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The IBS

ECOBIZZ
Magazine

June 2010

Inside this issue:

Greek Debt Crisis 3

Role of Private 6
Equity

Bhopal Gas 8
Tragedy

BP Oil Spill 10

Fundamental 12
Valuation
IFRS Convergence 14

Playing with 16
Derivatives
From The Editors Desk

Hello Everyone!

Hope all of us had a great stint getting introduced to the corpo-


rate world. I believe everyone has got back to enjoying life in
campus after the SIP.

It gives me immense pleasure in presenting the first issue in the


third semester as the senior batch of IBS, Hyderabad. This issue
has gainful insights on Greek Debt Crisis, Private Equity, Funda-
mental Valuation, BP Oil Spills, Bhopal Gas Tragedy, and so on.

As we all know the juniors, class of 2010 - 2012 has joined. It


feels great to welcome them to the campus. I with the complete
EcoBizz team wish them all the best and a great learning experi-
ence in our young and dynamic business school.

Regards,
Kriti Pant
Editor, The Focus

2
The Greek Sovereign Debt Crisis & The Eurozone

During the decade preceding the global financial


crisis, Greece‟s government borrowed heavily from
abroad to fund substantial government budget and
current account deficits. Between 2001 and 2008,
Greece‟s reported Budget deficits averaged at 5%
per year and Current account deficits averaged at
9% per year, compared to a Eurozone average of
2% and 1% respectively. Many attribute the budget
and current account deficits to the high spending of
successive Greek governments.

The Global Financial crisis which plagued the major Greece funded these twin deficits by borrowing in

economies of the world in 2008, which continued in international capital markets, leaving it with a

2009 and it just seemed to find the horizon when chronically high external debt (115% of GDP in

there was another wave coming this time in the 2009). Both Greece‟s budget deficit and external

form of a Sovereign Debt crisis from one the partner debt level are well above those permitted by the

in the European Union (EU). rules governing the EU‟s Economic and Monetary
Union (EMU). In October 2009, the new socialist

The Greeks are the one responsible for the current government, led by Prime Minister George Papan-

Euromess. Greece got Euro status in 2001 and cur- dreou, revised the estimate of the government

rently is one of the 16 member countries which budget deficit for 2009, from 6.7% of GDP to 12.7%

have Euro as their currency. To get Euro status or of GDP.

adopting Euro as the currency requires the EU


countries to meet some macro economic conver- Due to Greece‟s reliance on external financing for

gence criteria called the “Maastricht criteria” in order funding budget and current account deficits left its

to adopt Euro as their currency. The rules call for economy highly vulnerable to shifts in investor con-

budget deficits not to exceed 3% of GDP and debt fidence. Before the crisis, Greek 10-year bond

not to exceed 60% of GDP. These are some strin- yields were 10 to 40 basis points above German 10-

gent conditions the EU country needs to adhere to year bonds. With the crisis, this spread increased to

get the status. Greece is a relatively small country, 400 basis points in January 2010, which was at the

GDP of around $400Bn as compared to the other time a record high. High bond spreads indicate de-

EU members. clining investor confidence in the Greek economy.

3
Despite that the government was able to success- Greece‟s current economic problems have been
fully sell €8 billion ($10.6 billion) in bonds at the end caused by a mix of domestic and international fac-
of January 2010, €5 billion ($6.7 billion) at the end tors. Domestic factors: Firstly, High government
of March 2010, and €1.56 billion ($2.07 billion) in spending and weak Government Revenues, a large
mid-April 2010, albeit at high interest rates. and inefficient public administration in Greece,
costly pension and healthcare systems, tax evasion,
To finance the further maturing debt of the country and a general “absence of the will to maintain fiscal
mainly external, the Eurozone member states have discipline” as major factors behind Greece‟s deficit.
pledged to provide financial assistance to Greece in Weak revenue collection coupled with tax evasion
concert with the IMF. has contributed to Greece‟s budget deficits. Sec-
ondly, Structural Policies and Declining International
In April 2010, the details of the proposed financial Competitiveness, was another reason why Greek
assistance package for this year were released: a industry is suffering from declining international
three-year loan worth €30 billion ($40 billion) at 5% competitiveness. Relatively high wages and low
interest rates, which is well above the normal rate in productivity is the primary factor.
EU and another $15 billion from the IMF.
International factors: Firstly, Increased Access to
Investor jitteriness spiked again in April 2010, when Capital at Low Interest Rates Greece‟s adoption of
Eurostat released its estimate of Greece‟s Budget the euro as its national currency in 2001 is seen by
deficit. At 13.6% of GDP, Eurostat‟s estimate was some as a contributing factor in Greece‟s buildup of
almost a full percentage higher than the previous debt. The perceptions of stability conferred by euro
estimate released by the Greek government in Oc- membership allowed Greece, to borrow at a more
tober 2009. In late April 2010, the spread between favorable interest rate than would likely have been
Greek and German 10- year bonds reached a re- the case outside the EU, making it easier to finance
cord high of 650 basis points, and one of the major the state budget and service existing debt. If the
credit rating agencies, Moody‟s, downgraded market had discouraged excess borrowing by mak-
Greece‟s bond rating. ing debt financing more expensive, Greece would
have been forced to come to terms earlier with the
The crisis has contributed to a weakening of the need for austerity measures and reform. Secondly,
euro‟s foreign exchange value, and a fear that Issues with EU Rules Enforcement, the lack of en-
deepening crisis could spread across European forcement of the Stability and Growth Pact is also
bond markets and draw in countries such as Spain, seen as a contributing factor to Greece‟s high level
Portugal, Italy, and Ireland. The cost of providing of debt. In 1997, EU members adopted the Stability
financial assistance to Greece is relatively low. and Growth Pact, an agreement to enhance the
Greece‟s total outstanding debt approximately €300 surveillance and enforcement of the public finance
billion ($399 billion). rules set out in the 1992 Maastricht Treaty‟s
“convergence criteria” for EMU.

4
In an effort to restore investor confidence in the Another aspect of the Greek crisis lies with the big
Greek economy, the Papandreou government has Investment Banks, Greek government‟s debt had
pursued a series of wide-ranging fiscal austerity been underwritten by prominent financial institutions
measures. However, that the mix of tax increases including Goldman Sachs, and used complex finan-
and sharp spending cuts could lead to higher unem- cial instruments to conceal the true level of
ployment and deepen an ongoing recession in the Greece‟s debt so that Greece could get the Euro
country. The Greek government cutting large gov- Status by simply using an accounting loophole in
ernment budget deficits (contractionary fiscal poli- the system. For example, the government of Papan-
cies) and stimulating the economy during cyclical dreou‟s predecessor is alleged to have exchanged
economic downturn (expansionary fiscal policies) future revenues from Greece‟s highways, airports,
are at odds with each other. and lotteries for up-front cash payments from inves-
tors. Likewise, it is reported that the Greek govern-
In addition to austerity and financial assistance from ment borrowed billions by trading currencies at fa-
Eurozone member states and the IMF, Greece vorable exchange rates. Because these transac-
could finance its budget deficit and increase the tions were technically considered currency swaps,
competitiveness of its exports by exiting the Euro- not loans, they did not need to be reported by the
zone and adopting and devaluing a new national Greek government under EU accounting rules. The
currency. Federal Reserve is currently investigating the role
that Goldman Sachs and other U.S. financial institu-
However, most consider this an unlikely policy tions played in the buildup of Greece‟s debt.
course as both Greek and European leaders appear
committed to ensuring that Greece remain a Euro- If Greece defaults, there is a risk of contagion to
zone member and exiting the Eurozone could make other Southern European countries, including Portu-
future borrowing costs much higher for Greece. gal, Ireland, Italy, and Spain (which, along with
Greece, have been nicknamed the „PIIGS‟. Con-
Its geographic location, particularly as a potential cerns about a spillover of Greece‟s crisis to its
hub for regional trade and investment in energy and neighbors are rooted in memories of the Asian fi-
transportation networks; the renewable energy sec- nancial crisis in 1997-1998, where it is believed that
tor; and already strong global shipping and tourism investor Herding behavior contributed to the spread
sectors would help Greece in increasing exports of the crisis throughout the region.
and the much needed competitiveness.

By: Nikunj Doshi

5
Role of Private Equity Sector in India

Private Equity (PE) has emerged as a potential The factors contributing to the growth potential of

source of corporate financing in addition to the tradi- the sector are the possibility of higher returns in

tional sources of fund mobilization such as public comparison to alternative investments, capital re-

equity issues, bank loans, private placements, euro quirements in growing sectors like education, infra-

issues and external commercial borrowings. Techni- structure, power and the regulatory reforms in the

cally PE is the capital that is not listed on the stock primary market which widens the exit scope for the

exchange. It consists of funds and institutional in- PE firms. According to a recent report by Goldman

vestors who commit large amounts of money with a Sachs, India requires USD 1,700bn over the next

long term perspective. The investments made are decade for maintaining its existing growth rate. One

directed either into private companies or for buyouts third of the estimated Rs. 1,700 bn is expected to

of public companies which results in delisting of be funded by the PE sector. However, the PE play-

public equity. The funds generated through PE can ers cannot invest more than 33.33% of its investible

be used to expand the working capital of a firm, to funds in equity of listed company.

carry on an acquisition activity, to provide new tech-


nologies or to strengthen the balance sheet of a The regulation of PE in India is at an evolving stage.

company. The various categories of PE include Currently, there is no regulatory body established to

Venture Capital, Leverage Buyouts, Growth Capital frame standards and policies for PE in India, how-

Distressed Investments and Mezzanine Capital. ever, indigenous and foreign venture capitalist are
regulated by SEBI(Securities Exchange Board of

PE in India is relatively a recent phenomenon. PE India) Regulation, 1996 and Foreign Venture Capi-

funds are customizing their India strategy keeping in tal Funds Regulations, 2000. PE fund investments

mind the local realities, the relatively small size of from other countries are required to adhere to the

companies seeking capital, promoters‟ reluctance to restriction on foreign capital inflows.

cede control, and local takeover regulations, among


others. The performance of PE in past few years In first Quarter of 2010:

was disappointing due to the impact of global reces- PE Sectoral Break Up - Utilities, Consumer Dis-

sion. The deals decreased by 38% in 2009 over cretionary & Financials were the most targeted
2008 levels and 45% over 2007. India accounted for sectors for investment with deals worth $484

6% of total global PE deals volume in 2009 while million, $440 million and $403 million respec-
only 2% in terms of deal value. However, it is esti- tively in Q1 2010. Together, they accounted for

mated that the sector would achieve an annual more than 68% of total private equity deal value

growth of 15-20% by 2011. during the quarter.

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PE Investments - Q1, 2010

Consumer
Discretionary
Consumer Staples
$484 $440
Energy

$95 Financials
$112
Health Care
$134 Industrials
$403 $26
$131
$35 $82 Information
Technology
Materials

Telecommunications
Services
Utilities

Major PE Deals - The major private equity deals and Indian PE firms,. One of the factors that can be
were investments in Star Health & Allied Insur- identified is recent inception of PE sector in India.
ance, Coastal Projects Pvt. Ltd., Tikona Digital The top global players have a long standing history
Networks Pvt. Ltd., Coffee Day Resorts & Ho- and robust experience which differentiates it from
tels Ltd. and Asian Genco Pte Ltd. Indian Players.

In India the major PE players are ICICI Venture - PE is a transformational and value added invest-
India„s largest private equity fund, Chrys Capital, ment strategy. Also, for sustaining the projected
Kotak Private Equity Group, IDFC Private Equity growth rate of 8-8.5% India requires $1.3 trillion
and 2i Capital. Leading global players include over the next three years. PE firms can play a piv-
Texas Pacific Group (TPG), Goldman Sachs Capital otal role in providing funds for the pending project.
Partners, The Carlyle Group and the Kohlberg Although, there is a growing acceptance among
Kravis Roberts. There is massive difference in the various business owners, however, large business
amount of fund raised between the global PE firms entities are yet to embrace this potential source of
capital.

By: Bharti Bajaj

7
Bhopal Gas Tragedy-
A Reflection of sickened Indian System

Soccer seems to be the flavour of the season and Union Carbide Corporation will never ever be extra-

„Soccer Mania‟ seems to have grappled all the dited.

countries across the globe with the ongoing FIFA


world cup in South Africa. However, India seems to BJP which is the opposition party has demanded an

be indifferent to this African carnival, not because explanation from the Congress on who had let War-

India isn‟t a qualifying team at the world cup but ren Anderson escape from India. According to them

because there‟s another game which has kept Indi- Bhopal gas tragedy was the result of indifference

ans busy at the home grounds. The game is well- and nexus of the then ruling party i.e. Congress for

known and as you will browse through the morning which Arjun Singh (then CM of MP) and Rajiv Gan-

newspapers and surf the news channels you will dhi (then PM of India) both are being considered

realize that it seems to be the talk of the town. The responsible. Obviously a man who was responsible

game is „Blame game‟ and it has already been mak- for killing thousands of innocents could not be al-

ing great waves throughout the nation with the lowed to get away by Arjun Singh on his own. Also,

prominent parties and politicians playing it superbly there was no law and order problem in the city at

under the wake of 1984, Bhopal Gas massacre. that time which Arjun Singh is citing as the reason

Indian politics about which it was once said that it for all this. But then hardly any point in discussing

was facing danger of criminalization, is presently the wrongs committed by successive governments

witnessing unassailed politicization of criminals. If in the past. Be, it the congress or BJP, they have all

we call anything alarming this sure is! conspired to let the Americans get away as a favour
or for money. In 1985 we allowed Anderson to get

More than a quarter of century has passed since away and after 26 years of trial the seven surviving

the world‟s greatest industrial disaster swiped out accused of Union carbide India Limited have been

thousands of families after tonnes of poisonous given just two years of punishment and they have

methyl-isocyanate (MIC) gas leaked from the Union been left on bail after submission of bonds and a

Carbide pesticide plant on the night of December 3, security payment of Rupees twenty five thousand

1984 killing about 4000 people instantly, thousands only. To further frustrate us, Chief Justice Magis-

severely injured and handicapped with the death toll trate has given the verdict and told that the „justice

rising sharply to 10000 within 72 hours. However has been delivered‟. The judgment was not only a

the worst part to all this is that the main accused i.e. mockery of justice as it came so late but it also let

Mr. Warren Anderson who was the then CEO of the main accused go scot-free.

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Also, what has fuelled the wrath of the people is guarding the interests of his citizens and its pride.
that the company deliberately sacrificed the safety Also, why should he agree to compensate a country
of its workers in Bhopal. CBI officials who handled where its judicial system requires 25 years to take a
the investigations at the site have enough evi- catastrophic case into consideration. We wish if In-
dences to prove that that the management knew dian Government too had the same attitude and
that the Carbide plant was unsafe. In 1981, a gas support towards its citizens. MP Chief Minister
leak had killed one worker. In 1982 again, 25 work- Shivraj Singh Chauhan blames the legal system for
ers were hospitalized after another gas leak. Two the entire outcome. He feels that though the court
years later, Union Carbide sent its US experts for a gave what was possible, the quantum of punish-
safety audit of the Bhopal plant. The team discov- ment to the accused in such a huge disaster was
ered 30 hazard spots but still the management ne- not enough.
glected it which ultimately led to dangerous
amounts of water entering a tank containing methyl Thus, the parties are busy playing blame games
isocyanate gas forcing toxic fumes to vent, choking with each day formulating new and further attacks
and strangling thousands of people. However the to dismantle people‟s confidence in the other party
death of innocent lives do not really matter to US as and gain people‟s trust for themselves at the cost of
the President Barack Obama has stated that this people‟s innocence. Another example of this is the
case is now an internal matter of India which means nuclear liability bill which the Congress government
that neither can Anderson be tried for his crimes nor is planning to bring in the parliament, which says
will Dow Chemicals which has bought Union Car- that in the event of an accident the entire responsi-
bide will pay a dime more for compensation. All this bility for an accident will be that of the Indian com-
and more only proves that perhaps we as Indians panies, not of American companies. Also, the liabil-
are minor push-overs whose lives really don‟t mat- ity has been capped at Rs 300 crores and the over-
ter. Hypocrisy and dirty politics can be seen at its all liability at Rs 2200 crores implying that the Indian
pinnacle with Obama safeguarding an American company would pay a maximum compensation of
with the manipulated laws and at the same time Rs 300 crores and the rest would be paid by the
asking for compensation above the liability cap Indian govt. or in other words it will go from our tax
(including the financial loss) for the loss of eleven money, with the Americans again getting away scot
lives in Louisiana from BP chief Tony Hayward for free. However, instead of going into the critical
the oil spill. Can anybody answer as to why Mr. analysis of the tragedy we should focus on what
Obama has different standards for people of differ- can we look forward to, as a part of our future ef-
ent countries? Is twelve thousand rupees that have forts.
been given in case of Bhopal gas tragedy to the
victim‟s next of kin enough for the life of an Indian? Though, nothing much can be done to undo the
Do they sound fair? They do not but surely they are. harms caused, however, some steps can definitely
He has done what was expected out of him in ca- be taken to set off the issues as our sympathetic
pacity of being the First person of a nation for safe concern for the people who have suffered due to

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the tragedy. One of the bleak hopes in such sce- the liability by both Indian and the parent company
nario is to cash the golden opportunity when in case of an accident so that families of all the vic-
Obama comes to India in November and influence tims can receive succor. Last but not the least,
him to extract some large amount for our people. there is an urgent need for revision in the Indian
Also, rather than playing ridiculous blame games, judicial system norms so that no tragedy ever be-
the govt. of India along with the nation as whole comes a „Judicial tragedy‟.
should join hands to accelerate the ongoing reha-
bilitation processes in Bhopal. Bills like the „nuclear
liability bill‟ should include laws like sharing of By: Anuradha Upadhyay

The BP Oil Spill - A Closer View

Human efforts since time immemorial have been


guided towards understanding natural phenome-
non, using them, molding them and changing them
for human gains. However, most of these efforts
have often resulted into a war with nature which has
long lasting impacts with bearings on generations to
come.

One such resultant activity is oil spill-a release of BP is one of the largest energy companies in world.

a liquid petroleum hydrocarbon into the environment It deals in fuel, energy products and petrochemical

which has been result of careless or planned hu- products. BP was in the news headline worldwide

man activities. It often refers to marine oil spills, on April 20, 2010 for the oil spill from its nine year

where oil is released into the ocean or coastal wa- old mobile offshore drilling unit Deepwater Horizon

ters. There had oil spill crisis most famous of them in Mississippi Canyon.

are Exxon Valdez oil spill of March, 1989 and the


Gulf of Mexico oil spill in April, 2010.

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The spill started on April 20, 2010 when an oil well The economic and social impacts were seen soon
blew out. According to statement of president and their overall costs are yet to be estimated. The
Barack Obama, the reason for it was negligence prices of the seafood rose by 10% to 30%. The sea-
and lack of responsibility on the part of BP and its son is best tourist season. However the hotels, res-
associated companies- Transocean and Halliburton. taurants, clubs, resorts and airlines saw cancella-
The explosion in the oil well caused explosion of tion of booking. Hotels and resorts are losing money
Deepwater Horizon. According to BP‟s internal in- - between $100,000 and $200,000. Gulf Coast saw
vestigation, the reason of the explosion was the a 50% decrease in sales and hotel occupancy as
leakage of Methane gas from the well that ignited low as 15-19%.
after expanding out of the well. One more reason
that is tabled is the cost cutting by BP on mainte- Fishermen and boat owners are looking now for
nance activities causing explosion as an end result. alternate sources of income. The social life is seen
as misbalanced with families more stressed to fund
The size of spill is not yet fully determined different daily living sustainable and cutting regular expendi-
estimates have come. Initial BP estimates were ture.
1,000 barrels of oil per day (42,000 gallons) gushing
forth from the broken pipeline. By June 14, a gov- Overall U.S. oil production next year will drop by an
ernment panel announced that the rig was jetting as estimated 2%. Further high oil crude oil prices, rise
much as 2.5 million gallons of oil per day into the in oil imports is expected for US economy.
Gulf. This makes the spill near to be worst spill ever
seen. The impact of crisis is seen on BP‟s finances. The
company has been imposed with fines, lawsuits
Effects of explosion are multi dynamic. They can be apart from the relief measures it took. As of 18 June
traced from politics, economics, social, business to 2010, the gulf oil spill has cost BP an estimated 1.6
environment. The very first effect seen was political billion USD. This figure can be itemized as follows:
in nature which questioned President Obama‟s de-
cision to open new regions for offshore drilling. 25 million USD in grant money given to the
states of Alabama, Florida, and Mississippi,
The next in line are environmental issues. The oil 60 million USD allocated towards the construc-
spill threatened the most productive and fragile ma- tion of barrier islands off the coast of Louisiana
rine ecosystems in the US. About 25% of nation‟s 1.4 billion USD accrued as of 18 June 2010 in
wetlands lie in the Mississippi River Delta, a habitat cleanup efforts (tabulated at a rate of 33 million
for nesting seabirds and resting migratory birds. USD per day since the incident).
The Gulf is home to dozens of threatened and en-
dangered species, and commercially important fish,
crab, and shrimp that act as basis to Gulf Coast
economy.

11
This does not include lawsuits or the over 6700 back customers trust and clean brand image. To
compensation claims filed costs, although 1000 overcome such situations in future a strong initiative
claims have been settled. Energy analysts on the part of government and corporate is needed.
at Barclay Capital project losses worth 22.6 billion Since such oil spills effect are not limited to one na-
USD will be incurred by BP, including cleanup tion‟s boundaries so an international level directive
costs, worker compensation, legal fees, and lost is need of hour. Today we need global guidelines
th
revenue. On 6 June, 2010 BP announced cut in stating what precautions and security standards are
capital expenditure bill and suspend dividend pay- to be followed for oil rigs. Further, an international
ments until September 2011 to pay for the 20 billion body is needed to regulate oil refining in sea and
USD claims fund imposed upon the company by the oceans at global level. We also need more respon-
United States. sible corporate behavior guided towards efficient
management, maintenance and surveillance of off-
Although government is attempting to overcome the shore rigs. An efficient crisis management team
impact and boost economy of area time will decide with corporate and government joint efforts is
success of such measure. While BP is seeing needed to timely redress any crisis. Although, future
nearly 34-40% stock price decline and going though remains uncertain such efforts can hedge risks of
post crisis management and image makeover as a playing with nature and human life.
responsible company, it will take time for it to win

By: Garima Shukla

FUNDAMENTAL VALUATION:
A move towards reality

Investors in stock markets often hear a phrase While the purpose of DCF valuation is to determine

called- Fundamental Valuation. What exactly is the intrinsic value of the company (in other words

Fundamental Valuation? In brief one can say that the justified price for the company), the most com-

it‟s the real worth of the company or the intrinsic mon method brokerages use for giving recommen-

value of the company. There are different ways of dations is relative valuation, pricing an asset relative

determining it. The most common is the Discounted to its competitors . But does Fundamental valuation

Cash Flow (DCF) method. really matters while going for an individual invest-
ment decision?

12
With growth and the maturity of Indian Stock mar-
ket, the fundamental valuation of companies is gain-
ing prominence. More or less fundamental valuation
plays a major role when it comes to any acquisition,
takeover or merger decisions or when it comes to
long term investment decision. However, for giving
calls in intra day transactions or for short term in-
vestment decision, usually relative tools are found
to be more effective. In relative valuation, you are
assuming that the whole market is rightly priced. In
case the stock is not moving in the direction of mar-
ket, it considered to be mispriced. The work of an
equity researcher is to find out the scrip which is
performing differently from the market average,
The answer to this question depends upon the mar- thereby giving recommendations to “buy” or “sell” a
ket maturity and investor‟s motive. share.

In 1990s, Indian stock market consisted of investors Now as markets have started moving towards the
investing in stocks only with the aim of speculation maturity phase, the significance of fundamental
and an opportunity of getting higher returns not for valuation is gradually rising. The importance of Fun-
their interest in the company and its growth. Stock damentals can also be observed in the speeches of
Market was considered a place to gamble in antici- the world‟s richest investor “Warren Buffett”. His
pation of higher returns. In Indian stock market, investment choice always depends upon his knowl-
speculative motive of investors had made the mar- edge of the sector, functioning of the company and
ket unpredictable which also meant that no valua- its fundamentals. Realizing this, even back home in
tion worked. In past, most of the stock brokerages India, a number of portfolio managers have started
in India were not even looking at company‟s funda- following the practice of assessing a company‟s
mentals to value the firm, they were merely going fundamentals prior to making any long term invest-
by the trends in the stock market for their recom- ment decisions.
mendations (in fancy words by “technical analysis”).
Due to the speculative culture which prevailed in the Thus, promoting a culture of making sensible in-
stock market many retail investors suffered huge vestment decisions based on DCF of fundamental
losses and many investment firms went bankrupt. valuation.

By: Lakshya Mehta

13
IFRS Convergence –
A Road Map for Opportunities

From the April 1, 2011, India will join 120 countries touted as the next big thing for the Indian Economy

across the globe that allow or require preparation of and for Indians definitely, after technology and out-

financial statements in accordance with the Interna- sourcing.

tional Financial Reporting Standards (IFRSs). In


India, the convergence process is expected to be While the benefits of global convergence cannot be

over by 1st April, 2014. However, different dead- doubted, this requires considerable groundwork to

lines have been set for different sectors: be done to make the country ready for a new setup.
In this direction, all players involved in the formula-

insurance companies from 1st April, 2012, tion, implementation and enforcement of the con-

Banks and NBFCs from 1st April, 2013 and verged accounting standards have to play a pivotal
role.
all remaining listed entities from 1st April, 2014

The companies start preparing their financial state-


ments in accordance with the Accounting Standards
(AS) converged with IFRS as per the road map and
guidelines issued by the Ministry of Corporate Af-
fairs, Government of India in consultation with the
Institute of Chartered Accountants of India (ICAI).

By 2015, more than 150 countries including USA


will move to the IFRS. Thus, IFRS will emerge as
one single language of financial reporting ensuring
ICAI as the formulator of AS has already reached
comparability of financial statements prepared all
advanced stage of formulation of AS corresponding
over the world. This will facilitate cross-border
to all IFRS guidelines and has been regularly updat-
movement of capital at lower cost. Also, it will en-
ing the same. These Standards are also in the proc-
hance the mobility of professionals and professional
ess of consideration by the National Advisory Com-
services internationally. India, as an emerging econ-
mittee on Accounting Standards (NACAS) for rec-
omy has great appetite for foreign investment in
ommendation to the Central Government. The Gov-
various sectors of economy and convergence with
ernment in-turn would notify the same under the
the IFRS will definitely go a long way in moving
Companies Act 1956. To ensure that the Account-
capital in favor of India. In addition to this, with the
ing Standards corresponding to the IFRS do not
world proven skill set, the financial reporting is

14
conflict with various requirements of the Companies and conferences on IFRS are frequently conducted
Act 1956, the relevant provisions thereof are being to discuss various aspects related to implementa-
amended and for which the Government of India tion of IFRS.
has setup a specialized committee. It is expected
that the amendments in the Act will be in place Ministry of Corporate Affairs in association with the
much before the end of this year. ICAI has recently undertaken a task to conduct
workshops at 58 centers across India. While the
Certain areas have been addressed from the indus- Institute, Government and the Regulators are per-
try perspective for ensuring the consistency be- forming their allotted tasks, it is also imperative for
tween various regulations and AS converged with the entities to prepare themselves to change their
the IFRS. However, the regulators such as Reserve accounting and other systems to be fully ready to
Bank of India (RBI), Insurance Regulatory and De- implement the accounting standards converged with
velopment Agency (IRDA) and Securities Exchange the IFRS.
Board of India (SEBI) have also identified areas in
their regulations which are not consistent with the The country, professionals as well as the compa-
AS converged with IFRS and thereafter are required nies should take this as an opportunity of another
to be ammended. leap to capture the entire accounting and financial
reporting arena across the globe. It‟s time to gear
Another area which needs to be addressed from the up.
industry perspective is to ensure that the AS are as
tax neutral as possible so that there are no adverse
tax implications for the individuals as well as the By: Sudhanshu Pandey
corporate. To make a country ready for IFRS con-
verged accounting standards, the extent of prepar-
edness of the professionals in carrying out the tasks
related to audit of financial statements with the stan-
dards is pivotal. A massive training program by ICAI
has already been started for its members in industry
as well as in practice. Also, a number of seminars

15
Playing with Derivatives

A range of sophisticated toys available in the finan- Enterprise use derivative instruments to hedge

cial markets are „The Derivatives‟. Derivatives are against market risks such as interest rates risk, cur-

innovative financial instruments which are primarily rency risks and so on. Say for example if an enter-

used for two purposes one for „Risk Management‟ prise is to obtain goods from another entity located

and the other for „Speculation‟. Use of derivatives abroad and the payment for goods is to be made in

as the latter might create a havoc, however, its use a foreign currency at a later date. We know that

as the former can really help in effective functioning Currency is subject to fluctuations. Therefore, the

of an enterprise. Although, using Derivatives for enterprise making payment can book a “Buy” posi-

speculative purposes can also result in huge profit, tion of a derivative contract (forward, future, option)

however, the possibility of losing the game is way and safeguard against the possibility of loss due to

higher than the possibility of winning. unfavourable exchange rate fluctuations. Lets say a
speculator expects that the shares of a company

Let‟s understand what exactly are Derivatives? called AB Communications will rise in future. There-
fore, a contract of buying 1000 shares of AB Com-

Derivative is a contract between two or more parties munication at a future date is booked at current

whose value is determined by the rise or fall in the price. Currently, the share price is at Rs. 1,000 per

value of underlying assets. The underlying asset share and it is expected that it will rise to Rs. 1,300

could be a stock, a bond, a commodity or a cur- per share. Now on the due date, in case the share

rency. The most common types of derivatives are prices move as expected by the derivative investor,

Forwards, Futures, Options and Swaps. he gains Rs. 300,000. However, contrary to the ex-
pectation the price of the same share falls to Rs.

One can say that a Derivative challenges the uni- 700 per share the same investor looses Rs.

versal truth „future is uncertain‟, it gives the investor 300,000. Therefore, the probability of gain comes

an opportunity of living the current in future. with an equal probability of a loss.

Initially, derivatives were introduced with the aim of While with Swap the enterprise can exchange

Enterprise Risk Management. Risk Management is equivalent value of its foreign currency obligation

safeguarding the possibility of future losses. In case with that of another enterprise having its obligation

any possibility of loss is anticipated then it can be in the enterprise‟s domestic currency.

averted with Derivative instruments. An investment


in Derivative is primarily to ensure that the benefit Interestingly, we have derivative instruments for

derived from the regular trade contracts should Energy, Weather and Insurance. These instruments

never reduce below the ascertained levels. are used for management of risks associated with

16
prices of energy products (crude oil, electricity and Of late more and more sophisticated derivative in-
natural gas), safeguarding industries where per- struments like Swaptions, Leaps, Baskets and so
formance is affected by unpredictability of weather on are introduced in the financial market. They are
and the risk of excessive insurance claims due to usually a blend of two or more than two vanilla de-
natural calamities. rivatives. More than Risk management these de-
rivatives are increasingly used by the enterprises to
Currently, the Derivative investments are increas- make speculative gains and enhance their invest-
ingly used for speculation. Using Derivatives for ment earnings.
speculation is the other extreme of the same chord.
While speculating, the complete game is based on The latest innovation in the derivative market is the
the expectations and market sentiments. What you Media Derivatives. Recently in US, Commodity Fu-
believe is how you invest and if the belief comes tures Trading Commission (CFTC) has approved
true there is profit else a loss. The prime intention of the trading futures contract for movies in the com-
speculative investments is to leverage the profits. modity market. Imagine you bidding for the box of-
fice success or failure of a forthcoming movie.
One example of speculative practice is the invest-
ment in Collateralized Debt Obligations (CDO), the All in all, derivatives when sensibly used with the
assets underlying these financial instruments were purpose of Risk Management prove to be an excel-
the loans approved by the commercial banks. Huge lent tool for safeguarding against losses. However,
volumes of CDOs were traded in the stock market when the same instruments are used with a specu-
and profits were reaped by many. However, the lative intent then the results could be other than
complexity of these instruments and the little under- gains. Despite such possibilities enterprises have
standing of the same to the speculators engulfed been increasingly indulging in investment into such
the complete American economy into economic de- contracts. Hope they are keeping in their minds - to
pression and eventually the rest of the world. win while paying the game is to play smart and play
intelligent!
An investment into derivative markets requires a
deep rooted understanding of the financial instru-
ments and an excellent foresight about the future
market development. Exiting the market at the ap- By: Kriti Pant
propriate phase is an essential for profiting in real
terms.

17
TEAM ECOBIZZ
BATCH OF 2011

From Left to Right:


Sudhanshu Pandey

Anuradha Upadhyay
EDITORIAL
Garima Shukla

Kriti Pant

Lakshay Mehta

From Left to Right:


Sonal Agarwal
Vivek Narang

EVENT Aanchal Agarwal


Shivalika Singh
Shubhra Chaudhry
Bharti Bajaj
Nikunj Doshi
Prasanna Sawarkar

From Left to Right:


Ashmita De
Sweta Singhania
CREATIVE Rishi Vagrecha

18
From Left to Right:
Anjum Daniels

Sumair Riyaz

Aditya Manishi

Kunal Bhatia
marketing
Mansi Unadkat

Y.V. Sai Shanmukha

Mohil Mishra

Amit Vohra

From Left to Right:


Manish Patel
IT
Ankit Jain

19