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Niveshak From Editor's DesK

Volume II
ISSUE 4

T
May 2009
wo Upper Circuits in just a few minutes of trading at the BSE Sensex! Now
thats what you call a BULL RUN. It was shocking but we were desperate for
such shocks. We are hungry and foolish enough for a few more of such shocks, knowing the
Faculty Mentor fact that this would lead to correction in future. I have never been so confident about throw-
ing positive vibes about the Indian Economy over the last ten issues of Niveshak as I am
Prof. S. Sarkar
now. The stock market was buoyed not by any corporate financial results or GDP figures
on 18th May 2009, but by a favourable election result that saw the incumbent Congress
coming to power with more style and stability. The Indian public brutally punished the
Editor Left party for hindering the reforms and growth agenda for years, making clear that we
Biswadeep Parida desperately need economic growth and cannot tolerate any nonsense. After that, the market
has not only been pushed up by positive sentiments alone but by strong fundamentals as
well. The Central Statistical Organization also came up with revised data about the overall
performance of the Indian Economy, as well as some favourable future predictions that
Team Niveshak further pushed up sentiments and the market benchmark indices a bit. This proves the age
Amit Choudhary old fact that Bear and Bull run are an 80% play of sentiments and 20% play of economic
Nilesh Bhaiya fundamentals. And always remember one thing – The Stock market moves 3 months ahead
of the real economy. So we can expect recovery in the Indian Economy very soon, maybe
Sareet Mishra
today onwards.
Sarvesh Chowdhury
Sujal Kumar There has not been much of good news from the western markets although, there has
been some built-up for it. Large western banks wrote off almost all their toxic debts mak-
Tripurari Prasad ing way for profits in future quarters; expect some positive results for Q209. US iconic
automaker Chrysler filed for Bankruptcy protection and was fortunate enough to find out a
suitor in European auto behemoth Fiat. This could ensure it a smoother and quicker recov-
ery. White House and Capitol Hill think-tanks are also thinking on similar lines for reha-
bilitation of General Motors and Ford. Positive results are expected very soon from United
States and the Eurozone. Commodity prices are rising and Crude prices have touched USD
60 per barrel. This could be indicating a rise in demand. While the Eastern part of the
world may be blamed for not having pulled any miracles to electrify the markets, it must be
greatly appreciated for not throwing any disturbing news for the past few days that could
have further deepened the crisis. There was some great news of market performance only
from India, but we will hold on talks about Decoupling for some time.
Now, let me put my feet back on the ground and lets have a glimpse of the current is-
sue. As, we talk of recovery, we also take a look at the mother cause of all economic crisis the
modern world has seen till date. We will see if the basic premise on which modern money is
created and multiplied, without any asset backing, builds up a faulty system where inflation
and bankruptcies are just a part of the process. Our quest for moving away from traditional
financing and search for newer investment opportunities continues as this time we try to
acquaint you with the Art of Investing in Art. Hope you got a hint of that on the cover.
Under this quest, we will also try to find out if public investment in private equity or PIPE
as is popularly known would be a better financing and investing option.
We present to you an Investment B anking perspective of the Indian Ship building
Industry. This issue will try to foresee the future prospects and possible roadblocks for the
Small and Medium Enterprise sector of India. Who will be the superpower of the Asian
Century? The often debated topic – China or India or its Chindia has been taken up by
Niveshaks to give a perspective to this gripping encounter. As India prepares to recover,
All Images and artwork we will also see if Foreign Currency Convertible Bonds carry the seeds for another crisis in
are copyright of IIM Shil- the near future.
long Finance Club And now, back to the caveat-The market moves three months ahead of the real Econ-
omy.
So, HAPPY RECOVERY.
©Finance Club
-biswadeep Parida
Indian Institute
of Management, Shillong (Editor- Niveshak)
http://iims-niveshak.blogspot.com
Disclaimer: The views presented are the opinion/work of the individual
author and The Finance Club of IIM Shillong bears no responsibility whatsover.
ContentS

FinGyaan
PIPE Investments(4)

Line of fire
The design of financial system(6)

Perspective
IB in Indian Shipbuilding(9)

Cover Story
D’Arte ‘N’ Investment(11)

Article Of The Month
FCCBs the next ticking bomb(16)

Asian Superpowers
Tackling the Chindia Debate(18)

Opinion
Road Ahead for SME sector in India(20)

FinLounge
FinToon(10)
FinQ(22)
© The Finance Club, Indian Institute of Management, Shillong
FingyaaN

PIPE INVESTMENTS
I n a PIPE transaction, investors purchase equity private equity players are the one which play an active
linked securities (like publicly traded common role in PIPE transaction. Some of these are affiliated to
shares, preferred shares or convertible debentures) from major financial firms like Citi Group, Merill Lynch etc.
a publicly traded company. Depending on the structure, There are no investment criteria for any of these PIPE
the transaction can be carried out at premium to or at fund sponsors. However, most of them would have
a discount from the market price of company’s common their own criteria like targeting only a particular sector
stock. It is not mandatory to pre register the security (Health care, Energy, Technology & Bio-tech etc) or may
with Security Exchange Commission (S.E.C.). So, the secu- have geographical focus like Latin America, Africa or Chi-
rities have restricted liquidity and cannot be immediately na. Some may have specific criteria regarding the subject
resold in the public market. Now days, company usually companies.
agrees to register such securities with SEC as a part of the Historically, PIPES were sold to the sophisticated
PIPE deal. Hence, it provides near liquidity to investors market investors who focus both on fundamentals of the
and speed and predictability of the private placement company and also the technical aspect of public market
to the company. PIPEs are great for small- to medium- like trading volume, float and volatility. These investors
sized public companies, which have a hard time accessing do not have any strategic roles in the company and do
more traditional forms of equity financing. not occupy board positions. They are considered as out-
side investors apart from their right to resale the regis-
Deciding factors tration.
1. SPEED Many PIPE investors are focused on the liquidity of
the company’s stock, e.g. average daily trading volume.
PIPE financings are typically faster transactions to
While these PIPE investors tend to have a short-term
execute in comparison to a fully underwritten offering.
investment horizon, and are not typically long-term in-
2. COST
vestors, they must usually also be comfortable with the
The expenses related to PIPE are generally lower company’s business operations and potential for the fu-
than public offerings but higher than complete private ture. Other PIPE investors are more “traditional” private
placements. placement investors and will be looking for a longer term
3. PRICING investment of about two to three years, these investors’
This can vary considerably based on the stage of investment decision making process will rely on their
a company in its growth cycle. Generally, investors are own research and due diligence, which will usually fo-
willing to pay a premium for the liquidity of a PIPE deal. cus on an evaluation of the company’s current business
4. REGULATORY operations and the company’s prospects for the future.
Companies should consider the ongoing burden of  
public filing including resources and cost. Varities Of Pipes
Pipe Investors And Their Expectations PIPE investment are categorized on the basis of
Hedge funds, Venture capitalists and established their structure and terms of transaction, the securities
offered and the investors to which it is offered or tar-
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Niveshak Volume 2 Issue 4 May 2009
FingyaaN

geted. Typically, there are five types of PIPE investment: at a discount to market price.
• It tends to provide short term economic gain,
1. STANDARD PIPE: A GOOD PIPE which creates an incentive to sell the PIPE securities im-
mediately instead of holding it.
• The private placement of the securities is closed
prior to the filing of registration statement with S.E.C. • Due to heavy selling, the company’s stock price
fall.
• Resale registration process may take several
months to complete depending on whether or not the • Hence, the company requires issuing more secu-
S.E.C. opts to review the registration statement. rities under PIPE transaction.
• Due to this period of illiquidity / lock in, standard • Additional issuance further pushes the price
PIPE transaction is executed at a discount to the current downward and often causes a company to enter into
market price. “Death Spiral”.
• Today, management of a very few public compa-
nies are willing to commit to a “Death Spiral” PIPE, unless
2. PURE PIPE: A GOOD PIPE
they have desperate capital needs that can’t be achieved
• Investor agrees on a condition that a registration
otherwise.
statement for the resale of those securities is declared
In recent years management of many public com-
effective by the SEC immediately after the closing of the
panies have utilized PIPEs (“Private Investment in Pub-
private placement.
lic Equity”) as a way to obtain equity capital to finance
• Hence, the closing is delayed giving investor an
growth, acquisitions or for working capital. At the same
option to resell the securities purchased in PIPE deal.
time hundreds of investment funds have been estab-
• This is not into practice due to legal concerns & lished to invest in PIPEs. And, many investment banking
high transaction cost. firms are also specializing in placing PIPE transactions for
client companies.
3. TRADITIONAL PIPE: A GOOD PIPE
• Involves sale of common stock at a fixed price
(premium, discount or at market price).

By Arpit So lanki
• To offset the illiquidity of the common stock,
company might issue convertible preferred stocks, which
can be converted to common stock at a fixed conversion IIM Kozhikode
price.
• Preferred Stocks are generally priced at or near
the current market price of common stocks.

4. STRUCTURED PIPE: NOT-AS-GOOD PIPE
• Securities in transaction will be convertible bonds
or convertible preferred stocks.
• The conversion price is either fixed or variable,
which contains a re-set mechanism that automatically
adjusts the conversion price depending on the perfor-
mance of company’s common stock in the market.
• It protects the PIPE investor but exposes compa-
ny’s existing share holders to a significant risk of dilution.
• Hence, it requires share holder’s approval before
executing structured PIPE deal.

5. DEATH SPIRAL PIPE: BAD PIPE
• Conversion price of convertible securities is often
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© The Finance Club, Indian Institute of Management, Shillong
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ed ste N
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si S Fi e
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Is
dE

T he world economy is in the midst of its worst
crisis ever. Some of the most formidable names
of high street finance have been wiped off, most nota-
experiencing unprecedented volatility and TED rates have
been widening. Oil and other com¬modities have tum-
bled on fears of plummeting demand.
bly the glamorous Wall Street investment banks. Huge Bailouts after bailouts, rate cuts (read interest rate)
American and European financial behemoths have been after rate cuts there seem to be no way out of this for
forced to write off billions of dollars of toxic assets and some time. Central Banks and Governments across con-
seek shelter of government bailout plans. tinents have been billing overtime to counter this crisis.
The world of high finance had been turned upside Multiple liquidity windows have been opened in order
down. Before they went down, these extraordinary firms to flush out the menacing “Bear” from the bloodshed fi-
had dealt a body blow to many banks and hedge funds nancial markets. Governments have an¬nounced billions
which were highly leveraged on their securities, read of dollars of bail-out packages while Central Banks have
Collateralized Debt Obligations. There has been no good reduced Cash Reserves Ratio, Benchmark rates and Stat-
news from the world of finance since then. Stock markets utory Liquidity ratios. But No amount of money seems
from Tokyo to New York have hit rock-bottom. Inves- enough, neither in Wall Street, nor in Dalal Street, Asia or
tors with appetite for bottom-fishing are also hardly seen. the Euro¬zone. The much awaited “Bull” which had shied
Consumers and companies are feeling the pinch as sales away from the streets has tried to return on certain occa-
and profit figures have shrunk. Automobile and technol- sions. But it ran for cover the very next instant.
ogy giants have been pushed to the brink of bankruptcy There has been lots of brainstorming over this is-
throwing millions out of job. Most of the big corporate sue, thousands of articles and editorials have been writ-
houses of the world ended their FY08Q4 and FYO9Q1 in ten over the cause, effect and the way out of this Sub
the red zone. USA and most of the European countries Prime crisis. Some blame it on the greed of the Invest-
have been pushed into recession. Currencies have been ment banks while some blame it on the politicians who
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promised house for every American. Complex financial In- deposits in reserve (as cash and other highly liquid as-
struments like Collateralized Debt Obligations and Credit sets) and lend out the remainder. They are bound by the
Default Swaps, Borrow and spend habit of Americans, and obligation to redeem all these deposits immediately upon
negligence of credit rating agencies has also shared the demand. This practice is followed by all the commercial
blame of this crisis. banks of the world. By its very nature, the practice of
This is not the first time that world is facing such fractional reserve banking expands the money supply
a crisis. The Great Depression of 1929 had also assumed (cash + demand deposits) beyond what it would other-
dangerous proportions. Since then the US economy has wise be. Because of the prevalence of fractional reserve
seen recessions of 3-4 quarters once every 6-8 years and banking, the broad money supply of most countries will
so does the world. In 1952, it was a recession owing to the be a multiple larger than the amount of base money cre-
Korean War. There were recessions in the United States in ated by the central bank. That multiple is determined by
1958 and 1964. Then it was the Oil Shock in the 1975 which the level of reserve requirements imposed by financial
continued to pull down the world with it till 1979. There regulations. Apart from limiting the amount of money
was a minor recession during 1982 and in 1990-92 due to creation that occurs in the commercial banking system,
Iraq war. Then it was the currency crisis in South East it also ensures that banks have enough ready cash to
Asian countries in 1997 and the dotcom bubble burst in meet normal demand for withdrawals. Problems can
2000. Most of the times, a new crisis has exposed a new arise, however, when a large number of depositors seek
cause for it and every time economists have been suc- withdrawal of their deposits, which can cause a bank run
cessful in finding sufficient causes for failures. or, in extreme cases, a systemic crisis.
But the mother cause of all the economic miseries
lies gracefully at one place. The origin of all financial cri- Modern Money Mechanics
ses, bankruptcies and persistent inflation can be found in Money is created out of Debt. Yes, modern money is
Modern Money Mechanics - the official Federal Reserve not backed by any asset except a few pieces of well craft-
Document which governs the way money is created in a ed colourful papers, known to the world as US Treasury
fractional reserve system. Almost all the economies fol- Securities. To understand this, let us take the example of
low the same mechanism for money creation. The US the current situation where the US government requires
economy is the most powerful economy of the world and $100bn as a bailout package to rescue a bank. The Gov-
has proved time and again that it can take the world ernment takes some papers, paints them and write value
up and down with it at its own whims and fantasies. So of $100bn over it. The official seal of the United Stated
we take a deeper look at the Modern Money Mechanics of America is embossed over it to legalize. Thus $100bn
and try to answer the million dollar question – Is the of US treasury securities is created. The US Federal Re-
Financial System really crafted for inflation, failures and serve also takes up a similar exercise and print $100bn
bankruptcy? To answer this, let us first try to understand out of thin air. These papers are then exchanged which
the way money is created and circulated in a fractional are termed Open Market Operations. The US Government
reserve system. takes this money and promises to pay an interest. This is
where the currency is legalized and thus $100bn is creat-
How much money must be made available? ed and added to the US money supply. We can now safely
To this the Modern Money Mechanics answers “the assume that Money is created out of Debt as Government
modern bank must keep available, to make payment on bonds are inherently instruments of debt.
demand, a considerable amount of currency and funds
on deposit with the central bank. The bank must be pre- Money Multiplication
pared to convert deposit money into currency for those When the Government deposits this money in the
depositors who request currency. It must make remit- vault of a commercial bank, say Bank A, it becomes a
tance on checks written by depositors and presented for part of the bank’s reserves and it can freely lend is as per
payment by other banks (settle adverse clearings). Finally, the practices of the Fractional Reserve System. According
it must maintain legally required reserves, in the form of to the Fractional Reserve System, Bank A must maintain
vault cash and/or balances at its Federal Reserve Bank, a legally required reserve equal to 10% of its deposits
equal to a prescribed percentage of its deposits”. against its transaction accounts. This fraction is now
regulated by Basel norms for banks worldwide. So banks
Fractional Reserve Banking System can lend 9 times the money it has in its reserve. Banks
Fractional-reserve banking is the banking practice really do not pay out loans from the money they receive
in which commercial banks keep only a fraction of their as deposits. If they did so, no additional money would be
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© The Finance Club, Indian Institute of Management, Shillong
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created. When they make loans, they accept promissory Bankruptcies are normal?
notes in exchange of credits made to borrower’s transac- Let us now take a look at the same system from a
tion accounts. $90bn of fresh money is now created and different standpoint. Anyone who take loan from a bank,
lent because there is demand for such a loan and the government or individual, promises to pay the bank an
bank has $10bn to fulfil the reserve requirements. interest along with the principal on maturity of the loan.
The person who takes the $90bn loan deposits it But from our previous discussion we have found out the
in another commercial bank, say bank B. Now, $90bn is total amount of money created and in the supply in the
added to the reserves of this bank enabling it to lend system is equal to the total debt. This suggests that the
$81bn (90% of $90bn) upon demand for loan. total amount of money in circulation either created by
Again another person takes this $81bn dollar loan the central banks or expanded by the commercial banks
from Bank B and deposits in another commercial Bank, is the principal only and nowhere in the system is the
say Bank C. It will now maintain $8.1bn as its reserve re- interest amount created. The total amount of money
quirement and loan out the rest $72.9bn. owed back to the banks is more than the total amount of
This process is followed again and again till infinity money under circulation.
and in the process adds $900bn into the system. Thus Mathematically, defaults, bankruptcies and foreclo-
$900bn was created upon $100bn, i e for every single dol- sures are built in the system. The financial system is just
lar added to the bank’s reserve, 9 times the money was like the game of musical chair. When the music stops,
created out of nowhere. some unfortunate person is left out high and dry. Now
Here a million dollar question arises. What in the wealth of the individual is transferred to the bank. Thank
blue hell is giving value to this money if there has been god, the bank finally gets some asset backing.
no significant increase in demand for goods and services? The US Federal Reserve system has always been
The unfortunate answer is “This money steals its value regarded as the most influential institution to have gov-
from the money that already exists in the system”. This erned the world economy. The norms and practices that
implication of this is devastating. The existing money is it follows to control money supply & circulation have
devalued leading to Inflation. This is because the over- never been questioned. People have always viewed eco-
all demand for goods and services in the economy re- nomics and finance with confusion and boredom, and
mains essentially the same. Devaluation of Currency and the streams of complex jargons coupled with intimidat-
Inflation is just like a hidden tax and is same as cheating ing mathematical formulas quickly deters people from
people. the attempts to understand it. In this process, the absurd
I hope that a few facts are clear by now. The Federal practices of the central banks have assumed nearly re-
Reserve’s way of money creation leads to perpetual debt ligious proportions. But this is one of the most socially
and inflation. More the money there is in the system, paralysing structure humanity has ever unquestionably
more is the debt. If all the citizens in the country pay all endorsed. The most fundamental documents of the finan-
the debt including the government, there will be no mon- cial system carry the answers to all the miseries of the
ey in circulation. This fundamental policy which governs economic and financial system.
money creation and circulation is absurd and economi-

By Biswadeep Parida
cally self defeating.

IIM Shillong
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Niveshak Volume 2 Issue 4 May 2009
PerspectivE

Investment Banking Perspective of
Indian Shipbuilding
T he global shipbuilding industry is in the midst
of an unprecedented boom at present and is
estimated to be a USD 20 billion industry, presently domi-
capability in shipbuilding in the area of smaller vessels by
getting a sizeable market share(6%). However, there are
specific areas which have to be addressed if India has to
nated by Korea, Japan and China, which together account achieve the same in larger vessels.
for around 75 per cent of the world output. The Indian
shipbuilding industry has also witnessed healthy growth Future Trends
in the recent past. The annual turnover of the industry
has increased by 259 percent from 2002-2007. As per the The Indian Shipbuilding Industry has demonstrated
research carried out by i-maritime Consultancy the order- aspirations to acquire a 7.5 percent share in global ship-
book of the Indian shipyards, which was hovering around building by 2017, which is expected to have a size of above
Rs 1,500 crores in 2002, has reached a value close to Rs 500 mn DWT. Analysis suggest that this would require
13,700 crores by September 2006, with nine times increase Indian shipbuilders to invest close to INR 200 Bn in new
in just four years. yard capacity, which interestingly, is the current level of
cumulative investment declared by various entrants in
Key Drivers this sector. More importantly, Indian labor cost is grow-
ing at half the rate in China, which implies that India
Given the inherent labor intensive nature of the might continue to have an edge over China in the future.
shipbuilding industry, India has a natural advantage by This INR 200 bn investment in shipbuilding can trigger
virtue of its lower cost of labor and availability of skills. additional investment of INR 2200 bn in related sectors
In 2002, the Government of India introduced subsidy for such as steel and engineering goods manufacturing, IT /
both private and public and private shipyards further ITES and consumables. Likewise, shipbuilding is likely to
strengthening the low-cost arbitrage. The strong domes- generate revenue of INR 800 bn and overall revenue of
tic demand is yet another factor as with the recent eco- INR 3300 bn including associated sectors. This revenue
nomic boom power and steel and companies are looking could provide around INR 250 bn in taxes for the Govern-
to acquire ships to control transport from international ment. Furthermore, the job creation potential of
mines. The Government’s new initiatives in Coastal Ship-
Shipbuilding is more than other comparable sec-
ping and IWT, is likely to further boost demand for new
tors. In addition, a healthy shipbuilding industry is also
ships. Indian domestic industry can produce certain raw
likely to attract shiprepair business. Ship repair is even
materials for shipbuilding materials competitively like
more labor intensive than shipbuilding. India, with its
steel manufacturing and light engineering. These indus-
labor advantage and its ideal position on international
tries are currently not able to contribute due to lack of
trade route, is well placed to wrest this business from
scale in Indian Shipbuilding Industry. India enjoys a long
competitors, once the shipbuilding industry is developed.
coastline of more than 7,500 km long with several deep
This can create additional revenue and employment op-
water ports serving as good locations for setting up ship-
portunities with marginal increase in investment.
yards. Other drivers for shipbuilding industry in India
include the limited surplus capacity available with the
Companies present in the Industry
global shipbuilding yards and a booming capital market
which could provide easy financing for capital and op- Spurred by the recent growth, several companies
erational expenses of these yards. India has proved its are setting up shipbuilding capacities. Most existing
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© The Finance Club, Indian Institute of Management, Shillong
PerspectivE

yards, such as ABG and Bharati are expanding capacity the order of around 800 Bn) would provide huge invest-
and undertaking green-field expansion. Port companies, ment opportunities too. Such large revenues will result
notably Adani and SKIL are in different stages of devel- into huge tax amounts (INR 250 Bn) and thus provide
oping shipyards. Shipping lines are eyeing shipyards as business to many tax advisories primarily. Also the indus-
lateral expansion. Apeejay Shipping, Mercator Lines and try faces many a regulatory hurdle in the form of com-
Garware Offshore have entered the shipbuilding market plex set of levies and duties, Octroi, CST, VAT, excise and
in alliance with leading players. Finally, related heavy in- other such
dustry players are also planning to grab a share of this levies applicable to shipyards. Also the services tax-
market. This segment includes engineering giant L&T, and es @12.36 and the special financing requirements of the
steel makers Tata and JSW. The overall announced invest- shipbuilding industry open up many promising and re-
ment of the upcoming private shipyards exceeds INR 200 warding advisory opportunities in this sector.
billion, all coming online within the next 5-7 years. SCI
has placed order for 4 Aframax with Hyundai Shipyard,
Data Courtesy: KPMG Analysis, i-maritime consulting,
which is due for delivery in 2003. Great Eastern Shipping
Clarkson’s database (KPMG Research) and Shipyards Associa-
has placed order for 2 Aframax vessels, one each with
tion of India.
Samho Shipyard and Samsung Shipyard and is also plan-

By Kamal Melwani
ning to place an order for one more Aframax with a for-
eign shipyard. ABG Shipyards, one of the leading private
sector shipyards of the country, has recently executed an IMT Ghaziabad
order of newsprint carriers for Norway-based Lys Lines
and got another order of delivering five 10,000-dwt dry
cargo vessels from a German ship-owner.

Possible project financing
As mentioned above, a sizeable investment need of
around INR 200 Bn would provide ample project financ-
ing opportunities. Also, the revenues thus generated (of

FIN TOON
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Niveshak Volume 2 Issue 4 May 2009
Cover storY

De'Arte ‘N’ Investment
P erformance of traditional assets classes have
not been up the expectation in recent times.
This has forced the investors to look for various other op-
of human activities, creations, and modes of expression,
including music and literature. The meaning of art is ex-
plored in a branch of philosophy known as Aesthetics.
tions for getting better return on their investments. Huge
amount of growth has been observed in the alternative Footprints of the Art performance
investment opportunities like private equity, real estate, A lot of financial professionals and academics have
futures & hedge-funds. They have a very low correlation been focusing their attention in the analysis of the art
with equities. In addition to these traditional alternative market with the help of statistical tools. The given fig-
investments a number of funds have emerged which spe- ure is based on “Mei Moses Annual Art Index and the S
cialize in art. Art is being seen as another asset by the & P 500 Total Return Index”. It explains that the recent
hedge funds to be arbitraged and flipped. The recent vola- returns on art of 11.6 and 8.5% have far exceeded the re-
tility in stocks and bonds will sooner or later make the turns of the S & P 500 stock index of 6.1 and 8.4% respec-
wealthy investors to turn to the art market. tively. Further studies have shown that art can compete
Art can be defined as a process or product of de- with other asset classes for longer periods. However, the
liberately arranging elements in a way that appeals to art with a volatility of 21.3% from 1950 to 1999 is riskier
the senses or emotions. It encompasses a diverse range than the S & P 500 stock index of 16.1%. Page 11

© The Finance Club, Indian Institute of Management, Shillong
Cover storY

Risk And Return ing can essentially increase the prosperity of an owner in
just a few years. And it is not hard to choose such a piece
Investors now a days are now including Art in their of art, as it might seem at first.
portfolio in order to reduce the risk of overall portfolio. There a lot of questions and tribulations one will
For most levels of return, Art tends to reduce the risk of need to solve before making a decision on investing in
the entire portfolio. Lets say for example: Considering the Art.
expected return of 9%, the entire risk of the balanced
1. Why is there a great divergence in price for dis-
prtfolio is reduced from 8% excluding Art to about 6%
similar paintings?
includeing Art. This is primarily because, the returns on
art and shares are not correlated, hence, precariousness 2. How to buy artwork that will in due course rise
is reduced by having both Art and stocks in price?
For a certain level of expected return, investing in 3. How not to overpay for it?
art reduces the overall financial-risk in terms of instabil- 4. What factors manipulate the price tag of a work
ity. Thus, it is apt to invest in art as an asset allocation of art?
strategy. These and other questions are what one will have
to answer if he/she wants to change the interior of the
The Best Portfolio Mix house with a stylish modern painting and make a wise
investment for your hard earned capital. The difference
Both the art and other assets perform relatively dif-
in price of artworks can be astounding. For two almost
ferently at different phases of the business cycle. During
indistinguishable paintings in different places one will be
the detonation state of the financial system, investing in
asked to pay from $500 to $5000.
art performs the best. It is more defiant to inflation as
compared to other assets. If a comparison is made, the If a painting has to be procured from an art gallery,
return on art is always more than the return on bonds. A what are the factors that manipulate the price?
rational investor looking from a long term perspective of 1. Try to estimate the rent of the gallery space. The
10 years or more should have the most pertinent portfo- majority of galleries are located in premium locations.
lio mix that has at least 10% weightage on art. 2. Remuneration of employees of a gallery.
Hence, it is obvious that a cogent investor cannot 3. Cost of public relations such as publications in
circumvent the leeway of investing in art without proper media.
consideration. 4. Operating cost for posters, catalogues, invitations
to opening of exhibitions, etc.
What You Need
5. Financing different “noncommercial” art proj-
During an alarm in the financial market, all the in- ects, and many other things.
vestment opportunities just get increased in their worth. It is obvious that the investor has to overpay at
Besides traditional commodities such as gold and an- least twice as much of the worth if he/she buys a paint-
tiques, one can also consider some products of the mod- ing from a gallery. But if one wants to invest his/her
ern art as in investment for your money. money smart, buying from an exhibition or through an
Let’s mull over paintings. A properly chosen paint- art gallery makes sense. This is because Art Gallery will
Page 11

Niveshak Volume 2 Issue 4 May 2009
Cover storY

recommend the works of art that have already gone making a wise investment in a long-term store of value.
through groundwork assortment and tough antagonism. But taken together, a growing number of commentators
You know for sure it is a good investment. But if you are believe instead that a speculative bubble is now ripe for
buying a painting directly from an artist, all you can do is popping in the near future.
basically rely on your own taste and on some attributes
of professionalism and success that the art portrays of The Indian Art Market
the artist. What kind of attributes are they? While you
Art is an intrinsic part of Indian civilization. Its pres-
consider buying a painting from an artist, it is relevant
ence plays an important position in Indian history and
to take an interest in his or her art education. Certainly
Some of the trends in the current Indian art market sce-
there are some talented self-educated artists, but they are
nario are:
very rare.
»» Contemporary art grows as economies globalize:
There are some questions that can be asked to an
it is happening here and now.
artist.
»» Growth of GDP & and the economy as a whole.
1. Does he or she have any works in large muse-
ums? »» An immense increase in purchasing power of
HNI’s & NRI’s.
2. Is he or she a winner of any art competitions?
»» Art is regarded as a trend for safe haven emu-
3. Where was his or her recent exhibition?
lated by HNI’s & NRI’s.
4. Ask him/her to show you a catalog of exhibitions,
»» NRI’s looking for identity.
posters, booklets and other advertising material that he/
she has. »» Indian affluent looking for a new status symbol.
5. A good website is also a sign of professionalism. »» Availability of documentation and authenticity of
Certainly not all talented artists have their own websites works of art.
but most of them do. »» Awareness about artistic significance and pricing
6. And if you wish to get artwork, which in the near of paintings.
future will rise in price, you should choose among the »» Growth of services and expertise within the art
artists who have already reached certain level of success. world.
If an artist cooperates with large poster companies, it is a »» Market infrastructure is falling into place.
very good sign. For instance if a gallery offers you a paint- »» Growing secondary market has resulted in liquid-
ing for $5000, the artist will most likely give it to you for ity.
$3000. »» No secondary market for any other collectable
category.
Is the art bubble set to explode in future?
»» ‘Never sell culture’ resulting in limited supply.
If we have a look at the movement of art prices in »» Increasingly being viewed as a component of
last one year, we can see that there is a huge surge in the portfolio analysis and investment.
prices. Soaring interest in modern art pushed up prices in »» An increasing realization regarding the limited
the US by 40% last year, leaving them way past the highs supply situation for great works of art; hence they tend
set at the time of the last art boom in 1990. to command a high premium in price.
But why are prices rising so dramatically? According »» Investment in a new age market. Enter in early
to William Cash in “The Spectator”, it’s because the con- growth phase.
temporary art market is attracting attention from a new
»» Supply side has matured over 3 decades with es-
kind of wealthy, highly focused collector. The new breeds
tablished art history, artists and galleries.
of buyers see artworks primarily as a tradable asset – not
as something to be hung on a wall. Art fairs around the »» Buy side is consolidating after a break out.
world are swarming with slick young Wall Street and City »» Market is firmly in the sight of affluent Indian
types keen to recycle their fat earnings into fashionable Diaspora.
appreciating assets. One consequence of the rising prices »» Early mover scenario is still on offer.
and increasing interest has been a surge in so called Art »» Asset has a long term investment perspective.
Funds, essentially mutual funds for the art world, where »» Established artists have sustainable value.
instead of fund managers looking around for underval-
»» Younger artists have higher risk/higher return.
ued stocks to buy up, they look around for undervalued
artists. »» Best value as an investment in times of economic
depression.
But as Kathryn Cooper points out in “The Sunday
Times”, that where an asset class is being inflated by a
wall of speculative money, trouble is likely to follow.
Art & Tax Implications
Young collectors who have made their money in the fi- Beauty lies in the eye of the beholder. But lately,
nancial markets might each separately believe they are ‘Art’ has emerged as an alternative investment instru-
Page 11

© The Finance Club, Indian Institute of Management, Shillong
Cover storY

ment, even as the status tag continues to be attached a higher cost of purchasing / improving the capital asset
to art and artifacts. Perhaps one of the main causes for by indexing the original cost of acquisition / improve-
this increasing shift towards investments in art, are the ment. In such a situation, the gains arising there from
volatile stock markets and the low rates of returns on the would be chargeable to tax at the rate of twenty percent.
traditional means of investments.
However, as is always the case, can taxes be far be- Art Valuation
hind? The booming art market caught the Finance Minis- The contemporary art is much more about brand-
ter’s eye a few years ago and loopholes were duly plugged. ing rather than artistic merit. If any painting is owned by
Avid collector based in India used to invest in a Dennis Hopper or if the artist had committed suicide just
painting of the famous painter like M.F. Hussain. They after completing the painting all these can add millions
intended to hold the said investment for a period of five of value for an art
to ten years. However, as the Government vide its Union So how to determine the fair market value of an
Budget 2007, amended the Income Tax Act, 1961 (Act) to art piece, i.e. a dollar amount that a willing buyer pays
impose capital gains tax on sale of art work by a collector a willing seller under normal circumstances not in the
in works of art. Now Collectors are concerned regarding controlled environment of a gallery. For example, a paint-
the tax implications arising on sale of his art investment. ing priced at $3,000 in a gallery may have a fair market
Let us examine these implications. value of as little as several hundred dollars on the open
Collectors could before this amendment contend market-- hard to believe, but true! One other way to de-
that art work he/she owned constitutes personal effects termine the fair market value is to see the price that a
like wearing apparel (clothes) or furniture. On an occa- similar work of art sells at auction, assuming the auction
sional sale of an art work he could argue that it was a is reasonably well-publicized and that bidders familiar
capital receipt (and not income) and therefore not sub- with the art being auctioned are in attendance. At auc-
ject to tax under the Act. However, as mentioned above, tion, art is generally required to sell immediately, with
now the sale of art works falls under the purview of Act no fanfare or restrictions, to the highest bidders. Another
as ‘Income from capital gains’. The definition of capital good estimate of fair market value is the price that a
assets inter alia now includes personal effects such as retail gallery pays for a work of art before they mark it
drawings, paintings, sculptures and any work of art. up. This “dealer price” is considered to be the Wholesale
Profit on sale of capital asset is treated as capital Value of the art, and is generally considered a reasonable
gains. The capital gains could be segregated into ‘short indicator of a work of art’s fair market value
term capital gains’ or ‘long term capital gains’ based upon Sure, the data shows that art performs well as an
the period of holding of the capital asset. A capital asset asset over time. But for the wealthy people expected to
shall be treated as a ‘short term capital asset’ if it is held invest in these funds, much of the satisfaction of buying
for a period of not more than three years immediately (or investing) in art is being able to hang it on your wall
preceding the date of its transfer. and show it off. Someone who is willing to commit a few
The gains arising on sale of such an asset will be hundred thousand dollars to art would probably be more
treated as ‘short term capital gains’. However, if the capi- likely to go buy paintings at an famous art gallery than
tal asset is held for more than three years, the same shall invest in a private equity fund that buys paintings from
be treated as a ‘long term capital asset’ and the gains aris- that art gallery.
ing on such a sale will be classified as ‘long term capital
gains’.
For the purposes of computing the gains arising on By Saugat Das
the sale of capital assets, the cost of acquisition / improve-
IIM Shillong
ment of the asset and any expenses incurred on transfer
of the capital asset are reduced from the full value of
the sale consideration received. However, if collectors
acquires the art work as a gift or through inheritance,
the cost of acquisition of the art work for him would be
deemed to be the cost for which the previous owner of
the art work acquired it, as increased by the cost of any
improvement incurred or borne by the previous owner or
by collector himself, as the case may be.
Now, if the painting sold by collector qualifies as a
long term capital asset, he/she would be entitled to claim
Page 11

Niveshak Volume 2 Issue 4 May 2009
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v

Article of the montH

FCCBs the next
ticking bomb
U ntil a year ago, Foreign Currency Convertible Start of the Problem
Bonds (FCCB’s) are seemed to be cheapest During the period of last bullrun, with lot of Indian
source of funds for promoters, who felt they could have companies growing at a healthy pace, they have raised
best of both of the worlds- debt and equity. But the situ- large amount of sums using foreign funds to finance
ation has changed in a year and tide has been turned, growth and acquisition plans. With the market stock
many companies who have raised money through FCCB’s prices touching sky roof at that point of time, the bonds
are finding themselves in spot of bother and as the re- have been issued at the rate of stocks at that particular
demption dates are coming closer they are finding them- time. Now while maturity of the bonds, the investor has
selves on sitting on a ticking time bomb. Before we go two options, one is to convert those underlying principal
on to analysis of the crisis here is the brief introduction value of bonds into the stocks and the other is to re-
about the FCCB. deem those values into the cash value from the company
which has issued those bonds.
What is FCCB? The maturity of many FCCB’s will start from Octo-
It is a type of convertible bond issued in a currency ber 2009 and will peak in 2010-11. Most analysts say that
different than the issuer’s domestic currency. In other markets are unlikely to recover by that time. That leaves
words, the firm is being raised by the issuing company in the companies with two options, one is to revalue the
the form of foreign currency. A convertible bond is a mix debt at the current market price, a move that will dilute
between a debt and equity. As like normal bond it has the promoter holdings as will lead to more amount of
regular coupon and principal payments, and also gives equity shares for the same underlying price. The other
flexibility of converting the bond into stock. The origin of option is to redeem the bonds which will lead to increase
these convertible bonds can be traced back to railroads debt obligations of the lending firms. Now during the last
year, where the stock prices in India has taken bigger hit
It is beneficial for both the investors and the lender.
in the market, the redemption of these bonds is the most
For investors, it brings the advantage of capital protection
likely event. If that is so, then during the maturity this
like in other capital investment, as well as the chance to
will lead towards the large amount outflow of the cash
capitalize on an appreciation in the price of the com-
from the companies who are still fighting with the blues
pany’s shares through conversion. For the company, it is
of the recession.
a source of low-cost debt as coupon rates on the bond are
lower than the average lending rates due to the flexibility In some cases, the outstanding amount on account
provided to the investor. of FCCBs is higher than or around the current market
Page 11

Niveshak Volume 2 Issue 4 May 2009
Article of the montH

capitalisation of the companies concerned (see table). For being met:
instance, Hyderabad-based Subex Auzure raised $180 mil- a. Minimum discount of 25% of the book value of
lion (Rs 846 crore) in 2007 to finance the acquisition of bond.
Azure. The company’s market capitalisation as of Septem- b. Maximum buyback amount is limited to US $50
ber 30 was Rs 298 crore (Rs 2.98 billion). million of the redemption value per company.
Should the management decide to re-set the con- c. The money should be withdrawn from the inter-
version price and link it to the current market price, the nal accruals of the organization as certified by the statu-
company’s equity would be diluted. If it decides to repay ary auditor.
these bonds, the redemption amount with interest would
Although these steps are welcomed by the Indian
be around Rs 1,150 crore (Rs 11.5 billion). The company has
corporate, but issuers are the debt are still finding the
already raised debt of around Rs 1,050 crore (Rs 10.5 bil-
fallacy on the guidelines on the three major counts:
lion).
(a) Not many companies have the existing foreign
RBI to rescue resources to fund the buyback and raising fresh ECBs in
To help the companies to overcome the situation such conditions will be very difficult.
that some companies are in, RBI has allowed the buyback
(b) The cap of $50 million is looking clearly be inad-
of FCCB’s on certain condition for limited period of time
equate for funding buybacks;
through new External Commercial Borrowings (ECB’s).
(c) Buyback in Indian currency require prior ap-
RBI has issued a circular dated December 8,2008
proval from RBI, which would be very time consuming
which will allow the companies to buyback their
process.
FCCB’s . There are two major part of that circular:
Now as the time is coming nearer it is still seems
1) From Foreign currency: unpredictable what kind of affect would FCCB conversion
RBI has permitted the corporate regarding the pre- will take in Indian Industry and the effect of it is still to
mature buyback of their FCCB’s where the source of be seen on Indian Corporate houses.
funds are:
a. Foreign currency resources of the organization
held in India or abroad.
By Vishesh Kathuri a
b. Fresh ECB raised in conformity with the current
ECB norms, provided that there should be minimum dis-
Harshil Suvarnakar

Nikhil Tulsian
count of 15 per cent on the value of FCCB’s.
2) From Indian Rupee:
RBI will also consider the application for buyback of JBIMS Mumbai
FCCB’s out of rupee resources provided certain conditions

Company Amount out- Conversion price Share price as Mkt Cap as on Net debt
standing (RsCr) at maturity (Rs) on Sep 30 01-09-1930 (Rs Cr) (Rs Cr)
Subex Azure 846 897.6 85.4 298 1057.5
Aurbindo 1222 732.1 277.4 1491 2890.5
Hotel Leela 846 76.4 28.7 1082 1833
HCC 470 341.7 77.1 1975 2444
Bajaj Hindustan 564 621.7 103.5 1457 3760
Ranbaxy 2068 908 255.9 9268 4371
Orchid Chemicals 1072 237 212.7 1498 1786
Wockhardt 508 629.8 155.7 1703 2961
Firstsource 1292 128.6 28.6 1222 1325
3i Infotech 761 160.7 68.7 898 1175
M&M 940 1180.5 509.3 12514 1432.2
Tata Motors 4183 950.4 344.2 13344 6011.3
Bharat Forge 865 426.1 183.4 4083 940
Suzlon 2350 522.8 152.3 22810 3055
Amtek Auto 1175 616.5 165.4 2334 470
*Source: CLSA and other available data Conversion price at Rs47/$
Page 11

© The Finance Club, Indian Institute of Management, Shillong
Asian superpowerS

Tackling
Tackling
The CChindia
HINDIA

DEBATE
DE BATE
Both countries are red hot, but who’s the long-term titan?
C hina and India are the twin dynamos of devel-
oping world markets. Currently seem unstop-
pable, but analysts wonder whether each country has
exposes China to greater risks, which could help India
close the gap. For one thing, China is heavily dependent
on the US and Europe for its massive exports, while India
strength and stability enough to withstand a possible retains a relatively closed market due to the domestic de-
economic slowdown (which they already have to some mand story, with the exception of its gaining professional
extent!) and if any flaws are being masked by the red- ranks and world-class companies as Infosys, L&T, Bharat
hot growth rates both countries had experienced. India Forge, Suzlon to name few.
in particular has had a blessed half-decade: Its real GDP is China is more vulnerable to downturns because it
growing 9.2% annually, until last year, and since 2005. The has more foreign direct investments from US corporates
country has had an average growth rate in the 8% range, and also it has a large trade surplus with the US and the
compared with the anemic 3.5% average growth rate dur- EU, but it has deficits with pretty much everyone else. It
ing its fit sty three decades of independence. The changes imports intermediate goods from other Asian countries
began in the early 1990s, when India’s traditional socialist and then ships the final products off to the US and the
economy was transformed via lower trade barriers and EU. China is large, it’s open, it trades a lot and it’s a lot
deregulated capital markets. more exposed. At these uncertain times we have already
But China can be said to reside in another category seen its effects not only in China but we too have faced
altogether. After all, India’s growth spurt has occurred the music. Demographics also are in India’s favor. Over
only in the current decade. China has been a significant the next few decades India’s working-age population
economic power since the 1980s. China is more popu- should increase, while China, in part due to its “one child
lous than India and has a higher sovereign rating. There’s per family” restriction, could eventually face declining
a gap between those countries — between their growth and aging population. And China may find performing
prospects and their records because for China, it has been its economic miracles getting harder in the future. As
nearly 30 years of nearly 10% (Average annual growth). China becomes richer — it is still a developing country
That’s an extraordinary record! India has had only four — its growth will rely more on domestic consumption,
years of 8% to 9% growth and RBI now estimates it to be and thus its growth rate will moderate. But if China can
around 7%. A stronger international presence, however, manage to raise its GDP per capita to $10,000 from the
Page 11

Niveshak Volume 2 Issue 4 May 2009
Asian superpowerS

current $3000, it would need to grow a lot — for a large Below is a 2008 performance of select countries ma-
country of 1.5 billion people.” jor Indices & India v/s EM graph:

Strengths and Weaknesses Future Changes
Still, as of today, China seems unstoppable, ana- Both countries naturally expect to keep up their
lysts say. Its annual growth of 10% + till last Year was current growth pace. While Indian politicians have said
driven by freer markets, growing urbanization (some 10 they hope to make China’s 10% annual growth rates!,
million Chinese move from the countryside to the cit- there are signs the economy is slowing — wholesale price
ies each year) and increased globalization, from China’s inflation below 1% range and India remains at the mercy
large presence in international capital markets to its mas- of shorter-term capital inflows, rather than longer-term
sive exporting program. China’s banking system has also direct foreign investment (as is the case with China).
played a part. Chinese households and corporations save This makes India more vulnerable to fluctuating and un-
a disproportionate share of their income, which winds certain interest rate regime. Perhaps the biggest hurdle,
up being invested in China’s banks, and in turn those in- however remains the vicious fact of India’s endemic pov-
stitutions lend massive amounts of capital to companies erty. A majority of India’s Population lives either on or
and the govemment. The result is homegrown compa- below the poverty line, and its educational system and
nies with huge R&D budgets and an infrastructure that infrastructure are in poor shape. China, however, looks
is growing more complex by the day. Analysts do agree to be aiming higher, trying to move its economy from
that India’s shoddy highway, rail and port systems, and being dominated by cheap mass. To some extent, China
the dire state of its electrical grid and waterworks, re- is following the development path of Japan. One prob-
main the greatest obstacles to its emergence as a truly lem, however, is that as China’s economy expands and
global economic power. Analysts do have some concerns wages slowly rise, China’s appeal as a cheap manufactur-
about China’s banks as we have already seen some fire- ing base wanes. Such countries as Vietnam, analysts say,
works after the subprime crisis. In the past, most Chi- are positioning themselves as a lower-wage alternative
nese banks spent much of their time taking large pools to Chinese manufacturing. In the end, a choice between
of savings and redistributing them among various com- India and China comes down to hope versus experience.
panies and government projects, so the concepts of risk “In India, the growth has really occurred in the last four
management and credit analysis were seen as relativity or five years, so there are some lingering questions about
unimportant. Some Chinese banks still act more as social whether it’s sustainable,” says Mr. Raghuram Govind Ra-
welfare centers, such as the Agricultural Bank, which has jan, Chief Economist - IMF. “There are no more doubts
some 28,000 branches and mainly funds rural areas. As about China. You only have to visit once and you’re con-
a result, Chinese banks wound up with colossal nonper- vinced: It’s real.”
forming loans on their books. The Chinese government
has spent some $400 billion since 1998 cleaning up the

By Yatin Mota
banking system and retiring such loans. India’s banking
system has similarities, though it is currently being over-

Hardik Shah
hauled. While in the past, state-owned banks were mainly
preoccupied with financing the Indian government (defi-
cits have made up more than 10% of GDP in the past and
we could see it in the future too!), analysts say that In- NMIMS Mumbai
dia’s banks are improving and are now comparable with
those in Malaysia and Singapore. One issue has been that
many of India’s top companies have been going abroad
for their financing as there is lesser savings penetration
in the investment industry.
Page 11

© The Finance Club, Indian Institute of Management, Shillong
OpinioN

Road Ahead for
SME sector in
India
I ndia’s growth so far has been led majorly by the
service sector which accounted for more than
50% of the GDP in last few years. With the global financial
(by arranging for loans or creating SME funds), works
towards the funding requirements of the SME’s in India.
Banks may also contribute to the corpus created by
crisis, we need to turn towards a model which leads to SIDBI for the funding of the SME’s.
a more domestic consumption led growth than depend
on economies of developed countries alone. Small & Me- SME STOCK EXCHANGE
dium Enterprises (SME) sector is the future of India. In
Not all SME’s are listed on stock exchanges as most
order to sustain the economic growth and development
of them do not qualify the criteria to be listed. The SME’s
of the country, it is essential that the SME sectors play
do not raise funds by issuing bonds, commercial paper,
their role without which the growth story of India will be
etc. Hence, SEBI has approved an exclusive Stock Exchange
dampened. Production from this sector makes up about
35 per cent of industrial exports and it plays its part in for Small and Medium Enterprises in India. Though the
creating jobs in the country by employing 45 percent of idea of a separate Stock Exchange may sound exciting,
all industrial employment. how the investors are lured by it is yet to be seen.
However, there are some key issues hindering the
growth of SME’s such as lack of skilled labor, finance and EXTERNAL COMMERCIAL BORROWING
technological support, the biggest being the finance. Tra- So far, the profile of borrowers using External Com-
ditionally, projects were funded for entrepreneurs in the mercial Borrowings (ECBs) indicates a bias towards large
SME sector by essentially some bank borrowings apart and higher-rated corporate. Moreover, loans for corpo-
from the promoters’ contributions; however the recent rates, which are able to tank on ECB, will be costlier after
financial markets’ turmoil has turned banks into a con- the revised pricing strategy of the LIBOR (London Inter-
servative mode. Moreover, the funding demands of the bank Offered Rate) rate comes into effect.
growing SME sector are large enough to be met by the
promoters’ contributions alone. ASSET SECURITIZATION
There are various alternative avenues to attract- Investors can be encouraged to invest in SME’s
ing the appropriate form of capital for good projects and through SME portfolios.
credible entrepreneurs. But the major and continual flow
of funds would primarily be from the banking sector.
CLUSTER BASED LENDING:
The opportunity to fund the SME’s will be a big
boost to the loan books of the banks provided: 60 SME clusters have been identified by RBI for clus-
ter financing to be led by SIDBI (Small Industries Develop-
»» Banks make good use of the opportunity
ment Bank of India)
»» Banks are successful in distinguishing credit qual-
ity of the SME’s
LENDING BY BANKS
SME sectors • Loans: With the turmoil in the financial markets,
banks will tend to become more conservative towards
In the SME space, the bank has seen strong credit SME funding. The need of the hour is to separate SME’s
demand from the following sectors: with a strong growth potential from other fly-by-night
• Engineering & Infrastructure companies Enterprises.
• Manufacturing companies • Loans in Joint Ventures with Private Equities(PE):
• Retail sector India’s private equity sector has seen considerable
• Pharmaceutical sector growth in terms of deal values since last few years. India
was first in Asia in the overall deal value in 2007 with 290
Opportunities & challenges deals aggregating to $9.9 bn. In most countries, venture
capital and private equity funds have played a big role
FINANCING THROUGH NBFC’S – SIDBI in the growth of the economy. They become partners
SIDBI - Small Industries Development Bank of India in growth and back the project and the entrepreneurs,
is a NBFC which directly (by giving loans) or indirectly
Page 22

Niveshak Volume 2 Issue 4 May 2009
OpinioN

not only by providing funds, but also by playing a sup- stringent rating tools used by banks to rate the credit
portive role in formation of business strategies. One such quality of the SME’s. This would boost the confidence of
example in India is of the Joint Venture between Yes Bank banks on the rating provided to SME’s.
& Avigo Capital. More such joint ventures will lead to the
benefit of all stakeholders namely the bank, PE firm and GOLD CARD SCHEMES
the SME’s.
Under this scheme, banks issue gold card to credit-
worthy SME’s with good track record for easy availability
Banking scenario of export credit.
PRESENT CHALLENGES FOR BANKS
1. Increase in rates has increased the asset quality What does RBI need to do
risks and the default risks both from the individuals and »» Set up a regulatory mechanism for the SME rat-
corporates. ing agency
2. Balance sheet quality is likely to deteriorate with »» Fasten the process of the SME stock exchange
rising Non Performing Loans (NPLs) and inadequate pro- and set up appropriate regulatory body for the same
visioning relative to expected loss-given defaults. Tier I »» Define sector specific loan disbursement require-
capital and coverage levels are also low. ments for the banks.

By P uja Kasat
3. With the implementation of BASEL II norms in
2009, there would be additional pressure on the profit
margins of the banks
FMS Delhi
Bank funding to SMEs
FINANCING PROBLEMS
SME’s face financing problems from banks on vari-
ous issues, most of which can be addressed by consider-
ing each one of them individually:
Issue:
»» SMEs are regarded as high-risk borrowers due to
weak financial strength
»» Asymmetric information provided by SMEs about
business plans, accounting statements and projects gives
little help to investors and banks in assessing their credit
worthiness
»» Unlike higher corporate loans, SMEs take small FinQ May’09 Issue Answers
loans which increase the transaction costs, administra-
tive costs and other costs involved in information collec-
tion
1.
Recommendation:
a) Jack Nash
»» Banks should be encouraged to partner with busi- b)International currency, Bancor;
ness development service providers. These providers can Bretton Woods
help SME’s in various activities such as developing fea- c) James David Wolfensohn ninth
sible business plans, risk assessment, improving account- president of the World Bank Group.
ing standards, structuring information, etc. This will also d) Wilbur Ross.
help in reducing transaction costs.
e) Subba Rao Pai; Canara Bank.
Issue:
f) Antwerp, Belgium
»» Inability to provide collaterals demanded by the
lenders g) Kothari Pioneer
Recommendation:
»» Bank may partner with third party institutes giv- 2. They were all RBI governor after inde-
ing collateral or guarantees for the SME’s pendence. The second sets are RBI governor
Issue: before independence.
»» High interest rates charged by lenders due to
higher risk involved in SMEs 3. SBI Mutual Fund
Recommendation:
»» SME Rating Agency – SMERA should use the same
Page 22

© The Finance Club, Indian Institute of Management, Shillong
FinloungE

FinQ
1. He Graduated from St. Stephen’s College and was an ex-director at IMF and Independent
Evaluation Office. Identify?

2. Who coined the term BRIC Countries?

3. Which country’s foreign market is known as ‘Rembrandt Market’?

4. In money market, what is the term used for the non-convertible paper money?

5. Which theory states that some investors will buy stock even if it is over-valued, on the con
viction that there will be someone else who will buy the stock from them at higher prices?

6. What do you mean by “Bracket Creep”?

7. What is a bond denominated in a currency different from that of the country in which it is
sold called?

8. ICICI bank acquired this finance company for Re1 in 1990’s. Identify?

9. Which was first Indian bank to open to open an international branch and where?

10. Identify the logo of this Michigan headquartered company

All Enteries should be mailed at niveshak.iims@gmail.com by 10th June 2009 23:59 hours
One lucky winner will receive cash prize of Rs 500/-
Page 22

Niveshak Volume 2 Issue 4 May 2009
FinloungE

ARTICLE OF THE MONTH
The article of the month for March 2009 goes to Mr. Mayank Sinha and
Mr. Vishesh Kathuria, Mr. Harshil Suvarnakar and Mr. Nikhil Tulsian of JBIMS,
Mumbai. They recieve a cash prize of Rs.1000/-
CONGRATULATIONS!!

Fin-Q Winner for Last issue
Mr. Santosh Mohanty of IIM Shillong. He receives a cash prize of Rs.500/-
CONGRATULATIONS!!

All Are INVITED!!
The team Niveshak invites article from B Schools all across India. We are
looking for original articles related to finance & economics. Students can
also contribute puzzles and jokes related to finance & economics. Refer-
ences should be cited wherever necessary. The best article will be featured
as the “Article of the Month” and would be awarded cash prize of Rs.1000/-

Please send your articles before 15th June 2009 to niveshak.iims@gmail.com. Do
mention your name, institute name and batch with your article.
Format: Font:- Times New Roman, Size:- 12, Length <= 5 Pages in word doc/docx.
Please DO NOT send PDF files and Kindly stick to the format.
Number of authors 2 at max.

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Thanks
Team Niveshak
http://iims-niveshak.blogspot.com
Page 22

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