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Niveshak

THE INVESTOR VOLUME 4 ISSUE 3 March 2011

BUDGET 2011

THE
balancing act


Housing MFI PG.08 Facebook valuation PG.16
FROM EDITOR’S DESK Dear Niveshaks,
The last few months have been bad for the world economy in gen-
eral. The Libyan Crisis, high oil prices, European debt woes and now the
Tsunami in Japan, there seems to be no respite for the global markets. The
Niveshak latest natural calamity in Japan sent shock waves across the global mar-
Volume IV kets and pounded commodities and equity markets worldwide. Japan, the
ISSUE III world’s third largest economy is also the world’s third largest energy con-
sumers and imports almost all its energy needs. As a result, the rally in the
March 2011 oil market came to a halt and the crude slid below $100 for the first time
ever since the beginning of political unrest in the oil-rich Middle East and
North African regions. As far as the equities markets are concerned, the
MSCI’s entire country world index fell to a five week low and most of the
Faculty Mentor Asian markets tumbled including Sensex which fell by 154 points on back
Prof. N. Sivasankaran of the Japanese disaster. The IIP numbers for the month of January that
came on March 11 also didn’t present a rosy picture. The industrial growth
was a meagre 3.7% as compared to a robust 16.8% in the same month last
year. The sectors mainly responsible for the tepid overall growth, as mea-
THE TEAM sured by IIP, were manufacturing and mining which witnessed significant
deceleration in output. One of the reasons for the dismal IIP numbers over
the last few months has been the tight monetary policy of RBI to curb infla-
Editor tion. Against a slowing industrial growth, it would be interesting to see the
Rajat Sethia policy measures taken up by RBI in its upcoming policy review meeting on
March 17.
The other big story this month has been our Union budget. The three
Sub-Editors key macroeconomic concerns before the Union Budget 2011-12 were high
Alok Agrawal inflation, high current account deficit, and fiscal consolidation. Additionally,
Deep Mehta there was an expectation that the government would restart the reform
Jayant Kejriwal process. The Budget has made an attempt to address all these issues. By
Mrityunjay Choudhary and large, the budget was a balancing act. It ventured little and gained little.
Sawan Singamsetty As far as the market reaction was concerned, no bad news was good news
and the markets saw a short lived rally post budget. The three key themes
Shashank Jain
of this year’s budget were fiscal consolidation, inclusive growth and focus
Tejas Vijay Pradhan on agriculture and infrastructure financing. The greater outlay and liberal-
ization of FDI/FII in infrastructure is an example of Government’s renewed
focus on infrastructure sector. Social sector spending too remained one of
Creative Team the top priorities of the government. However, refraining from announcing
Vishal Goel new schemes, the budget laid stress on providing reasonable allocation to
Vivek Priyadarshi the existing schemes, in order to curb fiscal deficit and provide room for the
already committed Right to Food Act.
The month’s cover story on ‘Union Budget’ delves further into various
All images, design and artwork aspects related to the budget and the impact it will have on various industri-
are copyright of al sectors. Given the focus of the budget on inclusive growth and infrastruc-
IIM Shillong Finance Club ture, the ‘Article of Month’ explores the topic of Housing Microfinance and
its role in supporting affordable houses for masses in India. The other big
news this month was about General Atlantic buying a tenth of Facebook
and valuing the company at $65 billion. Earlier in January, Goldman Sachs
©Finance Club had valued the company at $50 billion. The present issue features an article
Indian Institute of Management on the Facebook valuation and digs into whether the high numbers truly
Shillong reflects Facebook’s value. The issue also features an article on the ‘Jasmine
Revolution’ in the Middle East and its impact on the inward remittances to
www.iims-niveshak.com India. Lastly, the month’s classroom focuses on the option trading strategy
‘Dividend Arbitrage’ and the type of securities it is best suited for.
Stay invested.

Rajat Sethia
(Editor -Niveshak)

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Niveshak Times finsight
04 The Month That Was 16 Facebook Valuation

Cover Story
12 BUDGET 2011

PERSPECTIVE
19 Jasmine Revolution - Impact
on Inward Remittances

Classroom Article of the month


21 Dividend Arbitrage 08 Housing MFI

FINLOUNGE
22 Fin-Q
www.iims-niveshak.com

The Niveshak Times


IMPLEMENTING BASEL-III NORMS WILL BE A MAJOR CHALLENGE FOR THE
RBI

TEAM NIVESHAK
IIM, Shillong

ONGC’s Navaratna status in danger exercise is believed to be a part of the larger Hin-
Oil and Natural Gas Corp (ONGC), India’s most prof- duja Group corporate branding exercise which is
itable firm, will lose the coveted Navaratna status underway. London-based firm Wolff Olins is said
and the accompanying financial autonomy in its to be working on the rebranding and category
rush to the Rs 11,500 crore share sales scheduled segmentation exercise for Ashok Leyland. Ashok
next month. The govern- Leyland is segmenting and branding the different
ment plans to withdraw product categories it will now inhabit thanks to its
both of its directors on tie-up with Nissan and other global alliances. The
the ONGC board to meet Hinduja group is also working on a strategy to give
the capital market regula- a common corporate and brand identity to all the
tor SEBI’s listing norm of companies in the group.
having equal number of Buffet makes entry into India through in-
functional and indepen- surance business
dent directors to allow Warren Buffett’s Berkshire Hathaway has made an
Rs 11,500 crore public offering ( FPO) on April 5, entry into India through the insurance distribu-
sources said. The move would, however, lead to tion business. Berkshire
ONGC losing its Navaratna status that gives the will directly market motor
The Month That Was

company board autonomy to approve investment and other retail insurance


in its projects and of up to Rs 1,000 crore spending products of private insur-
in a joint venture company. er Bajaj Allianz through a
Insider Trading Charges on Rajat Gupta corporate agency. Berk-
Federal regulators Securities and Exchange Com- shire India, a majority-
mission have charged Rajat Gupta, a former Gold- owned unit of Berkshire
man Sachs board member with insider trading, Hathaway Inc has been
saying he provided confidential information to incorporated and has re-
the central figure in a major hedge fund probe. ceived a corporate agency
The agency said Gupta gave Raj Rajaratnam, the license from the IRDA to sell and distribute gen-
founder of the Galleon Group hedge fund, confi- eral insurance products in India through their on-
dential information about quarterly earnings of line distribution portal. Initially, the focus will be
Goldman and Procter & Gamble, where he is cur- on motor insurance, but the company will then
rently a board member. The SEC also said Gupta update its business model to include other retail
provided Rajaratnam with confidential information products such as life, health and householders in-
about Berkshire Hathaway’s planned $5 billion in- surance.
vestment in Goldman at the height of the financial RIL group entities to suffer due to new LLP
crisis. Gupta also serves as the chairman of one of laws
India’s premier b schools, Indian School of Busi- The government has proposed that all LLPs will
ness (ISB). now pay tax at the rate of 18.5%, though it is still
Ashok Leyland to undergo rebranding not very clear if these entities will continue to en-
Hinduja group company Ashok joy tax breaks like not paying the dividend distri-
Leyland (AL) is in the process bution tax. The new levy called alternate minimum
of going through a major brand- tax (AMT) has been specifically introduced for LLPs
ing exercise which will include a to plug the revenue leakage under the income-tax
change in its logo, name as well act, and is effective from April 1, 2011 for finan-
as category segmentation. The cial year 2011-12 and assessment year 2012-13. At
present, LLPs have many tax advantages over oth-

4 NIVESHAK VOLUME 4 ISSUE 1 january 2011


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The Niveshak Times


EX-MANAGING PARTNER OF MCKINSEY, RAJAT GUPTA ACCUSED OF
INSIDER TRADING BY THE US SEC

er companies. For instance, LLPs are not subjected a $2-billion deal with Saudi Telecom Company, in
to minimum alternate tax (MAT), surcharge or divi- which the global outsourcing services company
dend distribution tax. The passage of the budget will manage the customer care operations of the
in Parliament will change this. The tax imposed largest telecom operator in the Kingdom of Saudi
on LLPs may, therefore, impact 27 companies con- Arabia. The joint venture, Contact Centre Company,
trolled by Mukesh Ambani and family, which hold will be near-equally owned by the two arms, with
the 35% promoters’ stake in Reliance Industries 50% plus one share being held by STC and the rest
(RIL). Last year 35% of the promoters holding in under Aegis, which will have operational control
RIL, currently worth about Rs 1.2 lakh crore, were and responsibilities.
transferred to these LLPs for tax advantage. Face book valuation up to $65 billion: Gen-
SBI bond issue witnesses 4.5 times retail eral Atlantic is expected to
oversubscription: Retail investors have lapped buy a 0.1% stake in Face
up the Rs 1,000-crore State Bank of India bond is- book, an investment which
sue 4.5 times taking the overall subscription to a will value the social net-
full 8.5 times. Retail investors have put in bids for working site at $65 billion.
Rs 4,500 crore, against the The General Atlantic invest-

The Month That Was


minimum Rs 500 crore on ment involves the pur-
the offer, while the quali- chase of a block of roughly
fied institutional investors 2.5 million shares of stock
have bid for Rs 3,500 crore from former Face book employees. The last major
compared to the mini- investment in Face book, made in January, had val-
mum offer of Rs 250 crore, ued the company at $50 billion. The company had
and those from the high said it raised $1.5 billion in a financing round led
net worth individual touched a little over Rs 500 by Goldman Sachs and Digital Sky Technologies.
crore, which is double the offer. The issue, which The latest investment, which values the company
opened for subscription on February 21, closed on at $65 billion, means that the social networking
28th of same month. This issue is part of the Rs site’s value has grown by 30% in less than two
10,000-crore retail bond program SBI has planned months.
for FY11 through FY12. Exports register 50% growth in February:
BP-RIL ink $7.2 billion deal: BP has entered The recovery in the West is showing on Indian ex-
into a $7.2-billion deal to jump into India’s oil and ports which grew 49.8%, the fastest pace of ex-
gas sector with Reliance Industries. The partner- pansion seen in 11 months. Provisional numbers
ship across the full value chain comprises BP tak- estimated exports at $23.6 billion during February
ing a 30 per cent stake in 23 oil and gas produc- and took the cumulative numbers for the current
tion sharing contracts that Reliance operates in financial year beyond the $200 billion target for
India, including the producing KG D6 block, and 2010-11. This year, exports have been propelled by
the formation of 50:50 joint venture between the traditional areas of strength such as engineering
two companies for the sourcing and marketing of (81% growth to $52.7 billion during April-February)
gas in India. The joint venture will also endeavor as well as newer items such as petroleum (34%
to accelerate the creation of infrastructure for re- growth to $32.9 billion) and pharmaceuticals (15%
ceiving, transporting and marketing of natural gas to $9.1 billion). The impact of the prolonged slow-
in India. The partnership will combine BP’s world- down and the consequent fall in demand was evi-
class deepwater exploration and development ca- dent on two Indian strongholds-gems & jewellery,
pabilities with Reliance’s project management and where the value of shipments has increased by
operations expertise. 5.4% to $26.9 billion and readymade garments,
Aegis, Saudi Telecom sign $2 billion deal: where exports went up 2% to $10 billion during
Aegis, a part of the Essar Group, recently signed April-February.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5


www.iims-niveshak.com

Market Snapshot
AoM Perspective

Source: www.bseindia.com
as

www.nseindia.com
Month That W

MARKET CAP (IN RS. CR)


BSE Mkt. Cap 65,36,555.70 BSE
Index Full Mkt. Cap 27,87,595.97
TheFinGyaan

Index Open Close % change


Index Free Float Mkt. Cap 14,74,877.80 Sensex 18,238.54 18,439.48 1.10
Source: www.bseindia.com
MIDCAP 6,661.65 6561.48 -1.50
Smallcap 8128.91 7920.72 -2.56
CURRENCY RATES AUTO 8755.25 8828.14 0.83
INR / 1 USD 45.15 BANKEX          12412.93 12358.31 -0.44
INR / 1 Euro 62.95 Consumer Durables 5719.04 5785.03 1.15
INR / 100 Jap. YEN 55.00 Capital Goods 13198.97 12646.73 -4.18
FinSight

INR / 1 Pound Sterling 72.58 FMCG 3309.49 3515.81 6.23


Healthcare 5956.83 5858.03 -1.66
IT 6234.34 6240.78 0.10
METAL 15920.87 15676.33 -1.54
OIL&GAS 9329.44 9936.95 6.51
POWER 2613.91 2586.58 -1.05
PSU 8528.08 8594.90 0.78
REALTY 2046.78 2,120.19 3.59
TECk 3648.42 3642.93 -0.15
Source: www.bseindia.com
21st February to 14th March 2011

Data as on 14st March 2011

6 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


www.iims-niveshak.com

Market Snapshot
RESERVE RATIOS
CRR 6%
SLR 24%

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LENDING / DEPOSIT RATES POLICY RATES
Base rate 7.6% - 8.5% Bank Rate 6%
Savings Bank rate 3.50% Repo rate 6.75%
Deposit rate 7% - 8% Reverse Repo rate 5.75%

Perspective
Gold INR 20871.00 / 10 grams
Silver 53620.00 / kg

The
WPI 8.31%
Crude Oil $99.07

Month
Index of Industrial Production (IIP) 3.70%

FinGyaan
That Was
FinSight

Note: Rank is mentioned after the name of the person

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 7


Potential Answer to India’s Housing Problem
CHARU BHATIA & SAURABH SINGHAL
NMIMS, Mumbai
THE HOUSING SECTOR SCENAR- Since there LIG/EWS constitute
Housing Micro Fi-
IO around 99% of those suffering from
nance represents housing shortage, targeting them
House is a basic need and important
one of the growing to ensure safety and health. Home is an effective method to alleviate
portfolios of Micro ownership gives you and your fam- the problem. Poor people in rural
and urban areas prefer to make im-
Finance Institu- ily a sense of stability and security.
About 60% of a poor person’s as- provements to their existing house
tions worldwide. rather than move to a new unit.
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sets are represented by his home.


In times when the The investment in housing can thus Thus, redevelopment of the houses
commercial banks be a significant gauge of social and is an integral issue to the problem.
and the traditional economic status for a poor person. LOW INCOME HOUSING PROB-
micro finance mod- In India, the right to housing and LEM
adequate shelter is guaranteed in The supply of low income hous-
els have not been the Directive Principles of State Pol- ing finance is constrained mainly
very successful in icy. Consequently, both central and because of commercial banks’ in-
making housing state governments have an obliga- ability to accurately assess credit
finance available for tion to keep this provision in mind risk associated with low income
while formulating laws and policies. borrowers, lower profit margins,
low income people,
But not everyone has access to this lack of land titles, and uncertainty
the housing micro basic need. As per The Ministry of of repossession. While the penetra-
finance model has Housing and Urban Poverty Allevia- tion of traditional mortgage finance
supported mass tion, at the end of tenth five year market in India is already minis-
plan (2007-08) the total housing cule, the penetration of low income
housing and reaf-
shortage in the country stands at housing is even smaller. Few banks
firmed as the cen- 24.71 million dwelling units. Nearly service low-income households and
trepiece program of the whole of the housing shortage tend to offer long-term mortgage
government in pov- in the country, as high as 99.84 per- loans which extend out to twenty
cent, relates to the underprivileged years and require a down payment
erty alleviation.
group i.e the low income and such between 10% and 30% of the home
other marginalized groups who are value, payslips, and a legal title to
beyond the reach of the formal in- the property. Even in the case of
stitutional agencies for housing fi- HDFC, whose proposed objective is
nance. to serve middle- and lower-income
clients, they require a legal title to
CATEGORY HOUSING SHORTAGE (in Milions)
Economically Weaker sections (EWS) 21.78
Lower Income Group (LIG) 2.89
Middle Income group (MIG) and High 0.04
Income Group (HIG)
TOTAL 24.71
Table 1: Housing Shortage Across Income Sectors

“While finance companies say ‘We’ll provide the credit, but who’ll construct?’, developers say
‘We’ll construct, but who’ll provide the buyers credit?’. This is a situation that needs to change.”
- R.V.Verma (NHB Chairman)

8 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


the house and clients to be formally employed or The central government also started a scheme
business owners with audited financial statements. under the name of The National Urban Renewal
As a result, only about 10% of their consumer hous- Mission (NURM) in 2005-06, which provides grants
ing portfolio is directed towards the lower middle to State housing boards to improve living condi-
and low income groups. tions in a holistic manner for the urban poor.
In the Indian context, a significant point to HOUSING FINANCIAL INSTITUTIONS HIERAR-
note is that the Housing Finance industry has been CHY
growing at a CAGR above 20% over last decade while
the Micro Finance sector has had an explosive CAGR
of more than 50% in the last five years. But when
we look at the Housing Microfinance segment, the
growth has not been proportionate. The fact clearly
highlights two points –

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1. A significant proportion of finances in
Housing Industry are used for Upper Income Hous-
ing needs.
2. By and large, the Low Income Housing is
not the primary focus of Micro Finance firms.
CHANGING ENVIRONMENT Figure 2: Housing Finance Institution Hierarchy in India
The Government of India has drawn its atten-
tion into the low income housing issue since 2000s. The most important public player in housing
The support comes in the combination of subsidies finance in India is the National Housing Bank (NHB).
and new housing construction and through the NHB was set up on July 9, 1988 under the National
slum up gradation and redevelopment programmes Housing Bank Act, 1987. It is the regulatory body
in the urban areas. Such programmes frame the for housing finance institutions and principally
environment within which any financing institution promotes housing finance institutions at regional
in the low income housing sector would have to levels. Both provide loans to housing finance insti-
function. tutions which are then lent to low-income house-
Following graph displays the rising invest- holds. They also refinance these housing finance
ments in the housing sector: institutions.

Figure 1: Housing Investments across Five Year Plans

The Housing boom has been


limited to the middle and up-
per income residential and the
commercial property market.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 9


EVOLUTION OF HOUSING MICRO FINANCE HOUSING MICROFINANCE EXPERIMENTS IN
(HMF) INDIA
Realizing the huge demand and supply gap 1. Government Microfinance Schemes
for low income housing in the last decade due to Apart from the construction projects like Indira
the inefficiency of the existing financial models, the Aawas Yojna, the government (central and state) is
government has been formulating reform policies taking initiatives to finance the LIG & EWG sector
which led to the rise of Housing Micro Finance or through micro finance channels. The government
Micro Housing concept. The two paths by which the agencies like NHB and NABARD play a major role in
Housing Microfinance model has evolved are: this regard. A good example is the “Bhavanashree”
Shelter Advocacy to Housing Finance (SAHF): project being carried out by the Kerala State Govern-
It grew out of slum up-gradation efforts, and hence ment. Bhavanashree program is the HMF wing of the
the primary focus is on land rights and shelter advo- ‘Kudumbashree’ project, which is aimed at poverty
cacy rather than credit terms. Since more emphasis eradication in the state. About 48000 households
is placed on human development indicators than have already benefitted with this program and on
AoM

on financial performance, SAHF tends to have larger an average micro loans of INR 50000 is provided to
loan amount used for longer tenure. a single party. Another example is the tie up of NHB
Micro-Credit to Housing Finance (MCHF): It has with REPCO bank in 2008 to cover 10,000 members
evolved naturally out of conventional micro-credit in 5 years with an outlay of Rs.100 Crore under rural
programmes, as over the time MFIs realized that housing Microfinance scheme.
a sizable portion of loan is used by their clients 2. Collaboration of Commercial banks with
towards their home improvement. The financial per- NGOs
formance and parameters are of prime importance The low income housing is not an attractive
in this case. proposition for commercial banks. However, col-
HMF MODEL: KEY FEATURES laborating with NGOs and other such organizations
A housing micro loan generally ranges from allows them to lend in bulk and reap benefits for
INR 50,000 to INR 600,000 and the tenure may ex- themselves. In such an arrangement the organiza-
tend from 5 years to 15 years. Although the interest tion acts as the bridge between the bank and the
rates are high (12%-18%) and are mostly unsecured, actual borrowers. For instance in the SEWA Project,
these loans do not require any official statements of HDFC disbursed a cumulative amount of Rs. 4.37
income for loan sanctioning. The non requirement crores to the SEWA Bank, Ahmadabad. A significant
of such documents and near to zero collateral is the portion of this fund was used by SEWA to address
key to target the EWG and LIG sector. Such loans are the housing needs of its women members.
sometimes accompanied by land acquisition, land 3. Entry of Private Micro financing firms
registration and construction (including self-help Realising that the major portion of credit is
building techniques) being used to meet the housing needs of the poor,
The following illustration shows the feasibility MFIs have started coming out with separate hous-
of such loans: ing products for borrowers with good credit history.

Figure 3: Illustration on HMF loan calculation


10 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011
Adhikar (MFI operating in Orissa) started Adhikar affect repayment which is one of the biggest risks
Basa Gruha Loan (Housing Loan) in 2008. Going a to this model from lender’s perspective. Another
step ahead, few players in MFI domain have shift- challenge is to sustain the micro housing loans due
ed their focus exclusively on housing sector. Micro to its quantum and long tenure while high interest
Housing Finance Corporation (MHFC) is one such rates also discourage the borrowers to seek loans
firm that has already started making it big within from HMF. One of the other bottlenecks is that the
two years of its operations. Since its inception in MFIs often do not have the expertise to provide
2008 in Mumbai, the firm has already disbursed technical assistance regarding construction. As a
about 350 housing loans and has entered into part- result, these services have to be outsourced, the
nerships with trusted builders like Tata. cost of which ultimately get passed on to the con-
4. The Self Help Group Channel sumer. Apart from this, even government subsidies
can also be a problem for the lender. Although the
Both the public and private institutions are
subsidies were introduced by the government to
specifically looking to tap the Self Help Group chan-

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support the finances, such measures perpetuate a
nel. Apart from NGOs, the SHGs give a substantial
culture of non-repayment on part of the borrowers.
opportunity to the financing institutions to not only
reach out to the poor but also to identify the right In spite of the presence of such challenges,
individuals for granting loans based on their credit the road lies ahead for the HMF. The concept is
worthiness. NHB has undertaken a pilot project in still in its nascent stage and it is hoped that with
this direction called as PHIRA (Productive Housing the passing time, it can overcome such obstacles.
in Rural Areas). The project has planned to cover Few ramifications measures can be in the form of
10,000 members in 5 years with an outlay of $25 deployment of Hidden subsidies, mortgaging legal
million. titles wherever possible and creating awareness for
‘progressive building’ in the construction arena.
THE SUCCESS STORY
CONCLUSION
HMF v/s MFI
HMF is one of the growing portfolios of MFIs
Though the MFI model addresses the credit
worldwide. Researches done by international agen-
concern of LIG, certain characteristics were re-
cy USAID in various countries have revealed the
quired to be tweaked in order that it works in the
immense potential of HMF. In China, the housing
housing domain. As one of the portfolios of the
market was liberalized only during the late nine-
MFI, the HMF model has following advantages over
ties by allowing a ‘one-time’ equity grants based
tradition MFI:
on the market value of their existing housing are
• Larger and longer loans given to enable them to access mortgage instru-
• Unlike MFI where the repayment capacity ments The success of subsidy program in Chile and
is measured in terms of loan usage to generate fu- social housing program in South Africa are other
ture income, in HMF this capacity is based only on major success stories and these have been pos-
current income and future income as the housing sible through government establishing partnership
asset does not directly generate income with housing institutions, communities, the private
• It removes the social collateral inherent in sector and NGOs. Since market forces will generally
MFI model which is very important as the housing not provide housing that the poor can afford, and
loans should target to the individuals further market forces will never have the ability to
HMF is a non-subsidized, sustainable ap- do so until these masses cease being poor, it is up
proach tailored to meet the housing needs of the to government to take the initiative.
entrepreneurial and working poor. Hence it results Looking at the success of the MHF models al-
in asset creation for the poor at the needed scale ready implemented coupled with the government’s
as demand for social housing continues to grow. In reforms in (i) the land (grant of land security to
the times when commercial banks and MFI models poor, reduced government interventions in land
have not been very successful, the housing micro market), (ii) finance (down marketing housing fi-
finance or the micro housing model has supported nance, fiscal incentives to the private sector devel-
mass housing and reaffirmed as the centrepiece opers, micro-finance institutions) and (iii) capital
program of government in poverty alleviation. subsidies, we believe the model is here to stay and
FEW BOTTLENECKS is the potential answer to India’s housing problem.
The volatile income of low-income groups and
the vulnerability of these small economic shocks
in absence of appropriate collateral can adversely

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11


BUDGET 2011
Cover Story

A Balancing Act TEAm niveshak


IIM Shillong
pected to adversely im-
Budget 2011 has in- pact the profitability
deed been a balancing of IT companies.
act with the finance The textile sector
is also going to get
minister leaving some- negatively impacted as a
thing on the table for The
three key mac- mandatory excise duty of 10% is be-
everyone. Though he roeconomic concerns before the ing imposed on branded ready-made
reiterated that elections Union Budget 2011-12 were high in- garments. The further analysis of the
flation, high current account deficit, impact of union budget on individu-
were not the main mo- al sectors has been done in the fol-
and fiscal consolidation. Additional-
tive in a country mired ly, there was an expectation that the lowing sections.
by high inflation and government would restart the re- BFSI
rising fiscal deficit, yet form process. The Budget has made The budget has been quite
the government tried an attempt to address all these is- positive for BFSI sector with minimal
sues, albeit through small steps. De- interest subventions, assistance to
an aam aadmi orienta- spite the strong performance of the micro-finance companies and prob-
tion by giving a boost economy in 2010-11, the outlook for ability of issuance of bank licenses
to agriculture and rural 2011-12 is clouded by stubborn and to NBFC’s.
development, infrastruc- persistently high inflation, and rising To start off, FM addressed some
external risks. By lowering the fis- concerns by raising the corporate
ture growth and hous- cal deficit target to 4.6 per cent in bonds limit for FII’s to $40 billion.
ing, as well as banking 2011-12 from 5.1 per cent achieved This will indirectly ease pressure on
and FMCG sector. Over- in 2010-11, the Budget reiterates its domestic money by increasing ac-
commitment towards medium-term
all it’s a thumbs-up for fiscal consolidation. As the Budget
cess to foreign money. This will im-
prove liquidity in the system. Also,
the congress govern- sets a lower deficit and net borrow- FII’s are now allowed to invest in
ment. ing target, it is not expansionary, mutual funds which will give a boost
and does not conflict with the RBI’s to mutual fund industry.
measures to tame inflation, at least
The decision to allocate Rs. 60
in intent. From an industry perspec-
bn for some PSU banks to help them
tive, the budget focused on support-
maintain Tier-I capital at 8% will
ing agriculture, infrastructure and
benefit banks like PNB, Vijaya Bank,
construction companies. The greater
Dena Bank, Union Bank. Announce-
outlay and liberalization of FDI/FII in
ment of a lower fiscal deficit at 4.6%
infrastructure is an example of the
of GDP in FY12 will be beneficial for
focus on infrastructure sector. The
all banks as this will be good for
proposal to bring SEZ units under
government bond yields.
the purview of the Minimum Alterna-
tive Tax (MAT) and the non-extension Most banks and housing fi-
of tax benefits for STPI units is ex- nance companies like LIC housing,
HDFC, Dewan housing will be ben-

12 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


efitted by raise in housing loan limit to Rs.2.5million gate - NEGATIVELY. Again, this was compensated by
from Rs.2 million. a 250bps reduction in surcharge on income tax from

Cover Story
Allocation of Rs. 60bn for re-capitalization of 7.5% to 5%. One major benefit to FMCG companies
banks is less than the figure in FY11 but will still in short term would be the increase in allocation
have a POSITIVE impact on SBI, IDBI, Canara bank and under Rashtriya Krishi Vikas Yojana – a rural initia-
Central Bank. tive on income generation. Allocation of Rs. 3 bn
for improved production of pulses will be beneficial
Market expected some decision on the gov-
to companies such as HUL, Marico and Godrej Con-
ernment subsidy or concession on interest rates to
sumer Products Ltd. This is because this allocation
be provided on lending to State Electricity Boards
will bring 60k hectares more in edible oil plantations
(SEBs) given their poor financial health. But NO AN-
and the above companies are exposed to edible oil
NOUNCEMENT regarding the same was mentioned in
imports since palm oil is a major input material for
the budget. Same holds true for wishlist regarding
them. Classification of cold storage projects as infra-
tax break on longer tenure deposits.
structure ones will be POSITIVE for FMCG companies
Issue of banking license guidelines before the in Food sector.
end of this fiscal will provide some clarity as to who
One other factor that will be POSITIVE for com-
will be eligible for the same. Additional tax deduc-
panies is the linking of NREGA to CPI. This will drive
tion of up to Rs. 20,000 for investments in long-term
income levels of rural consumers. This is because
infrastructure bonds for individual taxpayers contin-
allocation to NREGA will increase by approx. 20-25%
ues for one more year. This is definitely a POSITIVE
as compared to FY11 i.e Rs. 100bn and thus drive
for PFC, REC and IDFC.
consumption of products for rural consumers.
Decision to move legislations in the financial
Thus, we see that the overall impact can be
sector like The Insurance Laws (Amendment) Bill,
classified as NEUTRAL for FMCG sector with no major
2008; The Life Insurance Corporation (Amendment)
impact on any particular company.
Bill, 2009; Banking Laws Amendment Bill, 2011;etc
will be POSITIVE as it will open up the sector by Agriculture Sector
bringing in more capital and create more value. It Budget 2011 has given a major uplift to the ag-
will also clarify the accounting policies to be fol- ricultural sector. Especially in view of the upcoming
lowed. elections, the finance minister has tried his best to
One NEGATIVE we see is the increase in target appease the farmers. The target for credit flow for
credit flow to farmers from Rs.3750bn to Rs.4750bn. the year 2011-12 has been increased by Rs. 1, 00, 000
This will put pressure on SBI, ICICI, BoB, PNB and crore from Rs.3, 75,000 crores to Rs.4, 75,000 crores.
other banks as this will expose them more to direct Banks have been asked to step up direct lending for
agri lending and increase the subvention burden. agriculture to small and marginal farmers. The inter-
est subvention scheme will continue during 2011-12
FMCG
of providing short term crop loans to farmers at 7
It has been a mixed budget for this sector with per cent interest. A 3 per cent interest subvention
no clear majority in favor of a thumbs UP or DOWN. is proposed for those farmers who repay their crop
The increase in tax exemption limit from 1.6 loans on time in 2011-12. The total allocation under
lakhs to 1.8 lakhs as mentioned earlier will give Rashtriya Krishi Vikas Yojana (RKVY) has been in-
more disposable income in the hands of the con- creased from Rs.6, 755 crore in 2010-11 to Rs.7, 860
sumer and hence POSITIVE for FMCG companies. Ex- crore in 2011-12 mainly to check the smooth flow of
cise duty was expected to increase by approx. 10% distribution of the major commodities in the market
for cigarettes but budget gave them a surprise by and to control prices. The NABARD’s (National Bank
NO CHANGE in duty which greatly pleased companies for Agriculture and Rural Development) capital base
such as ITC, Godfrey Phillips. But companies such as would be strengthened by infusing Rs.3000 crore, in
Britannia, Parle were not impressed by a 100bps rise a phased manner. Approval is being given to set up
in excise on biscuits. Increase in excise in certain 15 more Mega Food Parks (15 already sanctioned)
consumer categories also impacted HUL, Nestle, Col- to ensure smooth flow of fruits & vegetable at com-

Infrastructure investments
have been allocated Rs.
2,14,000 crores, 23.3% higher
than the previous budget.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 13


petitive prices and to reduce wastages. To promote the retail sector which was expecting good news of
higher production, upgrade processing technologies allowing FDI in the multi-brand segment, but there
and to create health benefits awareness of nutri was no mention of it. Other measures like manda-
cereals like Bajra, jowar, ragi and other millets, a tory excise duty on garment manufacturers at a uni-
Cover Story

provision of Rs.300 crore is being made. An amount fied rate of 10% could increase the prices for brand-
of Rs.300 crore has been proposed to bring 60,000 ed garments. Nominal excise duty of 1% on branded
hectares under oil palm plantation, by integrating gold/ silver jewellery and articles could hurt branded
the farmers with the markets. This is to reduce the jewellery retailers. The marginally higher income tax
dependency on import as the domestic production exemption limit could be a positive for the sector in
of edible oil meets only about 50 per cent demand. terms of higher disposable income.
An amount of Rs.300 crore has been proposed to Infrastructure, Construction and Power
promote 60,000 pulses villages in rain fed areas for sector
increasing crop productivity and strengthening mar-
The most notable point in favour of this sec-
ket linkages. Continuing with last budget’s allocation
tor is that this time infrastructure investments have
of Rs. 400 crore to extend the green revolution to the
been allocated 2,14,000 crores which is 23.3% higher
eastern region of the country, another Rs. 400 crore
than the previous budget. This will certainly give a
has been allocated for the same.
positive outlook since many investments would be
Fertilizer Industry channelized into this sector and will benefit many
Fertilizer Industry as usual remained promi- Infra companies like L&T, Hindustan Construction,
nent in Budget 2011 as well. As the sector has con- Nagarjuna Construction as new projects would be
tinuously demanded higher capital, government launched. Further, increase in limit of FII invest-
proposed to include capital investment in fertilizer ments in corporate infrastructure bonds to US$25 bil-
production as an infrastructure sub-sector. This move lion would increase the flow of funds into this sector
will help fertilizer companies in accessing cheaper and reduce the funding constraints that were faced
financing and tax breaks. The government also pro- previously. However, there has been a small increase
poses that it will move towards direct transfer of in MAT rates from 18 to 18.5% which can have a
cash subsidy to people living below poverty line in a mild negative impact on Infra companies because
phased manner in order to ensure greater efficiency, this move will result in excessive cash outflow. Hav-
cost effectiveness and better delivery for fertilizers. ing said that, there has been a reduction in corpo-
This move is seen as positive for the sector as the rate surcharge from 7.5% to 5%. The tax benefits
domestic industry has suffered from under-recovery of section 80-IA have been extended for one more
of cost and delay in disbursement of subsidy for year which is beneficial for power companies and
long. Urea is the key focus in the industry, which road developers. The exemption on excise duty of
represents around 50% or 27mt of total fertilizer con- 10% for equipment required for expansion of exist-
sumption per annum. There is a proposal for active ing mega or ultra-mega power projects will help the
consideration of the Urea under the extension of the power utilities to lower their capital expenditures.
Nutrient Based Subsidy (NBS) regime. This move is Other measures that can improve the funding in
expected to be positive and will benefit both farmers the sector are the Tax free bonds of Rs 30,000 crore
and companies in the industry. Also the reduction of that would be issued by government undertakings
interest rates and allocation of higher credit to the to boost the infrastructure development. Budget al-
agricultural sector is likely to benefit the fertilizer location to major schemes include Rs 58,000 crore
industry as a whole. (increase of 21%) to Bharat Nirman, Rs 8000 crore
Retail Sector (Increase of 48%) to North Eastern Region and 10,300
crore (increase of 9%) to NHDP. Allocation for urban
The budget proved to be a disappointment for
infrastructure increased by 52.5% to Rs 8050 crore.
Mini Cement Plants
EXISTING REVISED
Upto MRP of Rs190/bag Rs 185/mt 10% ad valorem
Above MRP of Rs190/bag Rs 315/mt 10% + Rs 30/mt
Other Than Mini Cement Plants
EXISTING REVISED
Upto MRP of Rs190/bag Rs 290/mt 10% + Rs 80/mt
Above MRP of Rs190/bag 10% 10% + Rs 160/mt

Excise duty structure on cement

14 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


Overall, Budget 2011-12 has been a thumbs up for this year some sort of tax benefits were expected.
Infrastructure sector. An indirect boost to the sector would be the

Cover Story
Cement increase of the wages in the National Rural Employ-
The Excise duty structure on cement has been ment Guarantee Scheme. An extension on the ex-
revised as shown in the table below. emption of the countervailing duty of the parts of
mobile handsets is expected to keep their prices
With this new structure, the negative impact
low. This would to some extent help in increasing
is expected to be about Rs 8 – Rs 10 per bag. This is
the subscriber base of the companies. However their
marginally negative for the cement manufacturers,
potential in terms of revenues is doubtful. However
since it is likely that this excess cost will be pushed
an increase in the MAT and surcharge would impact
to the consumers and hence price hikes are expect-
the bottom lines of the companies. Also the gov-
ed very soon. There has been a reduction in custom
ernment’s plan to charge extra licence fees has put
duty on pet coke and gypsum to 2.5%. This means
extra stress on the sector already burdened by the
that raw material needed for manufacturing would
3G spectrum auction.
be cheaper in general. This measure is specifically
very beneficial for Shree Cement which relies highly Thus overall the telecom industry has been dis-
(reliance of nearly 60%) on pet coke. The increase in appointed with the budget proposals.
allocation for infrastructure by 23% would certainly Pharma
create more demand for cement which is positive The allocation made to the ministry of Health
for sector. Overall, the Budget 2011-12 would have a and Family welfare has been increased by 20%
neutral impact on the cement sector. which would help the pharmaceutical companies.
Real Estate An increase in the MAT on the developers of SEZs
There has been an increase in the existing may indirectly affect the companies operating from
home loan limit from 20 lakhs to 25 lakhs for dwell- these zones. Another disappointment for the compa-
ing units under priority sector lending. This move nies involved in R&D is the decision of not allowing
is seen to boost demand among the lower income an extension in the weighted deduction on in-house
group of buyers who plan to buy a home by tak- R&D expenditures. Thus overall the budget has been
ing home loans. This increase would also be ben- neutral on the R&D sector.
eficial for the key players like Purvavankara, HDIL Conclusion
etc. in affordable segment in urban areas. The exist- To conclude, the budget has done what was in
ing scheme of interest subvention of 1% on hous- its control to alleviate pressures on interest rate and
ing loan has been extended for further 1 year. This, inflation. Secondly, despite 4 major state elections
again, would be beneficial for developers present in due and inflationary fears, the Government has re-
low-cost/affordable housing present in tier 2 and 3 frained from a populist budget and kept its commit-
cities. The imposition of MAT of 18.5% on developers ment on fiscal consolidation. As far as the markets
of SEZs would have an adverse impact in the form of are concerned, no bad news was good news and
increased tax liability, which earlier was an incentive the Sensex shot up by 400 points and Nifty by 100
for SEZs developers. The allocation for Rural Hous- points on budget announcements. However, looking
ing fund has been increased to Rs 3000 crores and forward, the market will be governed more by inter-
HUDCO has been allowed to raise funds by issuance national cues and macroeconomic factors.
of tax free bonds worth Rs 5000 crores. Both these
moves are positive for real estate sector. Overall, the
Budget 2011-12 would have a marginally positive im-
pact on the realty sector.
Telecom
The companies were expecting clarity from the
government on the treatment of the 3G spectrum
outflows. Also in lieu of the large expenses made in

The government proposes to


include capital investment
in fertilizer production as an
infrastructure sub-sector.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 15


Naresh Jallu
IIM Lucknow
Valuation
Facebook, the world’s largest revenue to be $4 Billion in 2011, re-
When Goldman
social networking site, has been cording a 100% jump in its top line
Sachs (including recently in news for its sensational growth. In fact, facebook is record-
its SPV) invested valuation of $50 Billion by Goldman ing a 100% jump in its revenue for
around $2 billion in Sachs. This valuation figure is arrived the last 3-4 years. It’s interesting to
when Goldman raised $400 million note that in a recent poll conducted
Facebook, it valued for about 0.8% shares of facebook. by Covario, a leading search market-
the Facebook at $50 And Goldman intends to raise an- ing platform, showed that 95% of
billion. This news other $1.5 Billion through its Special search marketers are advertising on
Purpose Vehicle (SPV), an indirect Facebook, and they are budgeting
has kept the analysts “10-20% of their paid search adver-
mechanism to allow its HNI’s to par-
all over the world ticipate in this investment. tising” for running ads on the Face-
ponder over the real Facebook was started in 2004 by Mark book social media platform in 2011.
value of Facebook. Zuckerberg and his fellow computer With this intrinsic value of Facebook,
science students Eduardo Saverin, no investor would like to miss the
This article tries to chance of being part of facebook’s
Dustin Moskovitz and Chris Hughes.
valuate Facebook Though the site membership was profitable ride.
with the simple tools limited to Harvard students initially, We can have following observations
like CAPM and DCF. later it was extended to students in from the share holdings (Figure-1) of
colleges in Boston area, Ivy League, Facebook:
and Stanford University, before it 1. Founders together hold 39%
was opened to anyone aged 13 and of shares
above. As of January 2011, Facebook 2. Employees hold 30% shares
has user base of more than 600 mil-
lion. Given this astonishing size of 3. Rest is spread across inves-
facebook user base, one can see a tors and SPV
great potential for its present and Employees hold the second
future revenues. According to eMar- biggest share and are already started
keter, total revenues for facebook trading their shares in the Second-
for the year 2010 is estimated to be Market.com and SharePost.com. Ac-
$2 Billion and it forecasts facebook’s cording to SecondShares.com, there
FinSight

Figure 1: Shareholdings - Facebook

16 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


are about 2.5 billion Facebook shares outstanding. 3. Last but not the least, as one can observe
And ever since Goldman announced its valuation, the trend of increasing valuation in SecondMarket
Facebook share prices in the auction process are (Figure-2), by mid next year, Facebook would be in
skyrocketing. good position to demand high value when it goes
How does Facebook benefit from this for an IPO. All investors (including Goldman Sachs)
would see their investments giving at least 50% re-
Valuation
turn.
1. Mark Zuckerberg’s company is growing at
stupendous growth and certainly it needs capital in-
vestments to expand its services. Facebook accepted
the investment of $240 million from Microsoft in Oc-
tober 2007. Now one way to raise money is to list the
company publicly and accept the investments from
individual investors. But going public comes with
strings attached. A publicly listed Facebook needs
to disclose its financial details, for which Zuckerberg
seems to be hesitant of. So he accepted the invest-
ment of around $2 billion from Goldman and its SPV.
2. By accepting Goldman’s investment and pro-
longing the public listing, Zuckerberg is enticing the
investors with the growing prospects of Facebook. Data Analysis
Even if going-public gets delayed by one year, the
One question has always eluded me as a
increased valuation would help stakeholders get
grooming financial major in MBA. Is facebook really
higher capital gains on their investment. This can be
worth $50 Billion? I tried applying all my financial
easily evident from the ever increasing share value
concepts such as DCF, CAPM, etc to valuate and
of Facebook in SecondMarket, a market popular for
come to a convincing answer to above question.
trading unlisted stocks. The latest SecondMarket
Since facebook is not a listed company, I faced a lot
auction, on January 12, cleared Facebook shares at
of roadblocks in my analysis. Nevertheless, I tried
a price of $28.26, amounting to a total market cap
making use of Google’s financial records to assess
of about $70.5 billion for the estimated 2.5 billion
facebook’s financial health (as both are operating in
shares outstanding. The trend in the share prices
the same industry- Internet services) and tried ex-
can be seen from the below graph.
trapolating the cash flows of facebook. My analysis
3. Goldman’s valuation made Mark Zuckerberg may not be accurate but it gives a rational method
net worth stand on the ranks of Google founders’ of estimating the value of a particular firm, with sim-
– Larry Page and Sergey Brin, who individually own ple available tools like DCF and CAPM.
$15 Billion.
If we make use of Google’s financial reports to as-
How does the Deal work for Goldman Sachs sess the expenditure structure and its weightages,
1. Goldman Sachs, having helped Facebook we can come to a reasonable estimate of the ex-
raise its valuation, is in anticipation of underwrit- pected cash flows from Facebook for the next 10
ing deal of Facebook’s Initial public offer (IPO) that years. The same is shown in the model attached. FinSight
might be slated for next year. With this underwriting, One can see from the model that by assuming dif-
Goldman Sachs is certain to earn some percentage of ferent growth rates for Facebook, we can get differ-
the money raised in the IPO. ent valuation figures. The industrial beta (an average
2. Moreover, Goldman Sachs is drawing a com- derived from four major players viz. Google, Yahoo.
mission from its investors for guiding them and in- Amazon and eBay) is used as Facebook’s equity beta
vesting their money in the form of SPV. This not only and its WACC is calculated accordingly (it came out
increases the revenue but also helps Goldman Sachs to be 9.8%, with zero debt assumption).
to stand up to its reputation of innovative financial Going Forward
instruments to its clients. Apart from these mutual benefits to the stake-

“Goldman Sachs valued


Facebook at 50 billion dollar.
Is it a myth or the emergence
of another Google in Silicon
Valley?”

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 17


holders, there are a couple of criticisms being raised
by Wall Street analysts. It is natural to suspect that
Goldman Sachs is trying to skirt around the regula-
tions of Securities and Exchange Commission (SEC).
It means, a brokerage may use a single entity to
hold all the Google shares owned by all the firm’s FIN - Q
customers, and a special purpose vehicle (SPV)
would count as just one shareholder. But federal
law prohibits using a single entity to circumvent the
499-investor rule, and the SEC is reportedly looking FEBRUARY 2011
at whether the Facebook deal is designed to improp-
erly skirt the regulation. Later Goldman’s decision
to allow only foreign investors into the Facebook in-
vestment seems to be designed to assure the rule 1. Greenshoe Option
is not violated.
On the other hand its naïve to assume that
Zuckerberg is not aware of Goldman’s violation
2. Vatican City
these regulations. According to Vaidya Nathan, CEO
of Quantum Phinance, “the SEC regulation wouldn’t
take effect until May 2012 because the commission
3. Greenback
requires private companies to start reporting finan-
cial information only four months after the end of
its current fiscal year. So if Facebook violates the 500
4. Harshad Mehta
shareholder rule in the first week of January, then it
won’t have to start complying with SEC norms un-
til May 1, 2012, four months after the end of the
5. Coinsurance effect
US’s financial year on December 31.” So, now we
can easily understand why Goldman announced the
valuation deal at the beginning of this financial year.
6. Flipping/Stagging
This gives Facebook a plenty of time to delay it’s list-
ing and increase its valuation during the period. “A
key lesson that Facebook would have learnt from its
7. Asset Stripping
competitor—Google—is that, other things remaining
equal, the more you delay the IPO, the greater valu-
ation you command. Hence, time is of essence in a
8. Henry Kravis
different sense—the more time you buy, the more
moolah you rake in”, says Vaidya Nathan.
9. Nostro Account
Conclusion
As a grooming finance major, I was really fas-
cinated to study the deal and the analyst’s views
on this deal. Though deals need to be win-win to
FinSight

the stakeholders, how SEC’s review on this deal


would turn around Facebook’s valuation, needs to
be closely watched. Its now evident that Facebook’s
IPO would easily take one more year to list on the
bourses. Until then, how Facebook’s prospects turn
around its valuation during this year period can be
quite interesting.
Link for the model: http://miniurl.com/97781

Will Facebook be able to live


up to the expectations created
by Goldman Sachs?

18 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


NIKHIL PACHAURI
Goa Instititue of Management
Impact on Inward Remittance of Indian Rupees. If all banks have
in India due to Jasmine Revo- surplus foreign currency funds they With the advent of a
lution sell these to the RBI. Balances in the revolution termed as
foreign currency accounts of RBI be- ‘Jasmine Revolution’
Remittances refer to flow of
come the foreign exchange reserve
foreign currency into a country
of the country. Post liberalization i.e.
in the Middle East,
through citizens working abroad. the inward remit-
since 1991, remittances have grown
India is the world’s leading receiver
of remittances, claiming US $49,256
at 13% on a year on year basis. tances to India have
million as remittances in 2009 and However, the recent uprisings taken a dip. This
is expected to receive US $ 55 bil- against governments in West Asian revolution, however,
lion in 2010 . Remittances to India Arab countries, especially Tunisia
and Egypt have the potential to seri- has some negative
account for approximately 3% of the
country’s GDP. ously impact this stable source of in- impacts as well as
Remittances are the most pre-
come. The uprisings also dubbed as positive impacts on

Perspective
“Jasmine Revolution” started from
ferred form of foreign exchange. The India which have
Tunisia and resulted in the capsiz-
flow of remittances is the least in- been focussed upon
ing of local government few weeks
fluenced by economic downturn and
remains a stable source of income
back. Unemployment and corruption in this article
are being considered as the main
which can be seen from the follow-
reason behind these uprisings. It
ing graph.
also spread across Egypt resulting
Inward remittances are the in stepping down of President Hosni
remittances received from Indians Mubarak and protests in Jordan, Ye-
working abroad. These remittances men, Bahrain, Morocco and to an ex-
result in flow of foreign currency into tent to China also.
the country. The foreign funds get
This unrest in West Asia may
accumulated with the Indian banks
widen India’s current account defi-
that pay out equivalent Indian ru-
cit further which was last recorded
pees to the beneficiaries of the re-
as $16 billion in the quarter of July
mittances in India.
–Sept 2010. The region accounts for
Banks having surplus for- remittances worth $26 billion or 48
eign currency funds sell the funds per cent of India’s total remittance
to other Indian banks in exchange inflow of $55 billion. In addition, it

Figure 1: Comparison of Remittances and Forex Reserves in term of Rupees

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 19


could slow down the inflow of money from these stant.
countries to India as the unemployment rates are Contrary to the above mentioned issues, the
very high currently in these regions which may lead Jasmine revolution can bring in long term benefits
to large scale return of migrant labours back to In- for India in terms of the receipt of the remittances
dia. in the following way:-
Unemployment rate in UAE, which is consid- • The new governments may open up their
ered as the largest source of remittances among the respective economies towards liberalization and
Arab countries, has touched 2.4%. In case of Saudi hence may actually see a healthy balance of local
Arabia, the third-largest market for remittances to and migratory labour participation on a competitive
India, unemployment is pegged at 10.8 per cent, scale. This will increase the probability of increased
coupled with a 5.7 per cent year-on-year rise in in- inward remittances from these countries.
flation.
Perspective

Figure 2:Spread of Jasmine Revolution


• Some of the countries may follow the ex-
If this turmoil continues for a long time then ample of UAE, which has income tax free provisions
it will have long term implications on the Indian and hence is a popular destination for the migratory
economy as the country has to deal with the dou- labour from India as well as the source of remit-
ble impact of the increased crude oil prices (due tances. It is estimated that migratory labour force
to uprisings) as well as decreased source of foreign from India constitutes 40% of the UAE population.
exchange reserves due to decreased source of remit-
• The new governments may provide some
tances.
benefits like relaxed visa rules and tax treaty with
Another implication of this effect will be Indian government in exchange of contribution in
strained economic and political relations as the In- development of the region’s infrastructure. This can
dian government may have to change its policy to- provide an opportunity for increased migratory em-
wards the new and established governments in Arab ployment and hence increased chance of inward re-
region. These new governments may take conserva- mittance reception.
tive measures in order to tackle the issue of local
• Contributions in development by Indian
unemployment and may reduce the employment
companies (both government and private) in one of
opportunities for the migrant labours. This step will
the affected countries can create positive externali-
reduce the remittances being received from these
ties in the neighbouring countries. This may help in
countries.
boosting preference for Indian companies and Indi-
The new governments may also put in place an migratory labour, thereby further increasing prob-
some kind of taxation policies targeting migratory ability of increased inward remittances.
labours specifically to fill in the deficit created due
In the nut shell, it can be said that the on-
to previous corrupt regimes. This may be a short
going revolution can have both positive as well as
term measure taken by the new governments which
negative impact on the inward remittances in India.
will definitely act against the remittance collection
Whatever may happen, Indian government should
of India and hence will contribute to the increasing
be ready with flexible policies to carefully reap out
current deficit.
the benefit from these changes and ward off the
Some countries may go for currency devalu- negatives. This can actually help India to avoid de-
ation thereby decreasing the value of remittances creasing of remittances to dangerously low levels.
being received in India assuming same percentage
of participation as present and all other factors con-

20 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


CLASSROOM Dividend
FinFunda
of the
Arbitrage
Month

Alok Kumar Agrawal


Team Niveshak

obtain the put option.


I hope you guys remember my class Sir, but still I am unable to relate
on Arbitrage. Today, I am going to take up the put options to dividend arbitrage.
another related topic called Dividend Ar- Can you please illustrate it further with
bitrage. Dividend arbitrage is an options the help of an example?
trading strategy that involves purchasing put op-

Classroom
tions and an equivalent amount of underlying stock
Let’s elaborate the above concept
before the ex-dividend date and then exercising the
with the help of an example. Suppose that
put after collecting the dividend. Hence, it will give
stock XYZ is trading at $100 and is paying
you an opportunity to earn a small amount of gain
a $2 dividend in one week’s time. A put option with
in small period of time.
expiry three weeks from now and a strike price of
$110 is selling for $11. A trader wishing to structure
Sir! Though your definition is mak- a dividend arbitrage can purchase one contract for
ing some sense to me but I am slightly $1,100 and 100 shares for $10,000, for a total cost of
confused about the Put options. Can you $11,100. In one week’s time, the trader will collect
please elaborate on it a bit? the $200 in dividends and the put option to sell the
stock for $11,000. The total earned from the dividend
and stock sale is $11,200, for a profit of $100.
Put option is basically a contract
giving the owner the right, but not the
obligation, to sell a specified amount One last question, what type of
of an underlying security at a specified securities are best suited to adopt such
price within a specified time. This is the opposite options strategy and create dividend ar-
of a call option, which gives the holder the right to bitrage opportunity.
buy shares.
Good question. Generally, this
Yes Sir! I can recollect it now, But strategy is best when used on a security
can you please give some example to with low volatility (causing lower options
explain it in detail? premiums) and a high dividend. Hence,
it creates an opportunity to create profits while as-
suming very low to no risk.
Yes sure, here is an example. Sup-
pose you have one Mar 10 HUL 10 put,
you have the right to sell 100 shares of
HUL at $10 until March 2010 (usually the
third Friday of the month). If shares of HUL fall to
$5 and you exercise the option, you can purchase
100 shares of HUL for $5 in the market and sell the
shares to the option’s writer for $10 each, which
means you make $500 (100 x ($10-$5)) on the put
option. Note that the maximum amount of potential
profit in this example ignores the premium paid to

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 21


FIN-Q
1. Identify the Personality
Hint:- Value Investing


2. A strategy often used by hedge funds which involves purchase of a convert-
ible security and simultaneously shorting the same company’s common stock.

3. This entrepreneur took his company to an IPO while still being a teenager. He
was later found guilty of a massive accounting fraud worth $100 million. Name the
person.
FinLounge

4. _______ is used to measure income inequality in a country.

5. This Princeton graduate started the first Index Mutual fund which tracked the
S&P 500. Who is he?

6. The practice of acquiring a company using large amount of borrowed funds


the collateral for which are often the assets of the company being bought.

7. An account which is used to offset the effect of another related account on


the balance sheet

8. It is a measure of Risk which is used by banks to compute the maximum


amount a portfolio can lose over a time frame at a predefined confidence interval.

All entries should be mailed at niveshak.iims@gmail.com by 25th March, 2011 23:59 hrs
One lucky winner will receive cash prize of Rs. 500/-

22 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011


ANNOUNCEMENTS
ARTICLE OF THE MONTH
The Article of the Month winner for March 2011 are
Charu Bhatia & Saurabh Singhal
of NMIMS Mumbai
They receive a cash prize of Rs.1000/-

Crossword Winner
The Crossword Winner for the month February 2011 is
Rajesh Beriwal
of IIFT Delhi
He receives a cash prize of Rs.500/-
CONGRATULATIONS!!

ALL ARE INVITED


Team Niveshak invite articles from B-Schools all across India. We are looking
for original articles related to finance & economics. Students can also contrib-
ute puzzles and jokes related to finance & economics. References should be
cited wherever necessary. The best article will be featured as the “Article of the
Month” and would be awarded cash prize of Rs.1000/-

Instructions
»» Please email your article with the file name and the subject as <Title of the
Article>_<Institute Name>_<Author’s name/Group’s name> by 30 March 2011.
»» Article must be sent in Microsoft Word Document (doc/docx), Font: Times New
Roman, Font Size: 12, Line spacing: 1.5
»» Please ensure that the entire document has a wordcount between 1200 - 1500
»» The cover page of the article should only contain the Title of the Article, the
Author’s Name and the Institute’s Name
»» Mention your e-mail id/ blog if you want the readers to contact you for further
discussion
»» Also certain entries which could not make the cut to the Niveshak will get
figured on our Blog in the ‘Specials’ section

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