Finestra-

Finesse
Bimonthly
Newsletter
OCTOBER NOVEMBER
ISSUE-1
Sponsored By :
ADVANCE RESEARCH INSTITUTE
OF TECHNICAL ANALYSIS
Lal Bahadur Shastri
Institute of Management, Delhi
C O N T E N T
Foreword
RBI & Banks
G-Sec
FDI Approvals
IMF & World Bank Forecast for India
Coalgate Scam
Politics & Stocks
US Shutdown
NDF Markets
Rupee Bonds
Quantitative Easing
Summer Internship Experience
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3
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5
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6
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Foreword
I am happy to know that the 'Finesse' The Finance Club of LBSIM is bringing
out its first bi-monthly Newsletter Finestra. I congratulate the students for
bringing out such an important monthly newsletter which updates us about
the financial world be it in India or the world. This effort helps us in refreshing
our knowledge base and horizon of financial issues.
I wish all the best to our young to-be-managers for such a good effort.
Prof. P. K. Biswas
Director, LBSIM
It gives me an immense pleasure to see the enthusiasm of the Finesse team for
having come up with Finestra which stands for an eye on the financial issues
in the economy. My heartiest congratulations to the entire team for this
initiative and best wishes for their future endeavors. I hope they will continue
the good work with the same zeal.
Dr. G. L. Sharma
Advisor - Corporate Interface, LBSIM
I heartily congratulate Finesse- the finance club of LBSIM for bringing out the
inaugural Finestra Newsletter. The objective of the newsletter is to enhance the
awareness of students regarding current and future trends in economy and
finance, thereby facilitating their professional growth in their future career.
Prof. Prem Sibbal
Area Convenor-Finance, LBSIM
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RBI & Banks
G-Sec Market
FDI Approvals
IMF & World Bank
In a move to regulate foreign fund flow and avoid financial crisis, RBI has now mandated foreign banks with complex
structures and which do not provide adequate disclosure to operate in India only through wholly-owned subsidiaries (WOS).
WOS can acquire private sector banks in India. However, foreign bank subsidiary will not be allowed to hold more than 74
percent, the sectoral cap for overall foreign investment, in private banks they may acquire. Foreign bank subsidiary are now
also allowed to list on local stock exchanges. Also to safeguard against the possibility of the Indian banking system being
dominated by foreign banks RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the
capital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.
The RBI framework stipulates that the initial minimum paid-up voting equity capital for a WOS would be Rs.500 crore for the
new entrants. Foreign banks, which commenced banking business in India before August, 2010 will have the option to
continue their banking business through the branch mode.
A 13-member group, headed by RBI Executive Director R Gandhi, has made various recommendations on G-Sec market, retail
participation and interest rate derivatives market. The panel suggested that investment limit for foreign institutional investors
(FIIs) in government securities should be increased gradually. The present limits for investments by FIIs, QFIs and long term
investors in government securities and corporate debt stands at $30 billion and $51 billion, respectively. To broaden financial
markets, the Reserve Bank will unveil steps to improve the liquidity and depth of government securities market in the coming
weeks. Dr. Raghuram Rajan said the Reserve Bank plans to build its developmental measures over the next few quarters on
five pillars. The pillars are: clarifying and strengthening the monetary policy framework, strengthening banking structure,
broadening and deepening financial markets, expanding access to finance and improving the system's ability to deal with
corporate and financial institution distress.
Foreign Investment Protection Board(FIPB) has cleared 20 FDI proposals worth 916
crore in the month of October. This also includes approval given to Tata Group and
Singapore International Airlines for a 51:49 joint venture to set up an airline in India
entailing an initial foreign investment worth 303.18 crores. The two companies
announced their venture on September 20, 2013 to set up an airline with an initial
investment of around $100 million. The airline is likely to become operative by summer
2014. Other approvals include Rs 179.43-crore proposal of Religare Enterprises to
issue warrants to carry out the business of Investment Advisory Services and Financial
Consultancy, the Rs 22.19 crore proposal of JM Financial to issue warrants to set up a
core investment company. The two proposals -- DLF Limitless Developers and SingTel Global (India) are kept on hold.
The proposal of DLF was to exit foreign investors and the repatriation of the capital. SingTel's proposal was to hike the foreign
equity participation of the existing foreign investor from 74 percent to 100 percent in telecom sector company for an
investment of Rs 2.98 crore.
The World Bank slashed India's economic growth forecast for the current financial year to 4.7 per cent from an earlier
projection of 6.1 per cent. The IMF, in its World Economic Outlook, projected an average growth rate of about 3.75 per cent,
based on market prices, for India in 2013-14, that is expected to pick up to 5.1 per cent next fiscal As per the IMF Asian
economies has been hit by growing expectations that the U.S. Federal Reserve may soon taper its asset purchase program
and there has been a reversal of capital inflows across much of emerging Asia. Stock prices have fallen, currencies have
weakened, and borrowing costs for companies and governments have risen. However, India and Indonesia have been harder
hit. High inflation and a reliance on foreign borrowing have left both countries exposed to shifts in global liquidity. Investors are
moving their money out because of increased currency risks in these economies. In both countries, central banks have raised
interest rates and further rises will likely be needed in the coming months.
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However the Indian government is confident of achieving a growth rate of 5-5.5 percent growth rate. The government is
expecting the manufacturing sector to do well in second half as it will gain from the measures announce last 5-6 months.
Coal allocation scam or Coalgate is a political scandal concerning the Indian government's allocation of the nation's coal
deposits to public sector entities (PSEs) and private companies under Prime Minister Manmohan Singh (the Prime Minister
was also Coal Minister during some of the years under scrutiny). In a draft report issued in March 2012, the Comptroller and
Auditor General of India (CAG) office accused the Government of India of allocating coal blocks in an inefficient manner during
the period 20042009. Kumar Mangalam Birla, the head of the Aditya Birla Group & one of the richest industrialists in India,
has been charged with conspiracy and cheating to land two coal blocks in Odisha in 2005 for his firm, aluminum-maker
Hindalco. PC Parakh, who was Coal Secretary when Hindalco landed the coal licenses that are being probed by the CBI, has
also been accused of corruption in the new case filed today by the CBI. The agency is investigating how and why private firms
landed mining rights at throwaway prices from the government which did not auction coal fields or maintain records of its
decisions, according to investigators. Details of the 14thFIR in the coal blocks allocation scam which names PC Parakh and
Kumar Mangalam Birla reveals that the former changed the decision of the screening panel committee that was held in 2005
after a personal meeting with the industrialist. Some are speculating that it may hurt investments & create negative
environment in Indian markets but CBI has assured that if there is nothing found in the investigation, it will close the case
against Birla & Parakh. PMO has also provided all the available files to the CBI. It will be best scenario that the law takes its
course & everything comes clear.
The positive movement in the stock market is like a ray of positive hope for the Indian
financial market. But how far Narendra Modi is responsible for this positive
movement is still a debatable topic. Apparently, the stock market has risen since the
time Modi was anointed PM candidate. But Modi solely is not responsible for this
growth; there are many other factors such as appointment of Raghuram Rajan as a
new RBI governor, Setting of CCI (Cabinet Committee of Investments) by
Chidambaram, Global tour by Chidambaram to boost the Global Investment and
postponement of the US Fed's QE program. Raghuram Rajan, everyone knows what
the man has done since he took over in September. In fact, the maximum correlation
between the Sensex and anything is with Rajan's arrival. The man controlled the precipitous fall of the rupee in no time,
bringing confidence back into the external sector. He launched the forex swap scheme bringing in $10 billion already. He
allowed banks to borrow abroad to double the limit they were allowed to earlier. In short, he brought sense back into the
senseless fall of the rupee. In recent times, the Sensex has responded most to the fate of the rupee, not the fortunes of
Narendra Modi. Hence, this could be seen that market is rising not only because of the anointment of Modi as Prime Ministerial
candidate but also because of the improving business scenario.
The recent American shutdown was a result of deadlock between American Democratic and Republican Party with each party
holding an adamant position. There was a lack of consensus among the two regarding healthcare policy popularly known as
Obama Healthcare. American federal government require annual authorization to raise debt ceiling . Unless Congress votes to
fund roughly 35% of budget annual authorization treasury stopped paying bills such as salaries, pensions , just to name a few.
On October 16, 2013Congress passed a deal to reopen the federal government, raise the debt ceiling and avoid a sovereign
default. Written into the pact, however, were two horrible words: January and February. Unless the two parties can agree on a
budget deal the government will run out of money again, bringing another partial shutdown on January 15, 2014. Then, on
February 7, 2014 government borrowing will once again touch the debt ceiling.
The recent slide in value of rupee was exacerbated by trade in NDFs. NDF (Non- Deliverable Forwards) are popular derivative
instrument catering the demand of foreign investors who want to hedge the risk against the currencies which have foreign
exchange convertibility restrictions. This is how an NDF works. Foreign investors are currently not allowed to hedge their rupee
exposure in the Indian over-the-counter (OTC) or exchange-traded markets and must go through category-I banks. This has
forced them to use the NDF market, where there are no restrictions and transactions costs are lower as are barriers to trade.
Coalgate Scam
Politics & Stocks
US Shutdown
NDF Market
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Most of the NDF markets are centered in New York, Singapore and Dubai. During recent
depreciation in the value of rupee NDF was not used only as a risk management tool and
large amount of trades were done by the speculators who were speculating rupee to fall to
Rs.70/$. The speculation activity added to the negative sentiments which therefore lead to
the fall in value of rupee. Since the NDF market are located offshore they are therefore not
under the regulatory ambit of RBI or Government. The government has decided to mitigate
the impact of NDF market - where contracts in the currency worth billions of dollars are traded
every day - by persuading those active in it to shift to the onshore currency futures market in
India by easing restrictions. The move is part of the next generation of financial sector reforms
on the government's agenda.
A company or government needs funds to expand into new markets, while
governments need money for everything from infrastructure to social programs. The
problem large organizations run into is that they typically need far more money than
the average bank can provide. The solution is to raise money by issuing bonds (or
other debt instruments) to a public market. The World Bank's private-sector arm is to
offer up to US$1bn of global rupee-linked bonds in a move that will boost the Indian
currency's profile in the international capital markets. The coupon and settlement of
the bonds will be in dollars but the proceeds will be converted into rupees and
allocated to private sector projects in India. Investors in the bonds will bear the
exchange rate risk, but are likely to benefit from a wide interest differential between India and the United States. The
International Finance Corp's bond program, the most significant development to date in the offshore rupee market, comes as
India is stepping up measures to attract foreign investors and restore confidence in its embattled currency. It also points to a
liberalization of the closely controlled rupee, in line with comments from the country's newly installed central bank governor."In
these times of uncertainty for the Indian economy, IFC has been given the support and approval by the Indian Government to
launch the Indian offshore rupee program," said IFC treasurer Jingdong Hua. The new bonds will settle in US dollars, but
principal and coupon payments will vary according to the rupee exchange rate. As with standard Eurobonds, they will be
accessible via Euroclear, removing the need for buyers to navigate India's complicated quota and registration system, while
IFC's Triple A rating will allow investors to avoid any Indian credit risk.
A global rupee-linked bond from IFC will further lift India's profile among international investors, giving a much-needed
funding boost to a country that aims to mobilize US$1trn in infrastructure investment in the five years to 2017. It will also
support the country's balance sheet, as IFC plans to repatriate all the proceeds from the offshore program to India to fund its
private-sector investments. As of June 30 2013, India accounted for US$4.5bn of IFC's committed investment portfolio - more
than any other country. IFC invested US$1.38bn in India in the year ending in June. A global rupee-linked bond from IFC will
also promote interest in India's capital markets at a time when officials are looking to lower many longstanding barriers to
entry. Currently, only investors that have registered with India's local securities regulator can bid for a quota to invest in
government bonds. The creation of an offshore market for rupee-denominated debt, however, may be one way for the
government to increase the pool of potential buyers without relinquishing control over the local market.
Quantitative easing, the unconventional policy of Fed adopted after sub prime crisis to inject liquidity in the system. Under this
policy Fed injects $85 billion into the Us economy, which is facing high inflation and unemployment. A central bank implements
quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions thus
increasing the monetary base. When interest rates have been lowered to nearly zero (because of either deflation or extremely
low money demand), when a large number of non-performing or defaulted loans prevent further lending (money supply
growth) by member banks, and when the main systemic risk is a recession or depression because banks cannot lend any more
money, then central banks need to implement a new set of tactics. These are known as quantitative easing. QE's purpose is to
artificially increase demand of low-risk US assets and thus bringing down their yield. Hence forcing investors to invest in high
risk bonds, which drive US growth. During this period a large part of investment gets flown to Developing World. During QE
period American investors have access to low interest money. However, with withdrawal of QE, interest rates rise steeply. This
may lead to investors quickly pulling out their money which they had earlier invested in developing countries, leading to
Rupee Bond
Quantitative Easing
-5-
sudden depreciation of their currencies. This effect tends to even exaggerate when these economies are in a high fiscal deficit
condition. India is facing a high inflation situation. As a depreciated rupee implies costlier oil imports, this high cost is either
transferred to consumers leading to higher consumer good inflation or subsidized by government leading to high fiscal deficit.
Since RBI does not have enough funds to support Indian rupee, it has raised the interest rate. Oil imports are inelastic but Indian
export( IT sector) demands has not raised that much. However with Indian currency stabilizing and CAD decreasing, the
situation seems to be improving. Hence we can hope that with Fed withdrawal of policy by mid 2014, India would be
unaffected.
I am Priyanka Verma. I done my Summer Internship project with DE shaw & Co. As a part of my internship project, I worked on
assessing investment opportunities in unexplored territories with the help of fundamental analysis which involved analysing
the destined economy, the industry and ultimately the company. SWOT and PESTEL Analysis of the countries wherein the
companies are situated were done to assess the overall scenario. Lots of approaches were used in the valuation of company
like Discounted Cash Flows (DCF) and Dividend Discount Models. After a thorough analysis, I forecasted revenues for the
company and prepared a debt schedule for the forecasted years to critically evaluate the company's ability to repay debt
obligations. With the results from the all the levels of analysis: Economy, Industry and Company, recommendations were given
regarding investment in those particular securities and thereby an ideal portfolio was made of the securities of various
companies for investment. DE Shaw & Co. benefitted in terms of the thorough in-depth research of one of the areas of
investment they had been looking for to invest in. With the use of qualitative as well as quantitative tools like forecasting the
economic and political environment and backing it with quantitative techniques using software like SPSS, R software, and
EViews, I could provide an overall picture of the existing scenario and most likely scenario for the future in the coming years
from 2014-2017. It was a learning experience for me, overall. The managers I worked under for my project encouraged me to
think out of the box and think of all possible scenarios before coming down to my conclusion. The work environment was
conducive and apart from project learning, I also engaged myself in Sports Tournaments conducted at the company every year.
Summer Internship Experience
Newsletter Team
Monika Agarwal
Preksha Chorasia
Mohit Agrahari
Ashish Sharma
Ashish Periwal
Sujit Pandey
Kriti Singh
Garima Madan
Coordinating Team
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Lal Bahadur Shastri Institute of Management, Delhi
Plot No. 11/7, Sector - 11, Near Metro Station, Dwarka, New Delhi - 110075
Phone : 011-25307700 Fax : 011-25307799
www.lbsim.ac.in