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MARKS: 100                                                                               COURSE: MBA


N. B.: 1) Attempt All the cases

Case Study -1

Tata Motors - Financing the Acquisition of Jaguar and Land Rover

On January 27, 2009, UK's business secretary, Peter Mandelson (Mandelson), announced a
financial package worth £ 2.3 billion to support the country's car industry . Out of the
package, £ 1.3 billion was demarcated for loan guarantees to auto manufacturers from the
European Investment Bank and £ 1 billion from the Government. Mandelson said, "There is
no blank check on offer, no operating subsidies. We are committed to ensuring that anything
backed by the scheme offers value for taxpayers' money, enables us to green Britain's
economic recovery, delivers significant innovation in processes or technologies for the long
term, supports jobs and skills in Britain."

Introduction Contd...

Initially, it was expected that Jaguar and Land Rover (JLR), owned by the India-based Tata
Motors Limited (Tata Motors), would benefit substantially from the package. Later, it was
announced that the financial aid would be capped at £ 250 million per company. Imposition
of the limit came as a big blow for JLR which was expecting around £ 1 billion loan from the

Though Tata Motors had infused millions of pounds and announced an additional £ 670
million infusion in December 2008, JLR desperately needed funds from the government to
ease the flow of liquidity, as credit was not easily available.

According to David Smith (Smith), CEO, JLR, "What we have been trying to impress on
Mandelson is that it doesn't address the urgent nature of the problem. Tata has already put in
significant amounts of additional funding, but what we can't access is normal commercial
facilities. Like a lot of large companies rolling over existing loans, we are finding it difficult
to get refinancing - it requires the government to put in loan guarantees to do that."
Tata Motors had acquired JLR from the US-based Ford Motor Company (Ford) for US$ 2.3
billion, in June 2008. Tata Motors took a bridge loan of US$ 3 billion from a consortium of
banks and intended to repay it through the rights issue, issue of securities overseas, and
divesting its portfolio of investments. However, the company's plans to secure funds went

Initially, Tata Motors had proposed to secure funds through three simultaneous rights issues,
one of which was of 0.5 percent convertible preference shares...

Background Note

About Jaguar

Jaguar was founded in 1922 by William Lyons and William Walmsley, who originally
planned to build a motorcycle with side cars. The two started a company called the Swallow
Sidecar Company in Blackpool, UK. By 1927, they had started building cars and in 1928,
they moved to Coventry, UK...

About Land Rover

The history of Land Rover dates back to the 1860s when J K Starley (Starley) set up a sewing
machine manufacturing business in Coventry. The company was named Rover in 1884, with
the introduction of bicycles and tricycles...

About Tata Motors

As of 2009, Tata Motors was part of the Tata Group, a business conglomerate with a presence
in over 80 countries and a work force of around 290,000 people. The Tata Group comprised
98 companies of which 27 were publicly listed...

Ford Sells JLR

After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to a
significant decrease in the demand for luxury cars. However, Ford still continued to invest in
bringing out better interiors, styling, and features in the Jaguar vehicles, and launched several
new vehicles including a new range ‘insignia' in 1992, and the XJ12 and the XJ16...

Plans to Finance the Acquisition...

Tata Motors planned to raise US$ 3 billion, about 30% more than the agreed acquisition price
of US$ 2.3 billion.

The additional funding was meant for engine and component supply, for which Tata Motors
had entered into a separate agreement with Ford, for any contingencies and requirements that
may arise in the future, and for the working capital requirements of JLR...

In June 2008, India-based Tata Motors acquired Jaguar and Land Rover (JLR) from the US-
based Ford Motors for US$ 2.3 billion. To finance the acquisition, Tata Motors raised a
bridge loan of US$ 3 billion from a consortium of banks. Tata Motors planned to raise Rs. 72
billion through three simultaneous but unlinked rights issues. However, the rights issue ran
into problems as the share price of Tata Motors continued to slide down, after the issue
opened. The shares were available in the stock market at a much lower price compared to the
price offered by the company. Other options to obtain funds like divesting stake in the group
companies, floating international equity related issues were also scrapped, due to adverse
market conditions.

At this juncture, in order to obtain funds, Tata Motors announced public deposit scheme in
December 2008.

Through all the fund raising efforts, the company was able to repay only US$ 1 billion by the
end of 2008. Tata Motors was required to repay the entire amount of bridge loan by June
2009. Due to adverse financial conditions and credit freeze, Tata Motors announced that it
was planning to roll over the bridge loan, which was estimated to further add to the debt
burden of the company.

» Understand acquisition of JLR as an example of Tata Motors' inorganic growth strategy.

» Understand the impact of macroeconomic factors on the global automobile industry.

» Understand the implications of global credit crisis on the availability of funds for

» Analyze different modes of finance available to finance cross border acquisitions.

Case Study -2

Tata Steel's Acquisition of Corus


On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch
steel company, Corus Group Plc (Corus) for US$ 13.70 billion3. The merged entity, Tata-
Corus, employed 84,000 people across 45 countries in the world. It had the capacity to
produce 27 million tons of steel per annum, making it the fifth largest steel producer in the
world as of early 2007 (Refer Exhibit I for the top ten players in the steel industry after the
merger). Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said,
"Together, we are a well balanced company, strategically well placed to compete at the
leading edge of a rapidly changing global steel industry."

Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final
offer of 603 pence per share by offering 608 pence per share to acquire Corus.

Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6
billion on October 17, 2006. CSN then offered 475 pence per share of Corus on November
17, 2006.

Finally, an auction5 was initiated on January 31, 2007, and after nine rounds of bidding, Steel
could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than
the first bid of 455 pence per share of Corus.

Many analysts and industry experts felt that the acquisition deal was rather expensive for Tata
Steel and this move would overvalue the steel industry world over.

Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South West Steel said,
"The price paid is expensive...all steel companies may get re-rated now but it's a good deal
for the industry." Despite the worries of the deal being expensive for Tata Steel, industry
experts were optimistic that the deal would enhance India's position in the global steel
industry with the world's largest and fifth largest steel producers having roots in the country.
Stressing on the synergies that could arise from this acquisition, Phanish Puram, Professor of
Strategic and International Management, London Business School said, "The Tata-Corus deal
is different because it links low-cost Indian production and raw materials and growth markets
to high-margin markets and high technology in the West.

The cost advantage of operating from India can be leveraged in Western

markets, and differentiation based on better technology from Corus can work in
the Asian markets."

Background Note
Tata Steel

Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates
in India. Tata Group companies generated revenues of Rs. 967,229 million in the financial
year 2005-06.

The group's market capitalization was US$ 63 billion as of July 2007 (only 28 of the 96 Tata
Group companies were publicly listed). In 1907, Jamshedji Tata established Tata Steel at
Sakchi in West Bengal. The site had a good supply of iron ore and water...
Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever
since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel made
an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. Corus
responded positively to the offer on October 20, 2006.


On January 31, 2007, Tata Steel Limited (Tata Steel), one of the leading steel producers in
India, acquired the Anglo Dutch steel producer Corus Group Plc (Corus) for US$ 12.11
billion (€ 8.5 billion). The process of acquisition concluded only after nine rounds of bidding
against the other bidder for Corus - the Brazil based Companhia Siderurgica Nacional (CSN).

This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel
emerged as the fifth largest steel producer in the world after the acquisition. The acquisition
gave Tata Steel access to Corus' strong distribution network in Europe.

Corus' expertise in making the grades of steel used in automobiles and in aerospace could be
used to boost Tata Steel's supplies to the Indian automobile market. Corus in turn was
expected to benefit from Tata Steel's expertise in low cost manufacturing of steel. However,
some financial experts claimed that the price paid by Tata Steel (608 pence per share of
Corus) for the acquisition was too high.

Corus had been facing tough times and had reported a substantial decline in profit after tax in
the year 2006. Analysts asked whether the deal would really bring any substantial benefits to
Tata Steel. Moreover, since the acquisition was done through an all cash deal, analysts said
that the acquisition would be a financial burden for Tata Steel.

Agreeing to the takeover, Leng said, "This combination with Tata, for Corus shareholders
and employees alike, represents the right partner at the right time at the right price and on the
right terms." In the first week of November 2006, there were reports in media that Tata was
joining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen on
acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus
with a bid of 475 pence per share. In the light of CSN's offer, Corus announced that it would
defer its extraordinary meeting of shareholders to December 20, 2006 from December 04,
2006, in order to allow counter offers from Tata Steel and CSN...

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the acquisition
was worked out and was presented to the Corus' Pension Trusties and the Works Council by
the senior management of Tata Steel. The enterprise value of Corus including debt and other
costs was estimated at US$ 13.7 billion (Refer Table I for fund raising mix for the Corus'

The Integration Efforts

Industry experts felt that Tata Steel should adopt a 'light handed integration'approach, which
meant that Ratan Tata should bring in some changes in Corus but not attempt a complete
overhaul of Corus'systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-
Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “If
the target company is managed well, there is no need for a heavy-handed integration. It
makes sense for the Tatas to allow the existing management to continue as before...

» Gain an in-depth knowledge about various corporate valuation techniques.

» Critically examine the rationale behind the acquisition of Corus by Tata Steel.

» Understand the advantages and disadvantages of cross-border acquisitions.

» Understand the need for growth through acquisitions in foreign countries.

» Study the regulations governing mergers & acquisitions in the case of a cross-border

» Get insights into the consolidation trends in the Indian and global steel industries.

Case Study -3

Grameen Bank: The Grameen General Credit System


Saira Begum (Saira) became a member of Bangladesh-based Grameen Bank3 in 1994. With
the loans given by Grameen Bank, she invested in dairy cattle, and with this investment, she
earned regular income. When her outstanding loan was around Tk4 5,000, Bangladesh was
ravaged by floods. Saira Begum lost heavily and was deep in debts.

She received a top-up loan from the bank, which increased the burden of weekly installments.
Unable to repay the money she owed the bank, she stopped attending the mandatory weekly
meetings of the bank, and she was not able to obtain any more loans. Later, the branch
manager of Grameen Bank approached her and explained to her a new loan offering of the
bank called flexi-loan, which required her to pay only Tk 25 a week as installment - a smaller
amount than her earlier installment. Saira began paying the installments regularly and repaid
her entire loan. This made her eligible for a fresh loan, and using this loan she started a small
shop. She had plans to send her school-going son to college using the education loan
provided by Grameen Bank.

Several women like Saira were able to improve their living conditions because of Grameen
Bank, which provided them small loans. For over 25 years, Grameen Bank has been
following the Grameen model of micro-credit, later renamed the Grameen Classic System
(GCS) to extend loans to the poor in the country.

Though the system was successful, it was criticized for its standardized rules, which were
strictly enforced. The GCS rules required a strict adherence to repayment schedules. Once
poor borrowers failed to pay their installments on time, they were not eligible for any further

In order to address the drawbacks of GCS, Grameen Bank introduced a new credit system
called Grameen General System (GGS) popularly known as Grameen II.

Elaborating on the need for the new system, Muhammadnus (Yunus), Founder and Managing
Director of Grameen Bank said, "The system (GCS) consisted of a set of well-defined
standardized rules. No departure from these rules was allowed.

Once a borrower fell off the track, she found it very difficult to move back on, since the rules
which allowed her to return, were not easy for her to fulfill. More and more borrowers fell off
the track.

Then there was the multiplier effect. If one borrower stopped payments, it encouraged others
to follow."5 The changes were brought out in the form of new products, flexible loans and
repayment schemes for borrowers who were unable to pay their loans on time, deposit
services, pension services, etc.

The new system was completely demand driven; the products were tailored to the borrower's
needs. The new flexible system allowed the borrowers to decide on the amount, term and
payment schedule of the loan. GGS brought non-members into its fold by allowing them to
deposit money and use other services.

Background Note

Yunus completed his PhD in Economics from Vanderbilt University in Nashville, Tennessee.
He became the Head of Economics department in Chittagong University in Bangladesh. In
1971, Bangladesh got its independence. The country was hit by famine in 1974.

During this period, Yunus came face to face with the problems faced by poor women in
Bangladesh when he visited Jorba village, where he saw poor women making bamboo stools.
They were in the clutches of poverty and were forced to sell the products they made to
moneylenders at very low prices. He extended a small loan of US$ 27 to US$ 42 to each of
the women. They repaid the amount to the moneylenders and thus began the journey of
Yunus and Bangladesh Grameen Bank.
When Yunus approached the banks in Bangladesh, asking them to lend loans to the poor,
they were not willing to extend credit as the poor were not considered to be creditworthy and
did not have any collateral to offer...

The Grameen Classic System

Organizing people into groups of five members each and bringing together a few such groups
to form a center was the keystone of GCS. Under the system, group liability replaced the
collateral that was required by the banks to extend loans. The group had members from a
homogeneous background, who knew each other, but were not related to each other. Six to
ten such groups formed a center and each village had one or two centers. A branch of
Grameen Bank, with branch manager and employees covered 15 to 20 villages, with the
covered area not exceeding 50 square kilometers...

Need for a New System

The floods that ravaged Bangladesh in 1998 devastated most of the country, and several
places were submerged under water for over two months. The floods affected more than 1.2
million Grameen members and most of the borrowers were unable to repay their loans. The
bank relaxed the terms of repayment and tried to help the borrowers rebuild their lives by
providing additional loans. It was not long before the borrowers faced the burden of paying
higher installments, which was beyond their means. The repayment levels decreased and
several borrowers stopped attending the weekly meetings. In order to cover the defaults,
Grameen Bank obtained Tk 2 billion loan from the commercial banks and raised Tk 1 billion
through bonds...

The Grameen II Credit System

One of the major changes that was brought through GGS was that the group liability system
was discontinued and the individual liability system was adopted. The loan of each member
was secured against her word. Against the previous practice of providing the loans to only
two of the needy people in the group, the loans could be provided to all the members of the
group. The first basic loan provided to the new members was Tk 5,000; fellow members
could recommend for a higher or lower loan amount. The final decision on the amount to be
disbursed was made by the Kendra Manager...

Basic and Flexi-Loans

GGS consisted of one prime loan product called the basic loan. It provided flexibility to
design the loan according to the requirements of the borrower. The term of the loan could
range from 3 months to 3 years. When the borrowers had developed their skills, commitment
and discipline for conducting small businesses and expanding existing businesses, larger
loans were provided. If the members were regular in repaying their basic loan, saving, and
attending the weekly meetings regularly, they could opt for business expansion or special
production loans. The borrowers were also allowed to prepay the installments and loans...
The case explains Bangladesh based Grameen Bank's two microfinance models - Grameen
Classic System and Grameen General System (GGS). For over two decades, Grameen Bank
extended loans to poor people in Bangladesh under its Grameen Classic credit system. In
1998, the floods ravaged the country which led to many poor people default on their loan
payments. This led to the need for a new, more flexible credit system. The result was
Grameen General System which allowed the borrowers to remain as the member of the bank
even when they were unable to pay their loan installments. The case gives an overview of the
GGS and the success Grameen Bank achieved after implementing the new credit system.

» Study and compare the Classic and General microfinance models of Grameen Bank

» Examine the reasons that prompted the bank to introduce a new, more flexible credit system

» Analyze the advantages and disadvantages of Grameen General microfinance model

Case Study -4

The Microfinance Industry in India


India has one of most extensive banking infrastructures in the world. However, millions of poor
people in India do not have access to basic banking services like savings and credit. In the mid-1990s,
about 70% of India's population lives in rural areas which account for only 30% of the bank deposits.

About 70% of the rural poor do not have bank accounts and 87% of them do not have access to credit
from banks.In the same period, the share of non-institutional agencies including traders, money
lenders, friends and relatives in the outstanding cash dues of rural households was 36%.4

In the past, both public and private commercial banks in India perceived rural banking as a high-risk,
high-cost business i.e. a business with high transaction costs and high levels of uncertainty. Rural
borrowers, on their part, felt that banking procedures were cumbersome and that banks were not very
willing to give them credit.

Commenting on the problems faced by the microfinance industry in India, YSP Thorat, managing
director of National Bank for Agriculture and Rural Development (NABARD), and Graham AN
Wright, an international expert in microfinance, wrote, "Poor credit-deposit ratios, unsustainable
lending and high-levels of non-performing assets often cripple much of this infrastructure."5
In 1954, All India Rural Credit Survey Committee recommended expansion of the cooperative credit
system to cater to the credit needs of the rural poor. The regional rural banks (RRBs) were
incorporated in 1976. By the mid-1970s, the banking sector was operating as a three-tier system. The
first tier consisted of commercial banks, RRBs formed the second tier, and cooperative banks formed
the third tier. About 49% of all scheduled commercial banks operated from rural areas. In the early
1980s, the Indian government realized the need for microfinance to provide the rural poor with
savings and microcredit services. Loans available through microcredit schemes were more accessible
to the poor people as compared to bank loans. It also compared favorably with non-institutional
money lenders in terms of cost.

In the late 1990s, the microfinance business was boosted by the innovative initiatives take up by
microfinance institutions (MFIs), non-governmental institutions (NGOs) and banks. They offered
micro-credit i.e. credit provided to poor people for financial and business services and for self
employment in rural areas. It fulfilled their basic needs and emergency requirements. The
microfinance business had the ability to reach the most deserving people and also increased the
repayment rates for banks, which were, at the time, burdened by mounting non-performing assets
(NPAs) on the rural credit extended by them.

Background Note

In the early 1980s, NABARD study found that though the network of rural bank branches had been
trying to create self employment opportunities by providing bank credit for over two decades, many
poor people remained outside the purview of the formal banking system. The existing banking
policies, procedures and systems including deposit and loan products were not tailored to the
requirements of the poor. They required better access to services and products rather than subsidized
credit. The study concluded that there was a pressing need to improve access to microfinance. It
therefore recommended that alternative policies, systems and procedures be put in place in order to
boost the growth of microfinance in India.

The Reserve Bank of India (RBI)6 and NABARD were actively involved in spreading the network of
commercial banks in rural areas, especially after nationalization. RBI had made it compulsory for all
private sector banks to open at least 25% of their branches in rural and semi-urban areas.

It had also stipulated that 40% of the net bank credit should be allotted to sectors categorized as
priority sectors, like housing, rural development and agriculture. With these measures, commercial
banks did move into rural areas but the advances given to the poor remained very low. To improve the
accessibility of the existing banking network to the poor, the Self Help Group (SHG)7 - Bank Linkage
Model was launched in 1992 with a pilot project for promoting 500 SHGs. The objective of the
microfinance initiatives was to facilitate empowerment of the poor, while pursuing the macro
economic objective of overall economic growth. In 1995, the RBI set up a working group to study the
possibility of linkages between informal SHGs and banks...

Types of Microfinance Institutions

Microfinance institutions develop and deliver a range of financial products for the poor. There are
three categories of microfinance institutions. They are:

These are Societies under the Societies Registration Act, 1860 or corresponding State Acts.

Others in this category are Public Trusts under the Indian Trust Act 1882, and non-profit companies
under Section 25 of the Companies Act, 1956. There are several NGOs which are registered as
trust/society and have helped the SHGs form into federations. Federations are formal institutions and
carry out both non-financial and financial activities including social and capacity building activities,
SHG training, and promotion of new groups, apart from financial intermediation.

These institutions cannot undertake financial intermediation activities on a large scale, as they are
prohibited from carrying out any commercial activities...

Microfinance - Major Players

The major players which were instrumental in the growth of microfinance industry in India included
NABARD, SIDBI, Rashtriya Mahila Kosh, FWWB and SHARE Microfin Limited.


NABARD was established in 1982 to provide credit to the rural sector. NABARD was a pioneer in
microfinance programs in India.

The bank's vision is "to facilitate sustained access to financial services for the unreached poor in rural
areas through various microfinance innovations in a cost effective and sustainable manner."

By 2005, NABARD's SHG-Bank Linkage program had emerged as one of the largest microfinance
programs in the world. NABARD also collaborated with NGOs, MFIs, banks and governmental
agencies in order to use other models of rural credit like the Grameen Model and the individual
banking model.

Encouraged by the success of the SHG program, NABARD planned to link 1 million SHGs by 2007
and reach 100 million rural poor...

This industry report presents a detailed overview of the microfinance industry in India. The
advent of new millennium witnessed significant developments in the Indian microfinance
industry, which attracted the attention of several private sector and foreign banks.

The report analyzes the potential of Indian microfinance industry and examines the recent
polices of Indian government to boost the growth of the industry. It describes various
microfinance models popular in India and includes a note on the leading players in the Indian
microfinance industry. Finally, the report examines the challenges facing the industry in the
near future.
» Trends and new developments in microfinance Industry in India

Case Study -4

Tisco - The EVA Journey


The retirement of JJ Irani (Irani), former managing director of Tata Iron and Steel Company
(TISCO)1 in August 2001, marked the end of his long, challenging and eventful career in

He was credited for bringing about a major transformation in the oldest and the largest
private sector steel plant in India. On his retirement, Irani, who had numerous achievements
under his belt, was asked, "Is there anything that you wished to accomplish but could not?"
He honestly replied, "The shareholder value for Tata Steel should have been higher than what
it is today. I feel sorry that the share today is only priced at Rs. 100. I think it should be at
least double that figure."

Irani's successor, B Muthuraman (Muthuraman) also held the same opinion. Muthuraman was
well aware of the fact that TISCO had not generated enough returns to increase the
shareholders' value.

The company's share price had been hovering in the range of Rs. 70 to Rs 180 since 1998. In
an interview, he confessed, "We have inadvertently ignored the shareholder. It's time to fix
that."In order to improve shareholders' value, Muthuraman decided to introduce the
Economic Value Added (EVA) concept (Refer Exhibit I) in TISCO. He made every effort to
ensure that the concept of EVA sank in at each hierarchical level of the organization.

This meant putting the concept across effectively to 43,000 employees in the company.
Bimalendra Jha, the chief of the improvement program in TISCO said, "There's a finance
manager in every individual. We tried to tap into him."4 TISCO's officials were determined
to achieve a positive EVA figure by 2007. However, analysts felt that this was a big
challenge for TISCO's management because for a highly capital intensive and cyclical
industry like steel, a positive EVA would be difficult to achieve. TISCO was however, able to
declare a positive EVA of Rs 3.31 bn5 for the financial year 2002-03. Industry analysts were
surprised at TISCO's pulling off the feat four years ahead of schedule. Now expectations
were high, and they wondered whether TISCO would be able to do it again in 2003-04.

Background Note

The idea of making steel in India was conceived in 1867 when, during a visit to Manchester
(UK), Jamshetji Tata, the founder of TISCO, was inspired by a speech made by Thomas
Carlyle (famous Scottish writer of 19th century), in which he said, "The nation which gains
control of iron, soon acquires control of gold."

Jamshetji Tata returned to India and commissioned a series of studies and analysis for the
viability of a steel plant in India, and eventually TISCO was set up in 1907. In 1954, the
Indian government established Steel Authority of India Limited (SAIL) with a much larger
production capacity as compared to TISCO. The government regulations of controlled pricing
of input and output, licensing, and freight equalization favored SAIL. On the other hand,
TISCO was not allowed to build up its capacity to derive economies of scale. However, since
the domestic steel market was a seller's market during the first four or five decades after
independence, TISCO did not face problems in selling its entire output and making
reasonable profits during this period.

In 1991, the Indian economy was liberalized. Import tariffs and custom duties were cut,
making steel imports cheaper.

This put TISCO through a rough period. Financial institutions started funding additional
capacities in steel production. A lot of new industrial group/companies like Essar, Lloyds,
Jindal, Mittal and Mideast entered the steel industry operating on very low margins.

TISCO soon realized that the technology it had been using was outdated and did not match
global standards since now the company had to compete with global steel majors.

To overcome this handicap, Irani invested heavily in technology improvement, instead of

focusing only on capacity addition...

The Aftermath

In the next year financial year 2001-02, TISCO reported dismal financial results. The
company's revenues came down by 14% while the PAT decreased by 63%.

Ratan Tata, Chairman of TISCO, blamed the recessionary phase in the global steel industry
due to the buildup overcapacity for the company's poor performance. However, the fact
remained that TISCO was not improving shareholders' value. Media reports estimated that
TISCO had destroyed shareholders' value to the extent of about 35% though TISCO's
officials claimed that the value destruction was limited to 5%. This controversy cropped up
even as Muthuraman insisted that making TISCO an EVA positive company by 2007 was top
of his agenda. After a prolonged phase of poor financial performance, TISCO reported
significantly improved financial results for the financial year 2002-03...

The Solutions

Analysts held the view that in order to sustain a positive EVA, TISCO would need to insulate
itself from the ups and downs of the business cycles that affected the steel industry.
Muthuraman accepted this point of view, saying, "The price of steel should be irrelevant to
us." In order to achieve a positive EVA, analysts suggested that TISCO needed to diversify
extensively. They said that by widening the scope of its operations, TISCO would be
somewhat insulated from business cycles.

In this context, the company evaluated a plan to invest Rs. 50 bn in the telecom business.
However, industry experts argued that telecom was too unrelated a business and one with a
long gestation period. They cited the fact that Essar Steel which had invested in an unrelated
business, had landed in a major financial mess, even defaulting on an international debt
obligation in 1999...

The case discusses the implementation of economic value added (EVA) framework in Tata
Iron & Steel Company Limited (TISCO), the largest private sector steel company in India.

It covers in detail the reasons for implementing the EVA framework in TISCO and the
benefits derived from it. The case then describes the limitations of EVA implementation in a
cyclical industry.

It examines the possible options under consideration by TISCO to ensure that the company
posts a positive EVA figure in future

» Implementation of EVA

Case Study -5

Allied Irish Banks - The Currency Derivatives Fiasco


On February 06, 2002, Allied Irish Banks (AIB)2 revealed that its US subsidiary - Allfirst
Financial Inc. (Allfirst)3 had incurred a loss of US $750 million (mn) in foreign exchange
trading operations (Refer Exhibit I for information on the AIB Group).

The losses incurred were the result of fraudulent trading activities of John Rusnak (Rusnak),
a trader in foreign currency operations at Allfirst. Rusnak's job was to make arbitrage profits
by taking advantage of discrepancies in the price of currencies in the cash, futures and
options markets.
During the period 1997 to 2001, Rusnak incurred heavy losses in foreign exchange
transactions. However, he was able to successfully conceal these losses by constructing
fictitious option trades that offseted those that were genuine.

He manipulated bank records and documents and reported false profits.

Due to the senior management's carelessness, and lack of knowledge and experience in
foreign exchange trading, Allfirst finally landed up in a financial mess.

Analysts said that though AIB would be able to bear this loss as it amounted to less than 10%
of its equity capital, it could also make the bank more vulnerable to future takeover attempts.

They commented that this scam had once again sent across a strong message that inadequate
risk management control systems and improper supervision of traders' activities could lead to
massive financial losses with a negative impact on even the most successful companies.

Background Note

Allied Irish Banks (AIB) was formed in 1966 by merging three leading Irish banks - the
Provincial Bank, the Royal Bank and the Munster & Leinster Bank.

Founded in 1825, the Provincial Bank had pioneered the branch banking concept in Ireland,
whereas the Royal Bank, established in 1836, was famous for its mercantile links. The
Munster and Leinster Bank, formed in 1885, was the largest of the three banks with the most
extensive branch network.

In the mid-1960s, in their efforts to expand their operations and seize the emerging
opportunities in global markets, the three banks agreed to merge and form AIB. Over the
decades, AIB became an increasingly global organization. It established a branch network in
the UK in 1970s, followed by major investments in the US in 1980s.

In 1983, AIB made an initial investment in the equity of the US-based First Maryland
Bancorp (FMB). In 1989, AIB purchased 100 percent equity stake in FMB.

In July 1997, AIB acquired another US-based company Dauphin Deposit Corporation which
was later merged with FMB in 1999 to form Allfirst. Allfirst's treasury operations were
divided into three departments - Treasury Funds Management (TFM); Asset & Liability
Management (ALM); and Risk Control & Treasury Operations (RC&TO).

Each of these offices was headed by a Senior Vice-president who reported to the Allfirst
treasurer. In 1993, the TFM was headed by Bob Ray (Ray) and it acted as the front office for
Allfirst's treasury operations. It had four major functions - treasury funding; interest rate risk
management; investment portfolio management; and global trading...

Events Leading to the Loss

In 1989, Allfirst's currency trading activities were limited. It used to meet the foreign
exchange needs of its commercial customers engaged in import/export activities, which was
essentially a fee-based business and did not entail much risk.

In 1990, proprietary trading was started and a new person was recruited for the job. In early
1993, the trader left the job and Ray appointed Rusnak to the post. Rusnak introduced
arbitrage trading in Allfirst. Previously, Allfirst was engaged in directional spot and forward
trading - simple bets that a particular currency would rise or fall. Rusnak convinced his
seniors that his trading style would enable Allfirst to take advantage of price discrepancies
between currency options and currency forwards, thereby diversifying the revenue streams
arising from simple directional trading. Rusnak claimed that he had vast experience in foreign
exchange option trading and could easily and consistently make money by taking a large
option position, and hedging the position in the cash markets...

Why Did it Happen?

Industry analysts felt that a combination of factors led to the loss at Allfirst. The bank had
completely failed to implement a proper operational control system.

Due to the lack of effective control and supervision, Rusnak got an opportunity to conduct
fraud and also successfully hide them from being detected. The major reasons that led to the
disaster were:


There were numerous deficiencies in the control system of Allfirst. The absence of any net
cash payment from Rusnak's trading activity and the difficulty in confirming trades at
midnight had resulted in the back office decision not to confirm offsetting pairs of options
trades with Asian counterparties from early 2000. Confirmation of all trades was the basic
standard practice, and failure to do so proved to be a disastrous for Allfirst...

The case discusses how John Rusnak (Rusnak), a trader at Allfirst Financial Inc. (Allfirst),
the US subsidiary of Ireland's leading bank - Allied Irish Banks (AIB), lost $750 mn in
foreign exchange trading operations.

It describes in detail how the fraudulent trading activities and manipulation of records by
Rusnak resulted in major losses.

The case brings out the complete sequence of events and also highlights the reasons for the
loss, including inadequate supervision, control system deficiency and failure to review policy
and procedures.

» Risk Management in Banks, Value at Risk (VAR) Model