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F I N - Q goes online from March onwards


Dear Niveshaks,

Niveshak Volume VII ISSUE II February 2014

Faculty Chairman

Prof. P. Saravanan

Akanksha Gupta Anchal Khaneja Anushri Bansal Apoorva Sharma Gaurav Bhardwaj Gourav Sachdeva Himanshu Arora Ishaan Mohan Jatin Sethi Kaushal Kumar Ghai Kocherlakota Tarun Kritika Nema Mohit Gupta Mohnish Khiani Neha Misra Nirmit Mohan Priyadarshi Agarwal S C Chakravarthi V
All images, design and artwork are copyright of IIM Shillong Finance Club Finance Club Indian Institute of Management Shillong

With the retreating chill of the month of February, we bring to you a fresh new edition of Niveshak. India has now become a nation of 29 states with the Parliament approving the formulation of the new state Telangana by dividing Andhra Pradesh into two separate states. Hyderabad will be acting as a joint capital for the two states for the next 10 years. With the 2014 general elections round the corner, the political arena of India is buzzing with a lot of activity. Resignation of the newly appointed Chief Minister of Delhi, Mr. Arvind Kejriwal, from his position, was rumored to be another such politically motivated move. Although his exit was also quite dramatic, with him filing a FIR against Reliance Industries Ltd.s chairman Mr. Mukesh Ambani, the petroleum minister Mr Veerappa Moily, former Union minister Mr. Murli Deora and retired director general of hydrocarbons Mr. VK Sibal for unfairly influencing the decision of setting the prices of natural gas, in the year 2007, to give undue benefit to RIL. On the international front, the highlighted news was the appointment of Mr Satya Nadella, formerly an Indian native, as the CEO of the software giant Microsoft. His appointment came in the wake of retirement of the former CEO Mr Steve Ballmer. But, the biggest news of the moth was the acquisition of WhatsApp by Facebook for a whooping amount of 19 billion dollars. The price of this deal was a surprise for many and invited mixed reviews from the industry. As we move ahead with our initiative of Niveshak Investment Fund (NIF), the portfolio has shown a favorable growth trend by outperforming the market. A detailed report inside summarizes the overall performance of the fund for this month. The Article of the Month this time is Is the Indian banking sector vulnerable to crisis? and it discusses the Indian banks, their influence on the economy and what factors influence their functionalities. Our Cover Story for this month All that matters is Green? analyses the various aspects related to the Disinvestment policy of the Indian. FinGyan section of this edition elaborates on the various aspects of CrowdFunding. FinSight article Factoring: The Next Big Wave explores how this credit management tool can play a crucial in developing sustainable business models. The FinPact article Googles money Mine shows the rise and the journey of Google to the top of the corporate pyramid, making the company one of the biggest success of this millennium. This time, the FinView section has the experts from our interaction with Mr. K Venugopal, CGM of Global Markets at State Bank of India. He gave us many useful insights into the Indian banking sector. And lastly, the Classroom section would throw some light on the nitty-gritties of Fixed Income Securities. We would like to thank our readers for their immense support and encouragement. You remain our prime motivation factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. Thank you. Stay invested !

Team Niveshak

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

Cover Story
Niveshak Times

04 The Month That Was

Article of the month

10 Is the Indian banking sector

vulnerable to crisis?

14 The only color that Matters is Green?

18 Crowd Funding: The Next
Big Thing


26 Factoring: The next big wave

22 Googles Money Mine 29 Mr. K Venugopal:
CGM of Global Markets, State Bank of India


31 Fixed Income Securities


The Month That Was

The Niveshak Times


IIM Shillong
United Bank Of India To Raise INR 1000 Crore Through Equity The board of state owned United Bank of India has approved raising tier-1 capital and the bank is all set to raise up to Rs.1000 crore as capital through issue of bonds or equity. Bonds will be issued on private placement basis to eligible investors. The equity on the other hand will be raised by issuing preferential shares either to the Central Government or to other institutional investors. The capital raised will help the bank comply with BASEL III norms or global norms in the banking sector. The government holds around 88% shares in the Kolkata- headquartered bank and has already announced infusion of Rs. 700 crores in the United Bank of India in the current fiscal year ending 31st March. 40.72 Lakh High Spenders In The Country Under Tax Scanner Over 40.72 lakh high value spenders are under the scanner of the Income Tax department which plans to check potential evasion instances before the closing of the financial year on March 31. The department has information on 40,72,829 persons who had made cash deposits amounting to Rs 10 lakh or more in their saving bank accounts in the current fiscal. With technical solutions at the departments disposal, there is a lot of information that is readily available to the authorities. Satya Nadella Becomes The Third CEO Of Microsoft Satya Nadella has been named as the new CEO of Microsoft, who replaces the former CEO Steve Ballmer and takes the reins as the founder, Bill Gates, steps down as chairman, but remains a technology advisor. He is the third chief executive in the companys nearly four-decade long existence. John Thompson is named as the new chairman. Mr. Nadella was formerly the executive vice president of Microsofts Cloud and Enterprise group, which was Microsofts fastest growing division and accounted for $20.3 billion in revenue and $8.2 billion in operating income during the companys last fiscal year. Nadella is credited with playing a crucial role in moving Microsofts server and tools group to a faster, more agile development model so they are no longer innovating on long, 18-month release cycles. Further, hes also been a key player in forcing a shift in the business focus to the cloud and software-as-a-service. Satyas vision for how technology will be used and experienced around the world is exactly what Microsoft is said to need as the company enters its next chapter of expanded product innovation and growth. BSE Launches Institutional Trading Platform On BSE SME Countrys premier stock exchange BSE Ltd. has launched institutional trading platform in the BSE SME segment to facilitate the start-up companies and SMEs to list without IPO. The launch of BSE SME ITP is consequent to SEBIs provision in ICDR (Issue of Capital and Disclosure Requirements) guidelines allowing SMEs to list on the exchange without bringing in initial public offer (IPO). As per the regulatory norms, the BSE SME institutional trading platform offers relaxed compliance and cost effective listing to SMEs. The regulator has provided an exemption to SMEs, under which companies have to offer up to 25 percent of its shareholding through an IPO. Lenovo: The Dealmaker Of The Month Lenovo, the electronics giant of China was involved in 3 multi-billion dollar deals this month. At first it bought IBMs server business for $2.3 billion, expanding a product line-up dominated by PCs, tablets and smartphones. Lenovo has its own server business it was less than one-fifth the size of the IBM Corp. unit. The acquisition would move Lenovo ahead five years in its plan to expand in servers, raising its global ranking among suppliers from No. 6 to No. 3 and increasing its share of global server sales from 2 per cent to 14 per cent. It also surpassed rival Hewlett Packard Co. as the No. 1 PC maker in the third quarter of last year, a triumph that was tempered by eroding demand. The second deal was with Google, as Lenovo acquired Motorola Mobility for $2.91 billion. As part of the deal, Google will retain the bulk of Motorolas massive patent portfolio, including current applications and invention disclosures. Lenovo will acquire about 2,000 patents alongside the Motorola Mobility brand and its trademarks. The third deal, which shocked



The Niveshak Times

most people, was that of Google buying a 5.94% stake in Lenovo worth $750 million, after selling Motorola Mobility to it. These series of events spices up things in the smartphone arena and Microsoft, under tremendous pressure for its trend-lagging decisions, would be staring at another formidable competitor. Interim Budget Announced Indian Finance Minister, P.Chidambaram, presented the interim budget for fiscal year 2014-15 on 17th February, 2014 to cover expenditure until the governments term ends in May 2014. It is projected that growth expansion (GDP) in 2013-14 third and fourth quarters will be at least 5.2% and the fiscal deficit for 2014-15 is estimated to be around 4.1% of GDP. This lower fiscal deficit will be benefitting banking sector. The Current Account Deficit will be contained at $45 billion, which is less than analysts projection of $50.5 billion. This lower CAD would be instrumental in containing external shocks on the currency. In the power sector, the Finance ministry has decided to add 50000mw, four UMPPs for FY15. The ministry has also made plans for four 500mw solar power projects. This favorable news stimulated the stocks of power companies to gain momentum. In order to boost automotive demand, there is a cut in the excise duty on SUVs, mid-segment cars and bikes/two wheelers. For the students who took educational loans upto 31-3-2009, there is a respite announced by the ministry where there is a moratorium period for the loans outstanding till 31-12-2013. Jan WPI Inflation Eases More Than Expected To Eight-Month Low Indias wholesale price-based inflation eased to an eight-month low in January as food prices moderated, offering some relief to policymakers who have long battled to get a handle on surging prices. The wholesale price index (WPI), long regarded as Indias main inflation measure, rose 5.05 percent last month, data showed on Friday, compared with a 5.80 percent jump forecast by economists. But in a worry for new Reserve Bank of India (RBI) chief Raghuram Rajan, core WPI inflation inched up to 3 percent last month, which analysts said was its highest level since April 2013. Rising prices amid the economic slowdown have pressured household budgets and company profits, hitting consumer demand as well as corporate investments. Industrial production shrank 0.6 percent on year in December, its third contraction in a row, dragged down by weak investment and consumer demand. Last month, a panel set up by Rajan recommended the RBI pursue managing inflation as its main policy objective. It suggested setting a long-term retail inflation target of 4 percent, plus or minus 2 percent. In the intermediate term, the panel proposed the goal would be to bring it down to 8 percent by January 2015 and 6 percent by January 2016. India is among a handful of large emerging economies that do not target inflation. Facebook To Buy Whatsapp Message Service For $19 Billion Facebook Inc will buy fast-growing mobile-messaging startup WhatsApp for $19 billion in cash and stock in a landmark deal that places the worlds largest social network closer to the heart of mobile communications and may bring younger users into the fold. The transaction involves $4 billion in cash, $12 billion in stock and $3 billion in restricted stock that vests over several years. The WhatsApp deal is worth more than Facebook raised in its own IPO and underscores the social networks determination to win the market for messaging. WhatsApp was the leader among a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe. Although WhatsApp has adhered strictly to its core functionality of mimicking texting, other

The Month That Was

apps, such as Line in Japan or Tencent Holdings Ltds WeChat, offer games or even e-commerce on top of their popular messaging features. The deal provides Facebook entree to new users, including teens who eschew the mainstream social networks but prefer WhatsApp and rivals, which have exploded in size as private messaging takes off. Zuckerberg and Koum said that WhatsApp will continue to operate independently, and promised to continue its policy of no advertising. Facebook is paying $42 per user with the deal, dwarfing its own $33 per user cost of acquiring Instagram.



Article ofSnapshot the Month Market Cover Story

Market Snapshot



BSE Mkt. Cap 68,45,921.37


Base rate Deposit rate 10.00%-10.25% 8.00% - 9.10%

INR/1USD INR/1Euro INR/100Jap.YEN INR/1PoundSterling INR/ 1 SGD 61.938 85.1148 60.53 103.3136 49.05

CRR SLR 4.00% 23%


Bank Rate Repo rate Reverse Repo rate 9.00% 8.00% 7.00%

Source: 25th January 2014 to 25th February 2014 Data as on 25th February 2014



Market Snapshot
Index Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK Open 21133.56 6455.26 6444.46 11953.12 12556.16 5574.77 9624.23 6522.81 10182.79 9529.91 9604.37 8645.61 1568.57 5704.07 1307.17 5216.59 Close 20986.99 6469.03 6436.27 12427.9 12250.53 5991.44 10254.45 6505.67 10599.49 9653.2 8575.85 8427.72 1527.62 5466.22 1203.24 5191.86 % change -0.69% 0.21% -0.13% 3.97% -2.43% 7.47% 6.55% -0.26% 4.09% 1.29% -10.71% -2.52% -2.61% -4.17% -7.95% -0.47%

Article Market of Snapshot the Month Cover Story





Article of the Month Cover Story

Is the Indian banking sector vulnerable to crisis?

Sonia Kumari & Ganesh Mehta


In a Banks play a crucial role in shaping and boosting any economy by acting as an intermediary between those who have financial means at their disposal, and those who are in need of finances. Through this process bank helps in maintaining a balance between demand and supply of funds. For evaluating the current performance and future outlook of an emerging economy like India, sustainability and profitability of the banking sector is of utmost priority. The total assets of the Indian banking sector has reached USD 1.5 trillion in FY12 from USD 1.3 trillion in FY10, and is expected to reach USD 28.5 trillion by FY25. Total lending and deposits have increased at CAGR of 22.8 per cent and 21.2 per cent, respectively, during FY 06-13 and are further poised for growth, backed by demand for housing and personal finance. Some characteristics which ensure a healthy and growing banking industry are high net interest margins with low NPAs, high and stable Capital adequacy ratio, perfect mix of income generation from various resources, good internal capital generation, active capital markets, government support and transparent regulation framework . The Quality of Banks earnings cannot be judge solely on the basis of their profit or losses figures; mix of different assets namely standard, sub-standard, and doubtful & loss assets plays a critical role. Banks having an increasing income with poor credit quality of their asset base proves to be a threat for their long term existence. In

Fig 1: Ratio of Gross Npa to Total Gross Advances




fig-1, ratio of Gross NPA to Total Gross Advances increases to 3.84% from 2.33%, 2.97% from 1.91% and 3.42% from 2.39% for Public sector Banks, Foreign Banks and All Scheduled Commercial Banks respectively throughout the years, which imply that either NPAs are increasing nor Total Gross advances are decreasing. Capital Adequacy ratio which is maintained as the ratio of capital (Tier1 + Tier 2 Capital) to total risk weighted assets (risk weights as per BASEL II) is a very crucial indicator for analyzing banks performance. This was close to 14% as on March 31, 2011, and is currently around 1213% for PSUs. Low capital adequacy ratio with increasing Gross NPA to total Gross Advances is a concern for the Banking Sector. From 2010-2012 with an average growth rate of GDP above 6%, the Banking sector was growing reasonably well. FY13 and the ongoing FY14 has proven to be a challenging year for the Indian economy as well as the global economy. Indian economy is struggling with the t r i n i t y problem of high Inflation, high current account deficit a n d l o w e r growth. On one side of the c o i n , India is striving with an uncertain political environment, non-transparent regulatory framework which negatively affects investor sentiments and growth prospects of the country, on the other side the US Federal tapering and other global events affect the Indian economy on the global front. RBI, the Central Bank of India lays down rules and regulations for efficient functioning of the banking sector and investor protection, keeping in view the desired targets of the Government of India in terms of Monetary and Fiscal Policy. To regulate demand and supply of INR rupee and for investment and trade enhancement, the RBI sets policy rates (Repo and Reverse Repo) and rest of the money market rates change accordingly. Under the Fiscal policy, the RBI on behalf of Government of India decides limits for

priority sector lending, small and medium size industries to grow economy as a whole in terms of employment creation and standard of living. A depressed economy increases NPAs for the Banking Sector due to Priority sector lending and slowdown in various sectors like real estate, coal & mining and the infrastructure sector which are all heavily dependent on banks borrowings. The Banking Sector is a growth driver for an economy. Credit Quality of banks asset and economic conditions can change the game within seconds from that of a winner to a loser. Some of the main causes of the Eurozone debt crisis were easy credit conditions during the 20022008 period that encouraged high-risk lending and borrowing practices, 20082012 global recessions, fiscal policy choices related to government revenues and expenses and choices of government in bailing out the institutions. Similarly, sub- prime mortgage crises also worsen because of subprime lending with low interest rate and easy credit conditions. Now the question arises: Is the Indian banking sector vulnerable to crisis? Assessing NPAs It is evident that the m a j o r concern of the banking sector in India is rising NPAs over the recent period. The boom of the 2000s saw huge investments in emerging markets. As a result there was a surge in liquidity and demand in India backed by high growt. This led to huge disbursements of credit by banks. However with the changing scenario and high inflation in the Indian economy the Reserve Bank of India took to a tight monetary policy which led to high borrowing costs and thereby rising bad loans by companies. Scheduled banks recorded Gross NPAs as a percentage of total advances of 3.4% as at March 2013. Industry estimates place this figure at 4.4% at March 2014. Public sector banks in India are worst affected by bad loans as they have to face government guidelines and pressures being dominated by the political circle. Public sector banks which account for 76% of total gross advances in the banking sector have seen a 32% CAGR in Gross

Article of the Month Cover Story




NPAs since 2008. In the past two years itself the Gross NPAs grew by greater than 40%. Majority of the lenders which borrowed from public sector banks have been infrastructure companies and farmers both of which have seen a muted demand over the past few years on account of stagnant growth. These figures indicate that it was no surprise that the Reserve Bank of India issued a paper in December 2013 on recognition of financial distress and revitalizing distressed assets in the economy. NPAs in the Private Sector grew approximately by 9% CAGR since 2008. Private Banks have had the advantage of diversification of their credit base adding security to their assets. However, foreign banks in an attempt to compete in the Indian markets have seen a growth rate greater than 20% in their NPAs in the past two years. Dissecting the causes of NPA On scrutinizing the NPAs of public sector banks or nationalized banks it is witnessed that in 2013, 58% of the NPAs were generated by the non-priority sector and the priority sector which is often accused of being the non performing sector has accounted for around 40% of the NPAs. Among banks in the SBI Group itself, the NPAs of the nonpriority sector have grown by 54% in 2013 compared to an 11% increase in priority sector NPAs. To further assess the causes of NPAs in the non-priority sector there has been a drastic fall in credit demand across sectors besides witnessing a negative growth in Industrial input production of -3.1% as on March 2013. Total bank credit has seen a decline of 14.9% by June 2013. The major industrial sectors that support the banking structure had negative bank credit growth, these being petroleum, metals, mining, textiles and chemicals. The worst affected sector has been the real estate sector which has contracted due to an oversupply backed by high real estate prices and a falling demand in an illiquid market. Under such circumstances banks which fed these sectors with debt at times when they were booming have a difficult time recovering money in todays market. The question any responsible banker would raise is; why have banks taken to such easy loans over the years? Since the problem of NPAs has only increased in recent years why policy makers or the administrators hadnt taken any

action all this while? One major cause outlined by most bankers is the issue of restructured debt. The Corporate debt restructuring practices in India are a major cause of the recent sickness faced by Indian banks. In order to show low NPAs banks are lured to restructure loans offering companies lower interest rates and accepting equity stake for another round of financing. Furthermore the regulator does not mandate the times a company can restructure loans, therefore a company can restructure loans as many times at the behest of banks. This coupled with political appointments at heads of public sector banks provides easy money for cash starved companies. There is a lack of regulation that curbs the practices of promoters raising money through multiple companies. If restricted assets are accounted for, loans which are stressed in the banking sector in India are as high as 9.2% as per Crisil Ratings. All the hoo-ha by the current Finance Minister that banks need to identify willful defaulters comes out as hypocrisy when there are no norms by the government to identify these defaulters nor is there any attempt to ward off the misuse of Corporate Debt Restructuring. Way Ahead Researchers, analysts and bankers all state the issues faced by the Indian banking sectors are grave and the Public sector banks today need multiple times the money the government is providing them to stay afloat in an uncertain and murky environment both domestically and globally. A banking failure would have a direct impact to liquidity constraints faced by infrastructure companies in an emerging market. An economy already plagued with illiquidity may starve off cash if there is further shortage. Due to the close set up within Indian banks and a fluctuating set of foreign institutional investors the repercussions could be high and wide and strike the Indian interbank market spurring a Financial Crisis similar to the one witnessed by the USA in 2008. In an economy obsessed with reforms the banking sector has had its share of reformation but denied some essential changes in lending patterns. As recently as the 31st of January 2014, the RBI laid out frameworks to limit bad loans. This involved incentivizing banks which

Article of the Month Cover Story




Article of the Month Cover Story

uncertainty about the coming general elections and the awaited Federal Reserve taper is paramount to the fate of the Indian banking sector. Around 17% of total loans of Indian banks face foreign currency exposure. The major cause of concern over Indian banks is asset quality. A CPI inflation rate over 9% and talks of CPI being the basis of monetary policy review brings out negative vibes over an already high repo rate. It wouldnt be nave to say that fundamental factors of inflation and growth shall determine the ability of the borrower to payback. Analysts expect restructured and non-performing assets to rise to 15% due to a constrained growth and high inflation. Challenges are not new for Public sector banks in India. It would be safe to say that the key to one of the worlds most sought after treasury lies with the lender of the last resort. All that remains to be seen is who shall win the battle. The Rockstar or The Rouge.

identify stressed assets earlier and taking necessary steps like sale of assets to prevent loans from turning bad. The Reserve Bank issued guidelines aligned with their paper on bad loans which was elaborated on earlier. These recent measures mandated by the Central bank are promising as they involve categorizing assets that are stressed followed by decisions by banks to prevent such assets from turning bad. A dire need in banking practices is revisiting norms of corporate debt restructuring practices as mentioned earlier. The Central bank has issued guidelines lately introducing an independent examination of assets under restructuring by an evaluation committee. This should restrict nefarious practices by businesses to buy their way out of debt. Another recent introduction overseen by the new Governor of RBI has been the re-launch of interest rate futures. Although these do not have much to do with the quality of credit, yet they provide a suitable hedge to both investors and bankers and this should boost the structure of credit in the economy. These derivative instruments have been well received across the three exchanges where they have been launched. The major purpose of these derivatives has been as hedge instruments. Indian Banking Sector Outlook The banking sector in the near future in highly dependent on the growth the economy can sustain in calendar year 2014. As tedious as it is, the ongoing talk on the street over the

Capital Adequacy ratio which is maintained as the ratio of capital (Tier1 + Tier 2 Capital) to total risk weighted assets (risk weights as per BASEL II) is a very crucial indicator of banks performance.





Cover Story


If Some say that Government has no business to be in business but others say it to be every governments duty to protect its publics interest in their countrys resources. One way or the other, they will have to reduce their stakes, afterall what else is left to bridge this ever mounting fiscal deficit. But the important question is, is it the only purpose that it means to serve?

Akanksha Gupta & Priyadarshi Agarwal

Disinvestment has been a highly discussed and debated topic since the time of its introduction in India in the early 1991. This is one area, that might not get room for deliberation in the parliament, but outside it, it is the one most talked about and contended. Let us first understand what is actually meant by disinvestment. It is a method by which money can be raised through issue of securities and generally involves sale of a part of the equity holdings held by the government in the PSUs to investors (can be to a Private Investor or other PSUs). Disinvestment of ones stake results in the dilution of ownership. It differs from divestment in the manner that divestment involves selling off an asset for meeting financial or social goals. Further it also differs from Privatization in the sense that Privatization involves complete transfer of ownership from government to the private investors, whereas in disinvestment only a partial stake is sold to the investors. Although, the process of disinvestment began in the year 1991 with government selling small stakes in PSUs, the process of strategic sale, i.e. selling a controlling stake to a private owner, only got initiated in the year 1999. There are various methods by which disinvestment can be done viz. Strategic Sale, through participation in Capital Market, reduction in equity, Cross Sale, Management Buyout (MBO), Sale through Demerger and Spinning off. Any of these ways can be employed for disinvestment. But the question that arises is What is the need of the government to sell public sector shares? It is humouring that there are both noble and corrupt reasons for this. The most important reason behind disinvestment is to make sure that the state keeps carrying out its most crucial functions of running the public machinery and focusing on core activities instead of wasting resources in loss making non-core departments. Especially in case of some PSUs which were proving to be more of a liability than an asset for the government. Selling government equity also improves the management of public sector enterprises gradually and provides funds which can be used to invest in social welfare schemes or decrease the public debt (fiscal deficit). On the other hand, the percieved corrupt reason behind disinvestment is to raise some money in desperation to stave off bankruptcy by the




government in a mishandled economy and this is considered one of the key reasons why budget after budget higher disinvestment targets have been set by the government. The importance of disinvestment lies in the utilisation of funds raised for the following purposes: Financing the increasing fiscal deficit Financing large-scale infrastructure development For investing in the economy to boost spending For retiring Government debt - almost 40-45% of the Centres revenue receipts go towards repaying public debt/interest For social programs like towards health and education As can be seen, governments major source of earning is by tax and the total contribution made by disinvestment is only around 2%. By going for disinvestment, the government introduces private players in the operations of the PSUs, which can bring technological and managerial skills to enhance the operational efficiencies, that are in general characterized by low rate of return on capital, excess cash in books, low productivity, inadequate human resource development, etc. Table1 has the statistics of the total disinvestment of PSUs that took place in India, since the formulation of the policy in 1991 (all figures are in Rs. Crores). As can be observed from Table 1, the government is seldom able to meet the disinvestment targets it sets. Taking this trend into consideration, the initial target for the year 2014-15, which was originally set to Rs. 40000 crores, was slashed by

Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Targeted Receipts 2,500 2,500 3,500 4,000 7,000 5,000 4,800 5,000 10,000 10,000 12,000 12,000 14,500 4,000 No target No target No target No target No target 40,000 40,000 30,000 40,000


Cover Story

3,038 1,913 Nil 4,843 168 380 910 5,371 1,860 1,871 5,658 3,348 15,547 2,765 1,570 Nil 2,367 Nil 23,553 22,144 13,893 23,956 5,094

Table 1: A Statistics of the Total Disinvestment of PSUs that took Place in India (all figures in Crores)

60% and set to Rs. 16,027 crores in the recently declared Interim Budget for 2014-15. The disinvestment transactions of the year 2013-14, that earned a total of Rs. 5,093.87 crore were in MMTC (Rs. 571.71 cr), HCL (Rs. 259.56 cr), NFL (Rs. 101.08 cr), ITDC (Rs. 30.17 cr), STC (Rs. 4.54 cr), NLC (Rs. 358.21 cr), NHPC (Rs. 2131.28 cr) and PGCIL (Rs. 1637.32 cr).

Fig 1: An Approximate Breakup of Government Receipts and the Precentage Contribution to its Sub Heads (as per Given by FY13 Budget Estimates)




Why is then disinvestment unable to meet its targets? The prime motive of government behind creating PSUs was to utilize the natural resources for the public welfare. Hence, to some people it makes more sense not to privatize them which, according to these people, monetizes the whole concept. One more notion that comes into play is that the government must retain its hold in the core-industries (according to the Ministry of Commerce and Industry Office of Economic Advisor) like Coal, Crude-Oil, Steel, Cement, Fertilizers, Natural Gas, Refinery Products and Electricity, but can dilute its stake in the other non-core industries like aluminium, zinc, etc. Selling its stake has its own merits and de-merits for the government. It can be a disadvantageous deal for the government, in the scenario where the PSU is profit making, since then the government looses a regular source of their income by diluting their stakes. On the other hand, if the PSU is making losses, then by introducing a private player, the government will have an additional fund infusing entity. These have given way to a new concept of Cross-selling where PSUs buy stakes in each other or a PSU buys more stake in itself from the government (like buy back of shares). Most of the PSUs have a large cash pile at their disposal, generated from their internal operations. The government can ask the PSUs to hold a portion of these reserves as investments in other public enterprises, liberating cash for the government to spend on vital projects without increasing the fiscal deficit, instead of allowing the private players to become the shareholders of the PSUs. This strategy was first seen in the 1990s when oil companies such as ONGC brought stakes in IOC and Gail. Even today, a continuation in this trend can be seen where the latest proposed disinvestment deal will see ONGC and Oil India buying stakes in the disinvestment of Indian Oil Corporation. Limited investment interest of the Private Sector While disinvestment may be considered as an attractive offer for the private organizations getting a chance to invest in stable government organizations, it has been observed that that has not been the case. In the first decade of beginning with the disinvestment policy, the government had planned to mobilize approximately Rs. 78300 crores but could actually attract a mere amount of Rs. 30917 crores. One of the reasons, which keeps the private players from investing is that, until the complete stake is sold, the government will always enjoy a majority stake in the PSUs, and the motive behind disinvesting, i.e. to enhance the operational efficiencies

of these agencies, will not be satisfied. As highlighted earlier, except for a few years, the government is generally not able to meet its revenue tagets from disinvestment. Even its Privatization targets do not make much significant contribution. There have been a few PSUs that were privatized like VSNL, Balco, Maruti Udyog, Hindustan Zinc, CMC, IPCL and a handful of hotel properties owned by India Tourism Development Corporation. But the money raised was merely a total of 6300 Crore as against 1.38 Lakh Crore that were to be raised through disinvestment, which was again a much lower achievement than what was expected to be raised. These facts point in the direction that a broad-based shareholding patterns of PSUs to help improve their managements response to the market challenges has taken a lower priority over making this whole process a mere financial exercise to raise some more revenue to reduce the fiscal deficit. Many times, when the government is not able to meet its set target revenues for disinvestment, it offers discounts on the share prices. This may cause existing shareholders to lose out as the company stocks falls, eroding its market cap. Further, even during the normal process of disinvestment, the government generally announces its Offer for Sale, at discounted prices much in advance. This results in the drop of the prices of the stock and many times, this drop is so drastic that the prices of the stocks are not able to rise much from these low levels. Many of the disinvested stocks have shown this trend, for example Shipping Corp. of India Ltd has plunged by over 75%, Hindustan Copper Ltd has declined by 62%, National Mineral Development Corporation (NMDC) has lost 13.6%, National Thermal Power Corporation (NTPC) has declined by 20.69% and MMTC lost 21%, each since their respective disinvestments (calculated for prices on 26/02/2014). Stocks of only a few companies have shown a positive return on their stocks, such as Power Grid (6%) and IOC (30 per cent) (26/02/2014). A simple disinvestment of public sector through strategic sale will not be a sustainable proposition in the long run, unless Indian industry gains global competitiveness. Unlike India, many countries have earmarked their privation proceeds for definite and specific programmes. For example, Peru government used its privatization income of $7.13 billion in fund specific social welfare schemes and to recapitalize the public pension system. In contrast, in the last 10 years, our Central Government has not undertaken any such exercise, whereas it could have used disinvestment funds to retire the public debt or build its financial assets. Further, the process of

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utilizing any of the proceeds of disinvestment has ignored the creation of safety net for the workers of the PSUs and the use of the proceeds to raise additional budgetary support for plans, primarily the social and infrastructure sector, is very vague. Additionally, such spendings can give results only in the long run with a lot of non-monetary and non-quantifiable benefits. A high fiscal deficit can lead to social insecurities, by creating pressure for a speedy disinvestment at undervalued prices or increased PPP (PublicPrivate Partnership) in various sectors, where the costs are passed on to common man who is also paying various taxes levid on him by the government. Recommendations India has more than 250 state and central government companies. In these, when the condition of 51% stake sale by the government is applied, then a combined condition that no one company can own more than 26% can also be applied so that government, with 26% holding, can possess power to introduce special resolution in the affairs of the company. Many of these companies are listed and have a very good organisational and capital structure, but are not progressing on the expected lines. The current state of private sector firms like HDFC Bank shows how world class organisations can operate efficiently without being owner-driven. It can only be hoped that the government owned companies can also follow their example and the funds generated can be used by the government to strengthen its infrastructure. The most talented and professional management can then be identified and fully incentivised so that they can create world-class capacities and quality, including creating huge profitability of their companies. With this capacity, the companies may generate higher employment. Profitability of companies increases after divestment because of reduced agency problems which are multiple and often, conflicting objectives of PSUs become forged into the dominant objective of profitmaximisation. Even though public sector managers are not replaced under share issue privatisation, the presence of other (than public sector) managers at the Board level does not allow excessive political interference, as is seen at Coal India Limited, which continues to be in the public sector with government shareholding of 90% still, a minority institutional shareholder, the UKbased Childrens Investment Fund has ensured that the government cannot issue directions to the company that would hurt its profitability. Conclusion If the policy of disinvestment is to be employed in broader public interests, it is necessary to

examine systematic issues such as proper valuation of shares and suitable use of disinvestment proceeds. The disinvestment of PSUs must be done with utmost care and thorough planning. To conclude, it may be said that disinvestment in India, though slow, has helped the government considerably to unlock value of central PSEs, though certainly the process needs to be hastened to ensure that the Indian markets are able to reap appropriate benefit from this exercise. Gradually, the government should move away from commercial activity and leave it best to the private players who are driven more by markets. Another way of looking at the alternative to disinvestment is to follow the policy of hands off, which implies that Public Sector Undertakings be given more independence. On many occasions, PSUs have been made the scapegoat by the government. They are forced to declare more dividends to meet their governments budget deficits. One important criticism which attracts attention is the use of proceeds from disinvestment. If it is used for funding expenditure, it makes no fiscal sense. Also, when the government disinvests, it gets one-time cash flow but at the same time, it loses out on the regular income which it receives from companies in the form of dividends. But the question still remains- whether disinvestment is just a revenue raising exercise or does it hold any benefits from the companys perspective of productivity, profitability and employment?

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Praveen M


Crowdfunding is about to go big time. The new trend in the finance world is using the capital from a large number of small investors to finance a new business venture. It is becoming a worldwide phenomenon by pooling the resources through internet. It solves one of the core problems facing early-stage businesses: limited access to capital. Crowdfunding, a popular concept started in the US and the UK, is a new way of raising capital, involves the use of internet or social networking sites such as Facebook or LinkedIn or Twitter or even some dedicated websites. Recent data from Global Entrepreneurship Monitor(GEM) confirms that in 2011, 4.8% of the U.S. population personally provided funds for new businesses while only 1% of the population was represented by formal or accredited investors along with venture capitalists. This shows that 95% of business plans received by the accredited investors and VCs were rejected. Of the 2500 business plans the VC invests in 3-4 projects. The probability of getting funded by a

VC is 0.2%. So, if you want to raise funds, what you are required to do is create an online profile and describe your project and fund-raising goals and share the same with public on the whole, including your peers, relatives, friends, and so forth. Those who couldnt attract funding might watch their companies diminish due to lack of resources. There are two models in crowd funding donation and equity based. In donation based people donate money in exchange for tangible rewards or special experiences. Kickstarter is the top crowdfunding site which brings creative projects to life. Crowdfunding is hardly new. Sites like Kickstarter and Indiegogo which are the forefronts in crowdfunding have helped fund projects through payments raised online. Through those sites and others, supporters can pledge $10 - or tens of thousands of dollars to help start a project, be it a business or a charity. In return, investors can receive a gift, such as a tickets to a game or a T-shirt. Or they can simply feel satisfied knowing they helped a




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Fig 1: Growth Trend of Crowd Funding Industry

good cause. Crowdfunders and angel investors capital. In addition, this new capital base will share the common desire to participate and be likely be comprised of mostly new investors involved in the creation of something new. with minimum or no experience in investing at the early stage of the project. Investor Protection Industry insider Massolution reported that a total In Equity crowdfunding as with most things of $2.7 billion was pledged by individual donors in a entrepreneurial structure, only the best through crowdfunding last year[4]. Equity based will survive. There will be adverse selection. crowd funding allows investors to make direct Experienced and good entrepreneurs will not investments in private companies at the early go to crowdfunding sites as they can raise stage of development through registered portals capital the old-fashioned way. Good investors in web. However, in US they are subjected are not going to crowdfund because they do not to rules and regulations set forth by the SEC struggle to associate with good entrepreneurs. (Securities and Exchange Commission) and JOBS Thus, equity crowdfunding websites will be left Act (Jumpstart Our Business Startups Act) which with entrepreneurs who couldnt raise capital and investors who couldnt get reliable projects. helps to protect the investors. Under the proposal, people with annual income and net worth of less than $100,000 could invest a maximum of 5 percent of their yearly income[1]. Those with higher incomes could invest up to 10 percent. Companies could raise a maximum of $1 million a year from individual investors. Transactions must be conducted through an intermediary. Intermediaries include registered brokers, or in crowdfunding terms they are called a funding portal. The new fundraising method will most likely be used by early stage companies looking for seed money. Equity crowdfunding has become an interesting option for entreprenuers who now have an alternative to traditional venture
Hurdles to invest


Professional investors -- angels, seed investors, venture capitalists -- add a tremendous amount of value to the company-creation process. These investors help form ideas and structure the business processes. They also provide contacts and introductions to customers and partners. Good investors can make a company a realization. On otherhand, in crowdfunding the investors will either be too inexperienced to add value or have invested so little that their interest will be limited. Around 75% to 90% of startups fail, and even the most successful venture capitalists have a tough time finding the right investment




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Fig 2: Total Funds raised during 2012 in USD

opportunities[2]. If the business succeeds, then its value goes upand so does the value of that share of the business. But the converse also can be true. Its also extremely risky, given that a majority of start-ups fail. Experts warn that the reality is nearly 55 percent of start-ups fail within five years. The SEC voted in favor of the JOBS Act section 201(a), which does away with the ban on general solicitation. The lifting of the ban allows venture capitalists, angel investors, hedge funds and early stage companies to advertise openly in various media to raise money in private offerings. Before the ban, communications about their donations had to be done in person, relying on just word of mouth and networking. Now, the ability to market and advertise projects will make it easier for companies to raise money, and also will uncover an entirely new business for marketers, advertisers and websites seeking to strike deals with investors.
Success Story

Dave Girouard, the former president of Google Enterprise, has started a new startup called Upstart, which offers crowdfunding and mentorship tools to help college graduates pursue their entreprenueral goal. This money could help them start their own business instead of settling for a corporate job which they are not excited about. In India crowdfunding can be explained by the story of the Reliance Industries founder Dhirubhai Ambani. His small yet

developing textile business was crowdfunded by communities across Gujarat.3D printing, 3D writing pen, smart watches (Pebble), location devices (Tile), Photography (360 degree photos), Ubuntu Edge (Smartphone by Ubuntu), security devices (Canary) and other great software projects are crowdfunded currently[3]. To have a successful crowdfunding the business or a startup must have the right type of business or product. People must be able to understand the idea of the business properly. Must create an exciting video. People must be able to understand and view the prototype. Raise sufficient funds. Set an achievable target, vision and achieve the target by fund raising. Choose the right crowdfunding platform. The site must meet the needs of the project like the type of the product/service, the amount of equity required and the amount needed to raise. Project good quality photos as part of the campaign. Pictures help enthusiasts and followers spread the word about your project through social media. Plan a marketing campaign. You must plan your crowdfunding campaign as if you were launching a new product.
What CrowdFunding could bring

And it is crowdfinance that what will fund the innovation that will fuel the next economic boom. The process of raising capital for a company is very difficult and despite its negatives like




very low returns for most venture funds it has helped build many of the great companies that have significantly advanced our economy and society. When we think about the displacement in the startup projects, the disparity is not a lack of capital but rather a lack of good ideas. In India, the concept is catching up fast and is posing a risk at the same time, as very soon these funds could step up. A lot of money laundering schemes might start in the name of crowdfunding, which could involve lot of investor money and SEBI has to come up with regulations to protect the investors. India should soon bring in the requisite laws and regulations to support this in a big way, as well-organized crowdfunding system can act as a catalyst in bringing the startup ideas into reality.

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FIN-Q Solutions
1. Western Union Telegraph Company 2. Candy Crush 3. Shikha Sharma, Axis Bank 4. Angel Investor 5. Tenbagger Stock 6. Burson Marsteller -A global public relations and communications firm, There are two events it is in news for- Strategize the 2014 Lok Sabha polls campaign for Rahul Gandhi, Launched new concept The GBM Newsroom in India 7. Sebi Chairman- U.K Sinha 8. Deal between Apple and China mobile which took six years and in this deal Apple will sell iPhone through China mobile 9. Facebook bought technology start up Little Eye Labs in India during Jan 2014




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Googles Money Mine

Apoorva Sharma


Google it! The neologism emerged because of the popularity and instant connect our favourite search engine, Google garners. The word Google was added to the Oxford English dictionary on June 15th, 2006. Google Inc. is an American corporation which offers a plethora of internet related services including search, cloud computing software and advertisements. Its breakthrough innovation in web search made Google, a loved and credible brand, garner worldwide recognition leading to its web site becoming a top internet destination.
Quick Facts

Science Foundation and other federal agencies. Page nicknamed his project as the BackRub. Larry and Brin formally incorporated their company, Google Inc., on 4th September, 1998. Soon Google was able to attract a loyal following with a growing number of Internet users, who preferred its simple design and relevant information search. Eric Schmidt was hired as the first CEO of Google in March 2001.

Revenue: $50.1 billion Gross Profit: $16.06 billion Net Profit: $6.5 billion Ticker Symbol: GOOG Stock Exchange: NASDAQ Fiscal End Year: December Key People: Eric Schmidt (Executive Chairman) Larry Page (Co- founder & CEO) Sergey Brin (Co-founder) Number of Employees: 53,861 Headquarters: Mountain View, California

The first funding for Google as a company was that of US$100,000 and was secured in August 1998 from Andy Bechtolsheim, co-founder of Sun Microsystems. On June 7, 1999, a round of equity funding totalling $25 million was taken from two major venture capitalists, Kleiner Perkins, Sequoia Capital and Caufield & Byers.

Google was born in March 1996, the brain child of Larry Page and Sergey Brin, Ph.D., both Stanford students working on the SDLP (Stanford Digital Library Project) project under the supervision of Terry Winograd. It was funded by the National

A public offering where shares of stock of a company are sold to general public is called an IPO. This process transforms a private company into a public company. Initial investors can exit by selling all or part of their holdings in the company, an opportunity to monetize their investments. After IPO, shares are traded in the open market. This is basically to raise capital to finance a company, the advantage being that the repayment of capital to public investors is not required. Being listed on an exchange raises the prestige of a company and facilitates acquisition in return of shares of stock. One major concern however in an IPO is that of




mandatory disclosure of certain information for potential investors in a lengthy document called prospectus. Companies generally use the services of investment banks in going for an IPO, who help the company in the valuation of shares and also serve as an underwriter. Six years after its inception, after having become a household name, Google went for an IPO. Google announced its IPO in April, 2004. Many bankers were eagerly waiting for this and started making speculations. Google hired Credit Suisse First Boston, Morgan Stanley and others to arrange for the IPO and to become the underwriters for the deal.

a fair market valuation of Google and unlike the traditional method, small investors would not be devoid of the opportunity. Above all, Google was known for being unconventional and at the same time innovative, egalitarian, trustworthy and playful. Investors were not very happy because fixed price earned them more commission. The agreed upon commission for the Google auction was 2.8% which was way under the often quoted 7% fee. This was different from the fixed price method (Book building) which was the norm wherein the shares are valued and a price is arrived at before the auction begins.

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Fig 2: Different Auction Methods


Fig 1: Syndication Included

The IPO was estimated to raise $4 billion. Out of 19.6 million shares, 14,142,135 were floated by Google and 5,462,917 by selling stockholders. The shares were sold in an online auction format. There were two classes of authorized common stock, Class A and Class B common stock. The rights of the holders were identical, except with respect to voting and conversion. Each share of Class A common stock was entitled to 1 vote per share. Each share of Class B common stock was entitled to 10 votes per share and was convertible at any time into one share of Class A common stock. Google was to go public on August 19th, 2004 using the Dutch auction method. In a Dutch auction, people bid and the bids are ranked from highest to lowest, then a particular share price is arrived at and all successful bidders with bid price greater than or equal to the arrived offer price, end up getting shares, everyone paying the same price. Google wanted to go for Dutch auction because it would reflect

Decision: Many thought that the young Google would lose its quirky spirit if it turned into a mature public company. Danny Sulivan, editor, search engine watch newsletter, said that this was one of the worst things that could happen to Google. Timing: A research firm, Dealogic claimed that there was a fall of nearly 4% in the number of IPOs in America and NASDAQ fared poorly between April and August, 2004. Close competitors like Yahoo! And Amazon reported earning misses for the second Quarter of 2004. Also, institutional investors holidayed in the second half of August.

Fig 3: US Initial Public Oferings




Auction Design flaw: Investment banks thought that Dutch auction was quite complicated and an average American was not ready for it. Insult and lack of interest: Eric Schmidt did not attend the road shows which came across as an insult to the investors. Choice of dual stock: Division into Class A and Class B common stock was taken as a negative indicator of corporate governance as they were different in terms of voting rights and conversion.

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electronic notice of acceptance of bid was sent. The bidder was obliged to purchase the shares allocated to him/her.

Difficulty with SEC: Interview of the founders of Google which featured in Playboys August issue which was against the SECs quiet period restriction. Investors were of the opinion that investigation would take considerable amount of time citing the example of Salesforce.coms IPO early in 2004 which caused a delay of 3 months but surprisingly for Google it was just a 10 day affair. Failure in reporting issued shares: Google failed to report the shares issued to its employees between 2001 and July 2004.
Impact of the Controversies

Fig 4: Money Raised Through Auction and Book Build

History has it, these controversies heightened so much that Google reduced the price of shares from the $108-$135 range to $85 - $95 range and reduced the number of shares to be sold from 25.7 million to 19.6 million.
IPO Process

The auction was conducted in five stages: Qualification, Bidding, Auction Closing, Pricing and Allocation. Qualification On meeting the underwriters eligibility criteria and obtaining a unique bidder ID, one was qualified to submit a bid. Individual investors outside US were not eligible for the offering. Bidding Process All investors had to submit bids to any one of the underwriters over the internet, telephone or facsimile, indicating the numbers of shares they were interested in purchasing and the price per share they were willing to pay. All speculative and manipulated bids would be rejected. Auction Process Dutch auction was used. Anyone could withdraw the bid before the auction closed. If the price of the share arrived at, in the auction, was at or below the bid price, the bid was accepted and an

Pricing Process Based on all the bids, the initial public offering price was determined by the underwriters and Google after the auction was closed. The offer price arrived at was $85. A press release was issued to announce the IPO price. The price was also mentioned in the final prospectus delivered to purchasers of stock in the offering. Allocation Process All shares were sold at the offering price. All successful bidders were allocated number of shares that were nearly equal to the number of shares represented by their bids. The objective was that successful bidders should receive at least 80% of the shares they bid for. For this Pro Rata Allocation and Maximum share allocation methods were used.
Post IPO Impact on the following

Employees: 2,300 employees of Google became instant millionaires and retention of these wealthy employees became a challenge. M&A: M&A heats up after any IPO so was the case for Google. Important acquisitions include Motorola, Blogger and You tube. Real Estate: The demand for luxury homes increased as the newly rich searched for avenues to invest their money in. Venture Capitalists: Googles IPO became a benchmark for exit valuations. Stock Performance: Just a few hours after opening the auction, Google shares surged to more than $100 registering an increase of around 18%. The next day the share prices touched $108.31. The IPO earned around $1.67 billion




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Fig 5: Performance of Google Stock

out of which $1.1 billion was for Google and the initial investors and founders earned the rest. The market capitalization of Google was more than $23.1 billion. On June 1, 2005, Google shares recorded a gain of 4% after Credit Suisse First Boston increased its price target on the stock to $350. Google was not included in the S&P 500 until 2006. On June 7, 2005, Google was valued at nearly $52 billion, making it one of the worlds biggest media companies by stock market value. One year later, on 17th August, 2005, Google announced that it would sell 14,159,265 more shares to raise money. This would double Googles cash stockpile to $7 billion. Google said it would utilize the money for acquisitions of complementary businesses, technologies or other assets. By 2010, Google had become a wall street pleasing firm. Its lovers thought that it had grown up and lost its innocence, commercialized and became all about selling ads. However it was performing brilliantly at the stock exchange. Its shares closed at $865 on August 19th, 2013 showing a gain of around 900%.
Google Today

In December 2012, Alexa, a subsidiary company of listed as the most visited website in the world.

Google tried adopting the best auction method including investor access as well as transparency. Although it incurred initial losses due to underpricing its stocks, it fared well in the long run. If the founders had not reduced the share prices, an extra $23 could have been earned per share. Also, had road shows been taken seriously and choice of dual stock avoided, the IPO would have performed better. Google expanded the Syndicate which further obstructed the IPO process. Nevertheless, phenomenal growth, innovative products and numerous acquisitions and partnerships have made Google what it is today. Google acquiring other compatible firms in the domain of cloud computing and mobility shall definitely enhance its scope to grow and retain its phenomenal streak. This can certainly be spoken in light of facebooks recent acquisition of messaging giant Whatsapp, which holds a tremendous business potential in days to come.

The company earned revenues of $50,175 million for FY2012, an increase of 32.4% over FY2011. The revenues increased majorly due to an increase in advertising revenues generated. The operating profit of the company during FY2012 was $12,760 million, an increase of 8.7% over FY2011. The net profit recorded an increase of 10.3% over FY2011 and reached $10,737 million in FY2012. FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG



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Factoring: The next big wave

Sandesh Gupta & Pawan Paliwal


What it is?

Factoring is a credit management tool in which a business sells its account receivable to the third party at a discount rate. Factoring is quite common in industries like textile and manufacturing where the operating cycle is quite long. The service provided by the specialized organizations is called the factor, usually the banks or big financial powerhouses. These organizations have expertise in credit management, collection and administration. Factoring is quite popular technique to manage finances in US and UK and it is catching trend in India as well.
Why it is required?

quite long and company can become cash strapped if it doesnt receive cash at regular intervals. Also, there is huge risk of bad debt for these receivables. These receivables occupy a significant part of the current asset in the balance sheet but these assets serves no business purpose since they are illiquid in short term. Hence it is better to sell these receivables to a third party (factor here) who has got expertise in the credit collection and administration. One more aspect to this is that a firm can focus more on its core operations rather than worrying about the receivables.
How does it work?

In several industries the operating cycle is

Following diagram will explain the factoring business in the most simplistic manner.

Fig 1: Working of Factoring




The seller, Business Owner in this case, sells its account receivables to the factor for some instant cash or some other financing. The selling price of the receivable will always be less than the invoice because the factor charges a fee for the service provided and in some advance factoring bears the risk of default from the client. The factor then collects the receivables from the client.
Type of factoring

seller of invoice cant claim the remaining amount from the factor. This technique is quite popular in developing countries where it might be very difficult to get the credit information about the client. This technique is more of a short time financing than a credit management tool.
Global Scenario

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Factoring facilities worldwide can be divided majorly in two types. 1. Full service non-recourse: In this kind of factoring, the factor buys full book debt and assumes 100 percent risk. The factor also advances 80-90 percent of the invoice to the client. This kind of factoring is highly popular in USA and suitable in a situation where the amount of transaction is quite high and the client prefers 100 percent protection from any bad debt. Since the factor assumes the full risk, it comes at a higher cost. The amount of the fee charged is the highest. 2. Full service recourse factoring: In this type, the factor doesnt assume the risk of bad debt or default from the client. Hence if the client fails to pay the money on time, the

For sustained growth of business it is important to manage and control the extent of nonperforming assets, this becomes even more important when the company is operating in a rough and slowing economic market. Lack of liquidity has forced many companies out of business. The practice of factoring has been in existence since the time of Mesopotamian culture but it has got impetus in recent times with many countries passing statutory laws regarding the conduct of factoring business. According to Factors Chain International the Global factoring turnover stood at Rs. 1.13 trillion in 2006 and has grown at CAGR of 11.1% and has crossed Rs. 2.10 trillion in 2012. Europe contributes two third of the global factoring services offered globally. The factoring industry has grown at a robust pace despite of facing one of the worst economic slump after the great depression and has

Fig 2: Factoring Explained




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Table 1: Factoring Summary

nearly doubled the factoring services in the last four years. There are more than 250 companies offering factoring services globally which are operating in 73 different countries.
Indian Perspective

Currently there are 12 Factoring service providers providing their services and doing business to the tune of 3.65 billion. One of the steps taken by the RBI to promote factoring services is the formulation of Factoring Regulation Act 2011. This would help MSME sector, which will be the biggest beneficiaries of factoring services. Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly exciting and dynamic sector of the Indian economy over the last few decades. MSME contributes 8% of Indias GDP and 45% of the manufacturing output. As per the data obtained from Indiastat dated 29th Aug 2011 the number of sick micro and small enterprises were 90,141 units and the number of medium enterprises declared sick were 4,416 units. There are a number of internal and external factors for this pandemic but inadequate credit facilities and poor cash management are the leading causes for this.
Steps taken by RBI to encourage factoring

the Factoring Act which has laid the basic legal framework for factoring in India. Before the Factoring Act came into effect the companies already in this business came under the purview of RBI Act, 1934 and were classified as NBFCs. Under the Factoring Act, a NBFC- Factor means a non-banking financial company fulfilling the principal business criteria i.e. whose financial assets in the factoring business constitute at least 75 percent of its total assets and income derived from factoring business is not less than 75 percent of its gross income, has net owned funds of Rs. 5 crore. Existing companies have to comply with the criteria or to unwind the business totally. If companies start using factoring effectively it would go a long way in reviving the manufacturing sector which has become the laggard in Indias growth story.

Looking at the number of advantages of factoring which we have already seen, the Central Bank realized the importance of factoring and the role that it can play in successfully running a business. Looking at the benefits of factoring, RBI enacted




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CGM of Global Markets, State Bank of India

RBI is under the process of issuing new banking licenses with an objective of promoting financial inclusion and increasing competition in the sector. SBI is already losing its market share to private banks like ICICI and HDFC. On top of it, loan growth is expected to be suppressed due to weak economic growth next year. How is SBI going to tackle with this growing competition under this scenario? Competition is always welcome. In any field, competition is an area that makes you sharper, better and therefore, results-wise it should do you good over a period of time. In India, there is always room for any number of banks because there is still population growth, we still have a lot to grow in terms of GDP and we still have a lot to do in terms of industrial production. So, it is nice to have more players around. While it is true that we have been losing some share because of the fact that we were the number one for a long time, in any market when new players come, the existing market players will lose a little bit of their share. But in the last two years, we have gained market share at the expense of most of the other players. So, those who are ready to fight will win. We welcome the competition. None of Indian banks feature in the list of top banks in the world unlike their Chinese counterparts. Any specific reasons for the same, in your opinion? Banks are a reflection of the country which means that they are a reflection of the industrial activity and the economic activity of the country. So, when we grow, we grow after the customers become big. We follow our customers. That is the same practice throughout the world. About 50-60 years back, Japanese banks were also not known. But in 80s there were at least 3 or 4 Japanese banks were in the top 10 banks of the world. Why did that happen? It happened because the industrial activity picked up in Japan and they produced world class industrial

giants. Then, the banks who supported them also became big. Similarly I dont think anyone of us would have heard names of Chinese banks 10 years or 20 years back. Chinese banks became big after their customers became big. Indias turn also will come when the country becomes very big and when some of the companies become multi-nationals, which has already happened with the likes of TATA and Reliance. So very soon banks of Indian origin will soon feature in the top banks of the world. Why couldnt SBI become one of the top banks in the world in spite of having more than 15000 branches in India? We should understand that India does not stand among the top countries in the world. It is just because of numerical numbers you are there. What is the per-capita income of an average Indian? Today, the nominal per-capita of a Chinese is above USD 5000 which was less than USD 500 two or three decades ago. We have reached a per-capita of about USD 1500. When that becomes USD 5000, we will also become big. Ultimately, it is the sum total of all of us individuals, companies, services all these add on to the factor by which a country progresses. So when it moves from one segment to the other, when the country moves from low-end to mid-end, mid-end to high-end, at that we will see all these that we were talking about. Not only banks but also other companies will be in the top among the world. We still do not have top companies in the world. But, it will happen and thats my belief. SBIs gross NPA levels are among the highest in the banking system in India. The gross NPA levels of SBI stood at 5.64% (an amount of Rs. 64,206 crore) at the end of Q2 last year. What bottlenecks is SBI facing in curbing these bad debts as SBI has seen a dip in its performance three times already in the past immediately after a new chairman has taken over? NPAs again is a reflection of the industry. By and large, for the last several years, there have





been problems in the industry. The expenditure from government has gone down and industries are trying to get over the recession which has happened in the US and Europe. Its a combination of internal factors and external factors and therefore you are seeing this problem reflecting in the level of NPAs. America is spending $85 billion every month, which is money printing. India also went through the trouble, but the banks stood by its customers. So, they were able to pump some money to the customer and run the system. Otherwise we would have had to let some of these industries go down. So you will find a strain in the balance sheets of some companies. It is not that they will be washed away, most of them will be able to come back. We have to give that supporting or helping hand in order to see through difficult times. I am sure all of us will be able to work together to get to that solution which will reduce the levels of NPAs. Is the level of NPAs that SBI has today is because of its social cause to promote financial inclusion in the country? I dont say that is a strong reason. What you see today on the growth of NPAs of SBI is not purely or largely because of what you are talking of. It is because of companies which have had a problem in their cash flows. So we feel that most of the companies can come around over time. How far is the government regulation to lend to priority sectors aggravating the situation? There is a small problem there as we also lend to SMEs which is the sector that has the maximum stress today. Then mid-corps are facing a problem because their cash flows are not enough for them to generate sufficient revenues to give back what they have taken from banks. So there is a strain in these areas. That is the major reason and our feeling is that if you are able to help them at this stage, they will be able to revive themselves. In the recent time, especially the past year, rupee has seen high instability and fluctuating values against the dollar in the market. What is your outlook on the performance of Rupee in short as well as long term? Ultimately, a currency will get strong when you have a surplus of inflows over outflows. It is just a question of demand and supply. As long as the demand for foreign currency is higher than your supply which is needed, currency will weaken

over time. Nobody can predict on how much it will weaken and how quick it can happen. But over time, as long as India cannot value add more than what it borrows from outside, currency will always be depreciated. So it will continue till that time. So it is for the country to embark on a path which will take us forward and enable us to be a forex surplus nation. You have experience of working in different countries like France and the US. What major differences did you find between the banking system there and in India? First of all, the major difference between banking here and banking there probably is that rules and regulations are far clearer than in India today. It is not the regulatory framework of India that creates a problem. But, the major difference between why the banks have blossomed there and not as much here is because of other reasons like high growth in industry and even agriculture. What is the unemployment level of these countries? The real unemployment level there is low. So the economic activity itself is very high. Therefore, banking and allied areas keep growing much faster than what happens in a country like India. The penetration level of financial products into the entire public in India is still low. But it will grow with time as and when everything starts growing in India also. So we have to wait a little longer. We are on that path. It has improved from what was 20 years ago and far improved from what was 40 years ago. So we will also reach those levels shortly. Lastly, we would like to ask you that how does the banking industry view to utilize the talent of the B-School students who aspire to join the banking sector. (How should they be prepared to face the industry) I would say innovation must be there in applying whatever you have learnt to local conditions in India by coming out with products which are meant for the local areas. Maharashtra may differ from what is needed in Andhra Pradesh. So, application of what you have learnt must be put into integrating new products, services, and technology to give a winning solution. That is the most important thing which B-Schools students need. The theories that you learn in class wont change. It is the same whether you are in America or here. But two things change, the application as well as the final distribution. Those two need to be tailored to what is localized. We will end up with much better results if we can do that.






CLASSROOM FinFunda of the Month

FIXED income securities

Ankit agarwal
covenants are actions that the borrower promises to perform, and can include the maintenance of certain financial ratios and the timely payment of interest and principal amount.

Classroom Cover Story

IIM Shillong

Sir, yesterday I heard our investment advisor telling my father to invest in fixed income securities instead of equities because the market is very volatile right now? Can you please explain what fixed income securities are? Fixed income securities are investments which promise to pay a stream of fixed periodic payments (usually, semiannual) for a given number of years and then repay the principal amount at the maturity date. For example, consider a Treasury bond with 5% coupon and 5 years to maturity, having a face-value of Rs.1000. This bond will pay the investor Rs.25 at the end of every 6 months (Rs.50 annually) and repay Rs.1000 at the end of 5 years. It is basically a loan from the investor to the issuer. What are the benefits of investing in fixed income securities? Firstly, it provides the investor with a low risk and reliable income stream through coupon payments, where the dates and amount of coupon payable are fixed at the time of issue. It also provides liquidity. Secondly, it preserves capital since it repays the entire face-value at maturity. Unlike equities, it provides protection against loss in a cyclical downturn. Thirdly, it helps diversify your portfolio. It can counter-balance higher risk investments in the portfolio such as equities and property. I also heard them talking about covenants. What are covenants? The issuer and owner of fixed income security sign a contract (called bond indenture) which specifies all the rights and obligations of the two parties. The provisions contained in this contract are known as covenants and include both negative and affirmative covenants. Negative covenants are prohibitions on the borrower, and can include restrictions on asset sales, negative pledge of collateral and restrictions on additional borrowings. Affirmative

When you talk about coupons, what are the various coupon rate structures? Generally, there are four types of coupon rate structures: a) Zero-coupon bonds: These bonds do not pay any periodic interest. They pay the par-value or face-value of bond at maturity. Interest results from the fact that these bonds are initially sold at a significant discount to par-value (i.e., sold at a price below par-value). b) Step-up notes: They have coupon rates that increase over time at a specified rate. This increase in the rate may take place once (single step-up note) or more (multiple step-up notes) during the life of the issue. c) Deferred-coupon bonds: These bonds incorporate the features of both zero coupon and coupon paying bonds. They carry coupons, but the initial coupon payments are deferred for some period. These payments accrue at a compound rate over the specified period, and are paid as a lump sum at the end of that period. After this, regular coupon payments are made for the rest of the period till maturity. d) Floating-rate bonds: These bonds have coupon rates that vary over the life of the issue. Coupon rates are reset at predetermined times, and are usually linked to an index or benchmark (for example, LIBOR) with some sort of spread added to or subtracted from the benchmark. What is the difference between clean price and dirty price? The amount that the buyer pays to the seller is the agreed-upon price of the bond (clean price) plus any accrued interest (from the previous coupon date through the date of the sale). The total amount paid, including accrued interest, is known as the dirty (or full) price of the bond. This clears a lot of questions that I had. Thank you Sir for the explanation.



Goes Online
With TOTAL Prize Money of INR 1500
We are pleased to inform you that your favourite Niveshak FinQ is going to take a new shape from March, 2014 onwards. The monthly quizzing event will now be conducted online for a total prize money of INR 1500, the details of which will soon be disclosed. We expect you to show the same enthusiasm, as always, in your participation and make this event a grand success. For further updates, follow our Facebook page:

All entries should be mailed at by 10th February, 2014 23:59 hrs One lucky winner will receive cash prize of Rs. 500/-


Prize - INR 1500/Master of Finance & Control, University of Delhi

Article of the Month

Sonia Kumari & Ganesh Mehta

Prize - INR 500/-


Heena Motwani
IIM Shillong

Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute 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.1500/- along with a certificate. Instructions Please send your articles before 10th March, 2014 to The subject line of the mail must be Article for Niveshak_<Article Title> Do mention your name, institute name and batch with your article Please ensure that the entire document has a wordcount between 1200 - 1500 Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 Please do NOT send PDF files and kindly stick to the format Number of authors is limited to 2 at maximum 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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