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Dear Reader, It has been a season of conferences here at the ISB. Students and faculty organised conferences on a wide spectrum of management subjects - from real estate to healthcare and pharma, from social responsibility to supply chain and logistics. The student clubs have been very active indeed, vying with one another to get excellent speakers on campus, with the result that now everyone is beginning to feel extremely knowledgeable about various industries and the issues that drive them in today’s business environment. The most scintillating discussion was organised by the Media club where Editors and CEOs from the media sparred with one another, at the same time sharing common problems that the media industry faces, and what the regulators should be doing to support the Indian media industry instead of putting spokes in their wheel. The ISB has been fortunate to attract visionary speakers, so when Thomas Friedman, the author of ‘The World is Flat’ spoke at the ISB, the Khemka auditorium was packed and spellbound. The effect was the same when Sadhguru Jaggi Vasudev spoke on a completely different matter – ‘inner engineering’. We learnt yet another lesson from Captain Gopinath’s (of Air Deccan fame) passionate story of an entrepreneur who dared to reinvent himself again and again, and his journey from the armed forces to farming to the airline business. To top it all we had artist Julius Macwan, this year’s Artist in Residence, paint a controversial picture of a lady on the cross. It set everyone wondering whether this was the depiction of the death of the MBA, while Julius enigmatically smiled and said that it was up to everyone to interpret art to make sense personally. Kalpna Lajmi, in her inimitable and ﬁery style, regaled us with the history of ﬁnancing of the Indian cinema. In all, an intense and thought provoking three months, and the ISBInsight team brings snippets of all these experiences to you along with interesting cover stories on Financial Risk Management.
ISB Insight Team Bhuvana Ramalingam Varshaa Ratnaparke Monidipa Mukherjee Pallavi Dutt Sulagna Bishoi Photography: Kasarla Visual Communications Design & Cover Illustration: Trapeze Resources: Learning Resource Centre at the ISB Printed at Kala Jyothi Process Pvt Ltd Indian School of Business Gachibowli, Hyderabad 500032, India Phone: 91 40 23007000, Fax: 23007012 Email: firstname.lastname@example.org www.isb.edu Inside Cover: Section of the ISB Learning Resource Centre
Subscriptions: For details contact: email@example.com © Copyright, 2007. Indian School of Business (ISB). All rights reserved. All articles have been copyrighted by ISB and no part of this magazine may be reproduced either in part or full, or electronically stored into a retrieval system, or disseminated in any form (electronic, mechanical, photocopying, recording or otherwise) without ISB’s prior written permission.
Bhuvana Ramalingam Editor
December 2007 | ISB
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S T O R Y
4 Cover Story: Financial Risk Management Given the inherent unpredictability of markets across the world, ﬁnancial risk management is imperative for all, be it economies, capital markets, or individual investors 6
M Rammohan Rao, Dean, ISB, with TiE-ISB Connect guests
C O V E R
Preparing for the Next Downturn Forecasting the time and depth of the next downturn is never easy. Managers, at the crest of an upbeat economy should also be ready for a recession that will follow inevitably, and ﬁnd ways to make the most out of such a downturn
18 ISB Insight Special- The Wave of Economic Reforms ‘The next generation of reforms have to focus on how to bring growth to the rest of the country,’ shares Raghuram Rajan, Professor of Finance, Graduate School of Business, University of Chicago, in conversation with Sudip Gupta, Assistant Professor of Finance, ISB 22 TiE –ISB Connect - On the Right Track The catalytic forum of TiE -ISB Connect this year, focused on new and emerging sectors like retail, media & entertainment health-care among others. Each track reviewed global trends in the sector and predicted sector opportunities 24 Realty Concerns - A Global View Eminent industry leaders gathered for a panel discussion to address the impending concerns in the real-estate sector in India. Professor Joseph Gyourko, Director of Zell-Lurie Real Estate Centre, The Wharton School, University of Pennsylvania, observed that a lot of fundamentals can be replicated across borders 26 Creating a Life Balance in a Flat World Three times Pulitzer Prize winner Thomas L Freidman, shares the genesis of his best seller, the three eras of globalisation, the forces that created the ﬂat world, and how to stay ahead in the ‘ﬂat-world’ platform
10 The future of currency derivatives in India Professor Ramabhadran Thirumalai makes an impressive case for introducing currency futures in the Indian markets 14 Offshore betting on the Indian Rupee Professor Rajesh Chakrabarti adds another idea to the futures market – the non-deliverable forward market 17 Risk Management in India – a view from NSE NSE shares brief comments on managing risks in the complex and unique Indian market – An insight into risk parameters and the ‘value at risk’ principle
During the ISB Media Conclave
The Real Estate Conclave
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insight | December 2007
30 On Managing Healthcare and Education Two conclaves, organised by the student Clubs at the ISB, addressed the corner-stones of social infrastructure - education and basic healthcare. Access to basic healthcare, the economics of healthcare in India, empowerment through education such were some issues of deliberation 32 Getting to Know the India Factor To further their understanding about the Indian economy and market ethos, Belgium based investment company, GIMV, attended a CEE Programme at the ISB. Chairman of Board, Herman Daems, shares the scope of his visit 33 Is it the Death of Broadcast? Students chat up with media stalwarts during the ISB Media Conclave, on issues of consolidation, media ethics, and the future of broadcast. They ask upfront - ‘Is the media selling out?’
40 The Limitless Classroom The Business and Arts programme seamlessly merges classroom learning at the ISB, with the inspirational world of art. Director Kalpana Lajmi and artist Julius Macawn, during their recent visit, helped merge the binaries between art and business 42 Tryst with a Guru Spiritual guru Sadhguru Jaggi Vasudev talks on the ingredients of successful life and a successful business and adds that the beauty of life lies in the fact that it has no meaning 44 Taking Logistics to the Next Level The Centre for Global Logistics and Manufacturing Strategies (GLAMS) at the ISB hosted its ﬂagship event of the year, the Global Supply Chain Summit, and explored challenges and opportunities in rural and global supply chains in emerging markets 46 ISB Happenings Festivals, visits by dignitaries, social initiatives, inspirational talks – these and more were some on–campus glimpses of the quarter. Never a dull moment, this time of the year at the ISB 48 Book Review Alan Greenspan’s personal and intellectual legacy is available to those interested in managing ﬁnance in the 21st century in ‘The Age of Turbulence’
Sadhguru Jaggi Vasudev
Artist-in Residence, Julius Macwan interacts with students
36 From Sourcing Deals to Managing Exits A Venture Capital Development Programme equipped participants to deal better across the investment table and imparted an acute understanding of ﬁnancing entrepreneurial businesses. Also, Coach John Mullins shares how to assess a business opportunity
38 Operation ‘Goal’ Ram Bala, Assistant Professor at the ISB, recounts how a book inspired him in his journey of Operation Management. He is keen to pursue ‘India-centric’ solutions through his current research in the pharmaceutical industry
Union Minister Shivraj Patil visits the ISB
December 2007 | ISB
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Risk Management 4 | ISB Financial insight | December 2007 .
Overall. Swiss psychiatrist and founder of Analytical Psychology. they are redeﬁning the role of risk management in achieving objectives and. this has made the world much better off. The broader issues of risk have become a top priority for the senior management CFOs. we have also seen the emergence of a whole range of intermediaries. In the process. whose size and appetite for risk may expand over the cycle. as ﬁnancial markets become more volatile and competition increases. integrated approach to identifying and managing risks. Risk ofﬁcers are working to build risk management processes and embed them into management practices at all levels. Developments in the ﬁnancial sector have led to an expansion in its ability to spread risks. We hope you gain some valuable insights in the following pages. treasurers. under some conditions. it is important to give careful thought to ﬁnancial risk management. ultimately. managers need a clearer understanding of the risks they are taking to protect the physical. increasing shareholder value. and managing risk. Not only can these intermediaries accentuate real ﬂuctuations. And to have the ability afterwards to explain why it didn`t happen. they can also leave themselves exposed to certain small probability risks that their own collective behaviour makes more likely. Tongue in cheek quotes apart. and credit risk. December 2007 | ISB insight | 5 . Given the portent of economies of nations. Although uncertainty has always been a factor in corporate decision-making. ﬁnancial institutions are now seeking a comprehensive. However.” said Carl Gustav Jung. has led to a range of ﬁnancial transactions that earlier were not possible. Catalysed by Basel II. are the topics that have been covered. next week. the option of currency futures. It becomes vital therefore to be forewarned about the cyclical turns of the economy and prepare for a downturn when things are going good. and intellectual assets of their companies. British prime minister and writer. This issue features cover stories on ‘Financial Risk Management’ from academicians as well as industry executives. Nevertheless. economies may be more exposed to ﬁnancial-sector-induced turmoil than in the past. Foreseeing the cyclical turns of the economy. and next year. operational. The increase in the risk bearing capacity of economies. As a result. Their main goal is not to eliminate uncertainty. ﬁnancial. measuring. next month. the regulator’s pivotal role in inﬂuencing the markets. and has created much greater access to M ﬁnance for ﬁrms and households. human. ISBInsight gathers perspectives from the NSE on managing risks. ﬁnancial institutions around the world are taking a fresh look at managing market. but rather to be proactive in assessing and managing risk for their own advantage. as well as in actual risk taking. much energies are spent in planning. “The great decisions of human life have as a rule far more to do with the instincts and other mysterious unconscious factors than with conscious will and well-meaning reasonableness.” said Winston Churchill 1874-1965.anaging risk can probably be deﬁned as the ability to foretell what is going to happen tomorrow. the innumerable investors and exchanges that participate in the stock market and the mind boggling capital outﬂow across the world.
executives enjoying today’s upbeat economy should also be preparing for the recession that will inevitably follow. What’s more. Arguably. and joint ventures. probably in an effort to negotiate lower prices and better service. nearly 40 percent of leading US industrial companies toppled from the ﬁrst quartile in their sectors during the 2000-01 recession. many that emerged from it as leaders expanded their businesses during 6 | ISB the recession.” Nobel laureate Paul Samuelson famously quipped. alliances. we believe that ﬂexibility can make a notable difference by allowing managers to take advantage of the opportunities that that next recession might provide. on average. which became even more valuable during the recession. In addition. o understand how to make the most of a recessionary environment. the average net debt-to-equity (D/E) ratio before the recession was roughly half that of their less successful competitors. And although the leaders increased their asset bases through capital expenditures or acquisitions at the same pace as less successful companies did before the recession. At industrial companies that ultimately emerged as sectors leaders. capital expenditures that were 8 percent higher and growth through M & A that was 13 percent lower than their less successful counterparts did. both organically (through internal investment) and through inorganic activities such as M&A. Entering the downturn.” Impossible as it is to forecast the timing or the depth the next downturn. they were able to pay their suppliers faster. T Balance Sheet Flexibility Whatever the positions the companies had within their sectors before the downturn. Although recessions strike different sectors in different ways and at different times. “have correctly predicted nine of the last ﬁve recessions. companies that emerged in the top quartile spent 15 percent more on capital expenditure and conducted 7 percent more M&A – possibly buying cheaper assets from distressed sellers. In 1999. the post recession leaders also held insight | December 2007 . they typically maintained lower leverage on their balance sheets. for example. At the same time. and focused more on organic growth.Preparing for the Next Downturn “Economists. and a third of leading US banks met the same fate. During the recession itself. leading companies had. however. the post recession leaders in most of the sectors we explored had characteristics in common. we analysed which characteristics they exhibited before the recession that might help explain why they outperformed their peers. And although previous recessions aren’t necessarily a guide to future ones. we analysed the performance before. during. and after the 2000-01 recessions of some 1300 US companies from a broad range of sectors1 and identiﬁed which of these companies emerged from it having gained or maintained leadership status2. winning companies leveraged the beneﬁts of balance sheet ﬂexibility that they had achieved before the recession. the focus of their growth was different: the more successful companies spent less on M&A. by our reckoning. better performers leapfrogged the competition by continuing to invest and to grow inorganically: in the year 2000. Many weren’t ready for the last one. and diversiﬁed their product offerings and business geographies. 15 percent of companies that had not been industry leaders prior to the last recession vaulted into those positions during it. For these industry leaders. for example. Such fundamentals gave them a greater degree of strategic ﬂexibility. on average. controlled operating costs well.
and administrative costs during recession. continue to improve levels in pre-recession years • Maintain ability to pay suppliers sooner to secure good contract terms Financing capacity for taking advantage of opportunities • Reduce leverage compared to industry • Boost ability to ﬁnance internally – higher cash balance. lower dividend payout Operating Flexibility Cost variability • Reduce selling. innovative product offering • Offer products • Tailored to proﬁtable customers • Identify. but not before • Build ability to quickly refocus. reduce spending • Maintain higher employee productivity • No across-the-board head count reduction at beginning of recession Flexibility of product offering Healthy Diversiﬁcation • By segment • By geography Value Based Product Innovation • Understand customer segment • Introduce innovations to increase volume without discounting prices • Continue focused advertising Restructured product mix. reduce exposure to unproﬁtable customers Ability to preemptively reduce costs • Improve interest spread • Reduce both personnel and non personnel costs Additional characteristics of banks Financing capacity for taking advantage of opportunities • Control portfolio deterioration. use quality measure in investing • Improve capital adequacy ratio December 2007 | ISB insight | 7 I C O V E R S T O R Y . for example.“Executives can build ﬂexibility into a company’s balance sheet by reducing the capital intensity of the business model. or by resisting the urge to use additional debt to ﬁnance dividend growth or share buybacks.” Exhibit 1: Pre-recession approaches to increase ﬂexibility Top quartile companies are better prepared Strategic Lever Balance Sheet Flexibility Industrial Companies Steady increases in capacity • Continue and increase capacity organically Reduction in inventories but also payables • Maintain lean inventories. general.
this strategy somewhat reduced the company’s ratio of advertising expenses to revenues (from 5. Executives can build ﬂexibility into a company’s balance sheet by reducing the capital intensity of the business model. assets. Although. general. When the recession began. Product Offerings Companies that emerged from the recession as industry leaders generally had I S T O R Y Exhibit 2: Starbucks – extreme ﬂexibility Starbucks accelerated its growth during the recession in part by increasing the number of licensed and owned locations. selling. and so they had to lay off more employees during the downturn. as the industry average hit a high of 31 percent.more cash on their balance sheets prior to the recession than those that weathered it less successfully. % 30 1 Compound annual growth rate. perhaps damaging their ability to attract and retain talent in the future. adding part time workers during the growth period of 1990s at almost double the pace at which it added salaried workers. increased the ﬂexibility of its workforce in the years before the recession. as proﬁts grew during the expansion. in spite of having comparable starting levels. Talbots also radically shifted its advertising mix away from TV and catalogue operations and toward focused activities targeting customer groups with the highest sales potential. before the recession their less successful counterparts kept dividend payouts roughly stable – at 35 percent in 1995 and 33 percent in 1999 – and even increased them to an average of 38 percent in 2000 as the recession began. and administrative (SG&A) costs are typically difﬁcult to cut in short term. and personnel as conditions changed.3 percent in 2001). reducing the payout ratio to 28 percent in 2000. Managers achieved this target by expanding the proportion of licensed outlets from 7 percent in 1998 to 13 percent in 1999 and 23 percent in 2000. their productivity per employee was lower than that of the leaders. In our study. From 1998 to 2000. respectively. cutting these costs even further. Consequently. the company’s hourly part- time workforce grew by 14 and 16 percent a year. Currently alliances contribute 14 percent of the company’s revenues but account for 39 percent of its proﬁts. for example. less successful companies cut their R & D and advertising more deeply. In contrast. and managers consistently reduced the company’s leverage every year until 19993. Starbucks was one company that used such tactics to good effect in holding onto its leader status before and after the recession. Licensing and international expansion through alliances allowed Starbucks to accelerate its growth during the recession. Talbots maintained advertising levels far above the sector in general. they quickly readjusted their SG&A to the new environment. McKinsey analysis 8 | ISB insight | December 2007 . or by resisting the urge to use additional debt to ﬁnance dividend growth or share buybacks. The US cataloguer and retailer Talbots. to a level 3 percent below that of their successful rivals4. Such measures helped Talbots emerge from the recession as a leader in its sector. the companies that emerged as winners refrained from increasing their dividends: their dividend payout ratio gradually decreased from a peak of 40 percent in 1995 to 32 percent C O V E R in 1999. In contrast. for example. That year the D/E ratio of Starbucks dropped to only 2 percent. they could redeploy their funds. putting them at a disadvantage at tapping the opportunities these expenditures might create. In 1996 it had a D/E ratio of 8 percent. compared to an average of 14 percent of the restaurant sector.5 percent of revenues in 2000 to 4. Operating ﬂexibility Many companies that emerged from the last recession as industry leaders also focused on reducing costs without damaging the longterm health of their businesses. Then. thousands Prerecession 9 8 7 6 5 4 3 2 1 0 1996 1 recession Postrecession Owned Licensed 1997 1998 34 1999 32 2000 40 2001 35 2002 25 2003 23 2004 19 CAGR of outlets. though it entered the recession as a challenger. Then they cut dividend payouts aggressively at the ﬁrst signs of recession. the salaried staff only by 9 percent. its ratio of advertising expenses to revenues was 120 percent higher than the sector average in 2000 and 80 percent higher than it in 2001. Before the recession. Number of Starbuck outlets. Source: Starbuck. winning companies did so by making their overhead costs and operations more ﬂexible before the recession. as the recession took hold in 2000 and 2001. Although.
successful companies proactively managed their customer and product portfolios before the recession. respectively).15 0. When the recession struck. By altering its service mix toward broadband and valueadded services.25 0. Average revenue per user.20 0. and product ﬂexibility to make the most of the next downturn. By geography. we believe our research can be useful in helping managers and boards prepare when they conclude that a recession is imminent. We investigated the ﬁnancial performance of each company during the period from 1995 to 2005. 2004. Reprinted with permission. July 7. they do not signiﬁcantly affect the relative ranking of companies. 4 Normalized for revenue.Dobbs. Starbucks avoided massive discounts. we focus on the years immediately preceding a recession to identify how companies prepared for it. managers and boards won’t forecast with any precision the timing of the next recession. This pattern was particularly true of companies that led their industries before the recession and retained this status after it: their sales were twice as diversiﬁed by segment as those of companies that ceased to be leaders. 2002. Average revenues per user fell throughout the industry as per minute revenues dropped by nearly 20 percent annually from 2000 to 2003. and after the recession than did their less successful counterparts. 3 The D/E ratios of the companies in this analysis were not adjusted for the capitalized value of operating leases and retirement liabilities.com. If past is prologue.mckinseyquarterly. the difference was smaller. index: average revenue per user in 1999 = 100 110 108 106 104 102 100 98 96 94 92 0 1999 2000 2001 2002 2003 0 1999 2000 2001 2002 2003 0. its comparable store sales growth increased by 5 percent in 1997 and 1998 and by 7 percent in 1999.30 Revenue per minute. Although everyone is different. This article was ﬁrst published in the Spring 2007 issue of McKinsey on Finance and can be found on The McKinsey Quarterly Website www. during. All rights reserved. But they should be asking themselves today whether they are building the ﬁnancial. Verizon combined an expanding customer base with increasing average revenues per user. Copyright © 2007 McKinsey & Company. we analyzed what helps companies succeed during a recession. but leaders that retained their status were about 20 percent more diverse in this respect. Tomas Karakolev. McKinsey analysis In our past research. Companies in the other three quartiles we refer to as challengers. As a result. In addition. Consider the US telecommunications company Verizon. “Learning to love recessions”. Source: Global Wireless Matrix IQ04. and improved customer service. 2 For the pre and post recession periods (1998-99 and 2001-02. achieved through trafﬁc growth of over 8 percent. measured by returns on invested capital (ROIC) and market-to-book ratios (M/B). $ Verizon 1 US industry average For 4th quarter only.10 0. In this article.) Exhibit 3: Success in the face of decline To offset falling call prices. Although such adjustments do affect the absolute degree of leverage. pp 6-9.05 0. Our sample included 1024 US companies in 27 industrial sectors and 264 US banks. which drove up sales during the late 1900s by boosting both prices and trafﬁc. 1 December 2007 | ISB insight | 9 .more diversiﬁed product offerings and a greater geographic presence before. The McKinsey Quarterly. which coupled an expanding customer base with increasing average revenues per user to offset falling call prices. For banks we used returns on equity (ROE) and M/B. as well as in the expansion periods between recessions. Verizon maintained its winning status through the recession. Merrill Lynch. we deﬁne the industry leaders as companies in the top quartile of their industries. and Francis Malige. operating. special edition: Risk and resilience. instead adding innovative valueadded services (including Wi-Fi internet access in its stores). Consider also the experience of Starbucks. in 2002 the company again posted comparable-store sales growth of 6 percent. the Starbucks Card. See Richard F.
in its Annual Policy Statement for the Year 2007-08. Futures are like forwards in that they are obligations to trade currencies at a speciﬁed exchange rate at a speciﬁed future date. a bank) and a private entity. The market has since cooled off and by the end of November 2007 around INR80 million worth of contracts have been traded each day. the Dubai Gold and Commodities Exchange became the ﬁrst to list and trade futures contract on the INR in June 2007. and swaps. The market started off with a bang with contracts worth over INR1 billion being traded on each day for the ﬁrst few days. entities wanting to hedge their exposure to exchange rate risk have to do so in the overthe-counter (OTC) markets using forwards. by deﬁnition. Based on this. Prior to joining the ISB. The Future Of Currency T he Indian rupee (INR) has appreciated by around 12 percent relative to the US dollar (USD) in 2007 alone. The Reserve Bank of India’s (RBI) Committee on Fuller Capital Account Convertibility has recommended the introduction of currency futures in India. Consequently. Further. the dealer attempts to reduce default risk by entering into these contracts only with highly creditworthy entities. In the current environment in India. trade on exchanges. As a result. the RBI. Both these contracts typically 10 | ISB insight | December 2007 . a currency derivatives market that could hurt Mumbai’s chance of being an IFC. These are physically deliverable contracts. Being private party agreements between a dealer (typically. It introduced futures on the INR-USD exchange rate with each contract on INR 2 million. he was teaching at the Kelley School of Business. His current research interests are in market microstructure and corporate governance. While the RBI and other government bodies debated the introduction of currency futures in India. Though trading volume of the INR-USD futures has dropped since introduction of the contract in Dubai. Indiana University. Thirumalai is an Assistant Professor of Finance at the ISB. Currency futures. This has led to reduced proﬁtability of a number of Indian companies. Ramabhadran S Thirumalai explores the pros and cons of introducing currency futures in India. This potential problem may be dealt with by having exchange-traded derivatives like futures. small companies and individuals may not be able to hedge their exchange rate risk through OTC markets. options. among other things. the Ministry of Finance’s High Powered Expert Committee on Making Mumbai an International Finance Centre (IFC) in its report points out to the lack of. set up an Internal Working Group on Currency Futures to recommend a suitable framework within which currency futures can be traded in India.Derivatives In India In this article. it does not undermine the importance of introducing currency futures in India. the push for introduction of currency futures in India has gained momentum.
Say. While this is not a perfect hedge.00INR/USD.75INR/ USD and the spot rate is 40. the current one-month forward exchange rate between INR and USD is 40.00INR/USD. This margin account is adjusted daily to reﬂect that day’s gains or losses. The counterparty to all futures contracts is the exchange clearinghouse. The difference between the spot and futures price on the day the hedge is unwound is called the basis. The company will enter into an obligation to sell USD and receive INR in a month’s time at 40. Daily settlement involves determination and immediate realisation of a daily gain or loss on each futures position. It closes its position in the futures contract and realizes a gain of 0. the hedge works a little differently. The company would sell USD1 million in the spot market and receive INR40 million.50INR/USD. It introduced futures on the INR-USD exchange rate with each contract on INR 2 million. thereby reducing default risk on one side of these contracts. regardless of what happens to the spot exchange rate over the next month. it will be able to convert the USD1 million to INR40 million. smaller investors may ﬁnd it easier to trade in these markets rather than in forwards. while forwards are customised. It wants to hedge its exposure to exchange rate ﬂuctuations over this period. typically less than 10 percent. in turn. reducing default risk. the risk is lower than staying un-hedged. Given that the daily settlement process is imposed on all investors trading in futures markets. The ex-ante uncertainty Professor Ramabhadran Thirumalai December 2007 | ISB insight | 11 . in a margin account with its broker. the current futures price is 40. the exchange requires it to deposit a percentage of the notional value of the contract.75 million.00. Say. Before further comparing forwards and futures. the Dubai Gold and Commodities Exchange became the ﬁrst to list and trade futures contract on the INR in June 2007. A company is expecting an inﬂow of USD1 million in a month’s time at which time it will convert the USD to INR. Here we assume that the futures contract expires after the company receives and converts the USD 1 million. On the day the company receives the USD.000 on USD1 million) on its futures position. At the time an entity opens a new position in a futures contract.“While the RBI and other government bodies debated the introduction of currency futures in India.75INR/USD (total gain of INR750. The clearinghouse. an example of how forwards and futures may be used to hedge exchange rate risk would be beneﬁcial. ” have a life of a few months up to a maximum of one year. The net realised cash ﬂow in INR would be 40. However. futures are standardised to facilitate a liquid market. imposes daily settlement on entities that have open futures positions. The company could also use a futures contract to hedge its risk. In this case. the futures price is 39. The company knows that.
it is not clear whether futures markets will have better liquidity than forward markets. is it really necessary to have a forex futures market in India? The answer is yes. A recent report from the Bank for International Settlements (BIS) ﬁnds that the notional value of outstanding forex contracts in global OTC markets was close to USD49 trillion at the end of June 2007. This may result in an imperfect hedge. While there may be perceived beneﬁts of having a centralised trading location for futures. Any hedger still has to decide between a forward and futures contract.I C O V E R S T O R Y “While there may be perceived beneﬁts of having a centralised trading location for futures. The potential beneﬁt of trading on a centralised market vis-à-vis a fragmented market is unclear. These include futures and options. both forwards and futures give identical hedges. One reason is the aforementioned access to forex hedging instruments by small companies and individuals. There are a few drawbacks of using futures to hedge exchange rate risk. currency swaps (25 percent). Yin (2005) shows that when these search costs are considered centralised markets have narrower bid-ask spreads than fragmented markets. it is not clear whether futures markets will have better liquidity than forward markets. From a market structure perspective. However. hedgers will prefer one over the other under different circumstances. even if prices in both markets are different. Biais (1993) shows that. who may not have access to OTC instruments. de Frutos and Manzano (2002) show that expected spreads in fragmented markets are narrower.” of this basis (called basis risk) causes the hedge to be less than perfect. investors cannot choose the size and the expiration date of the contracts. OTC markets for forex contracts are huge. and options (25 percent). relative to exchangetraded contracts. Lioui (1998) provides some insight about this choice. In the presence of stochastic interest rates. expected bid-ask spreads are similar in both markets. if the hedging effectiveness is measured by the risk-return trade-off of the two strategies. The notional value of exchange-traded forex products was a meagre USD303 billion. Hence it is possible to create a hedge that is closer to a perfect one. futures trade on centralised exchanges whereas forwards trade on fragmented OTC markets. On the other hand. Globally. Both these studies ignore search costs incurred by investors in fragmented markets. Given the relative size of global forwards and futures markets. However. As they are standardised contracts. all else being equal. A second reason for having a forex futures market is that it would facilitate timely dissemination of future expected exchange rates to all 12 | ISB insight | December 2007 . This does not mean that a hedger should always choose forwards over futures to hedge foreign exchange (hereafter forex) exposure. he ﬁnds that when hedging effectiveness is measured by volatility minimisation of the hedged portfolio. These include outright forwards and forex swaps (50 percent). forward contracts can be customised in terms of size and expiration dates among other dimensions.
It lists some of the advantages of doing this.” December 2007 | ISB insight | 13 . The SEBI has more experience with regulating exchanges and it has been fairly successful doing so. much like it is at other forex futures markets around the world like the Chicago Mercantile Exchange. To be able to attract small companies and individuals to forex futures. when the INR becomes fully convertible on the capital account. The existence of a forex futures market clearly improves the efﬁciency of currency markets. Involving any of the existing stock or commodities futures exchanges is a good idea. this would imply that investors would be required to post an initial margin of no more than INR4. Assuming that the exchange rate stays at around 40 INR/USD and the margin is no more than 10 percent.interested entities leading to better price discovery in this market.000. the Securities and Exchange Board of India (SEBI) is in charge of creating and regulating security exchanges in India. Most of these exchanges are fairly young and have a ﬁrst-hand experience in dealing with the “growing pains” of a young exchange. A major roadblock to introduction of forex futures in India is the regulation of its exchange. On the other hand. namely.000 per contract. As they are standardised contracts. it is hoped that these futures will be settled with physical delivery of foreign currency. The aforementioned RBI report recommends that the RBI regulate the forex futures market and setup a dedicated exchange for forex futures. This may result in an imperfect hedge. In India. lower set-up costs and the expertise and experience that these exchanges bring. which would be fairly affordable to small investors. This experience will go a long way in setting up a successful forex futures market in India. “There are a few drawbacks of using futures to hedge exchange rate risk. it is the RBI that controls the forex market and hence it wants to control the forex futures market also. investors cannot choose the size and the expiration date of the contracts. the futures market accounts for 80 to 90 percent of price discovery in currencies despite its small size relative to the OTC markets. One can argue whether the RBI or SEBI should be given the responsibility of regulating forex futures markets in India but given the report’s recommendation only time will tell if the RBI’s attempt at regulating an organised market for forex futures will be successful. This report further adds that the dedicated forex futures exchange could be run by one or more of the Indian exchanges provided they meet the eligibility criteria. the size underlying each contract should be small. Rosenberg and Traub (2006) ﬁnd that when compared to a fragmented and opaque spot market for currencies. A potential downside of the RBI regulating this exchange is its inexperience in regulating organised markets. The same RBI report has also recommended that the futures contract be cash-settled in INR because the INR is currently not fully convertible on the capital account. A recent report by the RBI’s Internal Working Group on Currency Futures has suggested that each contract should have a notional value of USD1. Eventually.
casuing an erosion of India’s competitiveness in key export markets like textiles and software. Non-deliverable forwards (NDF) provides foreign investors with a method to hedge their currency risk associated with movements in the rupee. where forward contracts on the Rupee are written against typically the US Dollar or the Euro with the difference that. the NDF provided foreign players with the only offshore hedging tool to manage Indian Rupee risks.5 percent in 2007. How does an NDF contract work? The NDF market is essentially a forward market for the Indian Rupee. on maturity. transaction volumes in the NDF market for the Rupee has reportedly soared to over $750 million a day from about $100 million a day in 2003-04. Foreign Institutional Investors seeking pure portfolio investments. Los Angeles (UCLA) and is currently focusing his research on the ﬁnancial sector in India. In the last ﬁve years foreign investment inﬂows have grown at a compounded annual growth rate (CAGR) of over 26 percent (see Figure 1). In 2007-08 so far. Kolkata and IIM. as is the norm in the usual forward market. The growth in activity in this market. private equity ﬁrms picking up large blocks of shares and all-out foreign direct investment have all contributed to the surge of capital inﬂows. has however. There has been a surge of foreign investment ﬂows into the country in recent years. ﬂuctuations in the Indian Rupee clearly present a risk that needs to be managed. the offshore non- I deliverable forward (NDF) market for the Indian Rupee is often completely forgotten. the contract is settled not by delivery of the Indian Rupee against that of the counterpart currency. t has been exciting times for the Indian Rupee lately. Educated at the Presidency College. A clearer understanding of the NDF market. aided by external commercial borrowings (ECBs) by Indian companies. occurring outside India’s borders. Indeed. Canada. From a foreign investor’s point of view.5 percent of total currency transactions in the world in 2004 to about 3. monetary authorities as well as industry are concerned that this deluge of inﬂows may inundate the system and is already causing an appreciation of the Rupee. provides insights into the currency risk management practices as well as speculative activities involving the Indian Rupee. Before the launch of the Indian Rupee Futures Contract in Dubai earlier this year. Its exchange rate dynamics has experienced quite a reversal from the time-honoured trend. 14 | ISB insight | December 2007 . He has published in top-tier academic journals and has authored two books including ‘The Financial Sector in India – Emerging Issues’. A large part of this is driven by foreign investors’ discovery of India. The sources of these funds have been numerous. and India and currently teaches the courses International Finance and Indian Financial System to students of the Post Graduate Programme in Management at the ISB. He has taught in the USA.S T O R Y Offshore Betting on the Indian Rupee – The Non-Deliverable Forward (NDF) Market I C O V E R Rajesh Chakrabarti is Assistant Professor of Finance in the Indian School of Business. Amidst all these excitements in India’s external sector. The familiar regime of the declining rupee has been replaced by swelling foreign exchange reserves and government efforts to control an appreciating rupee. surpassed both the impressive rise in rupee denominated forex transactions as well as investment inﬂows. he has a PhD from the University of California. Trading volumes in the Indian Rupee have risen close to four times in the last 3 years and the Indian Rupee’s share of world currency transactions has more than doubled from about 1. as the value of their investments and cash ﬂows directly hinge upon the value of the rupee in their home currencies. therefore. published by the Oxford University Press in 2006. Ahmedabad. France.
RBI rules now allow importers and exporters to buy forward contracts up to their previous year’s turnover or previous 3 years’ average import or export. However in 2003 the outside estimate for daily volumes in the Indian Rupee NDF market was $100 million. The NDF market is typically an offshore market. Several major global banks like Deutsche Bank. from the seller to the buyer. December 30. Since the rupee is weaker in the spot market as opposed to the NDF contract. with a “settlement date” of. 39 per USD.600. but at least 80 percent of their forward cover should be in the form of deliverables. Indonesian Rupiah. the buyer pays the seller approximately USD 25. The average bid-ask spread in the 1-month NDF is estimated to be about 11 basis points (of the midquote value).6 billion (Mishra and Behera (2007)). and Citibank are active traders in the Rupee NDF market. Chinese Renminbi. The activity here has risen by over 7. The buyer has made a corresponding loss. Though the size of the Indian Rupee NDF market is small compared to both those in other Asian currencies like the Korean Won. the direction of cash ﬂow would have been reverse. whichever is higher. and other Rupee exchange markets (it is less than a quarter of the Spot market as well as the onshore forward/swap market). therefore. indicating a difference of USD 0. The “ﬁxing” date for this contract is one business day before settlement. including multiple quote seeking) is over $4. The opposite side would typically be taken by Indian trading companies and exporters who could make arbitrage proﬁts as they had access to both the onshore currency markets as well as Dollar ﬂows outside the country. the relative liquidity in the NDF market mirrors these lower relative volumes. The “bidding volume” on NDFs (essentially quote enquiries and expressions of interest without necessarily resulting in deals. with the buyer taking delivery of Indian Rupees as in the usual forward market. and the Taiwan Dollar. i. free from regulatory control of the currency’s home monetary authority. Accurate numbers are hard to come by as NDFs are over the counter (OTC) instruments. Therefore the actual cash transactions in the NDF market are a small fraction of the notional values of the contracts transacted. New Taiwan Dollar. the seller of the NDF contract on the Rupee makes a proﬁt. NDFs are traded primarily in Singapore and Hong Kong with Dubai and Bahrain showing some activity as well. FIIs are allowed to hedge their equity and debt exposures. Onshore ﬁnancial institutions are prohibited from participating in the NDF market. and London are major centres with the ﬁrst two specialising in Latin American and Asian currencies respectively and the third spanning both sets.9744 million. FDI investors can have forward cover not exceeding six months.0256 million or USD 25. There is also a demand from arbitrageurs playing the two forward markets. i. New York.e. 2007. close to four times that in the December 2007 | ISB insight | 15 I C O V E R S T O R Y . Singapore. Multinationals also use the Indian Rupee NDF market to hedge their exposure. Foreign investors would generally sell the NDF Rupee contracts to hedge their underlying positions. and Professor Rajesh Chakrabarti the Indian Rupee – constituted a majority of global NDF markets with the remaining volume coming largely from Latin American currencies and the Russian Rouble. here the buyer pays the seller the loss (gain for the seller) and the contract is settled.e. Of course. however.600 and the contract is considered settled. In our example. The “ﬁxing rate” is the RBI reference USD-INR rate on the “ﬁxing” day. In 2007 it is estimated to be over $750 million.e. All derivative markets serve two constituents – hedgers and speculators – and the Indian Rupee NDF market is no exception. if the Rupee had strengthened in the spot market relative to the NDF rate. Non residents can buy but not issue currency derivatives.but rather through the exchange of Dollars or Euros depending upon the spot price on the settlement date. Let us take an example of the Rupee-Dollar NDF for 38 million Rupees with a price of Rs. the NDF market now primarily serves non-residents like currency hedge funds interested in speculating on India. Bidding volume is spread almost evenly across the different maturities ranging from 1 month to 1 year with the latter end showing slightly higher volume. If the buyer had taken delivery he would have had to pay USD 1 million for the contract. 2007. For the Indian Rupee.5 times in the last few years while total foreign investment in India has roughly trebled during the period and with easing currency restrictions. In 2003. As compared to the onshore spot and forward markets. December 31. Instead of actually settling the NDF contract on December 31. Philippine Peso. in the sense that he can notionally purchase Rupee in the spot market at the rate of Rs 39 per USD and settle the NDF at the higher (Rs 38) rate. In India. UBS.. With the gradual relaxation of exchange restrictions in India over the years. The NDF market for the Indian Rupee started back in the 1990s when it provided the foreign investors in India the only avenue of hedging currency risk in the presence of severe exchange restrictions in a scenario where the Rupee was expected to have a secular decline. The NDF market typically ﬂourishes when capital controls prohibit foreign players from having unlimited access to the onshore forward market.38 per USD maturing on. however. Hedging of the Indian Rupee risks by foreign investors is clearly one major activity for the NDF market. i. Hong Kong is an important trading centre for Asian currency NDFs as well. Chinese Renminbi. Now let us say this rate turns out to be Rs. it has witnessed a phenomenal rise in recent years. Selling the 38 million Rupees in the market would have fetched him USD 38/39 million or USD 0. six Asian Currencies – the Korean Won.
Figure 1: Foreign Investments inﬂows into India S T O R Y 30. Data from late 2005 to now shows the extent to which these markets have become integrated through arbitrage activities (ﬁgure 2). the NDF market would continue to serve as an important currency risk management tool for many foreign investors as well as for speculators betting on the Indian Rupee away from the regulator’s gaze. As the Rupee moves towards full convertibility (anticipated in 2009) and new instruments for hedging currency risk (and speculating on them) emerge – the ﬁrst Rupee future is trading in Dubai.30 0. Between 2004 and 2007 this difference appears to reveal a pressure for appreciation of the Rupee that has been resisted by monetary interventions. Till that time.000 15.000 20.000 5.000 10. the difference between the onshore forward rates and the NDF rates reﬂect the effectiveness of capital controls in India.00 -0.40 9-28-05 10-28-05 11-28-05 12-28-05 1-28-06 2-28-06 3-28-06 4-28-06 5-28-06 6-28-06 7-28-06 8-28-06 9-28-06 10-28-06 11-28-06 12-28-06 1-28-07 2-28-07 3-28-07 4-28-07 5-28-07 6-28-07 7-28-07 8-28-07 9-28-07 10-28-07 1M NDF Differential 30 per. The 1month Rupee NDF rates are about 50 percent more volatile than the spot rates. It is conjectured that RBI involvement in domestic currency markets is a reason behind these volatility differences.20 -0.30 -0. The average differential is nil.50 0. domestic and foreign. and RBI is considering introducing exchange-traded Rupee futures in India as well – the NDF market is expected to wither away.10 -0. and almost 25 percent more unstable than the onshore forward rates. Mov. about a third of what it used to be around the turn of the century.000 C O V E R P: Provisional Portfolio Direct Source: Handbook of Statistics on the Indian Economy. though there are moderately long-lived swings on either side of the zero line.40 0. Reserve Bank of India Figure 2: The NDF differential : NDF one month rate (INR/USD) – Onshore forward rate 0.000 Foreign Investments ($ millions) 25. I 1990-91 1990-92 1990-93 1990-94 1990-95 1990-96 1990-97 1990-98 1990-99 1990-00 2000-01 2001-02 2002-03 2003-04 2004-05 P 2005-06 P insight | December 2007 Rate differential (INR/USD) 2006-07 P . given that RBI is active in both the onshore spot and forward markets. 16 | ISB These higher spreads appear to be justiﬁed by the higher volatility.20 0. The Rupee futures is likely to become the venue for betting on the Rupee (or hedging underlying exposures) for all parties. average spreads almost double as one goes from the 1month to the 3-month horizon and rises to 29 basis points for the 6-month contracts.10 0. Finally. however. Clearly the Rupee has become signiﬁcantly more convertible during this period. The extent of the gap is. Liquidity falls sharply for longer term contracts – for the Indian Rupee NDFs. with volatility rising for longer-term contracts. and substitute the NDF market. (1M NDF Differential ) Linear (1M NDF Differential) spot market and over 20 percent higher than in the onshore forward market.000 0 -5. These spreads are worse than those for NDFs in the Chinese Yuan and the Korean Won but better than those for the Philippine Peso and considerably better than those for the Indonesian Rupiah. Avg.
SEBI has stipulated that it has to be reset multiple times during a day. Indian markets have many brokers with small outlays. Besides. The support provided by the Indian exchanges along with the guiding principles monitored by SEBI make for a good regulatory and infrastructural framework. Some exchanges go up to the client level but face a time lag in collection. mostly at the clearing member level. Even in tumultuous and volatile times during this decade. much to the admiration of the global community. The ‘value at risk’ principle tries to ﬁnd out the amount by which the underlying asset or position could ﬂuctuate. Typically. Going right down to the client level. Financial risk management in the National Stock Exchange (NSE). and that too online and real time. the risk gets managed. December 2007 | ISB insight | 17 I C O V E R S T O R Y . the regulator has prescribed an online. there are ﬁve different parameters . This is where the Indian system is unique. in the event of a broker not fulﬁlling his obligation. spot price. Therefore. the price of the stock is one of the risk parameters. the more it changes the more the risk changes In the case of derivatives and options pricing. The spot price and volatility change perennially. upfront. is a unique feature. with a diverse population. interest rate. has evolved over a period of time and is as prescribed by SEBI (Securities Exchange Board of India). The major risk that needs to be measured in order to be managed is. So the ‘value at risk’ on a position becomes important for managing the risk and this is the principle followed everywhere. Updation of risk parameters multiple times during the day. exchanges collect it post the transaction. In the equities market.strike price. Mumbai. The effort lies in measuring the volatility and ensuring a robust system by which a margin can be collected upfront. the frequency of resetting the risk parameter becomes very important in risk management. the categories. makes the Indian system. NSE is one of the budding. the amount of loss that may be suffered by the clearing corporation. If that probable loss could be made available upfront as margin. real time. the clearing party may entail a loss. where there are signiﬁcant number of small brokers operating. unique. The numbers of brokers. are all different. SEBI has successfully brought in a robust system to take care of these needs and manage the situation very efﬁciently. Indian market mechanisms are very sophisticated. client level. big markets in the world. The risk management system has proved itself time and again as a robust one.Risk Management in India – a view from NSE The following article is a direct response from the National Stock Exchange. similar in both the equities and the derivatives markets. NSE is the third largest exchange in terms of number of transactions in the equities market segment. India is a diverse nation. time to expiry. In the derivatives markets. In the process of honouring the obligation. in a way. the risk perceptions. and the volatility. In India. mechanism to ensure the robustness of the risk management mechanism. Risk measurement also depends upon the type of risk parameters applied. no broker has defaulted. the volatilities. this information provided by the exchanges to the members enables the clearing member to manage his own risk even at a client level. SEBI employs a consultative approach in involving the exchanges to arrive at an efﬁcient risk management system.
and now increasingly. I don’t think that is the case. Very few countries have grown at that rate. We shouldn’t doubt the fact that we have grown at 8. or just in skill industries. or certain sectors. rather than just in coastal areas. spoke with Raghuram Rajan. If we can bring more value-added growth to agriculture. forex reserves. while the economy is growing at eight and nine percent. policy-making. and then to European markets and to the rest of the world. we need to connect the large portion of our economy to the areas that are doing well. But. There has been very little agricultural growth. The Wave Of I Professor Sudip Gupta: It is 16 years since the structured economic reforms were introduced. which would be more widely spread. Professor Rajan laid the foundations for the Centre for Analytical Finance at the ISB. Agriculture is witnessing one percent growth. in terms of the employment opportunities generated by these reforms. and to the outside. All the second or third generation reforms have to take place throughout the country. and is the Centre’s Academic Fellow this year. Therefore. Most people think of reforms as a good thing. But. There have been very few stories like that. it’s very important that the growth spreads through the economy. Graduate School of Business. there is a feeling of a possible barrier to this spill-over. and a host of issues including competitiveness. connect urban India to rural India ﬁrst. the fact is that there have been fast growers in the past who have moved from poverty to become a rich country. The same factors that are needed for agriculture are also generally needed for the whole economy. If we can substitute low productive agricultural labour with 18 | ISB insight | December 2007 . agriculture has to be empowered. ISB. I mean. China. There are still complaints that we are not doing well enough. Taiwan. This is a major barrier for pushing ahead with the next generation of ﬁnancial reforms. Korea. but they are very important examples – Japan. Some natural spill-over will take place. it is very important that we make sure the growth continues at this pace. we shouldn’t diminish the value of what has happened so far. Assistant Professor of Finance. Eric J Gleacher Distinguished Service Professor of Finance. We have the potential to build in such a way that the poorer sections can be part of the economy. Some people argue that it has bypassed the poor. So. The next generation of reforms has to focus on how to bring growth to the rest of the country. about the economic reforms in India. But. then there could be a tremendous pace of growth. University of Chicago. For that. and integration of India with the world. what lies ahead? Professor Raghuram Rajan: First. Somehow. Some states are doing quite well in agriculture.C O V E R S T O R Y Economic Reforms Sudip Gupta.5–9 percent. By this.
and Chinese manufacturers compete with each other and reduce it further. and wanting special favours. We need to think more carefully for ourselves. or aim for exportled growth. The other is extrapolating the experience of other countries too closely. There is concern about outsourcing to India. but nor do you want to have a hugely undervalued exchange rate. and eventually got it right. or aim for export-led growth. But. should we think about our own path? I would love people to create the environment – not try and decide on a path for growth – and see what happens. If we had listened to the babus at that time. exports are going to be part of our growth. and saying that is the answer. the Chinese are running into political roadblocks in the rest of the world. and therefore. and just create the environment.” December 2007 | ISB insight | 19 I C O V E R S T O R Y . Now. Do we want to expose ourselves to that kind of work willingly? Why not instead allow the natural innovativeness of our people to emerge by creating an environment? Stop trying to determine a particular industry. Who would have thought India was a natural place for cell phones? So. we would be nowhere. but also ﬁnd our own way. you have six million cell phones being sold every month. Are we going to go head-to-head with China? Or. as people resist the ﬂow of Chinese made goods. the Chinese are running into political roadblocks in the rest of the world. Compete.INSIGHT SPECIAL In Discussion – Professor Raghuram Rajan and Professor Sudip Gupta industrial workers – some states are actually doing that – that would be great. Let’s ﬁnd something in between. You don’t want an overvalued exchange rate. already. There were some special circumstances when China set up the SEZ. One is being unique. penalising the rest of the economy at the expense of the export sector. Do you think that setting up a Special Economic Zone (SEZ) like China would be a big political question for India? Are there any implications? There are two dangers in any reform process. But. Already Chinese companies are suffering because they are competing with each other. Wal-Mart keeps reducing the price of Chinese goods. already. there is a comparison with China which may not be correct. not replicate what we did in the past. So. “Let’s not ape the Chinese. When India is trying to set up SEZ. We did that in telecom. We should not only change and learn from other countries’ experiences. The poor are beneﬁting tremendously from a free competitive market. Sure. there is a problem. which will increase if there is a world recession. Sure. learning nothing from outside. We followed a path which learned from other experiences but was different. let’s not ape the Chinese. as people resist the ﬂow of Chinese made goods. exports are going to be part of our growth.
and mergers that are taking place in India. and employment in narrow sectors. So. determines what kinds of activities impede competition. leading to adhocism in the MRTP rating. and make sure that the Indian consumer – rich or poor – beneﬁts. and changes what you allow in terms of domestic concentration in different industries. ISB You rightly pointed out the competitiveness within India. There are.Sudip Gupta. integration. which is apolitical. our public policy has been governed by narrow producer interests than wider public interest. it is couched in terms of producer interests. thinks about the welfare of Indians. wellrecognised economic principles. as it is getting impacted by the rest of the world. Mostly. With the tremendous amount of change. We need a professional body. of course. Building these institutions is very important. But. And. We need to build those institutions and their reputation. What is your perspective on that? I agree with you fully on that. independent of the government. there is a puzzling question in the average insight | December 2007 . One of the major sources of risk sharing is that we need more people. at the same time. which is lacking in terms of individual investor taking part in the stock markets in India. We should recognise that imports and foreign competition does help. we should make sure that 20 | ISB we reduce barriers with respect to imports when we have a concentrated Indian sector. One major institution which actually maintains competitiveness in the US is the Federal Trade Commission (FTC) or Department of Justice (DOJ) or the Federal Communications Commission (FCC). The Competition Commission of India (CCI) is in a stagnant state since 2002. There is a lack of attitude towards scientiﬁc evaluation. and the average investor is forced to think about the volatility of the markets. we will have a much better functioning economy. Also. time and again. It should be a professional body. and then. and is pending in the Parliament. not biased towards the private or public sector. whenever arguments are made in public forums. the Sensex suddenly dropped 500 points. For too long. and bases itself on useful. the Monopolies and Restrictive Trade Practices (MRTP) Act was bullish. they are being driven away because of the high volatility. For example. we have to be careful about them. We do not have any such thing in India right now. we need to create the frameworks of the ﬁrst world economy which do not allow ad hoc interventions by the politicians or the government. Until 1991. than thinking of the economy as a whole. 3G and other sectors. Assistant Professor. and with respect to China and the rest of the world.
is striking? Far more than China. University of Chicago investor’s mind that If he/she is getting associated with the rest of the world. we will have a much better functioning economy. you can make the leap from Third World to First World. Accountants are competing for accounting jobs. you can make the leap from Third World to First World. the RBI allows it. and other areas that are not too far away from the frontiers in any way. and that certainly has a lot of people in the West worried and thinking. households. Do you see such market ﬂuctuations happen very often? What is your take on that? Does it imply that the individual’s basket is riskier. to be diversiﬁed across the world. In fact. “India’s development process. I have made proposals in the past as to how to make outﬂows happen without exposing oneself to excessive risks as a country. Brazil’s market is also very volatile in a day. in your opinion. is suggesting that through knowledge. We need to build those institutions and their reputation. and. we don’t need special technology. India’s development process. especially in the IT. We are at the frontiers of some areas without spending a long period of apprenticeship. For them. you can never be protective against the world contagion. and a reasonable amount in the books of private investors. rather than investing only in India. It is worth looking back at the past experience to understand what went right. we should allow capital outﬂows in very controlled ways such that you can very easily buy stocks in the US or anywhere else. or that the ﬁnancial risk has gone down? We are not necessarily more volatile than other emerging markets. but certainly one can protect against an idiosyncratic fall in the Indian market. That’s how India is different from the growth of other emerging economies. especially.” December 2007 | ISB insight | 21 I C O V E R S T O R Y . What. Having $220 billion in the Reserve Bank reserves makes less sense than having a lower amount in the Reserve Bank books. What implications do India’s 17 years of reform process have for the rest of the world – both developed and under-developed? What can they learn from it? We have learned a lot from China’s reform process. lawyers are competing for lawyers’ jobs. is suggesting that through knowledge. With manufactured goods. and now in pharmaceuticals and ﬁnancial services.INSIGHT SPECIAL “We need to create the frameworks of the ﬁrst world economy which do not allow adhoc interventions by the politicians or the government. he/she has more ways to share your risk. So. it took longer because you had to make your way up the scale from low-skilled to high-skilled manufacture. In theory. independent of the government. and then. Korea made that transition over a long period. especially in the IT. If this sort of fear catches on. compete with the First World in a very short period of time. and now in pharmaceuticals and ﬁnancial services. I do think we should be exploring by letting our investor become more diversiﬁed. similar to the portfolio way of sharing the risk. the single biggest technology is the knowledge of English. and.” Professor Raghuram Rajan. compete with the First World in a very short period of time. It should be a professional body. Of course. That’s worrying for people in the West. And.
“Entrepreneurship happens in the real world. C.ISB Connect.” Professor M Rammohan Rao.stepping up growth rate in agriculture sector.” Dr V Chandrasekar. bringing together early stage venture capitalists. Anji Reddy. Executive Director.” he said. “Fire the zeal in you. meeting infrastructure deﬁcit. Chairman. and good governance. noted the renowned economist and policy maker. Dr Rangarajan. hosted at the ISB. ﬁfty Venture Capitalists. and added that it pays to “cross the river by feeling the stones. start-up and growth stage entrepreneurs. He elaborated on the “uniqueness” of India’s economic reforms . Dr Campbell. WCED and co-convenor of TiE –ISB Connect said that the event was an attempt by the academia to reach out to the industry. in its third year. Addressing a plenary session on ‘Indian Economy – Challenges and Opportunities’. “Indian economic reforms are unique because ﬁrst. Other speakers of note were Dr.C O N N E C T TiE ISB Connect – I T i E On the Right Track Four hundred business plans. need for ﬁscal consolidation. which warrants priority attention .” he said. “Don’t just script ideas but take them forward and build businesses. Hyderabad Chapter. which has C Rangarajan. Reddy Labs 22 | ISB insight | December 2007 . Chairman. and not in the classrooms. said that in order to sustain India’s economic growth. the TiE-ISB Connect. and from an inward looking trade policy to being integrated in the world economy. addresses by renowned economic and business thoughtleaders – that was this year’s TiE. – I S B A joint initiative of the Wadhwani Centre for Entrepreneurship Development (WCED) at the ISB and TiE. gave a special address on ‘Leading through Innovation’. This democracy–federalism model has often meant restraint and compromise. and second they are pursued in a decentralising context. we need to “translate growth into poverty reduction”. was signiﬁcantly scaled up in scope and magnitude this year. but remember to include those who are deprived even of basic amenities. managing globalisation. Economic Advisory Council to the Prime Minister of India averaged 8. ‘Innovation and Research as Growth Engines’. a popular network-forum. Some of the well known and leading Dr Anji Reddy. from state ownership to private enterprise. Economic Advisory Council to the Prime Minister of India and Tom Campbell.” There are six challenges on the way forward. Dr Rangarajan mentioned. Key note speaker. Honourable Speaker of Andhra Pradesh Legislative Assembly.a journey from licence regime to entrepreneurial freedom.6 per cent per annum over the last four years. and academicians to interact and help build successful enterprises. Rangarajan. while Dr Reddy addressed a session themed. mentioned. UC Berkley. Dean ISB. Present at the inaugural session of this event was K Suresh Reddy. Reddy said. Speaking to an audience of venture capitalists and budding entrepreneurs. Reddys Labs. TiE –ISB Connect has managed to excite all the players in the entrepreneurial ecosystem. six new tracks. they are implemented in a democratic context. in his address. investing in social infrastructure (basic healthcare and primary education). Dean of Haas School of Business.
and the ‘Jumpstart your Venture’ which is an interactive workshop. one of their common concerns was how to ensure that both organised retail and small vendors can co-exist or even have a symbiotic relationship. Panellists emphasised the increasing importance of mobile phones for media. Light Speed Ventures. and New Media and Entertainment. The speakers in the Retail Track spoke on a variety of issues. Additionally a panel discussion by venture capitalists and successful entrepreneurs deliberated on sector opportunities. Yahoo. SEZs. Greylock Partners. One of the common themes in all the tracks was about how the boom in the Indian economy would positively affect various sectors. bottlenecks of broadband spectrum and low internet penetration holding back growth of industry. hospitality. the rapid rise of Indian animation and gaming companies. Various speakers in the Pharma track spoke of emerging trends in the industry including consolidation. gave a review of global trends in the sector by domain analysts. Security and Biometrics. TiE. Seed Fund and many others. and IT and ITES parks. and that Indian companies must look at foreign markets to get returns on their investments in games. The speakers in the The Emerging Technologies panel were bullish about enhanced usages of mobile phones. The need for professionals and managers in this sector was felt by all the eminent panellists. Track Record Participant–centric discussion tracks on diverse and emerging sectors like Mobile Convergence. However. Thomas Campbell. continued evolution of web services and the wireless. integrated townships. low-cost advantage for India. and rapid innovation by small companies. Sandalwood Partners. Problem areas such as land acquisition and taxation were also addressed.ISB Connect was once again the proven hub of energy. growth of biotechnology. Retail Industry. DFJ Ventures. a must-stop on the journey of successful business. Another concern was how the beneﬁts of growth in organised retail can beneﬁt the Bottom of the Pyramid through better proﬁt-sharing structures. idea. where budding entrepreneurs presented their projects to potential investors. The Media and Entertainment track was organised under the theme ‘Gaming and Animation Opportunities for the Indian Market’. Google. and need for Indian ﬁrms to invest more in R&D and be more innovative. They also deliberated on the localisation of gaming and animation content for the Indian market. In all. enterprise. Cannon Partners. lower prices. better quality of merchandise. and implementation. Dean of Haas School of Business. UC Berkley December 2007 | ISB insight | 23 I C O V E R S T O R Y . Real Estate and Infrastructure. Life Sciences and Health Care. The Infrastructure and Real Estate track focused on the opportunities in various segments including residential spaces. The other highlights of this event was the popular ‘Investor Pitch’. the increasing use of nanotechnology in several industries.Speaker K Suresh Reddy lights the TiE-ISB Lamp VC’s attending this year’s event were NEA IndoUS Ventures. preparing aspiring entrepreneurs for an exciting future. Sequoia Capital. industrial. and more variety of relevant products. The speakers also discussed about the partnerships Indian companies can have with foreign companies.
The panel attributed the surging growth of the Real Estate sector to several fundamental factors such as growing economy. non-availability of timely data. Amit Bhagat. The event was sponsored by Indu Group. The Wharton School. However. Suresh Marasawamy. CEO & MD. Sourav Goswami. increasing business needs. Director of ZellLurie Real Estate Centre. and high prices.’ T he highlight of the panel discussion was the presentation made by Professor Joseph Gyourko. hosted a Real Estate and Urban Studies Panel Discussion at the ISB. Citigroup. ICICI Home Finance. Avnish Singh. along with the ISB alumni and students. retail. The Professor attributed parallel replications of the dot-com boom Speakers at the Real Estate and Urban Studies Panel Discussion and availability of data in the US. He attributed the distress of the American housing market to oversupply. etc. were also present. Indu Group. MD. Gyourko observed that global markets are highly idiosyncratic. DLF. and predicted that it would impact the Real Estate future in India. in association with Indu Projects Real Estate Research Chair. University of Pennsylvania. The Panel saw some of the eminent leaders of the Real Estate sector come together. they observed that the Real Estate boom is restricted to few areas such as commercial ofﬁce space.‘Indian Real Estate Scenario – Bringing Up-to Date. Mayfair Housing. GE Real Estate. JLLM. The panel stressed on the need to address the sector’s impending concerns such as shortage of skills. TSI Ventures. Members from renowned real estate ﬁrms like Cushman & Wakeﬁeld. and housing sectors. The presentation titled ‘Re-evaluating Residential and Commercial Property Market’ provided good insights into the current real estate scenario. He said that doing well in Real Estate involved knowledge of supply and demand. Lehman Brothers. The members included Syam Prasad Reddy. KokHuat Goh. possessing economic intuition. JLLM. Nayan Shah. while Ernst & Young served as the knowledge partner. and Vornado. 24 | ISB insight | December 2007 . and implementing it in business. Walton Street Capital. and Sumit Anand. and a lot of fundamentals could be replicated across international borders. Professor Gyourko also presented an overview of the US Real Estate markets and evaluated the two recent booms in the US property markets. lack of sustainability and affordable housing. Assistant VP.C O N F E R E N C E S Realty concernsA Global View I The Wadhwani Centre for Entrepreneurship Development (WCED) and the Real Estate Club at the ISB. Anuj Puri.
These people used to be renters primarily. there will be much less ﬁnancial distress than exists in the US housing ﬁnance system at the moment. which never function as governments want them to. Do you think this differentiation between debt and equity will have some implications for the Indian market. but I suspect that as much equity you have in the system. You can do it much more efﬁciently without distorting the property markets. Director of ZellLurie Real Estate Centre. Do you think. that you have control of a property when you are equity ﬁnancing. in not just residential mortgage backed security. which are processing information to those sub-prime lenders.is data collection. WCED December 2007 | ISB insight | 25 I C O V E R Sub-prime crisis: The reality of realty S T O R Y . and what is available today is a lot of equity investments. and two. in an exclusive interview with Joseph Gyourko. at least technically. to develop a securitised debt market. to the extent that your city has outsourced work from sub-prime lenders. One is to integrate real estate ﬁnance with the regular capital markets. two. build that database.risks than upside risks. there are two ways to get down the cost of capital for real estate. The Wharton School V Chandrasekar. They are very costly ways to redistribute to the poor. but also in regular credit backed security. In the Indian context. Executive Director. The commercial markets are generally pretty healthy. I certainly don’t think that a drop in house values or slowing of the housing market in Philadelphia should have an effect on real estate in Mumbai or Hyderabad. So. Clinical Professor and Executive Director of the WCED at the ISB. I believe that the commercial market is reasonably healthy with more downside Professor V Chandrasekar. Equity is the great discipliner. to some extent. There are two reasons for that: one. Another area of opportunity for ISB to work with . with regard to difﬁculty of accessing debt? There is actually a good side to that. and understand what the state of regulation across different markets is. it is going to go away because the sub-prime markets are going to shrink dramatically. we have not overbuilt in our commercial and retail sectors. Do you think India is over-regulated? What do we need to do? Do we need more information on what is happening? I suspect India is over-regulated. It will lower returns. One example is rent controls. Professor Joseph Gyourko. Once you think. that lack of control and delays can harm your chance in a very signiﬁcant way. The government has controlled the debt access of real estate investors considerably. I would expect a decrease in demand from those folks. discusses the Real Estate scenario in the US in the wake of the sub-prime crisis. We present excerpts from the discussion: Professor V Chandrasekar: What is the real estate market scenario in the US? Can you explain the sub-prime issues affecting the US and global credit markets? Professor Joseph Gyourko: We have the sub-prime mess or debacle because it involved a great rise in lending to risky borrowers with less than sterling credit records.both with the government and the private sector . if there are ofﬁce districts in Bangalore or other outsourcing centres. One of the bigger issues beyond the regulation is the lack of clarity regarding title and development rights. the economy continues to grow. The seize up in the credit market is largely due to default rates in the sub-prime markets that spooked the broader credit markets on good credit quality. outside the owner occupied housing. What went wrong in our housing markets is that we got leveraged too highly with risky borrowers. In the long-run. The Wharton School. University of Pennsylvania. The sub-prime market is going to shrink radically. Director of Zell-Lurie Real Estate Centre. Is this situation in the US likely to affect real estate prices in emerging markets like India? It is hard for me to tell. and see how either onerous or enlightened the regulation is. The investors won’t like it much. It just makes the Indian real estate riskier as a result. some of the job loss in the sub-prime markets will transfer to the call centre jobs losses in India? That is a good point.
While we were actually budgeting about which call centres to go to – Costa Rica. and that’s what we did. He also gave a glimpse of what the future holds in such a world. CEO of Infosys. existed between 1492 till early 1800s. who spend their days imitating the Americans. ﬁnance and technology. There is one big meta argument in this book that there has been three great eras of globalisation. I was in that mode right up till January 2004.to look at the outsourcing phenomenon from ground up. It 26 | ISB insight | December 2007 . It emerged fully developed from my head. and traditional nationals). 2004.0. I set off for Bangalore with my Discovery Channel ﬁlm crew. I had this idea that we should go to call centres all over the world and interview young people. and the challenge to stay put in this ‘ﬂat’ global playﬁeld. the global economic playing ﬁeld is getting levelled and you Americans are not ready. Here are some excerpts: “I must confess that ‘The World is Flat’. I decided to take that on. came completely out of accident. Bangalore – in the middle of all this. 2001. Globalisation 1. This gave me the idea of going to Bangalore. the Philippines. between January 1995 and September 11. As a Foreign Affairs columnist for ‘The New York Times’. it rang continuously in my head that Nandan. and do a documentary called ‘The Other Side of Outsourcing . Suddenly. as I call it. It all came together with the last interview we did with Nandan Nilekani.” I wrote that down in my laptop. the issue of outsourcing just exploded on to the world stage. my column oscillated between Lexus issues. issues of globalisation. In the light of what happened on September 11. and that I had completely missed it. Across those 11 days. I thought it would make a kind of interesting double mirror. I spent the next three years trying to understand the roots of 9/11. John Kerry came out with his blast against what he called the ‘Benedict Arnold’ CEOs (American CEOs who engage in outsourcing). and. Thomas L Friedman. That line was the genesis of my book. I had this feeling that while I had been sleeping and covering the 9/11 world. It was while doing a documentary with the Discovery Channel that I realised that the big issue that really seemed to cry out for a documentary was ‘why does everyone hate America?’ So. something really big and fundamental had happened in the globalisation story. After that. and what I call ‘Olive Tree issues (issues of ethnic conﬂict.S P E A K E R S E R I E S I Creating Life-balance in a Flat World Three time Pulitzer Prize winner and renowned journalist. in his address at the ISB. shared the genesis of his famous book ‘ The World is Flat: A Brief History of the 21st Century’. I must tell you. We shot about 60 hours of interviews in 11 days. and ask them what they think of America. Nandan said. was telling me that the world is ﬂat. one of India’s premier engineering entrepreneurs. and that’s how the whole thing started. On February 15. “Tom. After that I took a sabbatical from work and began to write the book in March 2004 and ﬁnished by December in the same year.
The PC allowed and enabled individuals to become authors of their own content in digital form. With the PC. The dynamic agent of globalisation was the nation-state. but is built around individuals. ﬂattening the global economic playing ﬁeld at the same time.Thomas Friedman at the ISB shrunk the world from a size large to a size medium.from the year 2000 to the present. I will focus on three core ones that I think essentially created this ﬂat world platform. suddenly everyone was able to send their content anywhere in the world virtually for free. Thus we have moved from a globalisation spearheaded and built around countries to built and spearheaded by companies. and authored in digital form. we entered globalisation 3. The ﬁrst was the personal computer. let’s say. The second ﬂattener was around the date 9th September 1995. What is really new. This era of globalisation was really spearheaded by countries. California. manipulated.” December 2007 | ISB insight | 27 . photos. It shrunk the world from size medium to size small and that year of globalisation was spearheaded by companies across the world. How did we get here? Well. and it is shrinking the world from size small to size tiny. On that day a small start-up company called Netscape. empower. and in the form of bits and bytes. exciting and terrifying about this year of globalisation is that it is not built around countries. That was the second ﬂattening. and cheaper than ever before as individuals. And. videos in digital form. Britain colonising India etc. who can now compete. and collaborate – farther. It was for two reasons: ﬁrst was Netscape’s product . are the ones that are going to win. faster. And. Globalisation 2. When Netscape went public. we got here through what I call ‘10 forces’. individuals could suddenly author their own content. it meant that it could be sent to so many more places and distributed in so many ways. While you were sleeping. grandson and granddaughter could use with equal facility. in Mountain View. went public and that day the world changed forever. connect. It was Spain exploring the Americas. spread sheets. “The countries that unleash. and enable individual imagination. deeper.a device called the browser which was a simple point and click device which brought the internet to life. or exclusively around companies.0 . making it this incredible tool of connectivity that grandma and grandpa. Netscape was historically important for another reason. once content could be shaped. With Netscape triggering the dot com boom. That was the ﬁrst ﬂattener. words. to one now spearheaded by individuals. I’m talking about individuals of every colour of the world. tap. nurture. it triggered the dot com boom and the dot com bubble.0 was from the beginning of early 1800s to the year 2000. here I’m not just talking about white western individuals.
I will now share a few words about my next book. I believe. this move from vertical to horizontal. This ﬂat world platform. empower. I do not mean we are equal. So. in more places than ever before in the history of the world. the world is ﬂat. Suddenly. everyone was connected to each other on their computer. and at the same time be competing and connecting with the Satyams of the world. thanks to the work ﬂow revolution. there was an explosion . You put them all together and you have a crude ﬂat platform. Therefore. connect. It was a revolution in transmission protocols. greener way to power your dreams.” The third ﬂattener was a quiet revolution. All you need to understand is that this collection of protocols made everyone’s computers and software’s interoperable. the Chinese economy. Now let’s put them all together. of late. In mid-1990s. friends. we are going to burn up. the internet. and enable individual imagination. And actually the most important competition going forward is going to be with you and your imagination. That was a revolution. choke up. But if we don’t ﬁnd a cleaner. when I say. information. I believe. in the three-point edition of the book. what you end up with is humanisation. Then. although that still exists. is going to change everything. more people could compete. in time. is going to change everything. Three billion new players all walked onto the playing ﬁeld. heat up and smoke up this 28 | ISB insight | December 2007 . business. whatever can be done. about this ﬂat world platform. the countries that unleash. work. It is going to be seen as the mother of all inﬂection points. It means that we have created a platform – this ﬂat platform on which more people can enter everyday – from which they can share knowledge. all with their own versions of the American dream – house. Rule one is that when the world is ﬂat. That will be the most important competition in the world. it is going to be between companies. live in a world with a much more peaceful lifestyle. car. and the opening of eastern European communism. The second iron rule is that the greatest competition going forward in this ﬂat world is not going to be between countries. tap. are the ones that are going to win. microwave and a refrigerator. We are moving from vertical value-creation to horizontal value-creation. First. entertainment. will be done. and unfortunately. we were able to author our own content in digital form. We are moving from a value-creation model of command and control to a value-creation model of connect and collaborate. That is when the world will truly be in balance. Then. nurture.what I call as the work ﬂow revolution. When the localisation is in balance with the globalisation.I F I N A N C E Friedman autographs for fans at the ISB “You can stay in your community with your family. also terrorism. we were able to send our digital content anywhere for free. because it really falls in line here. And. no matter what hardware or software they were running. What happened when the world got ﬂat was it coincided with the opening of the Indian economy. toaster. and collaborate with more people for less money. thanks to the Netscape. It’s going to be as big as Guttenberg’s invention of the printing press! There are two rules that I have coined.
ﬁnished goods. That is when the world will truly be in balance. It means that you can stay in your community with your family. what you end up with is humanisation. and Brazil. live in a world with a much more peaceful lifestyle.” December 2007 | ISB insight | 29 . it means that you can live locally and connect globally. That’s not a revolution friends. But for that to happen friends. everyone’s a winner. China. That’s a party. Have you ever seen a revolution where no one got hurt? That’s a green revolution. cars. we need to have a real revolution – a real green revolution – and not just a green party. An example of a revolution was the IT revolution. everyone’s a winner. friends. That’s a party. If we can make that breakthrough. When the localisation is in balance with the globalisation. “Have you ever seen a revolution where no one got hurt? That’s a green revolution. What hasn’t arrived yet is the Energy Technology (ET) revolution.planet much faster. That’s not a revolution friends. The world will truly become ﬂat when IT meets ET. and at the same time be competing and connecting with the Satyams of the world. oil. What’s happening is that the global economy’s appetite for natural resources. we will see the ﬂattening of the world extend at an incredible speed to every rural village in India. Once localisation and globalisation are in balance. General Motors is green. when localisation and globalisation will ﬁnally be in balance. In the green revolution. It meant ‘change or die’. and get clean green distributed power. It meant ‘change or die’. General Motors is green. It will be a truly transformational moment. In the green revolution. is all heading for a $100 a barrel. An example of a revolution was the IT revolution.
about the emerging patterns in Contact Research Organisations (CROs). host of regional and local players etc. and increase mobility of services. and lastly aggressive market creation by local players. They brought together a host of thought leaders with new perspectives in the area of Healthcare and Education giving the ISB community an opportunity to challenge the status quo and think differently. 000 brands. addressed the current and future emerging trends of this industry. increase in health insurance coverage. One of the main concerns in this industry is about ethics. who presented to the audience an overview of the ‘clutter’ in this mushrooming sector in India . 25. debated on issues surrounding incentives to innovation versus challenges of affordability. and that we need to increase our bench mark for ethics to meet global standards. The Summit also saw an interesting insight | December 2007 . PAREXEL International said that clinical trails are growing in the Asia Paciﬁc regions because of factors like lower costs. Among the speakers was Anil Matai. 17. Pharmaceuticals Division. pointed out that in the pharma industry. CEO. rising prevalence of chronic diseases. the ISB Pharma Summit surveyed this sunrise industry through the lens of access. Sanjeev Dani. Eminent industry experts attending this Summit.500. President. rapid patient recruitment etc. Priyanka Aggarwal. Chairman & MD Suven Life sciences. patent legislation. Dr M Venkateswarlu.000 chemists. The need of the hour is to foster public private partnerships.300 hospitals. I Pharma Comes of Age As the Indian Pharmaceutical market is projected to triple to US$20 billion by 2010. and review it at regular intervals. Novartis India Ltd. growth in medical infrastructure. Senior VP and Regional Director.” Speaking on Contract Research Services. growth and economics. he shared. A panel of industry experts comprising Ranga Iyer.” he said. increased outsourcing. Drugs Controller General of India 30 | ISB Speakers also discussed key trends and drivers contributing to this burgeoning growth. Clinical Research Services. Drugs Controller General of India.S T U D E N T C L U B S On Managing Healthcare and Education The Healthcare Club and the Net Impact Club at the ISB. Dr M Venkateswarlu. hosted the annual Pharma Summit and the Social Responsibility Summit respectively. in his keynote address. Ranbaxy and Venkat Jasti. large markets for products.000 crore. “Today we have moved from a 10 crore turnover to a 35. Dr Mark A Goldberg. and a three fold growth is forecasted by 2020. a very wide price index. McKinsey & Company. and that India and China are the most attractive destinations to perform clinical trials outside the US. and how they will contribute to the growth of Indian Pharma. affordability is more of a concern than is access. He predicted that India’s attractiveness is going to grow with expected regulatory improvements. Asia. MD Wyeth. categorised six factors that will fuel the growth of this industry – “growth in income.
Government of India. Enable. The conclave consisted of two panel discussions. Editor. The management of IP according to him. and Advisor to UNICEF-India. They can be valuable resources only if they are properly educated and healthy or else they might turn into anarchists. should be a “boardroom issue and not left to scientists and lawyers”. Honourable Minister of State for Higher Education. which she said could help bring about a metamorphosis in the current education system. Professor V N Rajasekharan Pillai. industry. The ﬁrst dwelt on the theme: ‘Demographic Dividend of India: Education as a Turnaround Factor’. the social hierarchical relationships will not be accepted. The competition focussed on scalable and innovative solutions in these two vital sectors. ISB.” he said. Dr Preetha Bhakta.Panellists at the ISB Pharma Summit talk by Dr Ajit Dangi. Lead Partner of the Byrraju Foundation.’ It was a congregation of thought-leaders from various sections of the society – government. and academia. Educate and Empower The theme for this year’s Social Responsibility Conclave was ‘Education in India: Educate. provide water and toilets. Dilip Thakore. Among other speakers were Professor A K Shiva Kumar. Azim Premji Foundation. The ﬁnal phase of both the Summits saw a paper presentation competition organised by the students. CEO. who delivered the keynote address noted that there is much oppression in the system and that gradually. Education World. . said. which could be a dangerous proposition. “Students and teachers do not understand the context of the text. said that such a dividend does exist. both the conclaves generated insights and a plausible plan of action on issues relevant to society.” He stressed on the importance of increasing spending on education. and the second was on ‘Challenges in Service Delivery – A Ground Reality’. The Minister summarised the initiatives taken by the government. NGOs. Empower. expressed that in the 21st century education is no longer just a goal. “The students and teachers do not understand the context of the text and education is not dependant on knowledge and skills alone. IGNOU. Vice-Chancellor.” he suggested. “We must invest in children. Through a medium of rich exchange of perspectives and solutions. “Invest in the basic level. D Purandeswari. and education is not dependant on knowledge and skills alone. especially for the girl child in schools. Minister of State for Higher Education December 2007 | ISB insight | 31 . Director General OPPI. visiting faculty.” D Purandeswari. Dileep Ranjerkar. business schools. and that applying new ideas and technology to education is the real key. Naandi Foundation and Verghese Jacob. on how businesses can effectively utilise Intellectual Property Rights to create a competitive advantage for themselves.
We gave preference to India. You operate in three areas: corporate investment. attended a customised programme. We have discovered that as Indian companies become more international. We want to understand that whole process much better. our primary purpose here is to learn about what the Indian economy means for these companies. and then sell them. Do you have in mind a particular portfolio of companies in India in which you would like to invest? We are primarily interested in following what is happening in ICT. Chairman of the Board. and are looking into Contact Research Organizations (CROs). people are friendly and talk English. We invest in companies in Europe. where we are often confronted with the question: ‘what are the investment opportunities in the Indian market?’ So. towards an industry which is much more fragmented. I know China pretty well and I am also personally involved with companies investing in China.5 billion. designed by the Centre for Executive Education. We have already sold some of our companies to Indian companies. we are not a small company. go into manufacturing. the whole process of deciding our investment takes a lot of time and money. ﬁscal. GIMV 32 | ISB insight | December 2007 . With regard to some of the more traditional businesses. The entire value-chain of the pharmaceutical industry is on the verge of changing. because we like the entrepreneurial spirit here. It is all very positive. ISB Insight: You are a private equity ﬁrm specialising in investing in the equity of unlisted companies. As a private equity business. We are in biotech now. and life sciences. Information Communication and Technology (ICT). It is a very disciplined and systematic process. Do you have any particular reason for choosing India over other developed countries like China for investment? To be very honest. we may be in a different relationship. That creates opportunities for us. grow them. we will be doing a similar activity in China. top executives from a Belgium based Investment Company GIMV. What criteria do you follow while deciding to invest in a particular company? Today. we start companies. But. We are clearly moving away from very vertically integrated companies that do research. Excerpts from a talk with Herman Daems. we sold a transformer company to Crompton Greaves. GIMV. where some Indian companies maybe interested in buying some of the companies in our portfolio. Chairman of the Board. legal situations. and also life sciences. Doing the due diligence of the company involves aspects like the ﬁnancial. and then into sales and marketing. we see India on a very good track here. talking to customers. we spend a lot of time reviewing the strategy. for instance. How can investing in Indian companies make a difference to your company? Herman Daems: With assets of $1. Herman Daems. To further their understanding about the Indian economy and its future direction. We feel very welcome here. What potential do you think India has to offer in terms of ICT and life sciences? We were amazed and impressed to ﬁnd what is going on when we visited GVK Bio. so that we completely understand what is happening. and USA. seeing what competitors are doing. at the ISB. they are interested in looking at acquisition opportunities in Europe. there is a very entrepreneurial spirit in India. But.E D U C A T I O N Getting to Know the I E X E C U T I V E ‘India Factor’ There is a perceivable interest in Indian markets due to its increasing impact on global business. or the environmental legislation of the company. Israel. UK. most importantly.
Large companies have networks which obviously look into advertisements and sales. NDTV Imagine December 2007 | ISB insight | 33 I M E D I A Broadcast? C O N C L A V E . They have grown out of a political system and virtually become a monopoly in that state. and Pramath Sinha. Savio Wesley: If we are moving towards a consolidated media. Traditional media has suddenly realised that if it focuses on just one medium or just one genre. which is going to be increasingly bottom line driven. CEO NDTV Imagine. Sameer Nair. A lot of people are doing a lot of things. not provide that kind of scale. everyone would have agreed that consolidation is inevitable. Sameer Nair: In the media business.Is It The Death Of Is the Indian media consolidating. Very few are actually entering this ﬁeld to be in the news business or to promote journalism. and that is why it gets valued so highly. are a manifestation of the fact that we are in a business that is just about taking off. diversifying. SUN TV in Tamil Nadu is a classic example. There are a number of channels emerging. Some are entering because of high valuations. One is actually diversifying out of necessity. compromising? Is it future – ready? Students Aarti Kothari and Savio Barretto Wesley took this question up with media stalwarts. Everybody is groping for the next money plant. Managing Editor CNN-IBN. as news business does Rajdeep Sardesai.” Aarti Kothari: Can we arrive at a common deﬁnition of what consolidation is? Rajdeep Sardesai: If you had asked this question three years ago. and they believe it will be successful. it’s the classic big ﬁsh which eats the small ﬁsh. ABP Group. There is a lot of consolidation occurring in some parts of business. while there is fragmentation taking place below because people are entering into media for a variety of reasons. CNN-IBN Sameer Nair. Very few are actually entering this ﬁeld to be in the news business or to promote journalism. Then there are some players coming in because of political reasons. Rajdeep Sardesai. and scale means getting into entertainment. a number of media products in the market. and there is always a bigger ﬁsh. Today people really don’t know. Aarti Kothari: Are we then saying that it is not consolidation but diversiﬁcation that is happening? Rajdeep Sardesai: There is consolidation of the major players. Media is a very risky business. former MD. They have grown out of a political system and virtually become a monopoly in that state. where is “SUN TV in Tamil Nadu is a classic example. and how to generate the money. In fact there is growing fragmentation. The only way one can do it is by scale. CEO. Rajdeep Sardesai: There is internal consolidation taking place. There were people who controlled cable who have now moved on to controlling channels. Managing Editor. Both consolidation and the outbreak of a lot of new opportunities. others are entering because of the respectability it provides. and then there are niche products like ‘Property News’ being started! I think there are about 20 -25 news channels alone in this country. then it is at risk. and not out of choice. Pramath Sinha: This industry is fundamentally underdeveloped. and there seems to be no immediate sight of consolidation. during their visit to the ISB for the annual Media Conclave.
Television channels or the newspapers are not getting paid. In this country we don’t pay for media. but let’s leave it at that. because that’s an easy area of provocation. we have to pay for it. not so much consolidate.50 for the ‘Times of India’. When we pay the carriage fee. In this country we don’t pay for media. One needs to reverse this model if the business is to grow. There lies the disconnect. The editorial content of those events is limited. Sameer Nair: The current plan in the cable industry is to block the entry of new players by creating an entry barrier. Consolidation has to take place in the cable industry and in the distribution process. We need to regulate. And they refer to all the content as talk time. at his end. The TRP system. There are pressures on a daily/ monthly basis. rather than focusing and managing the growth of the industry in a healthy way. There lies the disconnect. we have to pay for it. Former MD. Sameer Nair . ABP Group Aarti Kothari. is riddled with ﬂaws. We are paying the cable operator huge amounts of money and the consumer. That can hardly be a growth engine! Let a thousand players come and charge the consumer because the same consumer is going to the multiplex on the weekend and paying 300 rupees to see a movie! Pramath Sinha: The quality of ﬁlms has gone up much more than the quality of television in the last ﬁve years. More importantly. survive and consolidate. I can see where they are coming from. It actually needs a broadcast regulator who will focus on issues of licensing and regulating the cable. You pay a meagre Rs. as we know. The faux pax is that TRAI keeps comparing television to telecom. we are essentially legitimising an illegal activity. Rajdeep Sardesai: In American television. In India 95 -97 per cent of revenue comes from advertising. and streamline the processes. The entry points have to be made more rigorous. can we really question those corporates in journalistic terms? Pramath Sinha: The fundamental point we seem to be missing here is – is the consumer paying for all this? If we want objectivity.” the space for objectivity in the media? Is there a compromise? Is media selling outNDTV doing Lifestyle and NDTV Good Times. is paying very little for getting 300-350 channels. The reason for deterioration of standards is because anyone today can own a media channel. Rajdeep Sardesai: Personally I would not have sold the mast head like NDTV did. speciﬁcally news content . are able to take up their ad price and they don’t have a TRAI in their life telling them how to regulate it. Rajdeep Sardesai: Media does not need a TRAI. 55 per cent of revenue comes through distribution and only 45 percent from advertisement.At least papers like ‘Times of India’. DTH platforms are going to take channels on an a-la-carte basis in the coming future. Class of 2008 34 | ISB insight | December 2007 . 1. Even we at CNN-IBN. do events which are essentially advertorials. The problem is that they are trying to focus on content. They are designed to make a little bit of revenue for us by bringing in the corporates After that.“If we want objectivity. You have 6.000 boxes deciding for a nation of seventy million cable outsourcers! Where is the attempt being made to try and bring in some transparency and greater regulation? Sameer Nair: If you take the cost break - Pramath Sinha. Class of 2008 Savio Barretto Wesley.
Proliferation is not the real issue. December 2007 | ISB insight | 35 . The fact that I can pay $1. switch the red button on and watch Sachin Tendulkar hit a century ﬁve times over. we are likely to have 3000 channels. which is just being born. and the consumer starts paying good money to people like us and says that we want to watch you uninterrupted. We have 100 percent FDI for entertainment channels and 26 percent for news. if you have to turn the world market into an addressable market. what would you like to see done differently? Sameer Nair: Most of the players inevitably are doing all the hard work themselves. Pramath Sinha: We also need somebody who understands technology and where it is going next. have more bandwidth etc.99 and can watch a programme on I-tunes completely takes away from the channel model. the carriagesheet is more than the content! It is like in 100 pages. 74 percent for telecom and 20 percent for DTH platforms. While we are growing. Today the Indian media is like what the US was in the sixties. there is a huge discontinuity. one has to go digital. The whole model is going to change. Every local station is a channel. given the language diversity. go back home. Pramath Sinha: We are at the cusp of an industry. Today we can regulate the cable operator or the DTH operator. but tomorrow when WiMAX comes in. all of us will be watching television on this mobile phone. This means that there is deﬁnitely no distribution revenue coming in. We need the right kind of regulations. without watching the advertisements. Savio Wesley: If you were able to institute changes in policy decisions or in the way the government is handling new players or/ and growing existing players. then how on earth is anyone ever going to hear about anything? Rajdeep Sardesai: And we are moving towards that happily. The biggest joke right now is the distribution and the FDI issue. has a red button that I can press and watch the match highlights. probably more. It is the death of broadcast. Sameer Nair: Actually this is creating a major terror for advertising.up of current news channels. One has to. 40 will go in content and 60 will go in carriage. A part of the reason for this rush towards consolidation. is the fear of what is going to happen two years from now when these smaller players come up with far more imaginative technologies and virtually pull the ground from under the feet. I can now ﬁnish my dinner. but proliferation of this scale is what needs to be addressed.500 channels in the US. even amongst the big networks. If we are going to be like the US in 50 years from now. We thought we were mature but what we have is a bunch of newspapers. Why should it be so random? Again it is 49 percent for cable. There are 2. They are drifting on the track of ‘why don’t you have a wonderful uninterrupted commercial break experience?’ And if that actually fans out. technology will destroy consolidation. for example. and that makes a huge difference to me. Rajdeep Sardesai: The government needs to streamline the FDI issue. Tata Sky. Obviously this discrimination is thought out by some bureaucrat.
and Professor Antony Ross. He pointed out the downside of getting into the business of venture capital as lacking “pride of ownership.” 36 | ISB he group was a montage of aspirations. Tripat Preet Singh.” On the bright side. future venture capitalists. through a combination of presentations. From sourcing deals I T “Being in the VC domain.hosted by the Centre for Executive Education (CEE) and the Wadhwani Centre for Entrepreneurship Development (WCED) at the ISB. best information systems. At a recently conducted Venture Capitalist Development Programme at the ISB. Seasoned entrepreneurs and senior venture capitalists shared real world experience. approached these issues of ﬁnancing and managing entrepreneurial business. and discussions with venture capitalists and entrepreneurs. what must an investor consider to build and realise the value of his investment. has mentored more than a dozen early stage companies. difﬁcult to ﬁnd in a book. with special attention to the Indian venture capital scenario. Senior Associate. Associate Professor of Management Practice and Chair of the Entrepreneurship group. gathered to learn about the intricacies of venture capital Co. Coaches. domain experts. and a host of professionals wanting a career shift to the venture capital industry. a slow path to wealth” and that “VC is fundamentally a negative process. a seasoned entrepreneur with over a decade of experience in investment banking and ﬁnancial operations. that being in the VC domain. how can an unquoted company be ﬁnanced. the ‘Due Diligence’ process. this six-day programme. helped participants gain real world experience while expanding their professional networks. structuring deals. Singh noted. what are the ‘people issues’ in private equity backed investments . experience. case studies.E D U C A T I O N E X E C U T I V E to managing exits What is the value of a company.the role of venture capital in promoting entrepreneurship. and in the long run gets rich. Professor John Mullins. investment bankers. insight | December 2007 . NEA IndoUS Ventures. in collaboration with the Wadhwani Foundation and the National Entrepreneurship Network (NEN). and ﬁre. London Business School ﬁnancial analysis and valuations. both from the London Business School educated the class on how a venture ﬁrm operates. is being ‘in the middle of it all. assessing management teams and new venture opportunities etc. One gets access to the best minds.A Venture Capital Development Programme at the ISB. what are the challenges of investors in a developing economy . Interesting tracks dealt with during the programme were . Professor John Mullins.
“The course design and delivery was excellent and so was the faculty.” The programme. unlike most others of its genre. They write it before they really have understood how attractive the opportunity is. The critical question here becomes that how do you know when to move from Plan A to Plan B or C. the aspiration. one of which he took public. best information systems. do they align with my mission and aspiration. An award-winning educator. One gets access to the best minds. The reasons why these connections are so important.”“I found the valuation methods that can be used to crack a new unlisted venture very useful during this course. Founder Director Eldico Innovators Pvt. added. On the ﬁnal day the participants admitted that the course sensitised them to various ﬁnancing issues that they need to address when starting or buying a business. Professor Mullins brings to his teaching and research 20 years of executive experience in high-growth ﬁrms. location is really important and if I see an entrepreneurial team who understands retail but does not understand location. and to their competitors. but how to assess the business opportunity itself. For example in retailing. If you make mistakes in the other areas. and spend an awful amount of time on it.” Ramesh Shet. In my book. We need to understand what those critical factors are for their industry. So the real question for me isn’t how you assess the business plan. ‘The New Business Road Test’. Is there alignment in terms of risk propensity? Is the entrepreneur willing to put some of his money or his livelihood in that. Director Chivach Media Pvt Ltd. brought to light both the investor’s and the entrepreneur’s point of view when funding a venture.. but if you get those critical things wrong. Participant GP Rao.. what is the mission. and if the entrepreneur is going to build a business that he is going to keep in his family forever. “The one take away from attending the course was to learn and understand the language of the Venture Capitalists. and in the long run gets rich.” Professor John Mullins. Excerpts from Professor Mullin’s take on assessing a business opportunity. and the team.How does one assess a business plan and an entrepreneurial team? Professor Mullins – I think entrepreneurs often make the mistake of writing a business plan too soon. distributors etc.” informed Ashish Ash. Ltd. That gets to your second question – How do you assess an entrepreneurial team? There are three crucial things to look out there. and the risk propensity of that team and if I am an investor. It adds value to my professional skills and will go a long way in serving my clients. then our missions are not aligned. I wouldn’t invest with them. a slow path to wealth and that VC is fundamentally a negative process. the industry. The seven domains are related to the market. Plan A does not work. The fact is that a lot of business plans go right into the rubbish bin. December 2007 | ISB insight | 37 . I lay out a framework of seven domains that one has to consider in order to ask business opportunity related questions. to others across the value chain. ISB Insight . If I’m a venture capitalist and am in the business of investing in companies that I can sell or make public. including two ventures he founded. a Chartered Accountant by profession. said. and does he want to invest in the same kind of sector? The second factor is that the team should be able to execute on the critical success factors that exist in the industry they are going to play in. you will have real difﬁculty. is being “in the middle of it all. is that in most ventures.“The downside of getting into the business of venture capital are lacking pride of ownership. inside the Classroom ISBInsight caught up with Professor John Mullins after the programme. The way to know is by having good networks which help you to see adjacent opportunities that are better. The third issue about teams is the degree at which they are connected to others up the value chain to suppliers and down the value chain to the customers. you will still be successful. thereby better equipping participants to deal with the person across the investment table. In most industries there are two or three really important things that you should get right. First.
Assistant Professor. ISB. Operations Management. as a consultant. His research interest in the pharmaceutical industry was sparked by his stint in consulting. Assistant Professor of Operations Management. on the east coast of the United States. pursue it to the necessary level of depth and constantly interact with peers who share my passion for the subject. Bala’s research spans a gamut of areas.” he assures. “Little did I realise that I would be teaching concepts from the same book almost a decade later. Bombay. particularly in the context of services. the internet revolution was at its peak. when he landed in California to pursue a Ph. ISB. UCLA. One of the pressing problems that pharmaceutical companies have to contend with is the fact that patents on many of their blockbuster products expire after a certain period of time. at the ISB. typically cutting across disciplinary boundaries. However. I Ram Bala. that stimulated his interest in the area of Operations Management. and California was right at its epicentre. from the pricing of information goods in competitive markets to allocation of marketing resources in the prescription pharmaceutical industry.” he says. ISB 38 | ISB “This does not mean that my views on Operations Management are frozen in time. What followed was a brush with the pharmaceutical industry. “Yet.D. I missed the rigour and independence of academia. insight | December 2007 . Bala is currently working with Professors Milind Sohoni.” says Ram Bala.D. The ﬁrm may have the ability to invest in R & D that could lead to the production of a variant of the current product. “I will continue to work on similar problems. This understanding morphed into a dissertation on pricing models for software products and services. They are likely to face competition from generic manufacturers. read as an undergraduate student.F A C U L T Y P R O F I L E Operation ‘Goal’ It was a book called ‘The Goal’. at the Indian Institute of Technology.” he shares. He found consulting to be a rather exciting profession. and perhaps the only career in industry that approaches academic variety in terms of the projects one undertakes. programme. This variant would have patent protection and hence would be able to retain or even increase proﬁts despite generic entry. “I discovered many challenging problems that even experienced consultants did not have handy answers to. and Professor Sumit Kunnumkal. his views matured into a serious understanding of the larger role of Operations Management. Coupled with the rigour of the UCLA Ph. “At ISB. In the year 1999. ISB is the best place to be in for that to happen!” he concludes. given the risk associated with a particular product type and the strategic behaviour of a generic manufacturer. given the lengthy and demanding FDA approval process.” and that was the thought that brought him to the ISB. in Management at the Anderson School of Management. typically located in a developing country such as India. But my long-term goal is to make India-centric problems a major theme of my work. I can set my own research agenda. Certainly. Bala’s research formulates a method to evaluate the effectiveness of product innovation (introduce variant) versus process innovation (reduce cost) strategy. the release of this variant is never guaranteed and involves substantial risk.
December 2007 | ISB insight | 39 .
Distributors also got themselves attached to these ﬁlm houses and it was this system of joint investment that served as an incentive to blend the aesthetics and the commerce of the product. Film Maker Kalpana Lajmi 40 | ISB insight | December 2007 . the passion for story telling. Lajmi I The Business and Arts Programme at the ISB this year. entice them. The vision of the ﬁnancer had less aesthetics and more commerce.” explained Lajmi. The classrooms at the ISB often spill over from the state–of –art lecture theatres to the sunlit atrium and the stoned pathways. the ﬁre of patriotism. from Business Law to Bollywood.who spilled their spoils into the industry. The Programme is an extension of the curriculum. Tracing the magical journey of Indian cinema . “The quality of ﬁnance had its ramiﬁcation on the quality of ﬁlm making. and a healthy competition between these studios.the tradesmen from Sindh and Punjab . through the medium of cinema. They themselves would reach out to people. does not depend on investment and returns. that propelled all these ﬁlm makers. then the Raj Kapoor and Bimal Roy era – Lajmi pointed out that emphasis was never on generating revenue returns. jewellery. Lajmi and Macwan were hosted by the Business and Art Programme. from the ﬁlmmakers of Bengal to Bombay Talkies. the audience wanted to know. the industry suffered a “cultural vacuum” and became rather stagnant Next Lajmi took the audience through the unorganised 90s. Lajmi continued the story-line. Commerce took over content and aesthetics.” said the vibrant ﬁlmmaker of Rudaali and Darmiyaan fame. who are at other times deeply immersed in management acdemics. or when free-spirited artist Julius Macwan made the connect between business and the history of culture – it all just fell in place.A N D A R T B U S I N E S S The Limitless Classroom W hen reputed ﬁlmmaker Kalpana Lajmi spoke to the students here. What is taught here can sometimes move from Econometrics to avantgarde art. during the 80s. After a brief spate of interesting cinema by Shyam Benegal (new wave cinema) and Mahesh Bhatt (personal cinema).” she said. and invest in this magical medium. kept the movement together. and get them ready to sell property. She then moved on to the next phase of Indian Cinema. “The ﬁlm makers themselves. cinema ﬂourished. when the industry was funded by a “parallel economy”. “It was the spirit of endeavour. and the drive to translate our rich literature into celluloid. about the evolution of ﬁnancing in Indian cinema. hosted ﬁlm maker Kalpana Lajmi and artist Julius Macwan.from the silent era to the cinema of Dadasaheb Phalke. designed to stretch and stimulate the creative energies of the students. Lajmi mentioned that the loyalty of the teams. Then came the era of carpet baggers .” clariﬁed Lajmi. seduce them. Lens on Indian Cinema Lajmi shared her experience and her journey with Indian cinema.the Studio Era.a time when more terror crept in while making a movie than commitment or passion. Till the 70s. our association with the art of creative expression. “For most of us. So who were the investors then.
painting. passion. etc. can art really be taught. Television is a hungry giant. religion. “We are in a speculative business which is driven by emotion.” “The 90s witnessed a sad decline of cinema. I just wanted to throw in a bit of drama and angst into your otherwise organised and idyllic lives here. Artist Julius Macwan at his canvas December 2007 | ISB insight | 41 I F A C U L T Y . Such interactions kindle the student’s aesthetic sensibilities and innovative edge. “I wanted this piece of art to have a personal connect with the ISB. not some horse ﬁgure which I could as well sketch sitting at my studio. There is no consistent behavioural pattern in this part of the world. ‘The death of MBA?’ ‘Women in a corporate world?’ “No. His “provocative. worked energetically at his canvas.the. all the time tackling curious questions from the students.” said the painter. the death of traditional producers and distributors.. he said. The painting ﬁnally represented a woman in a business suit. That alone determines the true value of art. etc.” the director rued. For business can not sustain itself without creativity. gives them a chance to explore the essence of creativity itself. which is now considered an essential for any business leader or entrepreneur. sculpture. whether business education should go through artistic channels. But above that art should create history and it should be relevant to more number of people and over a longer period of time. who likes to be known as one with a “free soul”.” said the artist. but the sensibility of understanding cinema has changed over the years. and they are buying our ﬁlms. the ISB hosts established artists and personalities from different creative genres to interact with the ISB community. in.“I just wanted to throw in a bit of drama and angst into your otherwise organised and idyllic lives here. etc. culture. and artists being respectable people to be revered. One gets to explore the mind of an artist through his or her mediumwhether it is cinema. The experience of witnessing a work of art being created. “I am trying to help you place business and work in connection to history. and glamour. The artist summed up. Finally the advent of satellite television changed the story somewhat. The group of eager students enquired of the artist about issues like commercialisation of art and assembly line artists.” Each year. gender-politics and history with business.” pointed out that the Hindi ﬁlm industry never got an industry status till 2001.face” artwork desires to mesh the concepts of culture. Producers are recovering their losses.” And he wants to break the stereotype of paintings being nice and pretty things to look at. The painting. in a cruciﬁed pose. was his interpretation about where the ISB is going. A Splash of Statement Artist Julius Macwan during his week long stay at the ISB. “Commercialisation of art is inevitable. during one informal session with a group of students.
renowned spiritual guru and founder of the Isha Foundation. But. or any other kind of suffering comes in. You are spiritual if something. mosque. you can play with life in anyway you want. you are referring to an economic structure. spoke with Bhuvana Ramalingam. then it is a successful business. You will see the meaning of life when you become completely vibrant. A successful life is one which you manage to live blissfully. That’s the freedom you have. A lot of us talk about ﬁnding some meaning or purpose in life. mental. does the question of meaning arise? Whenever you are happy. Life is sufﬁcient unto itself. there would be an end to it. performing to your fullest potential. I I N N E R Sadhguru Jaggi Vasudev. What is important is that you perform to your fullest potential. Is that necessary? If I can manage myself internally. you don’t think about the meaning of your life. Bhuvana Ramalingam: Can you tell us what a successful life is? Sadhguru Jaggi Vasudev: People generally think of success as gauged by a particular society.E N G I N E E R I N G Tryst With A Spiritual Guru the ultimate goal of business is human wellbeing. you wonder about life and its meaning. Once you surrender beyond suffering. He also inaugurated a student forum called the ‘Inner Quest’ during his visit to the ISB. It is far more than you understand right now. Only when you are a little depressed. His address to the Class of 2008 on the subject of ‘Inner Engineering’ was received with great enthusiasm. about spirituality and shared the essence of a successful life. without worrying about the consequences. there is no ‘meaning’ to life. and not cause misery to yourself and others. There are no words to describe it. If you are living in a remote society where everybody can afford to have only two cows but you have ten cows. As such. and that is the end of suffering. If there were a meaning to life. Economics is deﬁnitely the prime thing because no business can sustain itself unless it generates something economically. and much more than anybody can ever think of. Once a new dimension beyond physical. 42 | ISB Sadhguru talking with Bhuvana Ramalingam insight | December 2007 . If the dimension beyond physical becomes a living reality. becomes a living reality for you. apart from the physical. If you achieve human wellbeing. What is spirituality? It is used so loosely now-a-days. you can strive through your life whichever way you want. Spirituality is the experience of life transcending the limitations of the physical. going to a temple. or church is considered spiritual. which gives satisfaction but not fulﬁllment. Editor of the ISB Insight and the Director of Communications at the ISB. then you are considered successful. People look at success in comparison. Life is an endless pursuit. Right now. Whatever suffering you have known in your life has happened to you either through the body or mind. something more than mental and physical happens within you. What is a successful business? When you talk about business. Life cannot touch you. The beauty of life is such that it has no meaning to it. Money will mean something only till a certain point.
December 2007 | ISB insight | 43 .
Anshuman Singh. probably partly true. Cofounder. Rural India is different in terms of ﬁguring out risks and ﬁnancial penetration but not necessarily because it is growing at a much slower rate. It’s not that it’s rapidly converging but it has to the Next Level improved much in the last ﬁve years When you sell ﬁnancial services do you pitch it completely differently to rural customers? There are very important differences that need to be noticed in rural India. You want to look at rural and urban India in different ways because they are dealing with different approaches to income consumption. GLAMS. and the Logistics Sector. the Service industry.’ The summit included two events – the GSS conference and a workshop on Radio Frequency Identiﬁcation (RFID).” said Professor N Viswanadham. that in rural India the local money lender fulﬁlls all the ﬁnancial requirements I Professor N Viswanadham. among others. Nike India. Rupa Purushothaman: I don’t want to paint a completely rosy picture. Dow. it is really not all that far behind. “The Summit’s agenda was to take the retail. that will be the key issue in terms of logistical arrangements. and had lots of interesting takeaways for the participants. Some of them were Professor Sanjay Sharma. Rural India looks like it is moving in the Urban direction but it still is largely ﬂuid consumption. Exactly. Director–Supply Chain. The themes of the other sessions of the summit were India speciﬁc and relevant. of risks and how they are viewed because people are largely employed in agriculture. The theme for the summit was ‘Strategies for Global Competitive Advantage in Services. There is a perception. The Inaugural Session of the Summit saw two interesting key note addresses. and business service industries to the next level of competitiveness in the global arena.. they are all highly labour intensive. An excerpt: Rajesh Chakrabarti: One of the things you shared during the talk was that it’s a myth that rural urban disparity is widening. Purushottaman. urban India spends double that of rural India. credit worthiness. in rural India. A lot of people are still worried about smoothening income volatility across seasonal variations. a Yale and LSE graduate. She discussed her recently published paper ‘Is Urban Growth Good for Rural India?’ and came up with startling ﬁnds. the Global Supply Chain Summit (GSS) in September 2007. CTO and Associate Professor of Mechanical Engineering at MIT.S U M M I T L O G I S T I C S Taking Logistics T he Centre for Global Logistics and Manufacturing Strategies (GLAMS) at the ISB hosted its ﬂagship event of the year. monitoring those things. credit checking. that actually there is a pretty sizeable trickle down effect. Ramesh Mangaleswaran. The second speaker was Roopa Purushothaman representing Future Capital Research. McKinsey & Company. Executive Director. distributions. GLAMS 44 | ISB insight | December 2007 . and Ravi Kallayil. There are different issues of infrastructure. CEO. Partner. rose to fame when she co-authored the Goldman Sachs BRIC Report. Rajesh Chakrabarti. Executive Director. Assistant Professor of Finance at the ISB met with Purushottaman to get her views on a variety of issues. ThingMagic. Several leading industrialists and policymakers participated in the Summit. Future Logistics Solutions Ltd. Infrastructure is a big issue. credit worthiness. Ravi Pappu. The ﬁrst was by Jim Erdman from Penske Asia. you need a large number of people specially when you are talking of credit cards. The GSS explored several challenges and opportunities in rural and global supply chains in emerging markets. manufacturing. Peter Halloran. The sessions were on Retail. DirectorOperations.
because they are not used to shopping individually. There is no way you can displace such a large industry. I can see how Food Bazaar is purposefully made to be chaotic. You have lived in the US and Europe before coming here. It’s not that they only lend money and extract huge rates. people are throwing different ﬁnancial products at the consumer without actually understanding who they are and what they need. Right now businesses are busy setting up their locations. MIT December 2007 | ISB insight | 45 I C O V E R S T O R Y . So you really need someone that is sitting there and knows that maybe the crop hasn’t come through or a shock to income is going to occur at different points. so it has still some ways to go. But change is slow. I think some of the smaller rural banks and micro credit institutions are considering co-opting with the money lenders as distributors of these products in stead of competing with them. you see the Big Bazaar group hitting middle income level and now the big issue is to get to lower middle level. People are actually put off if things are organised in straight clean lines like other countries. That’s what we ﬁnd. The next stage will be with all those retail universities coming on. In India families buy things together. all these things are not necessarily going to go away. It has for whatever reason existed for so long. Even micro credit institutions have found it hard to displace the money lenders. they also provide risk measures. advertising and speaking to the customers there.Rupa Purushothaman with Professor Rajesh Chakrabarti at exorbitant rates. they may exist but probably in a different form. affected the way you view the logistics in a developing country? There are a lot of frustrations of settling in. you know who they are. You would go to them even though they charge 35 percent more than what you would get somewhere else. Professor Sanjay Sarma. because they have to be adapted to existing patterns. Things that frustrate me more than anything else are customer service and quality control. hiring manpower. But at this point organised retail is just burgeoning. the intermediaries have a huge presence and there are many of them. and make decisions together. In the markets where people auction products. you have the Hyper city able to attract upper income levels. What is deﬁnitely very exciting is that you are getting different formats that hit different groups. they are the people that you talk to when you have a wedding for your daughter. You have to adapt the traditional ﬁnancial services space in a different manner. What analogies connect this to the ﬁnancial sector?º–This is the ﬁrst time people are moving in to differentiated ﬁnancial products. Very similar to retail. they will focus on how to get quality customer service as part of the retail product. Has the experience of living in India. so there are spaces at the end of the aisle so that people can meet. you have to ﬁgure out other ways to be proﬁtable. They are not going to be able to get this in the immediate future.
Volkov. Events like Bandhan go a long way in sensitising future business leaders towards the challenges faced by the underprivileged. addressed the student body at the ISB on the theme of ‘International Economic Relations: Institutional Underpinnings. on his visit to the ISB found the ISB model “exemplary and impressive”. from various voluntary organisations in Hyderabad. who briefed him about the school’s vision. 270 children. Sushant Bhansali and Nishant Pandey. respecting of ISB Team Wins Darden Challenge The ISB student team ‘Innova’. The visiting children also performed a medley of group dances. “We have watched ISB in its growth and want to learn from your experiences and challenges. He also said that students of a business school can’t afford to ignore the vast network of international cooperation. He interacted with Dean M Rammohan Rao. aged 4 to 17. Festive Aura on Campus The months of October and November buzzed with festivities. Russia. the Student body made sure that Eid was not without the traditional chowki dinner. This is the third year in succession that two teams from the ISB made it to the ﬁnal top ten. songs.” Canadian High Commissioner Recalls Rule of Law Scholar-diplomat Dr David M Malone. Deputy Dean Ajit Rangnekar and faculty members. and enforcement of legislation. for the fourth consecutive year. has been adjudged as the second best innovative team at the Darden Innovation Challenge. at a cultural show organised at the School auditorium. In an attempt to ensure that customs and traditions are never forgotten. and instils in them a sense of responsibility towards this segment of society. etc. competed with eight other ﬁnalists from top global B-schools for the title of ‘Most Innovative MBA Team in the World’. when they are in positions to direct policies. ISB Model Impressive.” he said. The Minister assured government support in ensuring that the ISB model is emulated by other institutes in India and abroad. and challenges. Winning Team at Darden Dean MR Rao hosts Russian Delegates Bandhan Bondings Delegates from Moscow School of Management Dean Andrei Volkov. and were declared second. Canadian High Commissioner to India.’ Malone stressed on the importance of attachment to rule of law. The winning team comprising Prashant Goel. the Bandhan Bonding ISB Net Impact Club. future agenda. Dussehra and Diwali celebrations. Home Minister. skits. “The principles that you have adapted here. celebrated the cause called Bandhan . the largest competition of its kind. Meghna Rao. bringing together local underprivileged children to spend a day on the campus. in generating and sustaining business prosperity of a nation. which unites teams from the top 100 MBA programmes worldwide. Student life at the ISB was interspersed with Eid. who is also Advisor to the Minister of Education and Science of the Russian Federation said. Government of India day.E V E N T S ISB Happenings Canadian High Commissioner to India I Shivraj V Patil. Government of India. CEO Sun Group.a student-led initiative. Home Minister. visited the ISB to discuss cooperation opportunities and share experiences. Pushkar Jain. participated in a variety of events during the 46 | ISB insight | December 2007 . and hoped to “learn from. support and compliment each other. Moscow School of Management SKOLKOVO and Igor Goundobin. contract. This year two student teams from the ISB made it to the ﬁnals of the Innovation Challenge Business Competition. are accepted in the advanced parts of the world. says Shivraj Patil Shivraj V Patil.” Goundobin noted much ‘complementariness’ between ISB and the Moscow School of Management.
barefooted. interacted with Dean M Rammohan Rao and senior management. Thus he translated this aspiration into a scalable business plan – to tap the 250 million odd middle class and change the economic landscape of the country. was a mutually beneﬁting effort. traditional costumes. Stalls selling candles. and it meant Dandiya time. during his interaction with the students at the ISB. all dressed in the traditional Gujarati costumes. children bursting with energy . He recalled the period when India was awakening into a “new. when he took over an un-reclaimed land and converted it into a model. On the Atrium floor. and his vision of integrating the aspirations and resources of the ‘Other India. “Business schools in India could proﬁt from being a part of the global network of schools. traced his entrepreneurial sojourn. A community fire-work. He stated that AACSB’s interest in India and ISB. what kept him going was the simple philosophy of. He also informed that Indian business schools have just started to apply to the AASCB. a Ghazal recital and a Qawwali show put up by students. from a humble beginning in1997 when he started a helicopter company. but in schools of all sizes. because best practices are not invented just in Europe or in the United States. optimistic nation”. Vice President and Chief Advocacy Ofﬁcer. The making of his journey. high.Learning to Dandiya sumptuous Biriyani and Sheer Khorma. December 2007 | ISB insight | 47 I E V E N T S . who has translated into reality the dream of a common Indian to fly. AACSB AASCB Representative Visits ISB Dr Neal Mero. have allegiance to that one dream and hold on to it” he said to the future entrepreneurs at the ISB. was truly inspiring. spouses and faculty members fell in steps to the folk beats of Dandiya. and that the ISB is one of the pioneers. Diwali was lit up with 400 diyaas symbolising an almost equal number of students. “Listen to that inner prompting.” he said. and our members too can learn a lot by associating with Indian business schools. covering 66 cities. Dr Neal Mero.‘Life is full of sunshine’. From a village child who went to a regional medium school. The story of Air Deccan is the story of New India. students. “Energy and passion is most important. It was a time of aspirations for ‘New India’ and Gopinath realised that to build a successful business.yield farm. resurgent. it needed to be inclusive of the ‘Other’ India. AACSB on a visit to the ISB. capital will flow in if you have the integrity and the persistence to follow your dreams. Next was ushered in Dusherra. crackers and food items were crowded late into the night. according to this great entrepreneur of modern India. Gopinath recalled that in spite of countless hurdles. till a time today when Air Deccan has 45 aircrafts flying 350 flights every day. in all regions of the world. Captain G R Gopinath of Air Deccan fame Giving Wings to Dreams Captain G R Gopinath of Air Deccan fame. to his first “business dream” as an entrepreneurial farmer.these were some snapshots of that festive night.” said the man.
PhD in Economics from the New York University. The Age of Turbulence By Alan Greenspan Publishers Penguin Group. His other goal is to draw readers along the same learning curve he followed.Book Review T he most remarkable thing that happened to the world economy after 9/11 was…. Blair and Brown. including every US President from Nixon to George W. Alan Greenspan was born in 1926 and grew up in the Washington Heights neighbourhood of New York City.: 531 48 | ISB insight | December 2007 . partly due to the efforts of the then Chairman of the Federal Reserve Board. The Age of Turbulence is an incomparable reckoning with the nature of this new world – how we got here. From 1974 to 1977. he served as Chair of the Council of Economic Advisers under President Gerald Ford. In 1987. Alan Greenspan. Greenspan shares the story of his life to convey to readers the full ﬂavour of the extraordinary years he has experienced and helped shape. The post 9/11 global economy is a new and turbulent system – vastly more ﬂexible. Prime Ministers Thatcher. MA. a position he held until his retirement in 2006. so they have a grasp of his own clear-sighted and hard –won understanding of the dynamics that drive world events. he earned his BA. for good or ill. open. The distillation of a life’s worth of wisdom and insight into an elegant expression of a coherent worldview.nothing. What would once have meant a crippling shock to the system was absorbed astonishingly quickly. seen from the perspective of Greenspan’s own experiences working in the command room of the global economy for longer and with greater effect then any other single living ﬁgure. resilient. The Age of Turbulence is Alan Greenspan’s personal and intellectual legacy. In 1954. USA Pp. President Ronald Reagan appointed him Chairman of the Federal Reserve Board. he co-founded the economic consulting ﬁrm Townsend-Greenspan & Co. what we’re living through and what lies over the horizon. self -directing and fast changing than it was twenty years ago. Bush. After studying the clarinet at the Juilliard School and working as a professional musician. and the great crises and challenges that they faced. taking full measure of the individuals who made strong impressions on him.
Part of the ISB Collection .Painting by Artist Julius Macwan .