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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.
CONTENTS
MEANWHILE IN INDIA
TEAM NETWORTH
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
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
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 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-
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-
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
MARKETS
EMERGING ECONOMIES
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.
1822- Brazil
becomes an indepen-
dent nation. Trade
flourished though with
regulations; Britain
was the main trading
partner of Brazil.
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
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
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
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
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
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
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
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 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
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
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
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
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
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
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
The Central Statistics Office in India predicted that Indian economy will grow at 7.6% in
FEBRUARY
Market regulator SEBI raised the Foreign Portfolio Investors (FPI) investment limit in
MARCH
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
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
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.
BSE became first stock exchange and second bourse (after MCX) to file IPO on NSE to
SEPTEMBER
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
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
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
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.
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]