FINly

ISSUE NO. 48 DECEMBER 2015

S I M S R

MY NAME IS BOND.

MASALA BOND.

LATINAMERICAN

CRISIS

NEW METHOD

CALCULATIONIN INDIA

OF GDPRETIRAL FUNDSAND ADVISORYMANAGEMENT

Dear Readers

This month of December we have witnessed how conventional politics wins over

prudent politics As the winter session was washed away under the name of Political

Vendetta, most of the key bills including GST in upper house was not even tabled in

the parliamentary.And in the midst of all this chaos, few miles away at the

headquarters of RBI, things seem to be very clear in terms of perspective of the

economy and financial system is concerned. RBI's new lending formula exemplifies

our banking system is in serious stress and hence, needs to change the course of

direction to revive credit growth via cost of fund methodology.

In this edition, our cover story covers the comprehensive study of the Masala bonds,

which the RBI has come up with to encourage Indian companies to raise capital in

foreign currencies and what implications it may have on the economy, companies and

the financial system. Our faculty section throws some light on why there has been

inconsistency as far as GDP numbers is concerned with the explanation of New GDP

calculation methodology which has been adopted in conformity with global

standards.

Next in line of our , we have presented Latin American Crisis

in 1980s, under this section we have covered how unprecedented lending made the

entire financial system at the brink of failure coupled with oil crisis that occurred

during that time.

Lastly, It gives me immense pleasure to announce from

as the Winner of Call for Articles for this edition. I would also like to thank

our sponsors Finacue Research and Education for their support ,all our readers,

Faculty members and seniors for their constant support and encouragement.

Bubble Trouble series

Akhilesh Prabhu KJ

SIMSR

Abhimanyu Singh Chauhan

EDITOR’S NOTE

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CONTENTS

EDITOR’S NOTE 2

COVER STORY 4

ARTICLE OF THE MONTH 11

ECO SECTION 14

FACULTY SECTION 17

ALUMNI SECTION 22

ARTICLE BY FINACUE 25

FINSTREET FIESTA 29

NEWS BUZZ 30

TRIVIA 32

FACULTY INCHARGE : Prof. (Dr.) Pankaj Trivedi

EDITOR IN CHIEF : Abhimanyu Singh Chauhan

EDITING TEAM : Shreya Gupta, Tamoghna Das, ParthaBanerjee, Preyas Jain, Prateek Singh, Abhijit Khadilkar,Rishi Tekchandani, Gunjan Pathak

DESIGN : Geetanjali, Prateek Singh, Rohit Prabhakar,Jay Khuthia

S I M S R

Bond…Masala Bond-The Indian BondRishi Tekchandani - PGDM-FS (

Preyas Jain - MMS

2015-17)

(2015-17)

COVER STORY

S I M S R

Since time immemorial, Indian spices have been popular all over the world. Indian

food too, has gratified the taste buds of the people in the West. Now, a financial

instrument-Masala bond, named after the vital ingredient for making Indian cuisine,

'MASALA', is set to be tested in the global capital markets.

Masala bonds refer to rupee-denominated borrowings by Indian companies in the

foreign markets. The International Finance Corporation (IFC), the investment arm of

the World Bank, had successfully issued Rs 10,000 crores worth of Masala bonds in

London in November 2014 to increase foreign investment in India. Those were the

first rupee bonds listed on the London Stock Exchange. They were 10-year Masala

bonds with a yield of 6.3% andAAAbenchmark rating.

IFC then named them Masala bonds to give a local flavour by accentuating Indian

culture and food. While it may seem weird to name a sedate debt instrument after food

items, it has been done in the past also. To exemplify, the

The Indian Railway Finance Corporation recently sanctioned the issue of Masala

bonds to raise $1 billion and other firms such as NTPC are also opting for the Masala

bonds. During his visit to the UK in November, Mr Prime Minister-Narendra Modi,

had spoken about the Indian Railways issuing these bonds and getting them listed on

the London Stock Exchange.

What is the Masala (bonds) all about?

Chinese bonds were

christened as Dim-sum bonds after a popular dish in Hong Kong and Japanese

bonds were named Samurai after the country's warrior class.

Narendra Modi pitching for Masala bonds:

The Central bank (RBI) Governor Raghuram Rajan has augmented the efforts of

honourable PM by encouraging the Indian companies to borrow in rupees, which is a

sensible plan to wean them off foreign-currency debt, which threatens to puff up into a

balance-of-payments crisis every time the rupee encounters depreciation pressure.

An investor who buys a bond issued by an Indian company at a rate that is, suppose,

150 basis points above the globally accepted pricing benchmark like the London

Interbank Offered Rate or Libor — is betting on India, and anticipating that currency

and inflation would be stable enough to give him good returns after hedging for the

foreign exchange risks. As India's Gross domestic product(GDP) or national income

is rising and is projected to grow at a reasonably fast rate over the next few years, many

overseas investors would want to buy into such bonds to join the treat — and to earn

better returns compared to the US and Europe where interest rates are still low.

Masala bonds, if they take off, can be quite a significant plus for the Indian issuers and

economy as elaborated below:

How much Masala and spice in it for the foreign investor?

Why is the Masala (bonds) so important for the Indian issuers?

Sources of the image: MOFCOM,RBI.

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Currency Risk-Abetter option against the ECBs:

Foreign exchange risk FX risk currency risk or exchange rate risk

costs at least 200 basis points

lower than the benchmark rates of RBI

external commercial borrowings (ECBs)

.

, also known as ,

is a financial risk that exists when a financial transaction is denominated in a currency

other than that of the base currency of the company. When the foreign subsidiary of a

firm maintains financial statements in a currency which is not the same as the

reporting currency of the consolidated entity, the Foreign exchange risk intensifies.

There may be an adverse movement in the exchange rate of the denomination

currency in relation to the base currency before the date when the transaction is

completed, which could result in losses for the firm.

An Indian company or issuer of an overseas bond offering runs a risk on account

of currency fluctuation. A diminishing rupee during the tenure of the bond might add

significantly to costs at the time of redemption or repayment, which is normally at the

end of five years.

By pricing or issuing bonds in rupees, the issuer/borrower gets free of this risk

which, passes on to the foreign investor instead. Besides, borrowing overseas can be

relatively cheap when compared to India; with average

. This also provides the opportunity of a new

and diversified set of investors for Indian companies, and more liquidity in exchanges

such as London, apart from bank borrowing and the corporate bond/debt market in

India. Under the , Indian companies raise

money in foreign currency loans, but Masala bonds are issued to foreign investors and

denominated in rupees; hence the currency risk lies with the investor and not the

issuer

While ECBs help companies take advantage of the lower interest rates in

international markets, the cost of hedging the currency risk can be significant-this can

lead to higher actual costs. If un-hedged, adverse exchange rate movements can come

back to worry the borrower. But in the case of Masala bonds, the cost of borrowing can

work out to be much lower, resulting into a sigh of relief for the borrower. The RBI in

?

?

?

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its April,2015 policy held that it would issue guidelines/rules and regulations for

allowing corporates to issue rupee bonds in overseas markets.

- Here are some of the important

guidelines of the RBI regarding the Masala bonds:

Any Indian corporate or body corporate,

Real Estate Investment Trusts and Infrastructure Investment Trusts have been

permitted to issue Masala Bonds. Banks, Non-banking Financial Companies

(NBFCs), infrastructure or investment holding companies and companies in the

service sector which were otherwise not permitted to raise ECBs have not been

restricted from issuing Masala Bonds.

Vanilla fixed rate or floating rate bonds denominated in rupees

and settled in a foreign currency (freely convertible) issued in a FATF(Financial

action task force) compliant financial centres can be issued.

Vanilla fixed rate: A bond with no unusual features, paying a fixed rate of interest and

redeemable in full on maturity. The term is derived from vanilla or 'plain' flavoured

ice-cream.

Floating rate bond: It is a debt instrument with a variable interest rate. It is also known

as a “floater” or “FRN,". The peculiarity of a floating rate note's interest rate is that, it

is tied to a benchmark such as the U.S. Treasury bill rate, LIBOR, the fed funds or the

prime rate. The increase or the decrease under this method is relative to the

benchmarks mentioned.

Masala Bonds can be placed

either privately or listed on stock exchanges in accordance with the host country's

rules and regulations.

Masala Bonds will have a minimum maturity period of 5 years.

If someone aims to exercise the call and put options (if any), it would only be possible

upon completion of the minimum maturity period of 5 years.

The RBI tastemaker for the Masala bonds

Expanded definition of eligible borrowers:

Nature of instrument:

Flexibility to issue either listed or unlisted instruments:

Minimum Maturity:

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Underwriting restrictions:

Maximum of Masala:

Where an Indian bank endorses an issue of Masala Bonds,

it would not be able to hold more than 5 per cent of the issue- post completion of 6

months of the issue; which is subject to applicable prudential norms. However, this

would not be applicable to non-Indian banks.

The maximum limit which could be raised in any financial year

has been set out at USD 750 million per annum under the automatic route. For an

amount exceeding 750 million per annum, specific RBI approval would be needed.

Masala bonds can have implications for the rupee, interest rates and the economy as a

whole. Let us consider the advantages first. Competition from overseas markets may

nudge the government and regulators to hasten the development of our domestic bond

markets. A vibrant bond market can open up new avenues for bond investments by

retail savers. If Masala bonds are eagerly lapped up by overseas investors, this can

help prop up the rupee. The rising demand for Dim-sum bonds in 2011, for instance,

promoted the use of the yuan in global trade and investment. Dim-sum bonds also

provided investment avenues for yuan-holders outside of China. With talks of full

rupee convertibility back home, Masala bonds can help the rupee go global.

But these bonds can have bad after-effects too if companies decide to binge on them.

As of December 2014, corporate overseas borrowings stood at $171 billion. The

recent turmoil in the rupee is already prompting caution on existing foreign loan

exposure. Some reports estimate that Indian corporates are likely to issue about $6

billion worth of Masala bonds this fiscal. With our economy still on shaky ground, too

much reliance on external debt (even in rupees) can weigh heavily on our rating by

global agencies.

A Rs 170-crore ($25-million) masala bond issue has been launched by the

International Finance Corporation, the private finance arm of the World Bank by

betting on the growing interest in India among international investors. Despite the

Why should we be bothered?

Recent developments:

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volatility in emerging markets, investors have shown strong demand for Masala

bonds. British Columbia, the 15th-largest metropolitan region in Canada, will issue

$150 million rupee-denominated bonds, also known as Masala bonds, in the first

quarter of the next calendar year.

Global investors are unnerved by the currency and corporate risks attached to these

papers and international events such as US Federal Reserve's policy decision on rate

hikes(are seeking rates as high as 50-75 basis points) over and above their domestic

corporate bonds.

In a recent case, Power Finance Corporation (PFC) had to cancel its plans of a $250

million issuance after most banks failed to offer a firm price, or underwrite it, for a

period of 15 days.

Even after conducting international road shows, HDFC bank and state-owned power

generator NTPC have already postponed their fund raising plans to January. This

signals a somewhat negative trend in the issuance of Masala bonds.

: Investors are also supposed to bear a 5% withholding tax on

these instruments. The tax is usually deducted at source and is imposed on the interest

income payable to entities outside the country. This is also one of the negatives of

Masala bonds.

Amatter of concern-Why are the masala bonds losing their flavour?

Taxation dilemma?

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So finally….How much Masala is good for health??

Masala bonds are a good idea to protect corporate balance sheets from exchange rate

risks. But they are best, when used in moderation. The after-effects of too much

masala are not pleasant, as is the case with Indian voracious eaters. So, the corporates

need to play cautiously and make sure that they don't over-eat the Masala.

S I M S R

GST Support: Is there a hidden reason to Congress'Defiance?

Akhilesh PrabhuKJ SIMSR, MMS, 2015-17

ARTICLE OF THE MONTH

S I M S R

Goods and Services Tax (GST) is a unified indirect tax regime which will replace the

numerous taxes that are levied on the goods and services under the current tax

structure. The implication is that wherever the goods are manufactured, the tax paid

would be the same irrespective of the state it is being produced in. Currently there are

numerous taxes that are paid by the manufacturers and the consumer of the goods and

services such as VAT, Service tax, Sales tax, entertainment tax etc. Under the GST,

these taxes would be eliminated and a single tax would need to be paid, which would

be uniform across states. Also the GST would ensure that there is no evasion of taxes

as the system is more simplified as compared to the current tax structure, which the

evaders can manipulate and use the loopholes in it to their advantage.

The previous governments, starting from NDA led by Atal Bihari Vajpayee and the

UPAgovernment led by Manmohan Singh, had plans to implement the GST regime as

it would add around 2-3% to the GDP. So looking at the stance that the Congress

government is taking in the GST debate, it does not match the rhetoric that the

previous Congress Government had in view of the Draft GST Bill. The demands that

the Congress has for the passage of GST bill are scrapping of the additional 1% inter-

-state tax in addition to the GST, 18% limit on GST barring a few commodities and

putting the rate of GST in the ConstitutionalAmendment Bill. The ruling government

has agreed upon two of the above demands, but will it ensure the support from the

Congress for the passage of the bill, only time will tell. But there are compelling

reasons for the Congress to not support the passage of the bill till 2017-18 from the

analysis that are available of governments in other countries that have implemented

the GST.

It is found that no government has ever been re-elected after the implementation of

GST and also the alarming fact is that the successive government has reaped the

benefits of the implementation. The reason for this is that GST has a short-term

inflation implication on the economy. The CPI in most cases has risen in the short term

period of 2-3 years after implementation of the GST. The reason being the

manufacturers will pass on the tax to the consumers since it would be slightly higher

than the current rate (proposed 18% as against 14% of service tax) of tax. Also the

transition to a newer system of taxation would mean that the accounting processes of

companies will have to change to accommodate the new system which would create

confusion and chaos among the investors and the stakeholders of the company.

However this is limited to the short term and the long-run benefits far outweigh the

scares of the short-run. Looking at the scenario, Congress can play politics and use this

to its advantage.

If the Congress is able to stall the GST passage till the year 2017, and later agrees to

give its consent and the government passes the GST Bill, there is a high possibility of

inflation creeping the economy. The government will be blamed for not being able to

control the prices of essential commodities and this will be further fuelled by the

opposition's charge against the centre. Although it is a short-term impact of the GST,

the government will find it difficult to convey this to the general public as India is a

price-sensitive economy and elections in the past have been lost due to this factor of

inflation. Politics then becomes a game of perception, and in most cases, the negative

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perception will rule and would topple the government at the centre. With the next

general elections in the year 2019, the opposition party Congress will have a

compelling case against the BJP-led Centre that it failed to curb the general prices of

commodities, which was the same strategy applied against the Congress by the BJP,

other than the corruption aspect. If this scenario plays out, Congress will be able to

form a government at the centre. With the GST implemented nearly 2 years back, the

short term inflation aspect will play out and the GDP of the country will witness the

positive impact of it and the Congress can then claim their contributions to the

recovery of the economy.

The central government has to be mindful of the various strategies that may or may not

be employed by the main opposition party and at the same time ensure that the various

reforms that have been promised is implemented. The government is treading on a

very thin line between the economic reforms for the country and the political survival

of the party. It's a decision that the party high command has to take strategically so as

to create a win-win situation for both the country and the party. It will be interesting to

see as to how things will pan out in the future and it remains to be seen whether the

economic reforms of the country or politics over reform wins.

S I M S R

BUBBLE TROUBLELATIN AMERICAN DEBT CRISIS

Prateek Singh, PGDM-FS (2015-17)

ECO SECTION

S I M S R

The World experienced Latin American debt crisis in 1980s, the period which is often

known as “ During this period many of the Latin American

countries became so highly indebted that they were unable to repay their loan.

In the period between 1960s and 1970s, Latin American countries like ,

, and borrowed heavily to fund their Industrialization and

infrastructure projects. The economy of these countries was booming, and thus the

banks were to provide the loans to these countries. Initially the countries

funded their loans through public funds like World Bank etc. The other sources were

the international banks which were seeing an inflow of funds from the Oil Exporting

countries due the Oil Price Shock in 1973 thought of the sovereign debt as a safe

investment. The situation went unnoticed until the point where the where the Latin

American debt increased more than 4 times. The borrowing increased from the

in to in .

World was hit with the Oil Price Shock of which led to an Increase of the Oil

prices from to per barrel globally. This created a surplus in the current account

of the oil exporting countries while creating a deficit in the current account of the oil

importing countries. The banks had an inflow of the funds from these oil rich countries

which they lent out the (major portion of the funds) to the Latin American

governments. The majority of these banks which provided the loans were the

commercial banks of USA and Europe. The low interest rates coupled with the global

economic expansion in the1970s period made the situation tenable in the initial phase

of 1970s. However towards the latter period of the inflation reduction policy was

becoming a priority for the Industrialized world. This led to the monetary tightening in

LOST DECADE”.

Brazil

Argentina Mexico

motivated

$75

Billion 1975 $315 Billion 1983

1973

$3 $12

USA and Europe. The interest rates started rising and at the same time the banks

started reducing the repayment period. This led to the increase in the debt

accumulation for the Latin American countries. The exchange rate also deteriorated,

the fall in the value of the Latin American currencies in relation to US dollar further

increased the debt burden on the LatinAmerican countries.

The debt accumulation had been rising over the no. of years however the crisis

occurred in around 1982 when the Mexican Finance Minister declared to the United

States and the IMF, the inability of his country in debt repayment which amounted to

around $80 Billion. Subsequently there were other 16 Latin American countries

which missed their debt payment due dates. The crisis was spread across the other

parts of the World and as many as 11 countries rescheduled their debt. With the default

of the Mexico the banks curtailed lending significantly to the Latin American

countries. Majority of the loans issued to them were short term and they became due

immediate. This led to the many LatinAmerican countries plunge deep into recession.

Several steps were being taken by IMF and the World Bank in the Debt restructuring.

USA and the IMF pushed for the debt relief realizing the inability of the countries to

payback. USA also encouraged the rescue effort “international lender of last resort”

which was collaborative effort of the Commercial banks, central banks, and the IMF.

Under this, the commercial banks took to restructuring the countries debt while the

IMF and the other agencies took to lending to the LDCs(Less developed countries) to

enable them to repay their interest (not the principal). The motive was to revive the

economy and the exports which will lead to accumulation of the trade surplus and

reserves which will pay off the debt. The programme delayed the immediate crisis,

however the Latin American countries along with the other LCDs took steps to cut

down their government expenditure significantly on the infrastructure, health, and

education sectors. This ultimately led to the increase in the unemployment, decline in

the per capita income and the slow or negative growth of the economies hence the

“Lost decade”.

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It took years to sort out this situation of crisis. In 1989 USAproposed

a novel debt reduction agreement for the debtor nations to bring down their existing

debt service obligations. In return the 18 countries which signed the agreement agreed

to the domestic reforms that would enable them to payback their debt. During the

period of 1989-1994 the private lenders forgave a staggering 61Billion USD of the

loans to the debtor nations. The scars of the crisis were far from over for a long period

of time.

BRADY PLAN

“Time and again, be it in the Asian crisis or the Euro zone crisis, we have seen

how governments have failed to draw lessons from the Latin American crisis”

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Understanding newly revised calculation method ofGross Domestic Product (GDP) in India

Dr. Shaila SrivastavavaFaculty,Economics

FACULTY SECTION

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In January, the Central Statistics Office (CSO), using a new method, said that India's

real GDP in 2013-14 grew 6.9% instead of the earlier 4.7% and by 5.1% in the year

before compared to 4.5% in the earlier system. Advance estimates for 2014-15

released in February projected India's GDPduring the year to grow at 7.4%, making it

the world's fastest growing economy and India's

growth rate much closer to China's. The share of

manufacturing in the year ended March 2014 in India's

economic activity was 18% instead of 15%, while

services share was 51% instead of 60%. Agriculture's

contribution grew to 17% from 14% with the revision.

All these changes are due to new formula used to

calculate GDP.

Numbers and statistics are important not just for the policy makers but also for the

common populace as they act as report cards to determine the performance of a

government's policies. Investors, both domestic and foreign, use them to gauge

investment opportunities in the country. That's why the newly revised calculation

method of GDPform a significant national issue.

Gross Domestic Product or GDP represents the total value of all the final goods andservices that are produced within a country's borders within a particular time period,typically a year. GDP growth rate, denoted in percentage, is the growth in GDP ascompared to that of the previous year.

What is different in the new method to calculate GDP compare to earlier

method? Why change is important?

Three types of changes were made by the CSO in the GDP estimation procedure:

Methodological changes, Change in the base year and giving comprehensive

coverage to all sectors. Changes are important to make India's national income

accounting standards in conformity with global standards. For example, IMF's world

economic outlook projections are not based on factor costs. This used to create

confusion in the past as IMF's projections turning out to be very different from the

Government's.

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Globally accepted standard: the SNA

1.

2.

Globally, most accepted and followed national income accounting format is theSystem of National Accounting (SNA), prepared by the UN and ratified by theIMF, World Bank, OECD and EC.

The SNA describes a coherent, consistent and integrated set of measures in thecontext of internationally agreed concepts, definitions, classifications andaccounting rules.

The SNA was launched in 1992 and upgraded in 2008.

1- Methodological Changes

factor or basic cost prices of products

received by producers

the paid by

consumers

Globally there is a consensus that GDP in Market Prices is more powerful and useful

than GDP in factor cost. Earlier, GDP was GVA (gross value added) and was

calculated at , which took into account

. Now the GDPwill be measured by calculating the value that

consumers get to enjoy, new formula takes into account market prices

. Actually, estimation of GVA at basic prices is a step to measure the GDP

at market prices. The SNA and the new methodology adopted in India calculate

sectoral .

GVA at basic prices = CE + OS/MI + CFC + production taxes less production

subsidies.

GVA at basic prices

CE – Compensation of Employees, OS – Operating Surpluses, MI – Mixed Incomeand CFC – Consumption of fixed capital

The above identity says that GVAis the sum of payment made to labour, surplus of the

business entity (profit), income of the self employed people etc ( Mixed Income) and

the money we keeps to replace the existing machineries (CFC). The unique thing

about Basic price is that it measures the GVA by adding production taxes and

deducting production subsidies. In this way, the first step in calculating the GDP ie.,

obtaining sectoral GVA. Then cumulate these sectoral GVAs to get the GDP.

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GDPat Market Prices is calculated as the total (or sigma ) of the GVAs.

GDPat Market Prices = GVAat basic prices + product taxes – product subsidies Or

GDP(Market Price) = GDP(Factor Cost) + Indirect Taxes - Subsidies.

∑

∑

2- Change in the base year

Choosing a base year is the first step while counting the 'real' GDP.Areal GDP growth

rate removes any effects that have arisen due to inflation to give us a truer picture of

economic reality. The government has also changed the base year for estimating GDP

from 2004-05 to 2011-12.

What is a “base year”?

The base year of the national accounts is the year chosen to enable inter-yearcomparisons. It is changed periodically to factor in structural changes in the economyand present a more realistic picture of macroeconomic aggregates.

The GDP series with base year 2004-05 was launched in 2010, while the series withbase year 1999-2000 was launched in 2006. Going by the past, the base year for thenew series may have been 2009-10 instead of 2011-12. However, 2009-10 may not bean ideal choice for the 'base year' as the Indian GDPslipped in 2008-09 after four yearsof 8% plus growth beside some other reasons. The growth revived to 8% plus levels in2009-10 and 2010-11. The year 2011-12 was when the GDP deflator – an indicator ofsystem inflation used to convert nominal GDP to real GDP – as the highest in the last10 years.

3 The new GDPhas incorporated more comprehensive data on all sectors:

Under-

represented and informal sectors as well as items such as smartphones will now

be taken into account to calculate GDP.

Advantage of new GDPestimate:

-

Earlier, organized industrial activity was based on IIP. It used to get updated two years

later based on data coming in from the Annual Survey of Industries (ASI). This has

limitations, as ASI only captures goods' value at the factory gate, and that too only of

firms registered under the Factories Act. The preliminary estimates of the old GDP

series that used IIP data were derived from a database of less than 5,000 companies,

which were then extrapolated to get the final estimates.

Now, the corporate affairs ministry's MCA21 records, a comprehensive compendium

of balance sheet data of about 5,00,000 firms, is used. All companies have to upload

balance sheet data on the MCA's records and this captures the value added by all

activities of manufacturing, trading and even marketing. While the earlier data gave

only a factory-level picture, the new data looks at the enterprise level.

Comprehensive coverage of the financial

sector includes stock brokers, coverage of activities of local bodies etc.

GDP is a key metric used by global investor to allocate their investment between

countries. India's GDP growth may help investors view India in a more favorable

light.

That important indicators such as the fiscal deficit are measured as a ratio of GDP

too. The latest revisions will help the Government meet this year's fiscal deficit

target.

With indirect taxes added and subsidies deducted under the new GDP calculations,

there is more incentive for the Government to raise indirect taxes and rationalize

subsidies.

S I M S R

Challenges of new GDPestimate:

The new numbers pose a challenge to the Reserve Bank of India (RBI) because the

bank decides whether to increase or decrease the interest rates. For example, with the

earlier GDP numbers, the central bank was expected to decrease the lending rates for

reviving economy. Sudden spike in GDPnumbers puts RBI in a dilemma.

Other indicators, like unemployment rate, population below poverty line (BPL),

power consumption etc. and these numbers and the realities they represent won't

change overnight with the change in GDPcalculation methods.

(Secondary source of data such as government reports, newspapers etc. used in the

article)

S I M S R

My experience with Retiral FundsAdvisory & Management

Krishnamurthy GPGDM Finance (2012-14)

ALUMNI SECTION

S I M S R

To begin with, I would like to congratulate the bulls of FINSTREET, for continuing to

take FINLY to higher highs every time I get a chance to see it. It feels nostalgic, when I

think of the fact that I was part of the team which started FINLYas a weekly newsletter

to publish weekly updates on the Global Financial markets. From then to today,

FINLY has transformed to a great extent and kudos to the editors and members for

bringing in innovative ideas to make FINLYmore relevant.

I am currently working with Darashaw & Co. Pvt Ltd, which is a broking &

investment banking house providing services for raising funds, managing funds &

Financial Consulting. I am placed in the Retirement Benefits Investment

Management (RBIM) team at its Mumbai Office.

In RBIM we are investment advisors & managers to the Retiral Funds (which are

Provident Fund (PF), Pension Fund, Gratuity Fund & Superannuation Fund, etc) of

various organizations. These funds are part of social security programme started by

the Government, and the guidelines for managing these funds by the organizations are

given by the Government of India through their ministries. For example, guidelines

for managing the retiral funds of banks & Financial Institutions are given by the

Ministry of Finance, while guidelines for managing the retiral funds of manufacturing

companies are given by Ministry of Labour. The guidelines may vary from one

ministry to another.

As an Investment Manager my role is to optimally manage the funds while always

sticking to the guidelines given by the Government of India. From the fund

management point of view, 15 or 20 years back managing these funds were simple

because the investments were made only in Government securities & Fixed deposits.

But, as time passed more financial instruments were brought into the investment

pattern with the latest addition being Equity & Equity derivatives.

Currently some of the major instruments in the investment pattern include,

Government Securities, State Development Loans, Central & State Guaranteed

Bonds, PSU & Private Perpetual Bonds, Rupee denominated bonds issued by foreign

institutions like Asian Development Bank, International Bank Of Reconstruction &

Development, etc and Basel III Perpetual Bonds issued by banks for meeting their

Basel III requirements. These instruments are long term in nature and can span from 3

years, 10 years to perpetual in nature. In addition to this, there are some short term

instruments like treasury bills (T-bills), Cash Management Bills (CMBs), CBLOs,

etc. From the current financial year investments in Equity have become mandatory.

Thus, we see that the investment menu has increased and hence the organizations hire

investment manager to manage their funds. As an investment Manager I am expected

to do following tasks:

– The corpus of the portfolio might range

from few hundreds of crores to several thousands of crores depending on the size

of the organization. It will contain investments made since the inception of the

fund. By doing the health check-up of the portfolio, I am expected to analyse the

investments made till now and reckon if they are done in best investment options

or not. If not, I am expected to fund the best possible way to restructure the

portfolio by selling the low yielding investments and investing them in better

yielding securities that are available currently in the market.

– Retiral funds typically have regular inflows from

the contributions made by employees & employers. Along with this, it also has

outflows due to retirements or due to loans taken by the employees. The outflows

might be huge when a senior person is retiring from the organization. Since, the retiral

funds invest more than 90% of their funds in Debt instruments, the liquidity of the

instrument might not be good at all times. So, it is important to project the outflows

?

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Health check-up of the portfolio

Asset-Liability Management

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based on the current set of employees while making the investment. I project the

outflows for each year in the future and inflows from the current investment in the

future. If there is a mismatch between the two in the upcoming years, then the current

investments have to be made to mature in that particular year to minimize the shortfall.

– It is based on the above mentioned tasks and the

macroeconomic situation. Since the majority of investments are in Debt, it is

important to know the interest rate direction based on which the decision on the

duration of investments can be made. We know that the price and yield of a bond are

inversely related. So in a falling interest rate scenario, one should go for a longer tenor

bond and in a rising interest rate scenario, one should go for a shorter tenor bond.

In the last two years, globally lot of major macroeconomic events have taken place.

From US ending their QE programme to Euro Crisis to China's currency devaluation

to finally US Fed hiking its interest rate this month have impacted our capital markets

to a great extent. Being in the Capital markets, I was able to learn a lot in these

challenging environments.

I hope my experience helps the budding managers to get a taste of what it is to be in a

retirement benefits space and what it takes to work in it. It is always a pleasure to

contribute to FINLYand I hope that I would be able to contribute in the future as well. I

wish “All the very best” to all the current batch students for their placements. Keep

learning and don't give up until you get what you deserve. Cheers!

? Investment Recommendation

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Television : disruptions to shake up

incumbents!

article by finacue

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The imminent launch of Reliance Jio (Jio), isn't just an event for the telecom industry.

The television industry (Pay TV) too is watching the launch with bated breath. Jio isn't

the only disruptive force; the Pay TV industry is facing disruptions galore, as 'new age

content producers' threaten the stronghold of incumbent broadcasters such as Star,

Zee, Colors etc. The race for eyeballs is also seeing new, hitherto alien participants,

such as Balaji Telefilms and Singtel, who are looking to tap into viewership across

devices, viz. mobiles and tablets. We believe that this space is hotting up and

disruptions are likely to be impactful for incumbents such as broadcasters (Colors,

Star, Sony, Zee), television content distributors (Cable and DTH companies, viz. Tata

Sky, Hathway Cable, Dish TV etc).

India's content production industry is extremely fragmented, with small mom-and-

pop shores dominating the scene. The role of content producers is that of a contractor,

merely executing the commands of broadcasters. These content producers were

unable to even think of owning intellectual property (IP) for content they used to

produce, as monetisation was a key challenge.

Now, with increased bandwidth availability and willingness of consumers to access

video content on their mobiles, some players are looking to launch their own

platforms, hosting propreitary content to directly reach audiences. Based on its track

record of producing more than 15,000 hours of television content, Balaji Telefilms

(BT) is in the process of launching its own direct to consumer (D2C) offering, ALT

Digital.

Content prodcuers will directly reach consumers

Exhibit 1: Balaji Telefilms' thought process on its D2C offering

Source: Company, Finacue Research

ALT Digital intends to deliver original content across multiple screens through

Subscription/Ad-supported Video on Demand (SVOD/AVOD).

Not just Balaji, but a whole host of small and niche content producers such as The

Viral Fever (producers of Permanent Roommates, Pitchers, etc), The Humour

Beings etc, are reaching consumers through the mobile ecosystem.

Alarm bells ringing in US broadcasters

Not just content producers, but the likes of Netflix and YouTube too are on the prowl.

Netflix has announced that it will enter numerousAsian markets in 2016.YouTube has

launched an ad-free subscription service,YouTube RED, which allows users access to

Google Play Music and offline viewing. We believe that the Indian market is likely to

witness the entry of several global behemoths, who are also strengthening their on-

ground presence through initiatives like Youtube Spaces. Indian broadcasters are

cognisant of the changing consumer preferences, but their communique to

stakeholders is devoid of mention of these new entrants as 'threats.' Global

broadcasters/content distributors are less diplomatic and have taken congnisance of

these threats.

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Exhibit 2: Extract from(1) Comcast's 2014 10k

(2) 21 Century Fox's F615 annual reportst

Source: Company, Finacue Research

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India's broadcasters are making attempts to pre-empt content consumption on mobiles

by launching their own over the top (OTT) apps, such as Hotstar by Star, Ditto TV by

Zee, Sony LIV by Sony etc.

Apart from broadcasters and content producers, technology is lowering the entry

barriers in the the Indian pay TV, with Reliance Jio looking to start off with a mobile

Other new entrants too

video strategy. An IPTV startup, Lukup Media is looking to

launch full-scale video-cum-broadband services.

While, India's Pay TV market lags behind the US in

conventional technologies, we seeem to be fast catching up with

the US in the launch of disruptive technologies in this domain.

Both LukupMedia and

Reliance Jio arelooking to reach

consumersthrough LastMile Owners

Jury still out on the who has the edge

While broadcasters have their own OTT apps, they no longer have the edge over other

independent players such as HooQ (a Singtel app), Eros Now, YUPP TV, Hungama

Play, Wynk Movies (anAirtel app).

The distribution network advantage that large broadcasters had, by virtue of their easy

availability on television is unlikely to help in the digital world, where all OTT apps

are on even keel.

, we believe that the Pay TV industry is in for interesting times, as a

plethora of new entrants are looking to grab a share of India's entertainment loving

folks. We are in for interesting times, and only the paranoid will survive !!!

In conclusion

Team Finacue - Finacue offers role-specific industry projects in Finance, allowing B-

school students to hone their skills in the subject of their choice.

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Finstreet Finstreet Fiesta

Undergraduate Finance quiz

Investrix –

Lock Stock and Trade

Equity Research Competition

SIFICO -

in association with KOTAK SECURITIES brings to you “ -The Finance week at SIMSR” where you will witness a week full of enthralling eventsin the field of Finance! Fiesta has 400 teams participating from about 60 reputedcolleges across India. Fiesta aims at making everyone aware of the pre-eminenceof'Finance specialization'for MBA aspirants and shed light on the numerousopportunities it enfolds!Fiesta consists of following events with total prize money to

to be won!which is open for under graduate students all over

India irrespective of their specializationA panel discussion by renowned finance corporates on the theme

“

– The stock trading competition presented in association withICICIdirect Centre for Financial Learning with prizes worth INR 55000 to be won!

brought to you in association with FinShiksha. Cashprizes worth INR 20000 to be won.

SIMSR's International Finance Conference based on the Theme:where academicians and practitioners of

international repute will engage in a consummate discussion on contemporary topicsof finance and economics.

Prospects and challenges for investing in Indian capital markets under present

global environment”

“Trends

in Financial Markets and Services”

INR 1 lakh

finstreet fiesta

news buzz

Finance ministry lowers 2015-16 GDP growth forecast to 7-7.5%

In the mid-year economic review released, the

finance ministry scaled down the growth

projection of the economy to 7-7.5% in the

current fiscal, as opposed to 8-8.5% forecast in

February.The review cited weak demand as the

central challenge facing the Indian economy; it

also pointed out that macroeconomic cushions,

such as falling international oil prices, would

no longer be available.

Govt to set up debt management agency through executive order

The Public Debt Management Agency will

bring the country's domestic and external

borrowings under one roof. It was envisaged

as a mechanism to remove the perceived

conflict of interest between the Reserve Bank

of India's (RBI) role of controlling inflation

and its interest in keeping interest rates low to

reduce the cost of borrowings.

Rating agencies say debt quality deteriorating

The CARE Debt Quality Index for a set of 1,582

companies rated by CreditAnalysis and Research

has been on a downward trend since June. The

index moved lower from 93.43 in June to 91.78 in

November. The index captures on a scale of 100

whether the quality of debt is improving or

declining. Crisil in its presentation cautioned

credit quality pressures are intensifying for

highly leveraged firms and sectors with linkages

to investment activity and commodities.

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news buzz

Federal Reserve raises interest rates for the first time in nearly a

The US central bank has raised interest rates by

a quarter percentage point and pledged a

gradual pace of increases. This marks the end

to the near-zero borrowing costs that have

prevailed since the US was struck by the worst

financial crash in modern times.In this

backdrop, the outlook for Indian equities

doesn't look all that bright for the near future.

In the past months, outflows by foreign

Infrastructural, legal issues are hurdles to Digital India's success

The Digital India initiative aims to

provide Internet access to remote parts of

the country through a wireless network.

The implementation of many e-

governance projects is no measure of the

success of the Digital India initiative, as

experts are of the view that it has been

unable to make the desired impact due to

legal and infrastructural issues. The legal

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institutional investors have amounted to Rs.8,500 crore ($1.27 billion). The markets

have absorbed this to some extent, thanks to heavy purchases by domestic institutions.

But outflows by foreign institutional investors are likely to continue as long as

commodity prices remain low.

challenges that Digital India might face are that the laws are still outdated. There are

spectrum issues, data privacy issues and product liability issues. The Digital India

concept is glorified by India but it is a huge responsibility on the shoulders of the law

ministry to make sure that the laws are updated and not ambiguous for someone to

misuse.

trivia

2. The world's first bank was

Monte Dei Paschi di Siena, founded in

1472 and headquarted in Tuscany,

Italy. It still operates today.

5. The world's worst inflation was in

Hungary in June 1946, when the 1931

gold pengo was valued at 130 million

trillion paper pengos.

4. Morarji Desai was the only

Finance Minister to have had the

opportunity to present two budgets on

his birthday – in 1964 and 1968. He

was born on February 29.

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1. Singapore has the world's

highest percentage of millionaires with

1 out of 6 households having at least

USD one million in disposable wealth.

3. The ink used forAmerican money is

traceable, magnetic and birefringent (color

changing)- all in order to prevent

counterfeiting.

We Welcome your valuable Feedback

www.finstreet.weebly.com

Finstreet, Finance Committee of SIMSR

finstreet@somaiya.edu

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