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Bottomline // January 2017 PAGE 2 OF 66

EDITORIAL
The Finance Club of IIM Bangalore, Networth, chief editor, Gaerik Chhabra. It explores the
is pleased to bring to you the 5th edition of its following questions: What are the various
biannual magazine, Bottomline. Since its first concepts and how do they interplay to bring
edition in 2011, the magazine has been bringing about a change in existing transactions? What is
together divergent perspectives on finance and the role of regulation in emerging technologies
economics from various spheres, including like block chain? How has the industry evolved
eminent personalities, academia and students to how it is today and what are some of the
from various reputed universities. possibilities in future?

This edition focuses on the rapidly evolving The problem, critics claim, with finance is that
global financial industry and possible future it sacrifices equity of the nations at the altar
outcomes. We believe that the industry is at of growth. Our focus on emerging economies
crossroads, witnessing transformation at a pace explores and questions this idea. We have an
never seen before and moving towards a new article by Ms. Vidushi on challenges being faced
paradigm. Whether it is the unusually low yields by Brazil, an article by our Professor Srinivasan
on bonds across the world, the rise of FinTech Rangan on how successful Foreign Institutional
companies and their increasing influence, the Investors are in emerging economies and an
unconventional approaches taken by Central article by Professor Vaidyanathan on what
Banks across the world or changing regulations, challenges emerging economies like India
the industry is growing by leaps and bounds. face, particularly those related to security and
Combine all these changes with the evolving sovereignty.
demographics and politics, and it becomes clear
that the finance industry is at the doorstep of a Meanwhile 2016 has also been marked by highly
revolution. polarizing debates at home. Demonetization
has changed fortunes of many overnight and set
This edition promises you to give an immersion the economy into tumult, the effects of which
into the world of finance in seven sections. The still persist. We have an interview regarding
first section views the global finance sector the same with Mr. Sathya Kumar, a Chartered
from the point of view of an eminent academic, Accountant, passionate about public policy and
Professor Jayanth Varma, an experienced knowledgeable about this issue, We also have
bureaucrat, Dr. Karthik Hegdekatti, and our an article from a trio of Networth members,
Bottomline // January 2017 PAGE 3 OF 66

Archana Maganti, Ayush Agrawal and Rishi Patnekar for his contribution in the last section.
Vora on high inflation is posing an iniquitous
burden on people of India. We would love to hear from you regarding
your views on this magazine. Do send in your
This time we have dedicated a section to startups comments, feedback & suggestions to
with a special focus on FinTech, which are de networth@iimb.ernet.in.
rigueur in the current financial landscape.
Following an introduction by Archana Maganti, The Editorial Team,
we have an in-depth interview with a Venture Bottomline
Capitalist and IIM B alumnus, Mr. Parag Dhol on
the startup ecosystem in India and potential for Editorial Team
future. Chief Editors
Archana Maganti
We also tried to cover some of the prominent Gaerik Chhabra
deals that happened during 2016, domestically
as well as globally. These deals, we believe, will Lastly, you may find more interesting reads from
certainly have a significant effect on markets Networth at our blog. Our team publishes new
and industry structure in future. articles every fortnight. Please do visit!
https://macrohappenings.wordpress.com/
We also look at 2016, review the major
happenings by each month and focus on
powerful personalities in finance. We thank
Bharath Vejendla for his assistance in the
compilation of events in 2016.

We express our gratitude to all the members of


Networth, the Finance Club of IIM Bangalore. We
wish to thank Spriha Saggar, Dinkar Mohta and
Madhur Bajpai for all their valuable guidance
and advice. We have included a section on the
events conducted by our club, which vouch
to our enthusiasm. Lastly, we thank Ritwik
Bottomline // January 2017

CONTENTS

THEME: FINANCIAL REVOLUTION

07 FINANCIAL WORLD AT CROSSROADS

THE GOVERNMENT BITCOINS: REGULATED AND SOVEREIGN


12
BACKED CRYPTOCURRENCIES

16 THE FOUR NEW FORCES

EMERGING MARKETS VIEW

19 BRAZIL - THE CRISIS PROLONGED

22 FII TRADING AND FUTURE RETURNS EMERGING ECONOMIES

CIBIL - SHOULD OUR CREDIT DATA BE WITH A FOREIGN


26
COMPANY?

MEANWHILE IN INDIA

29 INFLATION - THE INIQUITOUS TAX

DEMONETIZATION DEMYSTIFIED: INTERVIEW WITH MR. SATHYA


34
KUMAR
Bottomline // January 2017

THE AGE OF STARTUPS

39 THE BLOOM OF FINTECHS

VC PERSPECTIVE OF STARTUPS IN INDIA - INTERVIEW WITH MR.


41
PARAG DHOL

MERGERS & ACQUISITIONS

46 UBER - DIDI : CHINA

48 MARRIOTT & STARWOOD

50 FORTIS & ITC HOLDINGS

LOOKING BACK AT 2016

53 2016 - GLOBAL EVENTS ROUND-UP

56 2016 - PERSONALITIES OF THE YEAR

TEAM NETWORTH

59 TEAM NETWORTH - SENIOR COORDINATORS

60 TEAM NETWORTH - JUNIOR COORDINATORS

61 NETWORTH - 2016 EVENTS ROUND-UP


1 FINANCIAL WORLD AT CROSSROADS

FINANCIAL 2 THE GOVERNMENT BITCOINS

REVOLUTION 3 THE FOUR NEW FORCES


Bottomline // January 2017 PAGE 7 OF 66

FINANCIAL WORLD AT CROSSROADS


- Gaerik Chhabra

T he past two decades represent an interesting


phenomenon in the global financial world.
Each decade has a story to tell that in almost all
Gaerik Chhabra is
first year student at IIM
a

Bangalore. Prior to joining


ways contrasts the story of the other. The earlier IIM Bangalore, Gaerik was
decade from the late 1990s to late 2000s is working in the Private
Wealth Management
viewed as the golden era of modern financial Technology division at
world and was marked by increasing global Goldman Sachs for 4 years.
trade, rapid growth of equity and debt markets At Goldman Sachs, Gaerik
(probably except for the dotcom bubble) in most has worked on a variety
of functions including the
stable economies and greater movement of labor lending business, client
and capital across borders. It was the triumph of portfolio ledger and trade order matching.
globalization and few had predicted that there
will be challenges or hurdles on this path.
THE DECADE BEFORE
However, a turning point occurred in this
Emergence of the Emerging Economies
narrative in 2008 that left the financial world
reeling in shock and probably even turned back Post World War II, the major economies of
the hands of the clock. Post the crisis, global trade the world had been weakened. The United States
has declined and not recovered to its pre-crisis was the sole capitalist state that drove economic
peak, investor confidence has failed to pick up growth and it continued to lead the world until
and countries across the world are struggling to 1970s, when some of the Western European
push the growth gears of their economies. countries started to recover. This was followed
by the rise of the Asian economies in the 1980s
In the light of the recent political and financial
and the 1990s, primarily lead by Japan and later
events, we view the 2008 global financial crisis as
by China, after its leader Deng Xiaoping in 1978
the pivot and analyze how the structure of global
liberalized the Chinese accompany. In 1991,
finance, economy and markets has transformed
after years of following socialist policies and
in the past two decades.
acting as a welfare state with strict regulations

2008 - A PIVOT IN FINANCIAL HISTORY?

The Decade Before The Decade After


Emergence of the Emerging Central banks: The lone wolves
Economies Bleeding Banks - Regulation and
penalties
Innovation and globalization in
financial markets Rise of populism End of
globalization?
The Consumption Era Growth of alternate finance
Bottomline // January 2017 PAGE 8 OF 66

in the private sectors, the then Indian Finance was $3.3bn, a three-fold increase from a decade
Minister Manmohan Singh (later Prime Minister), earlier (source: BIS). However, the biggest spike
implemented a wave reforms that opened the was observed in the daily average turnover of
doors of Indian economy to the private sector and OTC interest rate derivatives, which stood at
foreign investments. $1.6bn in 2007, up 8 times from a meager $0.2bn
As a result of these events, during the decade in 1998. These numbers are representative of the
before the 2008 crisis China and India, grew at over growth that the derivatives market witnessed in
8% annually. A similar wave of growth was being the decade before the financial crisis.
observed in Brazil and Russia. In 2001, the then Similarly, the growing financial markets
Chairman of Goldman Sachs Asset Management provided banks an opportunity to expand their
coined the term BRIC postulating that these four businesses, both geographically and in terms of
economies will be the driver of world economic the services provided. The fifteen-year period saw
growth. In 1998, the BRIC nations had a combined a steady increase in the number of foreign banks,
GDP of 8.31% of the world GDP in current US from 784 in 1995 to 1,301 in 20071. For the period
dollar value (World Bank Data). By 2008, this had between 1998 and 2008, the cross-border claims
increased to 14.47% and it now stands at 21.94%. and liabilities tripled from $9.1bn and $8.2bn to
Innovation and globalization in financial markets $34.4bn and $30.1bn, respectively (source BIS).
The era before the crisis transformed the Banks also diversified their service lines and
financial world in two crucial ways one, there grew rapidly in this decade. The strong capital
was innovation in the financial instruments being markets allowed banks to earn more income
offered which witnessed exponential growth and through services such as investment banking
two, banks across the world diversified their and wealth management. The intriguing aspect,
businesses leveraging globalization. however, is the growth of the shadow finance
sector during the same period. The graph on next
In the two decades preceding the crisis, there
page reveals that the financial assets held by the
was a growth in new financial instruments being
shadow banking sector had surpassed that held
traded such as derivatives and ETFs. Though some
by traditional banking sector.
of these instruments had existed for decades,
some even decades, it was only in the decade The Consumption Era
before the financial crisis that there was a spurt In the decade before the crisis, the economies
in the volume of these instruments being traded. of most of the developed economies were being
In the decade prior to the crisis, the global driven by increased consumer spending. The
daily average turnover in the listed futures household savings rate, as a percentage of
and options exchange market increased by personal disposable income, was declining in
almost 8 times from $1.3bn to $9.5bn (based on most of the growing economies. The United States
notional amount, source: BIS). Similarly, the has historically had one of the lowest savings rate
global daily average turnover for OTC foreign and lead this decline even in the decade before the
exchange derivatives on a net-net basis in 2007 crisis. The gross savings as a percentage of GDP in
the United States had come down from 21.33% in

1998 to 15.49% in 2008. Since the 1970s, this was


The growing financial markets the second period with one of the lowest savings
provided banks an opportunity rate. However, this trend has seen a reversal since
the economic crisis, changing the nature of how
to expand their businesses, both
consumers allocate their income. Since 2008, the
geographically and in terms of
1 Stijn Claessens and Neeltje van Horen: The Impact of
the services provided. the Global Financial Crisis on Banking Globalization.
Bottomline // January 2017 PAGE 9 OF 66

8 years after the crisis, most global economies


continue to be plagued by low spending by the
larger population despite several efforts by the
central banks to ease the availability of credit
and to discourage savings through lower interest
rates.

THE DECADE AFTER


Central Banks: The lone wolves
Until the 2008 financial crisis, the Central
Banks played a supporting role to the government
policies. However, post the crisis, the role of
central bank has shifted from a side-actor to the
key player.
Across the world, the growing importance
of the central banks has been attributed to
several factors, including the increasing debt of
US Government due to the bailout program, and
the political and structural weakness of the EU
Commission in case of the Eurozone. Similarly,
Japan had changed 7 Prime Ministers between
2006 and 2012, as the economy had continued to
struggle for over a decade since the Asian financial
Financial assets by holding sector (Source: Board of crisis in 1998. In the given circumstances, Central
Governors of the Federal Reserve: Financial Accounts Banks across the world had to step in to save
of the United States, the authors own calculations.) their economies from a catastrophic collapse.
Source: Traditional banks, shadow banks and the US
Most resorted to Quantitative Easing programs,
credit boom credit origination versus financing by
Robert Unger purchasing huge amounts of securities and debts
to pump in more money into the economy and
reducing interest rates, in some countries lower
gross savings in the US has increased every year
than 0%.
and now stands at 19.91%, fast approaching the
However, unlike any of the previous financial
late 1990s number.
crisis, these measures failed to lift the economies
Similarly, the household savings as
to the expected level and growth remained tepid
percentage of the personal disposable income in
years after Central Banks pursued these measures.
United States, China, Australia and Switzerland


reveals a similar trend. This phenomenon in four In the words of Mark Carney,
different regions of the world clearly indicates
Governor of the Bank of England,
that the problem is not limited to the US economy.
Monetary policy has been
While it is true that after every economic
keeping the patient alive, creating
crisis, the savings rate tends to increase due to
low consumer confidence in the future of the
the possibility of a lasting cure
economy, what is surprising in this case is the time through fiscal and structural
period for which this trend has continued. Even operations.
Bottomline // January 2017 PAGE 10 OF 66

settled $82 billion with 8


banks so far. Deutsche Bank
has been the most recent
victim, finally settling for
an amount of $7.2bn, down
from the initial amount of
$14bn which was widely
believed the bank would not
be able to pay. Adding to the
DoJ settlements, the various
lawsuits against the banks
takes up the total amount to
over $150bn.
The increased
regulations and continuous
inquiries have hit the
financial systems hard and
2014 Federalreserve, Flickr | GOV banks have struggled to stay
Chair Yellen presents the Monetary Policy Report to the Congress.
profitable in the past few
The lack of fiscal support in many countries with years.
these monetary policies have pushed the Central Rise of populism end of globalization?
Banks to a corner, left fire-fighting alone. In the
The greatest driver for economic growth in
words of Mark Carney, Governor of the Bank of
the past three decades was globalization borders
England, Monetary policy has been keeping the
were opened for trades via free trade agreements,
patient alive, creating the possibility of a lasting
migration rate increased significantly and a
cure through fiscal and structural operations. It
number of activities were outsourced from the
has averted depression and helped advanced
developed to the developing countries. Until a
economies live to fight another day, so that
few years ago, the general perception was that
measures to restore vitality can be taken.
globalization benefits all and just like each of
Bleeding banks - regulations and penalties the previous stages of globalization, the common
In the aftermath of the crisis, there was a consensus was that this phase, too, will last
demand to bring to book those responsible for forever.
it and to regulate the financial industry. The However, the prolonged recovery after
US Government responded with a number of 2008 crisis caused huge sustained levels of
regulations under the Dodd-Frank Act. The EU, unemployment in the developed economies. There
on the other hand, decided to implement a single was growing discontentment against movement
rulebook for all its member state banks and has of jobs and labor from these economies to the
enacted 30 rules since 2012 after it established


three supervisory authorities. Compliance with
these regulations has greatly impacted the Populism is now mainstream.
profitability of these banks. And this sentiment is affecting
At the same time, inquiries were setup to the nature of politics in the
investigate the role of these banks in the creation West as nationalism is gaining
of the crisis. The US Justice Department has already
momentum.
Bottomline // January 2017 PAGE 11 OF 66


emerging world. On the back of these conditions,
two major unexpected events happened in 2016 In Europe, the total volume of
which have probably set in motion the reversal of transactions in alternate finance
globalization. industry experienced a growth
Populism is now mainstream. And this of 144% and 92% in 2014 and
sentiment is affecting the nature of politics in 2015, respectively.
the West as nationalism is gaining momentum.
Whether this wave of populism will merely tell whether there are flip sides to this growing
redistribute the jobs and wealth or stall global industry. In that direction, it is imperative that
economic growth is to be seen over time. the authorities frame appropriate regulations not
only to support these new institutions but also
Growth of alternate finance
regulate their activities. In the US, conflicts are
While most of the commentary on the already emerging between Federal regulators
last decade has been bleak and pessimistic, and State regulators on FinTech.
there is a knight in the shining armour. The
growth of alternate financial systems promises
to revolutionize the industry. Finance and CONCLUSION
technology have blended together to disrupt the The global financial crisis has moved the
old model of banking. There are 4 main areas that world in a direction different from where it was
have seen phenomenal growth and captured our headed to before the crisis. Almost a decade
attention - crowd-funding, peer-to-peer lending, after the crisis first appeared, we are still seeing
microfinance and invoice trading. the effects on the global financial and political
In Europe, the total volume of transactions landscape.
in this industry experienced a growth of 144% In 2017, the outcome of elections in a number
and 92% in 2014 and 2015 respectively2. In the of European nations will demystify where we
Americas, the industry grew to $36.49bn in 2015, are headed to. On the other hand, the election
a 212 per cent annual increase from the $11.68bn of Trump has finally set the stage for monetary
in 20143. policy divergence, which will probably help
The leader in this category is peer-to-peer central banks steer out of the spiral of quantitative
lending, where a number of unsecured personal easing and maintaining low interest rates. In this
loans are pooled to support a business venture. regard, one cannot discount the role of changing
The success of Grameen Bank in Bangladesh demographics in some of the advanced economies.
has become a model for microfinance across A recent paper published by the Federal Reserve4
the world. Microfinance involves creating small concluded that with aging demographics, low
loans for the impoverished people without any interest rates is the new normal.
collateral, and is considered vital to kick start The question we are left with is - will the
economic growth in many economies. coming years see us returning to the pre-crisis
While various industry reports claim that era or take us further away from where we were
firms that have been funded using alternate before the crisis?
finance have performed well, only time will
2 Robert Wardrop, Bryan Zhang, Raghavendra Rau and
Mia Gray: Moving Mainstream - The European Alternative 4 Gagnon, Etienne, Benjamin K. Johannsen, and David
Finance Benchmarking Report . Lopez-Salido (2016). Under- standing the New Normal:
3 Robert Wardrop, Robert Rosenberg, Bryan Zhang, Tania The Role of Demographics, Finance and Economics Discus-
Ziegler, Rob Squire, John Burton, Eduardo Arenas Hernadez sion Series 2016-080. Washington: Board of Governors of
& Kieran Garvey: The Americas Alternative Finance the Federal Reserve System, http://dx.doi.org/10.17016/
Benchmarking Report. FEDS.2016.080.
Bottomline // January 2017 PAGE 12 OF 66

THE GOVERNMENT BITCOINS: REGULATED AND


SOVEREIGN BACKED CRYPTOCURRENCIES
- Dr. Karthik H.

S halmali is an Indian student who came to


the USA a few years ago to study. It was with
great difficulty that her father, a potato farm-
Dr. Karthik H is a Civil Ser-
vant in the Government of
India, Ministry of Railways.
er in India, made loans to send his daughter to He has written 7 interna-
the US to study. Now, Shalmali has graduated tionally acclaimed research
papers on Blockchain Tech-
and joined a company as a marketing manager. nology which were pub-
Shalmali wants to send money to her father. lished in more than 45 Jour-
nals. They were endorsed
When her parents used to send her money by 5 Nobel Laureates, The Deputy Governor of the
from the India, a good chunk of the money was Bank of England, renowned MIT faculty and many
other acclaimed personalities. He is the creator of
gobbled up by the Money Transfer Company
the K-Y Protocol; The First Protocol for the regula-
and Banks as remittance and transfer charges. tion of cryptocurrencies (like Bitcoin). He has pro-
pounded a new concept of money called ENTROPIC
But now, she is standing on her own feet.
MONEY to precisely measure the size and influence
She knows that her father will need every ru- of parallel economies in Macro-Economic Systems.
pee of the money, as she has two younger broth- A few of his concept creations (amongst others)
ers who need to be educated as well. include-The Canop-E Project, A Rail Tunnel Between
India and Sri Lanka, A Fast-Track Credit-based Edu-
But how? Can the middlemen and the cation System, International Standardization Proto-
agents be bypassed? Can the full amount be sent cols, and Managerial Index Protocol (MIPs).
to Shalmali s parents so that her father can pay Recently, as part of a National Brainstorming ex-
ercise - Rail Vikas Shivir, he presented some of his
off the loans and educate her brothers? Is there ideas and plans to the Prime Minister of India.
a solution to Shalmali s conundrum?
Money Systems tems.

The world is fast shifting to a cashless econ- But Bitcoin and Bitcoin-like currencies
omy. But just like before, a centralized banking (called cryptocurrencies) will change all that.
system still takes its cuts and commissions (to The present day money system is a central-
the tune of $400 Billion every year!). New tech- ized paper based money system. It is rapidly
niques of money transfer and schemes are now transforming into a centralized digital money
in the market which provides better avenues system. But any centralized digital system is a
for investment vis-a-vis present day money sys- security risk. It can be hacked and precious fi-

nancial data can be tampered with. Then, the


The world is fast shifting to a fate of a nation will depend on a few clicks on a
cashless economy. But just like hackers computer.
before, a centralized banking Blockchain technology is a proven, highly
system still takes its cuts and secure decentralized digital currency system.
commissions (to the tune of $400 A cryptocurrency (also called cryptocoin) is a
Billion every year!).
Bottomline // January 2017 PAGE 13 OF 66

medium of exchange based on Blockchain Tech-


nology.
By an intricate (yet transparent) procedure,
the bitcoin network is able is transfer money
with minimal cost from one part of the world
to another in very less time (a few seconds to a
few minutes depending on the amount). In the
process, fresh bitcoins are also minted.
Bitcoin is a peer-to-peer based cryptocoin
which is not backed by any commodity and (un-
like fiat money) carries no sovereign guarantee
tion and confirmation is done by banks. So banks
whatsoever.

act as a Trusted Third Party (TTP) between the


Imagine Bitcoin as a globally transactor and the transacted. Basically, the TTP
accepted digital currency. Bitcoin certifies that the transaction is authentic. There
usage needs no intermediaries. is an inbuilt transaction cost, deducted by the
As such, banks will be banks for their service as a TTP and verifier.
completely bypassed. Loans and The most vital role of a bank now-a-days is
mortgages will become personal to act as a Trusted Third Party (TTP). Banks act
and customized. Anyone willing as TTPs in settlements, loan lending, project fi-
to loan will become a money nancing, issuing of banknotes (printed by Cen-
lender. tral Banks), credit mediation and creating mon-
ey (through the Fractional Reserve Banking).
Role of Banks in the Current Landscape
Commerce is based on transactions. And to
A bank, as we all know is a financial in-
conduct a transaction, there needs to be a su-
stitution that accepts deposits from the public
pervisor, trusted by both the transacting par-
and creates credit. One of the important ways
ties. Banks evolved to fulfill this role of a Trust-
by which banks help create money is through
ed Third Party.
the Fractional Reserve Banking system, a
book-keeping technique that banks use to cre- Pitfalls of Unregulated Cryptocoin
ate additional money in the system. Imagine Bitcoin as a globally accepted
The Central Banks tightly control this cre- digital currency. Bitcoin usage needs no inter-
ation of money by several direct and indirect mediaries. As such, banks will be completely
regulations. bypassed. Loans and mortgages will become
personal and customized. Anyone willing to
Banks fulfill several other functions too.
loan will become a money lender. People will
One crucial function of banks is that of a veri-
no longer keep money in banks (or prefer to
fier. A transaction done through a bank is also
keep) as they will have a competitive market for
supervised, verified and recorded by that bank.
interest rates throughout the world.
Payment services with verified authentica-
Joe can lend his money to Kate at 10% inter-
Bottomline // January 2017 PAGE 14 OF 66
est rate, wherein his banks provide only 5% on RSBCs as a better alternative
savings. Kate, on the other hand will get money Bitcoin is unregulated. RSBCs are regulated.
at 10% (from Joe) interest rate instead of 14-18% Regulated and Sovereign Backed Cryptocurren-
interest rate loans offered by banks. cies (RSBC), on the other hand are government
Thus, Kate would rather take loan from Joe backed cryptocurrency akin to paper currency,
than from banks. And Joe would give loans to but in digital form. Simply put, RSBCs are Gov-
Kate, rather than keep it in the bank. ernment Bitcoins.
In the age of Bitcoin, creditworthiness will RSBCs are completely managed by the Sov-
become an important issue. In a scenario where ereign Authority i.e. the Government on its own
Bitcoin becomes a major currency of exchange, Blockchain. This system is based on the K-Y Pro-
each individual will need to have a creditrat- tocol. The K-Y Protocol is a set of rules and in-
ing. Creditrating agencies will then start to structions to implement the Regulated and Sov-
take center stage. The banking system will be ereign Backed Cryptocurrency (RSBC) system.
all but extinguished. Probably banks can take Contrast the bitcoins with a scenario where
on new roles as creditrating agencies. RSBCs will be the norm in a cashless society.

Along with sovereign backing, there will be a


In the age of Bitcoin, credit regulated market. Banks can then act as a Trust-
worthiness will become an ed Fourth Party (TFP) instead of a TTP (which
important issue. Creditrating will be the network itself). They can underwrite
agencies will then start to take or guarantee creditworthiness of investors,
center stage. The banking system money lenders and loan takers. They will be
will be all but extinguished. regulators and insurers merged into one.
Probably banks can take on new
What about Fractional Reserve Banking
roles as creditrating agencies.
(FRB) in case of RSBCs? FRBs role in the mon-
A few banks may successfully transform ey supply will be greatly diminished in case of
into Credit-Rating Agencies whereas others will RSBCs. In case of Unregulated Cryptocoins like
have to bite the dust. It is therefore important Bitcoin, FRB will be totally eliminated. Govern-
to realize that Bitcoinlike currencies (unregu- ments will no longer have control over money
lated ones) are heavily disruptive. supply. In fact, money supply will be decided by
Lending money without supervision or market forces. This provides a fertile ground for
control becomes very easy. But so will cheating. manipulation by cartels and interest groups.
People may lose their lifetime savings to un- Bitcoin has a 21 million cap on its produc-
scrupulous elements with doubtful credentials. tion. It thus has a constricted money supply re-
In such a situation, CreditRating Agency data gime. This will only lead to a deflationary spiral.
may themselves be manipulated. Cartelization This is detrimental to the world economy as a
and insider trading may go on unabated. This whole.
system will quickly deteriorate to a point where
In case of RSBCs, governments will have
nobody can trust anybody.
control over the money supply. The role of FRB
will indeed be greatly reduced. Banks can still
Bottomline // January 2017 PAGE 15 OF 66

use FRB to increase money supply. But money can be controlled. The role of FRB in money
supply can be more closely controlled by Cen- supply will be greatly reduced. But banks will
tral Banks than it is now. A builtin inflation still have an important role in the economy as
rate will ensure that a constant inflationary sit- a Trusted Fourth Party (TFP). The economy, as
uation is maintained. Economic expansion is usual will continue on an expansionary trajec-
thus ensured. tory. Thus, a government controlled Cryptocur-
Banks lend money not only to private bor- rency is better than an unregulated one.


rowers but also to governments. But in a cash-
less Blockchain society, Governments can di- The time for a cashless society
rectly borrow from the people at competitive based on Blockchain technology
rates. Banks will still exist as TFPs, albeit with has come. Demonetization is just
a more sophisticated role. One can thus see that the first step.
Bitcoinlike currencies are heavily disruptive.
They have the potential to destroy FRB, elimi-
nate banks, resulting in a deflationary econom- A Look at the Future
ic outlook. Nations today pay a high price to run a pa-

per currency based economy due to substantial


RSBCs are also equally cost of effort, resources, time, maintaining and
disruptive. But their disruptive operating paper money infrastructure, high
power can be controlled. The fees for cash withdrawals, moving and manag-
role of FRB in money supply will ing cost of paper money etc.
be greatly reduced. But banks
Imagine all the money saved by shifting to
will still have an important role a cashless economy. It is estimated that India
in the economy as a Trusted alone - a $2 Trillion economy now- could save
Fourth Party (TFP). The economy, close to $70 Billion by 2025 if it shifts to a cash-
as usual will continue on an less economy. The savings world-wide by intro-
expansionary trajectory. duction of RSBCs will be enormous, probably
running into hundreds of billions of dollars by
The final result will be that the total amount 2025. All those savings can be utilized for pov-
of trust in the system will go down. And an un- erty alleviation or managing the ill-effects of cli-
trustworthy economic system is not good for mate change.
business or individual growth.
The time for a cashless society based on
The role of government as the sole issuer of Blockchain technology has come. Demonetiza-
currency will also be side-lined. This is akin to a tion is just the first step.
government surrendering its sovereign author-
(The views and opinions expressed in this
ity to the network. The problem is that, if the
article are those of the author and do not reflect
network goes down, the economy goes down
the view of the Networth Bottomline Editorial
with it.
team.)
On the other hand are RSBCs. They are also
equally disruptive. But their disruptive power
Bottomline // January 2017 PAGE 16 OF 66

THE FOUR NEW FORCES


- Prof. Jayanth Varma

T his is a wonkish post that links together four


concepts that are somewhat slippery even in
isolation. So let me begin with a quick primer on
Prof. Jayanth Varma did his
post-graduation in manage-
ment from the Indian Insti-
each of them tute of Management, Ahmed-
abad (IIMA), where he was
1. Global banking glut refers to the idea that awarded a Gold Medal for
there is an excess lending capacity on the scholastic performance. Sub-
balance sheets primarily of European banks. sequently, he obtained his
Not finding enough outlets in their home doctorate in management
from the Indian Institute of
markets, this money chases assets elsewhere Management, Ahmedabad.
in Europe and then in the United States. (More He is also a qualified cost accountant.
details can be found in Hyun Song Shins He is currently a Professor in the Finance and Ac-
article and paper). I would extend this notion counting Area at the Indian Institute of Manage-
to other institutions for example Japanese ment, Ahmedabad where he teaches courses in cap-
ital markets, fixed income, alternative investments,
insurance companies chasing US assets. risk management and corporate finance. He has
2. Original sin is the idea that most lenders are been the Dean of the Indian Institute of Manage-
willing to lend only in their own currencies ment, Ahmedabad for three years.

and not in the borrowers currency. Large The following articles are published with his per-
mission from his blog at http://www.iimahd.ernet.
advanced countries like the US are not subject
to this constraint. By holding their foreign
exchange reserves in US dollars (invested in for maturity transformation and credit
US treasury bonds), central banks around intermediation. The vehicles most relevant
the world lend to the US government in the to this post are money market mutual funds
borrowers currency. But a weakened form of (MMMFs) in the United States which invested
this constraint still exists. Banks will lend in a in short term instruments exposed to some
foreign currency only to the extent to which (though small) degree of credit risk, but
they themselves can borrow in that currency whose units were regarded as completely
or can otherwise hedge the exchange rate risk. safe, cash equivalent instruments. Because of
A European bank will have dollar liabilities their ability to issue and redeem units at par,
roughly equal to its dollar assets net of hedges MMMFs could hide fluctuations in the value
so that it does not bear any exchange rate risk. of their investments from their investors.
3. Shadow banking refers to non bank vehicles 4. In the good old days before the crisis, a bank
that could borrow euros at the inter bank euro


lending rate (EURIBOR), was able to swap these
For much of the last decade, the into dollars to get funding at the dollar inter
supply of credit from the banking bank rate (LIBOR). Not any longer. A large
glut in Europe was matched by cross currency basis has emerged making
dollar funding through this route significantly
the demand for dollar credit
more expensive. The BIS paper by Borio and
emanating from US and emerging
others has details about this phenomenon. I
market companies. must add though that while Borio and other
Bottomline // January 2017 PAGE 17 OF 66


economists regard the cross currency basis as
a market inefficiency or failure of arbitrage, The other rather remote (but
the post-crisis finance literature, no longer frightening) scenario is that
regards the cross currency basis as a market
an implosion of the European
imperfection. Since EURIBOR and LIBOR are
banking system eliminates the
no longer seen as risk free, the cross currency
basis is just another input to calibrate a multi-
banking glut in that continent.
curve discounting model (See for example, fund credit in dollars. In the good old days before
Masaaki Fujii). the crisis, a large European bank borrowed euros
at EURIBOR, and swapped these into dollars to
get funding at dollar LIBOR. The large and rising
Interplay affecting currency behavior
cross currency basis has made this solution less
For much of the last decade, the supply of credit attractive.
from the banking glut in Europe was matched
by the demand for dollar credit emanating from
Possible scenarios in future
US and emerging market companies. Some
US companies were levering up to fund stock In the long run, this will probably lead to a
buybacks; some were funding their investment repricing of credit risk with dollar credit becoming
(or losses) in oil fracking and other businesses. more expensive and euro credit cheaper. The
Emerging market companies sought to borrow latter process is being accelerated by the ECBs
in dollars because they could not borrow in their corporate bond buying program. Borrowers
home currencies (original sin). accustomed to borrowing in dollars will at some
stage have to accept the currency risk of euro
Though the banking glut was in euros and
denominated borrowing. The large reverse Yankee
the credit demand was in dollars, the US shadow
bond issuance (US companies borrowing at zero
banking system (particularly, the MMMFs)
or near zero rates in euros) is the early stage of
stepped in to solve the currency mismatch. US
this process. So far, however, most reverse Yankee
MMMFs lent to the European banks in dollars
issuances have been swapped into dollars. Rising
and these banks then lent the funds to dollar
cross currency basis will force at least some of
borrowers. In this solution, the funding was in
them to leave the borrowing un-hedged thereby
some sense coming from the US itself, but the
taking on euro exchange rate risk, and the US
credit risk appetite and the capital required to
corporate sector will for the first time get a taste
support this risk came from the European banks.
of what original sin looks like. For many emerging
With the implementation this year of the post
market companies, who almost instinctively
crisis reforms of the US MMMF industry (abolition
borrow in US dollars, this is an opportunity to
of stable value accounting for MMMFs), this route
rethink their liability management strategy. The
to matching euro banking glut and dollar credit
other rather remote (but frightening) scenario is
demand is coming to an end.
that an implosion of the European banking system
eliminates the banking glut in that continent.
Role of derivatives
(The views and opinions expressed in this
But there was a second solution to the article are those of the author and do not reflect
currency mismatch and that was through the the view of the Networth Bottomline Editorial
derivative market, especially, the cross currency team.)
swap. The European banks had abundant access
to euros, and they swapped this into dollars to
1 BRAZIL - THE CRISIS PROLONGED

EMERGING 2 FII TRADING AND FUTURE RETURNS

MARKETS
EMERGING ECONOMIES

VIEW 3 CIBIL - SHOULD OUR CREDIT DATA BE


WITH A FOREIGN COMPANY?
Bottomline // January 2017 PAGE 19 OF 66

BRAZIL - THE CRISIS PROLONGED


- Vidushi Jalota
Introduction
Vidushi is a first year stu-

B
razil has the ninth largest economy by nom- dent of MBA (IB) at the
Indian Institute of For-
inal GDP in the world1. The Brazilian econo- eign Trade. She has done
my is characterized by moderately free markets her graduation in B.A.(H)
Economics from Miranda
and an inward-oriented economy. House, University of Delhi.
She has also been a special
In the past few years, there has been a shift invitee to the Godrej LOUD
in the image of Brazil, from an example of an competition and a Campus
Finalist for the Citibank
aspirational model in economic growth to a one Woman Leadership Award. Her interests lie in
struggling to develop strongholds of accountabili- baking and chocolate making and she has a dedi-
cated Facebook page too.
ty and transparency. Such deficiencies can wreak
havoc on the economic and financial standing of political inefficiency, to name a few.

a country, like has been the case with Brazil. The


following article highlights the factors and areas Corruption
which have been instrumental in bringing about Brazilian economy has been victim to one of
a political and consequently an economic crisis the biggest corruption scandals associated with
in the fifth largest country of the world, by land the state-owned-oil-giant, Petrobras. Its GDP grew
mass and population. at a meager 0.1% in 20142. Petroleo Brasileiro,
Coming to the present bleak economic situa- widely known as Petrobras, was formed in 1953
tion of Brazil, some major factors are responsible as Brazils national oil company. It is one of Lat-
for the doom. Corruption, trade-restrictions and in Americas largest companies, with the govern-
ment holding a majority stake in it. The infamous
scandal involves money laundering to the tune
of $23 billion, which the executives are accused
of awarding to outside companies. Market capi-
talization of Petrobras has plummeted from $230
billion in 2010 to just $49 billion today. This infa-
mous scandal has caused the economic indicators
of Brazil, such as unemployment rate, to nosedive
over the years. The Petrobras scandal is one of
the main reasons as to why majority of the popu-

1http://statisticstimes.com/economy/countries-by-project- 2 World Bank Data


ed-gdp.php
Bottomline // January 2017 PAGE 20 OF 66

1822- Brazil
becomes an indepen-
dent nation. Trade
flourished though with
regulations; Britain
was the main trading
partner of Brazil.

1900s (1st half


of 20th Century) - Un-
til 1930, Brazil was
lation is going jobless. The country being heavily referred to as the Cof-
dependent on the oil company had failed to invest fee-Economy due to immense coffee production
substantially and shrewdly in other sectors, espe- (close to 60%) and hence largely traded in it. Trade
cially infrastructure development. This resulted policies were oft undertaken to protect the coffee
in widespread unemployment rates in Brazil. producers.
Lastly, even though Brazil is a resource rich President Fernando Collor de Mello (In of-
nation, but due to difficulty in setting up of busi- fice: 1990-92) adopted certain radical policies to
nesses, industrial growth has been stymied. As open up the Brazilian economy . Though these
we can see from the graph above, the ease of policies were initially beneficial in reigning in
doing business in Brazil deteriorated in the past the situation and brought industrialization in the
few years on a whole, with the lowest being 129 short run, but later took a toll on the domestic in-
in 2009 to the highest being 111 in 2014. It takes dustries whose competitiveness nosedived in the
about 83 days to start a business in Brazil3. The following years.
offshoots of the Petrobras scandal, infested the Monetary Policies
economy with immense corruption; since then
Here, we discuss about two main monetary
it has become quite difficult for industries to set
policy tools used by the central banks- interest
shop on the Brazilian soil and the growth of the
rates and money supply. Using these instruments,
industrial sector has taken a hit.
the central bank influences the availability of
Trade Protections credit in an economy which further influences
Economic History of trade in Brazil- If a hawk- the growth which takes place over time.
eye study of Brazils trade history with rest of the Banco Central do Brasil, the central bank
world is conducted, it would be found out that it of Brazil, has kept the interest rates at approx.
depicts quite volatility. A broad timeliness can be 14.25%. This is quite high as compared to India
constructed for easier analysis: (6.5%). Due to high interest rates, it gets difficult
3 World Bank Data for households and private investors to borrow
Bottomline // January 2017 PAGE 21 OF 66
from banks. Investment, mainly capital invest- damage some measures like opening up the econ-
ment gets affected due to this, because it gets omy, which would increase the competitiveness
costlier to procure funds. As we observe in the of the indigenous firms, could be adopted. Reduc-
Keynesian equation given by the British econo- ing restrictions on trade would also help Brazil
mist, John Maynard Keynes (1883-1946), to leverage its comparative advantage, mainly in

Y = C + I + G + NX natural resources, in industries and even in man-


ufacturing and services. This would be possible
where Y=National income or GDP, C=Consumption
because of the reduced costs due to the presence
by households; I=investment; NX=net exports
of economies of scale in production.
due to fall in investment (I), the overall in-
Another measure could be reducing the
come/GDP of the decreases and the economy
oil-dependence of the country, as it can help to
plunges into a bust period and eventually a crisis
make the ailing economy self-reliant, thus push-
occurs.
ing the industrial sector towards competitiveness.
Another major influencer of liquidity in the
Subsidies given by the government need also to
economy is the Cash Reserve Ratio (CRR). It is per-
be kept in check, as they are often believed to not
centage of deposit of funds banks are required to
contribute towards investment purposes. Expen-
keep with the central bank, in the form reserves.
diture on capital investment should be the prior-
The CRR in India is fixed at 4%, while in Brazil it
ity so as to help the economy rise from the debris
has been at 45% since the past one year4. Having
of a slump.
a high CRR means the banks have to keep a large
All this is and much more is achievable by a
fraction of their deposits with the central bank,


change in the outlook of
thus it decreases the li-
If immediate results are not the present Rousseff gov-
quidity in the economy
shown by those at the helm, ernment, which has been
and from the Keynesian then the outraged public
tainted with corruption
equation shown above might overthrow the sitting
charges associated with
we can conclude that the government by a huge mandate.
A policy reform is thus the need Petrobras, the oil-giant of
GDP (Y) of the country
falls due to less Consump- of the hour. the country. If immediate
results are not shown by
tion (C).
those at the helm, then the outraged public might
Conclusion and Suggestions
overthrow the sitting government by a huge man-
As has been observed, political imprudence,
date. A policy reform is thus the need of the hour.
fueled by excessive corruption and existence of
(The views and opinions expressed in this
protections on Brazils trade have been major
article are those of the author and do not reflect the
contributors to the downfall of the economy.
view of the Networth Bottomline Editorial team.)
To bolster growth and to prevent further

4 Trading Economics
Bottomline // January 2017 PAGE 22 OF 66

FOREIGN INSTITUTIONAL INVESTOR TRADING AND


FUTURE RETURNS EMERGING ECONOMIES
- Prof. Murugappa Krishnan & Prof. Srinivasan Rangan
INTRODUCTION AND MOTIVATION
Prof. Srinivasan Rangan

F oreign Institutional Investors (FII) are


institutions established outside India that
invest in securities in India. The label FII masks
joined the Finance & Control
Area of IIMB in May 2010.
Earlier, he taught at North-
western University, Univer-
considerable heterogeneity. FIIs include large sity of California at Davis,
overseas mutual funds and hedge funds, as well University of Colorado at
as small investment firms. FII participation in the Boulder, University of Texas
at Dallas, Amrita School of
Indian Equity market has grown considerably in
Business (Coimbatore), and
the last 15 years, from Rs. 38bn ($1.2bn) at the University of California at
end of December 1993 to Rs. 8,082bn ($174.8bn) Berkeley. His work experience includes two years
at the end of December 2015 (EquityMaster). In as a management consultant at Pricewaterhouse
Coopers.
light of this growth, an important question to
His research interests are in the areas of market
be addressed is whether FII investments have
efficiency, financial analysis and valuation, initial
generated positive abnormal returns. That is public offerings, and earnings management. He has
how, skilled have FIIs been? refereed publications in the Journal of Financial
Economics, Accounting Review, Journal of Account-
What are the current views of academics
ing Research, Review of Accounting Studies, and
and regulators on the expected performance of Financial Management. His work on earnings man-
FIIs? Two broad and opposing views have been agement and initial public offerings has been cited
offered. Some commentators argue that FIIs are in The Wall Street Journal.
endowed with superior expertise and resources views dominate, researchers have examined data
by virtue of being global firms, and are hence on investment performance of FIIs. Interestingly,
likely to be successful portfolio managers. Others the evidence on the stock-level investment
contend that FIIs are likely to be disadvantaged performance in multiple markets (including
in terms of experience and access to information Finland, Indonesia, Japan, South Korea, and
vis--vis the incumbent domestic investors Taiwan) is mixed. While Grinblatt and Keloharju
(Brennan and Cao (1997)) and hence likely to (2000), Huang and Shiu (2009), and Bae, Min, and
underperform. Additionally, local governments Jung (2011) conclude that FIIs generate superior
tend to tightly regulate FIIs in terms of the types performance, Kang and Stulz (1997), Dvorak
of securities that they can trade and thus limit (2005), and Choe, Kho, and Stulz (2005) report the
their performance potential. opposite.
To evaluate which of the two afore-stated


In this study, our research objective is to
Some argue that FIIs are endowed evaluate the investing skill of FIIs in India, a large
with superior expertise and emerging market that is relatively unexplored.
resources by virtue of being While there are many anecdotal references in the
global firms, and are hence Indian financial press of significant FII activity
likely to be successful portfolio in Indian financial markets, formal evidence of
Bottomline // January 2017 PAGE 23 OF 66


their role, and the consequences of their activity,
is limited.
A frequent claim in the financial
FII trades can be classified into two broad press is that P-Note holders are
categories: trades on their own account and
connected to Indian corporate
trades on behalf of foreign investors. To facilitate
the latter, FIIs issue derivative instruments
entities and thus help the latter
known as P-Notes, via investment banks. FIIs to retain control in the investee
initiate trades on behalf of their clients and then firms or to even avoid paying
P-Notes are issued to the clients to indicate that taxes in India.
shares are held by the FII on behalf of the client.
by the desire to retain corporate control or avoid
Information on the identity of P-Note holders
taxes, potentially at the expense of a return
is typically difficult to establish, at least at the
maximization objective. Hence, whether FIIs are
time of the trade. Thus, P-Notes offer foreign
successful portfolio managers, and whether they
investors an opportunity to get exposure to the
even care about market performance, are open
Indian market without having to register as an
questions.
FII with SEBI. A frequent claim in the financial
press is that P-Note holders are connected to
Indian corporate entities and thus help the latter FINDINGS
to retain control in the investee firms or even Our study employs a database of daily stock-
avoid paying taxes in India. Thus, it is possible level trades of FIIs in India for the years 2003-
that FII trades related to P-Notes are motivated 2014. This firm-level data was not available till

The figure tracks the value of Rs. 1 invested on March 31, 2003 in three portfolios of stocks: stocks in which FIIs
are net buyers in a quarter (net buy portfolio), stocks in which they did not trade during the quarter (no trade
portfolio), and stocks in which FIIs are net sellers (net sell portfolio).
Bottomline // January 2017 PAGE 24 OF 66


SEBI began releasing masked FII transaction data
in a step towards compliance with a promise Fewer analysts follow small
made in reply to a parliamentary question. We firms and these firms face more
aggregate daily trades over a quarter to construct uncertainty and are hence harder
a measure of quarterly net buying. value. Hence, we expect that the
Our first finding is that FIIs trades are on relation between FII trading and
average unprofitable over the sample period. subsequent returns to be more
For our sample period, portfolios of stocks that negative for small firms.
are formed based on positive, zero, and negative
finance have developed theoretical models that
FII quarterly net buying yield average quarterly
posit that traders who are overconfident trade
returns of 1.6%, 3.8%, and 2.4%, respectively.
too much and consequently suffer losses (Odean
This suggests that investing in stocks in which
(1998); Barber and Odean (2000); Daniel and
FIIs do not trade yields superior returns to those
Hirshleifer (2015)). Therefore, we predict the FII
in which they trade. Further, their sells perform
trading losses will be magnified when they trade
better than their buys.
more frequently. We divide our sample based on
We also employ regressions that correlate
the median number of transactions per quarter
3-month and 12-month returns with prior
(buys + sells) and find that more frequent FII
quarterly FII trading and find that the latter is
trading magnifies the negative relation between
negatively associated with subsequent returns. A
FII trading and subsequent returns. Thus, the
10% increase in FII net buying is associated with
poor performance of FIIs in India can be partly
3% (6%) decline in returns in the subsequent
attributed to excessive trading.
quarter (year).
Next, we examine the relation between


FII trading and subsequent earnings surprises
and announcement returns. We find that net
The study suggests that investing quarterly FII buying is unrelated to unexpected
in stocks in which FIIs do not earnings for the next quarter. In contrast, net
trade yields superior returns buying is significantly negatively related to
to those in which they trade. earnings announcement returns: a 10% increase
Further, their sells perform better in lagged net buying is associated with 0.7%
than their buys. decrease in earnings announcement returns.
The inability to predict earnings news and the
poor returns around earnings announcements
To understand the causes of this poor
strengthens the conclusion that FIIs in India do
performance, we separate the sample into (a)
not behave like informed traders. This contrasts
small/large stocks and (b) stocks that are frequently
with a bulk of the U.S. evidence that institutional
traded by FIIs and those that are less frequently
trades are positively associated with subsequent
traded. Fewer analysts follow small firms and
earnings news (Gompers and Metrick (2001); Yan
these firms face more uncertainty and are hence
and Zhang (2009)).
harder value. Hence, we expect that the relation
Lastly, we examine whether FIIs exploit a
between FII trading and subsequent returns to
well-known trading anomaly known as the post
be more negative for small firms. Our results,
earnings-announcement drift, or PEAD. This
especially for one-year returns, are consistent
refers to the tendency for a stocks cumulative
with this prediction. Researchers in behavioural
Bottomline // January 2017 PAGE 25 OF 66

abnormal returns to drift in the direction of an


earnings surprise for several weeks following an
earnings announcement. Our examination of FII
net buying during the earnings announcement
suggests that they do not exploit the post-earnings
The inability to predict earnings
news and the poor returns
around earnings announcements
strengthens the conclusion that
announcement drift. In contrast, we find that FII
FIIs in India do not behave like
net buying during the earnings announcement is
not related to earnings surprises and is negatively
informed traders.
related to subsequent three-month stock returns.
Our findings lead to the question of why
We conclude that FIIs fail to exploit the PEAD
FIIs perform poorly in the Indian market. The
strategy.
first possibility is that FIIs are either not smart
or are overconfident. The evidence that their
IMPLICATIONS losses are magnified when they trade more
Our study adds to the evidence on FII frequently suggests that overconfidence is a
performance by examining their medium-term partial explanation. A second explanation is that
performance in a relatively unexplored economy, other investors perceive FIIs as smart money and
India. In a contemporaneous study of Indian FIIs, follow /mimic their trades. This herding in turn
Acharya, Anshuman, and Kumar (2014) find that could lead to prices overshooting true values and
abnormal returns associated with unusually subsequently reversing.7 A third possibility is
low (high) daily FII flow innovations reverse (do that FIIs are global investors who are willing to
not reverse) over the next two weeks, especially accept losses in Indian markets some of the time
when global volatility is high. They interpret because some of their Indian trades are executed
the low FII daily innovations leading to price to rebalance global portfolios and thus reduce
reversals as evidence of limits to arbitrage. Our risk. A fourth possibility is that FIIs might be
evidence suggests that reversals occur over longer conduits for Indian funds routed back to India
periods three months to one year, and are also via foreign countries. Because some of these
concentrated around earnings announcements. funds may represent income on which taxes
Further, we find that both FII buys and sells are have been avoided, FIIs might be willing to accept
associated with poor subsequent performance. trading losses as the benefit from tax avoidance
Our evidence that unusually high trading exceeds these losses. Lastly, the desire to increase
magnifies FII trading losses complements work or maintain corporate control might cause some
on trading losses associated with overconfident FIIs to behave like long-term investors and accept
individuals who trade too frequently (Barber and short-term losses. Disentangling these alternate
Odean (2000); Daniel and Hirshleifer (2015)). explanations would be a very interesting subject
for future research. This paper only takes the


first step in understanding FII flows into India
Many investors in emerging and raises more research possibilities.
markets tend to mimic FII actions. (The views and opinions expressed in this
This herding in turn could lead to article are those of the author and do not reflect the
prices overshooting true values view of the Networth Bottomline Editorial team.)
and subsequently reversing.
Bottomline // January 2017 PAGE 26 OF 66

CIBIL - SHOULD OUR CREDIT DATA BE WITH A


FOREIGN COMPANY?
- Prof. R Vaidyanathan

Y ou want a loan for a house or flat from a com-


mercial bank then your CIBIL score is import-
ant for the bank. CIBILs products, especially the
Professor R Vaidyanathan
has been a professor at IIM
CIBIL Score and the credit information report Bangalore for 34 years. He
has played multiple roles
[CIR] are very important in the loan approval
in his illustrious career - as
process. The credit score helps loan provider to a consultant to various or-
quickly determine, who they would like to eval- ganizations such as HLL,
uate further to provide credit. . Even though the LIC, ITC, BPL, World Bank,
credit rating is only a decision support system Goldman Sachs, Shriram
many banks use the score for the decision mak- Group, Dalmia Group,
Ministry of Finance, IDBI etc. and a number of
ing. The CIBIL Score ranges from 300 to 900. Data
commercial banks. A graduate of Loyola Col-
indicates that loan providers prefer credit scores lege, Madras and a post-graduate from the In-
which are greater than 750 dian Statistical Institute, Calcutta, he obtained
Once the loan provider has decided which set his Fellow in Management (Doctorate) from the
of loan applicants to evaluate, it analyzes the CIR Indian Institute of Management Calcutta where
he also taught for four years. His book titled In-
in order to determine the applicants eligibility. dia Uninc about the unincorporated sector in
Eligibility basically means the applicants ability the Indian economy published by Tata West-
to take additional debt and repay additional out- land in 2014 has been well received by policy
flows given their current commitments. planners and the market. He is working on a
book on Black Money & Tax Havens and Indias
That is the importance of CIBIL.
Wealth Abroad (Tata Westland).
History of CIBIL
The current article has been taken with per-
Nov 1999: CIBIL is also Report submitted by mission from his blog https://rvaidya2000.com/
Siddiqui Committee for setting up Indias first
Credit Information Bureau
to Banks
Aug 2000: CIBIL was Incorporated basis the rec-
Jul 2010: CIBIL Detect Indias first repository
ommendations made by the Siddiqui Commit-
for information on high-risk activity was initi-
tee
ated
Apr 2004: CIBIL Launched Credit Bureau ser-
Sep 2010: First centralized database on Mortgag-
vices in India (Consumer Bureau)
es in India- CIBIL Mortgage Check was launched
May 2006: Started Commercial Bureau opera-
Apr 2011: Individuals were able to avail CIBIL
tions
TransUnion Score
Nov 2007: CIBIL TransUnion Score introduced


The diversified shareholding pattern is shown
on next page. From the Shareholding pattern it is
55% of shareholding of CIBIL is
clear that 55% of shareholding is with TransUnion
with TransUnion International International Inc. This implies that millions of
Inc. This implies that millions of credit data of Indians are held/controlled by a for-
credit data of Indians are held/ eign private company. We also do not know about
controlled by a foreign private their sharing arrangement if any with other in-
ternational security agencies like CIA etc.
company.
Bottomline // January 2017 PAGE 27 OF 66


Problems with TransUnion International Inc.
TransUnion was originally formed in 1968 as Credit data of millions of Indians
a holding company for the railroad leasing orga-
nization, Union Tank Car Company. TransUnion
is too sensitive to be held in HK
has evolved its business over the years to of- or London or NY. Let India decide
fer products and services for both businesses about this important issue.
and consumers. For businesses, TransUnion has
evolved its traditional credit score offering to in-
clude trended data that helps predict consumer the USAs largest credit agencies. TransUnion and
repayment and debt behavior. In November 2013, Experian settled out of court for an undisclosed
TransUnion merged with TLO LLC, a company amount. TransUnion has also been criticized for
that leverages data in support of its investiga- concealing charges. Many users complained of
tive and risk management tools. For consumers, not being aware of a $17.95/month charge for
TransUnion offers credit monitoring and identity holding a TransUnion account.
theft protection tools. The companys app offers a Pitfalls of CIBIL-TransUnion model
function called CreditLock that allows an individ- This whole scheme has come into existence
ual to unlock and lock their credit to help protect during UPA time and more so when Chidambaram
against fraudulent activity. was Finance Minister. So it is one more albatross
In 2003, Judy Thomas of Klamath Falls, Or- on our neck gifted by UPA. Sooner we get rid of
egon, was awarded $5.3 million in a successful this better for us.
lawsuit against TransUnion. The award was made Not only that 49% to 74% increase in holding
on the grounds that it took her six years to get of in credit information companies was first pro-
TransUnion to remove incorrect information in posed by RBI in November 2013 and the recent
her credit report. notification in May 2016 when it was allowed up
In 2006, after spending two years trying to to 100%
correct erroneous credit information that result- It is important that we re-visit this entire
ed from being a victim of identity theft, a fraud CIBIL model of mortgaging our interest before
victim named Sloan filed suit against all three of global capital since we are
sure we have enough exper-
tise and capability available
among our own domestic
companies both in Public
sector and private sector.
Credit data of millions
of Indians is too sensitive to
be held in HK or London or
NY. Let India decide about
this important issue.
(The views and opinions
expressed in this article
are those of the author and
do not reflect the view of
the Networth Bottomline
Editorial team.)
Diversified shareholding pattern of CIBIL
Source: CIBIL Website
MEANWHILE 1 INFLATION - THE INIQUITOUS TAX

IN 2 DEMONETIZATION DEMYSTIFIED -
INTERVIEW WITH MR. SATHYA KUMAR
INDIA
Bottomline // January 2017 PAGE 29 OF 66

INFLATION - THE INIQUITOUS TAX


- Ayush Agrawal, Rishi Vora & Archana Maganti
With special thanks to Prof. Ravi Anshuman for his guidance

One reason inflation is so destructive is because some people benefit greatly while other
people suffer; society is divided into winners and losers.
- Milton Friedman
Introduction
Inflation can be defined as too much mon- Ayush is a first year MBA
student at IIM Bangalore.
ey chasing too few goods. One of the primary Prior to joining IIMB, he
reasons of inflation in Indian economy is high has worked on credit risk
government deficit (revenue expenditure). If modeling and mortgage
the government has a deficit, then this deficit is servicing. He has written
out two white papers on
financed by borrowing from the central bank regulations in mortgage
which has the power to create new money and servicing and one on ac-
issue new currency. This leads to a rise in the in- count level modeling meth-
comes of the people and hence an increase in the odology for CCAR.
aggregate demand which is given by the formula:
Aggregate Demand = 1/(1-mpc)*Income
Dr. Archana Maganti is
We can see that, a change in income can lead an Indian Railways Ac-
to a much high change in aggregate demand (due counts Officer (Batch of
to multiplier effect). Hence though inflation leads 2011), currently pursuing
to no increase in the intrinsic value of goods or PGP (Post Graduate Pro-
gramme in Management)
services, the demand for those goods and services
in IIM Bangalore. Her
increases thus leading to an increase in nominal
fields of interest include
prices. Depending on how the newly printed cur- Public policy, Health, In-
rency has been circulated, some would be able to frastructure and Finance.
afford the goods and services at the cost of oth-
ers.
Inflation - An added tax
Rishi is a first year / PGP 1
Inflation is regarded as a case of taxation student at IIM Bangalore.
without representation or legislation. From the Prior to joining IIMB, he
governments point of view, inflation is essential- has worked as a Risk Man-
ager in Reliance Indus-
ly a monetary seigniorage which acts as a source tries. He also has a strong
of revenue for the government. Many articles experience in trading, as
have shown that the relationship between infla- a result of his experience
tion (money growth) and seigniorage follows the in Futures First as a Com-
modity Market trader and
Laffer curve pattern i.e. the curve relating tax
analyst. Rishi is a certified
rates to tax revenues. Thus seigniorage is pur- Chartered Financial Analyst / CFA level 3 profes-
ported to rise with inflation till certain percent- sional.
age, and thereafter with increased inflation there
Bottomline // January 2017 PAGE 30 OF 66

Figure 1: Routine Expenditure breakup of Figure 2: Routine expenditure breakup of


different income bracket states rural & urban India
Source: How India Earns, Spends and Saves, Rajesh Shukla Source: How India Earns, Spends and Saves, Rajesh Shukla

is decreased seigniorage1. As the total value of as- tax to government every year. Further, any effort
sets remains constant, the government (currency on their part to spend money on purchase of cap-
issuer) is earning revenue at the cost of people ital assets will come with added risk of erosion of
(currency holders). Generation of new currency capital value due to inflation tax. Hence it can be
thus decreases the value of the existing currency concluded that over the long term, inflation tax
(purchasing power), redistributes the resources discourages capital accumulation and promotes
in favor of government and acts as a hidden tax instability in the economy.
on the existing currency holders. This inflation Inflation - Effect on other taxes
tax is then used by government to finance its
Adam Smith laid down equity as the guid-
debt, lower public expenditure in real terms and
ing principle of fair taxation: people should pay
inflate GDP figures.
taxes per their ability to pay and marginal util-
From the consumers point of view, prices ity. However, inflation tax overrides this canon
change faster than wages (due to multiplier ef- of taxation. Apart from acting as a tax itself, in-
fect). Thus, they end up paying more for the same flation also has a considerable impact on other


value goods over time which leads to erosion of
publics wealth. Consumers save their money in
accounts whose interest rates are less than infla- Generation of new currency
tion rates. In a country like India, with dominant decreases the value of the existing
saving philosophy, millions of people particularly currency, redistributes the
the poor who have no access to financial markets resources in favor of government
and pensioners who favor stability over risk, save and acts as a hidden tax on the
money in such accounts and thus pay this added existing currency holders.
1 Seigniorage in United States, JM Neumann, 1992
Bottomline // January 2017 PAGE 31 OF 66

taxes i.e. if one pays an income tax of 10%, not CPI, it can be said that the impact of a higher in-
only is he/she paying greater than that percent- flation tax is higher on low and middle income
age due to the hidden inflation tax but also be- states as compared to high income states. Thus,
cause of bracket creep. For example, a year back we can safely conclude that inflation as a tax is
a person who can purchase a basket of goods at 2 iniquitous in the economy because not only does
Lakh may not have been qualified as a tax payer, it act as an extra tax on the citizens but also be-
but at the current inflation rates, a person pur- cause it is unequally distributed across various
chasing the same basket of goods at 2.5 Lakh is sections of the society.
now falling in the tax bracket, and has to lose his However, we believe that CPI cannot be tak-
purchasing power in the form of taxes. This ef- en as a blanket measure of inflation for all in-
fect of inflation on taxes not only limits to direct come groups. Instead the government should
taxes, but to indirect taxes as well. look to develop different indices for different in-
INIQUITOUS INFLATION TAX come groups where the weights would be decid-
Inequity in impact of CPI fluctuations ed based on sensitivity of that group to different
components. This would help in capturing the
To compare the impact of inflation tax on
impact of inflation on each income group better
different sections of the society, the percentage
and thereby build policies around it. The overall
expenditure of these sections on different com-
inflation can be taken as the weighted average
ponents of CPI have been compared using data
of the three indices where weights would corre-
from NSHIE survey2.
spond to percentage population in each group.
As shown below, low and middle income
Inequity in generating returns from savings
states have a much higher component of food in
their total routine expenditure when compared Based on a NCAER household survey, it has
with the high-income states. A similar trend can been found that the percentage of investors is
also be seen in the rural versus urban divide. nearly 20% in urban areas while it is much lower
Since food forms the biggest component driving (6%) in rural India3. At an overall level, less than

Total Investor Households Non-Investor Households


All India 10.74 89.26
Urban 20.75 79.25
Rural 5.99 94.01
Table 1: Investing & saving household distribution
Source : How Households Save and Invest: Evidence from NCAER Household Survey, SEBI Report

Post Office Commercial


Pension Life Insurance Regional Banks
Savings Banks
INCOME GROUP
Lower 11.9 3.74 41.81 39.08 3.47
Middle Lower 17.34 4 37.94 37.27 3.45
Middle 22.18 4.11 33.52 37.81 2.38
Middle Upper 21.98 4.14 32.76 38.65 2.48
Table 2: Saving methods for different income groups
Source : How Households Save and Invest: Evidence from NCAER Household Survey, SEBI

3 How Households Save and Invest:


2 How India Earns, Spends and Saves, Rajesh Shukla Evidence from NCAER Household Survey, SEBI Report
Bottomline // January 2017 PAGE 32 OF 66

11% of the total households invest in the mar- ciates facilitating the entry of foreign portfo-
ket. This shows that the number of savers form a lio funds, which reap more benefits than the
huge proportion of the total households in India. local producers. Hence, we recommend that a
From the above tables, we can say that a high- separate credit mechanism be made available
er inflation would erode the savings of both rural to these priority sectors whose borrowing
and urban population. This is because both urban rates should be competitive when compared
and rural households save majorly through life to other countries. We also recommend to
insurances and savings accounts in commercial continue with the current financial inclusion
banks which provide low/no returns. It can also schemes. RBI should also make investments
be seen that the lower and middle lower income in inflation indexed bonds exclusive to low
groups save much more (in % terms) through life tax bracket population to as to prevent erod-
insurance which generate no returns. Thus, the ing their savings due to inflation.
impact of high inflation would be much high- 2. RBI should use the differential between wage
er on rural households as compared to urban growth and inflation index for each income
households. group (as discussed in Inequity in impact of
Recommendations CPI fluctuations) as a proxy for impact of in-
flation rather than using inflation index as a
Now that we have established inflation as an
standalone measure. The policies (both fiscal
iniquitous tax (particularly in high inflation econ-
and monetary) should be focused around the
omies) imposed on public, let us look at some of
group that has the lowest value of differen-
the ways in which the negative tax implications
tial. This will ensure that RBI is focusing on
of inflation can be abated.
the income group that is most adversely im-
1. The strategy of RBI is to stabilize it at 4% with
pacted by current inflation.
tolerance limit of 2%. The usual way for RBI
3. The governments budget is composed of
to achieve it is by changing policy rates (Repo,
revenue component and capital component.
Reverse Repo, CRR, SLR) which will translate
In revenue budget the government mainly
to increased lending rates of the banks and
collects money through taxes but revenue
credit issue. The defects in
expenditure does not lead
this mechanism are two-
RECOMMENDATIONS to any increase in aggregate
fold - (1) lack of financial
supply in the economy. How-
inclusion which dampens
Govt. investment in priority ever capital expenditure in-
the effectiveness of these
sectors such as agriculture and creases the number of assets
instruments (2) these in-
infrastructure with a creation and hence leads to increase
struments do not make
of separate credit mechanism to in aggregate supply in the
any distinction between shield them from inflation risks
economy. Therefore, if the
credit intended for short
new money being printed is
term consumption and Bringing revenue expenditure
used to finance the capital
credit intended for long down; Fiscal deficit should
expenditure then an increase
term productive assets. mainly finance capital
in aggregate demand would
Moreover, the lending be- expenditure
be complemented by an in-
comes dearer, primarily
crease in aggregate supply
affecting agriculture and Indexing tax brackets, tax
which would lead to lower
manufacturing sectors. indexed bonds and finance
inflation as compared to rev-
The exchange rate appre- mechanisms
Bottomline // January 2017 PAGE 33 OF 66


enue expenditure where aggregate supply
remains constant. We recommend that the
government should look to reduce revenue The government should look
deficit to zero while financing only capital to develop different indices for
budget deficit through the money borrowed different income groups where
from RBI. the weights would be decided
4. In order to control revenue expenditure based on sensitivity of that
through monetary policy, RBI should reduce group to different components.
SLR. On the recommendation of 1991 Nara-
as foreign investors. The government needs
simham Committee, SLR was reduced from
to focus on improving agriculture infrastruc-
38.5% to 25%. Since then, our economy has
ture by building cold storage facilities across
grown by more than six times but SLR has
India and by making transportation system
only been reduced to 21.5% which provides
faster. The government also needs to focus
government with a higher quantum of mon-
on improving food processing technology by
ey for revenue expenditure. We recommend
incentivizing investors to invest in this tech-
that a reduction in SLR to around 15% would
nology and educate farmer about using this
technology.
6. To decrease the effects of inflation on vulner-
able classes of people, tax brackets should be
indexed to inflation so that people can only be
charged what they afford to pay in real terms.
Although the current tax laws provide for in-
dexing, they still lack the full indexing which
will mitigate iniquitous effects of inflation. An
additional cess or an additional tax bracket
on the top 10 percentile of the country may be
considered to even out the indexing effects.
Widening the tax base through effective tax
reforms and digitization of transactions can
also help decrease revenue deficit and thus
result in better asset generation using the reduce inflation.
same quantum of money thereby controlling Conclusion
inflation. It has been touted that inflation is essential
5. Steps to control food inflation (which consti- to maintain high growth rates of the economy.
tutes 57% of the CPI) should be taken. Around However, the question that needs to be asked is
40% of the food by value is being wasted in - growth of who? At the cost of who? An iniqui-
India annually4. The main reasons for these tous inflation means inequitable growth which is
include inadequate supply chain manage- unsustainable. Therefore, to distribute fruits of a
ment, few cold storage facilities (10% of the nations labor there is an urgent need to strike a
total requirement), inefficient transportation fine balance between growth and development,
management and negligible incentives to in- making inflation as equitable as possible.
vest in agricultural sector for domestic as well
4 Food Wastage In India A Serious Concern, CSR Journal
Bottomline // January 2017 PAGE 34 OF 66

DEMONETIZATION IS THE ECONOMIC


FREEDOM OF INDIA
DEMONETIZATION DEMYSTIFIED
INTERVIEW WITH MR. SATHYA KUMAR

O n 8th Nov 2016, in a swift move against


black money and growing corruption, the
Prime Minister of India accounted that Indias
Mr. Sathya Kumar
A Chartered Accountant by
profession and a humanitarian,
advisor, debater, academician,
two major currency bills, Rs. 500 and Rs. 1000
social activist and mentor to
were no longer valid as legal tender. The two many students, Mr. Kumar
bills, roughly worth $7.50 and $15 respectively, is a passionate speaker on
are worth 86% of Indias cash economy. Public Policy Matters in India.
Apart from writing in financial
Since the move, there has been great dailies and magazines, he
commentary in the media regarding the move is also a regular speaker on Economic, Financial,
itself and its implementation. Mr. Sathya Kumar, Taxation, Educational & Start-up matters on
reputed TV Channels. He has blessed the audience
a renowned speaker, has been following the at a plethora of esteemed places such as IIMK, IIMT,
move since its announcement and has deep National Ilan University Taiwan, Uganda Revenue
insights on the implications of the move, Authority, Indian Embassy Muscat, ICAI, ICWAI, ICSI,
Malaysian Institute of Accountants (MIA), NRI at
beyond what is generally discussed.
Doha, Tibetan Chamber of commerce Nepal, and the
list goes on.

Do you think the move was a surprise move?


established the Ministry of Skill Development and
Yes, and no. Black money eradication Entrepreneurship. An SIT, comprising of senior IT
was the narrative of this government from its officers and judges was formed, which travelled
start. When the Prime Minister claimed that he to various countries to understand their tax laws.
will fight against black money, many viewed it Subsequently, the Black Money Act was passed
merely as a political statement. But steps were and Voluntary disclosure scheme was launched
being already taken to lay the ground for the which only managed to collect 4,028 crore, not
demonetization move. The PM after taking charge realizing the dream of 40,000 crore.

In 2016, the government launched another


I believe most people scheme, where people who voluntarily disclosed
underestimated the will of this their income would keep 55% and the rest
government. It is a majority
45% would be kept by the government. To
government with a huge
encourage people to participate in this scheme,
mandate and thus took this


the government assured that there will be no
bold decision.
Bottomline // January 2017 PAGE 35 OF 66


prosecution for those who disclose their money
The cash economy is not
as part pf this scheme.
bad, per se. However, it is the
However, by Sep 30th 2016, the total collection unaccounted money and the
was 65,000 crore. The PM had warned that the illicit money that is harmful to


consequences of non-disclosure are going to be the economy.
serious and that this is the last opportunity.
crore. If this entire black money is recovered, we
I believe most people underestimated the will
can cover our budget deficit. Besides, currently
of this government. It is a majority government
we are spending for defense to protect national
with a huge mandate and thus took this bold
security. That spending will also come down.
decision. I consider this as a surgical strike on
The RBI has printed around 17.36 lakh crore
black money.
in 500 and 1000 rupees notes that is about 86%
The secretive manner in which the entire
of the money in circulation. This does not include
decision was implemented surprised the
the fake currency.
public. In Jan 2014, the then Finance Minister, P
Out of the total black money in circulation, I
Chidambaram and then RBI Governor, Raghuram
believe 12 lakh crore will come into the banking
Rajan tried to implement this in a step-by-step
system and 3 lakh crore will not.
manner by phasing out notes issued before 2005.
However, Prime Minister Modi did it in one go and Besides the political gains, why is the fight

that had huge ramifications for the fight against against black money so critical?

black money. I believe given the boldness of this There are two economic system running
move, even if the news had been leaked, no one in India. One, the banking system, the size and
would have found it plausible. scale of which the government is aware of. The

There are various numbers on the scale of second system is the cash economy also referred

black money in circulation. Could you shed to as the parallel economy. Demonetization will

some light on what the actual numbers maybe? formalize this parallel economy.

How much of this money do you expect to come Now, since it is difficult to estimate the size
into the formal system through this move? of the parallel economy, the countrys GDP is

There are various estimates. According to a measured through the former. The cash economy

1978 report by the famed economist, Raja Chelliah, is not bad, per se. However, it is the unaccounted

the size of black money is 20% of Indias GDP. We money and the illicit money that is harmful to

can only make a guess what the size must be now. the economy. The unaccounted money is the
money not declared to the tax authorities. On the
Even if we stick to the conservative estimate
other hand, illicit money is legal money used for
of 1978, then the black money economy is at least
illegitimate activities and the fake currency in
30 lakh crore, given that the current size of the
circulation. It is estimated that 55 to 60 thousand
economy is 150 lakh crore.
crore legal money has been routed for Naxal
Compare that with our annual budget of 19L
Bottomline // January 2017 PAGE 36 OF 66

activities. On the other hand, there is no account expect 10 to 12 lakh crore of deposit. Assuming an
of the fake currency in circulation. average tax rate of 20%, this will bring in a gain
It is also important to understand how this of 2 lakh crore to the exchequer. Combine the
black money is generated. It is through exports of two, and there will be a 5 lakh crore windfall gain
various goods which are not reported to the tax to reduce fiscal deficit. Well achieve the target
authorities, through bribes, illegal commissions stipulated in the Fiscal Responsibility and Budget
and lastly through goods supplied to black market Management (FRBM) Act.
and stock markets. In summary, black Money is Now, on the remaining deposits in the banks,
anything contrary to economic policy of country. applying the CRR and SLR of 4.5% and 20%
Do you personally support the move? respectively and this will translate to a manifold
to the economy.
I support the move because it was long
overdue for at least 10 years and the strong What are some of the undiscussed benefits of
mandate that the government has helped it demonetization?
implement this step. I think there will be huge ramifications in the
The cash economy has increased from 10% in banking sector itself. Earlier banks were cautious
2002 to 12% in 2015. Credit Suisse says that 50% about lending to infrastructure projects because
is cash economy. This move is not only a fight of their NPAs. The Public Private Partnership
against black money but also to transform the model had been stalled, it never became a Build-
economy to a digital one. I expect more moves in Operate-Transfer model because of the NPAs.


this direction. For instance, the Jan Dhan Yojana
(a government scheme to attract poor people to With so much money flowing
open bank accounts) has already attracted 25 lakh to banks, I expect that SME &
crore as deposits. The purpose was to bring people MSME lending will pick up via


to make credit accessible as 86% benefit of any MUDRA.
transaction goes to the middle men. The scheme
takes it to common man. Similarly, demonetization With so much money flowing to
will further cut these commissions. banks, I expect that SME & MSME lending will
This move was also about national security. pick up via MUDRA. Remember, this sector is
We saw the impact as within 2-3 days of believed to generate 90% of the employment.
demonetization, extra money came in to J&K However, there are roadblocks. The MUDRA law
banks, stone throwing in the valley was curtailed cannot be passed due to stalemate in Parliament.
and Maoist funding also got destructed. One possible suggestion to overcome this hurdle
is to register NBFC in branches and route these
Do you believe the move is likely to benefit the
funds via them.
exchequer?
At the same time, I think the RBI will cut the
Absolutely. Lets look at the numbers. Around
interest rate because of market pressure and
3 lakh crore of illicit money will be destructed. We
Bottomline // January 2017 PAGE 37 OF 66

views?
The first impact will be that inflation will
go down as lesser disposable income will be
available.
The productivity will move to essential
commodities. Simultaneously, demand will fall,
bringing down the GDP.
However, the long run story will be different.
Close to 10 lakh crore is expected to come to the
formal economy. This part of the cash economy
Image Courtesy: Pixabay
was not accounted for earlier. But now cash
make lending rates cheaper. Today MSME and economy will be accounted and 2019-20 we can
SME borrow on a daily basis. A similar push expect double digit growth.
was done in 1993 by the then Finance Minister
Do you see any tax benefits to the general public?
Manmohan Singh by infusing 300 crore. But given
The government may increase the basic
the current economic scenario, it is more likely to
exemption limit to 5 lakh now that money has
be successful today.
come to the system. India has one of the highest tax
How do you see this impacting Real Estate prices?
rates but collection is low. Demonetization might
For the past 3 decades the real estate prices change from an era of deductions to exemption.
were spiralling upwards. Not because country has
Weve discussed about how demonetization
prospered. Not because we dont earn enough. But
benefits the economy. But how do you view the
because people were involved in illicit activities.
hardships faced by common man?
The high land cost can be attributed to blank
Yes, there are hardships that the common
money.
man is facing. However, consider this as the
I believe there will be ripple effects of black
economic freedom of the country. Yes, it has
money in buying other lands. The real estate
affected the common man. It has affected normal
price will come by 30-40%. The government has
life, but given that this is a financial emergency,
a target to provide affordable housing to 19 lakh
people have cooperated by and large.
people by 2022. The fall in real estate prices will
The limit of 2.5 lakh on deposits has been well
help the government achieve this. Its true that
thought through. Most people will not have more
the construction workers will lose, but it was a
than that.
bubble waiting to be burst anyways. Sooner, the
better. One way the government can reduce the
hardship is by paying 20-30% salary in cash to
There are various estimates that GDP will fall
improve liquidity.
to anywhere between 3% and 6%. We have

already seen a decline in IIP. What are your
1 THE BLOOM OF FINTECH

THE AGE 2 VC PERSPECTIVE OF STARTUPS IN


INDIA - INTERVIEW WITH MR. PARAG
OF STARTUPS DHOL
Bottomline // January 2017 PAGE 39 OF 66

THE BLOOM OF FINTECH


- Archana Maganti

I t is the year 2040. Jonathan is woken up by


his robot who hands his coffee over to him
and reminds him it is the day to settle his bills.
micro loans and credit facilities have brought
in a tsunami of change in the way we handle
money. Banking has shown its dark belly in
Jonathan whips out his phone, settles his debts the Economic crisis of 2008. Coupled with
through an app, purchases and pays through his widespread internet use and mobilization, start-
wallet services. He finds he is short of money ups like Transferwise, Betterment, Wepay etc.,
and borrows it from his peers. His financial are waiting to exploit the weakness of banking
advisor aka his artificial intelligence assistant sector. Cryptocurrencies like bitcoin are waiting
runs the days algorithm to help him determine to substitute the formal currencies. Insurtech
which stocks to invest in. His wife Martina who is is similarly waiting to usurp the traditional risk
working in the United States has taken a mortgage management market. There are various FinTechs
out there through an online service. He transfers cropping up in investment, wealth management
money through an international money transfer and other verticals, particularly in the retail
app. All of this has been carried out in a space segment. The high potential of these start-ups has
of a quarter hour through technologies such as caught the imagination of Venture Capital funds.
cloud computing, quantum computing, Big data This is evident by the fact that Fintech funding
analysis and blockchain technology. Jonathan hitting an all time high of $19.1 billion in 2015
himself works in a financial service startup which (KPMG).
analyses consumer data to map their preferences Potential for disruption of banking services
and give out recommendations. The car he
How do these companies bring about
drives transmits his behavior (it is part of the IOT
disruption in the finance sector? First, the
network) using telematics to fintech providing his
inefficiency and costs are quite low when
insurance so he can pay as he goes.
compared to traditional banks, with customer
Mushrooming of FinTechs being the one with the most power in the
FinTechs, as this portfolio of services, are transaction. The physical distribution costs are
called, are poised to rule the world in a big way. almost zero. Second, there is a real time settlement
They have already disrupted the traditional of the transaction with the data points distributed
banking services in a major way. Digital wallets, in multiple places (blockchain), which ensures
peer-to-peer lending, equity and crowd funding, the security of the data and remote delivery. Third,


the data available and mined is really extensive
There is a fear that the story of which facilitates better risk management. Fourth,
Fintech might closely follow that they avoid pitfalls of leverage and mismatching
of dotcom bubble. 2016 has of maturities. This would also lead to division of
seen slow down of investment monetary and financial functions, each function
into Fintech compared to 2015. taken up by a specific fintech which adds an extra
layer of seamless service over disintermediation.
Bottomline // January 2017 PAGE 40 OF 66

FinTechs also have a huge potential to explore to digital payment services, the effect on FinTechs
in areas like social sector financing, financial still waits to be seen. Moreover FinTechs by and
inclusion, health and environmental finance. large are operating out of sight of the regulators.
There are hundreds of startups with a lot of There is a high possibility that FinTechs can be
brains and money working on various alternatives used in money laundering and ponzi schemes.
to traditional banking they are very good at The critics also pose questions of data security
reducing pain points. and ethics.

- Jamie Dimon, CEO, JP Morgan The immediate strategy that FinTechs can
undertake is enter into partnerships with banks
(coopetition) in short run. In fact many banks are
Sustainability of FinTechs
developing in-house FinTechs through corporate
There is a fear that the story of FinTechs entrepreneurship or acquiring nascent FinTechs.
might closely follow that of dotcom bubble. 2016 The other challenges in front of FinTechs are
has seen slow down of investment into FinTechs how to create awareness among the customers,
compared to 2015. Customer acquisition costs transcend beyond the millenials and establish
are still high, with the industry being highly credibility and trust.
fragmented. So unless they are scalable, their
FinTechs do have endless possibilities and a
sustainability is questionable. Further, these
disruptive potential. However caution is always
companies are not entirely without structural
advised as disruption has oft become an overused
problems of their own. Currently the regulations
word. Whether it is disruptive or sustainable,
and Banking secrecy act are highly geared in
one outcome is assured. The world has changed
favour of banks. Start up ecosystem in emerging
because of FinTechs. Je suis Jonathan.
countries like India still remains poor. Although

the recent demonetization has given a huge push
Bottomline // January 2017 PAGE 41 OF 66

INCUBATORS AT IIT, IIM AND IISC HAVE


TO PLAY THE ROLE OF STANFORD
VC PERSPECTIVE OF STARTUPS IN INDIA
INTERVIEW WITH MR. PARAG DHOL

S tartups, including FinTechs, are at an Mr. Parag Dhol


interesting point of their evolution in Indian An alumnus of Indian
Institute of Technology,
economy. With huge support in the form of Start
Delhi and Indian Institute
up India, Stand up India policy by the Government of Management, Bangalore,
of India and outpouring in form of Venture Capital, Mr. Parag Dhol currently
the atmosphere has never been better. Mr. Parag is Managing Director at
Dhol provides us an interesting perspective of Inventus Advisors India.
Parag made a foray into
a VC in the Indian industry.
venture capital after his
MBA in 1993. He started off with ICICI Venture (in
Have you always been into investing in com- Bangalore) and followed that up with stints at GE
Equity (in Gurgaon) and Intel Capital (in Bangalore).
panies? How has the industry changed in past
At Inventus, Parag is a Board Director at FundsIndia,
25 years since inception? Vizury, Power2SME, PolicyBazaar, eDreams, Avaz,
Essentially when I got into my job, I thought it peel-works and Tricog.
was a finance job. It is not. It is a very good place
for an MBA as it is a very broad job. You see people some distinct approach to market. In 1999-2000,
making mistakes, you see people doing right things first internet boom happened with services like
in marketing side, finance, HR etc., That way it Netscape. However with bad investments, many
is beautiful. In the initial years it was services companies went bankrupt, many people left
and more services with a flavor. For example, I McKinsey, some bit of what we saw last year or
invested in a company called Geometric which 2014 happened that time as well. The fault was
did reasonably well, which was focused on CAD/ even worse than what has happened today,
CAM. So it was verticalisation of services and a because there was no substance. At the end of the
bit of products thrown in, may be more tools than day we had 1 million subscribers to Internet, that
products. That was the first 6-7 years of industry provided big set back till about 2004. 2005 is when
- software services with some verticalisation or real VC started in India for two reasons: Foreign

experienced VCs started coming in, there were


2005 is when real VC started in
India for two reasons. Firstly, India US bridges and second reason was telecom
foreign experienced VCs started actually which proved that Indian market is
coming in, and secondly, when large enough, people started developing products
telecom proved that Indian for Indian market. Till then almost all the tech
market is large enough, people


investments taking place in companies exporting
started developing products for software services, because Indian market was not
Indian market.
strong. 2005 was the starting point, it was more or
Bottomline // January 2017 PAGE 42 OF 66

less continuation of that till the ups and downs of regime no one liked investing in India, then
2008 due to financial crisis and craziness of 2015. tech in India is not producing exits irrespective
But otherwise may be it is an oversimplification of red bus exit. It is quite a hard job, we have 3
to call it more with the same but it has followed in previous fund contributing 106 millions, for
the same trend line. our current fund of 150 million, we need about 4
How has the ecosystem changed? The process- investors.
es? Platforms? Do you also look into HNI investors, NRIs stay-
Substantially. Way back in 1993-94, when ing outside?
we used to go out during marketing they used Yes, substantial chunk of money is from
to ask how much interest you charge, we had to people who have made money in the past,
tell them it was equity not debt, so thats where it typically in US or some other parts of geography,
started. The whole industry managed 50 million who have invested because they know some of
dollars, it was such a small industry, people didnt us. But that money comes through challenges,
know how it worked. It was concept selling at because individuals go through ups and down in
that point, and slowly because Silicon Valley and life, you want institutional money because it stays
India have been connected because of techies longer time. It is a 25 yr long business. You want
going back and forth and all of that, tech industry someone to back you for a long time, so you prefer
in particular caught on to VC, rest of the sectors institutions to individuals.
are still catching up, and the ecosystem in all its There are lot of tumultuous happenings
forms - VCs, Angel ecosystems, lawyers, mentors around the world, like Brexit, BOEs interest cut
- everything has grown, it is still no where close to or Japans negative interest rates, QE etc. Do you
Silicon Valley. Incubators at IIT, IIM or IISC have think all these affect Indian markets, trickling
to play the role of Stanford which is still a distance down to startups?
away. It is an evolving journey.
Obviously they do affect, but as Buffet in

particular says, there are certain things you can


You want someone to back you control and certain things you cant. There is
for a long time, so you prefer no way I can have better understanding than


institutions to individuals. somebody in CSLA etc., I personally dont spend
a whole lot of time on macro economic factors,
because you just react but you cant predict.
How difficult it is to pool in funds of other peo- Most people cant predict. If you see lot of signals
ple to your fund to invest? coming, e.g. UK during Brexit, you assume the
Entrepreneurs at times make fun of VCs, how worst, react to it upfront and diversify, but in all
difficult it is to raise funds, how they dont get it. probability, I think entrepreneurs should hardly
But what they dont realise is we have to convince worry about macroeconomic factors. But if the
10-15 people to pool funds, it is hard because you investors are from that part of the world it can.
are not just selling yourselves, you are selling tech Let us say Indian currency depreciated by 15%,
in India, you are also selling India. Each of these our fund is in India and we will get affected.
has failure points, for example during congress But I can only hedge or do some amount of risk
Bottomline // January 2017 PAGE 43 OF 66

management. Many of my friends in debt or Hence it


equity market worry about it on daily basis, but I
India has not produced any
dont. Simply because it is uncontrollable.
exits. We are putting money,
What is the one challenge you face to convince we are not taking it out. Proof
foreign investors to invest in India? of the pudding is when you


India has not produced any exits. I think that take it out.
is the biggest unanswered question of Indian
venture ecosystem. Everything said and done,
is ideally placed from that perspective. Another
we are putting money, we are not taking it out,
one is Yashishs DNA. We are very excited about
proof of the pudding is when you take it out.
a company called Unbxd based in Bangalore. It
Startups like Red bus are few and far between.
enables search for companies which are not
Startups like Free charge are all fine, but they are
e commerce giants like flip kart, Amazon, etc.
merging into another company, very few people
which have their own internal search engines.
got liquidity. Secondary exits are fine, somebody
For example when you type in Tintin collection
bought out some stock in Flipkart, but it has not
on Flipkart, Amazon and Snapdeal, the right
been sold or gone IPO. There are Naukris, Justdials
product crops up in Flipkart and Amazon, but
on Snapdeal what crops up is collection of tiffin
boxes and all. Similarly take a brown bag. If
brown bag is not there it is better to show a green
bag than brown shoe. This intelligence is limited
because the underlying search technology is text
based. These guys have come up with structured
data solution. For example CVS pharma store in
US is trying to fight Amazon which is using this
technology. It started in India, got customers and
relocated on US and grown 10 times in last few
The Government of India has launched a huge months. This time around we believe that it is the
campaign, StarupIndia, to promote startups.
time for software products out of India because
they are delivered on SAS basis, you could be
etc., but they still few and far in between. That
conceptualizing, executing and delivering over
has to change, such exits have to happen in 1 in 3
web from anywhere in India.
month frequency for Indian ecosystem, but that
is not happening. In my opinion that is the biggest So do you or VCs in India look into family run
problem in India. business?

In your talk you mentioned you have 40 start Traditionally manufacturing and trading
ups in your kitty. What are some of the most have tended to be family businesses. Technology
exciting ones? business, which we do, are not family businesses.
We are skeptical about family businesses, there
Policy bazaar. Indians have love for comparing,
are too many complexities. There will be conflicts
for price comparison sites, value for money etc.
between family members. The good thing in
Bottomline // January 2017 PAGE 44 OF 66

technology business is we dont have many of More information is not necessarily good
such companies. Very few companies we see information. The idea is to narrow it down to
are run by families. We tend to be skeptical, but trusted sources, at the same time read as much as
although there are exceptions, but it is dangerous. possible after filtering the data. More information
There are successful me-too companies copy- does not lead to better decisions. Otherwise Nobel
ing foreign models. Do you believe in look- winners would be the most successful ones.
ing into innovative albeit risky companies in Perfect information is not possible. Read as much
startups in India? as possible but the right people.

I feel the so called concept arbitrage or copy What do you think about Flipkart reneging on
and paste business models are very risky. For campus recruitments? Is the startup scene in
example, there is a successful company called India just a bubble?
PoshMark, whose model involves women trading People recruited ahead of time, anticipating
closets. Typically the company does 25 - 35 million growth, but money didnt come along. I have
GMVs a month. I have seen at least three people sympathy for them as the cycles are currently
trying to copy that model in India. First thing short, by the time you go to campuses, recruit
people dont have iPhones or Instagram quality them and bring them on board, your market
pictures. The payment escrow system is difficult reality would have changed. At the same time
here in India. Further, women dont trust you to defaulting on your commitments does not look
have dry cleaned others closets. The eBay kind of good. Once you go back on your word you may go
system with seller-buyer comfort does not exist back again. Some of the crazy unicorns are bound
here. Hence we are gutturally opposed to such to fail. But fundamentally strong companies like
copy and paste models. The best thing to do is let Bookmyshow, Freshdesk, Unbxd etc., will always
the entrepreneur come out with his idea and back stand powerful. You as students have to choose
him up. For example I invested in a company right start ups, not just choosing investment
called Tagmedia whose idea was to play ads on banks because everybody is going there. Even
screens inside supermarkets, grocery stores, some investment banks have become bankrupt.
elevators, airports etc., replicating Focusmedia How do you think IIM B has added value in
of China. I thought this guy would run it sensibly your career?
so I invested but the markets were so different.
IIM B gives a broad cross functional
Cutting and pasting is a terrible idea.
understanding. I focused too much on finance

IIM B definitely gives you a in retrospect. Efforts and grades definitely have
much broader exposure when a correlation. I did very well in finance, but not
compared to our time and as well in others. I wish I had read Kotlers better.
multidisciplinary problem If you have your fundamentals clear, it will help


solving skills which are very you in every function. IIM B definitely gives you
important in todays world. a much broader exposure when compared to our
time and multidisciplinary problem solving skills
There is a lot of information out there, how do which are very important in todays world.
you keep yourself updated? As students how
do you advise us to keep track of it?
1 Uber - Didi : China

MERGERS & 2 Marriott & Starwood


ACQUISITIONS
3 Fortis & ITC Holdings
Bottomline // January 2017 PAGE 46 OF 66

UBER - DIDI : CHINA


Introduction Later in 2014, Chinese Internet-search giant

C hinas dominant ride hailing firm Didi Baidu, along with China Life Insurance, agreed
Chuxing acquired Uber China, the regional to make investment in Uber signaling Ubers
subsidiary Uber that would intention to grow big
value the combined entity at in China. Uber China is
$35 billion. The $35 billion a separately-held joint
is made up of Didis latest venture between the main
$28 billion valuation and $7 Uber business, China-based
billion value for Uber China. internet giant Baidu, and
Uber and investors in its other outside investors.
UberChina unit will take a
20% stake in the company. Deal Rationale
After the merger, Uber will become the largest
While Didi claimed to be profitable in 200
shareholder in Didi. Uber will be given a 5.89
out of the 400 cities it was operating in, the
percent stake in the newly merged entity, with
successive rounds of fund raising by both Uber
preferential equity that is equal to a 17.7 percent
and Didi indicated that they were burning cash
economic interest in Didi Chuxing. Existing Uber
at an unsustainable rate. The unsustainability
China investors, which include Chinas dominant
of the cash burning competition the two giants
search firm Baidu, will get 2.3 percent of the new
were involved forced them to rethink their
business. (Thus summing to 20% stake).
strategy.
Also, with the new regulations brought in
About Didi Chuxing just a week before the merger, the operating
Didi Chuxing, a Chinese transportation environment became much more challenging
network company is the result of the merger of for Uber and Didi, especially given that they
rival firms Didi Dache and Kuaidi Dache (backed could no more offer the subsidies. Moreover,
by the two largest Chinese Internet companies, investors were concerned how much more cash
Tencent and Alibaba respectively. would be burnt before a winner emerged. By
going through the deal, both Uber and Didi have


About Uber
Ubers interest in China first became visible Once Didi becomes operationally
in Apr 2013, when Ubers executive decided to profitable in China, it may look
take a scouting trip to China. Within 6 months, to expand to other markets.
Uber launched its operation in China under the It could also possible mean
aegis of Uber soft in Shanghai. In Feb 2014, Uber another Uber-Didi face-off in
formally launched its operation in three Chinese other markets.
cities Shanghai, Shenzhen and Guangzhou.
Bottomline // January 2017 PAGE 47 OF 66

put a logical end to the costly battle. threaten its existing operations and expansion to
Before the deal, Uber was spending most other markets. Last year alone, Uber lost $1bn.
of its raised funding in China, implying that it Ubers graceful exit now gives it an opportunity
was investing little in other markets. Uber can to focus on other emerging economies where
now focus on its competition Lyft in US and Ola competition is less fierce.
in India. The deal also helped Uber get closer 2. Didi to go international Closing out
with Didi, which was forming a global anti-Uber completion, Didi now has the largest market
alliance. share in China. Since the merger last week, both
Lastly, it is believed that Ubers expensive Uber and Didi have already cut down some
battle in China was preventing it from going of the subsidies and discounts. Didi already
public. With the deal, Uber has sent a clear signal claimed to be profitable in 200 out of 400 cities.
that it intends to become profitable in the long Once Didi becomes operationally profitable in
run, paving the way for an IPO. China, it may look to expand to other markets.
If Didi choses to do so, it would be interesting to
observe which markets Didi aims to capture. It
What next?
could also possible mean another Uber-Didi face-
1. Uber to focus more on other markets: off in other markets.
In the fierce competition in Chine, Uber was
burning cash at a rate that was starting to
Bottomline // January 2017 PAGE 48 OF 66

MARRIOTT & STARWOOD


M arriott and Starwood tied knot in April16
as MarriottInternational signed to acquire
Starwood Hotels for $13.6 billion thus creating
Deal terms
As per the terms, Starwood shareholders
will receive 0.8 shares of Marriott common
the largest Hotel Company in the world. Post this stock and $21 in cash per share of Starwood
mega merger, the combined entity will boast of 1.1 common stock. The transaction values Starwood
million rooms spread out over 5,500 hotels and 30 at approximately $13.6 billion ($79.53 per
different brands. The deal will impact peers like share), consisting of $10.0 billion of Marriott
Hyatt Hotels Corporation, InterContinental Hotels International stock, based on the closing price of
Group (IHG) as well as alternative lodging options $73.16 on March 18, 2016, and $3.6 billion of cash,
like HomeAway and Airbnb. based on approximately 170 million outstanding
97% of Marriott shareholders and 95% Starwood shares.
of Starwood shareholders approved the deal.
Marriott had originally planned to buy Starwood
for $12.2 billion, but a rival bid from Chinese
insurance consortium Anbang forced Marriott to
increase its bid to $13.6 billion. Rationale for the deal
Starwood Hotels and Resorts Worldwide Inc. One of the biggest factors of Marriotts
interest in Starwood was to gain access to its
powerful Starwood Loyalty program. The merger
will allow Marriott to leverage Starwoods brand
to attract more business from corporate clients.
Starwoods loyalty program, Starwood Preferred
Guest is a favorite among business travelers.
Starwood has had a far stronger presence in the
It is one of the leading hotel and leisure Eastern Hemisphere (Middle East, Asia, Oceania)
companies in the world with more than 1,300 than Marriott -- 653 hotels vs. 206 hotels. This
properties in some 100 countries. Some of its acquisition should allow Marriott to strengthen
renowned brands include St. Regis, the luxury its presence in Asia, positioning them as the


collection, W, Westin, Le Meridian, Sheraton etc.
Marriott International Inc. One of the biggest factors of
It is an American multinational diversified
Marriotts interest in Starwood
hospitality company that manages and
was to gain access to its
franchises a broad portfolio of hotels and related
powerful Starwood Loyalty
lodging facilities. Some of its key brands include
program. The merger will allow
JW Marriott, Renaissance Hotels, Ritz Carlton,
Marriott to leverage Starwoods
Courtyard.
brand to attract more business
from corporate clients.
Bottomline // January 2017 PAGE 49 OF 66

Role Acquirer (Marriott) Acquiree (Starwood)


Financial Advisor Deutsche Bank Lazard and Citigroup
Legal Advisor Gibson, Dunn & Crutcher Cravath, Swaine & Moore
Table 1: Advisors in Marriott Starwood deal

dominant brand in that region. of the cost synergies by leveraging general,


Starwood has been constantly struggling administrative and operating costs. Both
since a couple of years as the company lagged MarriottRewards and Starwood Preferred Guests
industry growth and investor expectations. have a very loyal following, so what is going is
One of the reasons why Starwood has been going to how to these two programs for retaining
underperforming is they are lagging when it the customer base is something to watch out for?
comes to limited service properties. They mostly Also, the extent to which the combined entity will
have lifestyle brands. Marriott on the other hand benefit from these synergies is to look out for in
does really well in the Limited service market. this merger!!
Hence the two will complement each other.
Scale is quintessential
to succeed in the hotel
industry given the
high fixed to variable
cost ratio. Mergers
are viewed as a tool
to monetize the
unutilized capacity.
Annual savings of
~ save $200m are
expected on account
Bottomline // January 2017 PAGE 50 OF 66

FORTIS & ITC HOLDINGS


F
ortis Inc. Canadian electric and gas utility 26% gas), with the remaining 4% comprised
plans to acquire electric power line company of non-regulated energy infrastructure. The
ITC Holdings (ITC) , for $11.3 billion. Corporations regulated utilities serve more
92.51% of the Fortis shareholders voted to than 3 million customers across Canada, the
approve the issuance of up to 117 million Fortis United States and the Caribbean.
common shares as partial consideration for About ITC Holdings
the acquisition of ITC. ITC owns and operates
high-voltage transmission facilities in Michigan,
Iowa, Minnesota, Illinois, Missouri, Kansas
and Oklahoma. The Novi, Michigan-based
utility serves a combined peak load of more
than 26,000 megawatts along approximately
15,600 miles of transmission line. The closing
of the acquisition of ITC is expected to occur
in late 2016 and is subject to receipt of certain ITC is the largest independent electric
regulatory approvals, including the approval transmission company in the United States.
of the Federal Energy Regulatory Commission, Based in Novi, Michigan, ITC invests in
the Committee on Foreign Investment in the the electric transmission grid to improve
United States, and the United States Federal reliability, expand access to markets, allow
Trade Commission/Department of Justice under new generating resources to interconnect
the Hart-Scott-Rodino Antitrust Improvements to its transmission systems and lower the
Act of 1976, as well as various state approvals, overall cost of delivered energy. ITC owns and
among others. operates high-voltage transmission facilities in
About Fortis Inc. Michigan, Iowa, Minnesota, Illinois, Missouri,
Kansas and Oklahoma, serving a combined
peak load exceeding 26,000 megawatts
along approximately 15,700 circuit miles of
transmission line.
Fortis is a leader in the North American Deal Terms
electric and gas utility business, with total assets 1. ITC shareholders will receive US$22.57
of approximately $28 billion and fiscal 2015 in cash and 0.7520 (a total of US$6.9 billion) of
revenue of $6.7 billion. The Corporations asset a Fortis common share for each ITC common
mix is approximately 96% regulated (70% electric, share and Fortis will assume approximately
Bottomline // January 2017 PAGE 51 OF 66

Role Acquirer (Fortis Inc.) Acquiree (ITC Holdings)


Financial Advisor Goldman Sachs and Scotiabank Barclays and Morgan Stanley
Legal Advisor White & Case LLP and Davies Simpson Thacher and
Ward Phillips & Vineberg LLP Bartlett LLP
Table 1: Advisors in Fortis - ITC Holdings deal
US$4.4 billion of consolidated ITC indebtedness Corp. for US$2.5 billion in 2014. The acquisition
2. Upon completion of the Acquisition, of ITC is a continuation of this growth strategy
ITC will become a subsidiary of Fortis and 2. In terms of accretion, this deal is expected
approximately 27% of the common shares of to yield 5% accretion to EPS in the first year,
Fortis will be held by ITC shareholders. following close. In terms of diversification, it
3. Based on the February 8, 2016 closing dramatically diversifies Fortis earnings on a pro
price for Fortis common shares and the US$/ forma basis with Canada contributing 35%, US
C$ exchange rate on that date, the per share 62%, and Caribbean 3%
consideration offered by Fortis represents a 3. ITCs average rate base and CWIP is
premium of 33% over ITCs unaffected closing expected to grow at a compounded average
share price on November 27, 2015 and a 37% annual rate of approximately 7.5% through 2018


premium to ITCs unaffected average closing
price over the 30-day period prior to November $2bn bond issuance would be
27, 2015. required to fund the acquisition,
4. The Fortis-ITC transaction was valued at
which would effectively double
Fortis Inc.s debt. However the
approximately US$11.3 billion as of the close of
deal will be transformative for
markets on February 8, 2016. The ITC Holdings
Fortis, with its U.S. business
shareholders will see an increased yield to about accounting for 62 per cent of
3.6% versus the current dividend yield of 1.9%. revenues.
A US$2 billion bond issuance would be
required to fund the acquisition, which would 4. The management team of ITC Holdings
effectively double Fortis Inc.s debt. However has a proven track record of delivering
the deal will be transformative for Fortis, with superior total shareholder return and cash flow
its U.S. business accounting for 62 per cent of generation. They are execution-oriented with a
revenues. focus on safety, reliability and managing projects
on time and on budget. Cultural similarities also
Rationale for the deal
exist between Fortis Inc. and ITC Holdings with
1. Fortis has been building its asset base in
management pursuing operational excellence
the U.S. with the acquisition of New York-based
and regulated focus.
CH Energy Group Inc. for US$1.5 billion in 2013

and Arizona-based utility company UNS Energy
1 2016 - GLOBAL EVENTS
LOOKING BACK ROUND-UP

AT 2016 2 PERSONALITIES OF THE YEAR


Bottomline // January 2017 PAGE 53 OF 66

2016 - GLOBAL EVENTS ROUND-UP


China President launched Asian Infrastructure Investment Bank (AIIB) which was for-
mally established in Beijing on December 25, 2015. India and 56 other countries joined
as its founding members. Notably, US and Japan stayed out.
Reserve Bank of India sought the government an additional Rs 26,000 crore to be inject-
JANUARY

ed into state run banks by 2018 as part of implementing Basel-III standards.


Japans central bank, Bank of Japan imposed negative interest rate of -0.1% on its ac-
counts of commercial banks. World market interest rates were subsequently driven
down.
Government revised 2014-15 GDP growth to 7.2% YoY from 7.3% YoY.
Brent crude hit a low of 27.1 dollars which caused selling of energy shares and bonds.

The Central Statistics Office in India predicted that Indian economy will grow at 7.6% in
FEBRUARY

FY 2015-16, a five year high.


Employees Provident Fund Organization (EPFO) increased the PF interest rated to 8.8%
from 7.75% for FY 2015-16.
Macro-Economic Survey 2015-16, prepared by Chief Economic Advisor Arvind
Subramanian was tabled in parliament by Finance Minister Arun Jaitley.

Market regulator SEBI raised the Foreign Portfolio Investors (FPI) investment limit in
MARCH

govt. securities to Rs. 1,40,000 crore from April 4.


Current Account Deficit fell to 1.3% of GDP due to lower commodity prices.
Government permitted 100% FDI in e-commerce through automatic route in market-
place of retailing.

In its first Bi-Monthly Monetary Policy Statement for FY 2016-17, RBI cut the Repo rate
to 6.5%, Reverse Repo rate is 6.0% and CRR was 4%.
India has the worlds largest remittance in 2015 with $69bn in remittances, according
to report. Other large remittance recipients in 2015 are China ($64bn), Philippines
APRIL

($28bn), Mexico ($25bn) and Nigeria ($21bn).


RBI and National Payments Corporation of India (NPCI) launched Unified Payments In-
terface (UPI) to promote electronic payments.
IMF retained its 7.5% GDP expansion forecast for India in 2016 and 2017 in its economic
outlook.
Bottomline // January 2017 PAGE 54 OF 66

Finance Ministry announced that Income Declaration Scheme 2016 for domestic black
money will commence from June 01 to September 30 for filing of Declarations and Pay-
MAY

ments towards Taxes, Surcharge and Penalty.


SBI planned to merge its 5 associate banks and also merge Bharatiya Mahila Bank, a
state owned one. This would create a banking behemoth with a balance sheet size of
Rs. 37tn.

RBI introduced a Scheme for Sustainable Structuring of Stressed Assets to strengthen


JUNE

the banks ability to deal with stressed assets.


United Kingdom has voted to leave European Council in a referendum in which about
52% voted to leave EU. This was widely referred to as Brexit.

Cabinet approved changes to GST Constitutional Amendment Bill, dropping 1% manu-


facturing tax and promising to compensate states on lost revenue in the first five years
of rollout.
HDFC launched India s first full-fledged online banking service for Small and Medium
JULY

Enterprises (SME). It becomes first issuer of Masala Bonds in India raising Rs. 3000
Crore.
Italys constitutional referendum and the bad loans plaguing the countrys banks were
in spotlight which ultimately led to the resignation of Matteo Renzi as prime minister.
Particularly affected are Italys banking sector shares.

Urjit Patel appointed as Governor General, Reserve Bank of India.


HDFC, Max, Max life and Max India merge their insurance businesses into HDFC life, a
company worth Rs. 67000 Crore.
AUGUST

Forex reserves reached record high of $365.82bn.


Japan recorded highest current account surplus (10.63 trillion yen) in first half of
2016, mostly due to its tourism industry.
By August, globally the universe of negative yielding debt had swollen to $13.4tn. The
biggest casualty of some $14tn of global debt trading below zero per cent were the
pension and insurance industries.
Bottomline // January 2017 PAGE 55 OF 66

BSE became first stock exchange and second bourse (after MCX) to file IPO on NSE to
SEPTEMBER

raise 1200 to 1300 Crore INR.


World Trade Organization lowered forecast of global trade growth to 1.7 %, slowest
since financial crisis signaling anti globalization rhetoric in the world.
A new Monetary Policy Committee (MPC) was constituted and notified to deal with
monetary policy matters in India.
Jim Yong Kim took over as the president of World Bank for second term.

Reserve Bank of India reduced repo rates by 25 basis points from 6.5%to 6.25%.
OCTOBER

ICICI becomes Indias first bank to execute block chain technology in partnership with
Emirates NBD.
Department of Industrial Policy and Promotion notified 100% FDI in other Financial
services of NBFCs to attract foreign capital in India.

Prime Minister of India announced that the two largest currency denominations, Rs.
500 and Rs. 1000, are no longer valid as legal tenders.
The shock of Donald Trump winning the vote for markets was short-lived lasting a
matter of hours as investors rapidly embraced the idea of a Republican-controlled
NOVEMBER

Congress being a game changer by implementing fiscal stimulus, tax cuts and rolling
back on regulations for US business.
Booming share markets after the US election also reflected hopes of an oil production
deal that eventually came to pass in late November when OPEC met in Vienna. The big
motivation for the deal had been the economic pain inflicted by a falling oil price on
the economies of producers, notably Saudi Arabia. As the country looked to line up an
equity flotation of state-owned oil company Aramco by 2018, keeping the price firmly
above $50 a barrel is a crucial aim.

A year after the first rate hike in almost a decade, the Federal Reserve increased the
Fed Fund rate by another 25 basis point.
DECEMBER

On the tail of demonetization e-transactions touched 1000 Cr INR mark.


India crossed $300bn in FDI, biggest contributor of which is Mauritius.
India overtook UK & becomes 5th largest GDP after USA, China, Japan & Germany.
The era of ultra-low bond yields was in doubt, with the tally of negative-yielding debt
slipping to less than $11tn this month. Wall Street equities moved further into record
territory.
Bottomline // January 2017 PAGE 56 OF 66

2016 - PERSONALITIES OF THE YEAR

DING XUEDONG
Chairman of China Investment Corporation, the
countrys largest sovereign wealth fund, Ding steers
810 billion $ sovereign wealth fund. He also chairs
China International Capital Corporation, the coun-
trys leading international investment bank. This cor-
poration was in news for being one of the sources of
funding Chinas One belt, One road initiative. Since
he took the helm of CIC in 2013, he has been credited
with restructuring CIC, by instilling entrepreneurial
spirit and promoting direct investments overseas.
CIC has suffered negative returns on its overseas in-
vestments due to volatility in international markets
and foreign exchange losses in 2016. CICs strategy in
2016 has shifted from global to domestic markets, in-
vesting in some of the Internet companies of China.

LLOYD BLANKFEIN
Chief Executive Officer of Goldman Sachs, Lloyd
Blankfein remains firmly ensorcelled in his position
even after the management shuffle post appoint-
ment of Gary Cohn as senior economic adviser to
the White House. The strategy of Goldman Sachs
is expected to remain the same under Lloyd cau-
tious expansion into new areas with feet firmly in
trading and corporate banking. A lawyer from Har-
vard Law school, Lloyd Blankfein started his career
as precious metal salesman before his parent firm
J Aron & Co was acquired by Goldman Sachs. Gold-
man Sachs currently manages 1.35 trillion $ in as-
sets with its shares currently trading at 25% premi-
um to book value.
Bottomline // January 2017 PAGE 57 OF 66

2016 - PERSONALITIES OF THE YEAR

STEVE SCHWARZMAN
Chief Executive Officer of Blackstone Group, Steve
Schwarzman rose through ranks at Lehman Broth-
ers and founded Blackstone with Peter Peterson in
1985 (Schwarz Black, Peter Stone). Blackstone
currently runs 350 billion $ in assets. Roped in by PO-
TUS Donald Trump as leader of his advisory board,
he believes in substantial reduction of regulations
for financial sector as contributory to growth of US
economy and attracting foreign investment. In 2016,
he famously made 250 million $ in five days by sell-
ing 25% stake in Hilton Worldwide Holdings to Chi-
nese conglomerate HNA group for $ 6.5 billion.

ABIGAIL JOHNSON
Abigail Johnson, CEO of mutual fund giant, Fidelity,
has taken full reins of the fourth largest asset manag-
er in the world and assumed its chairmanship from
her father, Edward C. Johnson III. Fidelity holds
some $2.1 trillion in managed assets, and handles
the retirement and savings plans of approximately
25 million Americans and 20,000 companies. While
Fidelity is famous for its stock picking (76% of its
U.S. stock funds outperformed their peers in 2015),
these pricey funds are falling out of favor; investors
pulled $18.8 billion from Fidelitys actively managed
equity portfolios last year. So Johnson is slashing
fees on Fidelitys passive funds and targeting a fresh
generation of customers with digital tools.
Networth is the finance club of IIM
Bangalore. The club carries out a
number of activities throughout the
TEAM year, including major events in national
fests, weekly financial publications on
NETWORTH global finance news, monthly magazines
on M&A deals and a blog on macro
happenings.
Bottomline // January 2017 PAGE 59 OF 66

TEAM NETWORTH - SENIOR COORDINATORS


Bottomline // January 2017 PAGE 60 OF 66

TEAM NETWORTH - JUNIOR COORDINATORS


Bottomline // January 2017 PAGE 61 OF 66

NETWORTH - 2016 EVENTS ROUND-UP


Back to the Futures winners and 1strunner up position was backed
Networth conducted a new event in Vista by the team from IIM Lucknow led by Ankit Raj.
2016 themed on Financial Derivatives. Named Some feedback received from finalists
Back to the Futures, a pun on the movie name and below:
futures (a popular derivative product), the event Rahul Rao, NMIMS: The event was great. A good
was aimed at challenging the participants in their learning experience!
understanding of derivatives and formulating
Anirban Kundu, IIMC: Thoroughly enjoyed the
strategies to maximise profits on their
event. Superb Questions!
derivatives portfolio. The event was conducted
in two stages. Stage 1 was a time bound quiz on
Stock 20-20
derivatives which saw participation from more
than 100 teams from top B-Schools of the country. A client once asked an investor if he makes
13 teams qualified for the final round where the a trade and earns millions in a matter of time.
finalists battled by taking positions on NIFTY But, do you really believe that he earned that in
options by analysing a timeline of information a matter of minutes? No! He spent years after
provided on global macro events, data release years learning and practicing this art.
and performance of various indices. Teams were Networth, in association with Aditya Birla
required to provide rationale at each stage for group provided a unique platform to participants
their positions and across the country
ultimately predict to come and
the NIFTY price and pitch a stock
RBI policy decision of their choice.
for interest rates. With more than
All the teams 50+ outstanding
t h o r o u g h l y entries in the first
enjoyed the round, a two-step
event and it was process followed
a great learning to narrow down
experience for the the 8 finalists.
participants as well The second round
as the organizers. did not involve
Team from IIM just a buy-sell
Ahmedabad led opinion but was
by Ashish Khullar more exhaustive
were declared as each point
Bottomline // January 2017 PAGE 62 OF 66

was backed by industry and firm analysis. enter into the niche yet competitive smartwatch
Evaluation of firms management, their recent segment. To build a case for the competition, we
decisions, past performance and total valuation visited the CEO, Mr. Somnath Meher, at a typical
against comparable firms were the key factors start-up environment, a co-working space in
Bangalore. The experience enabled us
to create a realistic case putting forth
even the all-important qualitative aspects
that go into valuing a startup for the
participants to build upon. Mr. Meher
agreed to judge the event and asked
pointed yet meaningful questions while
giving some insightful comments to each
team after their presentations.

Convexity calls (Vista)


During Vista Networth conducted
a unique event based on Asset Liability
Management that tested contestants
skills in Balance Sheet Management. With
Financial Markets worldwide recognizing
the need for a robust balance sheet, and
as rules get ever more stringent, this
event tried to put the contestants straight into the
considered by teams while evaluating it. The
shoes of a Treasurer whose responsibility is to
panel with years of expertise in fundamental and
bring his/her banks balance sheet inline before
technical analysis took an account of the overall
the upcoming stringent stress tests. In the first
depth of analysis, clarity of thoughts, quality of
round, a case was provided on the spot containing
the pitch and final recommendation to choose
the balance-sheet information followed by some
the winners.
conceptual questions. The teams will have to
solve the problems given in the case in the pre-
Nextup (Eximius) allotted time. In the final round, the teams had to
NextUp, the startup valuation event dynamically change their balance sheet based on
included a preliminary round that focussed on the stress scenarios created. The winning team
the fundamentals of valuing a company, after was from of IIM Bangalore and comprised of M/s
which the top 6 companies were shortlisted for Jayesh Bhansali, Akshay Soni and Chetan Dixit.
the final round. The NextUp finale was based on
a real startup, Witworks, which is planning to
Bottomline // January 2017 PAGE 63 OF 66
Bottomline // January 2017 PAGE 64 OF 66

SO YOU THINK YOU KNOW FINANCE...


Bottomline // January 2017 PAGE 65 OF 66

Across Down
4. Federal Reserve Chief [6] 1. Largest Initial Public Offering ever [7]
5. Popular alternative to paying dividends [7] 2. Measure of sensitivity of bond prices to
6. Oracle of ___: Warren Buffett [5] interest rate changes [8]
7. European country with highest household 3. Predominantly used absolute valuation
debt to GDP ratio in the world [7] method [3]
9. Statement of financial ___: Balance sheet [8] 7. Brexit, Trump indicate risk of ____ in
10. Four best performing US tech stocks (acro- world economy [15]
nym) [4] 8. You lose ___ when a) you are bored; b)
13. Distributed digital ledger of transactions when you take a loan [8]
[10] 11. Risk-free profit due to market inefficien-
15. ____ Leverage: A function of operating cost cies [9]
as well as capital structure [8] 12. ___ Yield Curve: Long-term debt has
16. Black-____ Model for options pricing [7] lower yield than short-term [8]
17. Beta is a measure of non-diversifiable or 14. Commodity that entered a major bull
____ risk [10] market post Trump [6]
21. Assets minus liabilities; IIMB Finance Club 18. Certain European countries facing debt
[8] crisis (acronym) [5]
22. South American country facing severe hy- 19. What goes out; Deferred payment [6]
perinflation [9] 20. Failure to repay a loan; Preset value [7]
24. ___ Loan: Short term loan until long term 23. Marketable security that tracks an index,
finance is available [6] etc (acronym) [3]
25. At the same rate, "equal footing" (Latin) 26. An ____ of financial statements is re-
[4,5] quired for listed companies [5]

For answers, visit our blog at


https://macrohappenings.wordpress.com/
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