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The Senior Analyst

February, 2013 Issue

Contents

The Team - Finsoc, FMS Delhi

Finance Lab at Faculty of Management Studies

many students opt to do with faculty members. In addition, the terminal will play an important role in making students industry ready. Most finance professional use Bloomberg terminals regularly, and being familiar with the scope and operation of a finance industry staple will be an added boost to a prospective recruit candidature. Companies can rest assured that fresh recruits fully appreciate the potential and importance of the terminal. Finally, the terminal will also help students in endeavors outside of pure academics and professional skill building. Competitions are a staple of b-school life, and access to the terminal will help students perform analysis and dissect problem statements with greater insight, hard data, and contextual understanding. Therefore, the terminal will significantly enhance a students learning during their MBA program, and also better prepare them to join the corporate world. This initiative demonstrates FMS commitment to developing financial education, and validates the institutes reputation as a hub for learning.

Late in 2012, FMS Delhi became only the

third campus in India to be equipped with a Bloomberg terminal. With this terminal, students will now have access to live data across great breadth and depth. The terminal will provide information on government securities, equity markets, debt markets, rates, capital structures, industry comparables, and a host of other categories. This terminal will enable students to greatly improve the standard and level of detail in their final year dissertations, as well is in their term assignments, case studies, and collaborative research that

The IPO safety net: Investor Protection or Wrongful Intervention?

SEBI chairman Mr. UK Sinha recently created headlines in the financial press when he said that the capital market regulator is going to implement a safety net mechanism to protect retail investors from incurring significant losses in case of failed IPOs. This move by SEBI has been triggered by widespread dissatisfaction over IPO pricing among small investors in recent months. Theres an impression that small investors are being willfully fleeced by managements and merchant information. banks who this have superior the

promoters and their shady financiers, but would keep honest companies out of an already slow IPO market. Others feel that the proposed regulations are a throwback to the pre-liberalization days when the Controller of Capital Issues (CCI) stipulated the prices of all capital issues using a predetermined pricing formula. It has been argued that financial markets operate on the principle of risk and return and equity capital, by its very nature, implies ownership and hence risks. Before going into the details of the proposed regulations and their pros and cons, we feel its important to take a look at some of the statistics of the IPO market scenario in India.
The IPO situation

Echoing

concern,

Chairman said at an Assocham event, The pricing of IPO in this country has been an issue. Again and again, we are finding that there is lack of transparency in pricing. In this situation, SEBI feels it must take some action in order to restore investor trust in the financial markets. Earlier it had issued a discussion paper titled Mandatory Safety Net Mechanism and invited comments from the public. The response from the bankers and the financial industry has been predictable. They have termed the proposals a draconian intervention in a free market. Some fear that such regulations would not deter crooked

The table below shows that there has been significant slowdown in fundraising via the IPO route in the past couple of years. This slowdown has been attributed to a

combination of factors including global economic slowdown, subdued secondary markets at home, policy logjam at the Centre as well as poor investor response. In 2012, at least a dozen companies shelved their IPO plans even after obtaining all the required clearances from SEBI.

Table 1: Marked Slowdown in IPOs Financial Year Number of Issues Succeeded 2012 2011 2010 2009 2008 25 37 64 21 36

No of issues failed 2 3 2 1 3

Total Amount Raised (Rs crore) 6895.94 6043.57 36,362.18 19,306.58 18,339.92

According to the discussion paper floated by SEBI, an analysis of the price performance of scrips listed between 2008 and 2011 shows that out of a total of 117 scrips, 72 (around 62% of the issues) were trading below the issue price 6 months after the listing. Out of these 72 scrips which witnessed a fall in price, in 55 scrips the fall was more than 20% of the issue price. Our analysis shows that this trend continued in the year 2012 as well. Though some of the scrips increased in

absolute value, they underperformed the market. In this context, it must be kept in mind that the BSE Sensex posted gains of 25.7% in 2012 and was one of the best performing stock indices in the world. The following table shows the largest IPOs of 2012 and the performance of the scrip 3 months after listing. The table also shows the performance of the BSE Sensex in the corresponding period.

Table 2: Dismal performance of IPOs in 2012 Issuer Issue Issue Issue Company Bharti Infratel Limited IPO PC Jeweller Ltd CARE Ltd MCX India Tribhovandas Bhimji Zaveri Dec 11 Feb 24 Apr 26 539.98 663.31 200.00 750.00 1,032.00 120.00 Dec 12 609.30 135.00 Clos e Dec 14 Size (Rs cr) 4,155.80 Price (Rs) 220.00

Price after 3 months/Year end(Rs) 192.85 (31st Dec) 149.7 (31st Dec) 914.55 (31st Dec) 888.05 (24th May) 103.55 (26th July)

% change in price -12.34 10.88 21.94 -13.94 -13.70

% change in Sensex 0.56 0.36 0.20 -9.49 -2.86

The table shows that 3 out of the 5 biggest issues in 2012 traded below their issue price three months after listing /at end of year.

Among these, the biggest issue by far, Bharti Infratel was a spectacular failure. The stock was trading 12.34% below its issue price a

fortnight after its listing, even as the market index posted nominal gains.
The SEBI Proposal

triggered. On the other hand, if the market gains 10% and the stock depreciates by 11%, the safety net wont be triggered, even though the relative fall is more than 20%. This is because the absolute drop in the stock price is 11% which is lesser than the trigger level of 20%.

In the discussion paper, SEBI proposes a broad framework for the safety net mechanism for investors. Some of the salient features of the framework include: a) The Safety Net shall be mandatory for all IPOs b) The Safety Net provision shall trigger only in cases where the price of the shares depreciate by more than 20% from the issue price. The price will be calculated as the volume weighed market price the shares for a period of 3 months from the date of listing. The 20% depreciation in the market will be considered over and above the general fall (if any) of the market index. The market index used for this purpose will be the BSE500 or S&P CNX 500.

The paper also mentions the eligibility criteria for investors under this mechanism. The two most important points among the criteria are: a) The facility will be available for all the allotted securities to original retail allottees who had made an application for up to Rs 50,000 b) The total liability of the Safety Net Provider will be capped at 5% of the issue size. c) In case the total number of shares offered under this scheme works out to be more than 5% of issue size, the purchase of

For example if the share price (calculated by the prescribed method) drops by 25% in 3 months while the market index drops by 3%, the safety net will be triggered. But if the market index drops by 7%, the net wont be

securities from retail investors shall be done on proportionate basis such that total obligation does not exceed 5% of the issue size.

Evaluation of the Proposal

Some of the proposals forwarded by SEBI have attracted criticism from various quarters. In this section, we evaluate the proposals and discuss possible pitfalls.

a) Calculation of Safety Net trigger:

The

discussion paper calculates the safety net trigger relative to the overall market index. This method makes the implicit assumption that the given security is as risky as the overall market.

The fundamental premise of the proposals is that the sole risk facing an IPO investor is mispricing of a security and overall market movement (systemic risk) and hence the regulator is entitled to take action to reduce the mispricing risk which primarily arises out of an information asymmetry between the issuer and the small investor. This approach ignores all other risks, including industry specific risks and firm specific risks. In capital markets, stock prices may crash due to resignation or death of key management personnel, accidents, policy change leading to re-rating of a particular sector etc. The proposed framework fails to take these risks into consideration.

This artificial cutoff would incentivize retail investors to invest in multiple issues than into a single public issue, regardless of the quality of the other issues.

c) Safety net period: The SEBI proposal that the safety net should trigger three months post the listing date is also fraught with problems and seems inadequate for protection of retail investors. If the promoter does have malafide intent of mispricing a security, he can easily rig the prices and artificially support the security at issue price levels for three months.

d) Promoter liability: The current proposal primarily holds the promoter responsible

b) Eligibility Criteria for retail investors: The paper proposes that the safety net facility should be made available to retail investors who made an application for up to Rs 50,000. But in Oct 2010, SEBI increased the investment limit for retail investors from Rs1 lakh to Rs2 lakh, taking inflation and other factors into consideration. Also data shows that going by the subscription figures for IPOs since November 2010, barely 15-30% of retail investors bid for less than Rs50000 of shares. For example, in the MCX India IPO, which was one of the biggest issues of 2012, the number of applications that came from investors bidding for less than Rs50000 of shares stood at just 28.9%.i

for providing the safety net irrespective of whether the promoter has actually

benefitted from the issue (by an offer for sale of his shares or by taking cash out of the company). This creates an extra risk for the promoters and leaves the

possibility of an honest mistake out of the consideration set. This might have the undesirable effect of making the IPO route a risky way of raising money.

Conclusion
There is little doubt about the fact that the pricing of IPOs is a problem in India at present. And the market regulator is rightly concerned about the weakest and probably the least informed player in the

field; the retail investor. But it appears that the safety net mechanism in its current form is probably not the right way forward. The market regulator must take a long and hard look at the current proposals and overhaul the mechanism. Alternatively, it should focus more on

market

integrity by ensuring proper

checks and balances on issuers and intermediaries. It should also facilitate seamless information flow to market participants by upholding strict disclosure standards and at the same time strengthen its investor education programs.

Article by SanchalakBasu XLRI, Jamshedpur

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The Return of the Reform Impact of 1991?

On 15th August, 1947 Jawaharlal Nehru, Indias first Prime Minister spoke out to the people of the nation, At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. India, then began its long and laborious path to rebuilding itself. And from 1947-91 it had restricted trade and foreign investment into the country, till the point the strain on the economy could not bare the isolation from rest of the world any longer. Even with a great opposition, India underwent an

to call for a change, the industrial areas restricted to private enterprises was reduced from 18 to 3, i.e. Nuclear, Armed forces and railways. Industrial Additionally, controls the Governments licensing was

and

dismantled to ensure competitiveness and an increase in efficiency in addition to the movement of the Indian currency from fixed to a floating exchange system. At the time the general public were opposed to these policies out of fear that free trade would result in a loss of their jobs but it was assured that it would be beneficial to the country and its people in the long run. India then witnessed one of the greatest

extensive reform in 1991 which enabled it to move towards its potential as major player in the global market and now 20 years later the country is taking another leap forward towards liberalization, unfortunately it has not been able to amount to the same level. In 1991, The Indian economy had reached the tipping point where in its foreign reserves could fund the countries imports for only a mere 7 more weeks. A change was not only advised, but was required for the survival of this young nation. Manmohan Singh, at the time Indias Finance Minister pushed for legislation to open the Indian economy to the world. At the time there was even external pressure from both the World Bank and the IMF to do so, urging the country to remove its trade barriers. The combination of these circumstances, forced the Indian Government

transformations in economic reform and development, with the 2nd highest GDP growth rate in the world and with a FDI that grew at a CAGR of 36.3%* from 1991-2010. But in the last few years, the impact of those reforms has began to diminish, India now faces a global economy which requires similar reforms to keep it a attractive market for investors. In September of 2012, Manmohan Singh, now the Prime Minister of India continued to push for economic reforms, to keep India a haven for investors from across the world with reforms such as to reduce the diesel subsidies by 12% and leave investment by

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foreign supermarkets in the hands of the state government as opposed to the central. Additionally, the restriction of single foreign investors such as IKEA would be lifted to give freedom to the companies to invest in India without the requirement of a domestic partnership. Similar steps were taken for the power sector, domestic broadcasting and aviation sector. We can undoubtedly claim these steps are moving India towards once again achieving its pace of development, However the level of these reform cannot be stated as the same level as those that took place in 1991. Thus, would not be able to leave as great of an impact. The reforms that took place in 1991 involved external pressure from the World Bank allowing for an industry wide

1992-2000*, it has now dramatically reduced down to 7.2% from 2006-10. Other countries have proven to appear more attractive with Vietnam having CAGR in FDI from 2006-10 of 35.1%, Indonesia with 29.3% and Brazil with 28.8%. Thus, corporations have begun outsourcing jobs requiring unskilled labor to other parts of the world. As Indias per capita has increased since 1991, foreign

conglomerates have started searching for investment in other countries where they can continue to pay low wages for decent quality products. As Indias per capita has increased since 1991, foreign conglomerates have started searching for investment in other countries where they can continue to pay low wages for decent quality products. Through the reforms in 1991, the inflation rate in India was kept in check through competitive prices and more efficient

liberalization at a time when India was being eyed by corporations for its excess supply of cheap labor. These reforms resulted in years of rapid development and increase in

employment across all sectors. Unfortunately, the reforms being suggested now are mostly restricted to specific sectors and requiring heavy investment and risk on the part of the company without much guarantee to whether this expansion would be successful or not. Thus restricting investment to only the major conglomerates. This situation has led to foreign investors setting their eyes on other markets. Where India had a CAGR in FDI of 37.7% from

operations. Unfortunately now this inflation has returned to a projected 7%. We now require further liberalization on the same scale to keep the prices in check. Unfortunately, the publics perception that foreign investment in retail would result in a loss of their jobs along with red tape and bureaucracy is currently hampering any truly developmental reforms from taking place. The impact within each of the relevant sectors will definitely witness a benefit in long run.

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With the ease of restrictions in the retail sector, retail giants such as Wal-Mart can now enter the market with a number of states signed on to facilitate their endeavor. Indias inflation in 2010 had reached a staggering 8.4%, the introduction of foreign retailers would help to manage the prices. A more efficient supply chain, which would be brought by these corporations would allow for a decrease in price by about 20% and increase in income realizations for farmers by 15% according to CRISIL. The FDI policy requires $100 million investment over the 3 years of which 50% is suppose to be in back end operations. This policy would thus allow for a combination of creation of jobs while keeping prices in check. Unfortunately, this may not be entirely positive in the short run. The overall retail market in India is estimated to $450 million of which 93% follow traditional methods of retail. The introduction of modern retail with lower prices while offering higher income would shift attention away from these

traditional stores and would likely lead to unemployment. However as with any

liberalization process, a loss of jobs in inevitable to allow for a country to specialize and concentrate its efforts on its competitive advantage. With the 12% decrease in diesel subsidies, which has become the primary source of fuel in the rural areas by farmers for tractors, there has naturally been a certain level of dissatisfaction from the people, however it shows a movement towards a more

competitive environment. It would allow for the government to utilize this surplus of funds for programs in the areas of health and education, which could benefit the country in long run. India certainly has the ability and the resources to once again achieve the pace of economic development poor it once had, of

unfortunately,

implementation

policies and slow bureaucratic process to achieve these reforms has hindered its development.

Article by Samir Evan Jain FMS, Delhi

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Quantitative Easing A Blessing or a Curse?

An Insight

During

the times of turbulent economy,

Quantitative Easing (or more popularly QE) in economists fraternity. The Central Bank implements QE by first creating new money and then using this new money to purchase assets from a range available Government bonds, equities, corporate bonds or other assets from banks. With this process the central bank ensures

various countries of world try to apply their conventional tools, monetary and non-monetary, to regain a state of sound economy. Majority of world economies tried to reduce their short term interest rates of market lending from commercial banks to bolster the borrowing and spending from households and businesses. But then a point arrives when economy faces a phenomenon which is widely known as Liquidity trap (short term nominal interest rate is zero). There exists no possibility for the Central Bank of a country to further reduce short term nominal interest rates from that point onward. Such constrained scenario pushes the Central Bank of the country to employ various unconventional monetary policies to alleviate the deflationary economy. One such unconventional monetary tool used by the Central Banks (especially when interest rates are close to zero) to

stimulate the economy is known as

that it injects a pre-determined quantity of

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money in the economy. This results in rise in assets price and fall in the yield, or interest rates on those assets making the borrowing and spending more attractive and hence resulting in improved economy. It also aims at increasing the excessive reserves of the banks for higher lending and consequent spending by the households and businesses. Low and stable inflation is crucial to a thriving and prosperous economy. QE can also be used by the Central Bank to ensure that inflation does not fall below or rise above optimum target (Generally it is considered to be 2%).
Pros and Cons of QE

prime concern that underlines this activity is that in the past there have been instances when banks did not encourage the lending to households and businesses and hence retained the surplus with them. Also, this current process of stimulating economy focuses well on financial market of economy but fails to transform the other craving for cash sectors like infrastructure, energy etc. during

economy downturn. Hence relying on banks may not serve the purpose of stimulating economy if banks fail to act as an active agent.
Inflation Is Central Banks approach myopic?

QE is often referred to as a last resort of the Central Bank to restore the disrupted

At prima facie, QE offers a short to medium control over inflation rates, but a holistic perspective would starkly reveal the truth behind the curtain. First, the Central Bank relies on banks and other financial institutions to lend money to businesses and households and stir the economy and rise in inflation. This calls for responsible approach from banks, which is not guaranteed though. Also,

economy. But before answering the question in subject, whether QE is a blessing or a curse, an insightful evaluation of topic at hand is of prime significance and to best achieve the purpose, the author have enlisted various merits and demerits of QE.
Purchasing of Assets and its distributional effects

unless the Central Bank devise a diversified assets purchase drives, long term assets bought by the Central Bank from banks may not be equally competitive and profitable at the point of maturity and hence dispensing them then becomes a challenge for the Central bank which would leave the latter to incur loss. This loss consequently would be transfer to Tax-payers. Hence in the long run, economy could suffer from hyper (or

Purchasing of Assets, as quoted above, have been mostly advantageous to banks and other financial institutions. It has helped banks to increase their excess reserves and the size of their balance sheets. Also buying of too much of above quoted assets increases their price which unblocks credit market as investors now start investing in appreciating assets, who were otherwise shedding away. But the

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massive) inflation if the amount of easing is over estimated.

Threats to conventional investment policies

employment rates. Cheap electronic US keyboard credit, then started flying abroad as banks tried to earn their way out of debt by financing arbitrage gambles, glutting

QE tends to push down long-term bond yields, making other short term investment plans more attractive for immediate spending and investment. But in this process, QE reduces the return on the long term

currency markets while depreciating US dollars. So the Feds move of saving banks from negative equity resulted in flooding the global economy with a glut of US Dollar credit, destabilizing global financial system.
Unwinding Policy Exit strategy from QE

investment made by pension schemes. As a result, QE makes it more expensive for employers to provide pensions and Economists generally quote QE as a process and not an event. There always exists an underlying pressure on the Central Bank to exit from QE by selling back the riskier assets and narrowing down its balance sheet. But this process is not that simple as it appears. There are all the chances that the Central Bank may end up pilling bonds worth trillions of rupees and find it difficult to unload them off because selling such astronomical figures of bonds back to financial institutions will only hamper its very own objective of restoring sound economy.

consequently it weakens the funding of schemes as their deficit increases.

Does QE lead to global economy fracture?

An unpredictable outcome of Feds QE3 declaration was a worldwide opposition. US banks utilised the Fed reserves and treasury bailouts received from QE2 to increase their own profits and to continue paying high salaries and bonuses. What their lending inflated, were the asset prices and not the commodity prices, neither output nor

Post to evaluation of various nuances involved in implementation of QE and considering pros and cons, the author believes QE could prove to be a curse for an economy if not implemented aggressively and tactfully. The major QE failures which world witnessed were the series of QE drives undertaken by Bank of Japan (BoJ) from 1996 to 2006. The prime reason of failure then was that the local banks held the reserve surplus generated by BoJ with themselves rather than offering it to households and businesses for lending and

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consequently for spending and increasing the employment rate. Also USAs Federal Reserves and UKs Bank of England are not much confident about the success of their QE program which they undertook post to late 2007 Global crisis. A significant threat that underscores QE is a stock bubble. When Fed reserve recently announced its 3rd round of QE, almost all major stocks started exhibiting the upward trend. One of the prime financial websites explains it as, What is happening now is that stocks
A Better Quantitative Easing

are appreciating, not because of enhanced productivity or expanding markets, but simply because Central Banks are printing money. There could be a critical moment when the markets collectively recognize that stocks (all stocks) are overpriced and the bubble will burst. This will simply lead our economy to a point from where recovery would still become difficult. Also at times, few Central Banks tries to monetize the Governments deficits and to cap governments borrowing rates which only lead to inflationary pressures and leaves detrimental scares on countries economy.

Increasing application of QE, in one or the other form, by various major economies makes it a significant unconventional

enrich (or diplomatically capitalize) the major financial institutions. Banks have also been observed arguing that there are no borrowers (by which they mean borrowers at the going interest rates). To overcome this blockage, the Central bank should set up a National Investment Bank which they would capitalize and mandate to spend some fixed crores of rupees a year on investment projects at

monetary tool, especially when an economy faces Liquidity trap. But rather than being myopic in approach, one need to consider long term outcomes of QE, both positive and negative, and only can then it be confirmed as a helpful resort for an economy. After learning lessons from historical

interest rate low enough to fulfill the investment mandate. Candidate for such investment would be infrastructure projects such as high speed rail, innovative water supply systems for rural India etc. which promises direct growth in employment rates.

instances and considering advance economy dynamics, following are the prime

recommendations, 1. There is little evidence that QE, in its current

form, is helping small and medium size 2. It is of utmost importance for the Central businesses to expand and create more jobs. On the other hand it is certainly helping to Bank to undertake diversified investment portfolio rather than focusing on Government

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bonds and securities because if it loses money on its particular sector focused asset

On the basis of various facts and figures, lessons learnt from both successful and unsuccessful QE programs and dynamics of advance economics, its gives me an

purchases, then that loss would have to be made good by taxpayers either with higher future taxation or by the Central Bank by creating more money and risking higher future inflation. 3. Also, before undertaking QE, an important question to be asked by the Central Bank is, How much is enough?, because going too far with creating and spending money may devalue the currency. Inflation or even hyperinflation would then be the result.

impression that if QE lacks rigor and aggression in its implementation, it may become a potential curse for any economy. To make QE a lasting blessing, it is very important incorporate a customized QE i.e. including all sectors while distributing new money into economy.

Article by Tushar Shah School of Petroleum Management

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Eurozone Crisis: Gold to the Rescue

It doesnt take a degree in economics for

the average Indian woman to decide to invest in Gold. The reason behind her choice of Gold over other forms of investments is simple: beauty, value

also sitting on a pile of Gold; 10,792 tonnes of Gold. Common sense dictates that the outright sale of the Gold reserves of the Eurozone is not the solution to the problem. This is primarily due to the fact that existing European Union laws prohibit such sale of Gold as do the provisions of the Central Bank Gold Agreement.

appreciation and security. While we may ignore the vanity quotient associated with Gold, it only makes sense to consider the value appreciation and security it offers vis--vis any other form of investment. What an average Indian woman

Moreover, the outstanding debt levels of the Eurozone countries far surpass the value of their Gold reserves. The Gold holdings of the crisis-hit Eurozone

understands about Gold is about the only basis on which one may base ones assumption that Gold has the potential to substantially alleviate the Eurozone Crisis. While all that glitters might not be Gold, one certainly cannot deny the fact that the glitter of Gold carries with it a minimal credit risk. Unlike national currencies, value of Gold is not dependent on a nations economic policies and carries negligible inflation and exchange risks. So, what does an average Indian woman do when her family faces a crisis situation and needs money? She either sells off her Gold to generate liquid cash or borrows money against the collateral of her Gold. Well, the situation of the Eurozone is somewhat similar to that of this average Indian woman! The Euro area is in a crisis and is

countries (Portugal, Spain, Greece, Ireland and Italy) represent only 3.3% of the combined outstanding debt of their central governments. A one-time sale of all of their Gold reserves would barely cover one years worth of their debt service costs. What then is the alternative? The

alternative comes in the form of using gold reserves to collateralize government debt. The idea is to bring down borrowing costs by using Gold to guarantee the partial repayment of bonds to investors in case of a default. Gold would serve to provide sovereign bonds with further safety and thus comfort investors who do not give credence to Eurozone government balance sheets any more. Historically, Gold has been successfully used as collateral. In 1970, Italy and Portugal employed their

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Gold reserves as collateral to loans from the Bundesbank, the Bank for International Settlements and the Swiss National Bank. In 1991, India applied its Gold as collateral for a loan with the Bank of Japan. The proposal to use Gold as collateral for government carries with it advantages for the Eurozone. They include: The Eurozone is not based on a Gold standard and hence Gold is not a monetary asset. The proposal applies not to the Gold held by the European Central Bank (ECB) for the management of the Euro but to the Gold reserves held by the National Commercial Banks (NCB). Monetary purchases by the ECB of government debt of an individual Member State constitutes a fiscal transfer, because assets held in common over the Eurozone as a whole are used for the benefit of an individual Member State. But NCB owned Gold is an asset owned by an individual Member State. So the use of the Gold would not involve a fiscal transfer between

states but, rather, the use of the assets of a state for the interests of that state. Unlike a monetary asset, Gold is available in restricted amounts. The ECB could theoretically produce unlimited quantities of new euros to purchase additional sovereign bonds. But the amount of Gold available as collateral sovereign debt is the amount held by the NCBs. This is an important disciplining factor.

While the problems of the average Indian woman are not as complex or humongous as those of the Eurozone nations, fact remains that the time has come for the Eurozone to realise the true potential of the Gold reserves held by them (6.5% of all Gold ever mined!). The legal issues that need to be considered for Gold backed bonds to proceed are surmountable. For the Eurozone countries that have built up substantial reserves of Gold over the years now could be the time to harness the benefits.

Article by Namrata Shah Nihal Adsul JBIMS, Mumbai

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Declining corporate investment and implications

Even though IIP has shown some recovery

from its sharp fall a few months back and a marginal fall in inflation, corporate

has been bleak since 2009, with a sharp decrease as % of GDP from 14% prior to 2009 to 10% thereafter. Indeed, the growth of investment (gross fixed capital formation) has slowed to about 0.6% (quarter on quarter) on average in the first three quarters in 2011, compared with an average of nearly 3% during 200007, and the figures only weakened further in the coming future.
Factors

investments are still not indicating any bright scenario. Indeed, as suggested by SBI and other banks, the corporate pipeline is pretty tight and is not expected to be flourishing soon in the immediate future. As rightly pointed out, the capital expenditure in large number of industries is lacking. It is not to say that the potential or opportunities do not exist, what lacks is the willingness to take projects and indulge in large expenditures and borrowings. This is one of the reasons that the banks have been asking for lower rates by RBI, and supporting reforms by the Government. There is an increasing need to provide greater incentives for greater capital expenditure in industries. This is particularly important for pushing growth and improving performance of Indian economy in medium and long run.
Global Crisis and Declining Capital Investments

Number of factors has been cited to influence the weakening of corporate investments. Increased macroeconomic uncertainty with high inflation Weaker global economic outlook with

European Union also facing recession Monetary tightening since early 2010 by RBI and rising interest rates Structural factors such as weakening

India saw a significant growth prior to Global Crisis with large amount of investments been undertaken by both private and public sector. Before the global financial crisis, strong corporate investment was very evident and well above levels in most emerging governance and slower project approvals

economies (as % of GDP). But the picture

21 Implications

significant improvement in loan demand, at least in the near term.

This weak corporate investment performance has demand and supply implications. It will lead to lower growth over the medium term It would also enhance supply constraints in already supply constrained Indian economy
Capital Expenditure and Banks Corporate Lending

Projected Capital Expenditure

Projects Sanctioned
720 700 680 660 640 2010-11 2011-12

Macro-picture The GDP growth of India has been lower in 2011-12 at 6.5 % as compared to 8.4% in 2010-11. The growth rate had been

continuously declining over the 4 quarter 2011-12 financial year, and was reflected in declining figures of manufacturing sector. Due to such developments and reasons discussed earlier, the investment intentions in 2011-12 showed a setback. With still high inflation and interest rates, the investment outlook for 2012-13 remains subdued. But at the same time with reforms it is expected to see revival, though at a moderate pace.
Bank's Perspectives
600000 400000 200000 0

Proposed Investments (Rs. Crore)

2010-11

2011-12

From the above diagram the effect of crisis on capital expenditure can be clearly visualized. In 2011-12, banks and financial institutions sanctioned only 668 projects with proposed investments of Rs 212,000 crore. This was significantly lower than the previous financial year and shows the setback. According to RBI, the planned capital expenditure for the current financial year was estimated around Rs 207,300 crore, even lower than the 201112 level.

SBI has recently sanctioned large loans to Tata Steel and Hindalco. But even so it not yet satisfied with the performance of its corporate line which has been quite dried up for last few months. It still does not expect a

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Industries Outlook

and long term would be difficult to achieve and sustain. India still has a strong position and great potential to grow. Though its savings and consumption rates have shown a marginal slowdown recently, it is still comparatively high. Thus, the opportunity for investment still exists. With large population, rising consumption, and favourable demographics, a lot of opportunities await. Whether PSUs or private sector; well funded companies confident of growth prospects must build capacities before competition catches up.
Conclusion

From the above graph, it can be seen that certain sectors are clearly stronger for investments as compared to others. As can be observed, most capital intensive sectors are showing a decline in their investments and can be a cause of concern in the medium term. Manufacturing in India needs to pick up pace and can provide an impetus to investments in growth generating capital expenditure in India. There are some PSUs such as BHEL, NT PC and ONGC with hoards of cash on their balance sheets. The plans earlier made by the government are non-existent, and

dependency on external factors has been increased for any improvement or growth. It is important for these capital extensive and surplus PSUs to start pushing for capital expenditure, which can further kick-start a growth cycle in Indian economy. Without these sectors contribution, growth in medium While banks such as SBI has shown pessimistic opinion, there are also some banks are optimistic about the 2nd half of the 2012-13 though agree that recovery would be slow.

23

Corporate investments are not only an important indicator the growth and stability of an economy, but also a critical factor in ensuring growth for the economy in the medium and long run. With not enough capital expenditure, the resource mobilization in the economy would be lower which would further spread into the real economy and create undesirable stirs. This is also important for the banking sector to grow and expand. Without funds being used or invested in the capital investments, it would face difficulties of diversification and returns on investments. Various banks and RBI as well do recognize the problem of low corporate investments. As corporate investments are strongly influenced by the unstable macroeconomics of the moment, it has been rightfully argued again

and again that capital intensive sectors such as fertilizers and petroleum should lead the way. These sectors have been dominated by the public units and therefore it is required for the Government to realize the need for kickstarting capital expenditure and draw as well as implement the required plans of action soon.

There is renewed business confidence as reflected in the behaviour of the stock market. The reforms are small stepping stones that will provide a springboard for capital expenditure. Obviously, there is a lag effect and full-scale revival will take some more time. Rana Kapoor, MD, YES Bank

Article by Sonika Toora FMS, Delhi

24

Small and Medium Enterprise Exchanges

The decision of SEBI to grant permissions to

NSE and BSE for setting up SME Exchange has opened up a new chapter in the history of SMEs by aiding them to raise funds in a more effective, transparent and faster way. India has registered a high economic growth in the past decade and nurturing the SME has become imperative to aid the growth engine in our country. The decision goes hand in hand with the governmental agenda of greater financial inclusion for the SME. For a

over leveraging from banks. The loans at rates as high as 16% affect their investment decisions. A crunch of monetary resources might cause some of them to opt for cheaper options of technology, skill and

manufacturing that hamper the exposure to new trends and future growth. SMEs participating in the exchanges will be required to submit all the details pertaining to investments and their use. This will make the process more transparent, arouse a sense of trust in the minds of investors and give impetus to SMEs to access the retail funds. Scripps of SME belonging to the main boards of the exchanges faced the problem of illiquidity due to poor trade volumes. The setup of a trading platform and the separation from the big stocks in the industry can provide a solution to the problem. Although there will be some time before the stocks pick up some liquidity. Market making is a way to add liquidity to the stock. The BSE has also come up with the BSE SME index, an addition to its existing 28

country like India whose 40% of the direct exports are contributed by SMEs, the NSE Emerge and BSE SME exchange are

platforms to match the capital hungry SMEs with the retail investors. With a 45% contribution to GDP of India, SMEs also play an important role in contributing towards employment. At present over 24 countries provide independent boards and exchanges for SME examples being the Growth

Enterprises Market (GEM), Hong Kong, MOTHERS, Japan, the Alternative

Investment Market (AIM) in the United Kingdom, NASDAQ in the USA. The exchanges will provide an

indices. It will track the value of companies for two years post the completion of its IPO (Initial Public Offering). Amidst a surge of IPOs in the market, unstable economic conditions, threat of shares being traded below their listing price and even the

opportunity for the enterprise to ideally restructure their debt equity capital ratio. Generally the SME have been heavily relying on funding from financial institutions thereby increasing more debt liability and problem of

25

government

making

strong

attempts

to

in 2007 raises questions about the success of the BSE and NSEs latest attempts with the SME Exchange. To increase participation from

achieve its target disinvestment in PSUs , the future still seems bright for SME IPOs as stats show that out of 11 companies listed on BSE, 10 have been trading above their listing price in 2011. SME growth has various dimensions. India has evolved from being an agrarian to a service industry based economy. It seems to have majorly missed the step of being a manufacturing economy before marching to service industry growth. The success rate of small enterprises will also help ensure good manufacturing segment advancement. The picture seems good but the high cost of capital, limited awareness; regulatory

companies to get listed on the new bourse, SEBI has relaxed norms in terms of reducing reporting frequencies (quarterly to bi

annually), exemption from tracking previous profits, etc. Can this hamper the success of SME exchange? The SEBI will not give any recommendations to the merchant copy filed by the banker. The considerably small sized company listing might be a no-no factor for the investment banks who find it easier to get a bigger company listed on the main board. Due to this the structure of these junior exchanges stipulated by the regulators the reliance seems more on market makers and less on the platform itself. Nonetheless with around 13 million existing SMEs in the nation, need for better communication resources, advanced

requirements in disclosures come forward as hindrances to raising of equity capital. However BSE seems to have been trying to overcome the awareness problem by

conducting several seminars (both general and sectored) for educating the SMEs on the benefits of listing and the preparations required for the same The failed attempts of government in the past with the setup of the Over the Counter Exchange and the Indonext

technology and ease of operations, one can expect SME exchanges to succeed in the long run and create a better India.Inc

Article by Neha Joshi FMS, Delhi

26

US Fiscal Cliff: What Lies Ahead?

The United States fiscal cliff can be referred to the economic effects that could result from the tax increases and spending cuts that will be in practice from 2013 if existing laws are not changed. These laws on one hand will reduce fiscal deficit to a great extent but also has the potential to hinder economic growth pushing the country to recession. Hence there are arguments and counter-arguments for and against for fiscal adjustment. In the article we will discuss the following aspects of the fiscal cliff: Alternatives put forward by CBO Components of the fiscal cliff Need for the fiscal adjustment Limits and targets to fiscal

The fiscal cliff and the steps taken to mitigate it will have effects on the fiscal deficit i.e. the debt and tax revenues. The CBO has put forward two scenarios for the coming 10 years.
The baseline scenario:

This

scenario will result if current laws are not altered. This will result in lower deficits and debt combined with spending cuts and higher taxes.
The alternate scenario:

This

scenario will result when some specific laws are changed to

reverse or stall the effects of the fiscal cliff. The following graph obtained from a CBO report shows the pronounced difference between the two scenarios. If no action is taken to alter the current laws, the economic scenario closely resembles the baseline projection. On the other hand if the fiscal cliff is not succumbed to and some tax cuts and spending patterns are continued we will have a scenario

restructuring Effect on world economy Our outlook and conclusion

Alternatives put forward by CBO

Congressional Budget Office (CBO) is responsible for providing economic data to the US government. It is a federal agency under the legislative branch of the US government.

resembling the alternate scenario.

27 Baseline projection:

The CBO since 1985 has been publishing baseline predictions for the coming fiscal years.
The positives:

The estimate they have come up with shows that fiscal deficit will come down to an estimated 1.2% by 2012 from 8.5% of GDP in 2011.

Revenues would rise from 18% (historical average) to 24% of GDP. Debt reduction of about 7 billion USD vs increases of debt by 10-11 billion USD if current policies are extended.
The negatives:

The GDP growth is likely to be reduced from 1.1% to 0.5% in the short run. High chance of recession in the initial part of the year followed by 2.3% in the second half.
Alternate fiscal scenario: The positives:

Economic slowdown can be avoided in the short run especially in this time of high unemployment
The negatives:

Revenues will remain on and around the historical average of 18% GDP. Public debt rises from 69% GDP in 2011 to 190% GDP by 2035

28 Components of the fiscal cliff

1. Economic Growth

and

Tax Relief

Category Revenue Increases Expiration of certain provisions in income tax, estate tax, and AMT indexation at end-2012 Expiration of employees payroll tax reduction Other expiring provisions Taxes in the Affordable Care Act Subtotal Spending reductions Automatic cuts, Budget Control Act Expiration of emergency unemployment benefits Reduction in Medicare payment rates for physicians Subtotal Other revenue and spending changes

FY2013

CY2013e

Reconciliation Act (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act (JGTRRA): These laws combined have cut government revenue by about 2.6 percentage points of the GDP. A large permanent tax cut may have looked feasible a decade ago after the budget surpluses of the late 1990s, but it looks far less feasible today, after three years of fiscal deficits close to 10 percent of GDP and a surge in debt held by the public from about 40 to about 70 percent of GDP. 2. Expiration of temporary payroll tax cut: This tax cut has temporarily eliminated 2 percentage points out of the employees 6.2 percent Social Security tax on the first $110,000 of salary. 3. The compromise budget control act: This act provided that if a super committee could not agree on fiscal cuts, an automatic mechanism beginning in 2013 would cut spending by $109 billion annually, divided evenly between defense and nondefense non-entitlement spending.

221

294

95 65 18 399

126 86 24 531

65

86

26

35

11

15

103 105

137 140

4. Expiration of emergency unemployment benefits and surge of collection of alternate minimum tax (AMT): The two components of the monetary budget repeatedly dealt with annual fixes.

Total reduction in deficit: Direct (% of 607(3.7) GDP) Effect of economic feedback -47 -62 745(4.5) 807(4.9)

Total change (% of GDP) 560(3.4)

29

The table put forward by a CBO report lists down the major components of the fiscal cliff and their respective sizes. Table 1

resources from use in government purposes to use in private purposes. If instead there were no excess capacity and unemployment were at, say, 4 to 5 percent, a case could be made to simply allow the fiscal cliff effects to happen.
Limits and targets to fiscal restructuring

summarizes the components of the fiscal cliff. The first column reports the impact of the fiscal cliff for the portion of FY2013 after December 2012, a nine-month period. The final column annualizes these amounts to obtain an approximation of the full effect for calendar year 2013. On an annual basis the total impact of the fiscal cliff amounts to a reduction in the federal budget deficit of about $800 billion.
The need for fiscal adjustment

The fiscal restructuring should look at the following targets. These targets are

formulated keeping in mind the long term as well as short term requirements in the economy. Overall, in the medium term federal spending needs to be held down to a range of 20 to 22 percent of GDP and federal revenue needs to recover to a range of 18 to 19 percent of

The US fiscal history can be divided into two parts: 1. From 1990-2007: Government revenues

GDP. For the financial year of 2013 CBO has projected government spending to be at 23.5% of GDP which will result in a deficit of 7.2% in the alternate scenario. Thus the basic target will be to raise revenue by 1.5 to 3 percent and cut spending to around 1.5 to 3.5 %. Suppose for simplicity one were to adopt the averages of these ranges as the targets,

were around 18% of GDP while spending was about 20% 2. From 2007-2011: Government revenues went down to 15.8% of GDP while spending rose to 23.5% Thus the government fiscal deficit also rose during the second phase. The fiscal cliff hence seems to be a necessary evil. However there will be a loss of 1.6% of GDP in the short term on submitting passively to the current scenario. This sacrifice on GDP will mean loss of demand and will result in higher unemployment. Again reduction in demand would mean a sacrifice in potential output rather than a redeployment of

placing the spending cut at 2.5 percent of GDP (to 21 percent of GDP) and the revenue increase at 2.2 percent of GDP (to 18.5 percent of GDP). The medium-term deficit would then be 2.5 percent of GDP.

30 Effect on Indian Economy

slowing down of economy. The projected fall of growth in Singapore will be about 0.2%. The model proposed by UN estimates decline in both direct and indirect trade.
Our Outlook

Since the India is not one of the countries that exports manufacturing outputs to the United States the only sector that can be affected is the services sector. Again services industry will not be affected much as it is majorly a cost cutting measure to outsource for the US companies. The US indices are currently trading very close to an all time highs. So it is natural for them to fall at the beginning of 2013 when the US economy finally falls off the cliff. Some experts are of the opinion that the equity markets of countries like India might be a safe bet for investments. However these markets share a positive correlation with market performance of the west. Hence any fall in US markets due to a fiscal cliff could cause a fall in all emerging stock markets including India.
Effect on other economies

The fiscal cliff scenario requires pragmatism. The importance of pragmatism i.e. balancing long-term reduction of fiscal deficit with actions that would not result in slowing down the economy in the short-run cannot be over emphasized. In general the US government has to look back at the components of the cliff

objectively and decide on the elements that are desirable and the ones that can be avoided. A complete submission to the scenario may be just as bad as taking steps to stall the change altogether. A time phased implementation of the changes is what is desirable.

According to a CNN report the failure of the US political class to deal with the fiscal emergency correctly can affect economies world over. The following are pointed out as possible outcomes: The GDP of China might take a direct hit from the fiscal cliff baseline scenario. The major reasons will be decrease of trade with the US. There will be also impact due to changes in inflation and interest rates. Countries like Singapore and Switzerland which are dependent on exports will also face

Just for example the tax cuts that are currently in place and will expire in the coming year can be done away with the top 5% of the population while can be continued for the rest. As the major tax earnings of the government comes from the tip of this pyramid the government will not lose much in terms of revenues while a major chunk of the population can be protected from the impact. A focused approach we believe will be a much better way to go about things rather

31

than taking the route of across the board tax increases and spending cuts.
Conclusion

Play it safe: It is our suggestion to move to investments which have low risk and regular returns. It is also advised to take into consideration the exit options while making an investment. Go high on savings and cut down expenses: Cut down on debts especially avoidable ones like credit cards. Plan to make healthy savings and move towards value with your purchases rather than going for flashy. Be opportunistic: The fiscal cliff will bring with itself lower interest rates which will be a good opportunity for purchase of useful assets. The opportunities need to taken with both hands.

As discussed in the article in our opinion succumbing to fiscal cliff will not be right due to the current state of the economy and the levels of unemployment. There has been a lot of procrastination involved in the process given the presidential elections. But now the situation is ominous and steps need to be taken proactively. Targeted relaxation of taxes and spending cuts as suggested by a lot of experts may be the way to go forward and possibly only way to protect small and midcap enterprises. As far as the common man is considered, these are our suggestions for him:

Article by Prajata Das Chowdhury Shilpa Sardar FMS, Delhi

32

2G Spectrum Auction An Autopsy

Abraham Lincoln once said, You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time. The government of India came up with another round of auction of telecom licenses between 12 -14 November 2012. This debt track. For the auction conducted in this period of 12-14 November, only spectrum in the less efficient 1800 MHz was put on auction, keeping aside the precious spectrum in the 900MHz bandwidth. The government might have done this because it wants to keep that spectrum aside to re-farm the leading incumbents away from their precious 900 MHz spectrum. Another reason of not coming up with complete spectrum for auction was creating an artificial scarcity and also it was highly anticipated that RIL would also bid for the 2G spectrum and the incumbents will try every bit to keep it out of the market. But nothing, as anticipated, happened and RIL chose to keep away from the auction. Technically, a 900MHz BW is more suitable for rural areas, where the population density is less, as the wavelength is longer than the 1800 MHz, which is suitable for urban areas with high population density. (Frequency and wavelength are inversely proportional). Yet in the auction we saw operators choosing spectrum in 1800 MHz band in the UP East and Bihar (Idea, Vodafone, Telewings and Videocon got spectrum in Bihar; Vodafone, Telewings, Videocon got spectrum in UP (East). This could be because they had no other options and the operators might expect

happened due to the result of canceling of 122 2G licenses by Supreme Court of India in February 2012. The spectrum was issued along with the licenses by the Government on a First Come First Serve basis. As per the direction of the Apex Court, TRAI came up with the base price which was almost 10 times the price paid by the operators earlier.
The Government Strategy

The first auction of spectrum, the airwaves that carry telephony services, proved to be a double-edged sword. In 2010, when the government called bids for spectrum in the 2,100 megahertz (MHz) band, which enables the data-intensive third generation (3G) services, only a small amount of it was on offer, creating an artificial scarcity.

Spectrum-starved companies, which had to either have 3G in their bouquet of offerings or lose high paying data users, bid the moon. The auction magically repaired the

government's finances by netting more than Rs 67,000 crore but put the companies on a

33

growth in the user base from the untapped

rural

markets

in

these

circles.

Operator Bharti Vodafone BSNL Reliance Comm MTNL Aircel Tata Teleservices Idea S Tel

Amount (in Rs) 12,295 11,618 10,190 8,585 6,564 6,449 8,864 5,769 338

No. of Circles 13 9 20 13 2 13 9 11 3

RESULTS OF SPECTRUM AUCTION NOV 2012 Operator Circle in which operators participated Metro Telewings* Videocon Idea Vodafone Bharti Total 1 6 14 1 Circle A 3 1 1 1 Circle B 2 4 1 7 Circle C 1 1 5 6 1 14 Total Circles 6 6 8 14 1 35 Payout (Rs Mn) 40183 22214 20313 11279 87 94076

34

On August 03, 2012, the Union Cabinet approved the reserve price of Rs. 14,000 crore for 5 MHz pan-India (22 telecom

for reserve price for 800 MHz band at 1.3 times that of 1800 MHz band. Thus, the reserve price for 5MHz of spectrum in 800
Amount to be paid (Rs. Mn)

Metro

Circle A

Circle B

Circle C

Reserve Price Rs. Winning Mn/bloc Auctione Bids Rs Circle k d Slots Mn/block Telewings Videocon Idea Vodafone Bharti Total Delhi 6931 0 Kolkata 1137 4 1137 4548 4548 Mumbai 6785 0 AP 2869 4 2869 11476 11476 Gujarat 2248 8 2248 8994 8994 17988 Karnataka 3301 0 Maharashtra 2628 5 2628 10512 2628 13140 TN 3061 4 3061 12244 12244 Haryana 465 6 465 1861 930 2791 Kerala 653 1 653 653 653 MP 540 6 540 2160 1080 3240 Punjab 673 1 673 673 673 Rajasthan 671 0 UP East 762 9 762 3047 3047 762 6856 UP West 1074 10 1074 4296 4296 2148 10740 WB 258 7 258 1292 517 1809 Assam 87 7 87 347 173 87 607 Bihar* 425 11 464 464 929 1393 HP 78 1 78 1857 1857 78 3792 J&K 63 6 63 253 127 380 NE 88 6 88 354 177 531 Orissa 203 6 203 811 405 1216 TOTAL 35000 40182 22215 20313 11280 87 94077

circles) spectrum for 1800 MHz band. This was 23% lower than the Rs. 18,110 crore recommended by the Telecom Regulatory Authority of India (TRAI) in April 2012, and at the lower end of Rs.14,000-16,000 crore reserve price recommended by the Empowered Group of Ministers (EGoM). However, the price was more than seven times the Rs. 1659 crore at which the cancelled spectrum was awarded in the first place in 2008. The Union Cabinet also approved the recommendation of EGoM

MHz band stands at Rs. 18,200 crore.

From the above table it is clear that there were no bids for the most coveted circles of Mumbai and Delhi. Existing players like Bharti Airtel and Vodafone dont need spectrum at these high reserve prices while it may prove out to be too costly for the new entrants with already loss making operations.

35

The other side of no bid for for these But the industry has its own woes. The much anticipated 3G data wave didnt flow well. As of now majority of the revenue, around 90% still comes from voice.
Non-Voice

circles is that the players did not want to set up a market price for the spectrum when the government goes for re-farming of the spectrum in the 900MHz band. (Bharti Airtel and Vodafone hold licenses in these circles since 1994 and the licenses would be up for re-auction in 2014 when they expire)

Country India Spain South Korea France Canada US Japan

Revenues 12% 19%

21.70% 25.40% 25.70% 33.20% 48.70%

Impact

on

the

Operators:

The

Industry experts are of view that Indian telecom might start getting close to 50% of its revenue from data services by 2016. But by then the equation would have another major change. RIL is expected to be out with its 4G services and this factor accounts mainly in the projection of 50% revenue share from data services. The above table supports Telewings decision to operate in the Indian market solely on voice for the coming period in the shortrun. Idea, Videocon, Telewings were in the hunt to get their licenses back. Only Vodafone, which bid in 14 circles, was looking to augment its spectrum bank.

government might have missed on its target of garnering Rs 40000 crores in the auctions but it emerged as a breather for the operators and the public in general. By not fully participating in the auctions the operators managed not to get more debt on their already debt laden balance sheet. This also benefitted the general masses for some time by not giving a reason for tariff hikes to the operators. The positive impact can easily be seen from the stock movement of the players on the exchange, where every player gained from its position before the auctions.

36

Naturally, the bids were feeble, and in many cases there were none at all. Four of the 22 circles, including the biggest markets of Delhi and Mumbai, received no bids. Of the 18 that did, only the bid for Bihar was above the reserve price, albeit only nine per cent above. The other 17 were won at the reserve price-an indicator of an auction's failure. The government has accepted its failure which is evident from its current decision to slash the reserve prices by 30% in the four circles (Delhi, Mumbai, Karnataka and Rajasthan) which saw no bid from the telecom operators. The remaining and the un-auctioned bandwidth would once again be put for

auctions before the end of this financial year. The government would try to get its pricing and regulatory environment right to induce players to come with open wallets to the auction to help it nurse its fiscal deficit wound. On the other hand, operators would carefully asses the market, the competition, their own spectrum bouquet which expires in 2014 and plan carefully to buy spectrum in the required bandwidth to support their operations.

Article by Ashish Jaiswal Rounak Chandak FMS, Delhi

37

Bank Restructuring

Within
agency

three months of Standard &

Railway Finance Corporation. Alongside, the rating agency also downgraded the credit outlook of seven PSUs NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC.While the markets had already anticipated that Fitch would revise the outlook and so there is no surprise in the announcement but the question is Can we rely on the rating and take adequate steps to promote major reforms or its just the hiatus with no prolonged effects on Indian economy? Downgrading of any countrys credit outlook has several effects on economy such as1. 2. 3. 4. 5. 6. 7. 8. Expensive Credit Less allocation of investments Less Private Equity Flight of Capital outside India Stock Market Sell Offs Currency Depreciation Less New Business Ventures Less Employment Downgrade of the

Poors downgrade in April, global rating Fitch, on 18th June, has credit downgraded Indias sovereign

outlook from stable to negative citing the reasons as corruption and the absence of adequate reforms. The agency estimated general government debt for India of 66 percent of GDP at the end of the most recent fiscal year, compared with a median of 39 percent for BBB-rated countries .While the government took the defensive stance in S&Ps downgrade, it criticized the Fitch downgrade saying the rating agency observations were based on old data and did not reflect the recent developments. Fitch revised downward

credit rating outlook of 12 financial agencies, including State Bank of India (SBI), ICICI bank, and Punjab National Bank (PNB). The list of downgraded entities includes six PSUs and two private banks. These include Bank of Baroda (BoB) and its overseas subsidiary Bank of Baroda (New Zealand), Canara Bank IDBI Bank and Axis Bank. Others to be affected by the rating action include Export-Import Bank of India, Hudco, IDFC and Indian

9. Rating Corporate 10.

Reputation Damage

38

If we see a broad range of factors such as macroeconomic policy, economy and

much of their analysis was wrong which led to many investors putting their investments in risky and sometime even fraudulent financial assets, these agencies were of the view that they should not be held responsible as they were only giving opinions. But the fact of the matter is that such opinions have huge impact on the global markets and economy. Recently these credit rating agencies have played dangerous games pushing for more

public finances we can see India is facing an awkward combination of slow growth and elevated inflation as well as structural challenges surrounding its investment climate in the form of corruption and inadequate reforms. The Indian

government had repeatedly delayed tax and subsidy reforms and thus the

confluence of weaker economic growth and a large subsidy bill which means India will likely miss the 5.1% fiscal deficit target for 2012-13.But on the other hand Fitch has not taken note of recent government initiatives including fertilizer subsidy reform, capping of subsidies as a fraction of GDP, the new manufacturing policy and the telecom policy. The fact that Foreign institutional investors (FII) have already brought in $12.5 billion in the first five months of 2012 as compared to $8.3 billion invested during the full calendar year of 2011 cannot be ignored. Do we need to pay attention to these ratings and design our framework or do we need to see more intrinsic problems in our country? The reactions of domestic policy to these downgrades are of much greater concern than actual analysis and prediction of these agencies. The accountability and responsibility of these credit rating

financial liberalization reforms that are in there own interests all in the name of analysis and opinions. Fitch has cited corruption as one of the reason for the downgrade. Is this a new thing to India? Was there no corruption in India few years ago when Fitch was so optimistic about Indian economy when compared to the rest of world economy? Fitch has also cited lack of reforms as one of the reasons. This is an open push for reforms to benefit large corporate capital in finance and elsewhere, which is not at all the same thing as policy changes that will put the Indian economy on a sustainable and employment-generating growth path. It is certainly true that the recent Indian success has been based in large part on the perceptions of global capital, inflows. But which these

generated capital

inflows have not really been of the kind that generates more productive capacity and work along with access to new

agencies are also in question. When it became clear in the United States that

39

technologies and markets. Rather, financial inflows have dominated, and have

GDP growth is at about 2.2%. The Indian economy has numerous positives - such as an enviable 37% of its GDP in gross national savings (GNS), over three times the figure for the United States, with Indian households saving about $1.1 trillion in the past five years. Two-thirds of India's population is below 35 years of age, and the growing middle class is expected to form 60% of India's income profile in the coming decade. High domestic savings rates, high investment rates, demographic middle dividends class and a

contributed to a boom driven by consumer credit (including for real estate) and debtdriven high spending by corporations, generating growing current deficits in the process. It has not provided better living standards and employment for the bulk of the population. To ensure more inclusive growth the Indian economy needs to head to a different path based on generating more employment and better living

standards. This is not likely or even possible given the incentives created by the past pattern of capital inflows. If anything, such incentives actually militate against such a desirable change in strategy. Its true that Fitch reduced their credit rating outlook from stable to negative but the Bombay Stock Exchange reported gains of between 0.23% and 1.39% in shares of State Bank of India, ICCI, Axis Bank, Bank of Baroda, Canara Bank and IDBI. Investors are tired of downgrades. That is why these stocks did not show any adverse reaction to the Fitch rating outlook. As far as growth is concerned its a matter of perspective. At most

burgeoning

with

high

purchasing power are also the positives for India. But among these positives there are few concerns too. Against the

backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run

growth potential of the Indian economy. Small and medium enterprises (SMEs) must be supported and there is a need to provide them with credit as they form a core foundation of a sound Indian

conservative estimates, India's economy is at present growing at around 5% and is expected to expand at least 6% annually for the next five years. Only China has reported a better gross domestic product (GDP) growth in the past five years. US

economy and more so as demand of credit from large investors are drying up, SMEs have a vital role to play to bail out the economy in times of crisis. Though it is vital to know the consequences of a credit

40

downgrade on the country and the residents, but at the same time it is important to know that a downgrade is not permanent. It comes when the financial position of a country deteriorates. If the associated elements which have resulted in the deterioration of the financial position are rectified, the health will get restored resulting in reinstating of the credit rating or a Credit Rating Upgrade. Isnt that a part and parcel of the regular economic cycles? If we analyze the whole world economy we find that we are living in a very highly inter-connected world where individual economies cannot remain

currently needed in India are a series of conscientious steps to from our

Government to clear the hurdles which are acting as bottlenecks in the growth path of the economy. Many of these hurdles are just because of whims and fancies of the politicians. Others require a long term policy action to improve the infrastructure of the economy to sustain long term growth which paves the path of Indian economy from a developing economy to a Developed Economy. The problems in Indian economy need to be addressed but its not the credit ratings that make the base for solutions.
Article by Sachin Pal IMT, Ghaziabad

oblivious of happenings in other parts of the globe. If we see the crisis in Europe and partially in US, it is affecting the exports as well as investments in India. So if the whole world is more or less in financial turmoil, we cannot expect India as an exception. If life is about looking for silver linings, the new negative ratings could well serve as blessings in disguise. India can benefit from cleaner and more faithful foreign investment funds while a weaker rupee could boost exports, force the manufacturing sector to be less dependent on imports, and so help to bring about a more balanced economy. What is

Investment opportunities in Solar Energy Sector in India

Introduction

included some major developers from the national and international market with over 84 project developers registering for the project. With more national and international companies showing interest in the project and the power generation capacity expected to increase to 1000MW by 2013, the charanka solar plant has undoubtedly given our nation a new ray of hope in meeting Indias energy requirements and also Indias mission to achieve 15% of clean energy annually by 2020. (Gujarat Solar Park, 2012)

India is deficit in power generation and the public sector companies have not been able to meet the increasing demands leading to a huge demand-supply gap in the country. The non-availability or high cost of fuel associated with the power generation, the government is looking at alternate sources of energy to fill the ever increasing gap in demand & supply. Solar power generation in India is being seen as a next big step in mitigating the problems being faced by the distribution companies of not meeting the demand of customers. Charanka Solar Plant, the 600 MW plant known as Asias first and largest solar park has been set up in the Gujarat state in Patan district. The solar park completed by December 1, 2012 is set up over 3000 acres of wasteland bordering the Rann of Kutch which will generate two-thirds of Indias total 1050MW of Solar power generation. The investment cost in Charanka Solar plant amounts to US $280 million for the entire functional, engineering, procurement & maintenance of the park. The project

Current Status of Solar projects in India

The amount of solar energy generation in India till 2007 was less than 1% of the total energy demand, which grew to 25MW in 2010 and 468 MW in 2011. By 2012 the installed solar plants in India has increased with the overall capacity of 1040 MW. Various state governments are coming up with new projects and are inviting the developers to participate in the solar power generation in their respective states. Gujarat is the leader in solar power contributing about 2/3rd of Indias total solar power generation. Rajasthan, the sunniest state of

42

India comes second with 197MW of solar power generation with many more projects in the pipeline. Various other governments of states like Andhra Pradesh, Maharashtra, Tamil Nadu, Haryana, and Uttar Pradesh are also promoting projects for the solar power generation in their respective states. Also the government of India is taking necessary steps to increase the solar power generation in the country. The launch of Jawaharlal Nehru National Solar mission by the government of India to give a big impetus to the solar energy market in India is one of the many steps taken in this direction. (MAHURKAR, 2012) (Prakash)
Round I (Dec-2010)

subsequent stages. The land requirement for 1MW of solar plant is between 1-2 hectares with the annual operating and maintenance cost ranging between 8-10 lakhs every year. The current tariff rates for solar power is Rs 8.5 per unit ( in Gujarat) and with more projects coming up, the tariff rates are expected to go down to Rs 4 per unit making it more viable for the general consumers. From the investors point of view the solar projects are an attractive investment. The projects are well balanced with support from the state government and Central Electricity Regulatory Commission (CERC) offering incentives. The cost of solar power projects
Round II (Dec-2011)

Solar PV Tariffs ( INR ) Highest Tariff Lowest Tariff Median Tariff Marginal Retail Power Tariff
12.75 10.95 12.12 5.50--7.50 9.44 7.49 8.91

are also expected to come down over the

Financial Analysis of Solar Energy Generation

years which will make it at par with the coal fired power plants thereby increasing the share of solar energy and solving the energy crises in the country. (Solar power puts Modi, US on one platform, 2012)
Tariffs discovered : (KPMG, 2012)

The cost of a 1MW solar project comes out to be anywhere between Rs 19-23 crores. Due to the high development period required for the projects, most developers prefer to set up the project in phases starting from 1MW and adding the capacities at

43 FDI in Solar Sector

Going ahead with the challenges, the first and foremost is the set up time and cost of a solar power plant. The initial setup cost of a solar plant is high. Due to this, managing funds (debt and equity) could be a major challenge for companies. Tariff rate is the next big concern for the set up companies. Due to the huge working capital requirement and the gestation period of recovery of investment, the tariff rate plays a crucial role. Along with this, huge investment is required to bring in the technology by importing. Hence import duty on capital equipment, raw material and excise duty, interest rate loans and priority sector lending form few challenges for the companies.

Solar Power Sector has been able to attract huge opportunities from Foreign Direct Investment. Charanka project itself had drew the initiative and investment by 21 domestic players and 4 foreign players(U.S.A). Spanning over two years, Charankas construction and commissioning witnessed various investors joining hands for development and management of the 600 MW power plant, such as Moser Bear, Abellon Clean Energy, PDPU, Sun Edison Energy India Pvt. Ltd., Roha Dyechem Pvt. Ltd., GMR Gujarat Solar Power Pvt. Ltd. among others. With about US$280 million being invested for Charanka Project, which adds to the 66% of Indias total solar power, it definitely opens up gates in future for such projects to be taken up. The development of Indian solar power sector has shown promising growth over the years. With 100 percent FDI into renewable energy through automatic route being implemented by the government, we should expect more investments by the foreign players in coming times.
Challenges

Opportunities & Future Scope

Needless to say the future of Indian Solar power sector looks brighter than ever. Due to the huge amount of inflows through FDI and the interest shown by domestic players, getting the funds have now become seemingly easier. The banks have too shown a keen interest along with the Government of India to develop the solar power sector. The GoI has proposed incentives of up to US$0.258 per kilowatt hour for power plants, tax holiday for 10 years apart from other tariff exemption. In addition to this, to promote solar power for offgrid application for thermal and photovoltaic (PV), the Government is offering financial support through

The most important challenge faced in setting up Charanka Solar Power plant was the land acquisition. Land being a scarce resource in India with low per capital cost, allocating land for a dedicated purpose of installing solar arrays poses the biggest threat to other necessities of the land by the society.

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Article by Akanksha Kumari Nishit Jain School of Petroleum Management

a combination of 30 percent subsidy and/or 5 percent interest rate bearing loans for companies in the business. (Overseas Indian Facilitation Centre, 2012) With Jawaharlal Nehru National Solar Mission in congruence to build a Solar India, the coming times will witness a plethora of investments and set ups of solar plants making India a truly independent nation. With the support of the government, a long list of solar projects is already in pipeline. Many states are aggressively attracting investments by changes in their policies. With an aim of reaching grid parity by 2022, the GoI has also taken several initiatives to enhance energy efficiency and conservation and helping set up indigenous manufacturing capacity.

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Interview with Anurag Aggarwal

Anurag Aggarwal is a Batch of 2008 alumnus of Faculty of Management Studies, Delhi. Prior to this, he completed his B.E. (Electronics & Communications) from Netaji Subhas Institute of Technology, Delhi University. Selected from campus by TAS (Tata Administrative Service), he is currently heading the Northern Region Business for Tata Steel Global Wires. Beyond work, Anurag keeps himself busy with photography and exploring new places and cultures.

How has your overall experience at TAS been so far?

It has been quite an exciting and self-enriching journey with TAS so far! My first and only exposure to corporate life has been with the Tata Group and, over the past five years, thanks to the TAS programme, I have experienced a rich mix of diverse sectors, work profiles, geographies and cultures. A large portion of my time has been spent with Tata Steel in Mumbai and Delhi. Ive worked on a wide range of assignments ranging from Business Development to Branding to Business Excellence and now working on a hard-core front-line Sales profile. Working in a territory such as North India is definitely a very challenging task with low margins, demanding customers and handling many trade malpractices! Overall, there is definitely a sense of pride to be a brand ambassador of a prestigious conglomerate such as the Tata Group! How do you feel about this years budget?

There are many aspects of this years budget while look very promising! An investment of USD 1 trillion planned in infrastructure (as projected by the 12th Plan) is definitely a shot in the arm for the entire economy. The power sector currently plagued with many issues can expect some respite from the financial restructuring plans of the Power Distribution companies. Also, the 15 percent investment allowance on manufacturing investment should give a fillip to domestic manufacturing. An interesting fact is that we can see many practices pioneered by the Tata Group are now being taken up by the government at a larger level. Case in point is the New Companies Bill which obliges companies to spend 2 % of average net profits for CSR purposes. Also, the move to create a women-oriented public sector bank (PSB) with an initial capital of Rs 1,000 crore is a forward-looking step; aiming at creating a bank that is run by women, hiring mostly women and catering primarily to women and the self-help groups and businesses they run.

46 Tell us about your experience at FMS Delhi.

My time at FMS has been quite memorable! In my first year, like most enthusiastic freshers, the Induction Programme during the first month was a once-in-a-lifetime experience. I worked actively in Mark Soc Marketing Society as well. The Summer Placement process too was an eye-opener as one gets a chance to see how individuals react differently in the pressure cooker situation we are all subjected to. In my time, the batch size was about a 100 students and there was a lot of bonding and camaraderie amongst the students! The faculty has also always been supportive of student initiatives. It was during my time at FMS that I visited Kenya (Summers Project with TAS) and China (part of Student Delegation). These experiences too, amongst my first international ones, helped in broadening my perspectives about things around me! What advice would you give to the B-school student community?

Though I am not currently practicing what I am about to preach, I strongly believe that one should definitely give a shot at entrepreneurship! I believe that the level of satisfaction achieved when one puts in effort in his/her own entrepreneurial venture, is unmatched and unparalleled to that achieved in any other assignment. I strongly urge my friends to think seriously on these lines as, based on my exposure of corporate life till now, I realize that some of the glimmer and gleam which one sees on the surface is fleeting in nature. Secondly, whenever you get an opportunity to take up any international assignment, go for it! You gain immense learning through experiences of doing the same thing differently when you work with individuals from diverse cultures, ethnicities and mindsets! Cheers!

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Annual Budget Discussion 2013 at FMS