1

The Senior

Analyst

February, 2013 Issue

2

Contents

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The Team - Finsoc, FMS Delhi

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Finance Lab at Faculty of Management Studies

Late in 2012, FMS Delhi became only the third campus in India to be equipped with

a Bloomberg terminal. With this terminal,

students will now have access to live data

across great breadth and depth. The

terminal will provide information on

government securities, equity markets,

debt markets, rates, capital structures,

industry comparables, and a host of other

categories.

This terminal will enable students to

greatly improve the standard and level of

detail in their final year dissertations, as

well is in their term assignments, case

studies, and collaborative research that

many students opt to do with faculty

members.

In addition, the terminal will play an

important role in making students

industry ready. Most finance professional

use Bloomberg terminals regularly, and

being familiar with the scope and

operation of a finance industry staple will

be an added boost to a prospective recruit

candidature. Companies can rest assured

that fresh recruits fully appreciate the

potential and importance of the terminal.

Finally, the terminal will also help students

in endeavors outside of pure academics

and professional skill building.

Competitions are a staple of b-school life,

and access to the terminal will help

students perform analysis and dissect

problem statements with greater insight,

hard data, and contextual understanding.

Therefore, the terminal will significantly

enhance a students learning during their

MBA program, and also better prepare

them to join the corporate world. This

initiative demonstrates FMS commitment

to developing financial education, and

validates the institutes reputation as a hub

for learning.

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The IPO safety net: Investor Protection or Wrongful Intervention?

SEBI chairman Mr. UK Sinha recently

created headlines in the financial press when

he said that the capital market regulator is

going to implement a safety net mechanism

to protect retail investors from incurring

significant losses in case of failed IPOs. This

move by SEBI has been triggered by

widespread dissatisfaction over IPO pricing

among small investors in recent months.

Theres an impression that small investors are

being willfully fleeced by managements and

merchant banks who have superior

information. Echoing this concern, the

Chairman said at an Assocham event, The

pricing of IPO in this country has been an

issue. Again and again, we are finding that

there is lack of transparency in pricing. In

this situation, SEBI feels it must take some

action in order to restore investor trust in the

financial markets. Earlier it had issued a

discussion paper titled Mandatory Safety

Net Mechanism and invited comments from

the public.

The response from the bankers and the

financial industry has been predictable. They

have termed the proposals a draconian

intervention in a free market. Some fear that

such regulations would not deter crooked

promoters and their shady financiers, but

would keep honest companies out of an

already slow IPO market. Others feel that the

proposed regulations are a throwback to the

pre-liberalization days when the Controller of

Capital Issues (CCI) stipulated the prices of

all capital issues using a predetermined

pricing formula. It has been argued that

financial markets operate on the principle of

risk and return and equity capital, by its very

nature, implies ownership and hence risks.

Before going into the details of the proposed

regulations and their pros and cons, we feel

its important to take a look at some of the

statistics of the IPO market scenario in India.

The IPO situation

The table below shows that there has been

significant slowdown in fundraising via the

IPO route in the past couple of years. This

slowdown has been attributed to a

combination of factors including global

economic slowdown, subdued secondary

markets at home, policy logjam at the Centre

as well as poor investor response. In 2012, at

least a dozen companies shelved their IPO

plans even after obtaining all the required

clearances from SEBI.

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Table 1: Marked Slowdown in IPOs

Financial Year Number of Issues

Succeeded

No of issues

failed

Total Amount Raised

(Rs crore)

2012 25 2 6895.94

2011 37 3 6043.57

2010 64 2 36,362.18

2009 21 1 19,306.58

2008 36 3 18,339.92

According to the discussion paper floated by

SEBI, an analysis of the price performance of

scrips listed between 2008 and 2011 shows

that out of a total of 117 scrips, 72 (around

62% of the issues) were trading below the

issue price 6 months after the listing. Out of

these 72 scrips which witnessed a fall in

price, in 55 scrips the fall was more than 20%

of the issue price. Our analysis shows that

this trend continued in the year 2012 as well.

Though some of the scrips increased in

absolute value, they underperformed the

market. In this context, it must be kept in

mind that the BSE Sensex posted gains of

25.7% in 2012 and was one of the best

performing stock indices in the world. The

following table shows the largest IPOs of

2012 and the performance of the scrip 3

months after listing. The table also shows the

performance of the BSE Sensex in the

corresponding period.

Table 2: Dismal performance of IPOs in 2012

Issuer

Company

Issue

Clos

e

Issue

Size (Rs

cr)

Issue

Price

(Rs)

Price after 3

months/Year

end(Rs)

%

change

in price

% change

in Sensex

Bharti Infratel

Limited IPO

Dec 14 4,155.80 220.00 192.85 (31st Dec) -12.34 0.56

PC Jeweller

Ltd

Dec 12 609.30 135.00 149.7 (31st Dec) 10.88 0.36

CARE Ltd Dec 11 539.98 750.00 914.55 (31st Dec) 21.94 0.20

MCX India Feb 24 663.31 1,032.00 888.05 (24th May) -13.94 -9.49

Tribhovandas

Bhimji Zaveri

Apr 26 200.00 120.00 103.55 (26th July) -13.70 -2.86

The table shows that 3 out of the 5 biggest

issues in 2012 traded below their issue price

three months after listing /at end of year.

Among these, the biggest issue by far, Bharti

Infratel was a spectacular failure. The stock

was trading 12.34% below its issue price a

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fortnight after its listing, even as the market

index posted nominal gains.

The SEBI Proposal

In the discussion paper, SEBI proposes a broad

framework for the safety net mechanism for

investors. Some of the salient features of the

framework include:

a) The Safety Net shall be mandatory for all

IPOs

b) The Safety Net provision shall trigger only

in cases where the price of the shares

depreciate by more than 20% from the issue

price. The price will be calculated as the

volume weighed market price the shares for

a period of 3 months from the date of listing.

The 20% depreciation in the market will be

considered over and above the general fall

(if any) of the market index. The market

index used for this purpose will be the BSE-

500 or S&P CNX 500.

For example if the share price (calculated by

the prescribed method) drops by 25% in 3

months while the market index drops by 3%,

the safety net will be triggered. But if the

market index drops by 7%, the net wont be

triggered. On the other hand, if the market

gains 10% and the stock depreciates by 11%,

the safety net wont be triggered, even

though the relative fall is more than 20%.

This is because the absolute drop in the

stock price is 11% which is lesser than the

trigger level of 20%.

The paper also mentions the eligibility

criteria for investors under this mechanism.

The two most important points among the

criteria are:

a) The facility will be available for all the

allotted securities to original retail

allottees who had made an application

for up to Rs 50,000

b) The total liability of the Safety Net

Provider will be capped at 5% of the

issue size.

c) In case the total number of shares offered

under this scheme works out to be more

than 5% of issue size, the purchase of

securities from retail investors shall be

done on proportionate basis such that

total obligation does not exceed 5% of

the issue size.

Evaluation of the Proposal Some of the proposals forwarded by SEBI

have attracted criticism from various quarters.

In this section, we evaluate the proposals and

discuss possible pitfalls.

a) Calculation of Safety Net trigger: The

discussion paper calculates the safety net

trigger relative to the overall market

index. This method makes the implicit

assumption that the given security is as

risky as the overall market.

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The fundamental premise of the proposals is

that the sole risk facing an IPO investor is

mispricing of a security and overall market

movement (systemic risk) and hence the

regulator is entitled to take action to reduce

the mispricing risk which primarily arises out

of an information asymmetry between the

issuer and the small investor. This approach

ignores all other risks, including industry

specific risks and firm specific risks. In

capital markets, stock prices may crash due to

resignation or death of key management

personnel, accidents, policy change leading to

re-rating of a particular sector etc. The

proposed framework fails to take these risks

into consideration.

b) Eligibility Criteria for retail investors:

The paper proposes that the safety net

facility should be made available to retail

investors who made an application for up

to Rs 50,000. But in Oct 2010, SEBI

increased the investment limit for retail

investors from Rs1 lakh to Rs2 lakh,

taking inflation and other factors into

consideration. Also data shows that going

by the subscription figures for IPOs since

November 2010, barely 15-30% of retail

investors bid for less than Rs50000 of

shares. For example, in the MCX India

IPO, which was one of the biggest issues

of 2012, the number of applications that

came from investors bidding for less than

Rs50000 of shares stood at just 28.9%.i

This artificial cutoff would incentivize

retail investors to invest in multiple issues

than into a single public issue, regardless

of the quality of the other issues.

c) Safety net period: The SEBI proposal that

the safety net should trigger three months

post the listing date is also fraught with

problems and seems inadequate for

protection of retail investors. If the

promoter does have malafide intent of

mispricing a security, he can easily rig the

prices and artificially support the security

at issue price levels for three months.

d) Promoter liability: The current proposal

primarily holds the promoter responsible

for providing the safety net irrespective of

whether the promoter has actually

benefitted from the issue (by an offer for

sale of his shares or by taking cash out of

the company). This creates an extra risk

for the promoters and leaves the

possibility of an honest mistake out of the

consideration set. This might have the

undesirable effect of making the IPO

route a risky way of raising money.

Conclusion There is little doubt about the fact that the

pricing of IPOs is a problem in India at

present. And the market regulator is

rightly concerned about the weakest and

probably the least informed player in the

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field; the retail investor. But it appears

that the safety net mechanism in its

current form is probably not the right way

forward. The market regulator must take a

long and hard look at the current

proposals and overhaul the mechanism.

Alternatively, it should focus more on

market integrity by ensuring proper

checks and balances on issuers and

intermediaries. It should also facilitate

seamless information flow to market

participants by upholding strict disclosure

standards and at the same time strengthen

its investor education programs.

Article by -

SanchalakBasu

XLRI, Jamshedpur

10

The Return of the Reform Impact of 1991?

On 15th

August, 1947 Jawaharlal Nehru,

Indias first Prime Minister spoke out to the

people of the nation, At the stroke of the

midnight hour, when the world sleeps, India

will awake to life and freedom. India, then

began its long and laborious path to

rebuilding itself. And from 1947-91 it had

restricted trade and foreign investment into

the country, till the point the strain on the

economy could not bare the isolation from

rest of the world any longer. Even with a

great opposition, India underwent an

extensive reform in 1991 which enabled it to

move towards its potential as major player in

the global market and now 20 years later the

country is taking another leap forward

towards liberalization, unfortunately it has not

been able to amount to the same level.

In 1991, The Indian economy had reached the

tipping point where in its foreign reserves

could fund the countries imports for only a

mere 7 more weeks. A change was not only

advised, but was required for the survival of

this young nation. Manmohan Singh, at the

time Indias Finance Minister pushed for

legislation to open the Indian economy to the

world. At the time there was even external

pressure from both the World Bank and the

IMF to do so, urging the country to remove

its trade barriers. The combination of these

circumstances, forced the Indian Government

to call for a change, the industrial areas

restricted to private enterprises was reduced

from 18 to 3, i.e. Nuclear, Armed forces and

railways. Additionally, the Governments

Industrial controls and licensing was

dismantled to ensure competitiveness and an

increase in efficiency in addition to the

movement of the Indian currency from fixed

to a floating exchange system.

At the time the general public were opposed

to these policies out of fear that free trade

would result in a loss of their jobs but it was

assured that it would be beneficial to the

country and its people in the long run. India

then witnessed one of the greatest

transformations in economic reform and

development, with the 2nd

highest GDP

growth rate in the world and with a FDI that

grew at a CAGR of 36.3%* from 1991-2010.

But in the last few years, the impact of those

reforms has began to diminish, India now

faces a global economy which requires

similar reforms to keep it a attractive market

for investors.

In September of 2012, Manmohan Singh,

now the Prime Minister of India continued to

push for economic reforms, to keep India a

haven for investors from across the world

with reforms such as to reduce the diesel

subsidies by 12% and leave investment by

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foreign supermarkets in the hands of the state

government as opposed to the central.

Additionally, the restriction of single foreign

investors such as IKEA would be lifted to

give freedom to the companies to invest in

India without the requirement of a domestic

partnership. Similar steps were taken for the

power sector, domestic broadcasting and

aviation sector.

We can undoubtedly claim these steps are

moving India towards once again achieving

its pace of development, However the level of

these reform cannot be stated as the same

level as those that took place in 1991. Thus,

would not be able to leave as great of an

impact. The reforms that took place in 1991

involved external pressure from the World

Bank allowing for an industry wide

liberalization at a time when India was being

eyed by corporations for its excess supply of

cheap labor. These reforms resulted in years

of rapid development and increase in

employment across all sectors. Unfortunately,

the reforms being suggested now are mostly

restricted to specific sectors and requiring

heavy investment and risk on the part of the

company without much guarantee to whether

this expansion would be successful or not.

Thus restricting investment to only the major

conglomerates.

This situation has led to foreign investors

setting their eyes on other markets. Where

India had a CAGR in FDI of 37.7% from

1992-2000*, it has now dramatically reduced

down to 7.2% from 2006-10. Other countries

have proven to appear more attractive with

Vietnam having CAGR in FDI from 2006-10

of 35.1%, Indonesia with 29.3% and Brazil

with 28.8%. Thus, corporations have begun

outsourcing jobs requiring unskilled labor to

other parts of the world. As Indias per capita

has increased since 1991, foreign

conglomerates have started searching for

investment in other countries where they can

continue to pay low wages for decent quality

products.

As Indias per capita has increased since

1991, foreign conglomerates have started

searching for investment in other countries

where they can continue to pay low wages for

decent quality products.

Through the reforms in 1991, the inflation

rate in India was kept in check through

competitive prices and more efficient

operations. Unfortunately now this inflation

has returned to a projected 7%. We now

require further liberalization on the same

scale to keep the prices in check.

Unfortunately, the publics perception that

foreign investment in retail would result in a

loss of their jobs along with red tape and

bureaucracy is currently hampering any truly

developmental reforms from taking place.

The impact within each of the relevant sectors

will definitely witness a benefit in long run.

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With the ease of restrictions in the retail

sector, retail giants such as Wal-Mart can

now enter the market with a number of states

signed on to facilitate their endeavor. Indias

inflation in 2010 had reached a staggering

8.4%, the introduction of foreign retailers

would help to manage the prices. A more

efficient supply chain, which would be

brought by these corporations would allow

for a decrease in price by about 20% and

increase in income realizations for farmers by

15% according to CRISIL. The FDI policy

requires $100 million investment over the 3

years of which 50% is suppose to be in back

end operations. This policy would thus allow

for a combination of creation of jobs while

keeping prices in check.

Unfortunately, this may not be entirely

positive in the short run. The overall retail

market in India is estimated to $450 million

of which 93% follow traditional methods of

retail. The introduction of modern retail with

lower prices while offering higher income

would shift attention away from these

traditional stores and would likely lead to

unemployment. However as with any

liberalization process, a loss of jobs in

inevitable to allow for a country to specialize

and concentrate its efforts on its competitive

advantage.

With the 12% decrease in diesel subsidies,

which has become the primary source of fuel

in the rural areas by farmers for tractors, there

has naturally been a certain level of

dissatisfaction from the people, however it

shows a movement towards a more

competitive environment. It would allow for

the government to utilize this surplus of funds

for programs in the areas of health and

education, which could benefit the country in

long run.

India certainly has the ability and the

resources to once again achieve the pace of

economic development it once had,

unfortunately, poor implementation of

policies and slow bureaucratic process to

achieve these reforms has hindered its

development.

Article by -

Samir Evan Jain

FMS, Delhi

13

Quantitative Easing A Blessing or a Curse?

An Insight

During the times of turbulent economy,

various countries of world try to apply

their conventional tools, monetary and

non-monetary, to regain a state of sound

economy. Majority of world economies

tried to reduce their short term interest

rates of market lending from commercial

banks to bolster the borrowing and

spending from households and businesses.

But then a point arrives when economy

faces a phenomenon which is widely

known as Liquidity trap (short term

nominal interest rate is zero). There exists

no possibility for the Central Bank of a

country to further reduce short term

nominal interest rates from that point

onward. Such constrained scenario pushes

the Central Bank of the country to employ

various unconventional monetary policies

to alleviate the deflationary economy.

One such unconventional monetary tool

used by the Central Banks (especially

when interest rates are close to zero) to

stimulate the economy is known as

Quantitative Easing (or more popularly

QE) in economists fraternity. The Central

Bank implements QE by first creating new

money and then using this new money to

purchase assets from a range available -

Government bonds, equities, corporate

bonds or other assets from banks.

With this process the central bank ensures

that it injects a pre-determined quantity of

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money in the economy. This results in rise in

assets price and fall in the yield, or interest

rates on those assets making the borrowing

and spending more attractive and hence

resulting in improved economy. It also aims

at increasing the excessive reserves of the

banks for higher lending and consequent

spending by the households and businesses.

Low and stable inflation is crucial to a

thriving and prosperous economy. QE can

also be used by the Central Bank to ensure

that inflation does not fall below or rise above

optimum target (Generally it is considered to

be 2%).

Pros and Cons of QE

QE is often referred to as a last resort of the

Central Bank to restore the disrupted

economy. But before answering the question

in subject, whether QE is a blessing or a

curse, an insightful evaluation of topic at

hand is of prime significance and to best

achieve the purpose, the author have enlisted

various merits and demerits of QE.

Purchasing of Assets and its

distributional effects

Purchasing of Assets, as quoted above, have

been mostly advantageous to banks and other

financial institutions. It has helped banks to

increase their excess reserves and the size of

their balance sheets. Also buying of too much

of above quoted assets increases their price

which unblocks credit market as investors

now start investing in appreciating assets,

who were otherwise shedding away. But the

prime concern that underlines this activity is

that in the past there have been instances

when banks did not encourage the lending to

households and businesses and hence retained

the surplus with them. Also, this current

process of stimulating economy focuses well

on financial market of economy but fails to

transform the other craving for cash sectors

like infrastructure, energy etc. during

economy downturn. Hence relying on banks

may not serve the purpose of stimulating

economy if banks fail to act as an active

agent.

Inflation Is Central Banks approach

myopic?

At prima facie, QE offers a short to medium

control over inflation rates, but a holistic

perspective would starkly reveal the truth

behind the curtain. First, the Central Bank

relies on banks and other financial institutions

to lend money to businesses and households

and stir the economy and rise in inflation.

This calls for responsible approach from

banks, which is not guaranteed though. Also,

unless the Central Bank devise a diversified

assets purchase drives, long term assets

bought by the Central Bank from banks may

not be equally competitive and profitable at

the point of maturity and hence dispensing

them then becomes a challenge for the

Central bank which would leave the latter to

incur loss. This loss consequently would be

transfer to Tax-payers. Hence in the long run,

economy could suffer from hyper (or

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massive) inflation if the amount of easing is

over estimated.

Threats to conventional investment

policies

QE tends to push down long-term bond

yields, making other short term investment

plans more attractive for immediate spending

and investment. But in this process, QE

reduces the return on the long term

investment made by pension schemes. As a

result, QE makes it more expensive for

employers to provide pensions and

consequently it weakens the funding of

schemes as their deficit increases.

Does QE lead to global economy

fracture?

An unpredictable outcome of Feds QE3

declaration was a worldwide opposition. US

banks utilised the Fed reserves and treasury

bailouts received from QE2 to increase their

own profits and to continue paying high

salaries and bonuses. What their lending

inflated, were the asset prices and not the

commodity prices, neither output nor

employment rates. Cheap electronic US

keyboard credit, then started flying abroad

as banks tried to earn their way out of debt by

financing arbitrage gambles, glutting

currency markets while depreciating US

dollars. So the Feds move of saving banks

from negative equity resulted in flooding the

global economy with a glut of US Dollar

credit, destabilizing global financial system.

Unwinding Policy Exit strategy from QE

Economists generally quote QE as a process

and not an event. There always exists an

underlying pressure on the Central Bank to

exit from QE by selling back the riskier assets

and narrowing down its balance sheet. But

this process is not that simple as it appears.

There are all the chances that the Central

Bank may end up pilling bonds worth trillions

of rupees and find it difficult to unload them

off because selling such astronomical figures

of bonds back to financial institutions will

only hamper its very own objective of

restoring sound economy.

Post to evaluation of various nuances

involved in implementation of QE and

considering pros and cons, the author believes

QE could prove to be a curse for an economy

if not implemented aggressively and tactfully.

The major QE failures which world witnessed

were the series of QE drives undertaken by

Bank of Japan (BoJ) from 1996 to 2006. The

prime reason of failure then was that the local

banks held the reserve surplus generated by

BoJ with themselves rather than offering it to

households and businesses for lending and

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consequently for spending and increasing the

employment rate. Also USAs Federal

Reserves and UKs Bank of England are not

much confident about the success of their QE

program which they undertook post to late

2007 Global crisis.

A significant threat that underscores QE is a

stock bubble. When Fed reserve recently

announced its 3rd

round of QE, almost all

major stocks started exhibiting the upward

trend.

One of the prime financial websites explains

it as, What is happening now is that stocks

are appreciating, not because of enhanced

productivity or expanding markets, but simply

because Central Banks are printing money.

There could be a critical moment when the

markets collectively recognize that stocks (all

stocks) are overpriced and the bubble will

burst. This will simply lead our economy to

a point from where recovery would still

become difficult. Also at times, few Central

Banks tries to monetize the Governments

deficits and to cap governments borrowing

rates which only lead to inflationary pressures

and leaves detrimental scares on countries

economy.

A Better Quantitative Easing

Increasing application of QE, in one or the

other form, by various major economies

makes it a significant unconventional

monetary tool, especially when an economy

faces Liquidity trap. But rather than being

myopic in approach, one need to consider

long term outcomes of QE, both positive and

negative, and only can then it be confirmed as

a helpful resort for an economy.

After learning lessons from historical

instances and considering advance economy

dynamics, following are the prime

recommendations,

1. There is little evidence that QE, in its current

form, is helping small and medium size

businesses to expand and create more jobs.

On the other hand it is certainly helping to

enrich (or diplomatically capitalize) the major

financial institutions. Banks have also been

observed arguing that there are no borrowers

(by which they mean borrowers at the going

interest rates). To overcome this blockage, the

Central bank should set up a National

Investment Bank which they would capitalize

and mandate to spend some fixed crores of

rupees a year on investment projects at

interest rate low enough to fulfill the

investment mandate. Candidate for such

investment would be infrastructure projects

such as high speed rail, innovative water

supply systems for rural India etc. which

promises direct growth in employment rates.

2. It is of utmost importance for the Central

Bank to undertake diversified investment

portfolio rather than focusing on Government

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bonds and securities because if it loses money

on its particular sector focused asset

purchases, then that loss would have to be

made good by taxpayers either with higher

future taxation or by the Central Bank by

creating more money and risking higher

future inflation.

3. Also, before undertaking QE, an important

question to be asked by the Central Bank is,

How much is enough?, because going too

far with creating and spending money may

devalue the currency. Inflation or even

hyperinflation would then be the result.

On the basis of various facts and figures,

lessons learnt from both successful and

unsuccessful QE programs and dynamics of

advance economics, its gives me an

impression that if QE lacks rigor and

aggression in its implementation, it may

become a potential curse for any economy.

To make QE a lasting blessing, it is very

important incorporate a customized QE i.e.

including all sectors while distributing new

money into economy.

Article by -

Tushar Shah

School of Petroleum Management

18

Eurozone Crisis: Gold to the Rescue

It doesnt take a degree in economics for

the average Indian woman to decide to

invest in Gold. The reason behind her

choice of Gold over other forms of

investments is simple: beauty, value

appreciation and security. While we may

ignore the vanity quotient associated with

Gold, it only makes sense to consider the

value appreciation and security it offers

vis--vis any other form of investment.

What an average Indian woman

understands about Gold is about the only

basis on which one may base ones

assumption that Gold has the potential to

substantially alleviate the Eurozone Crisis.

While all that glitters might not be Gold,

one certainly cannot deny the fact that the

glitter of Gold carries with it a minimal

credit risk. Unlike national currencies,

value of Gold is not dependent on a

nations economic policies and carries

negligible inflation and exchange risks. So,

what does an average Indian woman do

when her family faces a crisis situation and

needs money? She either sells off her Gold

to generate liquid cash or borrows money

against the collateral of her Gold. Well, the

situation of the Eurozone is somewhat

similar to that of this average Indian

woman! The Euro area is in a crisis and is

also sitting on a pile of Gold; 10,792

tonnes of Gold. Common sense dictates

that the outright sale of the Gold reserves

of the Eurozone is not the solution to the

problem. This is primarily due to the fact

that existing European Union laws prohibit

such sale of Gold as do the provisions of

the Central Bank Gold Agreement.

Moreover, the outstanding debt levels of

the Eurozone countries far surpass the

value of their Gold reserves. The Gold

holdings of the crisis-hit Eurozone

countries (Portugal, Spain, Greece, Ireland

and Italy) represent only 3.3% of the

combined outstanding debt of their central

governments. A one-time sale of all of

their Gold reserves would barely cover one

years worth of their debt service costs.

What then is the alternative? The

alternative comes in the form of using gold

reserves to collateralize government debt.

The idea is to bring down borrowing costs

by using Gold to guarantee the partial

repayment of bonds to investors in case of

a default. Gold would serve to provide

sovereign bonds with further safety and

thus comfort investors who do not give

credence to Eurozone government balance

sheets any more. Historically, Gold has

been successfully used as collateral. In

1970, Italy and Portugal employed their

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Gold reserves as collateral to loans from

the Bundesbank, the Bank for International

Settlements and the Swiss National Bank.

In 1991, India applied its Gold as collateral

for a loan with the Bank of Japan. The

proposal to use Gold as collateral for

government carries with it advantages for

the Eurozone. They include:

The Eurozone is not based on a Gold

standard and hence Gold is not a monetary

asset. The proposal applies not to the Gold

held by the European Central Bank (ECB)

for the management of the Euro but to the

Gold reserves held by the National

Commercial Banks (NCB).

Monetary purchases by the ECB of

government debt of an individual Member

State constitutes a fiscal transfer, because

assets held in common over the Eurozone

as a whole are used for the benefit of an

individual Member State. But NCB owned

Gold is an asset owned by an individual

Member State. So the use of the Gold

would not involve a fiscal transfer between

states but, rather, the use of the assets of a

state for the interests of that state.

Unlike a monetary asset, Gold is available

in restricted amounts. The ECB could

theoretically produce unlimited quantities

of new euros to purchase additional

sovereign bonds. But the amount of Gold

available as collateral sovereign debt is the

amount held by the NCBs. This is an

important disciplining factor.

While the problems of the average Indian

woman are not as complex or humongous

as those of the Eurozone nations, fact

remains that the time has come for the

Eurozone to realise the true potential of the

Gold reserves held by them (6.5% of all

Gold ever mined!). The legal issues that

need to be considered for Gold backed

bonds to proceed are surmountable. For

the Eurozone countries that have built up

substantial reserves of Gold over the years

now could be the time to harness the

benefits.

Article by -

Namrata Shah

Nihal Adsul

JBIMS, Mumbai

20

Declining corporate investment and implications

Even though IIP has shown some recovery

from its sharp fall a few months back and a

marginal fall in inflation, corporate

investments are still not indicating any bright

scenario. Indeed, as suggested by SBI and

other banks, the corporate pipeline is pretty

tight and is not expected to be flourishing

soon in the immediate future. As rightly

pointed out, the capital expenditure in large

number of industries is lacking. It is not to

say that the potential or opportunities do not

exist, what lacks is the willingness to take

projects and indulge in large expenditures and

borrowings.

This is one of the reasons that the banks have

been asking for lower rates by RBI, and

supporting reforms by the Government. There

is an increasing need to provide greater

incentives for greater capital expenditure in

industries. This is particularly important for

pushing growth and improving performance

of Indian economy in medium and long run.

Global Crisis and Declining Capital

Investments

India saw a significant growth prior to Global

Crisis with large amount of investments been

undertaken by both private and public sector.

Before the global financial crisis, strong

corporate investment was very evident and

well above levels in most emerging

economies (as % of GDP). But the picture

has been bleak since 2009, with a sharp

decrease as % of GDP from 14% prior to

2009 to 10% thereafter. Indeed, the growth of

investment (gross fixed capital formation) has

slowed to about 0.6% (quarter on quarter) on

average in the first three quarters in 2011,

compared with an average of nearly 3%

during 200007, and the figures only

weakened further in the coming future.

Factors

Number of factors has been cited to influence

the weakening of corporate investments.

- Increased macroeconomic uncertainty with

high inflation

- Weaker global economic outlook with

European Union also facing recession

- Monetary tightening since early 2010 by RBI

and rising interest rates

- Structural factors such as weakening

governance and slower project approvals

21

Implications

This weak corporate investment performance

has demand and supply implications.

- It will lead to lower growth over the medium

term

- It would also enhance supply constraints in

already supply constrained Indian economy

Capital Expenditure and Banks

Corporate Lending

Macro-picture

The GDP growth of India has been lower in

2011-12 at 6.5 % as compared to 8.4% in

2010-11. The growth rate had been

continuously declining over the 4 quarter

2011-12 financial year, and was reflected in

declining figures of manufacturing sector.

Due to such developments and reasons

discussed earlier, the investment intentions in

2011-12 showed a setback. With still high

inflation and interest rates, the investment

outlook for 2012-13 remains subdued. But at

the same time with reforms it is expected to

see revival, though at a moderate pace.

Bank's Perspectives

SBI has recently sanctioned large loans to

Tata Steel and Hindalco. But even so it not

yet satisfied with the performance of its

corporate line which has been quite dried up

for last few months. It still does not expect a

significant improvement in loan demand, at

least in the near term.

Projected Capital Expenditure

From the above diagram the effect of crisis on

capital expenditure can be clearly visualized.

In 2011-12, banks and financial institutions

sanctioned only 668 projects with proposed

investments of Rs 212,000 crore. This was

significantly lower than the previous financial

year and shows the setback. According to

RBI, the planned capital expenditure for the

current financial year was estimated around

Rs 207,300 crore, even lower than the 2011-

12 level.

640

660

680

700

720

2010-11 2011-12

Projects Sanctioned

0

200000

400000

600000

2010-11 2011-12

Proposed Investments (Rs. Crore)

22

Industries Outlook

From the above graph, it can be seen that

certain sectors are clearly stronger for

investments as compared to others. As can be

observed, most capital intensive sectors are

showing a decline in their investments and

can be a cause of concern in the medium

term. Manufacturing in India needs to pick up

pace and can provide an impetus to

investments in growth generating capital

expenditure in India.

There are some PSUs such as BHEL, NTPC

and ONGC with hoards of cash on their

balance sheets. The plans earlier made by

the government are non-existent, and

dependency on external factors has been

increased for any improvement or growth. It

is important for these capital extensive and

surplus PSUs to start pushing for capital

expenditure, which can further kick-start a

growth cycle in Indian economy. Without

these sectors contribution, growth in medium

and long term would be difficult to achieve

and sustain.

India still has a strong position and great

potential to grow. Though its savings and

consumption rates have shown a marginal

slowdown recently, it is still comparatively

high. Thus, the opportunity for investment

still exists. With large population, rising

consumption, and favourable demographics, a

lot of opportunities await.

Whether PSUs or private sector; well funded

companies confident of growth prospects

must build capacities before competition

catches up.

Conclusion

While banks such as SBI has shown

pessimistic opinion, there are also some

banks are optimistic about the 2nd

half of the

2012-13 though agree that recovery would be

slow.

23

Corporate investments are not only an

important indicator the growth and stability of

an economy, but also a critical factor in

ensuring growth for the economy in the

medium and long run. With not enough

capital expenditure, the resource mobilization

in the economy would be lower which would

further spread into the real economy and

create undesirable stirs.

This is also important for the banking sector

to grow and expand. Without funds being

used or invested in the capital investments, it

would face difficulties of diversification and

returns on investments.

Various banks and RBI as well do recognize

the problem of low corporate investments. As

corporate investments are strongly influenced

by the unstable macroeconomics of the

moment, it has been rightfully argued again

and again that capital intensive sectors such

as fertilizers and petroleum should lead the

way. These sectors have been dominated by

the public units and therefore it is required for

the Government to realize the need for kick-

starting capital expenditure and draw as well

as implement the required plans of action

soon.

There is renewed business confidence as

reflected in the behaviour of the stock

market. The reforms are small stepping

stones that will provide a springboard for

capital expenditure. Obviously, there is a

lag effect and full-scale revival will take

some more time.

Rana Kapoor, MD, YES Bank

Article by -

Sonika Toora

FMS, Delhi

24

Small and Medium Enterprise Exchanges

The decision of SEBI to grant permissions to

NSE and BSE for setting up SME Exchange

has opened up a new chapter in the history

of SMEs by aiding them to raise funds in a

more effective, transparent and faster way.

India has registered a high economic growth

in the past decade and nurturing the SME has

become imperative to aid the growth engine

in our country. The decision goes hand in

hand with the governmental agenda of greater

financial inclusion for the SME. For a

country like India whose 40% of the direct

exports are contributed by SMEs, the NSE

Emerge and BSE SME exchange are

platforms to match the capital hungry SMEs

with the retail investors. With a 45%

contribution to GDP of India, SMEs also play

an important role in contributing towards

employment. At present over 24 countries

provide independent boards and exchanges

for SME examples being the Growth

Enterprises Market (GEM), Hong Kong,

MOTHERS, Japan, the Alternative

Investment Market (AIM) in the United

Kingdom, NASDAQ in the USA.

The exchanges will provide an

opportunity for the enterprise to ideally

restructure their debt equity capital ratio.

Generally the SME have been heavily relying

on funding from financial institutions thereby

increasing more debt liability and problem of

over leveraging from banks. The loans at

rates as high as 16% affect their investment

decisions. A crunch of monetary resources

might cause some of them to opt for cheaper

options of technology, skill and

manufacturing that hamper the exposure to

new trends and future growth.

SMEs participating in the exchanges

will be required to submit all the details

pertaining to investments and their use. This

will make the process more transparent,

arouse a sense of trust in the minds of

investors and give impetus to SMEs to access

the retail funds. Scripps of SME belonging to

the main boards of the exchanges faced the

problem of illiquidity due to poor trade

volumes. The setup of a trading platform and

the separation from the big stocks in the

industry can provide a solution to the

problem. Although there will be some time

before the stocks pick up some liquidity.

Market making is a way to add liquidity to

the stock.

The BSE has also come up with the

BSE SME index, an addition to its existing 28

indices. It will track the value of companies

for two years post the completion of its IPO

(Initial Public Offering). Amidst a surge of

IPOs in the market, unstable economic

conditions, threat of shares being traded

below their listing price and even the

25

government making strong attempts to

achieve its target disinvestment in PSUs , the

future still seems bright for SME IPOs as

stats show that out of 11 companies listed on

BSE, 10 have been trading above their listing

price in 2011.

SME growth has various dimensions.

India has evolved from being an agrarian to a

service industry based economy. It seems to

have majorly missed the step of being a

manufacturing economy before marching to

service industry growth. The success rate of

small enterprises will also help ensure good

manufacturing segment advancement. The

picture seems good but the high cost of

capital, limited awareness; regulatory

requirements in disclosures come forward as

hindrances to raising of equity capital.

However BSE seems to have been trying to

overcome the awareness problem by

conducting several seminars (both general

and sectored) for educating the SMEs on the

benefits of listing and the preparations

required for the same The failed attempts of

government in the past with the setup of the

Over the Counter Exchange and the Indonext

in 2007 raises questions about the success of

the BSE and NSEs latest attempts with the

SME Exchange.

To increase participation from

companies to get listed on the new bourse,

SEBI has relaxed norms in terms of reducing

reporting frequencies (quarterly to bi

annually), exemption from tracking previous

profits, etc. Can this hamper the success of

SME exchange? The SEBI will not give any

recommendations to the merchant copy filed

by the banker. The considerably small sized

company listing might be a no-no factor for

the investment banks who find it easier to get

a bigger company listed on the main board.

Due to this the structure of these junior

exchanges stipulated by the regulators the

reliance seems more on market makers and

less on the platform itself.

Nonetheless with around 13 million

existing SMEs in the nation, need for better

communication resources, advanced

technology and ease of operations, one can

expect SME exchanges to succeed in the long

run and create a better India.Inc

Article by -

Neha Joshi

FMS, Delhi

26

US Fiscal Cliff: What Lies Ahead?

The United States fiscal cliff can be

referred to the economic effects that could

result from the tax increases and spending

cuts that will be in practice from 2013 if

existing laws are not changed. These laws

on one hand will reduce fiscal deficit to a

great extent but also has the potential to

hinder economic growth pushing the

country to recession. Hence there are

arguments and counter-arguments for and

against for fiscal adjustment. In the article

we will discuss the following aspects of

the fiscal cliff:

Alternatives put forward by CBO

Components of the fiscal cliff

Need for the fiscal adjustment

Limits and targets to fiscal

restructuring

Effect on world economy

Our outlook and conclusion

Alternatives put forward by CBO

Congressional Budget Office (CBO) is

responsible for providing economic data to

the US government. It is a federal agency

under the legislative branch of the US

government.

The fiscal cliff and the steps taken to

mitigate it will have effects on the fiscal

deficit i.e. the debt and tax revenues. The

CBO has put forward two scenarios for the

coming 10 years.

The baseline scenario: This

scenario will result if current laws

are not altered. This will result in

lower deficits and debt combined

with spending cuts and higher

taxes.

The alternate scenario: This

scenario will result when some

specific laws are changed to

reverse or stall the effects of the

fiscal cliff.

The following graph obtained from a CBO

report shows the pronounced difference

between the two scenarios. If no action is

taken to alter the current laws, the

economic scenario closely resembles the

baseline projection. On the other hand if

the fiscal cliff is not succumbed to and

some tax cuts and spending patterns are

continued we will have a scenario

resembling the alternate scenario.

27

Baseline projection:

The CBO since 1985 has been publishing

baseline predictions for the coming fiscal

years.

The positives:

The estimate they have come up with

shows that fiscal deficit will come down to

an estimated 1.2% by 2012 from 8.5% of

GDP in 2011.

Revenues would rise from 18% (historical

average) to 24% of GDP.

Debt reduction of about 7 billion USD vs

increases of debt by 10-11 billion USD if

current policies are extended.

The negatives:

The GDP growth is likely to be reduced

from 1.1% to 0.5% in the short run.

High chance of recession in the initial part

of the year followed by 2.3% in the second

half.

Alternate fiscal scenario:

The positives:

Economic slowdown can be avoided in the

short run especially in this time of high

unemployment

The negatives:

Revenues will remain on and around the

historical average of 18% GDP.

Public debt rises from 69% GDP in 2011

to 190% GDP by 2035

28

Components of the fiscal cliff

1. Economic Growth and Tax Relief

Reconciliation Act (EGTRRA) and Jobs

and Growth Tax Relief Reconciliation

Act (JGTRRA):

These laws combined have cut government

revenue by about 2.6 percentage points of

the GDP. A large permanent tax cut may

have looked feasible a decade ago after the

budget surpluses of the late 1990s, but it

looks far less feasible today, after three

years of fiscal deficits close to 10 percent

of GDP and a surge in debt held by the

public from about 40 to about 70 percent

of GDP.

2. Expiration of temporary payroll tax cut:

This tax cut has temporarily eliminated 2

percentage points out of the employees

6.2 percent Social Security tax on the first

$110,000 of salary.

3. The compromise budget control act:

This act provided that if a super committee

could not agree on fiscal cuts, an automatic

mechanism beginning in 2013 would cut

spending by $109 billion annually, divided

evenly between defense and nondefense

non-entitlement spending.

4. Expiration of emergency unemployment

benefits and surge of collection of alternate

minimum tax (AMT):

The two components of the monetary budget

repeatedly dealt with annual fixes.

Category FY2013 CY2013e

Revenue Increases

Expiration of certain

provisions in income

tax, estate tax, and

AMT indexation at

end-2012

221 294

Expiration of employees

payroll tax reduction 95 126

Other expiring provisions 65 86

Taxes in the Affordable

Care Act 18 24

Subtotal 399 531

Spending reductions

Automatic cuts, Budget

Control Act 65 86

Expiration of emergency

unemployment

benefits

26 35

Reduction in Medicare

payment rates for

physicians

11 15

Subtotal 103 137

Other revenue and

spending changes 105 140

Total reduction in

deficit: Direct (% of

GDP)

607(3.7) 807(4.9)

Effect of economic

feedback -47 -62

Total change (% of GDP) 560(3.4) 745(4.5)

29

The table put forward by a CBO report lists

down the major components of the fiscal cliff

and their respective sizes. Table 1

summarizes the components of the fiscal cliff.

The first column reports the impact of the

fiscal cliff for the portion of FY2013 after

December 2012, a nine-month period. The

final column annualizes these amounts to

obtain an approximation of the full effect for

calendar year 2013. On an annual basis the

total impact of the fiscal cliff amounts to a

reduction in the federal budget deficit of

about $800 billion.

The need for fiscal adjustment

The US fiscal history can be divided into two

parts:

1. From 1990-2007: Government revenues

were around 18% of GDP while spending

was about 20%

2. From 2007-2011: Government revenues went

down to 15.8% of GDP while spending rose

to 23.5%

Thus the government fiscal deficit also rose

during the second phase. The fiscal cliff

hence seems to be a necessary evil.

However there will be a loss of 1.6% of GDP

in the short term on submitting passively to

the current scenario. This sacrifice on GDP

will mean loss of demand and will result in

higher unemployment. Again reduction in

demand would mean a sacrifice in potential

output rather than a redeployment of

resources from use in government purposes to

use in private purposes. If instead there were

no excess capacity and unemployment were

at, say, 4 to 5 percent, a case could be made

to simply allow the fiscal cliff effects to

happen.

Limits and targets to fiscal restructuring

The fiscal restructuring should look at the

following targets. These targets are

formulated keeping in mind the long term as

well as short term requirements in the

economy.

Overall, in the medium term federal spending

needs to be held down to a range of 20 to 22

percent of GDP and federal revenue needs to

recover to a range of 18 to 19 percent of

GDP.

For the financial year of 2013 CBO has

projected government spending to be at

23.5% of GDP which will result in a deficit of

7.2% in the alternate scenario. Thus the basic

target will be to raise revenue by 1.5 to 3

percent and cut spending to around 1.5 to 3.5

%.

Suppose for simplicity one were to adopt the

averages of these ranges as the targets,

placing the spending cut at 2.5 percent of

GDP (to 21 percent of GDP) and the revenue

increase at 2.2 percent of GDP (to 18.5

percent of GDP). The medium-term deficit

would then be 2.5 percent of GDP.

30

Effect on Indian Economy

Since the India is not one of the countries that

exports manufacturing outputs to the United

States the only sector that can be affected is

the services sector. Again services industry

will not be affected much as it is majorly a

cost cutting measure to outsource for the US

companies.

The US indices are currently trading very

close to an all time highs. So it is natural for

them to fall at the beginning of 2013 when

the US economy finally falls off the cliff.

Some experts are of the opinion that the

equity markets of countries like India might

be a safe bet for investments. However these

markets share a positive correlation with

market performance of the west. Hence any

fall in US markets due to a fiscal cliff could

cause a fall in all emerging stock markets

including India.

Effect on other economies

According to a CNN report the failure of the

US political class to deal with the fiscal

emergency correctly can affect economies

world over. The following are pointed out as

possible outcomes:

The GDP of China might take a direct hit

from the fiscal cliff baseline scenario. The

major reasons will be decrease of trade with

the US. There will be also impact due to

changes in inflation and interest rates.

Countries like Singapore and Switzerland

which are dependent on exports will also face

slowing down of economy. The projected fall

of growth in Singapore will be about 0.2%.

The model proposed by UN estimates decline

in both direct and indirect trade.

Our Outlook

The fiscal cliff scenario requires pragmatism.

The importance of pragmatism i.e. balancing

long-term reduction of fiscal deficit with

actions that would not result in slowing down

the economy in the short-run cannot be over

emphasized.

In general the US government has to look

back at the components of the cliff

objectively and decide on the elements that

are desirable and the ones that can be

avoided. A complete submission to the

scenario may be just as bad as taking steps to

stall the change altogether. A time phased

implementation of the changes is what is

desirable.

Just for example the tax cuts that are currently

in place and will expire in the coming year

can be done away with the top 5% of the

population while can be continued for the

rest. As the major tax earnings of the

government comes from the tip of this

pyramid the government will not lose much

in terms of revenues while a major chunk of

the population can be protected from the

impact.

A focused approach we believe will be a

much better way to go about things rather

31

than taking the route of across the board tax

increases and spending cuts.

Conclusion

As discussed in the article in our opinion

succumbing to fiscal cliff will not be right

due to the current state of the economy and

the levels of unemployment. There has been

a lot of procrastination involved in the

process given the presidential elections. But

now the situation is ominous and steps need

to be taken proactively. Targeted relaxation

of taxes and spending cuts as suggested by a

lot of experts may be the way to go forward

and possibly only way to protect small and

midcap enterprises.

As far as the common man is considered,

these are our suggestions for him:

Play it safe: It is our suggestion to move to

investments which have low risk and regular

returns. It is also advised to take into

consideration the exit options while making

an investment.

Go high on savings and cut down expenses:

Cut down on debts especially avoidable ones

like credit cards. Plan to make healthy

savings and move towards value with your

purchases rather than going for flashy.

Be opportunistic: The fiscal cliff will bring

with itself lower interest rates which will be a

good opportunity for purchase of useful

assets. The opportunities need to taken with

both hands.

Article by -

Prajata Das Chowdhury

Shilpa Sardar

FMS, Delhi

32

2G Spectrum Auction An Autopsy

Abraham Lincoln once said, You may fool

all the people some of the time, you can even

fool some of the people all of the time, but

you cannot fool all of the people all the time.

The government of India came up with

another round of auction of telecom licenses

between 12 -14 November 2012. This

happened due to the result of canceling of 122

2G licenses by Supreme Court of India in

February 2012. The spectrum was issued

along with the licenses by the Government on

a First Come First Serve basis. As per the

direction of the Apex Court, TRAI came up

with the base price which was almost 10

times the price paid by the operators earlier.

The Government Strategy

The first auction of spectrum, the airwaves

that carry telephony services, proved to be a

double-edged sword. In 2010, when the

government called bids for spectrum in the

2,100 megahertz (MHz) band, which enables

the data-intensive third generation (3G)

services, only a small amount of it was on

offer, creating an artificial scarcity.

Spectrum-starved companies, which had to

either have 3G in their bouquet of offerings or

lose high paying data users, bid the moon.

The auction magically repaired the

government's finances by netting more than

Rs 67,000 crore but put the companies on a

debt track. For the auction conducted in this

period of 12-14 November, only spectrum in

the less efficient 1800 MHz was put on

auction, keeping aside the precious spectrum

in the 900MHz bandwidth. The government

might have done this because it wants to keep

that spectrum aside to re-farm the leading

incumbents away from their precious 900

MHz spectrum. Another reason of not coming

up with complete spectrum for auction was

creating an artificial scarcity and also it was

highly anticipated that RIL would also bid for

the 2G spectrum and the incumbents will try

every bit to keep it out of the market. But

nothing, as anticipated, happened and RIL

chose to keep away from the auction.

Technically, a 900MHz BW is more suitable

for rural areas, where the population density

is less, as the wavelength is longer than the

1800 MHz, which is suitable for urban areas

with high population density. (Frequency and

wavelength are inversely proportional). Yet in

the auction we saw operators choosing

spectrum in 1800 MHz band in the UP East

and Bihar (Idea, Vodafone, Telewings and

Videocon got spectrum in Bihar; Vodafone,

Telewings, Videocon got spectrum in UP

(East). This could be because they had no

other options and the operators might expect

33

growth in the user base from the untapped rural markets in these circles.

Operator Amount (in Rs) No. of Circles

Bharti 12,295 13

Vodafone 11,618 9

BSNL 10,190 20

Reliance Comm 8,585 13

MTNL 6,564 2

Aircel 6,449 13

Tata Teleservices 8,864 9

Idea 5,769 11

S Tel 338 3

RESULTS OF SPECTRUM AUCTION NOV 2012

Operator Circle in which operators participated Total Payout

Metro Circle A Circle B Circle C Circles (Rs Mn)

Telewings* 3 2 1 6 40183

Videocon 1 4 1 6 22214

Idea 1 1 1 5 8 20313

Vodafone 1 7 6 14 11279

Bharti 1 1 87

Total 1 6 14 14 35 94076

34

On August 03, 2012, the Union Cabinet

approved the reserve price of Rs. 14,000

crore for 5 MHz pan-India (22 telecom

circles) spectrum for 1800 MHz band. This

was 23% lower than the Rs. 18,110 crore

recommended by the Telecom Regulatory

Authority of India (TRAI) in April 2012,

and at the lower end of Rs.14,000-16,000

crore reserve price recommended by the

Empowered Group of Ministers (EGoM).

However, the price was more than seven

times the Rs. 1659 crore at which the

cancelled spectrum was awarded in the

first place in 2008. The Union Cabinet also

approved the recommendation of EGoM

for reserve price for 800 MHz band at 1.3

times that of 1800 MHz band. Thus, the

reserve price for 5MHz of spectrum in 800

MHz band stands at Rs. 18,200 crore.

From the above table it is clear that there

were no bids for the most coveted circles

of Mumbai and Delhi. Existing players

like Bharti Airtel and Vodafone dont need

spectrum at these high reserve prices while

it may prove out to be too costly for the

new entrants with already loss making

operations.

Amount to be paid (Rs. Mn)

Circle

Reserve

Price Rs.

Mn/bloc

k

Auctione

d Slots

Winning

Bids Rs

Mn/block Telewings Videocon Idea Vodafone Bharti Total

Delhi 6931 0

Metro Kolkata 1137 4 1137 4548 4548

Mumbai 6785 0

AP 2869 4 2869 11476 11476

Gujarat 2248 8 2248 8994 8994 17988

Circle A Karnataka 3301 0

Maharashtra 2628 5 2628 10512 2628 13140

TN 3061 4 3061 12244 12244

Haryana 465 6 465 1861 930 2791

Kerala 653 1 653 653 653

MP 540 6 540 2160 1080 3240

Circle B Punjab 673 1 673 673 673

Rajasthan 671 0

UP East 762 9 762 3047 3047 762 6856

UP West 1074 10 1074 4296 4296 2148 10740

WB 258 7 258 1292 517 1809

Assam 87 7 87 347 173 87 607

Bihar* 425 11 464 464 929 1393

Circle C HP 78 1 78 1857 1857 78 3792

J&K 63 6 63 253 127 380

NE 88 6 88 354 177 531

Orissa 203 6 203 811 405 1216

TOTAL 35000 40182 22215 20313 11280 87 94077

35

The other side of no bid for for these

circles is that the players did not want to

set up a market price for the spectrum

when the government goes for re-farming

of the spectrum in the 900MHz band.

(Bharti Airtel and Vodafone hold licenses

in these circles since 1994 and the licenses

would be up for re-auction in 2014 when

they expire)

Impact on the Operators: The

government might have missed on its

target of garnering Rs 40000 crores in the

auctions but it emerged as a breather for

the operators and the public in general. By

not fully participating in the auctions the

operators managed not to get more debt on

their already debt laden balance sheet. This

also benefitted the general masses for

some time by not giving a reason for tariff

hikes to the operators. The positive impact

can easily be seen from the stock

movement of the players on the exchange,

where every player gained from its

position before the auctions.

But the industry has its own woes. The

much anticipated 3G data wave didnt flow

well. As of now majority of the revenue,

around 90% still comes from voice.

Industry experts are of view that Indian

telecom might start getting close to 50% of

its revenue from data services by 2016.

But by then the equation would have

another major change. RIL is expected to

be out with its 4G services and this factor

accounts mainly in the projection of 50%

revenue share from data services. The

above table supports Telewings decision to

operate in the Indian market solely on

voice for the coming period in the short-

run.

Idea, Videocon, Telewings were in the

hunt to get their licenses back. Only

Vodafone, which bid in 14 circles, was

looking to augment its spectrum bank.

Country

Non-Voice

Revenues

India 12%

Spain 19%

South

Korea 21.70%

France 25.40%

Canada 25.70%

US 33.20%

Japan 48.70%

36

Naturally, the bids were feeble, and in

many cases there were none at all. Four of

the 22 circles, including the biggest

markets of Delhi and Mumbai, received no

bids. Of the 18 that did, only the bid for

Bihar was above the reserve price, albeit

only nine per cent above. The other 17

were won at the reserve price-an indicator

of an auction's failure. The government has

accepted its failure which is evident from

its current decision to slash the reserve

prices by 30% in the four circles (Delhi,

Mumbai, Karnataka and Rajasthan) which

saw no bid from the telecom operators.

The remaining and the un-auctioned

bandwidth would once again be put for

auctions before the end of this financial

year. The government would try to get its

pricing and regulatory environment right

to induce players to come with open

wallets to the auction to help it nurse its

fiscal deficit wound. On the other hand,

operators would carefully asses the market,

the competition, their own spectrum

bouquet which expires in 2014 and plan

carefully to buy spectrum in the required

bandwidth to support their operations.

Article by -

Ashish Jaiswal

Rounak Chandak

FMS, Delhi

37

Bank Restructuring

Within three months of Standard &

Poors downgrade in April, global rating

agency Fitch, on 18th June, has

downgraded Indias sovereign credit

outlook from stable to negative citing the

reasons as corruption and the absence of

adequate reforms. The agency estimated

general government debt for India of 66

percent of GDP at the end of the most

recent fiscal year, compared with a median

of 39 percent for BBB-rated countries

.While the government took the defensive

stance in S&Ps downgrade, it criticized

the Fitch downgrade saying the rating

agency observations were based on old

data and did not reflect the recent

developments. Fitch revised downward

credit rating outlook of 12 financial

agencies, including State Bank of India

(SBI), ICICI bank, and Punjab National

Bank (PNB). The list of downgraded

entities includes six PSUs and two private

banks. These include Bank of Baroda

(BoB) and its overseas subsidiary Bank of

Baroda (New Zealand), Canara Bank IDBI

Bank and Axis Bank. Others to be affected

by the rating action include Export-Import

Bank of India, Hudco, IDFC and Indian

Railway Finance Corporation. Alongside,

the rating agency also downgraded the

credit outlook of seven PSUs NTPC,

SAIL, IOC, PFC, GAIL, REC and

NHPC.While the markets had already

anticipated that Fitch would revise the

outlook and so there is no surprise in the

announcement but the question is Can we

rely on the rating and take adequate steps

to promote major reforms or its just the

hiatus with no prolonged effects on Indian

economy?

Downgrading of any countrys credit

outlook has several effects on economy

such as-

1. Expensive Credit

2. Less allocation of investments

3. Less Private Equity

4. Flight of Capital outside India

5. Stock Market Sell Offs

6. Currency Depreciation

7. Less New Business Ventures

8. Less Employment

9. Rating Downgrade of the

Corporate

10. Reputation Damage

38

If we see a broad range of factors such as

macroeconomic policy, economy and

public finances we can see India is facing

an awkward combination of slow growth

and elevated inflation as well as structural

challenges surrounding its investment

climate in the form of corruption and

inadequate reforms. The Indian

government had repeatedly delayed tax

and subsidy reforms and thus the

confluence of weaker economic growth

and a large subsidy bill which means India

will likely miss the 5.1% fiscal deficit

target for 2012-13.But on the other hand

Fitch has not taken note of recent

government initiatives including fertilizer

subsidy reform, capping of subsidies as a

fraction of GDP, the new manufacturing

policy and the telecom policy. The fact

that Foreign institutional investors (FII)

have already brought in $12.5 billion in

the first five months of 2012 as compared

to $8.3 billion invested during the full

calendar year of 2011 cannot be ignored.

Do we need to pay attention to these

ratings and design our framework or do we

need to see more intrinsic problems in our

country? The reactions of domestic policy

to these downgrades are of much greater

concern than actual analysis and prediction

of these agencies. The accountability and

responsibility of these credit rating

agencies are also in question. When it

became clear in the United States that

much of their analysis was wrong which

led to many investors putting their

investments in risky and sometime even

fraudulent financial assets, these agencies

were of the view that they should not be

held responsible as they were only giving

opinions. But the fact of the matter is that

such opinions have huge impact on the

global markets and economy. Recently

these credit rating agencies have played

dangerous games pushing for more

financial liberalization reforms that are in

there own interests all in the name of

analysis and opinions. Fitch has cited

corruption as one of the reason for the

downgrade. Is this a new thing to India?

Was there no corruption in India few years

ago when Fitch was so optimistic about

Indian economy when compared to the rest

of world economy? Fitch has also cited

lack of reforms as one of the reasons.

This is an open push for reforms to benefit

large corporate capital in finance and

elsewhere, which is not at all the same

thing as policy changes that will put the

Indian economy on a sustainable and

employment-generating growth path. It is

certainly true that the recent Indian success

has been based in large part on the

perceptions of global capital, which

generated capital inflows. But these

inflows have not really been of the kind

that generates more productive capacity

and work along with access to new

39

technologies and markets. Rather, financial

inflows have dominated, and have

contributed to a boom driven by consumer

credit (including for real estate) and debt-

driven high spending by corporations,

generating growing current deficits in the

process. It has not provided better living

standards and employment for the bulk of

the population. To ensure more inclusive

growth the Indian economy needs to head

to a different path based on generating

more employment and better living

standards. This is not likely or even

possible given the incentives created by

the past pattern of capital inflows. If

anything, such incentives actually militate

against such a desirable change in strategy.

Its true that Fitch reduced their credit

rating outlook from stable to negative but

the Bombay Stock Exchange reported

gains of between 0.23% and 1.39% in

shares of State Bank of India, ICCI, Axis

Bank, Bank of Baroda, Canara Bank and

IDBI. Investors are tired of downgrades.

That is why these stocks did not show any

adverse reaction to the Fitch rating

outlook. As far as growth is concerned its

a matter of perspective. At most

conservative estimates, India's economy is

at present growing at around 5% and is

expected to expand at least 6% annually

for the next five years. Only China has

reported a better gross domestic product

(GDP) growth in the past five years. US

GDP growth is at about 2.2%. The Indian

economy has numerous positives - such as

an enviable 37% of its GDP in gross

national savings (GNS), over three times

the figure for the United States, with

Indian households saving about $1.1

trillion in the past five years. Two-thirds of

India's population is below 35 years of

age, and the growing middle class is

expected to form 60% of India's income

profile in the coming decade. High

domestic savings rates, high investment

rates, demographic dividends and a

burgeoning middle class with high

purchasing power are also the positives

for India. But among these positives there

are few concerns too. Against the

backdrop of persistent inflation pressures

and weak public finances, there is an even

greater onus on effective government

policies and reforms that would ensure

India can navigate the turbulent global

economic and financial environment and

underpin confidence in the long-run

growth potential of the Indian economy.

Small and medium enterprises (SMEs)

must be supported and there is a need to

provide them with credit as they form a

core foundation of a sound Indian

economy and more so as demand of credit

from large investors are drying up, SMEs

have a vital role to play to bail out the

economy in times of crisis. Though it is

vital to know the consequences of a credit

40

downgrade on the country and the

residents, but at the same time it is

important to know that a downgrade is not

permanent. It comes when the financial

position of a country deteriorates. If the

associated elements which have resulted in

the deterioration of the financial position

are rectified, the health will get restored

resulting in reinstating of the credit rating

or a Credit Rating Upgrade. Isnt that a

part and parcel of the regular economic

cycles? If we analyze the whole world

economy we find that we are living in a

very highly inter-connected world where

individual economies cannot remain

oblivious of happenings in other parts of

the globe. If we see the crisis in Europe

and partially in US, it is affecting the

exports as well as investments in India. So

if the whole world is more or less in

financial turmoil, we cannot expect India

as an exception. If life is about looking for

silver linings, the new negative ratings

could well serve as blessings in disguise.

India can benefit from cleaner and more

faithful foreign investment funds while a

weaker rupee could boost exports, force

the manufacturing sector to be less

dependent on imports, and so help to bring

about a more balanced economy. What is

currently needed in India are a series of

conscientious steps to from our

Government to clear the hurdles which are

acting as bottlenecks in the growth path of

the economy. Many of these hurdles are

just because of whims and fancies of the

politicians. Others require a long term

policy action to improve the infrastructure

of the economy to sustain long term

growth which paves the path of Indian

economy from a developing economy to a

Developed Economy. The problems in

Indian economy need to be addressed but

its not the credit ratings that make the

base for solutions.

Article by -

Sachin Pal

IMT, Ghaziabad

Investment opportunities in Solar Energy Sector in India

Introduction

India is deficit in power generation and the

public sector companies have not been able

to meet the increasing demands leading to a

huge demand-supply gap in the country. The

non-availability or high cost of fuel

associated with the power generation, the

government is looking at alternate sources of

energy to fill the ever increasing gap in

demand & supply.

Solar power generation in India is being

seen as a next big step in mitigating the

problems being faced by the distribution

companies of not meeting the demand of

customers.

Charanka Solar Plant, the 600 MW plant

known as Asias first and largest solar park

has been set up in the Gujarat state in Patan

district. The solar park completed by

December 1, 2012 is set up over 3000 acres

of wasteland bordering the Rann of Kutch

which will generate two-thirds of Indias

total 1050MW of Solar power generation.

The investment cost in Charanka Solar plant

amounts to US $280 million for the entire

functional, engineering, procurement &

maintenance of the park. The project

included some major developers from the

national and international market with over

84 project developers registering for the

project. With more national and

international companies showing interest in

the project and the power generation

capacity expected to increase to 1000MW

by 2013, the charanka solar plant has

undoubtedly given our nation a new ray of

hope in meeting Indias energy requirements

and also Indias mission to achieve 15% of

clean energy annually by 2020. (Gujarat

Solar Park, 2012)

Current Status of Solar projects in India

The amount of solar energy generation in

India till 2007 was less than 1% of the total

energy demand, which grew to 25MW in

2010 and 468 MW in 2011. By 2012 the

installed solar plants in India has increased

with the overall capacity of 1040 MW.

Various state governments are coming up

with new projects and are inviting the

developers to participate in the solar power

generation in their respective states. Gujarat

is the leader in solar power contributing

about 2/3rd

of Indias total solar power

generation. Rajasthan, the sunniest