How Do You Think 3 G Services Will Change India

After Sachin Tendulkar’s double century what is probably heard the most in India is 3G services. Department of telecom have planned to issue 3G licences in phased manner according to circles in which DoT has divided entire Indian telecom operations. What 3G is offering is basically high capacity data transmission and other value added services. With high competitive environment there is a tough race amongst all the telecom operators to get the licence to tap larger market share. With so much hoopla around 3G services more or less everyone is aware the potential benefit it will render to consumers at but in this article lets go a little behind the scene and find out how it will impact on telecom infrastructure which has gained altogether a separate industry status in past few years. Telecom infrastructure industry in India stands at nearly $28 billion. There are three main constituents of this industry Passive (steel tower), backhaul and active(BTS & microwave). Passive infrastructure being one of the most important components of a mobile network, the same has been a critical area of operations for telecom companies in the past. However, with increasing competition posing an urgent need for telecom companies to expand their coverage and sharpen their focus on core operations so that they can sustain and improve their market position, passive infrastructure has assumed the status of an independent industry during the past few years.

With the competition in Indian telecom industry set to intensify further for 3G services the key factor that would earn competitive advantage to the operators is faster rollout. Faster rollout necessitates the need for sharing of passive infrastructure. By sharing of passive infrastructure means that on a single tower more than one operator can install their active communication devices which was not the case earlier. This will change the entire working model of this industry. Not only will it bring down the operating expense of telecom operators but also at the same time will increase the revenue of ITICs(Independent Tower Infrastructure Company). According to ICRA’s estimate the improvement in a tower company’s profitability with increase in tower-sharing ratio to 49% (approx.). Analysis indicates that capital expenditure savings could reach US$4 billion if operators achieve double tenancy on deployed sites by 2010.Apart from faster rollout in race of providing affordable 3G service the only way Telecom Company could improve their ARPUs(average revenue per user) is to reduce their operating expense which is possible through tower sharing.

Initially larger telecom companies in order to focus on their core operation hived off their tower portfolios but with the increasing scope of tower sharing comes increase in revenue generation several large telecom companies are entering in to infrastructure business.

So in near future with the advent of new technologies like 3G not only will we see the change in the revenue generation model of tower infrastructure industry but also the telecom infrastructure industry will see the path of consolidation like formation of consortium of leading GSM players as Indus tower.

References:

Booz & Company report, ICRA’s report

Written By:

LEENA CHAND

MBA-IB

2009-11

IIFT Kolkata

RBI’s Proposed Rules For Granting New Private Bank Licenses

Financial inclusion has been the priority of the government since quite some time. In order to achieve its target of total financial inclusion in the country by March 2011, the government has been adopting several steps. Amongst them was the proposal given by Finance Minister, Pranab Mukherjee during Budget 2010-11 that new banking licenses be granted to eligible corporates and non banking financial companies (NBFCs). Banking regulator, Reserve Bank of India has been working on the issue for some time and has come up with draft guidelines for issuing fresh banking licenses. The fact that the level of regulation is quite less for NBFCs than banks might pose an issue for these companies in getting a bank license.

Adequate capital requirement is likely to be an important criterion to be eligible for obtaining a banking license. This is because an entity with strong capital base can aid better to the goal of financial inclusion. If that be the case, then corporate houses stand a fair chance of getting selected in the race. But a key disadvantage associated with handing a license to Corporates lies in the fact that they might get biased towards their respective associate companies and subsidiary units and gives lesser priority to other clients and in times of crisis it can quickly increase the amount of bad loans. This disadvantage cannot be seriously overstated enough as it is believed that the presence of large Corporate-owned banks was one of the key reasons for the Asian Financial Crisis of 1997. Indeed the RBI has long been opposed to the idea of corporate owning banks, a policy it has completely reversed this year as a result of the Finance Minister’s announcement. It is believed that, as a result, the biggest corporate houses in the country like Reliance, Tata Group and AV Birla Group are all eying the lucrative possibility of starting their own banks.

So is the RBI undertaking sufficient precautions after taking cues from the experiences of other countries while drafting the policies for new private bank licenses? The draft discussion paper released in August this year suggests that RBI is indeed undertaking an extensive study of all the different issues involved. It has justified the rationale for simplifying the issue of bank licenses by stating that, “a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service.” On the other hand it has also suggested, quite rightly, that if corporate houses are to be given licences, there has to be amendments to various statutes and acts. There are several deep rooted fears in allowing industrial and business houses to own banks, the paper said. Conflict of interest, concentration of economic power, likely political affiliations and potential for regulatory capture were some of the concerns listed by the RBI. “When banks are flush with liquidity, there is a great risk of diverting the funds to liquidity constrained operations of the group,” the paper said. Further, the paper has said that companies and even non-banking financial entities directly or indirectly involved in real estate should not be allowed to promote banks. As an intermediate step, however the paper suggested that, industrial and business houses could be allowed to take over regional rural banks.

The RBI has invited suggestions from banks, non-banking financial institutions, industrial houses, other institutions and the public at large on six aspects.These are: minimum capital requirements for new banks and promoters contribution (net worth of Rs 500 crore or Rs 1,000 crore), minimum and maximum caps on promoter shareholding and other shareholders, foreign shareholding in the new banks (50%), whether industrial and business houses could be allowed to promote banks, should non-banking financial companies be allowed conversion into banks or to promote a bank and business model for the new banks.RBI listed three options, namely having a low minimum capital requirement but above Rs 300 crore, a minimum requirement of Rs 1,000 crores, and that of Rs 500 croreswith a condition to raise the amount to Rs 1,000 crores within five years. Suggestions were accepted till September 30 and now the Central Bank is working on the Final Guidelines after going through the feedback.

There is one aspect that the paper is however clear on- that companies with real-estate linkages should not be allowed to set up banks. The RBI has said that it fears for financial stability if an industrial house that is involved in real-estate also establishes a bank. The regulator stated that given the sensitivity of the real-estate sector, any sub-version of the Chinese wall between the bank and rest of the group could have extremely negative consequences for financial stability. Individual promoters are also unlikely to get another shot at what’s a lucrative business since their past performances have been far from satisfactory as seen from the failures of banks like Global Trust Bank.

While this is expected to be a long drawn-out process, it is expected that the tight licensing regime is now irrevocably changing for the better and the customers- i.e. the people of India will be hugely benefited if the process is carried out right.

Written By:

Arka Khasnabis

MBA (IB) 2009-11

IIFT Kolkata

Microfinance from an Indian Perspective

The term microfinance has been a part of the common man’s dictionary for quite some time now. Considering the exponential growth that the entire microfinance sector has shown in the past few years, I guess it’s time to take a good long look at this newest animal in the zoo after witnessing the innovative financial instruments of the financial institutions of the U.S. and the common currency economic model of Europe.
The concept of microfinance, contrary to the popular belief, is not new and it has captured the minds of many social reformers over the past few centuries. However, its first successful implementation was during the microcredit movement of the 1970s which was spearheaded by Muhammad Yunus and his Grameen Bank. This bank now serves over 7 million Bangladeshi women. Since then, the microcredit movement has gained huge momentum in S-E Asia and many other developing countries of the world. India is no exception.
In India, SKS Microfinance is the top institution in terms of loan amount outstanding. It has disbursed over Rs 10 billion till date and it raised Rs 1,654-crore through its IPO launched on 28th July. It has already roped in high profile investors like Narayan Murthy and the Quantum Hedge Fund founded by the billionaire investor George Soros. This is surely going to rev up the microfinance market. Another positive indicator for the microfinance in India is the Forbes Top 50 list of microfinance institutions. There are 7 Indian institutions in this list with Bandhan Society coming in at number two. If it looks all too well for the future of microfinance, then it must be noted that presently, a microfinance bubble is feared in South India as most of the MFIs are located in this region. In fact, a repayment crisis in Southern Karnataka has significantly dented some MFI portfolios in the region.
Though microfinance was once being hailed by many economists as the single handed solution to the problem of poverty, there are many issues when you take a broader perspective. Firstly, microfinance is looking increasingly unprofitable in regions with low population density. This is because of the fixed costs associated with maintaining a regional branch. Here, it’s worth mentioning that the main reason why traditional banks don’t provide loans to the poor is because of the fixed costs associated with maintaining an account. The revenues from a loan and the associated fixed cost incurred by banks match at one point and banks refuse to lend where the revenues are below that point. Similar problems are faced by MFIs operating in regions with low population density.
Secondly, microfinance is necessary but not sufficient to solve the problems of the poor. Poor needs micro-insurance and money transfer facilities as well. And then, in some situations, private moneylenders appear as a better option over the MFIs. The reason is that private moneylenders provide flexible repayment schedules and they almost never ask why the borrower needs that loan. On the other hand, MFI loans are mostly restricted to starting up small enterprises. So, people do shore up to moneylenders in spite of the fact that they charge considerably high interest rates.
So, though the future of microfinance looks bright, there are some issues that must be addressed along the way. However, if we can achieve a sustainable model for microfinance, then we will have a scheme through which the rich can alleviate poverty profitably. Combine that with other social policies like NREGA and what you get is growth for every section of the society.

Could Glass-Steagall Act have saved us from Recession?

Contributed By:
Kushal Masand, IIFT Batch of 2012

The economic recession from which we are still recovering from, has brought with it a number of questions. Some of these questions will remain unanswered,not because we don’t have enough statistical data to prove it, but it will be impossible to expect economists from around the world to agree upon a single reason.
Moreover, in today’s complex economic world, there is only one thing on which economist can agree upon, and that is, a number of reasons joined force together to bring the recession of this level seen only during Great Depression. Some of these factors are sub-prime mortgage crisis, over-complicated financial instruments, bubble in commodity prices and real estate, unbalanced economic trade, easy credit conditions, regulations not able to keep pace with financial innovation, increased importance of shadow banking. These are some of the many reasons which contributed in recession.
One of the factors which lead to the economic recession has been the havoc the investment banking business, seen by many as risky,on to the commercial banking business, seen as traditional and not risky. To an idea how the securities played an important role in the recession can be understood by the fact that how mortgages were converted into AAA ranked debt securities under names as collateral debt obligation (CDO), Mortgage based securities (MBS), assets bases securities (ABS). But when another fact is added to this scenario that these securities were created not only from the good quality mortgages but also consisted of poor quality securities. By converting the mortgages to securities the banks havee removed the risk from their balance sheets and at the same time have created more liquidity to give more sub-prime mortgages, thus further increasing the risks for the people buying these securities. This all went well till the real estate prices were increasing and once the bubble burst all these securities turned into toxic assets which had to be pruned at the cost of tax-payers money.
Now let us see what were the changes brought by the Banking Act of 1933 popularly known as the Glass-Steagall Act.
Glass-Steagall act was introduced in 1933 by Senator Carter Glass and Congressman Henry Steagall. This act came after the Great Crash of 1929, during which one of every 5 American banks failed. Many people thought that the market speculation created by banks as the cause of this crash. This act was created to separate the investment banking business of the traditional commercial banks. It prohibited bank sales of securities and created Federal Deposit Insurance Corporation (FDIC), which insures deposits which guarantees the safety of deposits in member banks. In the early 1900’s, many commercial banks created there investment banking arms which corporate stock issues. This continued till great crash of 1929, after which a number f banks failed and the people confidence in US financial structure was low. To restore the public confidence, the Glass-Steagall Act was enacted. It prohibited the banks from using their own assets to invest in various securities. In 1920’s , a number of commercial banks were found guilty of misusing the depositors fund to acquire and trade into stocks and bonds.
So what Glass-Steagall act did was to strengthen the Federal Reserve. Member banks of Federal Reserve have to report all investment transactions and loans. Also it was mandatory for banks belonging to federal reserve to join FDIC and in order to join FDIC the had to be in sound financial position. Thus in the hindsight the act brought Darwin’s law of “ Survival of the fittest “ in the financial world of US banks where only the strong banks were able to survive. Thus by 1934, the failures of banks stopped and many banks reopened after joining the FDIC.
Now let us see how the Glass-Steagall Act was repealed layer by layer. The first effort started when some brokerage firms began encroaching in the banks territory by offering accounts that pay interest and offer credit and debit cards. Then in 1986, the Federal Reserve, under the pressure from Wall Street and intense lobbying, reinterpreted the section 20 of the Glass-Stegall Act, which bars commercial banks from engaging in the security business. It decided that banks can have 5 percent of their gross revenues from investment banking business.
Then in 1987, the fed board hears a proposal from the Citicorp, J.P. Morgan and Bankers Trust to allow banks to underwrite several securities like MBS and commercial paper. In the same year the Fed allows Chase Manhattan to underwrite the commercial paper. And at the same time it indicated that it may increase the limit that investment banking business can contribute in the gross revenues of the banks to the order of 10 percent.
In 1989, the Fed board approves the application from a number of banks to deal not only in commercial paper and municipal securities but also in debt and equity based securities.



In 1996, the Federal Reserve Board, under the Chairmanship of Alex Greenspan, a former director of J.P. Morgan, comes out with the rule that the investment banking business can contribute a hefty 25% to the gross revenues of the banks. Without considering that any bank holding company can remain under stipulated 25% norm.
Finally on 22nd October 1999, after 12 attempts iin 25 years, Congress repealed the Glass-Steagll Effect. A number of reasons were given to repeal the act. Some of them were that the investors are more knowledgeable today, and the existence of the sophisticated agencies, and the fact that banks of other countries doesn’t have to work under any regulations of such kind.
Now we come to question, had the Glass-Steagall Act had not been repealed, could we have saved ourselves from the economic downturn we are suffering from?
Some people say that it is most obvious to reinstate the Act, and the fact if it had not been repealed, the we couldn’t have seen the banks engaging themselves in so much of business relating to securities and creating toxic assets not only for themselves but also for the investors worldwide. And we didn’t had to save the so-called “ too big to fail “ banks which cost taxpayers their dearer money and could have been used to strengthen the public system, during the turnmoil.
Others advocate that the shadow banking system i.e. is nonblank lenders like Bear Stearns, Lehman Brothers, Goldman Sachs and Morgan Stanley sits at the epicenter of this turnmoil and that the fact these resides outside thee jurisdiction of Glass-Steagall Act. Also that banks like Washington Mutual, which collapsed even without the investment banking arm.
Economist can support either of the cause, but it is hard to remember any big banks which have failed during the time period of the Glass-Steagall Act. So it is to be decided by the conscience of the bankers and the tougher regulations from the governments that the world doesn’t have to suffer from a recession of such scale.

Why Goldman Sachs made money & UBS lost during recession?

Contributed By: Shashank Kyatanavar
IIFT MBA (IB) 2010-12 Batch, Kolkata

The belief is investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system, hence consequently should be the first ones to go under. But big daddy of investment banking, Goldman Sachs, debunking this theory earned a handsome profit & gave bonus; a bonus which infact is the largest bonus payouts in the company’s 140 year history.
On other hand we have one the safest destination where wealthiest people park their money , the Swiss Bank and the largest among them, Union Bank of Swizerland(UBS) suffering huge loss, an amount that is more than the sum needed to rescue Greece! Let’s try to understand this which seem to turn logic on its head.
Starting with UBS, it has lost about SwFr60 billion since the start of the credit crunch, partly because it was one of those deepest into the subprime, but also because it has fallen foul in a big way of the most countries tax authorities, especially US, who discovered by various means that the bank had been encouraging its residents to bank with it and engage in schemes which would avoid tax. This eventually led to a punitive settlement the fallout of which has been too much for a lot of clients and effect that they have took their business elsewhere. As a result the net money outflow for the division known as “Wealth management and Swiss Bank” was Swfr 33 billion, the division known as Wealth Management Americas lost Swfr12 billion and the Global Asset Management division had an outflow of Swfr11 billion
Goldman Sachs on other hand has reduced its overall leverage from a year ago with its fixed-income business, a less-risky arena than the illiquid derivatives and others products it loaded up on amid the credit bubble. It not only managed risk better, but it dramatically reduced is exposure to sub-prime mortgages. It also saw an opportunity in recession where it created a financial product that allowed one hedge fund, to bet against the value of housing. Also, the company has benefited because competitors like Lehman Brothers went bankrupt.
So is Goldman Sachs merely being punished for being a better bank than its peers? The answer is probably yes. And the reason for Goldman's profits - the source of the bonuses - are not from lending but from trading, using its own capital to buy stocks and bonds, and selling stocks and bonds short. And the reason Goldman Sachs thrived is just that it learned to play better than anyone else.

Collapse Of Lehman Brothers | Story of brainy bankers in ideal market...

Harsimran Singh Sahni
Indian Institute of Foreign Trade
Kolkata Campus

Email- harsimransahni@gmail.com

The Collapse of Lehman Brothers


This was an economic 9/11!!

On September 15, 2008, Lehman Brothers filed for bankruptcy with $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, surpassed Enron and WorldCom, which induced the financial crisis that swept through global financial markets in 2008.
The History of Lehman Brothers

Lehman Brothers, the largest investment bank, roots are traced back to a small general store founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844. In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers which was primarily involved in Investment Banking, equity and fixed income sales, research and trading. It was primary dealer in US Treasury securities market.
It has emerged stronger as it faced the plenty of challenges but it survived all- the railroad bankruptcies of 1800, the Great Depression of 1930s, Two World Wars. Despite its ability to survive the major challenges, it filed for the largest bankruptcy in US history on 15 September 2008.

Build-up to the Collapse

Mathematical Model for Money Making

From about 2001 and onwards, a credit bubble started to appear in the United States. Huge amount of capital moved into the country, in search of profit higher than the low rate of interest that existed at the time and at the same time, housing bubble was also in the making; and through the process of securitization the housing market was closely linked to the credit bubble in the U.S. financial system. The team of maths and physics PhDs showed, then CEO Dick Fuld, the calculations that how the bank will end up in profits if they invest in real markets and the next five years saw the bank borrowing billions of dollars to invest in housing market.
Lehman Brothers started giving insurance to the banks that have offered loans to customers and accepted that the chance of default on loans would be 5%. If 100 customers borrowing $1million have 5% assumed chance of default, given the interest rate @5%, the next year's $5 million would be worth 5/(5/100+1)=5/1.05=4.76 million now. So banks would have to pay minimum $4.76 million for insurance and to make money, Lehman Brothers would double the price to $9.5 million and expect to make $4.76 million out of each of these deals. And if more than ten of them default, the banks had to pay premium only for ten customers and the rest will be bear by Lehman Brothers. This type of deal is called Collateralised debt obligation contract in which the Lehman Brothers’ offering is senior tranche of CDO and one you are getting is junior tranche of CDO.
As it was unlikely to have more than ten borrowers defaulting, Lehman don’t have to pay anything and just pocketing the premium and it was considered as the safe investment as government deposits.

Pitfalls in Model

CDO is lot more risky than bank deposits, but Lehman Brothers didn’t realized them. The first source of error was that that they have assumed that each investor has 5% chance of default from historical data. There hasn't been a national drop of housing price since the great depression in the 1920s, so the chance that a borrower defaults was calculated on the basis of a good period when the housing prices surged. However, the housing market crashed in 2007 and to worsen this, 22% of these borrowers are sub-prime borrowers, those who had little income and had little hope of returning money which made lending quite risky.
The second source of error is that whether you make money from selling the CDO insurance for the bank depends on whether the borrowers return the money, which in turns depends on the economy. So if the economy goes down, you are a lot more likely to lose money. These two errors were sufficient to mask the risk in CDO.

Major cause of the Collapse- Subprime mortgage crisis
One novelty about housing bubble was that it involved the new group of economic actors: people who for the first time were able to buy house-subprime borrowers. In 2005 and 2006 Lehman was the largest producer of securities based on subprime mortgages.
The moment the market turned down, however, they would have to foreclose and securities based on this type of mortgage would register a loss. This is exactly what happened in August 2007 when the decline of US housing market started to register in major way in financial systems and major mortgage outfit went under and the amount of subprime mortgages was estimated at $2 trillion.

The indices came to play a crucial role in transforming a situation of economic loss in the housing market into a low level panic in the parts of financial system along with a lack of information about the location of the risks. However, it allowed investors to realize that the market was now lowering the price on securities based on subprime mortgages, they didn’t allowed the investors to figure out which securities were of low quality and which were not. The result was the fear about the hidden losses spread to all subprime mortgage-related bonds and CDO as well as to the institutions.
In 2007, due to the poor market conditions in mortgage space necessitated the substantial reduction in its resource and capacity and the firm closed its subprime lender, BNC Mortgage. As 2007 became 2008, during the months after the fall of Bear Stearns the general economic situation continued to worsen and value of many assets had fallen dramatically and the pressure shifted to another investment banks especially to Lehman. In 2nd fiscal quarter, Lehman reported losses of $2.8 billion and forced to sell $6 billion assets which further panic the investors, who feared that Lehman had quite a bit more of hidden losses.
Financial Market Fallout


The Lehman bankruptcy act as kind of detonator and set off the panic which ended up threatening not only US Financial system but also global financial system. Some of the institution owned Lehman bonds and were engaged in credit default swaps with Lehman which had direct effect of Lehman bankruptcy. But the indirect effects of Lehman bankruptcy were caused by the fear and rumours that now begin to circulate and were more dangerous than direct effects. This was the $613 billion bankruptcy, largest ever in US history. There were nearly eighty Lehman subsidiaries around the world that had close ties with US parent company which ensured that fallout of Lehman will immediately spread all over world.

Fig-1. Short Term and Long Term Trends of Global Economy

In Japan, the banks and insurance companies announced the losses $2.4 billion because of ties with Lehman. Similarly, Iceland’s financial institutions were very much hurt by spike in CDSs that followed Lehman’s fall. Fed and Treasury failed to realize that major actor Primary Fund, which held $785 million in Lehman bonds became worthless overnight which set off a run on money market. The existence of investments in Lehman bonds in one market firm made investors think that other money market firms might have Lehman bonds or hidden losses. The direct link to one actor, led to belief that all the actors in the market might have similar holdings having indirect effect. UBS AG suddenly lost $4 billion due to rumours whereas actual figure stood $300 million. (Fig-1)

The process of financial disintegration that was set off by Lehman accelerated during the fall of 2008. The LIBOR-OIS spread peaked in mid October until decision was announced to invest TARP money directly into US banks and the fear Index shot up as well. (Fig-2)

Fig-2. Fear Index (VIX) and LIBOR during the Financial Crisis, August 2007 to September, 2009

The investors in various markets feared that some of the assets had suddenly become worth much less than they had thought and the loss of confidence that comes when they realized that there are hidden losses among their assets was the collapse of confidence. The second type of loss of confidence is related to action that investors and institutions take when they realized they no longer trust the proxy signs in the economy, it represented withdrawal of confidence.

Both types of confidence were part of event after Lehman bankruptcy which involved the fall of A.I.G and sudden demand by Bernanke for $700 billion to handle the crisis. Bernanke felt that if A.I.G went bankrupt this might break financial system and a decision to invest $80 billion in A.I.G. While the decision by the Fed to back A.I.G may have eliminated the breakdown in financial system, it also led to some confusion that why the FED had let Lehman fail? This was an economic 9/11!!

Outward FDI Philosophy: INDIA vs China

Outward FDI Philosophy: INDIA vs China

By: Kumar Saurabh (2010-2012)

Outward Foreign Direct Investment (FDI) flows from developing countries especially from the large companies in China and India have of late generated significant international interest. As per the Boston Consulting Group (BCG) study, considering the top hundred companies from the developing world involved in outward FDI, more than sixty are from India and China. Predominantly, Foreign Direct Investments are made for acquiring assets outside the country. (Assets largely take the form of companies operating in developed and developing economies). A typical example is the acquisition of Corus (an English company) by Tata Steel, an Indian company. This is an outward FDI from India.



Traditionally, Indian companies have been into international acquisitions much longer than the Chinese companies and have steadily gained the tacit knowledge and intellect to deal with the complex management issues relating to managing international businesses. However, China in the last two decades has acquired several international assets with the help of its huge foreign currency reserves.

China and India's history and success of outward FDI

The outward FDI of the United States (US) for 2008 stood at $250 billion. Chinese, outward FDI during 2008 amounted close to $60 billion and that of India stood at $20 billion. Though the outward FDI of India and China are lower than the US, their growth has been significant. In recent years, the Chinese companies have become very aggressive; average overseas acquisition during the 1980 was around Rs. 4,500 crores per annum, equivalent of about half a billion US$, which climbed to an annual average of around Rs.12,000 crores during the 1990; Rs. 30,000 crores by 2004 and Rs.125,000 crores by the year 2007. In 2008 it amounted to Rs.200,000 crores.

In the last two years alone close to Rs.200,000 crores, or an equivalent of $40 billion, has been invested by Indian companies abroad; when we compare the same numbers with amount spent by Indian companies in domestic acquisitions, within India, it is less than Rs.50,000 crores, or one fourth the outward FDI figure. Over the last four years Tata Group alone has spent close to Rs.100,000 crores in various small sized and large global acquisitions. Other Indian groups like Aditya Birla, Essar and Bharti have all been very active in global acquisitions, as well. Companies like Jindal Steel and Godrej have also shown activity in term of overseas acquisition. Given the sheer size of such investments; outward FDI by India and China has grabbed the attention of the international community.

Differences in Underlying Philosophy

There is a fundamental difference in the underlying philosophy of the Chinese and the Indian companies with respect to outward FDI, and overseas acquisitions. When we say philosophy, we mean the objective for which the overseas acquisition is being pursued. The reason for such differences is attributed to the diverse political systems and the overall development strategies of the two countries, which is of late blurring.

Chinese Philosophy:

Large Chinese companies are run with the support from the government. There is strong interference of the Chinese government in the day-to-day operations and functioning of these companies. The Chinese government heavily influences the priority and rationing of the global investments by the Chinese companies and most of the outward FDI of China till 2004 has been towards energy security (the Chinese government wanted to secure its long term oil needs). Most Chinese state run oil companies have heavily invested in oil fields around the world, including in Africa and Russia. With foreign currency reserves in China close to US $2,000 billion, liquidity is abundant and is a major driver for the Chinese overseas acquisition; China's cumulative outward FDI is around US $150 billion. Comparatively, India's investment is in the range of US $70 to US $80 billion.
Till recently, China shied away from acquiring professionally run companies possessing strong brands, which has remained a forte of Indian acquisitions. Lack of international experiences and management talent and cultural and language barriers are being cited as reasons why Chinese companies have not been confident to manage geographically diversified operations, away from mainland China. If we analyze the key competencies of Chinese companies, it is their ability to manufacture low cost products for the developed world using their large-scale supply of semi skilled and cheap labor. China has been unable to put to use this key competence in their global acquisitions. Due to these shortcomings China has been unable to add value to its overseas acquisition of professionally managed global brands.
Chinese companies have failed in their acquisition attempts and inappropriately managed their global acquisitions; for example, failure by Chinalco to acquire the Australian mining company Rio Tinto and their failure in executing the North Rail Project in Philippines. But things have started to improve; and one can see a spurt of investments by Chinese companies in acquisition of well-run professional companies abroad. Although few, these include Lenovo's acquisition of IBM's 'think' personal computer business and Nanjing's acquisition of the British car maker MG Rover. Others include China's Bluestar acquisition of Belgium's Adisseo brand.
The sectoral investments too are getting diversified from the traditional energy related investments, with investments flowing into information technology, manufacturing, consumer durables, mining, internet, green technologies, agriculture and fisheries. Such a paradigm shift in the outward FDI philosophy is likely to position China in a competing stance with Indian corporates for attractive overseas assets, in the future.
Off late not only China, but other high growth developing economies like Brazil and South Africa too has shown significant level of outward FDI. These countries, together with India and China are controlling around 15 percent of the global Gross Domestic Product (GDP)

Indian Philosophy:

The outward FDI philosophy of India, contrarily, rests on very different fundamentals. Governmental interference in functioning of Indian corporate sector, for example is virtually non-existent. A large pool of Indian professionals having experience with multinationals and global corporations abroad, have over the last few years moved back to India due to its economic prosperity. They have been able to relate and deal with global corporations and understand management practices; and as a result many large and professionally run Indian companies have been successful in acquiring global and multinational companies.
Performing stock markets, good flow of foreign investments, a strong rupee, easy access to and availability of funds, both domestic and foreign currency, are resulting in fundamentally strong economic conditions in India. This gives an impetus to move forward with more outward FDI deals. Consistent and reasonably good corporate results have also left significant liquid cash, which is also a key driver for increased outward FDI. Further, the global economic crisis has provided attractive investment opportunities for the Indian companies; as a result India's global acquisitions have been much greater than their domestic acquisitions. In line with the Chinese outward FDI model, state owned Indian companies like Coal India, Oil and Natural Gas Corporation and Indian Oil Corporation have also created significant levels of outward FDI in securing energy assets. These companies are expected to pursue this more aggressively in the near future.
Indian companies have reached a stage of maturity in their management style and strategic planning for their operations. To that extent Indian acquisitions abroad have been founded on a strong fundamental synergy seeking behavior with their global acquisition targets. For example acquisition of Corus by Tata and Novelis by Hindalco are not knee jerk reactions; they have been well thought out acquisitions keeping in mind the strategic synergies that will arise.
Talking about Tata Steel's acquisition of Corus, Tata Steel had the worst productivity record during the 1990. In order to improve its competitiveness, it injected new technologies spending billions of dollars; and by the end of the 1990. Tata Steel became the world's most efficient steel maker. The company evolved a strategy to acquire global steel maker Corus, producing high value added steel having a capacity of around 20 million tonnes. Through this acquisition, Tata Steel not only enhanced its overnight steel making capacity multifold, but also secured sophisticated manufacturing technology, access to high value Western customers and achieved lower input costs. This is what we call strategic fit! On similar lines Tata Steel also acquired companies in other attractive markets like Singapore-based NatSteel and Millennium Steel in Thailand. The synergies proposed in this acquisition were very strategic and well thought out. The management expertise of the Tata Senior management and its advisors helped the company successfully conclude this acquisition.
A second example in this category is the acquisition of Novelis by Hindalco. What was the strategic fit in this acquisition? Hindalco being primarily an 'upstream' manufacturer of raw aluminum boasted of higher profitability in comparison to other aluminum manufacturers, but volatile sales price often pulled down its overall profitability. Hindalco wanted to become vertically integrated by getting into value added aluminum products in the form of sheets and foils, (known as 'downstream products'), primarily to stabilize its overall profitability. Profitability of the 'downstream' business is lower than 'upstream,' but is less volatile and also provides access to high value added customers, sophisticated manufacturing processes and access to technologies. Acquisition of Novelis provided this strategic fit to Hindalco. This is hailed as one of the most successful acquisitions in the Indian history.
Hence we can say that Indian companies have good strategies, founded on solid planned rationale; combined with effective managerial skills in successfully acquiring large global brands. Cultural and language compatibility has also helped the Indian acquisitions to be successful, especially in the task of post acquisition integration. The Chinese companies having failed in their acquisition attempts due to lack of the above knowledge, have pulled up their socks and have started to acquire professionally run Western companies and are high on the learning curve. Over time the philosophies of both the countries are likely to converge and pose stiff competition to each other and to the others in a growing global market.

Kumar Saurabh
2010-2012 Batch
IIFT, Kolkata

Indian Institute of Foreign Trade, Kolkata

Fintoon of the day !!

ARC FINANCIAL WORKSHOP ON VALUATION TECHNIQUES

We were privileged to have a 2-day workshop on June 26^th and 27^th with ARC Financial Services Ltd., a one stop financial services firm designed to enable its clients to improve the effectiveness of their decision-making and meet their desired profitability and growth objectives. ‘Team ARC’ brings together a group of professionals with rich experience in Investment Banking (IPOs, PE, VS, M&As), Financial Research, Strategic Consulting, Corporate Finance and Investor Relation Services. Two of the lead faculty in ARC Academia – the India office of Wall St. Training, a pioneer financial training firm – came forward to share their rich insights with us. Our workshop was taken by Tapan Jindal, a Chartered Accountant and a Bachelors in Commerce from Panjab University, who has rich experience in Investment Banking, Equity Research, Corporate Finance, IPO Consulting, Content Management and Investors Relation Services and co-founded ARC Financial Services in early 2008 after previously being with Fidelity Investments and Himanshu Jain, a qualified Chartered Accountant and Bachelors in Commerce from Panjab University, who co-Founded ARC Financial Services after working with McKinsey & Co. and brings with him exquisite experience in Strategic & Financial Research, Consulting, Insurance & Corporate Finance.

In this workshop, we learned about the techniques employed for valuation of a company. “What is the business worth?” Although a simple question, determining the value of any business in today’s economy requires a clear understanding of financial analysis as well as sound judgment from market and industry experience. Himanshu and Tapan told us that the answer can differ among everyone who does the valuation and depends on several factors such as one’s assumptions regarding the growth and profitability prospects of the business, one’s assessment of future market conditions, one’s appetite for assuming risk (or discount rate on expected future cash flows) and what unique synergies may be brought to the business post-transaction. Thus, the purpose of this workshop was to provide an overview of the basic valuation techniques used by financial analysts.

Basic Valuation Methodologies

For determining value, we learned that there are several basic analytical tools that are commonly used by financial analysts. These methods have been developed over several years of research and refinement and are based on financial theory and market reality. However, Himanshu and Tapan remined us that these tools are just that – tools – and should not be viewed as final judgment, but rather, as a starting point to determining value. The techniques we became aware of are:

1. Relative Valuation – This is the one of the most frequently used methods, which compares a stock's valuation with those of other stocks or with the company's own historical valuations. Relative valuation is a simple way to unearth low-priced companies with strong fundamentals. As such, investors use comparative multiples like price-earnings ratio (P/E), enterprise multiple (EV/EBITDA) and price-to-book ratio all the time to assess the relative worth and performance of companies and to identify buy and sell opportunities.

2. DCF Valuation - Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

3. Deal Comps or Analysis of Selected Acquisitions (for M&A): It implies values based on multiples and premia of acquired private and public companies and is very relevant in absence of public traded competitors.

We began from the fundamentals and built upon them by applying the theoretical models in valuation of Idea Cellular Ltd., which gave us a hands-on experience in applying the concepts in a real-life situation. This workshop was an enriching experience for all of us. We are extremely grateful to the college and to Finance Club for having been given the opportunity to learn from the experts and we look forward to more of such elevating workshops.

Post- Budget Panel Discussion held at IIFT Kolkata

A Marketable Budget!

2^nd March 2010- The Kolkata wing of ‘Cash-O-Nova’, the Finance club at IIFT, organized a panel discussion on Union Budget 2010-11. The distinguished panel comprised of Dr. Ajitava RayChaudhari, former Head of Economics Department at Jadhavpur University, Mr. Gopal Aggarwal, Indirect Tax Consultant, PricewaterhouseCoopers and Mr. Chetan Panchamia, Head, Equity Research Division, Eastern Financial Ltd. The discussion was moderated by Dr. Ranajay Bhattacharya, an Economics graduate and Fulbright scholar and also a popular professor at IIFT.

Dr. Bhattacharya stated that like every year the current budget too reflected the tussle between economics and politics. He set the tone by stating that this budget was “less popular” than the previous one. However this view was opposed by Dr. RayChaudhary who stated the dual problem of growth and inflation that India faces and said that only innovative budgets would be the way out. He explained how strong social programmes and the rise of the Indian middle class had helped fuel demand but due to poor monsoons we had short supply. This was causing the inflation and he thought only long term measure such as projects under Bharat Nirman like building roads and in general agriculture infrastructure would be the way out. He stressed that budget being basically a one year plan could not cure the problem of inflation; rather what it could do is set the road map for the future. He also emphasized the need to remove the subsidies unless it was absolutely ensured that it benefitted the intended persons. He welcomed the idea of Unique Identification number (UID) programme as a solution to this problem. He did criticize the hike in indirect taxes as this would hit the poorer people more than the middle class and rich.

Mr. Aggarwal voiced a similar opinion on the increase in indirect tax. He reiterated that while the change in slabs made the budget a good one for the middle and high income families, the poor were not incentivized enough. However, he lauded the fact that the honourable finance minister had set a specific date (April 2011) for the Goods and Services Tax (GST). He saw this as a step which will remove the cascading effect of the various excise tax, customs tax etc. He also spotted a trend of a fall in the excise tax and increase in service tax. He said that this was an indicator that India was slowly but steadily moving towards service taxes. He rated the budget a modest 7 on a scale of 10.

Stock market’s reaction is an important indicator of the marketability of a budget and according to Mr. Panchamia the budget was a very marketable one. It not only addressed the question of fiscal consolidation but also stated that the aim was to get the fiscal deficit down to 5.5% of GDP. This was in fact what the market was looking forward to hear as this would mean a better rating from credit agencies, thereby ensuring more inflow of FII. However he did mention that the oil subsidy had caused the debt market to give thumbs down to the budget. He was of the view that markets would be bullish as long as we avoided global pitfalls.

We also witnessed a very good discussion at the end of the session with the floor been thrown open to the students. Prof. RayChaudhari pacified the concerns raised by the students regarding overheating of economy by emphasizing on the importance of technological development. He favoured more focus on developing infrastructure over doling out subsidies. Mr. Chetan was optimistic regarding the disinvestment of the PSUs and Mr. Aggarwal felt that there was a high probability of IT tax cuts being extended by the turn of the year. The session was closed on a positive note with the speakers reasserting that there were definite benefits from this budget such as the bringing of the GST. The final assessment termed it a budget on expected lines and definitely not a path breaking one.

By: Sayani Ghosh

MBA(IB)

2009-11, IIFT

Union Budget 2010- Some Highlights

Our honourable Finance Minister Dr.Pranab Mukherjee announced the union budget on 26^th February, 2010. The budget has been termed as disappointing, consolidating, relief oriented and good marketing budget by different people. But I would like to term it as a moderately positive budget. There are some pros and cons for everyone in the budget. Let’s take a look at the objectives behind this year’s budget-

1. To maintain a growth rate of around 8% per year.

2. To reduce the fiscal deficit of the country.

3. To have an inclusive development.

4. Encouraging disinvestment in PSU’s to the tune of Rs. 25000 crore.

5. To ensure good allocation of money in building of infrastructure.

6. To give relief to export sector as well as for agriculture.

7. To reduce the rising Inflation rate.

The budget aimed at achieving all these objectives but sadly, seldom does it happen that we achieve all that we wish. The key announcements that were made in this year’s budget were-

· Changes in the tax slab- A step towards Direct Tax Code

2010-11			2009-10
Income		Tax	Income	Tax
0-160000		Nil	0-160000	Nil
160000-500000		10%	160000-300000	10%
500000-800000		20%	300000-500000	20%
8,00,000 and Above	30%		5,00,000 and above	30%

· Increase in Minimum Alternate Tax from 15% to 18% of book profits.

· Current surcharge of 10 per cent on domestic companies reduced to 7.5 per cent.

· Rate reduction in Central Excise duties to be rolled back

· Standard rate on all non-petroleum products enhanced from 8 per cent to 10 per cent

· Helping growth in agriculture by helping in increasing agricultural production.

· Providing credit support to farmers.

· Providing around 1,73,000 crore for the development of Infrastructure.

· Rs 1,900 crore allocated to the Unique Identification Authority of India (UIDAI)

for 2010-11

The budget was basically aimed at benefitting the common man and as expected did not offer much to corporate India. Some rates like excise duty have been increased keeping in view the government’s plan to implement GST from next year. Similarly, the slabs for tax have been expanded keeping in mind the Direct Tax Code expected to be implemented from next year.

All in all, the budget focused on consolidation and I am hopeful that Indian economy will grow at a good pace this year too and the announcements made in the budget will only help achieve our dream of 9% growth each year.

Contributed By-

Arun Singhal

Coordinator

Cashonova, Finance Club

Indian Institute Of Foreign Trade