niveshak february 2012 issue

THE INVESTOR VOLUME 5 ISSUE 2 February 2012

sustainable economy through innovation>> Pg. 08

A peek into the union budgetpg. 14

NiveshakWorldEconomicForum

The Great Transformation: Shaping new models

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

F R O M E D I T O R ’ S D E S K

NiveshakVolume V

ISSUE IIFebruary 2012

Faculty MentorProf. N. Sivasankaran

Editorial TeamAkanksha BehlAkhil Tandon

Chandan GuptaHarshali Damle

Kailash V. MadanNilkesh Patra

Rakesh Agarwal

Creative TeamAnuroop Bhanu

Venkata Abhiram M.

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,From being the worst performer among emerging market currencies in

2011, the rupee has outperformed all emerging market currencies in 2012. Cor-porates will find dealing with this volatility a challenge as several forecasters are now changing their 2012 projections for the domestic currency. The rupee has gained nearly 8.2% since the beginning of the year up to February 3, which is the highest appreciation compared to other Asian currency. The BSE Sensex shot up to 6-week high on sustained foreign institutional investors (FII) inflows, low food inflation and firm overseas markets. FIIs remained net buyers. Another factor working in favour of markets is the sharp appreciation of rupee.

The RBI cut CRR for banks by 50 basis points to 5.50 percent to ease tight liquidity, signalling a policy shift towards reviving growth after nearly two years of fighting inflation. With core inflation still stubbornly high, the Reserve Bank of India, as expected, left its policy repo rate unchanged at 8.50 percent for the second consecutive review. FDI in single brand has led to emergence of some global majors in Indian market. This will provide stimulus to domestic manu-facturing value addition and help in technical up gradation of our small indus-try. Some more good news is expected on March 16, the day on which Finance Minister Mr. Pranab Mukherjee will present Annual Budget for 2012-2013 in the budget session of parliament commencing from March 12, 2012.

There was some respite for international economy as well. The US unem-ployment rate fell to 8.3 percent in January, its lowest level in more than two years, thanks to an unexpected surge in hiring. This is the major factor which is going to help Barack Obama in the US presidential election, 2012. The financial crisis is calming down. Europe is no longer on the edge of an abyss. All the efforts must now be dedicated to the resolution of the economic crisis.

This issue brings to you some more interesting and insightful reads. The cover story this month focuses on The World Economic Forum Annual Meeting in Davos. The issue also features an article on the annual union budget of India, which is going to be presented on 16th March 2012. The article of the month throws light on achieving goal of sustainable economy through innovation. This issue also features other articles on structuring the equity gap and telecom bank-ing. The classroom section explains the concept of “Options Market”.

We, the Editorial Team of Niveshak, would like to take this opportunity to thank our senior team for their valuable contribution to Niveshak. They are: Alok, Deep, Jayant, Mritunjay, Rajat, Sawan, Shashank, Tejas, Vishal and Vivek. Please join us in bidding adieu to all of them and wishing all happy times, good health and bright future in their personal and professional life.

Stay Invested.

Team Niveshak

C O N T E N T S

Niveshak Times04 The Month That Was

Article of the month 08 Achieving The Goal Of Sustainable Economy ThroughInnovation

Cover Story

11 The 2012 WEF Annual Meeting At Davos

Perspective 14 A peek into the Union Budget

Finsight

17 When Airtel Launches Airtel Bank...

Fingyaan20 STRUCTURING THE EQUITY GAP

CLASSROOM23 Options Market

Bidding adieu 24 Finance Club 2010-12

February 2012

Strong inflows strengthen ` to 3-month highExpectations of easing monetary policy by the central bank to boost growth has led to a surge in foreign fund flows aiding the rupee to post its fifth straight weekly gain in the week ending 3rd February. The rupee ended at 48.6850/6950 to the dollar, close to the day’s high of 48.67, a level not seen since October 31. The total in-flows this year has been nearly $5.8 bil-lion in both equities and debt combined. The euphoria stems from the annual headline in-flation, which slowed to a two-year low of 7.47% in December. The dollar inflows have resulted due to measures taken by the central bank to curb corporate and interbank speculation while attracting funds from non-resident Indians and foreign investors to support the rupee.

Services PMI hits six month high in Janu-aryImproved market sentiment and strong demand boosted the HSBC Services Business Activity in-dex to a six month high of 58 in January from a distant 54.2 in December. The sentiment is driven by positive outlook for financial interme-diation and hotels & restaurant sub-sectors that have witnessed a phenomenal growth since July 2011. However, as inflation still remains above the comfort level, the numbers have to be taken with a pinch of salt. The consensus is that it is too premature for RBI to cut rates at this mo-ment and it would ideally wait for sustained de-cline in inflation before taking any action on the rate front. That has not prevented the central bank to cut cash reserve ratio by 50 bps to ease liquidity to indicate its shifting focus towards aiding growth. Overall, the HSBC composite PMI, which includes manufacturing and services, rose fastest in nine months to 59.6 from 54.7 in De-cember.

Positive outlook for IT sector in 2012In spite of uncertain conditions in key glob-al markets, rating agency Fitch has affirmed a

stable outlook for the Indian information tech-nology (IT) services sector in 2012. It considers that the strong liquidity position of the Indian

IT companies would stand them in good stead in the current year. It also fore-

sees a moderation in revenue growth in 2012 from 2011 levels as demand from key clients in US and European countries is likely to remain muted. The increased hiring by IT compa-

nies in anticipation of a better year is likely to put downward pressure on

their EBIDTA margins. But, above all, the sector experienced some relief in the last quar-ter of 2011 by the depreciating rupee, though that rally may not be sustainable for long as seen by the reversal of the trend in early this year. The agency also mentioned that the sec-tor would be monitored closely to update their stance depending on the margin position of the companies.

Facebook to go public

After a long period of eight years of existence, Mark Zuckerberg has finally decided to take his company public. Investment bankers have sug-gested that Facebook’s initial fund-raising tar-get of $5 billion could well stretch to $10 bil-lion based on investor demand resulting in the company valuation of up to $100 billion. This could make FB one of the most valuable internet compa-nies of modern time. The step is a clear indication of the growing competition between Google and FB with the former launching its own version of social network called Plus. Also the paperwork involved in going public provided analysts the rare opportunity to peep into the financial de-tails of the web giant that was created in a Har-vard University dorm room. Zuckerberg agreed to cut his compensation from $1.5 million last year to $1 effective January 1, 2013, following the example of Apple founder Steve Jobs.

The Niveshak Times


IIM, ShillongTeam NIVESHAK

NIVESHAK4T

he

Mon

th T

hat

Was

European leaders looking east European leaders are beginning to recognize the financial influence of China’s huge holdings of foreign exchange reserves. In an attempt to build stronger ties with China, European leaders are making a bee-line to meet Chinese premiers, the latest being Chancellor Angela Merkel of Germany on a three-day visit. In response, Chi-nese Prime Minister Wen Jiabao assured greater co-operation by working with the International Monetary Fund to help shore up Europe’s financ-es. But he was silent on whether China was will-ing to drop conditions that so far have made its proposed help unappealing to European leaders. China has amassed a massive $3.18 trillion of foreign exchange reserves by the end of Decem-ber, dwarfing the reserves of every other country and potentially giving it the financial firepower to make a significant contribution. China’s earlier stance of the need to buffer the risk of lending more money to Europe has not seen any amend-ment. As Chinese money could restore the confi-dence of the international investing community, the European leader might have no choice but to agree to political or trade concessions that China wants in exchange for assistance.

India selects the winner of the fighter plane deal

Indian govern-ment has decided to enter into a deal with French defence supplier Dassault Aviation.

Their aircrafts, Mirage 2000 fighters, played a vi-tal role for India during the Kargil conflict in 1999. The new offering by Dassault Aviation- the Ra-fale fighters, emerged a winner with the lowest bid among severe competition from Eurofighter Typhoon, American firms Lockheed Martin and Boeing, Swedish jet Saab Gripen and Russia’s MiG 35. French President Nicholas Sarkozy has assured of greater collaboration through transfer of technology and full support of French authori-ties. The deal will definitely provide a new life to the re-election bid of Mr. Sarkozy. An important term in the contract for the multi-role combat

jets ensures that half the value of the contract must be spent in India which will boost the pub-lic and private defence contractors in India.

Piramal Heathcare in diversification mode

After having entered into financial services by launching two non-banking financial companies (NBFCs) and acquiring two private equity (PE) businesses Indiareit Fund Advisors Pvt Ltd and Indiareit Investment Management Company for Rs 225 crore, Piramal Healthcare Ltd. has its eyes set on the telecom sector. Piramal Healthcare picked up 5.5% stake of Essar Group in Vodafone in August 2011 and in February 2012 decided to pick up the remaining stake of Essar Group for Rs 3007 crore taking its total stake in the compa-ny to about 11 per cent. The series of purchases comes on back of the group desire to diversify into sectors that have more potential than phar-ma. That was one of the reasons for selling its Indian formulations business to US-based Abbott Laboratories in 2010.

SC judgement on 2G is finally outThe Supreme Court verdict on the 2G spectrum allocation saga appears to agree with the coun-try’s Comptroller and Auditor General’s conten-tion that a first-come first-served process of dispersing the licenses at “throwaway” prices led to large losses to the public exchequer com-pared to the alternative of auctioning them. Not wasting time after the apex court struck down 121 licences, the ministry has written to TRAI to put forward a policy and pricing mechanism for 2G services in view of the order setting auctions as the means of allocating spectrum.

The Niveshak Times

www.iims-niveshak.com 5NIVESHAKT

he M

onth

Th

at Was

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

February 2012

6C

over

Sto

ryNIVESHAK6

Art

icle

of t

he M

onth

MARKET CAP (IN RS. CR)BSE Mkt. Cap 63,57,880Index Full Mkt. Cap 29,92,574Index Free Float Mkt. Cap 14,78,260

CURRENCY RATESINR / 1 USD 49.33INR / 1 Euro 64.84INR / 100 Jap. YEN 63.25INR / 1 Pound Sterling 77.41

POLICY RATESBank Rate 9.50%Repo rate 8.50%Reverse Repo rate 7.50%

Market Snapshotwww.iims-niveshak.com

RESERVE RATIOSCRR 5.50%SLR 24%

LENDING / DEPOSIT RATESBase rate 10%-10.75%Deposit rate 8.5% - 9.25%

Source: www.bseindia.com www.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com23rd January to 14th February 2012

Data as on 14th February 2012

Mar

ket S

naps

hot

CURRENCY MOVEMENTS

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

7C

over Story

NIVESHAK 7A

rticle of the Month

7C

over Story

NIVESHAK 7M

arket Snapshot

BSEIndex Open Close % ChangeSensex 16,667 17,849 7.09%

MIDCAP 5,681 6,347 11.72%Smallcap 6,278 6,961 10.88%AUTO 8,808 10,005 13.59%BANKEX 10,919 12,127 11.06%CD 5,801 6,247 7.69%CG 9,799 10,452 6.66%FMCG 4,042 4,136 2.33%Healthcare 6,183 6,333 2.43%IT 5,495 6,042 9.95%METAL 11,178 12,527 12.07%OIL&GAS 8,110 8,775 8.20%POWER 2,078 2,187 5.25%PSU 7,223 7,697 6.56%REALTY 1,711 1,934 13.03%TECK 3,292 3,573 8.54%


Market Snapshot

February 2012

8C

over

Sto

ryNIVESHAK8

Art

icle

of t

he M

onth

8C

over

Sto

ry

A sustainable economy is one in which the re-sources are not used up faster than nature re-news them and benefits are shared equitably. On one account, sustainability concerns the specification of a set of actions to be taken by present generation that will not diminish the prospects of future generations to enjoy levels of consumption, wealth, utility or welfare com-parable to those enjoyed by present persons. At present, the average per capita consumption of people in the developing world is sustainable but population numbers are increasing and indi-viduals are aspiring to high-consumption west-ern lifestyles. The developed world population is only increasing slightly, but consumption levels are unsustainable. The challenge for sustainabil-ity is to curb and manage western consumption while raising the standard of living of the devel-oping world without increasing its resource use and environmental impact. This must be done by using strategies and technology that break the link between economic growth on the hand and environmental damage and resource deple-tion on the other.

However, the concept of sustainability is much broader than the concepts of sustained yield of welfare, resources or profit margins. If we see around us today, a sustainability revolution is taking place – from an old economy that is high carbon, high pollution, waste intensive and ecologically disruptive, to a new economy that is low or zero carbon, low pollution, energy/

resource efficient and ecologically supportive. But the question that has been lying beneath all those subtle layers of evolution is still the same - How to attain sustainable development for an economy?

And it is perhaps the most important and the most daunting long-term challenge that the world faces today. It has often been forecasted that businesses, cities, communities and regions that lead this revolution will prosper because the new economy will outperform the old one.

Why Sustainable development is so important for an economy?Communities, cities, counties, regions, states, provinces and nations need to undertake sus-tainable economic development strategies for defensive reasons, to avoid being left behind as the momentum toward a sustainable econo-my rapidly accelerates over the next few years. However, the positive reasons for launching a sustainable economic development strategy are even more important. A sustainable economic development strategy can guide places in evolv-ing a culture of stewardship, innovation and action that will lead to prosperity, satisfaction, and inspiration. At the same time, a sustain-able economic development strategy can be a powerful tool for regenerating low and moder-ate income communities.

A sustainable economic development strategy provides guideposts on the way to the full real-

8A

rtic

le o

f th

e M

onth

NIVESHAK

IIM IndoreRajiv Singh & Sourabh Sahu

Achieving The goAl of SUSTAINABLE ECONOMY Through INNOVATION


9C

over Story

NIVESHAK 9A

rticle of the Month

9C

over Story

9A

rticle of the Month


9

ization of the promise of a sustainable economy. As such, it can help create places that people will be very proud to provide for their children, and for their children’s children.

Can Innovation realize a sustainable economy?Nowadays, a culture of innovation and action in relation to sustainability is increasingly becom-ing one of the criteria that businesses use to determine the strategic locations of their major financial investments and where they build and manage their main job-creating facilities. There is a reason for innovation to play a major part in the strategies of businesses.

Over the years, new inventions and innovations in agriculture, mass production, transportation and communication during the In-dustrial Revolution were largely responsible for proving wrong English economist Thomas Malthus, who predicted that the world couldn’t support an expo-nentially increasing population. In the same vein, today’s inventors and inno-vators could very well prove wrong the skeptics who say that economic development and environmental protection cannot possibly go hand in hand.

What should be the primary target for a sustainable economy?The sustainability revolution is based on the fun-damental recognition that there are three forms of capital essential to the creation of genuine prosperity. In addition to economic capital (fi-nancial and manufactured), there are two other forms – natural and social. Any businessperson knows that, over the long run, a successful busi-ness needs to invest wisely to generate more income than expenses and to grow its capital. If a business lives off its capital, it will eventually go bankrupt. This is just as true for natural and

social capital as it is for economic capital.

Natural Capital: The economy operates within design limits inherent in the natural environ-ment. If the economy disrupts the environment, it disrupts itself; and adds a higher financial cost to society and to individual businesses. Conversely, the sustainability revolution recog-nizes the economy’s dependence on the envi-ronment for fresh air, clean water, climate stabil-ity, renewable energy and a thriving ecosystem. Businesses need to derive value from the eco-system without disrupting it. As the sustain-

ability revolution proceeds, true cost pricing and true cost accounting to value major

contributions of the natural world are emerging.

Social Capital: A prosperous economy depends on a stable

society with an effective work-force. The economy threatens

its own foundations if it disrupts society by allow-

ing an extreme gap to emerge between the very wealthy few and the rest of the pop-ulation or by inad-equately supporting

society’s ability to en-sure public safety, an ef-

fective educational system, a well trained workforce and an afford-

a b l e health care. At the same time, a pros-perous economy contributes to a stable society by creating the jobs, the opportunity for produc-tive work and the income that people need to live satisfying lives.

Economic Capital: Sustained economic prosper-ity requires that both the private sector and the public sector operate according to sound finan-cial principles. Massive government budget and balance of payments deficits are not sustainable and put the borrowing countries in jeopardy to foreign lenders. At the same time, it is essen-tial for countries to maintain and enhance their physical infrastructure. Economic capital is built

NIVESHAK 9A

rticle of the M

onth

Sustainable Economic Development Strategies generate substantial economic and employment growth and sustainable business and community development by demonstrating that innova-tion, efficiency, and conservation in the use and reuse of all natural and human resources is the

best way to increase jobs, incomes, productivity, and competitiveness

February 2012

10C

over

Sto

ryNIVESHAK10

Art

icle

of t

he M

onth

10C

over

Sto

ry10

most effectively and the economy works best when operations are transparent and guided by appropriate policies.

Strategy to tackle these primary targetsSustainable economic development strategies generate substantial economic & employment growth, sustainable business and community development by demonstrating that innovation, efficiency and conservation in the use and reuse of all natural and human resources is the best way to increase jobs, incomes, productivity, and competitiveness. In addition, sustainable economic development strategies are the most cost-effective method of promoting renewable energy and clean technologies, protecting the environment and preventing harmful impacts from climate change. A sustainable economic development strategy has four key elements, referred to as the four greens:

1) Green Savings—cutting costs for businesses, families, communities and governments by effi-ciently using renewable resources and by reduc-ing and reusing waste.

2) Green Opportunities—growing jobs and in-comes through business development and ex-panding markets for resource efficiency, sus-tainability and clean technologies.

3) Green Talent—investing in fundamental assets such as education, research, technological in-novation and modern entrepreneurial and work-force skills, because people are now the world’s most vital green economic resource.

4) Green Places—establishing sustainable trans-portation and infrastructure and protecting and enhancing the natural and built environment, to create more attractive, livable, healthy, vibrant, prosperous, productive and resource-efficient areas and communities.

Innovation can both enhance economic growth and achieve sustainability through the develop-ment of alternatives to traditional usage of re-sources. The combination of drivers to reduce dependence on depleting natural resources; to reduce negative environmental impacts, notably climate change; to create significant new mar-

ket opportunities for new technologies; consti-tute a historically novel impetus to innovation.

ConclusionThe long-term solution to the model of sus-tainable economy is therefore to move beyond the “growth at all costs” economic model to a model that recognizes the real costs and ben-efits of growth. We can break our addiction to fossil fuels, over-consumption and the current economic model and create a more sustainable and desirable future that focuses on quality of life rather than merely quantity of consumption.

We should aim to establish a long-term vision for the future that facilitates a cleaner and fairer future for generations to come. We envision that the measures taken will create a platform for an economy that helps to reduce worldwide carbon emissions, as well as provides attractive business opportunities to internal and external investors. The sustainable economy will be-come an economy, renowned for its utilization of renewable energy and innovative practices, celebrated for its commitment to zero waste practices and distinguished by a value system that goes beyond the financial.

It will not be easy; it will require a new vision, for innovation with new measures and new in-stitutions. It will require a redesign of our entire society. But it is not a sacrifice of quality of life to break this addiction. Quite the contrary, it is a sacrifice not to!

Art

icle

of

the

Mon

thNIVESHAK

A Sustainable Economic Development Strategy can guide places in evolving a culture of steward-ship, innovation, and action that can lead to prosperity, satisfaction, and inspiration


11C

over Story

NIVESHAK 11A

rticle of the Month

11NIVESHAK 11


11NIVESHAK 11

the top concerns this year. This was a striking turnaround as it had never been identified as an issue at the WEF before. This can be attributed largely to the Arab Spring uprisings, the Occupy Wall Street movement and other protests world-wide. There were no responses to the widening inequality gap, but an intensifying realization that economic development must include the poor, that creation of employment opportuni-ties is critical, and that affordable food, hous-ing, health care and education need to be an integral part of any solution. Before the start of the annual meeting, the International Monetary Fund reduced its projection for global growth in 2012 to 3.3 per cent from the 4 per cent mark it had forecast in September 2011. Many other economic forecasters also predicted a slowing economy. It is expected that Asia will continue to be the engine for global economic growth though at a comparatively slower rate, with Chi-na leading the list with 8 per cent plus growth, followed by India and Indonesia. A feeble global rescue effort and financial tightening over the past year have taken their toll on developing markets’ growth. Overall, emerging market de-velopment is expected to sustain in 2012, al-though at a slower pace. Domestic demand will be robust and with lower inflation, there is a possibility of both monetary and fiscal impetus in many countries.

The Future of Euro ZoneComing to the Euro zone, its finance officials have guarded optimism about the latest efforts

Cover Story

TeaM nIveshak

Akanksha Behl

What is the World Economic Forum? The World Economic Forum (WEF) is a Swiss based, independent, non-profit international or-ganization dedicated to improve the condition of the world economy by engaging corporate, po-litical, academic and other leaders of the society to shape worldwide, local and industry agendas. The annual meeting at Davos, for which the fo-rum is best known, brings together over 2,500 top corporate leaders, global political leaders, selected highbrows and correspondents to dis-cuss the most pressing issues facing the world, including health and the environment. Apart from the meetings, the foundation produces a series of research reports and involves its mem-bers in sector specific initiatives.

Annual Meeting 2012The 2012 annual meeting in Davos was held from 25th January to 29th January, with the theme “The Great Transformation: Shaping New Models.” With 260 sessions, discussions and conferences, the theme echoes the need for a thoughtful renovation of the face of an unrav-elling universal system and haunting economic disorder. The discussions revolved around driv-ing new models of growth and employment, leadership and innovation, sustainability and resources, and society and technology.

Income Disparity- discussed for the first time in WEFEurope’s mounting debt crisis dominated the meetings. However, income disparity was one of

The 2012 WEF Annual Meeting At Davos

February 2012

12C

over

Sto

ryNIVESHAK12

Art

icle

of t

he M

onth

Cov

er S

tory

tem that has improved humanity and the world is better off due to the presence of capitalism. How-ever, as per another school of thought, capitalism in its current form does not fit the world around us anymore. British Prime Minister David Cameron said that the link between risk and reward has been broken due to years of uncontrolled “turbo capitalism”.

The effect of Inequality and Youth Unem-ploymentEconomic issues dominated this year’s five-day meeting. Inequality and youth unemployment were also discussed, pushed due to demonstra-tions from the Occupy WEF movement in the vicin-ity. The Occupy movement was brought forward many a time in the discussions. It emerged as one of the key issues at the annual gathering of busi-ness and political leaders. The business leaders at least claimed that tackling the growth of inequal-ity in the world is imperative in order to sustain in today’s environment. According to the senior economic people at the World Economic Forum, the priority for the leaders after the economic cri-sis should be the growing inequality. They insisted that more needs to be done to tackle excessive pay, poverty and unemployment. Economist Nou-riel Roubini warned that inequality threatened so-cial stability.

Youth unemployment refers to the unemployment amongst the young, typically aged between 18 and 25 years. The issue was high on the agenda at the WEF where politicians, economists and bank-ers said that immediate action was necessary to rouse demand and prevent a generation from be-coming alien to work. Youth unemployment is not just a problem of the West, but is also present in the emerging economies. It is said that the world is sitting on a social and economic time bomb. It is plagued by youth unemployment. Over 200 mil-lion people are jobless worldwide out of which 75 million are between the age group of 16 and 24 and every year about 40 million young people are entering the workforce.

The conclusion of the discussions on joblessness was that the objective of providing young people with good quality jobs, continued education, an internship or training within four months of leav-

to curtail the Euro zone crisis. They are certain that an arrangement to prevent a muddled Greek default is pending and that the key ingredients to resolve Europe’s sovereign debt crisis are gradu-ally falling in line.

One of Europe’s top economic official’s stated in an interview that a contract between the Greek administration and its private creditors on volun-tary losses for bondholders would be complete within days and that the euro zone was showing improvement on solidifying its financial firewalls. However, in spite of the positivity, fears of a debt contagion remain. As stated by the IMF Managing Director, Christine Lagarde, “The Euro Zone crisis is not the region’s problem alone. It’s a crisis that could have collateral and spill over effects around the world.” She also said that no country is pro-tected from the possible contagion and that it’s in everybody’s interest that the crisis is resolved effectively.

Growth in developing high-growth mar-ketsAnother topic that was highly discussed was the quest for growth in developing high-growth mar-kets. Today, the search for growth prospects in emerging economies has become a necessity. The landscape of high growth consumer markets is changing rapidly. Household incomes in emerging economies will jump by more than US$8.5 trillion between 2010 and 2020—about 60 per cent of the global rise over this period. The growth in these incomes would lead to an increase in the con-sumption and demand.

As per the Global Competitiveness Report 2011-12 published by the WEF, Singapore, Switzerland and Sweden top the rankings. The United States con-tinues the decline it began three years ago, fall-ing one more place to fifth position. However, the emerging economies continue to close the com-petitiveness gap with OECD economies.

Capitalism – an important issueThis year the WEF began with a debate on Capi-talism. Bill Gates labelled Capitalism as a “phe-nomenal system” as it has generated a lot of innovation, something that no other system has achieved. According to him, there is no other sys-

Economic issues dominated this year’s five-day meeting. Income disparity was one of the top concerns this year. This was a striking turnaround as it had never been identified as an issue at the WEF

before


13C

over Story

NIVESHAK 13A

rticle of the Month

13C

over Story

NIVESHAK 13A

rticle of the Month

13C

over Story

NIVESHAK 13

will lead to a much bigger problem. The govern-ment will then have to take more aggressive steps to bring the situation under control.

The jittery oil market- yet another concernYet another issue addressed was that of the jittery oil market. Due to the discon-certed debt situation in the Euro zone and chances of a severe slowdown in China, the commodity mar-ket risks remain concen-trated on the downside. In oil markets, however, these obstacles are offset by geo-political concerns, including the stand-off between Iran and the West over the for-mer’s nuclear weapons pro-gramme, growing concerns over the health of the Saudi king and the possibility of a troublesome succession, and on-going unrest from the Arab Spring.

ConclusionOn the whole, there was a lack of a major development in dealing with the on-going economic crisis. However, this does not mean that the WEF failed in its purpose. It gave the highbrows and the leaders of the world a plat-form to talk about broader issues that are affecting dif-ferent strata of the economy.

Most importantly, the an-nual meeting of the World Economic Forum provided endless opportunities for

prominent corporate and administrative leaders to discuss and reflect on universal issues, something that was clearly accomplished.

ing school should be achieved. It is extremely im-portant that the capacity of the economies is in-creased with respect to job creation because youth unemployment is like a ticking time bomb under the global economy. Young people who were un-employed for a long time will earn less throughout their en-tire lives. As a result they will be less employable and would lack the skills that are needed by business. Such people are more likely to have long-term health problems and it can cause social disturbance. We need to ensure that young people have the skills needed to gain meaningful employ-ment in order to ensure rapid economic growth.

Will China’s real estate trouble cause another recession?Another major worry for the year is about China’s real es-tate market. There is a pos-sibility that the troubles in its real-estate market will spill over to the rest of the econ-omy and cause recession. China is expected to face slower economic growth rate of about 8.5 per cent this year down from 9.2 per cent in the previous year. It has been hit by a “double whammy”. Both exports and local demand are falling down simultaneously. Local demand is falling due to the problems in the real-estate sector. So far, only the required reserve ratio has been cut down by the govern-ment in order to lift business credit lines and help companies mitigate subsiding demand at home and abroad. If more property developers run into trouble and default on their interest payments, it will lead to greater non-performing loans and this

The Euro Zone crisis is not the region’s problem alone. It’s a crisis that could have collateral and spill over effects around the world

The 2012 annual meeting of the World Economic Forum in Davos was held from 25th January to 29th January, with the theme “The Great Transformation: Shaping New Models.” With 260 sessions, discussions and conferences, the theme echoes the need for a thoughtful renovation of the face of an unravelling universal system and haunt-ing economic disorder. The discussions revolved around driving new models of growth and employment, leadership and innovation, sustainabil-ity and resources, and society and technology. The major is-sues talked about in the meet-ing were the future of the Euro Zone, income disparity, growth in developing high-growth markets, inequal-ity and youth unemployment, capitalism, China’s real estate trouble and the jittery oil mar-ket. The meeting provided endless opportunities for prominent corporate and ad-ministrative leaders to discuss and reflect on universal issues.

..

February 2012

14 NIVESHAKC

over

Sto

ry14

Art

icle

of t

he M

onth

14 NIVESHAKC

over

Sto

ry14

Art

icle

of t

he M

onth

14 NIVESHAKC

over

Sto

ry14

Art

icle

of t

he M

onth

14 NIVESHAKC

over

Sto

ry14

Pers

pect

ive

India’s first Finance Minister, Mr RK Shanmugham Chetty presented the first Financial Budget of in-dependent India on November 26, 1947. Since then every year, the Finance Minister of the Union has presented the budget. Initially, the main attention was paid to the agriculture sector which is the pri-mary sector of independent India. But as the econ-omy evolved, the focus shifted from agriculture to other sectors such as industry, services, etc.

In the early fifties, the Indian budget revolved around the public sector and public finances. At that time taxes, inflation, public saving, were much talk about issues. This trend continued until the funding budget 1985-1986.Change in this approach began with Mr. Manmo-han Singh, who served as Minister of Finance under the leadership of Mr. P.V. Narsimha Rao. Mr. Singh was instrumental in head starting the new phase of economic liberalization and privatization. There was a reduced government control over public sec-

2012 has started where 2011 left off, with global growth opportunities under the threat of a dis-tress in financial markets.The Asian economies are also vulnerable if the current financial crisis in Europe ends in a euro zone split or a series of sovereign defaults - which would create a global financial shock wave similar to that observed in 2008-2009.In this scenario, the coming budget has a ma-jor impact on India’s preparedness for the future. Therefore, all managers must be aware of the im-portance of a budget and its components.

What is a Budget? The word budget is derived from ‘bougette’ a French word meaning ‘purse ‘. The budget is a financial plan listing all planned expenditures and revenues. This is a plan of savings, loans and ex-penditures for a specified period of time. A bud-get is an important concept in both micro and macroeconomics. Microeconomics uses a budget line to illustrate the advantages and disadvantag-es between two or more products. In other words, a budget is a plan expressed in financial terms of an organization for a specified time period.In summary, the purpose of the budget is to:

1) Provide an estimate of revenue and expen-diture, i.e., build a financial model of how our company can do if certain events, strategies and plans are carried out.2) Aid in the evaluation and analysis of how the real data deviates from the plan. It therefore acts as a control tool.History of the Union Budget in IndiaThere is a constitutional requirement in India (Ar-ticle 112) to present to Parliament a statement of estimated income and expenditure of government for each financial year which runs from 1st April to the 31st March.

TeaM nIveshakHarshali Damle

The liberalization process that began years ago still continues and is a part of the announce-ment of India’s budget each

year

A peek into the Union Budget


15C

over Story

NIVESHAK 15A

rticle of the Month

15C

over Story

NIVESHAK 15Perspective

tor units through disinvestment. The liberaliza-tion process that began years ago still continues and is a part of the announcement of India’s budget each year. This year the Union Budget 2012-13 will be announced by the current Fi-nance Minister Mr Pranab Mukherjee.Union Budget- IndiaThus, the yearly Union budget is a comprehen-sive presentation of government finances. It is one of the most important economic and fi-nancial events of India. The Minister of Finance makes a report containing the government’s revenues and expenditures for a fiscal year.The Union budget is preceded by an economic study that describes the overall direction and data on the budget and national economic per-formance. The economic survey studies and analyzes trends in the agricultural and indus-trial production, infrastructure, employment, money supply, prices, imports, exports, foreign reserves and other economic factors.The budget is therefore the most extensive ac-count of the government’s finances, in which the income from all sources and expenditures of all activities are enlisted. It comprises the rev-enue budget and capital budget. It also contains estimates for the next fiscal year called bud-geted estimates.With some exceptions such as elections, the Minister of Finance presents the annual budget of the union in the parliament on the last busi-ness day of February. The budget must be ap-proved by the Lok Sabha before it can enter into force on April 1.Components of the BudgetThe Union budget is made up mostly of Revenue Budget and Capital Budget.1) Revenue budget: The revenue budget primar-ily comprises government revenue receipts like tax and expenditure met from the revenue. The tax revenues principally constitute yields of tax-es and other duties imposed by the government of India.2) Capital Budget: The capital budget primarily comprises capital receipts and payments. The primary components of capital receipts include

loans brought up by government of India from public, termed as market loans. Some of the other components of capital receipts include borrowings by Government from Reserve Bank and loans obtained from foreign governments and bodies.The budget documents presented to Parliament include, apart from budget speech of the Fi-nance Ministry, the following:1) Annual Financial Statement (AFS)2) Demand for Grants (DG)3) Appropriation Bill4) Finance Bill5) Memorandum Explaining the Provisions in the Finance Bill6) Macro-economic framework for the relevant financial year7) Fiscal Policy Strategy Statement for the finan-cial year8) Medium Term Fiscal Policy Statement9) Expenditure Budget Volume -110) Expenditure Budget Volume -211) Receipts BudgetImportance of Budget for the economyBudget plays a very important role for a develop-ing country like India. The budget of the country has an overall effect on different sectors of the economy. In a country like India, the concept of growth fear is partly fulfilled, as it is grow-ing rapidly. However, in the current scenario, growth cannot be assumed. Also achieving the other development indicators is still far from reach. Growing inequality is the best example. In this context, Budget has its own importance and role. Indian economy is also experiencing one of its periods of weakest growths since 2002 due to both internal and external issues. The high interest rates and inflation, together with a deteriorating global economy have had an impact on business confidence and trust in government. This has depressed the private in-vestment, which before the 2008 crisis was one of the main drivers of growth in India. The government can use this budget to lighten the mood of consumers and investors and to

The Union budget is preceded by an economic study that describes the overall direction and data on the budget and national econom-

ic performance

February 2012

16C

over

Sto

ryNIVESHAK16

Art

icle

of t

he M

onth

NIVESHAK16A

rtic

le o

f the

Mon

th16

Cov

er S

tory

16

promote greater confidence in the business fra-ternity.Economists expect most of the headwinds to de-crease during 2012, which provides for a recov-ery during the year, but not before GDP growth has slowed considerably.One should look out for the following as major components of the budget that affect the com-mon people in the coming budget:1) GDP2) Fiscal Deficit3) Income Tax benefits4) Steps to curb inflation - Duty on Oil5) Corporate Tax rates - Tax Slabs and deduc-tions available6) Excise and service Tax rates7) Direct Tax CodeMain predictions and viewpoints for the next budget:1) Based on the analysis conducted by CRISIL, the country is expected to have a GDP of 7% in the next year with growth of 5.8% inflation and fiscal deficit to 5.5%.2) On the basis of es-timates of CII, the gov-ernment’s fiscal deficit would be in the range of 5.5-6.0% of GDP.3) Preparatory changes for laying a foundation for GST4) The question of the removal of STT has been raised by the representatives of the different ex-changes, including BSE, NSE, MCX-SX and USE.The main improvements suggested are: 1) Efforts should also be made to increase rev-enues by broadening the tax net, the control of subsidies and the release of funds in disputes and litigation.2) The government should announce a clear roadmap for the process of disinvestment in the next five years.

3) The government could also carry out a census of land and other assets locked up in central public sector units that have become economi-cally unviable.4) To promote foreign investment in infrastruc-ture, easing the rules for entry of foreign funds to this sector is another option for enhancing investment.5) A synergy of MSMEs and large companies can be promoted through tax incentives to supply inputs for small industry.6) The Direct Tax Code and Goods and Services Tax are still being thrashed out. Establishing a clear deadline for the application can help ac-celerate the discussions and add comfort to in-vestors.Therefore there is a need for the government to focus on promoting inclusive growth and devel-opment of infrastructure in the plan, through

better manage-ment and utiliza-tion of resources. There is also a need to create an environment for sustained eco-nomic growth in the medium and long term.

Liberalization in the banking, in-surance, retail and aviation will excite investors. As a fast-track di-

vestment, modernizing the rules of land acquisi-tion and ending harmful government monopolies such as coal is needed.

The budget is usually presented in the last day of February each year. However, with assem-bly elections in five States from 30 January to 3 March, Finance Minister, Pranab Mukherjee, in-dicated that the presentation of Union Budget 2012-13 would be on March 16, 2012. Thus, next month, our budget-makers have the opportunity to provide a sound direction to the country in the midst of crisis.

Per

spec

tive

NIVESHAK

The government can use this budget to lighten the mood of consumers and investors and to promote greater confidence in the business fraternity


17C

over Story

NIVESHAK 17A

rticle of the Month

17NIVESHAK 17


17NIVESHAK 17

competitive voice calls and messaging market have forced the telecom companies to look out for new business opportunities. These telecom companies will definitely target the avenues which will give them returns in the same scale as during the telecom heydays. With the con-sistent growth and returns of the banking in-dustry, the telecom companies seemed to have found

the perfect

ground.

While the feasibil- ity of offering the complete set of banking services right from com-mercial loan services to bond services will take time what customers may initially expect are a basic set of services like mobile payment, credit and charge card services. With the experience in mobile banking, the telecom companies can slowly takeover the whole umbrella of business that uses network. This will open up a whole gambit of opportunities for the operators as well as a plethora of facilities for the customers. One important sector that they will be able to fi-nance will be the micropayments via messaging or voice call. It is imperative that carriers will try to muscle in on the mobile wallet and payments space and a slow demand of banking license by some of the telecom giants has cropped up in the industry corridors. Rogers Communications

Finsight

nITIe, MuMbaIHimangshu Das

We always come across telecom companies launching new “Talktime” or “Top Up” offers. The day is not far when we will see them launching new fixed deposit schemes, saving offers etc. The above statement, though seems absurd will perhaps make sense as we read below.

The estimated banking penetration among middle and high income groups in India is about 45% while for low income groups it is less than even 5%. Maximum financial inclusion of our human re-source is crucial to tap the countries savings and investments. While Micro-finance institutions do play an impor-tant role, still the penetration level is very low. Comparing this with the 76.03 % of teledensity and the projected tele-density of 84% by 2012, banks have in-deed realized the role that can be played b y mobile banking in reaching out to the unbanked areas as well as the on the run customers. Hence they have tied up with leading providers like Vodafone and Airtel to cater mobile banking services.

While this is a positive signal for both the tele-com and banking industry in terms of revenue and reach, it has also initiated discussions about the drift in the traditional role played by the telecom sector, from that of a provider of voice and message service to everything under the network. With the provision of mobile service, mobile banking, mobile commerce, etc. these telecom companies have come a long way out of their monolithic sector and it makes sense. The dwindling returns from the stagnant and

WHEN AIRTEL LAUNCHES AIRTEL BANK…

Banks have indeed realized the role that can be played by mobile banking in reaching out to the unbanked areas as well as the on the run customers.

February 2012

..

18C

over

Sto

ryNIVESHAK18

Art

icle

of t

he M

onth

Fins

ight

Inc, one of the telecom giants in Canada has already filed papers with the federal bank to start a bank. As per Rog-ers the next big thing will be money trans-fer, whether that’s paying for a subway pass or a p a r k i n g meter, or s e n d i n g m o n e y . The bank w o u l d p r i m a r -ily deal in credit and mobile payment services, as opposed to bricks and mortar bank branches that take traditional savings and loan ac-counts. While many big retailers have similar sort of finance divisions they are essentially ex-tensions of their core businesses.

The telecom companies are looking to position themselves in every part of the supply chain and earn return from the tons of monetary transac-tions between customers and companies that are happening via their network. It also makes sense for operators to offer banking products and services as people dispense with plastic and start using their mobile phones as payment devices. They want to take the control of the wallet on the phone. Banks are already getting detached from the end customer by a layer. While mobile service from a bank needs to pass through layers of technology and approval from Google, RIM , Apple etc. for future carrier bank-ers, we need just a phone or get online and send the money. All that is needed to know is the email address and mobile phone number. An example of an offering will be combination of prepaid phone deal with a prepaid debit card via which these telecom banks can aggressively target the under banked customer segment and

they will not need the entire expensive infra-structure like the traditional revenue. It is just new revenue.

Even banks seem to have opened up to this threat and have started offering more features to move up in the value chain. An interesting

trend has h a p -p e n e d in Italy w h e r e o n e of the b a n k s s e n s -ing the threat has

launched “Poste Mobile”, an ESP(Enhanced Services Provider)-MVNO subsidiary of the Italian Postal Bank. Here the carrier just acts

as a transport layer while Poste Mobile offers the various banking services and has full con-trol on pricing as well as customer information which is stored in a separate area of the SIM card.

Gauging at the benefits, Governments of certain countries like Nigeria are even vetting propos-als to license operators in the mobile banking sector thereby laying the foundation of another technological revolution. The Indian Planning Commission however is not in favor of allowing telecom companies to float banking companies. The government is more in the favor of allowing

The dwindling returns from the stagnant and competitive voice

calls and messaging market have forced the telecom companies to

look out for new business opportunities


19C

over Story

NIVESHAK 19A

rticle of the Month

19C

over Story

NIVESHAK 19Finsight

financial transactions to be done by banks to avoid any sort of financial crisis. Though not al-lowing the telecom companies to become banks themselves, an attempt has been made to set up a framework to allow people to undertake basic operations through cell phones. An inter-ministerial group has recently submitted a re-port to Telecom Regulatory Authority of India (TRAI) recommending that people in remote ar-eas be allowed to open accounts linked to their cellphones and withdraw money up to Rs 5,000 a day.

Though the government efforts do seem noble in questioning about how a telecom company can carry out the level of security procedures that is usually done in a traditional bank, it will be better if it can propose for a think tank to study the pros and cons in this reverse process; a telecom company entering the banking ser-vices. In the days to come we might see the traditional bank getting segregated to the back-end as a manager of risk and product manufac-turer while the day to day customers get owned by the telecom companies, social networks and marketing organizations. Perhaps a technologi-cal and financial revolution is in the offering.

FIN-Q SolutionsJanuary 2012

1. Hoshangabad, this is where the paper for the currency is manufactured

2. Guardian, Money Laundering

3. Fidelity Bond

4. Mu-Sigma, Dhiraj Rajaram

5. Laos Stock Exchange, Korea Stock Exchange

6. The parent company, DS Prabhudas and Compa-ny was the first company to be listed in the BSE

7. Moral Suasion, Jawboning

8. Predatory Dumping

9. Lazard Limited, Kodak

10. Rakesh Jhunjhunwala

February 2012

20C

over

Sto

ryNIVESHAK20

Art

icle

of t

he M

onth

20 NIVESHAKC

over

Sto

ry20

FinG

yaan

Equity gap refers to the difference in the supply and demand for equity between corporations and investors. It can be seen that a significant chunk (79%) of the glob-al financial assets are invested in the devel-oped countries. Few fac-tors that have affected the appetite for equity includes the ageing de-mographic of the west-ern world, emergence of alternative investment avenues and stringent financial regulations among others. These is-sues can be overcome only be improving inves-tor sentiment towards equities through rel-evant and apt reforms in primary markets, use investor friendly struc-tured products.

nancial assets, the household invest-ment in equity is decreasing. Among the household portfolios in emerging markets, the proportion is around 15 percent while the household portfo-lios in developed countries like U.S has 42 percent contribution towards equity. The contribution towards eq-uity is decreasing. Even the devel-oped countries are showing less ap-petite for equities. Among developed nations, Japan stands out for its very low investment in equities. Despite a long tradition of equity investing by individual investors for most of the 20th century, Japanese households now hold less than 10 percent of their assets in equities, down from 30 percent before the 1989–90 crash. Be-cause of low or negative returns over the past two decades, Japanese allo-

What is equity gap?If it can be put simply then equity gap is the difference between the in-vestors’ appetite and the company’s requirement of funds. Company usu-ally use this door of raising funds via equity but is the investors’ appetite towards investing in equity enough?

EQUITY GAP = INVETORS APPETITE IN EQUITY – COMPANY’S NEED OF FUNDS

Based on an analysis by McKinsey Quarterly, the financial assets in the world are worth 198 trillion dollars out of which around 21 percent are part of emerging markets and the rest is a part of developed economies. This tells that around 157 trillion lies with the developed world. Among these fi-

sIIb, Pune

Ajay Kumar Sethi

STRUCTURING THE EQUITY GAP

Fig. 1: Financial assets owned by residents, 2010 in $ trillion


21C

over Story

NIVESHAK 21A

rticle of the Month

21C

over Story

NIVESHAK 21FinG

yaan

cations have never exceeded 18 percent in this period.The figures 1 and 2 tells us the proportion of investments in various countries. We can see that among the financial assets, the majority of these assets are in household portfolios. Among the 198 trillion financial assets, 85.2 trillion are in household portfolios. This makes it to around 50%. If the household appetite for investments in equity decreases, then it shows the overall picture of investments. It is approximated that the global financial assets would reach the 371 trillion by 2020. Of these assets, the contribu-tion of emerging markets would increase from 21 percent to 36 percent while that of develop-ing countries would come to around 64 percent. Emerging market financial assets grew 16.6 per-cent annually over the past decade, nearly four times the rate in mature economies. These as-sets stood at about $41 trillion in 2010 and con-stituted 21 percent of the global total, up from 7 percent in 2000. Depending on economic scenar-ios, we project that emerging market financial assets will grow to between 30 and 36 percent of the global total in 2020, or $114 to $141 tril-lion. Of these financial assets the contribution to equities, which was around 28 percent in 2010, would come down to 22 percent by 2020. Some of the reasons for decreasing attitude to-wards equity can be:• Ageing population in western world: Aging is the largest factor affecting investor be-havior in mature economies. As investors enter retirement, they typically stop accumulating as-sets and begin to rely on investment income; they shift assets from equities to bank deposits and fixed-income instruments. This pattern has

led to predictions of an equity sell-off as the enormous baby boom generation in the United States and Europe enters retirement (the old-est members of this cohort reached 65 in 2011). This effect can be staggering: if investors retiring in the next ten years maintain the equity alloca-tions of today’s retirees, equities will fall from 42 percent of US household portfolios to 40 per-cent in 2020—and to 38 percent by 2030. In Eu-rope, where aging is even more pronounced, we see an even larger shift in household portfolios.• Shifts to defined contribution retirement plans: Also influencing equity allocations in mature economies are the shift to defined contribution retirement plans in Europe and rising allocations to alternative investments. In Europe, it can be seen that defined-contribution plan account owners allocate significantly less to equities than managers of defined-benefit plans. And as private pension funds close to new contributors, managers are shifting to fixed-income instru-ments to meet remaining liabilities. Meanwhile, institutional investors and wealthy households seeking higher returns are shifting out of public equities into “alternative” investments such as private equity funds, hedge funds, real estate and infrastructure projects. Although we esti-mate that some 30 percent of assets in private equity and hedge funds are public equities, the shift is still causing a net reduction in alloca-tions to equities.• Growth of alternative investments such as Pri-vate Equity (PE) investments: It can be also seen that the alternative invest-ments in the form of private equity investments is also on the rise. In recent times, the IGATE

Fig. 2: Assets allocation by investor, 2010 in %, $ trillion

February 2012

22C

over

Sto

ryNIVESHAK22

Art

icle

of t

he M

onth

NIVESHAK

buyout of PATNI has been largely contributed by the APAX partners (a PE firm). Also, PE firms find it suitable to invest in emerging markets be-cause of the low valuations, thus churning out huge amount of profits from the investments.• Low returns in equity: Another factor weighing on demand for equi-ties is weak market performance. The past de-cade has brought increased volatility and some of the worst ten-year returns on listed equities in more than a century. In opinion polls, Ameri-cans say they have less confidence in the stock market than in any other financial institution and believe that the market is no longer ‘fair and open’.• Regulatory changes for financial institutions: The final factor is the effect of financial industry reforms on the uses of equities by banking and insurance companies. U.S and European banks today hold $15.9 trillion of bonds and equities on their balance sheets. But new capital re-quirements under Basel III will prompt banks to shed risky assets, including equities and corpo-rate bonds. Similarly, European insurers have al-ready reduced equity allocations in anticipation of new rules, known as Solvency II, and could lower them further over the next five years. All these reasons attribute towards an estimat-ed equity gap of 12.3 trillion. The figure 3 will provide a better view to this picture.However there are some ways through which this equity gap can be reduced:1. Use of structured financial productsStructured financial products can be a proposed solution to the emerging equity gap. Investors are losing their appetite for investing in equity but the use of structured products under proper financial regulations can be a good booster in equity environment.

22C

over

Sto

ry22

FinG

yaan

2. Initiation of secondary marketSecondary market has been in operation in de-veloped countries which supports the innova-tion led investments. E.g. NASDAQ is a second-ary market for innovation led ventures. If such secondary markets can be introduced in emerg-ing countries such as India, then it will not only serve as a booster for equity market but can also prove to be a nurturing ground for young entrepreneurs to make their projects count. 3. Reforming IPO marketsIPO market has been in a down-trend since the successful IPO of Coal India. It may be due to the fragile policy making and implementation in India which has given rise to many political scams recently. Or it may be the European crisis which has proved to be major reason for the outflow of money invested by the FII’s. Whatev-er it is, the IPO market has to be well regulated to ensure generation of positive sentiments in the Indian market. The only way this equity gap can be narrowed down is by increasing the investor’s sentiments towards equity in emerging countries because emerging countries have been growing at a staggering rate of more than 16 percent. And if this growth continues, it will be very impor-tant to engross the equity investors in emerging economies and keep the markets in balance.

Fig. 3: Incremental demand for equities by domestic investors vs. increase in corporate equity needs, 2010-20 F $ trillion


23C

over Story

NIVESHAK 23A

rticle of the Month


23C

over Story

NIVESHAK 23A

rticle of the Month


23C

over Story

Hello students. Today, we would be talking about Options. So what do you know about options?

Sir, we know that there are two types of options available. They are call option and put option. An option is a security like a stock or a bond.

Yes, you’re right. An option gives a buyer the right to buy or sell an asset at a specific price on or before a certain date. But this is not an obligation for the buyer. Option is a contract that deals with an as-

set. Most of the times, this asset is a stock or an index. That means an option derives its value from an asset. Hence, it is also called as Derivative.

Sir, can you please give an example about the use of Option?

Let’s consider an example. A person finds a land with all the required features for his business. Then he approaches the landlord and finds the price of the land very high, i.e. Rs. 5000000. Unfortunately, he

doesn’t have enough cash to buy the land within next three months. He talks to the owner and negotiates a deal that gives him an option to buy the land in three months. The person has to pay a price of Rs.100000 as the option price.

Are these options available only to buy?

No, there are two types of options available. Call and Put options. A call option gives the buyer the right to buy an asset at a certain price within a certain time limit. A put option gives the seller the right to sell

an asset at a certain price within a certain time limit.

The buyers are called holders and sellers are called writers.

How are these options useful with respect to stocks?

The holders of the options are not obligated to buy or sell. They have the choice to exercise the option within the specified time. The call holder has a call

option to buy a stock at a certain price within a certain time limit. So, he always expects the price of the stock to increase, so that he will be benefited by exercising the option by buying the stock at a low price compared to market price. Similarly, the put holder expects the price of the stock to decrease, so that he can sell the stock at a higher price. But call and put writers are obligated to buy or sell.

Why would an investor use op-tions?

There are two main reasons. First one is betting on the price movements of a security. Investors not only make profits when the stock price rises, but also when the market goes down by using options.

Another reason is hedging. By using options, the investor would be able to restrict his downside while enjoying the full upside in a cost-effective way. For example, options can be used as insurance for the investments against the downturn.

How is the price of an option de-termined?

The price of an option is called the premium, which is determined by the stock price, strike price and time remain-ing till expiration.

Thanks a lot sir, for explaining the tricky concept of options to us.

CLASSROOMFinFunda

of the Month

Options Market

NIVESHAK 23C

lassroomIIM Shillong Nilkesh Patra

February 2012

24C

over

Sto

ryNIVESHAK24

Bid

ding

Adi

eu

My experience in Finance club for last one year was just great where I got opportu-nities to work with some of the best minds of our batch. The thing that I loved the most is the commitment of all of us towards completing all our activities before the deadlines and the greatest regret lies in the fact that we were unable to organize an online intra B-school competition. However, I hope that in next few years some of our talented juniors will definitely achieve this dream of ours. The experience of receiving numerous articles and selecting the best amongst them was the biggest challenge that I faced during my stint at Finance Club as all these articles were written by one of the best minds of our country. I hope that in future also wherever I go I will find the same pool of talent to work with that I got in our finance club.

Apart from finance, proposing new ideas, arguing over and over again and finally convincing the team to adopt it was a great learning experience for all of us. Once in the club, the way you tend to keep yourself updated and knowledgeable just to flaunt your awareness and impress people around will be a motivator for sure :P You definitely learn more practical stuff here than through books and lectures!

Working for the Finance Club has been an immense learning experience. It’s an hon-our to be a part of Niveshak, which today is a brand in itself. One gains a lot of dif-ferent perspectives while writing, editing and going through such huge number of articles every month. The response and feedback from the student fraternity of dif-ferent B-schools has been our biggest motivation. Wish Niveshak many more glorious years ahead.

Membership of Finance Club is something I have cherished and will continue to do so for the rest of my life. Working with a highly talented and motivated team inspired me to make a meaningful contribution towards club activities. Niveshak, the flagship monthly magazine of club offered me a platform to share my thoughts on business world with others and understand others’ viewpoint on the same. The unabated growth of magazine’s popularity with each passing edition has made it a brand among finance enthusiasts in B-Schools across India. Niveshak motivated me to become a “Niveshak” in real life and I hope it will continue to inspire many more in times to come. My best wishes to the new club members to continue to work with the same vigor and interest that they have displayed till now.

It seems like only yesterday when I was inducted as part of Team Niveshak. It’s funny how time goes by so quickly. Niveshak as a magazine and a platform has added lot of value to its readers and has done the same for me. It was a great learning experi-ence to work alongside such a wonderful team and it surely brought me closer to my passion in financial markets. Hope to see it become bigger and better in the hands of the new team.

ALOK AGRAWAL

DEEP MEHTA

JAYANT KEJRIWAL

MRITUNJAY CHOUDHARY

RAJAT SETHIA

Sayo Nara... They were the 3rd batch of the Finance Club, they helped niveshak reach new heights. Let us listen what they have to say about their experience...


25C

over Story

NIVESHAK 25B

idding Adieu

I have enjoyed every bit of the work and contributions done by me towards the bet-terment of Finance Club and Niveshak. It was a significant part of my 2 years here at IIM Shillong and truly a great honour and pride for me to be associated with such a prestigious brand name, Niveshak. It was really a great learning and enriching experi-ence and this will be one of the memories that I would carry forward throughout my life in the future. I would like to wish the junior club members all the very best in their future endeavours and I sincerely hope that the club scales greater heights in times to come.

Having access to a gamut of articles written on various aspects of economy, Industries and Banking and Financial Instruments has definitely added a lot to my knowledge base. Interacting with Industry experts, interviewing great economists of India has brought a different angle to the way I think about how the world operates. Working with the team on content building, editing and most importantly ensuring all editions are released on time has been a great experience. It feels good when on visiting other B-schools or moving out in the corporate world, being a member of Team Niveshak just brings you on a completely different platform. Hope the Team continues to do the great work and Niveshak becomes a much bigger name. All the best.

The past two years as a member of Finance Club have been highly memorable for me. As a part of the team, we were entrusted with the responsibility of publishing ‘Niveshak’ for one year of our term and I am glad that we were able to bring out a quality issue on time for every month of our tenure. I wish the best of luck to the new team and hope that the magazine scales greater heights in the years to come.

Two Years with Finance Club or better put it up as Niveshak was a roller coaster ride. I am lucky that I started working in this club right after the first week in campus. The team, where everyone is as competent as the other, provided enormous brain storming occasions to learn. New things started, old things reformed, but Finance Club stayed as one of the most respectable club not only inside this institute but ev-erywhere else. The consistency of keeping the issues on time gave Niveshak a niche which is praised across the B School fraternity. I hope that these aspects strengthen with times to come. As a team we laughed, we fought, we cursed, we praised but we remain united, or in Niveshak language - we stayed invested.

Being a part of Finance Club of IIM Shillong was a matter of great honor and pride as the flagship magazine of the club Niveshak is known all over India and synonymous with the name of IIM Shillong. The team was great one and each one of us helped and supported the other members and as a result we were able to deliver on time and with quality. I wish good luck to the team and hope that Finance Club and Niveshak rise to new heights in the years to come. Time just flew and now it’s time to say good bye. All the best for the future.

VIVEK PRIYADARSHI

VISHAL GOEL

TEJAS PRADHAN

SHASHANK JAIN

SAWAN SINGAMSETTY

February 2012

2626

F I N - Q1. X is an indicator used to forecast the trend in the stock market for the coming

year based on win of old National Football League(NFL) team or old American Football League (AFL) team.

2. “Focus on the process rather than focusing on the final result,” is a popular saying. An investment manager who invests in companies that provide equipment to an industry rather than investing on the industry’s end product is set to indulge in?

3. X is the type of acquisition where the raider company makes use of borrowed funds only to meet the cost of acquisition using either its own assets or the target company’s assets as collaterals.

4. X is an annual prize given to the authors with the best corporate finance re-search papers published in Y. Y is published by Wiley-Blackwell on behalf of the Ameri-can Finance Association. Identify X and Y.

5. X (Bank) shares its name with a famous Indian primetime television show which is presently in its fifth season. X, a Belgian multinational has a very important first in the Indian context. Identify X and its claim to fame.

6. The word X is synonymous with “endless wealth”. In modern history, it is be-lieved that X family has the highest net worth. Identify X?

7. Another growing indicator of the growing uncertainty in the IPO Market, SEBI banned X (company) from future merchant banking assignments because X handled the IPO of Y, proceeds of which were diverted to questionable land deals. Identify X and Y.

8. X is an investment strategy wherein an investor matches the short position he has in one stock with a long position in another stock of the same sector for the pur-pose of creating a hedge against the sector that the two stocks are in and the overall market.

9. Denmark – 48.2%

Sweden - 46.4%

Italy – 43.5%

Belgium – 43.2%

Finland – 43.1%

What is being discussed here??

10. Connect?

All entries should be mailed at [email protected] by 27th February, 2012 23:59 hrs One lucky winner will receive cash prize of Rs. 500/-

Article of the MonthPrize - INR 1000/-

Rajiv Singh & Sourabh Sahu IIM Indore

W I N N E R S

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invite articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puz-zles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/-

Instructions » Please email your article with the file name and the subject as <Title of the

Article>_<Institute Name>_<Author’s name/Group’s name> by 27 February 2012. » Article must be sent in Microsoft Word Document (doc/docx), Font: Times New

Roman, Font Size: 12, Line spacing: 1.5 » Please ensure that the entire document has a wordcount between 1200 - 1500 » The cover page of the article should only contain the Title of the Article, the Au-

thor’s Name and the Institute’s Name » Mention your e-mail id/ blog if you want the readers to contact you for further

discussion » Also certain entries which could not make the cut to the Niveshak will get figured

on our Blog in the ‘Specials’ section

SUBSCRIBE!!Get your OWN COPY delivered to inbox

Drop a mail at [email protected]

ThanksTeam Niveshakwww.iims-niveshak.com

27


FIN - QPrize - INR 500/-

Prince JainIndian Institute of Foreign Trade, New Delhi

niveshak february 2012 issue

Documents

annual budget

annual union budget

emerging market currencies

concept of o

finance club of iim

finance minister

years of fighting inflation

sharp appreciation of