niveshak_oct10

8/8/2019 Niveshak_Oct10

1/27THe great currency scra ble PG.06 SUSTAINABLE RURAL FINANCE pg.18

THE INVESTOR VOLUME 3 ISSUE 10 October 2010

All ha

Gliters is

"COAL"


2/27Disc aimer: The views presented are the pini n/w r f the individua auth r and The Finance C ub f IIM Shi ng bearsn resp nsibi ity whats ever.

F r o m E d i t o r s d E s k

NiveshakVolume III

ISSUE X October 2010

Faculty MentorProf. N. Sivasankaran

EditorBhavit Sharma

Sub-EditorsDurgesh Nandini Mohanty

Hitesh GulatiSumit KediaTanvi Arora

Upasna Agarwal

New Team Alok Agrawal

Deep Mehta Jayant Kejriwal

Mrityunjay Choudhary Rajat Sethia

Sawan Singamsetty Shashank Jain

Tejas Vijay Pradhan

Creative Team

Bhavya AggarwalSwarnabha Mukherjee

Vishal GoelVivek Priyadarshi

All images, design and artworkare copyright of

IIM Shillong Finance Club

Finance Club

Indian Institute of ManagementShillong

www.iims-niveshak.com

Dear Niveshaks

The currency space around us is on the threshold of a major trans-formation. We can distinctly see battle lines formed ahead of a forthcom-ing currency war that threatens to pit the developed nations against theemerging economies of Asia and South America. Although G-20 has beentrying to work around this issue, all their efforts seem to be going in vain.Currency devaluation, which has been a policy weapon of exporting na-tions like China for quite some time, has become a ubiquitous phenom-enon used to gain undue competitive advantage by many nations. Thisis probably the major reason why emerging economies, especially Brazilwhich has the highest real interest rates in G-20, are seeking to restraintheir currencies as investors seek higher-yielding assets in emerging markets

amid near-zero interest rates in the US, Japan and the euro region. Theabsence of any concrete steps to resolve this do make us believe that thecurrency wars could well intensify and the recent G-20 accord will prove asworthless as the piece of paper it is written on.

Well All may not be well on the global platform but we have somerecent Indian success stories to cherish. Our last edition had an article whichposed some serious questions about Commonwealth Games 2010. To oursurprise, India not only managed to host it up better than our expectationsbut also achieved unprecedented success in it. But one thing which hasreally grabbed all finance enthusiasts attention in the last few days is CoalIndias IPO. The massive response to Coal India IPO that had been oversub-

scribed 15 times augurs well for our Indian economy and suggests that itis gaining momentum from the pre-crisis era that began in 2008. This isbecause of the utility model in commodity business which is coupled withthe characteristics of sellers market; we can say that CIL will essentially havea linear earnings curve and impressive return on equity as well as free cashgeneration. This has also paved the way for share sales of few more PSUslined up for disinvestment. Our cover story for this month delves into thissame topic to give you complete analysis and probable implications of theCoal India IPO which is going to be the largest IPO in India till date.

It is giving me a dj vu feeling while writing this editorial as it was thesame October edition last year when the incumbent Niveshak team had

joined this illustrious magazine Niveshak. The time has now come to passon this legacy to our new team Niveshak. We, the Editorial Team of Nive-shak, are pleased to introduce to you our new team, which has been elect-ed to carry on the baton of Niveshak. They are: Alok Agrawal, Deep Mehta,

Jayant Kejriwal, Mritunjay Choudhary, Rajat Sethia, Sawan Singamsetty, Sha-shank Jain, Tejas Pradhan, Vishal Goel and Vivek Priyadarshi. Please join usin welcoming them to Team Niveshak. We are confident that they will takethe brand of Niveshak to greater heights. Keep supporting them the way

you have been doing to us.

Stay Invested.

Bhavit Sharma(Editor -Niveshak)

THE TEAm


3/27

C o N t E N t s

Niveshak Ti es04 The Month That Was

PERSPECTIVE18 Sustainable Rural Finance:Prospects, Challenges and Impli-cations in India

Cover Story 09 Coal India Limited -

The Largest IPO

Finsight14 Changes in the SEBI

Takeover Code

Fingyaan22 Hedge Fund: The Growth

Story

Article of the onth6 The Great Currency

Scramble

FINLOUNGE26 Crossword


4/27NIVESHAK VOLUmE 3 ISSUE 10 OCTOber 2010

Motorola and Microsoft embroiled in pat-ent infringement suit

A S ftware giant Micr s ft has sued M t r af r a eged infringement n nine f its patents inits Andr id smart ph nes. The patents are re ated

t functi na ity inc uding synchr nizingemai , ca endars and c ntacts, sched-u ing meetings, and n tifying app i-

cati ns f changes insigna strengthand batteryp wer. The casehas been fi ed atthe Internati na

Trade C mmissi n and the US District C urt in Wash-ingt n. Surprising y G g e the ma er f Andr ids ftware system is n t a part t this suit.

Arcelor Mittal and 16 others suffer nes

for cartelization

Eur pean C mmissi n, the executive arm fEur pean Uni n imp sed a hefty fine f 458 mi -

i n Eur s n Arce r Mitta and 16 ther stee ma ingc mpanies f r f rming and peratinga carte in Eur regi n f r ver c set tw decades. Arce r Mittawas s apped the argest indi-vidua fine f ver 20 mi i nEur s. Thesec m p a n i e s

were a egedt be inv vedin fixing individua qu tas and prices, a cating c i-ents and exchanging sensitive c mmercia inf rma-ti n and m nit ring these arrangements thr ugh asystem f nati na c -c rdinat rs and bi atera c n-tacts in vi ati n f Artic e 101 f the Treaty n theFuncti ning f the Eur pean Uni n.

Economic stimulus for Japan

In ine with its p icy f stemming the ec n mic

d wnturn the Japanese g vernment unvei ed a newstimu us f 5.05 tri i n yen ($61 bi i n) as a part fits supp ementary budget f r the current fisca year.This new pac age targets t increase the c untrys

GDP by 0.6 percentage p ints, creates r save up t5, 00,000 j bs and pr vide aid t sma and medium

sized business. Japa-nese ec n my is caughtin a def ati nary spirawith fa ing exp rts andfact ry utput resu tingin dec ining prices thatare dragging d wn c r-p rate pr fits and pay-

chec s. The rising yen n the ther hand is cuttingint the verseas earnings f maj r exp rters i eT y ta M t r C rps and Can n Inc. The centra banhas virtua y dr pped the interest rates t zer inan eff rt t rein in n the s aring yean. The stimu-

us c mes n the bac f an ther stimu us 915 bi -i n yen ($11 bi i n) pac age pr vided by the g v-

ernment ast m nth. The pac age appr ved by thecabinet is t be sent t par iament f r appr va andratificati n.

Binani to quit from bourses with sharebuybacks

B ard f Direct rs f Binani Cement has decid-ed t de ist the c mpany fr m NSE and BSE wherebythe pr m ters wi acquire the entire pub ic share-h ding in the c mpany. Right n w pub ic h dsar und 30.1% f entire c mpany shares with thec rresp nding capita izati n being appr ximate yRs.5.50 bi i n.

Nirma to delist itself from Stock exchangesIn an unanticipated m ve Nirma td. has de-

cided t de ist itse f fr m b th NSE and BSE with thepr m ters acquiring its entire pub ic shareh ding.The Rs. 46.20 bi i n c mpany p pu ar as a FMCGbrand particu ar y f r its detergent and its jing e hasdiversified int many n n re ated businesses i epharmaceutica s, cement and pr cessed minera s.The pub ic shareh ders have n t been very supp rt-ive f the further expansi n f c mpany int thesecapita investment industries. H wever the c mpanywas een t expedite its wea th creati n abi ity byestab ishing the p siti n f its recent ventures. Thispr m ted the c mpanys decisi n t a w its pr -

The Niveshak Timeswww.iims-niveshak.com

IIM, Shillong

TEAm NIVESHAK

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T

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T W

RATAN TATA AMoNG EIGHT BUSINESS lEADERS SHoRTlISTEDFoR FoRTUNE BUSINESS PERSoN oF THE YEAR


5/27 FINANCE CLUB, INDIAN INSTITUTE OF mANAGEmENT SHILLONG 5

STATE BANk oF INDIA MAY BRING DoWNCREDIT GRoWTH To 18 PER CENT: BHATT

m ters wh current y have a 77.17% h ding in it tbuy the entire pub ic he d st c f 3.63 cr re shares.This requires them t c me up with an pen fferat the current mar et price such that they mightend up p uring in Rs.8.35 bi i n in this pr cess. Theentire buybac pr cess wi be carried ut sm th yif the c mpany manages t garner the supp rt f 43HNI wh h d ar und 2.39 cr re pub ic shares f thec mpany. The c mpany h pes t un c the bind-ing va ues f its different businesses thr ugh this

initiative.Worlds largest diamond exchange opens upin Mumbai

Bharat Diam nd B urse (BDB), the w r ds arg-est diam nd exchange is a set t start its pera-ti n in in Mumbai. Rs.11 bi i n has g ne int thec nstructi n f this exchange designed by the re-

n wned architect Ba a rishna D shi.The exchange c mprises

f nine inter in ed

nine st ry bui d-ings spread ver

20 acres in businesshub f the city, Ban-

dra-kur a C mp ex. Ithas a par ing capacity

f 2200 vehic es, a 12000square f t Cust mer area and

an ther 6000 p us square f tarea with a number f amenities bui t int it. Cur-rent y India is the argest Diam nd pr cessing in-dustry by va ue and emp yee strength acc untingf r 70-75 % f t ta diam nd exp rts. H wever the

pening f this b urse mar s the transiti n f Indiafr m a diam nd manufacturing centre t a tradinghub. The exchange is equipped with the necessaryinfrastructure faci ities pr m ti n f diam nd, dia-m nd jewe ery fr m c untry and pr visi n f sup-p rt services f r traders, imp rters, exp rters and

ther sta eh ders.

SKS Micro nance CEO faces a surprise axe

Three m nths after its successfu IPo in In-dia, SkS Micr finance underwent a maj r eadershipchange with the firing f its CEo, Suresh Gurmaniwh j ined the c mpany in December, 2008 after

eaving Barc ays. The p siti n has been ta en up byhis deputy M R Ra . The c mpanys share saw a dip

f 6% in their price t Rs.1277 n the day B ard fDirect rs came ut with its decisi n. The c mpanydid n t pr vide any reas ns f r terminati n in itsn tificati n t st c exchange. H wever pressurefr m regu at rs SEBI and RBI has f rced c mpanyf under, Vi ram A u a int citing interpers na is-sues within the seni r management as the reas nbehind this drastic decisi n. But the f under denied

any p wer tuss e between him and Gurmani say-ing that the changing mar et scenari demanded am re seas ned pers n at the he m f affairs.

2ND Quarter Financial Reports

The m nth f oct ber witnessed business enti-ties c ming up with their sec nd quarter resu t re-p rts. Indian s ftware giant Inf sys surpassed ex-pectati ns rec rding a 13.16% rise in net pr fit t

Rs.17.37 bi i n whi e itsrevenues went up by

24.39% t Rs. 69.47bi i n in theast quarter. The

c mpany added27 c ients t its

a ready impres-sive c iente e f 592

c ients which inc udes biggies i e G dman Sachs,BP and BT gr up. With the b tt m ine g ing up f r amaj r IT p ayer the d mestic industry is ptimistic fbetter times ahead. In private ban ing sect r sec nd

argest p ayer HDFC Ban rep rted a 32.7% increasein net pr fits at Rs.9.12 bi i n with its revenues g -ing up by 15.87% against previ us c rresp ndingquarter t Rs.34.87 bi i n. In the infrastructure sec-t r larsen and Turb a s rep rted a rise f 31.9%in its b tt m ine t Rs.7.65 bi i n but this c u dn t prevent a dec ine in the net pr fit f r first ha f

f current fisca by 34.3% t Rs.14.31 bi i n. overait has been a quarter f ptimistic gr wth f r thesebusiness firms in the midst f rising inf ati n andtighter credit c nditi ns.

The Niveshak Timeswww.iims-niveshak.com

T h e M o n T

h T h a T W a s


6/27NIVESHAK volu e 3 issue 10 OCTOber 2010

Great Lakes Institute of Management, Chennai Vanshika Sethi

Loose monetary pol-icy in the US has re-sulted in an increas-ingly weakeningdollar leading to thequick appreciationof currencies in theemerging markets.With most econo-mies looking at anexport driven recov-ery from the eco-nomic slowdown,the appreciation of their domestic cur-rency has become amajor headache anda policy concern.

What started as a due betweenChimerica (China & America), hasbec me a fu b wn g ba curren-cy war. The st c mar et crash andc mp ete seizure f the credit andinterban mar ets were s me f them st apparent and visib e impacts fthe financiacrisis f 2008which a m stbr ught thew r d d wnt its nees.But there aremany aftereffects whichare p aying

ut n was nati nsar und theg be try t w r their way ut fthe ec n mic s wd wn. one sucheffect is n w being p ayed ut in theinternati na currency mar et whereeach nati n is trying t deva ue itscurrency t achieve c mpetitivenessin the exp rts mar et.

l se m netary p icy in theUS has resu ted in an increasing ywea ening d ar which has resu tedin quic appreciati n f currencies inthe emerging mar ets (Chart 1). The

pr b em is i e y t be further c m-p unded with the advent f Quan-titative Easing 2, n w being mu edpretty seri us y by the Fed.

With m st ec n mies ingat an exp rt driven rec very fr mthe ec n mic s wd wn that en-sued f wing the financia crisis f

2008, the appreciati n f their d -mestic currency has bec me a maj rheadache and a p icy c ncern. Ap-preciati n f currency ma es g dsc st ier in the internati na mar etsthreatening nati ns c mpetitive-ness.

It isp r e c i s e ythis c ncernthat f rcedJapan t in-tervene inthe currencymar et andarrest Yensa p p r e c i a -ti n whichhas reachedits 15 year

high against the d ar. Whi e Japans$25B interventi n made a the me-dia news, ther c untries i e Chinaand k rea have been d ing this ina m re si ent manner. This artic e

s at the issue fr m the perspec-tive f maj r p ayers inv ved andh w they are appr aching the issue.

Yuans stubbornness

China and USA have been ex-changing b ws n the currency is-

sues f r quite s metime n w. Duringthe financia crisis, China had peggedits currency t USD (Chart 2) t beab e t eep its exp rts c mpetitivein the internati na mar et. But withChinas current acc unt surp usburge ning at a rapid pace, US n wwants t f rce China t et its cur-

THE GREAT CURRENCYSCRAMBLE

AoM

Chart 1: Appreciati n f Austra ian d ar, Indianrupee and Brazi ian rea versus the US d ar

We are in the midst of an international currency war. Advanced countries are seeking to devalue their currencies - Guido Mantega (Brazils Finance Minister, September 2010)



While the Japanese interven- tion invited criticism from fel- low G-7 members, its competi- tors in Asia have been silently devaluing their currencies to protect their local exporters.

rency appreciate and achieve its fair va ue. China,which recent y became the w r ds biggest exp rter,p sted a $16.9 bi i n trade surp us f r quarter end-ing this September.

United States fee s that Chinas acti ns t de-iberate y eep Yuan underva ued are causing imba -

ances in the internati na mar ets and are threat-ening its wn rec very. China n the ther handbe ieves that any s rt f quic appreciati n f itscurrency wi s und d m f r n t n y its wn ec n-

my but f r the g ba ec n my. It in turn b amesUS f r eeping its m n-etary p icy se andcausing bubb e i ec nditi ns in the assetmar ets in emergingand deve ping ec n -

mies.T pacify the in-

ternati na c mmunity,China had ann uncedin June that it w u da w the Yuan t tradem re free y within arange. But even after this ann uncement, the Yuanhas hard y appreciated by a bit m re than 2% n y(Chart 2). This is s because the PBC (Pe p es Ban

f China) hasnt st pped intervening in the currencymar et. In the third quarter this year, Chinas curren-cy reserves jumped t highest ever eve s ma ing itevident that it is sti eeping the Yuan underva uedand is i e y t c ntinue d ing s in the near term.

Yens Quandary

The Japanese Yen seems t be suffering them st ut f the s -ca ed currency war. The Yen hasp sted significant gains this year (Chart 3) and iscurrent y trading at 15 year high eve s.

Their pr b ems are c mp unded by the factthat whi e ther c untries i e k rea are si ent y in-tervening in currency mar et, its wn $25b interven-ti n t arrest yens ascent attracted massive mediaand internati na c mmunity attenti n.

Japan being a member f G-7 is much m re an-swerab e t the internati na c mmunity than c un-tries i e S uth k rea and China and is thus finding

it difficu t t press ahead with currency interventi n.Its c mpetit rs in the internati na trade mar et, nthe ther hand, are ab e t regu ar y intervene tprevent quic appreciati n f their respective cur-rencies.

Japanese Prime Minister Na t kan recent y

as ed trade c mpetit rs China and k rea t refrainfr m intervening in currency mar ets t st p theircurrencies fr m appreciating and warned that thetw c untries sh u d act acc rding t c mm nru es. This statement h wever ref ected Japans

he p essness m re thananything e se. kansc mments ut inedJapanese g vernmentsfrustrati n. Whi e theirinterventi n invited

criticism fr m fe wG-7 members, its c m-petit rs in Asia havebeen si ent y deva uingtheir currencies t pr -tect and supp rt their

ca exp rters.

Rupees opportunity

Whi e there seem t be a currency war utthere, RBI has been etting the rupee ta e its wn

c urse and appreciate s w y (Chart 1). RBI has re-frained fr m intervening in currency mar ets evenas the trade weighted index f r rupee (against bas-

et f 36 currencies) has risen and stayed ab ve 100since Apri signa ing verva uati n f the currency.

Whi e this may c me as a surprise t many asan appreciated currency w u d be negative f r c un-trys exp rters, RBI is seeing this as a tw pr ngedstrategy. First y, as a means t curb inf ati n whichRBI has been strugg ing t eep in chec and hasa ready raised the p icy rates five times this year.An appreciated rupee wi reduce the ca prices fthe imp rted g ds and thereby curb inf ati n. TheSingap re g vernment a s seemed t be f wingsimi ar strategy when it a wed SGD t appreci-ate even th ugh its ec n my shran with s wingg ba gr wth negative y impacting demand f r itsmaj r exp rts: drugs and e ectr nics. Whi e Singa-

A o M

Chart 2: Exchange rate f r the Yuan versus the US d ar


8/27NIVESHAK VOLUmE 3 ISSUE 10 OCTOber 2010

AoM

RBI is seeing this as a two pronged strategy. Firstly, as a

means to curb in ation and to fund the current account

de cit

p res GDP went d wn by 19.8% (annua ized) in 3Qthis year, the M netary Auth rity f Singap re (MAS)ann unced recent y that it wi see a m dest andgradua appreciati n f SGD by widening its curren-cys trading band.

Sec nd y, RBI is

etting capita inf wst fund the current ac-c unt deficit which hasreached rec rd eve sthis quarter. With theimp rts gr wing fasterthan exp rts, the sh rt-fa in current acc untr se t $13.7 bi i n astquarter. The capita ac-c unt was at a surp us f $17.5 bi i n in the same

peri d.But it may n t be ng bef re RBI a s decided

t intervene in the currency mar ets t st p furtherappreciati n f rupee. N w that the current acc untdeficit has been ta en care f, RBI might s n de-cide t curb rupees appreciati n t maintain c m-petitiveness f Indian exp rters. RBI is trying t d aba ancing act between ma ing sure theres en ughm ney t fund c untrys current-acc unt deficit, butat the same time preventing any seri us damage texp rters c mpetitiveness.

Chain Reaction

over the ast decade, Chinas ec n my hasgr wn f ur times as fast as that f U.S., and it hasquic y s ared t bec me the w r ds sec nd- argestbeating Japan this year. The ey t Chinas successin exp rt mar et has been a f rcib y wea ened Yuanwhich gives it a sustained advantage ver its c m-petit rs in g ba mar et. Even as the w r d has suf-fered during the financia crisis, China has managedt garner even bigger trade advantage during thisperi d. This strategy f artificia y and de iberate ywea ening currency t capture w r ds exp rt mar-

et has ed t a massive imba ance in g ba trade.M re imp rtant y and unf rtunate y, this strategyseems t have c nvinced Chinas ey c mpetit rs asthe right way f rward and they have active y startedintervening in currency mar ets as a way t c mbat

their damaging currency disadvantage.Japan, k rea and Thai and have a been inter-

vening t arrest the tide f appreciati n in their cur-rencies in recent m nths. Brazi has n t n y been

d ing the same, it hasadditi na y imp sed

enhanced taxes n f r-eign capita t deter theinf ux f capita f wingint its ec n my. N wChinas trade c mpeti-t rs are trying t regainthe mar et share withcurrency manipu ati n

f their wn. Chinascurrency deva uati n

has initiated a g ba chain reacti n with a its c m-

petit rs n w p unging themse ves in the deva ua-ti n war.

The next war

With China n t heeding t U.S. demands ncurrency appreciati n, the next steps fr m U.S. wi

i e y be imp sing f trade restricti ns n Chineseg ds. Discussi ns n same are a ready under pr g-ress in U.S. C ngress.

Unf rtunate y, this pr tecti nism wi bringwith it reta iati n and its i e y t spread rea yquic y. This exact scenari p ayed ut during theGreat Depressi n and it br ught the internati natrade t a ha t putting fragi e ec n mies int evendeeper crisis.

The currency war that has emerged is an inter-nati na issue and theref re w u d require interna-ti na c - perati n, c - rdinati n and trust t find as uti n. When the, Gr up f 20, eaders meet nextm nth in Se u , they must ensure that this issue

ccupies t p f pri rity ist and they ught t dis-

cuss a p an t a w currencies t achieve their fairva ue. The IMF fai ed t bring ab ut any rec nci ia-ti n am ng the financia eaders ab ut the currencyissue, an ther fai ure in Se u w u d spe d m f rinternati na c - rdinati n and in a pr babi itiesstart the next war, that f Trade Pr tecti nism.

Chart 3: Appreciati n f Yuan and Japanese Yen versus theUS d ar


9/27


10/27

Cover

Sory

NIVESHAK VOLUmE 3 ISSUE 10 October 2010

The Company had recorded a ve year CAGR of 11.3%

in the top line. It registered a net pro t of `98.33 billion in the FY10, on total revenue of

`525.92 billion

der the reas ns f r the issue catching s many eyeba s.

Single largest coal producing company

C a India limited, is a Schedu es A NavratnaPub ic Sect r Underta ing under Ministry f C a . Itis the sing e argest c a pr ducing c mpany in thew r d with 64.78 bi i n t nnes (as f Apri 2010) fnati ns c a res urces. CIl a ng with eight f itssubsidiaries pr duced ar und 82% f the c untryst ta c a res urce fr m its 471 mines ut f 570rep rting mines in 2009-10. It is a s the argest c r-p rate emp yer in the c untry with manp wer f397,138 (as f March 2010).

The n y ther maj r p ayer in the industry isSingareni C ieries C a limited (SCCl), a j int ven-ture (51:49) between G vernment f Andhra Pradesh

and G vernment f India, which perates 13 pen-cast and 42 undergr und mines with manp wer far und 78,000. Bey nd that private invest rs are a -

wed n y if they pr duce c a f r supp ying t aspecific industry (e.g. p wer stati n, stee industry).Present y ar und 200 b c s had been a tted t theprivate p ayers f r captive mining.

C a being the prime fue avai ab e in India andwith the abundant reserves, the c mpany p ays asignificant r e in catering the needs f the re evantsect rs f Indian ec n my inc uding p wer, e ectric-ity, stee , cement etc. M re ver c mpany enj ys ad minant p siti n with a m st n c mparab e c m-petit rs in the industry.

Strong Financials

The C mpany had rec rded a five year CAGR f11.3% in the t p ine. It registered a net pr fit f98.33 bi i n in the FY10, n t ta rev-enue f ` 525.92 bi i n. Inthe first quarter f FY11the t ta inc me f CIlwas ` 131.10 bi i n withpr fit at ` 25.21 bi -

i n. As f March2010 the c mpanyhad Net w rth f` 258.4 bi i n,cash and ba ances f

` 390.7 bi i n and t ta debt f` 20.8 bi i n.C a India had an EPS f 15.56 in 2010, ` 6.43 in

2009, and ` 6.78 in 2008. The Return n Net W rth was38.03%, 21.37% and 24.91% f r the year 2010, 2009and 2008 respective y.

CIl in rder t sustain its c mpetitiveness and

C a Pr ducti n and C nsumpti nenhance pr fitabi ity is w r ing t wards im-

pr ving its perating efficiencies and pr ductivity.It is a s aiming t reduce per unit pr ducti n c sts

by imp ementing advanced mechanized pr ducti ntechn gies and equipment. It reduced its w r -f rce size fr m 445,817 in FY07 t current eve f397,138 increasing its pr ductivity fr m 2.54 t nsper manshift t 4.47 t ns in the same peri d. Thec mpany expects its pr fits t increase by 25% in

the c ming year.

Well positioned to capitalize on demandsupply gap

Indias c a pr ducti n has in-c r e a s e d f r m 255 mi i n t nnes inF Y 9 4 t 488 mi i n t nnes inFY09 but at the same time

gap between c nsump-ti n and pr ducti n has

widened fr m 3 mi i nt nnes t 31 mi i n

t nnes during the sameperi d.A September 6

rep rt by IIFl Gr up es-timated that Indias c ash rtfa is set t widenfurther t 155 mi i nt nnes by fisca year



C o v e r S t or y

CRISIL has assigned a CRI- SIL IPO Grade `5/5` to the initial public offer (IPO) of

Coal India. ICRA and CARE have also assigned the highest

rating

2013.The increase in c a requirement is primari y

attributed t demand fr m p wer and stee sect r,f wed by industries that use c a as fue . The c ademand f r p wer sect r in FY11 is estimated at442 mi i n t nnes when indigen us avai abi ity is

estimated at 389 mi i n t nnes. At the same timedemand by the stee sect r is pr jected at 50.51 mi -i n t nnes against indigen us avai abi ity f 17.92

mi i n t nnes.Being the maj r p ayer, CIl is we p siti ned t

capita ize the fav urab e demand ut f c a . Thec mpany at present near y acc unts f r the 75.5% fthe t ta therma e ectricity generated in the c untryby pr viding c a t 76 ut f 78 therma p ants. Thecapabi ities fr m 471 perating mines have he pedthe c mpany gr w its pr ducti n at a CAGR f 5.2%fr m 260 MT in FY00 t 431 MT in FY10. Despite this,CIl c ntinues t expand with 45 pr jects (22 capacityexpansi ns and 23 new pr jects) ined up.

C a c nsumpti n in IndiaIt is a s f cussing n D mestic and overseas

acquisiti n t impr ve its asset base. The c mpanyhas btained pr specting icense f r the c a b c sin M zambique thr ugh its wh y wned subsidiary.It is a s p anning t ma e equity investments instrategic br wn fie d and Greenfie d c a assets andenter int ng-term ff ta e arrangements f r theimp rt f c a int India. They have a s estab isheda strategic j int venture ICVl with f ur arge IndianPSUs name y SAIl,NTPC, NMDC and RINl f r the ac-quisiti n f c a assets utside India specifica y inAustra ia, the US, and Ind nesia. The c mpany has

set aside ` 53 bi i n in this financia year f r f reignacquisiti ns.

Scope of price hike

Despite being the price setter, CIl prices itshigh grade qua ity c a at 15% be w the c st fimp rted c a ( n FoB basis). As far as therma c ais c ncerned, Mr. Bhattacharyya, Chairman CIl, ina statement said that the c mpany priced c a atar und $22 which is ha f f the price f imp rtedc a fr m Ind nesia ($45). M re ver in rder t im-pr ve the qua ity f c a it has estab ished 17 c abeneficiati n faci ities with an aggregate designedfeedst c capacity f 39.40 mi i n t ns per annum.It further intends t deve p additi na 20 c a ben-eficiati n faci ities with an aggregate additi na pr -p sed feedst c capacity f 111.10 mi i n t ns per

annum.Mr. Bhattacharyya a s stated that with em-

phasis n pr viding washed c a t a c nsumersand demand-supp y gap widening, 2016-17 can b-serve the c nvergence f d mestic and internati naprices.

Risks & Concerns

CIl is current y the sec nd argest wner fand space in the c untry after rai ways, but sti

the engthy pr cess f regu at ry appr va s may

dampen its new acquisiti ns r imp ementati n fnew pr jects.

2010 CIL Pea-body

Energy

ChinaShenhuaEnergy

Bumiresources

Country India US China Ind nesiaReserves

(bn tonnes)10.6 9 7 2

PAT($ mn) 220.8 448.2 4,4641.06 371.69P/BV(x) 6 3.1 2.6 2.8

P/E 15.7 16.8 15.2 14.6EV/EBITDA(x)

6.31 8.4 8.6 7.6

Sec nd y, 26% mining tax that is ma ing r undsp ses ris t the b tt m ine f the c mpany. But asCIl a ready spends ar und 16% f its PBT in s ciaactivities, the impact f the tax, if c mes thr ugh,wi be ess as c mpared t ther mining c mpanies.


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Sory

CRISIL has assigned a CRISIL IPO Grade `5/5` to

the initial public offer (IPO) of Coal India. ICRA and CARE have also assigned the highest

rating.

NIVESHAK VOLUmE 3 ISSUE 10 OCTOber 2010

A s any change in G vernment p icy regard-ing envir nmenta issues and f rest c earance is a sa ris fact r t the c mpany.

Valuation and Recommendation

CRISIl has assigned a CRISIl IPo Grade `5/5` tthe initia pub ic ffer (IPo) f C a India. ICRA andCARE have a s assigned the highest rating.

At the higher IPo price band f ` 245, CIl isdisc unting its FY10 P/E (p st issue) and FY10 EV/EBITDA by 15.6x and 6.3x, respective y. The mu tip esare at par with its g ba peers.

If we at the perf rmance f the PSU sect rin the Indian capita mar et, the average PE mu tip eis ver 20x. A s the c mpanies in Sensex are trading

ver 23 times PE mu tip e. The c a demand is n tcyc ic and theref re CIl is m re f a uti ity c mpa-ny. A ready isted Indian uti ity c mpanies t trade

ver 20 times P/E and 11 times EV/EBITDA. Theref re,the CIl issue priced in between 14.3 and 15.5 timesPE mu tip e is sti at a disc unt.

Number of Times Issue is Subscribed (NSE and BSE)Last Day Shares Offered/

ReservedFinal

Oct 21,2010Qualified Institutional

Buyers (QIBs)284,236,398 24.7

Non

institutional Investors

85,270,919 25.4

Retail IndividualInvestors (RIIs)

198,965,479 2.31

EmployeeReservations

63,163,644 0.1

Total 631,636,440 15.28

overa , the issue is attractive y priced. Ta ingint c nsiderati n the str ng p siti n f the c m-pany t capita ize the pp rtunities in the mar et, itis expected that CIl wi perf rm g d in the future.It is a we g verned c mpany with a g d man-agement and a str ng business m de . Theref re, itis a g d investment f r pe p e ing f r steadygr wth.

CROSSWORD SOLUTIONS

SEPTEMBER 2010

Across

2. George Soros

6. Yield Curve

8. FOREX

9. Green Shoe

10. Arbitrage

Down

1. Private Placement

3. Sharpe Ratio

4. Open Offer

5. Liquidity

7. Dow Jones


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FINANCE CLUB, INDIAN INSTITUTE OF mANAGEmENT SHILLONG 13

C o v e r S t or y

A o M

P e r s p e c t i v e

F i n G y a a n

F i n S i gh

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The perf rmance f SEBI asthe regu at r f financia mar ets f

ur c untry has a ways been arge yappreciated by the business c m-munity. In rder t better verseeand pr vide guide ines f r the vari-

us Merger and Acquisiti ns (M&A)ta ing p ace in Indian mar et, SEBI

egis ated the Ta e ver C de in 1997and since then, the guide ines haveunderg ne 23 maj r amendments

as deemed necessary by the regu a-t ry b dy. H wever, in the wa e frecessi n, SEBI decided t verhauthe c de t ma e it in ine with theinternati na n rms and practices.Acc rding y, it app inted a Ta e-

ver Regu at ry Advis ry C mmit-tee (TRAC) in September, 2009 texamine and review the regu ati nsand rec mmend suitab e amend-ments. The c mmittee recent y sub-mitted a 139 page rep rt t SEBI inJu y, 2010 f r its review. The rep rtpr p sed many sweeping changesin terms f pen ffer trigger, ffersize, indirect acquisiti ns, exemp-ti ns fr m pen ffer b igati ns,ca cu ating the ffer price and c m-peting ffers. let us ana yze s me

f these pr p sed changes andtheir imp icati ns f r the businessh uses and c ncerned sta eh ders.

Open OfferThe pane has suggested an

increase in the pen ffer triggerfr m the current 15% eve t 25%.The 25% eve was c nsidered appr -priate by the pane f r Indian c n-text where a h ding f 25% r m repermits exercise f de fact c n-

tr ver the c mpany. This rec m-mendati n has bec me a cause fmuch debate in the business circ e.The c mpanies with sma pr m terh dings are s eptica f this idea asit increases the chances f a h sti eta e ver. on the ther hand, thissuggesti n is c nsidered t be a we -c me m ve f r private equity (PE)

investment under the Private Invest-ment in Pub ic Equity (PIPE) r ute.An ther imp rtant rec mmen-

dati n by the pane with regard tstatut ry pen ffer is t ma e theminimum ffer size f 20%, withan pti n t increase it t 100% tensure equa pp rtunities f r ashareh ders. This might have variedramificati ns f r the vari us sta e-h ders. This m ve might pr vide

pp rtunities t min rity shareh d-ers t exit and get fair price f r theirequity sta e but, at the same time, itwi a s ma e acquisiti n f wide yhe d c mpanies c st ier. The increas-ing acquisiti n c sts wi ensure thepresence f n y seri us p ayers inthe mar et and enc urage them th d strategic sta es in the targetc mpany. H wever, this a s increas-es the chances f h sti e ta e veras the acquirer can n w bid up t100% t ta e fu c ntr f the firm.

H wever, whi e suggesting the 100%ffer scheme, the pane has ta en

int c nsiderati n the scenari fthe acquirers h ding exceeding themaximum permissib e n n pub icshare h ding, in which case, the ac-

The Takeover Regu-latory Advisory Com-mittee has proposedsome sweepingchanges in regula-tions in the M&Afield to align themmore with the inter-national standards.The idea is to makethe process easierand smoother forboth the acquirer aswell as the acquired,and to encouragedirect investments inIndian industries.

IIM Shillong mritunjay Choudhary

Changes in the SEBI

Takeover Code

While suggesting the 100% offer scheme the panel has taken into consideration the scenario of the acquirers holding exceeding the maximum permissible non public share holding in which case the acquirer may have to bring down his holding or allow the company to be delisted



F i n S i gh

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That an indirect acquisition will be treated as direct acquisition if the Indian target company amounts to more than 80% of the bidders assets.

quirer may have t bring d wn his h ding r a wthe c mpany t be de isted. The pane has rec m-mended that the acquirer may state upfr nt his in-tenti n t de ist if his h ding in the target c mpanywere t cr ss the de isting thresh d, pursuant tthe pen ffer.

The pane rec mmendati ns f r stream ined ex-empti ns fr m pen ffer inc ude buybac s, interse transfers, c rp rate debt restructuring, rights is-sues, and schemes f arrangement n t inv ving thetarget c mpany.

Creeping Acquisition

A maj r change rec mmended by TRACn creeping acquisiti n n rms has been the rais-

ing f upper imit fr m 55 t 75%, subject t thec nstraint that the p st acquisiti n h ding d es

n t cr ss the maximum eve f n n pub ic share-h ding. H wever, the annua creeping imit f 5%per annum has been eft unchanged. It is a we -c me change f r fami y wned businesses wherethe fami y wants t av id any eventua ity f

ss f c ntr f business t an utside entity.

Indirect Acquisitions

T c ear the ambiguity surr unding indi-rect acquisiti ns, the c mmittee has c me ut withthe c arificati ns that an indirect acquisiti n wi

be treated as direct acquisiti n if the Indian targetc mpany am unts t m re than 80% f the biddersassets. The c mmittee has a s suggested that are evant ann uncement be made n the same day.

Competing Offers

In the case f c mpeting ffers i e thene witnessed in the case f Great offsh re, where

Bharati Shipyard and ABG Shipyard were s ugging itut t gain c ntr , the pane has a wed the ac-

quirer t switch t a fu -sized ffer, when a v -

untary ffer has a ready been made. The switch, itsaid, wi be a wed if the c mpeting ffer is made.

Non Compete Fees

The pane has suggested t c mp ete yd away with the practice f ffering n n-c m-pete fees t the pr m ters f the target c m-pany in an pen ffer eeping in mind, the prin-

cip e f equa treatment f a sta e h ders.

Determination of Offer Price

The pane has suggested new cri-teria f r determinati n f the minimum f-fer price t be made by the acquirer f r the tar-get c mpany. As per these rec mmendati ns,the minimum ffer price sha be the highest f:1. The neg tiated price under the agreement that

attracted the pen ffer.2. V ume-weighted average price paid by the

acquirer and pers ns acting in c ncert in thepreceding 52 wee s

3. Mar et price based n the 12 wee v umeweighted average f mar et price

4. Sixty day trading v ume weighted averageprice (VWAP) f r frequent y traded shares

The changes in the price determinati n param-eters are i e y t have a mixed effect n the acquir-ing pr cess. The pane f und the 26 wee mar etprice average t ng and 2 wee average t v a-ti e f r mar et price eva uati n and as an a ternativepr p sed the intermediate 12 wee s as the suitab eperi d f r this purp se. The c mmittee intr ducedVWAP as a parameter f r price determinati n with aview t eradicate the ut ier effects f share pricesf uctuati n, c nsidering it t be a better determi-nant f transacti n prices f the shares. H wever,a d wnside f this measure is the pr n unced ef-fect f pri r bu dea s n VWAP based price.

Payment Mode

The pane has a wed the paymentf r ffer price in f rm f f rm f cash r securi-ties i e shares, c nvertib es, secured debt instru-ments f the acquirer r f pers ns acting in c n-cert with him r a c mbinati n f these m des.

Corporate Governance Measure s

The pane has pr p sed the f rmati n ac mmittee f independent direct rs t c nsider andgive reas ned rec mmendati ns n the pen fferpricing in the f rm f a pub icati n. This is a we -c me m ve fr m a c rp rate g vernance standp intas this wi he p the shareh ders t ma e right de-cisi ns. Further, the c mmittee has n t a wed ap-p intment f acquirers representative t the b ard


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f direct rs f the target c mpany unti the acquirerp aces 100 % f the c nsiderati n under the pen

ffer in cash in an escr w acc unt. Such an ap-p intment can n y be made after the peri d f rc mpeting ffers expires. Meanwhi e, any materiatransacti ns utside the rdinary c urse f businesscann t be underta en during the ffer peri d with-

ut appr va f shareh ders f the target c mpany.

Reset of Timing Deadline

The vera time ine f r c mp eti n f penffer pr cess has been br ught d wn fr m 97 t

57 business days, starting fr m pub ic ann unce-ment. It wi be interesting t bserve the imp i-cati ns f such stringent time ines in view f theinv ved ega requirements, c urt pr cesses, etc.

Possible Chinks in the Armory

The pane draft is a pr gressive step t wardsimpr ving the efficiency f Indian mar ets and in-c rp rating extant business practices. H wever,there are certain grey areas eft unaddressed whichrequire further c nsiderati n. listed be w are s me

f the rec mmendati ns which may be c nsideredby the c mmittee bef re ma ing the fina guide ines.

More Elaborative Control De nition

The pane must be app auded f r c arifyingcertain ambiguities c ncerning the interpretati n fc ntr by inc uding b th the abi ity and the right tapp int the direct rs r ma e p icy decisi ns in thedefiniti n f c ntr . But certain d ubts sti exist asthis inc usi n c u d mean that an pen ffer can betriggered if the acquirer acquires de fact c ntrinstead f de jure c ntr . This imp ies that the inter-pretati n f de fact is pure y factua and c u d bea matter f egis ati n in times t c me. H wever,views n vet right have n t been expressed c n-sidering the matter t be pending bef re the c urt.Further, n the p siti n n ADRs/GDRs, the c mmit-tee has c arified that where these carry v ting rights,they w u d be inc uded in the definiti n f c ntr .H wever, c nvertib es are c unted as c ntr n ywhen the event triggering c nversi n ta es p ace.

The c mmittee must review the defi-niti n f c ntr in ight f these fact rs, andretain s me f exibi ity acc unting f r the un-certainty surr unding certain parameters.

Offer Price Determination Mechanism

The c mmittee has apt y hand ed the case ffrequent y traded shares by intr ducti n f VWAP in theprice fixing pr cess but the treatment f r infrequent-

y traded shares has n t been pr vided in its rep rt.

Scope for Creation of Squeeze Out

The present mar et scenari justifies theinc usi n f a squeeze ut pr visi n f r the bid-der. As per the existing guide ines, even after theacquirer see s 90% r m re shares thr ugh an

pen ffer, the remaining invest rs have a put p-

ti n n bidder f r ne year after pen ffer. Thismeans that the bidder cann t squeeze ut theutstanding shareh ders. This is a partia y bi-

ased regu ati n that reduces the attractiveness fcapita mar et f r c rp rate transacti ns. C nse-quent y, p tentia bidders and the target may turnt ff-mar et mechanisms as an a ternative r ute.

Supp rters f the absence f min ritysqueeze ut pti n have p inted t the av id-ance f cumbers me and expensive reverse bbui ding pr cess required therwise as its maj r ad-vantage. H wever, ac f a reverse b bui dingpr cess has its wn d wnturns as it eaves min rityshareh ders with n pti ns but t accept the fferprice as the de isting price r remain shareh dersin the un isted entity. This c u d see recurrences fpr b em f min rity shareh ders resistance as waswitnessed in the case f Cadbury, where min rityshareh ders f the Indian entity am unting t 2.43%c ntinued t h d n t their shares in the h pe

f a better pay ff, a th ugh the c mpany was de -isted in ear y 2003 after a buybac by its Uk parent.

More Disclosures on Acquirers Part

Given SEBIs emphasis n time y inf rmati nsharing t mitigate any arbitrage pp rtunities, itis rather g aring t n te that the pane draft d esn t pr p se a regu ati n requiring bidders as weas target c mpanies t ma e pub ic ann uncements

f impending discussi ns, in the event f abn r-ma share price m vements. Further, disc sures

n strategic intent sh u d be expanded t c ver in-tent in re ati n t emp yees, faci ities ( wned r

eased), ey c ntracts etc. Basica y, the c de mayinc rp rate a framew r in which shareh ders fthe target c mpany sh u d get access t the acquir-ers intenti n, bef re they eva uate the pen ffer.

If the ab ve suggesti ns may be c nsid-ered bef re fina izing the guide ines, then it w u dsure y he p in strengthening the existing frame-w r f ta e ver regu ati ns and enab e it tachieve its intended bjectives m re effective y.


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FINANCE CLUB, INDIAN INSTITUTE OF mANAGEmENT SHILLONG 17

C o v e r S t or y

A o M


F i n G y a a n

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NIVESHAK VOLUmE 3 ISSUE 10 October 2010

Government counts MFI as a social initiatives but the dif-

culties face by them to access capital tell the different story

altogether

S ust ainab le Rur a l Finance:P r ospect s, Challenges & I mplicat ions for I ndia

Xavier Institute of Management, BhubaneswarAnwesh Padhee &Santosh Patnaik

The Micr finance industry inIndia has witnessed a CAGR f 96%

n the utstanding p rtf i in theast 5 years. Its c ient base grew t

22.6 mn, gr wth f 59% y- -y andutstanding p rtf i $2.3 bn . In

India, 135 mn r 72% f the h use-h ds have been eft bey nd the am-bit f traditi na financia sect r be-cause setting up branches by ban sw u d be financia y unviab e. Theyhave traditi na y re ied n m ney-

enders wh charge rates as highas 60%-100% n the ans. Thus thep r fa in a debt trap and pr curethe ans t meet their medica / th-er urgent needs but n t f r c mmer-cia activities. Even t day maj rity

f the 72% f the h useh ds d nthave access t micr finance whichpr vides huge gr wth pp rtunitiest this sect r.

Tw distinct features f thisindustry are-

1. The NPA eve s f the vari usc mpanies in this industry remain at0.2-3% even as m st f the ansare unsecuritized, which is at par reven better than the NPA eve s fban ing industry.

2. This industry has remainedvirtua y unaffected by the g ba re-cessi n in 2008 which c u d be at-tributed t the tw reas ns-

i. Rura ec n my is primari yagrarian and it remains insu atedfr m the g ba ec n my.

ii. Farm an waivers and NRE-GA has eft g d disp sab e inc me

in the hands f the rura c nsum-ers and thus businesses in ruraec n my have thrived even in t ughtimes.

The rura p pu ati n f Indiaface many pr b ems- They are vir-tua y n t insured, pay high inter-est rates f 25-30% n micr finance.Even a sing e incident can imp ver-ish the h useh d.

MFIs can act as distribut rs f rvari us ban s and create ban ac-c unts f r their cust mers n be-ha f f the ban . This can be usedby the g vernments f r ma ing pay-ments f wages n NREGA and thersuch schemes, e iminating c rrup-ti n.

Vi ram A u a is right that pr f-its are necessary s that m re andm re pe p e sh u d benefit fr m

micr finance. H wever the c st ffunds f r the p r pe p e remainspr hibitive at 25-35% eve s, whichis higher than return n equity f rm st f the maj r c mpanies istedin BSE r Nifty. In spite f this factthe NPA eve s has remained werthan ban ing industry ref ecting at-tractive business pp rtunity inthe rura sect r and that reducingthe c st f funds c u d mean m rem ney in the hands f the rura c n-sumers.

COMPARISION WITH GLOBALPEERS

A c mparis n with g ba peerswi sh w that whi e mexic chargesas high as 100%+ EAR rates , S uth

MFIs serve an im-portant need of thesociety at relatively lower cost. In theprocess they alsocreate significant so-cial impact- womenare empowered, bet-ter self-esteem raisedincome and betterliving standardsbesides scope forproviding insuranceand other financialproducts at lowerincremental cost.Besides, BASIX alsooffers agriculturalconsulting, otherlivelihood services.




k rea has 32%. Even in USA,the c st f micr finance ansis 30.7% , even as their c st fb rr wing is 5.7%. This is win c mparis n t India wherethe c st f debt f r the MFIsstands at 12-16% . Thus IndianMFI is str nger than its g bapeers. Further, just by reducingthe c st f debt, c st f MFI

ans c u d be reduced.

TYPES OF MFIs IN INDIA

In terms f m de s, MFIs can be c assifiedas enders t gr ups r as enders t individu-a s. In India, MFIs usua y ad pt the gr up based

ending m de s, which are f tw types- the

se f-he p gr up (SHG) m de and the j int- ia-bi ity gr up (JlG) m de . The m st p pu ar JlGm de s are the Grameen ban m de and theASA m de . M st f the eading MFIs in Indiaf w a hybrid f the gr up m de s.

1. The Grameen system/model:Pr spective c ients are as ed by the MFI t

rganise themse ves int Gr ups f five memberswhich are then rganised int Centres f ar undfive t seven such Gr ups. The members ma e fre-quent savings with the MFI, acc rding t a fixed

b igat ry schedu e, and they a s ta e regu arans. They each have individua savings and an

acc unts with the MFI, and the main functi n f theGr ups and Centres are t assist the financia inter-mediati n pr cess.

2. The SHG model:A typica SHG c nsists f twe ve t thirty mem-

bers. The gr up is n t mere y a savings and an as-s ciati n, but serves as a fe w-fee ing gr up thatpr vides a p atf rm f r an array f issues.

Brief y, the SHG-MFI system has financia in -ages as f ws. Each SHG in the system raises fundsfr m individua members and b rr ws fr m the MFI.Each SHG ends t members and saves with the MFI.The MFI raises funds fr m three s urces: Capita ,SHG savings, and b rr wings fr m utside. The MFI

ends t SHGs, invests utside, and maintains a cashba ance.

3. The SHG-Bank-Linkage Model:In India, the adaptati n f the new micr fi-

nance appr ach by rura financia instituti ns as-sumed the f rm f the Se f-He p Gr upBan lin -age Pr gram.

Under the SHG-ban in age pr gram, NGosand ban s interming e with the p r, especia y

w men, t f rm sma h m g-en us gr ups. A th ugh indi-vidua y these p r c u d neverhave en ugh savings t pen aban acc unt, the j int savingsenab e them t pen a f rmaban acc unt in the name f thegr up. Gr ups then, meet ftenand use the j int am unt t pass

n sma ans t members f rmeeting their sma surfacing

needs.This m de dem nstrates b th the SHG and the

SHG-Ban -lin age appr aches. The differences be-tween a SHG and a JlG are isted be w:

SHGs JLG's

Based n trust Based n j int iabi ity(mutua agreement)Savings are there There is n pr visii n f r

savings within the gr upGr up f 12 - 15 members Gr up f 5-10 membersThere is n peer pressuret repay gthe an

Peer pressure in a gr upserves as an a ternativef r security against the

anless chances f gettingbac the m ney

Chances f repayment ism re

STRENGTHS OF MFIs IN INDIA

MFI is expected t gr w str ng y aided by GoIs initia-tives f r financia inc usi n. They maintain a hea thyasset qua ity because f gr up pressure and hea thyc ecti n mechanisms. MFIs have been extendingfinancia intermediati n t ensure steady ive ih d.MFIs are entering int newer territ ries that wi he pthem diversify ge graphica ris . The big MFIs are

perati na y efficient and m st f the MFIs havegr ss interest spread f 6-15%.

CHALLENGES OF MFIs IN INDIA

1. Access to capitalSteady access t capita remains a maj r cha -

enge f r MFIs in India. The interest rate chargedn m st MFIs remains pr hibitive. Even f r the big-

gest p ayer SkS Micr finance, the interest expensewas 10.7% f r FY10. This remains way ab ve the ratecharged n vari us t p c rp rate. SkS micr finance,wh se assets have gr wn m re than 40 times fr m

Mar.06 t Mar 10, has sti maintained an NPA eve f0.16% and CAR f 28%. There are tw f d pr b ems-i. The c st f funds f r m st estab ished MFI

remains high at m re than 10% c mpared t 7% ddeve s f r ris y sect rs i e rea estate, inspite f


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MFIs might serve as important medium to spread nancial

inclusion and help in diversi- fying risks through crops insurance, warehouse insurance etc.

in future.

the hea thy trac rec rd. This w u d be even higherf r sma er p ayers at c se t 15%.

ii. G vt is ta ing f capping interest ratescharged by MFIs at 22-24%. This w u d mean thatsma MFIs w u d be driven ut f business, as theyhave perating expenses in the rage f 15% in the

first few years. This w u d mean that in the absencef any FIs, the rura p pu ati n w u d have t gbac t the m ney enders, which seems a retr -grade step, as they w u d be charging far higherinterest rates.Solution

i. The high interest rate charged by ban sseems t be based n high perceived ris . Thiscan be br ught d wn by 2-3% easi y c nsideringthe trac rec rd f vari us c mpanies. Thus instead

f trying t cap interest rate charged by MFIs, g vtsh u d try t address the interest expense f MFIs,and MFIs c u d be as ed t pass this n t the c n-sumers.

ii. With EPS f 32.98 f r FY 10 and share pricef 1330(BSE, as n 24 sept) the share f SkS micr -

finance is trading at 40 times PE. This is we ab vethe PE f a the maj r ban s in India, ref ectingthe huge gr wth p tentia f this sect r. other MFIsc u d a s tap the equity mar ets t raise capita .2. Regulation in MFIs

MFIs registered as NBFCs are under the pur-view f RBI. H wever many f the MFIs f w dif-ferent acc unting standard and hence CRISIl whi eeva uating the MFIs has t ma e adjustments. Thereis a need t intr duce prudentia n rms f r MFIs.MFIs are n t a wed t ffer in-h use insurance andcreate savings acc unt.Solution

i. Since the ans are pr vided t p r pe p e,wh are very vu nerab e t ne maj r event, the

MFIs sh u d be a wed t pr vide hea th/cr p in-surance and ther such insurance pr ducts whichsh u d n t n y he p the p r pe p e but a s in-crease the margins f r MFIs.

ii. The MFIs sh u d be a wed t create sav-ings acc unt n beha f f the ban acc unts sinceit wi further g vts bjective f financia inc usi nand has the p tentia t reduce c rrupti n f we fare

schemes i e NREGA by paying the ab urers direct y.This w u d a s benefit the MFIs wh w u d get ad-diti na inc me and ban s which w u d get accesst w c st CASA dep sits.

iii. C nsidering the huge pp rtunities and thesize and p tentia f the industry separate n rms

have t be f rmed f r the MFIs. There sh u d bec ear acc unting standards.3. Asset quality could deteriorate due to growthplans

As MFIs expand huge y, they might face dete-ri rati n in asset qua ity as f cus shifts t gr wth.MFIs ris management practices have wea ened

ver the ast c up e f years. Further c ients havebeen given mu tip e ans fr m different MFIs. Rapidexpansi n t newer ge graphies has put pressure

n audit mechanism f MFIs.Solution

Insta ati n f s ftware f r eeping rec rd fans has been pursued by s me MFIs. This c u d

be centra ized t ensure that a b rr wer is n t givenm re than 1 an. Use f c mputers c u d a s in-crease efficiency f perati ns and better m nit ring

f ans. Str ng interna audit has t be maintainedin the gr wth phase t ensure that MFIs d nt endup with de inquent ans.

MAJOR RISKS TO MICROFINANCE INSTITU-TIONS-

FinancialRisks

OperationalRisks

Strategic Risks

Credit Ris Transacti nRis

G vernance Ris

liquidity Ris Fraud Ris Externa BusinessRis

1. Financial Risks: M st MFIs have put maxi-mum res urces int deve ping a ine f attac that

reduces individua credit ris s and maintaining qua -ity p rtf i s. The financia ris s are-a. Credit Ris : Credit ris is the ris t earnings

r capita due t b rr wers ate and n n-paymentf an b igati ns. It inc udes-

Credit Risk Management:

Well-designed borrower screening, vigilant




The big MFIs are operationally ef cient and

most of the MFIs have gross interest spread of 6% - 15%.

an structuring, c se m nit ring, c ear c ecti npr cedures, and strict supervisi n by seni r man-agement.

Policies on diversification, maximum loansize, types f ans, and an structures.

b. liquidity Ris s: liquidity ris is the i e i-

h d f negative effects n the interests f wners,cust mers and ther sta eh ders f the financiainstituti n ensuing fr m the incapabi ity t meetcurrent cash b igati ns in a time y and c st-effec-tive manner.

Liquidity Risk Management:

Maintaining detailed estimates of projectedcash inf ws and utf ws f r the next few m nthss that net cash requirements can be ac n w edged.

Maintaining investment accounts that can

be easi y iquidated.2. Operational Risks: operati na ris arises

fr m human r c mputer err r within dai y pr ductde ivery and services.

a. Transacti n Ris : Transacti n ris exists ina pr ducts and services. F r MFIs, cash transac-ti ns c nnected with ending are usua y the mains urce f perati na ris .

Transaction Risk Management:

Simple, uniform and consistent procedures

f r cash transacti ns thr ugh ut the MFI. Internal audit to test and verify the accuracy

f inf rmati n and adherence t p icies and pr ce-dures.

b. Fraud Ris : Fraud ris is the ris f ss fearnings r capita as a resu t f de iberate rac et byan emp yee r c ient.

Fraud preventi n sh u d be bui t int the de-sign f the MFIs p icies. The best way t determinefraud is f r s me ne ther than the an fficer t

visit the c ient t authenticate acc unt ba ances.3. Strategic Risk: This dea s with p r g ver-

nance, wea decisi ns ta en by the b ard. Regu a-t ry issues are main y due t n n-c mp iance f aw.

CUSTOMERS PERSPECTIVE

The susceptib e n n-p r c mprise a signifi-cant segment f the c iente e f many MFIs. This

gr up f c ients ac insurance r s cia securityand can easi y fa bac int p verty as a resu t fa sh c .

Micr finance c ients at a p verty eve s facerecurrent and widespread ris s. There are manys urces f ris : seas na ity, inf ati n, r the ever

changing weather; sic ness r sudden death f afami y member, unemp yment, fires and theft; andthe high c sts ass ciated with marriage, funera s,and educating chi dren. There are ris s in ed with

perating an enterprise r ta ing a an as we .MFIs p ay m re f a r e in he ping c ients

pr tect against ris s ahead f time than dea withsh cks after they ccur. These strategies c mprisediversifying inc me s urces, building up physical,financial, human and s cial assets, and f cusing ng d wealth management. Micr finance is als usedby clients t build human assets, like the educati n

f children and health care.Participati n in micr finance pr grams pr -

vides w men access t kn wledge and inf rmati nwhich helps them t interact with the utside w rldand permits the building and reinf rcement f s cialnetw rks. By increasing w mens financial c ntribu-ti ns t the h useh ld, partaking in a micr -financepr gram can help perk up their sense f self-respectand c ntr l ver assets.

once a sh ck r stress event ccurs, pe pleuse vari us c ping strategies: they m dify c nsump-ti n, raise inc me by m bilizing lab ur r selling as-sets; they draw n inf rmal and f rmal savings, anddraw d wn claims n inf rmal gr up-based insur-ance mechanisms.

The primary pr duct design challenge emerg-ing fr m this research is the need t design pr ductsbey nd credit that can help a br ad range f clientst ne d wn the vari us types f risks they face andhandle with crises after they have ccurred. Flexiblesavings and insurance, and h using, educati n, andemergency l ans are examples f p tential pr ductsthat c uld impr ve clients ability t deal with risk.The micr finance industry sh uld f cus n impr v-ing up n existing l an pr ducts and finding ways fintr ducing a br ad array f pr ducts that enablesclients t reduce their susceptibility t risk.


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Currently, the hedge fund market has gained momentum and is of the scale of around

$2.3 trillion

What is a Hedge Fund?A hedge fund is an investment

vehic e which p s in m ney fr mdifferent invest rs and a ws themt get exp sed t vari us mar etinstruments ranging fr m equitiesand debt t c mm dities and de-rivatives. A th ugh there are a widevariety f instruments t ch sefr m, every hedge fund is distin-guished fr m thers by a different

investment strategy which decidesthe type f instruments in which theinvestment sh u d be d ne. S , wecan have a macr hedge fund beinginvested in equities, debt and de-rivatives r equity based hedge fundbeing invested in g ba r d mesticequities n y. As the name suggests,hedge funds are used t hedge risin these mar et instruments usingm st y sh rt se ing and derivatives,

but ff ate these are used as strate-gies t earn abs ute returns n thecapita by exp sing t minimum ris .

Growth of Hedge FundsSevera rep rts have estimated

that hedge fund mar et was ar und$200 bi i n in 2000, which r se dra-matica y t $1tri i n in 2005and t uched thehigh f $2.1 tri -

i n bef re theec n mic crisis.Current y, thehedge fund mar-

et has gainedm mentum andis f the sca e f ar und $2.3 tri i n.This phen mena increase can be

attributed t instituti na invest rsi e pensi n funds and insurancefirms which f cussed n diversifyingtheir p rtf i and hence used hedgefunds t invest thr ugh vari us in-struments.

Structure of Hedge FundsHedge funds are characterised

by few regu ati ns and maximumfreed m, especia y in terms f use

f sh rt se and derivatives andabsence f mandat ry rep rting re-quirements which are n t avai ab ein ther funds viz. Mutua funds.Hedge funds can even s ip registra-ti n with Securities and ExchangeC mmissi n by imiting their inves-t rs t 15. S , even if a hedge fundhas many c ients, he can have gr up

f hedge funds with ess than 15 in-vest rs t ta e advantage f c ientsunique tax situati ns and dep yingdifferent investment strategies suit-ing the c ient needs. Hedge fundscharge fees under tw heads: Management fees as a fixed per-

cent f assets under manage-ment

Perf rmance fees as fixed per-cent f pr fits gen-erated n the in-vestments.

It is gener-a y termed as 2by 20, where 2represents 2% fasset under man-agement and 20

represents 20% f pr fits generated.Their perf rmance is gauged by theabs ute returns they generate with-

We often comeacross phrases likeheavy buying by hedge funds, pen-sion funds invest-ing in hedge funds,hedge funds shortselling etc. whilereading the newspa-pers. So what exactly is a hedge fund andwhy is it making somuch buzz in themarket among theinvestors?

IIM KozhikodeJatin Dewan & V Vinod

Hedge Funds: The Growth Story



F i n G y a a n

There have been cases like Black Monday (market crash of 1987) when hedge

funds were the major buyers and brought stability in the

market to certain extent

ut reference t any benchmar index. Usua y, theyhave restricti ns n ear y withdrawa f investmentsas the strategies emp yed are c mp ex and mightta e s me time t generate resu ts. liquidating theinvestment abrupt y wi decrease the returns f r

ther invest rs. Genera y, the c rre ati n f hedgefund is w with mar et benchmar as they f cus nabs ute returns. S , the f exib e strategies aim atgiving abs ute p sitive returns in rising as we asdec ining mar et scenari . Every fund has a specificsty e f investment due t which it has mar et risthat is systematic and a specific ris that is unsys-tematic in nature. T diversify the unsystematic ris ,the invest r needs t invest in vari us hedge fundsemp ying different strategies which w u d requireheavy investment and c ntinu us m nit ring. T

verc me this, invest r can ch se fund f hedgefunds which p in m ney fr m vari us invest rs

and invest in vari us types f hedge funds t diversi-fy unsystematic ris and m nit r their perf rmance.This re ieves the invest r fr m undue hass es f duedi igence and m nit ring, but eads t increase infees as it is n w charged at tw eve s. At ne eve ,a fee is charged by Fund f fund manager and thenby individua fund manager in which fund f fundmanager has invested.

Difference with respect to Mutual FundGenera y, there is c nfusi n between a hedge

fund and a mutua fund. B th are simi ar in the as-pect that they are investment vehic es which p inm ney fr m different invest rs and invest in pr fit-ab e investment pp rtunities. H wever, there is astructura difference in their perating envir nment.Mutua funds are m re regu ated than hedge fundsand restricti n is main y in terms

f use f sh rt sa es and deriva-tives. Mutua funds can enterint ng-term trades whereashedge funds can sh rt se anduse derivatives t . Mutua fundsare required t rep rt their h d-ing and perf rmance n a regu arbasis whi e this is v untary f rhedge funds because its successdepends n the abi ity f its manager t imp ementa pr fitab e strategy which thers are n t aware f.S , disp aying the h dings w u d ma e the secretstrategy pub ic, thereby eading t ss f pr fit p-

p rtunity. Due t this imited rep rting, the num-ber f invest rs is imited in hedge funds becausemany instituti ns are regu ated and are permittedt invest in mutua funds which happen t be trans-parent in terms f their h dings and perf rmance.Hence, mutua fund mar et is arger than hedgefunds. H wever, hedge funds are catching up prettyfast due t their attractive investment returns.

Risk Concerns for Hedge fundsoff ate, there have been c ncerns am ng regu-

at rs with respect t high m rta ity rate f hedgefunds. Ar und 10% hedge funds iquidate annua ydue t significant sses r invest rs ta ing ut theirm ney. These c ncerns can be c assified under thef wing categ ries:

1) Invest r pr tecti n: Regu at rs are c n-cerned ab ut the sses that invest rs face due t

high ris inv ved in Hedge funds. But there is nevidence which supp rts that there is any s ciac st due t this. Usua y, n y high net w rth ands phisticated invest rs invest in these hedge fundsdue t its c mp ex nature and they have st m neyand wi c ntinue sing in future. But there is nreas n t be ieve that supervisi n wi he p.

2) Ris t financia instituti ns: Regu at rs feethat the c apse f ne hedge fund might triggerthe c apse f ther financia instituti ns in ed tit which in turn may create instabi ity in the mar-

et. But there has been n evidence suggestingthe same. Se f regu ati n, investment in derivativesand maintaining a diversified p rtf i reduces thep tentia sses f hedge funds in such situati ns.M re ver, financia instituti ns interested in ris yinvestments w u d c ntinue t d s even with ut

hedge funds, s ma ing hedgefunds unavai ab e t them w u dn t serve the purp se.

3) Excess v ati ityris : Genera percepti n f regu-

at rs suggest that hedge fundsare the nes which verreact tany financia sh c and tend tm ve the prices away fr m their

fundamenta va ue ma ing the mar et m re v ati e.But n the c ntrary, there have been cases i e B acM nday (mar et crash f 1987) when hedge fundswere the maj r buyers and br ught stabi ity in the


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FnGyaan


Hedge funds are venturing in new domains of investment and earning positive risk

adjusted returns.

mar et t certain extent. S excess v ati ity c ncernd n t seem t h d gr und.

4) liquidity ris : Regu at rs pine that hedgefunds tend t trade in bu which causes iquiditypr b ems as they maintain arge p siti n in any par-ticu ar instrument and then se them in bu whichdrives d wn the prices. But there is n evidence tsuggest that hedge funds had s d distressed se-curities in bu and created a b tt enec situati na th ugh they have a high m tivati n t get rid fsecurities under distress.

Road to FutureAs p inted ab ve, apart fr m the c ncerns f

the regu at rs there has been a spurt gr wth in thehedge fund mar et with m re and m re investmentsp uring in. Such increase in investment wi certain ybring d wn the return per unit f m ney invested

as the m st pr fitab e pp rtunities have been ex-p red by fund managers and n w they have t in-vest the excess fund in newer pp rtunities withc mparative y wer returns. A th r ugh ana ysis fhedge fund industry and the current ec n mic sce-nari suggest that the f wing deve pments mayhappen in the hedge fund mar et in time t c me:

1) Instituti na izati n: Therehave been huge inf w f fundsin the hedge fund mar et after re-cent ec n mic crisis and the cur-

rent size f assets under hedgefund management h vers ar und$ 2.2 tri i n. With m re and m reinvest rs being drawn int hedgefunds, there seem t be need ftransparency in the hedge fundmar et. Instituti na invest rs i epensi n funds, end wments whhave invested in hedge fund eitherdirect y r thr ugh fund f fundsw u d want the hedge funds t

be pen in disc sures and rep rting. S , t attractm re and m re invest rs, hedge funds need t bem re transparent r need t be instituti na ized. In-stituti na invest rs w u d expect t benchmar theperf rmance f these funds s that they can havean idea f the perf rmance f different hedge fundsand ma e appr priate decisi n. This w u d meanan ther step t wards instituti na isati n.

2) Regu ati n: off ate, there have been gr w-ing c ncerns am ng regu at rs that with such hugesize f investment under the be t, there sh u d betightening f the regu ati ns f hedge funds. Ashedge funds enj y m re re axed n rms as c mparedt mutua funds in terms f trading activities statedab ve, mutua funds are at a disadvantage with re-spect t hedge funds. A th ugh re axati ns have beenmade f r mutua funds i e a wing sh rt sa es etc.,n w hedge fund is direct y c mpeting with mutuafunds f r investments. S , there w u d be increasedpressure fr m mutua fund industry t regu ate thehedge funds industry. Apart fr m that, n w hedgefunds are venturing in new d mains f investment.F r examp e, active enders and c mmercia ban sare n w facing direct c mpetiti n fr m mutua fundst end m ney t b rr wers. Hence, there w u d bea demand fr m ban ing industry t put imits and

chec s n hedge fund activities. Such regu ati nsare expected t c me n t because f increase f risin existing activities, but because hedge funds areventuring in new d mains f investment and earn-ing p sitive ris adjusted returns.

ConclusionThere is a surge in mar et interest f r the

hedge funds as they ffer an p-p rtunity t invest in high returnsstrategies emp ying minimum risand thereby generating abs utereturns. But having said this, thehigh perf rmance f hedge fundis acc mpanied by heavy ssessuffered by them in the past. Withgr wing number f invest rs in thehedge funds, regu at rs are fee ingthe need t curb the freed m andregu ate the activities f hedgefunds as security f invest rs is an

verriding criteri n f r regu at rs.H wever, imp ementati n f newer

regu ati ns wi n t adverse y impact the p pu arityf hedge funds due t the new safer and better in-

vestment avenues exp red by them.



F i nL o

un

g e

D own

1. over ha f f the financiafraud cases identified by US SECinv ved impr per____

2. US Bi enacted in resp nset maj r acc unting scanda s isc mm n y n wn as___

3. I am the chairman f AMFI.The c mpany I am CMD fis____

4. Rati used t measure theam unt f earning retained af-ter dividends

8. The C mpany is wide y n wnin the Venture Capita Industryf r its anti-p rtf i (on y Ini-tia s)

A cross

4. W r ds argest ever IPo

5. I was invented by JP M rgan in 1997 and pe p e b ame me f r subprime crisis

6. W r ds o dest F&o Exchange (on y Initia s)

7. The c mpany wh se open offer g t de ayed recent y is___

9. My investment principa is simp y Invest in what y u n w (Pers n)

(N te: All the clues given refer t Financial terms and n t pers nalitiesunless explicitly menti ned)

All entries should be mailed at [email protected] by 15th November,2010 23:59 hrs One lucky winner will receive cash prize of Rs. 500/-

C r o s s w o r d


26/27

A N N o U N C E m E N t sARTICLE OF THE MONTH

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of Great Lakes Institute of Management, ChennaiShe receives a cash prize f Rs.1000/-

Crossword WinnerThe Cr ssw rd Winner f r the m nth September 2010 is

Amit Mittalof IIM Ahmedabad

He receives a cash prize f Rs.500/-CoNGRATUlATIoNS!!

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