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ndia finds herself in a rapidly changing economic scenario today. along with the traditional and necessary disciplines. There is a growing need to have the dissemination of this information from the restricted forums where it is available right now and empower the youth and students to participate in these discussions and increase their own knowledge and awareness. and policies implemented in the East affect the global business stratrequires managers to have a working knowledge of various issues. Indian Institute of Management. more competitive and unpredictable than ever before. Arthaarth is the latest initiative by Finomina – the Finance Club of IIMU.AR T H A AR T H I SS U E I Page 2 From the Director’s Desk. rich in ideas to becoming opinionated. knowing how they affect each other and the various industries and services that depend on them. egies of corporations in the West. I hope it becomes a catalyst in this process of transformation. We have achieved such high levels of globalization that decisions made in the West influence the way business is done in the East. It is imperative that future managers get to know of the current trends in the industry and how the various macro-economic and micro-economic factors interact to affect the way business is done all over the world. Wishing them the best in all their future endeavors. Udaipur has been able to put in place. This dynamic environment Prof Janat Shah IIM Udaipur INDIAN INSTITUTE OF MANAGEMENT .UDAIPUR FINOMINA . The general business landscape is more complex. knowledgeable action leaders capable of steering the organizations they work with and the society as a whole towards success. subjects and issues that are most relevant to the current times and that will help shape future trends. which aims at easing the transformation from being thought leaders.
Aditya Raghunath. Talking about regulations. The financial climate world over is opments the world has experienced due to these uncertainties and how these have exerted serious implications in the world of business and economy. Aman Agarwal MoneyRatnam: Vivek Batra & Vivek Pandey Logophile: Rahul Agarwal & Ratika Mittal Back Cover Design: Ajith Pancily & Vivek Pandey FINOMINA ncertainty. is expected to make desirable impact on the market economy. effectively managing fiscal deficit and removing a slew of ambiguities of GAAR and other restrictions. As growth predictions go unbound. Rahul Agarwal. neither a stable ground. reverberating across other parts of the world as well. INDIAN INSTITUTE OF MANAGEMENT . The role of Government in orienting its fiscal policies. Editorial Team: Abhinandan Ghosh & Manish Jain Front Cover Design: Prateek Shukla Magazine Layout and Design: Ajith Pancily & Vivek Pandey Printing & Publishing: Aditya Arora. This is essential to safeguard the colossal amount of public funds that are subjected to clever manipulations by unscrupulous elements. we try to look back at what major devel- lenge of today’s business. But cruel are the financial worlds’ rules. Ajith Pancily Distribution: Aditya Raghunath Content Fiscal Integration in the Eurozone: Shiv Marwah & Vinay Tejasvi LI(E)BOR & MIBOR: Aditya Raghunath & Aman Agarwal Rupee’s Roller Coaster Ride: Ajith Pancily. Ratika Mittal FCCB Redemption Pressures: Varun Mediratta Face2Face with Dr. The budding managers may benefit themselves by being well aware of the effervescence and incertitude involved in all these business elements. All these play devastatingly on the health and stability of trade.AR T H A AR T H I SS U E I E D I T O R I AL 3 Page From the Editor’s Desk.UDAIPUR . Kunal Kochar. protecting their integrity Ceteris Paribus. It seems globalization is finally showing its true impact. uncertain demands and befuddling trends in stocks and bourses. Thus. The volatility of the Rupee-Dollar exchange rate saps off the energy from the business houses and entrepreneurs involved in the EXIM business from India. Khushboo Goyal. is the chalreplete with examples of volatile markets. It will be quite interesting to see how the RBI also could play its role in this direction. what happened in one part of the world caused all-out economic repercussions. such as easing on FDI restrictions in multi brand retail. the conversation capsule with Prof Sanjeevan Kapshe extensively covered various aspects of statutory and adhering to financial propriety. Kapshe : Aditya Arora. The Eurozone crisis and financial troubles in the US amply demonstrate the phenomenon of global interdependence and inter-connectedness in today’s complex world economy. Let me invite you to an invigorating read ahead as I sign off with these few wordsmechanisms required to ensure their optimum functioning. and how to effectively cope with it. In this maiden issue of Arthaarth. Nothing is sure. industry and business. stability is presumed. The exposé of LIBOR rigging in the United Kingdom brought out the urgent need to put in place effective monitoring and regulatory mechanisms in the banking system.
economic recession that has led to high unemployment rates.G L O B AL E C O NO M Y Page 4 AR T H A AR T H I SS U E I Fiscal Integration in the Eurozone tool to deal with the adverse macroeconomic conditions. credit ratings of France. To adjust unemployspending which further aggravated the already dismal fiscal deficit condition. step in the right direction and in its latest assessment integration and proposed the formation of a fiscal Why do they need a fiscal union? At present. the countries cannot use monetary policy as a INDIAN INSTITUTE OF MANAGEMENT . This led to rising public debts in these countries and they could not even dezone follows a common currency. After a lot of deliberation over the appropriate course of action to be taken. spending cuts on welfare schemes and trade imbalance among the member states. Governments will have to obey and go by the rules put in place with regards to tax- and fiscal deficits. the European Central Bank (ECB) manages the monetary policy of the Eurozone. Italy and a few other Eurozone nations were downgraded by Standard & Poor’s. Recently. the government had to increase fiscal tion and unemployment rates. A regular review to judge the bankability of these nations will be carried out so as to decide the future flow of funds to these nations and to vary the size of the European rescue fund commensurately. he Eurozone’s troubles began in 2009 with the other countries in the EU exposing high debt levels debt crisis in Greece and have since spread to value their currency to boost exports as the EuroTo eliminate such institutional problems and prevent more members of the Eurozone from defaulting on their debts and to avoid another wave of instability in the European banking sector the establishment of the ESFS (European Financial Stability Facility) is a of the crisis. It would allow for economic support IMF can closely monitor the actions of the debt ridden governments. It makes all market with the principal aim of managing the inflation and unemployment levels in the Eurozone. This means that policies made for the EU are based on the average of these rates in its member countries and individual countries can only adjust their fiscal policy if they wish to tackle their inflament rates. the decisions regarding the money supply in the FINOMINA .UDAIPUR ation and expenditure and will need to make budget amendments in their constitutions to provide for this. the IMF has called for greater economic union to add stability to the monetary union. the IMF has proposed the formation of fiscal and banking unions in the Eurozone to bolster the already existing monetary union. Thus. What will the fiscal Union do? The fiscal union will create a common budget plan being provided conditionally where the ECB or the for nations.
Italy and Spain and faces the major risk of default by these banks. countries. as investments in Europe will result in lower profits on conversion to dollars. where each acts as a major source of foreign direct investment for the other goods and services. can directly have a negative impact on the US A slow growth for countries in the Eurozone will affect US exports to the Eurozone and the sales of US companies operating in European markets. and represents a major market for the export of Secondly.AR T H A AR T H I SS U E I G LO B AL E C O NO M Y 5 Page Finland. Governments may have budgetary constraints imposed and a change in tax collection laws may also not be easily accepted. the US and Eurozone GDP. Ireland and Portugal. Member states will give up control over their Impact of the Eurozone crisis on the US Firstly. With the Euro declining against the dollar the US might look at other markets for investment. In case of the establishment of a fiscal union. they faced stiff opposition to using the rescue them. These banks are closely related to US economies together account for 40% of the world’s When bailouts were initially announced in the form of assistance packages to Greece. Public support for these measures.UDAIPUR . Adoption of austerity measures in many countries were met with public outcry and France where the incumbent president Nicolas Sarcized his austerity measures. the reaction to spending cuts will be no different. The first direct impact will be on exports. Implications in member nations tions. The continuing crisis of the European Union economy. as was evident in the case of kozy was beaten by François Hollande who critied Greek parliament has requested for slackening the strict austerity measures imposed by the EU and the IMF. nations would become a point of contention while nations try to outdo themselves in acquiring greater spending power. and may in turn default on what they owe to the Finally. Also. like for transferring taxes collected to other countries may be negative. Even the newly elect- money of tax payers in well-off nations in order to political backlash. which would in turn impact the country’s GDP growth. the concern is that in the event of default these banks would not be able to absorb the losses US banks. The European banking system has a high level of exposure to countries like Greece. What does this mean? The Eurozone will have a centralized authority that will create a common budget plan for all the nanational budget and let the ECB control their spending. It remains to be seen if all members of the Eurozone would even agree to the division of monetary resources among member austerity measures fearing political upheavals. among fiscally strong countries like Germany and FINOMINA INDIAN INSTITUTE OF MANAGEMENT . The two economies have a bilateral relationship with each other. As of January 2012.
de- pending on what would benefit them the most. At the heart of it.S government spending for about 96 years!) Moreover.C O V E R ST O R Y Page 6 AR T H A AR T H I SS U E I LI(E)BOR and MIBOR rates with the motive of making substantial profits on their large portfolios linked to the LIBOR interest rate. The reasoning behind this was that if the bank reported higher borrowing costs. been the impact of the scam? Is it possible for such Bank of England has created waves in the firesult in an additional cash flow of 2 million pounds to the member banks. this is an honor system. ranging from commercial loans to rivatives. The motive and the action taken by Barclays to rig FINOMINA mortgages and money-market instruments like de- pay interest rates based on LIBOR. There are several speculated reasons for the rigging of LIBOR by Barclays and the16 member banks. The member banks had understated their INDIAN INSTITUTE OF MANAGEMENT . If the rate was manipulated on the higher end. the numbers provided by the organizations were not based on trade data but guesstimates. Estimates of how much money is tied to the LIBOR vary from $350 trillion to $800 trillion (From a scale perspective. LIBOR and India Since this was tied to humungous amounts of money. Some of the pertinent questions that are often asked are: Why did they do it and what has an event to occur in the Indian banking industry? LIBOR (London Inter-Bank Offer Rate) is an interest rate benchmark on which many financial instruments are pegged. which were stated in conjunction with others or on their own. As it turned out. RBI has imposed The second reason. $350 trillion would pay for all U. a one basis point change in LIBOR could potentially he LIBOR scandal involving Barclays and the nancial world. companies would be paying huge amounts as interest payments. it had major repercussions on consumers and financial markets worldwide. Barclays might have reported lower rates to the BBA (British Bankers’ Association) due to the fear of nationalization after the Lehman Brothers collapse which crept in.UDAIPUR . a more obvious one. which some banks lever- aged to artificially inflate or deflate their rates. Reasons for Rigging of the LIBOR Probably the foremost reason for the same could have been Barclays’ fear of nationalization. the government may doubt its ability to raise capital and nationalize it for systemic reasons. The member banks of BBA followed the polling method to arrive at the LIBOR rates wherein a set of banking partners provide the rates at which they trade or at one which they speculate. and depending on the clout they had to maintain a certain rate. is that of profit. Many Indian companies that rely on external loans in dollars or euro an upper ceiling of 200 basis points above the LIBOR on trade credits and other loans up to three years.
The verification of MIBOR through bootstrapping ensures that the noise in reporting rates by banks is nullified. Unlike a voice didn’t want themselves to be nationalized whereas pool of 31 banks and dealers commanding close to Second. If these benchmark rates are manipulated then it would make the whole financial industry vulnerable and prove to be a breeding ground for arbitrageurs.UDAIPUR . NSE goes a step ahead and involves drawing up of a sample of mean data verifies the polled rate through bootstrapping. UBI among the 75% of the overall bank deposits). NDS is an electronic trading platform operated by securities and other money market instruments. The mean of FINOMINA with outliers. the motivation to rig the MIBOR is missing. This is because of the fact that these rates (LIBOR and MIBOR) are set and traded upon in the market on the basis of trust. the argument that the value of derivatives linked to MIBOR is miniscule and therefore rigging the MIBOR does not matter is flawed. of MIBOR is miniscule when compared to that of LIdred trillions of dollars. MIBOR refers to the Mumbai Interbank Offered Rate set by Reuters and NSE every morning and is the local rate over which Overnight Indexed Swaps are based. country along with CCIL are considering a move based trading system. and more importantly. which makes sure that any attempt to rig the MIBOR via cartelization is taken care of. So the banks around the thing exceptional or could it be replicated for MIBOR. PNB. Barclays did so because they the main contributing banks to MIBOR in India are themselves nationalized (ex.AR T H A AR T H I SS U E I the LIBOR compels us to reflect whether this is some- C O V E R ST O R Y 7 Page the sample with lowest standard deviation is reported to be the MIBOR. This looks like a credible solution as all the deals in government securities are ex- towards determining the rates through the screen ecuted through Negotiated Dealing System (NDS) and any deal executed outside the NDS is supposed based system used for trading money market instruments in other countries. both the rates are calculated by taking a poll of the rate at which the banks can or are expected to termined by actual rates rather than the polled ones. First. there is a difference in the way LIBOR and MIBOR are calculated. which (pooled) and finding the efficiency of this mean value by computing the standard deviation. should one even worry about a rigged MIBOR? The answer is a definite “Yes” because it is the central benchmark rate for majority deals struck for Interest Rate Swaps. RBI which facilitates the exchange of government To conclude. the value of n (sample size) drawn each time is dynamic. To start with. SBI. However. it is an easier option to switch to system wherein the MIBOR would be deto be reported within 15 minutes. The volume of trade happening in India on the basis BOR denominated trade which runs into several hunSo. the rates in MIBOR may not be rigged because of two main reasons. raise capital overnight. The polled rates are then cleared of outliers by taking the 2nd and 3rd quartile of the rates into the consideration set and doing away mean of the rates in the mentioned quartiles and publishes it on daily basis. In spite of using all technical jugglery there are apprehensions in the market that the MIBOR could still be rigged. Moreover. FRA’s and Floating Rate Debentures in India. British Banks Association reports the INDIAN INSTITUTE OF MANAGEMENT .
an interesting point to note is that Gold & Silver represent 10. Its effects are everywhere.2% of GDP in 201112 with a trade deficit of 10% of GDP. RBI has taken steps such as tightening the norms for rupee forward contracts. However. If the conditions do not improve quickly then the WPI figures are headed north again which will bring the rupee under further pressure. the situation has worsened due to an unprecedented increase in global crude oil prices as well. the rupee depreciation can be attributed to a host of factors which can be broadly classified into internal and external factors. Economists talk about the J curve coming into play when imports will eventually become expensive and thus their demand INDIAN INSTITUTE OF MANAGEMENT . But. This has resulted in the drying up of dollar inflows into the country and reducing the demand for rupees.57 in the country– with people ranging from the Prime FINOMINA . Media has been criticizing the RBI for rupee has strengthened from its all-time low of over Rs. This fetish for Gold & Silver is unique to India and has created a serious problem for the RBI governor on the current account deficit front. the effect of oil prices and the inflow of FDI and FII in India. Consequently. If we talk in absolute terms. current & trade deficits and the RBI policies to something as uncertain as the effect of monsoons. Owing to the circumstances discussed above. a variety of factors have been discussed which have played an important role in determining the rupee movements.UDAIPUR will decrease. Although this has been the story for many years now. Crude oil represents 30. An area where the government can support the rupee is through the implementation of business friendly policies such as GST. the problem in India is that huge subsidies are given on petroleum products which have resulted in inelastic demand for crude oil. Government Policies Policy paralysis has been widely cited as a reason for rupee depreciation. which are aimed at reducing tax avoidance by introducing rules that will penalize investors wanting to route their money through tax havens have dissuaded foreign investors from investing in India. To start with. Implementation of GST is expected to boost the business environment in India and will help increase the level of foreign investments which in turn will support the rupee. the Indian current account deficit has reached 4. Hence. The GAAR. the government has just managed to take a few small steps like increasing the limit for foreign institutional investments in government securities and increasing import duty on Gold to support the plummeting rupee.1% of the import basket. External factors are those factors which are not directly under Indian control such as the Euro crisis. it makes sense to explore the reasons behind this volatility and try to project the future movements in the currency. Current Account and Trade Deficit Widening current account and trade deficits were the primary reason for the dramatic depreciation in the value of rupee. India is an oil-deficient country and subsequently. it will be difficult for the J curve to function as expected.from government policies. Internal factors are those factors which are intrinsically linked to the Indian economy. India ends up importing close to 80% of its crude oil consumption. the domestic demand for petro products has not been influenced much by the depreciation of rupee.5 billion dollars. On the other hand. Till now. raising interest rates on non-resident deposits and announcing relaxations in external commercial borrowings to support the rupee. Although the Indian to a dollar. every 10 dollar increase in the price of an oil barrel increases the Indian current account deficit by roughly $6.1% of the total Indian imports in dollar value. In the following sections.MACRO ECONOMICS Page 8 AR T H A AR T H I SS U E I upee depreciation seems to be the current buzzword Indian Rupee’s Roller-Coaster Ride Minister to the friendly neighborhood paanwala talking about it. The government has failed to ease FDI restrictions in multi brand retail. the bulging fiscal deficit.
In fact. Fiscal Deficit India’s huge fiscal deficit at 5. hence. the current account deficit will take care of itself and the rupee will stabilize. On the current account and trade deficit front. However. it might lead to a downgrade by rating agencies. currency depreciation has opened a treasure trove for India by making the exports extremely competitive. Therefore. Investors still believe in the Indian growth story and as a result India has managed to be the third largest recipient of FDI in the last year. In a nutshell. any economic issue with these regions adversely affects the Indian economy. The government has two ways to bridge the fiscal deficit: raise money using bonds or ask the RBI to print more rupees. the rupee is not expected to touch 60 in the next six months. worsening the current account deficit.AR T H A AR T H I SS U E I not using its Forex reserves in the open market but past experiences indicate that a central bank can’t offset the market trend using its reserves. Also. The rupee now in unchartered territory. the European Central Bank has been firm in its support to the Eurozone nations and has maintained that the European Union will stay. everything is not that bad. It is evident that both the methods will result in conditions which make the country unattractive for foreign investors. has the market momentum firmly against it. On the global economy front. Once the exports start growing and the import of non-essential goods is controlled. holding all factors under consideration. the sovereign crisis in Europe and the possibility of “Grexit” (Greek Exit) from the European Union have weakened the Euro substantially and a capital flight started happening towards the US dollar. it is equally unlikely that it appreciates to 50. Moreover. Furthermore. thus.5% which is by no means a bad performance compared to the developed countries. Global Economy Although external. and shall require strong policy support from the government. The latter method leads to an increase in money supply leading in an increase in inflation. some might wonder how this is connected to rupee depreciation. The change in the finance ministry and the flak that the government has received from around the world gives a sense that the situation will improve in the coming months. Now. the Indian government will find it difficult to control fiscal deficit given that 2012 will witness elections in Gujarat and Himachal Pradesh. the coalition politics is likely to impose more pressure on the government to take populist decisions and. Low growth rates in these markets have diminished the demand for Indian exports.UDAIPUR . the government is now trying its best to remove as many policy barriers as it can to attract more foreign investors.6% of the GDP has put a huge pressure on the government to reduce its spending on items such as petrol and fertilizer subsidies. Also. USD is being MACRO ECONOMICS 9 Page perceived as the ultimate safe haven by the investors. this factor plays a very important role in deciding the fate of a currency.9% of the exports) and Europe (19% of the exports) have always been a vital market for Indian exports. Future Outlook The situation looks quite gloomy after looking at all the factors that are playing a role in the fall of the Indian currency. This has also resulted in investors pulling out from Indian investments in favor of dollar denominated securities. The movement will be less volatile than it had been in the last six months and the equilibrium range of 53 to 56 is estimated to prevail. subsidies will continue. The former method leads to an increase in interest rates making business difficult in the country. the government has increased the outlay for public expenditure in some areas. if the debt to GDP ratio is out of control. The United States of America (11. Steps towards a fiscal union and collaborative political effort by the European leaders give a signal that the conditions will improve. But due to the populist measures taken by the government and the pressures of coalition politics. It is bound to fall short as in the case of the Bank of England in 1992. FINOMINA INDIAN INSTITUTE OF MANAGEMENT . However. it has been unable to reduce this spending. However. India is still growing at a rate of 6. The inflows have reduced this year but still they form a significant number in dollar terms.
issued by Indian corporates worth Rs. 2012 = 55. if the currency in which the FCCB is issued appreciates significantly against the issuer’s home currency. Therefore. the currency has taken a serious knock and has fallen to 56/$ (closing quote as of July 30th. 31.15% which represents an imOne of the biggest risks that companies verse movement in the currency market. i. Some of the big companies facing redemption pressures include Suzlon ($536 million).1% at the time of issuance respectively (source: Bloomberg). 22. GTL payment is guaranteed even if the option ends up Infrastructure ($321 million) and Sintex Industries ($291 million) (source: Bloomberg).e. For the investors. the rupee was at 40/$ at the time of issuance but since then. the INDIAN INSTITUTE OF MANAGEMENT . the cost of debt pact of close to 700 basis points on the back of ad- has gone up to 12% . it presents a unique opportunity to take benefit of an appreciation in the share price while the downside risk is limited since the coupon being out of the money. Adding to this.6% but now. will be 12% and 15% due to the FINOMINA sued by Jaiprakash Associated and Tata Steel with ..M I C R O E C O NO M I C S Page 10 AR T H A AR T H I SS U E I FCCB Redemption Pressures FCCB will be redeemed at the prevailing exchange rate. This is exactly what has happened with many cy other than the issuer’s home currency and the defined as a bond which is issued in a curren- foreign currency convertible bond (FCCB) is investor has an option to convert the bond into eqmined period of time. FCCB’s close to Rs. FCCB’s worth will be up for redemption in 2013. a close to 40% drop. at the time of maturity in 2013. 500 Cr.6111/$. the cost of debt for the issue was in the range of 5% .3% and 8. source: Bloomberg). of the Indian companies. the total outgo for the issuing company at the time of redemption will rise. it is attractive to uity at a predetermined price and after a predeterboth issuers as well as investors since the conversion option lowers the coupon rate for the issuer in addition to preventing immediate equity dilution. At the time of issuance. may not get converted since the current stock prices of the issuing companies are significantly below their conversion prices. the current market price of the share of the issuer company is lower than the predetermined conversion price. Of these. This is because of the fact that in case the conversion option expires worthless. According to Bloomberg.UDAIPUR can be further substantiated by looking at bonds isyield to maturity of 5. This point which raise capital via the FCCB route face is cur- rency risk. Therefore. JSW Steel ($392 million). 000 Cr. Jaiprakash Associates ($524 million). Many Indian companies since they were able to raise debt at an average rate of raised capital via the FCCB route during 2006-08 5% as against the domestic market cost of debt of close to 9%. 000 – 24.
As a result. Since the rupee depreciation. Wockhardt and Zenith debt will further increase the interest burden and ultimately impact profitability.. some defaults on FCCB repayments have already started. additional In the present scenario where the companies Due to the above mentioned factors. The most suitable alternative out of the above mentioned options in this case would be to enter into a fixed rate swap agreement with a multinational company which has a large exposure to rupee debt. raising capital via the M IC R O E C O NO M I C S 11 Page ability of these firms since the interest and repayment FCCB route which was considered to be a cheap and replace foreign debt by domestic debt will go up their bottom-lines going forward. the refinancing of FCCB’s by raising domestic debt is very difficult for some of the interest rates are also ruling high in addition to the the FCCB’s due to a substantial depreciation in the rupee could have been negated if the FCCB issuing companies had entered into a derivatives contract at the time of issuance in order to hedge against the currency risk. also known as a QIP (Qualified Institutional Placement) which will ensure that the fund raising via the equity route is done at a fair valuation and thus. This has had a huge impact on the profitcost has shot up. Entering nies can swap their interest payments as well as prinsmaller companies. it will cause a sharp equity dilution which will lead to further pressure on the share price of the company.UDAIPUR even default on the repayments. minimizing the equity dilution. There are various options available with the company such as entering into a futures or forward contract. According to Standard and Poor’s estimates. PyrInfotech defaulted on their FCCB redemptions recently. Zenith Infotech had defaulted on FCCB’s worth $33 million due in September 2011 and the stock fell close to 79% during the next three months as a result of the default (source: Bloomberg). internal accruals should be used to be the maximum extent possible for repayment of the outstanding FCCB’s.AR T H A AR T H I SS U E I rupee’s fall. substantially which will definitely have an effect on The steep increase in the redemption value of source of funds has turned out to be costlier than the cost of raising debt in the domestic market. into a fixed rate swap agreement where the compacipal repayment will be beneficial for both the companies since it fixes the exchange rate and avoids any kind of volatility. INDIAN INSTITUTE OF MANAGEMENT . the best way to do this would be to raise funds via the private placement route. almost half of the 48 companies whose FCCB’s are up for redemption in the current year might go for restructuring or might amid Saimira Theatre Ltd. have no option but to redeem their outstanding FCCB’s at whatever is the spot exchange rate. And if these companies try to revise the conversion price downwards. Also. buying a call option or entering into a swap agreement which will ensure that the company does not get hit on the currency front. The interest costs for the companies that decide to restructure their debt FINOMINA . Refinancing via the debt route does not make sense at this point of time because of high interest rates prevailing in the country and a slowing economy and thus.
Team Finomina had a freewheeling interview with Prof. executive. In the times to come. we need to understand the context in which we (in India) are working. and the role of judiciary – in this context – is to see that the laws are interpreted in the spirit they the normal situations. Jabalpur. (Electronics) in 1985. And. therefore we have ‘regulators’ as inde- pendent organizations. Prof. legislative.may need advisors to play the role. Sanjeevan Kapshe where he covered a wide range of issues relating to regulations in general and financial markets in India. and judicial powers – within a lim- . laws reflecting the changing needs of the society. among many other things. Sanjeevan Kapshe started his career as EDP Engineer with BHEL Bhopal. Sanjeevan Kapshe fter completing B. He joined SEBI on deputation from Indian Railways as Officer-on-Special-Duty (OSD) to play the role of Chief General Manager and Head of Derivatives and New Products Department. a regulatothe legislature. the laws through framing of suitable rules and regula- Recently. The Constitution of India talks about various ernance system established by the Constitution of things: citizens and their rights & duties. primary role of the executive is to implement these tions. typically. of course. What is the role of regulation bodies / regulators in India? A. While the primary role of the legislature is to enact INDIAN INSTITUTE OF MANAGEMENT . however there are situations were enacted. As such.UDAIPUR matter where every executive or bureaucrat – typically a generalist . the centre and state governments and their relationships. What we can associate from our course work is that we have a govIndia. Well.E. Vadodara for several years. working under same constitutional framework. we may see more regulators depending on the degree of specialization required to carry out certain tasks – something that we enFINOMINA ry body is created under a specific law enacted by tive. He joined Indian Railway Service of Signal Engineers (IRSSE). After his doctoral work in derivatives from IIM Bangalore. This system of working goes well in which require specialist knowledge of the subject Q. On return to Indian Railways – before dedicating himself to academics – he was Chief Signal and Telecommunication Engineer (Projects) on West Central Railway. before we could get to the answer of this question. judiciary and executive arms and the distribution of power amongst them. he was Professor (Management Studies) at Railway Staff College. 1986 Examination Batch and worked on large construction projects on (old) Central Railway. this law gives legislaited sphere to the regulators. This may not be either possible or efficient all the time.F A C E 2F A C E Page 12 AR T H A AR T H I SS U E I A Cuppa with Dr.
with this background knowledge. Q. For example – SEBI in securities markets. But there is a key difference which places SEBI in unique position – it has a mandate ‘develop’ markets in India apart from its usual regulatory function. one may say. Well. Someday. implemented. at each firm or company level there is plays the role of regulator’s representative in the company.UDAIPUR . observed. I come back to your question: In India. etc. In this role a regulator is like a ‘policeman’. in India. some situation may arise which was not foreseen when certain rules and regulations were framed. Finally. SEBI is an example of a ‘learning organization’ in our management jargon. to contribute towards healthy governance the companies have to make efforts to move towards ‘self-regulation’. what Q. To respond to such emergent situations regulators are given powers. How does SEBI respond to scams in Indian market? A. How can the companies contribute towards healthy governance and make the work easier for the regulators? A. Essentially. etc. called as: ‘principle-based regulation’ and ‘rule-based regulation’. guidance. supwe are saying is: a regulator is more like a ‘facilitator’ in this situation. RBI as central banker and banking or financial sector.AR T H A AR T H I SS U E I F A C E 2F A C E 13 Page countered in our course on organization theory. That is the best form of regulation – coming straight from the investors . There are associations or voluntary organizations like AMFI (for mutual funds). INDIAN INSTITUTE OF MANAGEMENT . before going to the specifics of your question. One thing we may recall from our course work on programming courses is ‘no software is can remain bug free forever’. once again. Further. to the market participants. punishments. a ‘referee’ – one may say… So. IRDA in insurance. which provide support as SROs (Self-Regulatory Organizations) to a particular sega role of ‘compliance officer’. by all the market participants on voluntary basis and industry associsense. in some the agreed upon principles comes up. then the regulator may provide suitable direction. play the role of ‘self-supervision’. If any major issue or point of departure from ations. in your words ‘scam’ free forever. And SEBI has used these powers effectively. etc. SEBI plays the same role like SEC in the United States of America? A. in some sense. Today. ment. who main. So. Likewise. Under the first approach – regulators spell out. no market can re- A contrasting scenario is in the ‘rule-based’ working: regulators prescribe the rules for possible everything in great detail and failure to comply with these rules could lead to suitable penalties. there are many regulators in India. the (stock) Exchanges play the role of front-line regulators. approaches to regulation. it is responsibility of each investor to be vigilant and keep the regulator informed about Q. Yes and No! It plays the same role of regulating securities market in India like SEC does in USA. TRAI for telecom sector. build consensus about certain ‘core’ principles which are to be followed. regulators play a critical role to sector specialists and carry out the mandate given to them. In India. So. among others. etc. port. we need to understand the two basic FINOMINA anomalous situations in the markets.
the comleading to higher expenses.6 % of the total revenue. something that did not please Money Unflustered by the predictions of the doomsayers. Infosys could not meet its brows had barely settled to their mode height. had increased its focus on System Integration and Consulting. has not been able to reap benefits from these more profpany had to increase the local hiring at onsite locations these concerns or is there something on the brighter In the quarter ending Jun 2012. Persisting slowdown in US and European markets. lowered the y-o-y guidance from 14 % for the sector.78% in 2011-12. the company itable avenues. Reluc- domestic market segment. a practice it championed even when it was not mandated by the law. “I must new clients.7 percent in the latest quarter. find company specifics”. 700-crore project aimed at transforming the financial operations of India Post. In wake of recent VISA issues. He knew the time had come to summon all the investor th To Infy or not to Infy? teenth time in the last minute. In the wake of been able to command a high profit margin. bellwether.20591 crores) meant that the comities. to 31. Money Ratnam started looking at the situation more objectively. against the NASSCOM guidance of 11giving guidance. which contribute 85. The company. Money Ratnam's eyeresults were announced. It was clear that the poster boy of the Indian IT industry was no longer the Ratnam. Infosys has not tance from the client side meant that discretionary spending by them had gone down. looked at transforming Infosys from a technology Continued in Page 15 FINOMINA . Money vices which contribute about 34 per cent to the comRatnam rubbed his eye and in a moment of true in- sight realized that these factors are common to all the IT companies. Deeply engrossed in thought. reducing the pricing by 3. look through.UDAIPUR ing. The company had shifted its focus from playing the role of an IT vendor to that of a strategic partner.0. “To Infy or to not to Infy”. pondering over spirits to answer the question echoing in his mind. One of these projects was a Rs.M O NE Y R AT N AM Page 14 AR T H A AR T H I SS U E I oney Ratnam scratched his head for the umpthe 34 article he had read about Infosys Limited. like Russell Crowe in “A beautiful Mind”. In the annual results announced in the quarter ending Mar ’12. Infosys had added 51 7280 crore. The operating leaner and focused on systems integration and consult- profit margins have shrunk from 34. after almost two decades. Being a relatively new entrant.56% in 2009-10 INDIAN INSTITUTE OF MANAGEMENT . Infosys had failed to meet their annual guidance. clearly indicating a renewed focus on the of cash at hand (Rs. he declared. Zero debt and huge amount pany could invest heavily in major reorganization activInfosys 3. in alignment with this shift. The Banking & Financial Serpany’s revenues declined by 1 per cent. Jun ’12 quarterly guidance. impacted the revenue. It had also stopped the practice of 8-10 % to 5%. “But should I be swayed by side as well?” Money Ratnam thought. with the aim of making the organization the challenging global environment. Currency fluctuations led to a loss of Rs.
acmeant adding more than 200 clients and 750 front end cording to Money Ratnam's understanding of the matters. the quantifiable premium value of B (8) 9. without any further delay.Debt package that is highly unlikely to be repaid (5) 19.100 shares.0 was Infosys's recent acquisition of a Money Ratnam could not ignore all these latest developments. A slight shake of head and he knew what he revenues from SAP Consulting.) service provider to a strategic partner for clients.Leading a suit againt major banks involved in the LIBOR scam (9) 14.AR T H A AR T H I SS U E I Across THE LOGOPHILE 15 Page 1."The world's local bank" (4) 15. 2437”.One of the five PSUs beung disinvested by GOI 13. With the time nearing for his analyses to come to fruition.Regional form of promissory note (5) Money Ratnam : To Infy or not to Infy? (Contd. Price Rs. "Average average price of his investment in Infosys's stock for the had to do. Reaffirming Money Ratnam’s belief in the efforts being taken towards Infosys 3. positioning it as one of the global leaders in SAP Consulting. Lodestone Holding AG.Required rate of return in a discounted cash flow analy4.Company asked to refund Rs. The market price of Infosys share has been hovering in the range of around Rs. The step. The figures on his computer screen. against Infy struck his eye.Traders who play for high stakes (4) Down 2. noted in Charles Dickens' 1844 novel Martin Chuzzlewitt (5) 5. Buffet's first investment in India (8) 16. opened his laptop and logged into his demat account.17400 crore to investors (6) 10.A cozenage of 1920. 2550 over leading global management consulting firm. for 330 million Swiss francs.A acquires B. basic trading unit for stock (8) (2 Words) 11. 2300 to Rs. Money Ratnam was optimistic about the impact of this structural change and was also hoping for similar inorganic growth steps. FINOMINA sync with the organic growth. he clicked on “buy 100 shares”.Average price for blue chip industrial companies on 12.Pricing model used for risky securities (acronym) (4) 17.Partnership between bank and insurance company (13) 18. in in systems integration and consulting.UDAIPUR .India's New Chief Economic Advisor (8) 7. consultants into Infosys's kitty and touching $1 billion in the past month.Company acquired by Infosys (9) NYSE(acronym) (4) (acronym) (4) 6. Money Ratnam.Canadian investment research firm creating waves in 12.W.Amortisation of oil field would be termed as (9) India (7) 8.Current president of ECB (11) (2 Words) sis (6) 3. This was the last 2 years. to fasten the growth plan INDIAN INSTITUTE OF MANAGEMENT .
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