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TABLE OF CONTENTS

1. Brakes on BRICS 2

2. Academia Speaks 5

Ailing Economy Wailing India: Lack of Diagnostics 6

Impact Investing – Putting a human face to finance 9

3. Industry Speaks 12

GST: Game changer or name changer 13

FDIC Interview 16

Birds: Five Good Money Habits 18

4. Students Speak 20

The Slowdown of BRICS 21

Islamic Banking: A catalyst to financial inclusion in India 24

QE3: The idea that shook QE2 26

Credit Unwinding and EM Growth 28

5. Financial Technology 30

Treasury Management in Banks: A technological perspective 31

Algorithmic Trading interview 34

6. Sector Talks: Indian Retail Sector 36

7. Mergers and Acquisitions 41

Microsoft Nokia Deals 44

Vodafone Verizon Deal 45

8. Personality Profile 47

Patrick Dlamini 48

Xi Jinping 49

9. News Round Up 50

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Networth - The Finance Club of IIMB | [email protected] 1

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Team Bottomline:

Chief Editors

Romil Johri

Shashank Shekhar

Senior Coordinators

Abhishek Agarwal

Gaurav Pandey

Gautam Sridharan

Lavanya Pandey

Mehak Chopra

Nikhil Jalan

Pratik Jaipuriar

Shobhit Agarwal

Editorial Team

Akhil Mittal

Akshat Kumar Sinha

Devesh Jhalani

Jyoti Nathany

Rahul Ghosh

Shomrita Pal

Shubham Agarwal

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TEAM NETWORTH

Dear Readers

We are pleased to present to you the first

edition of ‘BottomLine’, the bi-annual finance

magazine of Indian Institute of Management,

Bangalore brought to you by Networth – The

Finance Club of IIMB. The endeavor of this

magazine is to bring to you insightful views in

the field of finance and economics from some

of the best academicians, industry practitioners

and students. We also bring to you a round-up

of economic news, M&A activity and sector

research.

The cover story for this edition of the magazine

was chosen as “Brakes on BRICs” which

represents the slowdown of growth in the

emerging economies of Brazil, Russia, India

and China. While these nations have been in

the news ever since the US Fed announced its

decision to scale down its unconventional

monetary policy of QE, we try to look beyond

just this factor and get to the bottom-line of the

factors inhibiting growth in these countries.

We would like to thank Prof. Charan Singh,

Prof. Utkarsh Majmudar, Mr. Abhishek A.

Rastogi, Mr. Dhananjay Sahasrabudhe, Ms.

Radha Valisetty and Kotak Mahindra Bank for

contributing to this edition of the magazine.

We would also like to thank the students for

the amazing response we received for the

student articles section.

We would love to hear from you about our

magazine. Feel free to send in your feedback,

comments and suggestions to the following

email id: [email protected]

Editorial Team

BottomLine

mailto:[email protected]


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When Jim O’Neill of the Goldman Sachs coined

the term ‘BRIC’ in 2001 while referring to the

tremendous growth potential of these economies,

global investors flocked to these countries. And

these countries didn’t disappoint, at least for the

first decade of the 21st century. However, the pace

of growth has slowed down significantly in these

countries. While part of it is due to cyclical

adjustments, quite a bit of the blame can be

apportioned to domestic issues in these countries.

The rise…

Brazil, Russia, China and India (the so called

BRIC nations) experienced a period of significant

growth at the turn of the new millennium.

Together they contributed more than 40% to the

worldwide GDP growth at the turn of the first

decade as the developed economies struggled to

attain even 2-3% growth rates. While China was

the clear leader with consistent growth rates in

double digits, India grew at about 8-10%, Brazil

and Russia grew at 2-6% and 5-8% respectively.

In PPP terms the share of GDP of these four

countries in the world GDP has grown from about

21% in 2000 to nearly 30% today. The growth

projections for these countries highlighted their

increasing importance in the global economic

landscape.



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EDITORIAL

However the projections for the second decade

did not fructify and the fall from grace of these

countries (so far) has been as fast, if not faster,

as their rise to prominence. In an interview

earlier this year, Jim O’Neill mentioned that

the only country in the BRIC group that

remains worthy of being in there is China.

GDP growth has fallen across the board, and

pretty precipitously in the case Russia and

Brazil. While part of it can be attributed to

cyclical adjustments that were inevitable, a lot

of it is due to the fiscal and/or monetary policy

issues that were not addressed by these

countries.

BRAKES ON BRICS

The tremendous growth witnessed by the

emerging economies in the first decade of the

millennium seems like a thing of the past.

Plagued by domestic issues and slowdown in

global demand these economies are beginning

to stumble.


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Brazil’s growth was driven by global

commodity demand which kept spurring

Brazilian iron ore and agricultural exports. The

graph below shows the change in the index of

commodity prices (CRY Commodity Index)

and Brazilian GDP growth. It depicts how

Brazil’s growth follows commodity price

movements. The lack of GDP expenditure on

investments (just 18% of GDP for the last

year) has also been a major impediment in

sustaining the high growth rates.

On the monetary front, Brazil has not been

able to control its inflation which has averaged

nearly 6% for the last 5 years. A part of the

problem was also the constant inflow of

foreign capital (chasing higher yields) which

led the Brazilian Real to appreciate to

uncompetitive levels.

Russia’s growth was primarily driven by

commodity prices and world demand, the

slump in global demand due to the US

financial crisis followed by the Eurozone crisis

and the slowdown in China led to collapse of

growth in Russia. GDP growth has fallen from

a high of 8.5% in 2007 to about 3%.



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EDITORIAL

India’s growth has been stifled due to lack of

reforms and policymaking that India badly needed

but was ignored during a time when it could have

implemented these easily. Crucial reforms on land

acquisition, tax related issues have been in limbo

for way too long to infuse confidence amongst

global investors. A bloated deficit has made India

vulnerable to external capital flows. After having

seen a year of double digit GDP growth, the only

economic indicator close to double digits in India

right now is inflation. India’s central bank missed a

trick when it tried to fight the currency depreciation

at the expense of domestic monetary policy.


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China’s growth had been due to over-reliance

on state driven investment and an export sector

propped up by a managed currency. The ratio

of Investment to GDP in China is close to 47%

and has been consistently above 40% for the

last 10 years. Although China can still boast of

7.5% growth rates, the sustainability of its

growth depends on rebalancing from

investment based to domestic consumption

based growth.

The way forward…

Whether these nations achieve the growth

which they saw in the first decade of the

century is hard to predict. But to recover to

more sustainable levels of growth these

countries need to bring about more stability at

the macroeconomic level. They need to ensure

they have greater control on inflation and that

high inflation levels do not become an

impediment for growth.

There needs to be greater fiscal prudence and

political stability to ensure the necessary

conditions for growth are made available.

Most importantly, the economies need to move

away from investment driven model to

domestic consumption driven model of

growth. This would not only allow for better

distribution of the benefits of growth, it will

also reduce dependence on foreign demand

and capital flows.

The BRICs have certainly slowed down along

with the other emerging economies. But the

potential GDP growth rates of these nations

have not gone down and if the macro and

fiscal scene is made conducive for growth they

can still return to the growth rates which were

seen consistently in the last decade.



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EDITORIAL

China Only BRIC Country Currently Worthy of the Title -O’Neill (http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/) Data Source: Bloomberg


http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/

http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/

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ACADEMIA SPEAKS

Ailing Economy Wailing India: lack of Diagnostics, Prof. Charan Singh

Impact Investing Putting a human face to finance, Prof. Utkarsh Majmudar


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DR. CHARAN SINGH

ACADEMIA SPEAKS

Ailing Economy – Wailing India: Lack of

Diagnostics

CHARAN SINGH.

The Indian economy has been passing through

an extremely critical situation which has been

acknowledged by the PM and the RBI last

week. The economy is suffering not only from

the global spillovers but also from domestic

ailments for quite some time now. This is

reflected not only in the lower growth rate of

4.4 percent in the first quarter of 2013-14 but

also in the spluttering exchange rate. The

global spill overs are expected to continue,

probably worsen, once the unwinding of the

unconventional monetary policy actually

begins in the US. The scenario is expected to

be challenging amid the ever widening current

account deficit (CAD), worsening fiscal

targets, persistence of high inflation, slowing

growth, deteriorating asset quality of banks

and depleting levels of confidence of the

markets in governance.

These challenges are not easy to face for any

country. But first, we must have the correct

diagnostics and only then can we strategize to

stage a respectable recovery. The first signs of

deterioration in the economy, if analyzed on a

quarterly basis in a dis-aggregated manner,

began in 2009-10, with CAD of more than 3

percent of GDP in three quarters. In 2010-11,

manufacturing had succumbed to lower

growth and by 2011-12, services and

construction.

Prof. Charan Singh is the RBI Chair Professor

at IIM Bangalore. His research areas include

Monetary & Fiscal Policies and Issues; Debt

Management; International Reserves;

Financial Markets; Banking; Infrastructure.

Thus the country has been in ICU, in the

economic sense, for more than a year with a

multi-organ failure, or complicated terms.


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The index of industrial production has been

stagnating at very low levels since the last two

years. The pervasiveness of the slowdown is

reflected in a wide range of industries. The

growth rate of manufacturing of 2.7 percent

and 1.0 percent in last two years compared to

11.3 in 2009-10 seems appalling. Some

industries like motor vehicles have registered

contraction. The services sector has recorded

the lowest growth in 11 years at 6.8 percent

during 2012-13.

The growth rates in construction, tourist

arrivals, and cargo traffic have declined over

the last two years. And in the absence of a

credible measure of real interest rate, national

savings and investments have also been

declining. To curtail the CAD, the government

has imposed import duty as well as other

measures on gold.

This, as would be expected, has resulted,

according to press reports, in higher smuggling

of gold. However, despite the efforts of the

government and stringent measures by the

Reserve Bank of India (RBI), CAD during

April to June 2013 continues to be high. On

the other hand, to contain the GFD, oil subsidy

has been reduced with a monthly reset. But the

additional expenditure on Food Security Bill

(FSB) would probably compensate the

reduction in oil subsidy and GFD would

continue to be high. In such a depressing

situation, recovery on account of a good

monsoon can neither be immediate nor

substantial. After all, agriculture only accounts

for about 13.7 percent of the total GDP.

And, in view of the FSB, the assessment of



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ACADEMIA SPEAKS

agriculture production and food grain

requirement would also change. The impact of

Land Acquisition Bill, on both industry and

agriculture, has yet to be assessed.

To stage a respectable recovery, some concrete

steps would be required. First, there is a need

to reduce the twin deficits. The best antidote

against these deficits is high-growth. To

achieve high growth, the government has to

identify sectors which have potential growth

and initiate targeted measures. In a weak

economy, revenue led fiscal correction is rather

difficult. Expenditure compression may also

be difficult unless there is a sharp reduction in

capital outlay or substantial increase in

government borrowings. A reduction in capital

expenditure would imply lower accumulation

of assets and increased borrowings leading to

higher interest payments, both burdensome in

an inter-generational sense. Thus, the complex

situation demands a careful analysis.

Exchange rates play an important role in

exports and imports and could an over-valued

currency could also be a cause of high CAD. In

determination of exchange rates, inflation

differential between two countries is a crucial

factor. As inflation has been high in India as

compared with the US, exchange rate should

be permitted to adjust according to market

forces.

China prefers to have a highly depreciated

currency while, it seems, India prefers to have

an overvalued currency. China, prefers the

beggar-thy-neighbor policy to grab larger share

of global exports while India, it seems, prefers,


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enrich-thy-neighbor policy, by insisting on

maintaining over-valued currency, losing its

share in global exports.

As a citizen, it is clear that the Ministry of

Finance (MOF), Government of India and the

Reserve Bank of India (RBI) are aware of the

grim situation. But what is not clear is whether

the RBI and the MOF have a common view on

the diagnostics of the problem? Is it high

interest rates, policy paralysis, governance

deficit or simple uncertainty that is the cause

of lack of demand and slow growth?

There are heaps of analysis in the media but

critical investment decisions cannot be based

on scattered media reports and individual

analysis. In the absence of credible and

common diagnose, at least in the perception of

common public, how would a strategic

recovery path emerge that inspires confidence

in the course of treatment? It is this lack of

direction and forward guidance that probably

is confusing the market.

To move ahead, and beyond the blame games,

and to navigate the economy through such a

turbulent period, it would be helpful for the

country if a committee of economic experts, be

constituted and mandated to arrive at a

consensual approach forward, similar to the

National Advisory Council or a panel of

doctors treating multi-organ failure. That is the

need of the hour, irrespective of ideologies,

and a common Indian, even if illiterate, is

neither new nor afraid of facing challenges.

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But responding to uncertainty, and confusion, off

course is a different story and legend of

Ashwathama, is an apt illustration.


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IMPACT INVESTING – PUTTING

A HUMANE FACE TO FINANCE*

UTKARSH MAJMUDAR


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Consider the facts. Two billion people on the

planet do not have access to safe water, heath

care, or financial services. A billion people do

not have access to electricity. Two hundred and

fifty million children do not have access to

education or childhood immunization. The

problems are immense and need speedy

solutions. With public funds being limited the

need for private investment in public areas is

acutely felt. Impact investing expands the role

for private enterprise in addressing the world’s

most pressing social problems.

Impact investing is defined by The Global

Impact Investing Network (GIIN) as:

“investments made into companies,

organizations, and funds with the intention to

generate measurable social and environmental

impact alongside a financial return.” Impact

investing also goes by several other names –

socially responsible investing, social investing,

mission driven investing, responsible investing

etc.

The social investing ecology is best described

in Figure 1. Although, traditionally

foundations, development financial institutions

and high net worth individuals have

contributed recent studies indicate that other

investors are getting attracted to the potential

of impact investment.

* By Utkarsh Majmudar. The author is an educator, trainer and a

consultant. His interest areas include corporate finance,

behavioral finance and corporate social responsibility. He can be

reached at: [email protected]

References:

“About Impact investing,” GIIN, accessed on October 3,

2013,

http://www.thegiin.org/cgibin/iowa/resources/about/index.

html

Social impact bonds,

http://www.socialfinance.org.uk/sites/default/files/SIB_repo

rt_web.pdf Accessed October 3, 2013.

World Economic Forum, From the Margins to the

Mainstream Assessment of the Impact Investment Sector

and Opportunities to Engage Mainstream Investors

http://www.weforum.org/news/new-report-bringing impact-

investing-margins-mainstream

Charan Singh’s Photo

ACADEMIA SPEAKS


http://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdf

http://www.socialfinance.org.uk/sites/default/files/SIB_report_web.pdf

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Impact investors also create new financial

instruments such as social impact bonds - a

contract with the public sector in which a

commitment is made to pay for improved

social outcomes that result in public sector

savingsThe growth, and visibility, of the

impact investment industry has been

remarkable. However, significant challenges

remain. It has generally been pointed out that

the lack of track record of successful

investments is a main concern and that too few

established players are active in impact

investing. One of the key challenges is a

measurement ‘problem.’ As an example, if the

impact of an investment is creation of three

jobs then the outcome is increased wages to

the workers, higher taxes to the state and

reduced government subsidies. On the other

hand, if one of the workers would have found

a job without the investment then the benefit

would have been a net of two persons. Hence

it is not easy to track impact over time.

Measurement issues are being addressed by

three distinct but complementary tools: IRIS,

PULSE, and GIIRS.

Another area of challenge is the much stricter

fiduciary obligations of institutional investors.

Lack of successful track record and shortage

of scalable and attractive investment

opportunities create barriers to impact

investing. Layering of financial instruments

(e.g. grants and PRIs) also makes it harder to

precisely define impact of investing.

Governance is an area of significant concern.

Profiting from the poor is a grey area and

significant attention needs to be paid towards

creating frameworks that build an independent



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third party monitoring mechanism.

Other roadblocks include investor skepticism

about achieving both financial returns and

creating social impact together; imperfect

information regarding investment opportunity

set; limited exit strategies due to insufficiently

developed and illiquid markets.

Despite the challenges, impact investing is set

to soar. Industry research suggests that

approximately 2,200 impact investments worth

$4.4 billion were made in 2011.This is almost

doubling of investments from 2010. In India,

the impetus is likely to come from the new

Companies Bill (2012) that mandates 2%

investment in CSR activities subject to certain

criteria. Growth in impact investing is likely to

come from four sources:

1. Massive pent-up demand at the bottom

of the pyramid – a large number of

consumers and producers in this segment

will join the market

2. Driving green growth – investment in

renewables are forecast to grow at a steep

rate

3. Reconfiguration of the welfare state –

fundamental shifts in the ways in which we

approach public good output will create

opportunities for the private sector

4. Emerging lifestyles of health and

sustainability segment at the top of the

pyramid – this is already a fast and

growing segment

Despite several roadblocks impact investing is

likely to grow and become part of the

mainstream finance.


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Case Study – Vaatsalya Healthcare

The poor in tier two and three cities in India

have limited access to healthcare services, as

primary and secondary healthcare

infrastructure is inadequate and tertiary

healthcare infrastructure is largely

concentrated in metropolitan areas or larger

cities.



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Vaatsalya addresses this gap in primary and

secondary healthcare infrastructure by offering

high quality, no-frills, affordable primary and

secondary healthcare services. Vaatsalya

currently operates across 17 tier-two and -three

cities in South India, such as Mysore,

Shimoga, and Ongole. (www.vaatsalya.com)

Figure 1 Impact Investing eco-system3


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GST: Game changer or name changer!!!

ABHISHEK A. RASTOGI


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As India, an aspiring superpower, enters into

the general election environment, the entire

World bracing a slowdown or dealing with a

fiscal cliff is again peering at the reforms

bubbling in India’s cauldron. To keep the pot

boiling, the Government realized that the

issues gyrating around fiscal bloat, fragile

investments, obdurate prices and reforms need

greater deliberation so that the economy can

hop back to a decent growth trajectory by

2014.

The Government’s strategy can be discerned

by various initiatives with respect to

Companies Act, Goods and Services Tax

(GST) and Direct Tax Code (DTC). While the

Companies Act has received the Presidential

assent, the DTC will be finalized based on the

best international practices so that the robust

draft of the Code can be soon introduced.

Further, in an attempt to refurbish the horribly

antiquated indirect tax system, the

Government has taken initiatives for

implementation of the GST which will always

be considered a “transformational change” in

the history of indirect taxes in India.

It is an acknowledged fact that the services

sector has been a vital force steadily driving

growth in the Indian economy which has

navigated the turbulent years of the recent

global economic crisis.

ABHISHEK A. RASTOGI

Abhishek is an Associate Director with Pricewaterhouse

Coopers. He has authored eight books on the GST and

service tax published by Taxmann Publications and

Lexis Nexis.

Various measures have been taken on the

service tax front in the last eighteen months

including introduction of negative list and

place of provision of services rules.


INDUSTRY SPEAKS


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The fundamental reason for adopting the

comprehensive basis of taxation framework is

to circumvent the current patchwork of

indirect taxes that suffer from infirmities,

mainly in the form of exemptions and multiple

rates. In addressing this issue, the new service

tax framework has opened a window of

opportunities as well as a Pandora’s Box of

threats for the country’s proletarian class.

Thus, in the negative list regime, it is

imperative to examine the new concept of

‘service’, details of the negative list, details of

exemptions mentioned in the mega exemption

notification, and broad contours of the point of

taxation and place of provision of services.

These significant legislative changes ensure

that the current model is closer to the GST

regime and that the implementation of the

GST would not be from scratch.

It is also important to probe into the diverse

impacts that variegated sectors may potentially

have. To encourage voluntary compliance and

increase service tax collection, Voluntary

Compliance Encouragement Scheme has

been introduced in 2013 for providing one

time amnesty to the stop filers, non-filers, non-

registrants or service providers if they have not

disclosed true liability in the returns filed by

them during the period from October 2007 to

December 2012. The scheme provides

amnesty by way of complete waiver of

interest/penalty and immunity from

prosecution.



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The fundamental reason for adopting the GST

framework in India is to not only get rid of the

current patchwork of indirect taxes that are

partial and suffer from infirmities, mainly

exemptions and multiple rates but also improve

tax compliance.

The spread of Value added tax (also called the

Goods and Service Tax) in different countries

has been one of the most important

developments in taxation over the last six

decades. Owing to its capacity to raise revenue

in the most transparent and neutral manner, the

GST has been adopted by a host of countries.

This transaction model has already spread to

more than 150 countries and attracts more

countries to be on the same platform. With the

increase of international trade in the arena of

services, the GST has become a preferred

international standard. So much so that all the

OECD countries except the USA follow the

VAT which makes international trade a much

easier reality.

India too has been moving slowly and steadily

towards the GST regime. The exercise began a

long back and was phased out in steps such as

implementation of VAT, rationalisation of

excise duty rates, introduction of service tax,

integration between excise duty and service

tax, introduction of the negative list of

services, implementation of point of taxation

and formulation of place of provision of

services rules.


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The Centre and the States are now embarked

on the design and implementation of a uniform

GST across the country. The unified tax will

take the form of a ‘Dual’ GST, to be levied

concurrently by both the levels of government.

The unified tax will comprise of a Central

GST and a State GST and both the Centre and

the States will legislate, levy and administer

the Central GST and State GST respectively. It

is important to stress on the key words

“legislate, levy and administer” as these words

clearly show that both Centre and States will

legislate the respective GST Acts and that both

Centre and States will have power to

administer the taxes. It is pertinent to mention

that under the dual GST system, the same

taxable base will be subject to the Central GST

and State GST.

The proposed tax system will subsume a

variety of Central and State levies such as

Central Excise Duty, Service Tax and VAT,

thereby simplifying the complicated tax

structure and reducing compliance costs. For

tackling the complicated issues related to inter-

state transactions, an innovative concept of

IGST (Integrated Goods and Services Tax) is

also under consideration. The Parliamentary

Standing Committee submitted its report on

August 7, 2013 with respect to the

Constitutional amendments which would mark

the beginning towards introduction of the

GST.



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Some of the important developments revolve

around the following key aspects:

Establishment of a GST Council

Design of the GST

Compensation mechanism for States

IGST model to tackle inter-state

supplies

Flexibility for States to retain state

autonomy

SGT dispute settlement authority

Harmonised tax structure

The report of the Parliamentary Standing

Committee headed by Yashwant Sinha will act

as a significant stride towards implementation

of the much awaited GST. Although lot of

changes have already been introduced in the

current service tax regime, there are still

disputes over various activities whether such

activities would qualify as ‘goods’ or

‘services’. There have also been disputes on

the constitutional validity of taxing various

activities. The litigation is still pending in

various cases where there are disputes as to

who is the service provider and who is the

service recipient. With the recent changes in

the indirect tax regime in a country of India’s

magnitude, a deep deliberation and analysis on

the impact of the new service tax structure on

various sectors is certainly the need of the

hour. These interesting service tax issues will

be discussed in the subsequent articles.


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FDIC INTERVIEW

WITH RADHA VALISETTY


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What is your opinion about the health of the

US banking system at present and the lending

practices followed by banks?

The health of the banking industry in the US is

improving slowly, but the improvement can be

partially attributed to the natural ebbs and

flows of the industry. The lending practices

have done very little to improve the condition

of the consumer.

With so much of analysis going on regarding

the tapering of assets purchases by the Fed,

how equipped are banks to handle an increase

in the fed rate?

The Federal Reserve announced that it will

make no changes in its asset purchase program

suggests that U.S. bank liquidity will remain

near record high, as securities held on the

Fed’s balance sheet continue to grow. When a

tapering of quantitative easing (QE) does

eventually begin, the impact of reduced bond

buying will have little effect on banks’ lending

capacity and funding costs in the near term.

.

Are the US banks in a position to cope with the

stringent capital requirements as mandated by

Basel III norms?

Implementation date for Basel iii for US banks

has been pushed to Jan 1, 2015. Once

implemented these rules will have a broad

impact on the capital planning and investment

strategy of US banks.

RADHA VALISETTY

Radha Valisetty works as a Business and Systems analyst at the FDIC,

Govt. of United States

FDIC, or the Federal Deposit Insurance Corporation is a US Government agency providing deposit insurance in member banks

INDUSTRY SPEAKS


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Do you feel that the requirement for higher

capital is having an adverse impact on bank’s

lending and subsequent economic activity?

The goal for mandating stricter capital reserve

standards is to create a stronger, more resilient

industry better able to withstand environments

of economic stress in the future, so even if the

lending standards make capital less available it

is a smaller pain in the near term to avert

bigger future catastrophes.

With so many banks failing after the 2008

crisis, what challenges does it pose for you?

How has risk assessment changed post 2008?

Prior to 2008 the regulators trusted the risk

management strategies and practices of the

banks themselves, whereas after the financial

crisis the regulators have done some

independent assessment of the reasons for the

crisis and are trying to mitigate similar risks as

much as possible in addition to trying to bring

more transparency to the risk management to

understand better what policies worked and

why, and conversely why some policies

failed.

FDIC had recently been filing a considerably

large number of law suits against the leaders

of the failed banks, how, according to you, did

these leaders lead the banks to doom?

In the 2008 financial crisis bank executives

paid little attention if any to mortgage-related



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INDUSTRY SPEAKS

risks. Executives at the American International

Group were found to have been blind to its $79

billion exposure to credit-default swaps. The banks

hid their excessive leverage using derivatives, off-

balance-sheet entities and other devices. Law suits

against bank officers are one of the many means for

recovering the costs of closing banks where fraud

and negligence occurred to protect the deposit

insurance fund.

What are the new challenges and initiatives from

FDIC under the Dodd Frank Act for assessment of

risk in the largest, systemically important financial

institutions?

The implementation and enforcement of DFA is

very complicated. FDIC has successfully made the

big banks identify dissolution plans and recorded

them. The biggest challenge would be to see how

realistic these plans are and if the FDIC can handle

failures of such institutions with minimal impact to

the depositors.

FDIC recently decided not to provide insurance for

cash held outside the country. What do you think

about it?

According to the chairman this rule protects the

Deposit Insurance Fund while at the same time

recognizing both the FDIC’s commitment to

maintaining financial stability through the prompt

payment of deposit insurance.


http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org

http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?inline=nyt-classifier

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32

GOOD MONEY HABITS CAN

CHANGE YOUR LIFE

BIRDS – Five Good Money Habits – that will

help you manage your money better


BOTTOMLINE

This article created by collating the views of

the Senior Leadership Team at Kotak

Mahindra Bank talks about the money we

spend. The acronym BIRDS signifies the five

key investor money habits - ‘B’ stands for Budget; it always pays to have

your budget in place ‘I’ stands for manage your Investments well

‘R’ is for plan for your Retirement ‘D’ stands for manage your Debt

‘S’ stands for Secure your family These are the five key mantras- 5 Good Money Habits that will help you manage your money better.

B You can always become rich either by making

money or saving money. Avoiding impulsive

purchases with a reasonable, realistic Budget

is the first step to achieving that dream. To

keep track of your budget, there are lots of

tools available, like Money Manager, money

management tools etc. Also, ensure that you

use whatever loyalty points you earn on

various cards and all discounts available from

service providers.

I

Managing your Investments is about setting

right and realistic goals. So the first point is to

set the right goals and the second is to avoid

investing into complex instruments. You must

decide an investment allocation based on your

risk appetite and stick to it, irrespective of what

the market dictates.

The rule of 100: A formula for Investment Allocation

Deduct your age from 100, and that would be

your ratio between debt and equity. The thumb

rule is that the younger you are, the longer you

have to plan your investments and therefore the

higher should be you equity allocation. Debt is

supposed to give you steady returns in the long

run but equity can give higher returns. So if

you are 25 years old, and you put 75% of your

money in equity, it is expected to grow well.



INDUSTRY SPEAKS


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BOTTOMLINE

Coming back to risk appetite, if you have

aggressive risk appetite, then you would invest

more in equity: in which case even 80%

investment in equity is good. But if you are a

conservative type, even 10-20% is high. All

these things put together, it's a good idea to

have an investment advisor. The earlier you

start the better!

R If you plan for retirement, plan for long-term

goals. Retirement is one of the biggest goals.

The idea is to invest regularly, save regularly -

here instruments like recurring deposits,

systematic investment plans and insurance

come in handy. The rule of 72: A formula to double your money

This rule of 72 is not perfect, but it points a person in the right direction. Say, you want to double your money in 10 years. Then, your rate of investment should be 72 divided by 10, that is, 7.2 years. Similarly, if you are getting 10% returns today, it will take you about 7.2 years to double your money. One should not try to time the markets, they should continue

with regular investments, having allocations and sticking to it. The common man should take note of the power of compounding. Einstein once said that the biggest force on earth is that of compounding. That's how `1 lakh turns into `7.5 lakh in 20 years; all because of compounding, where your principle earns interest and the interest too earns interest in turn.

D

Debt can be a killer!Let us look at credit cards.



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INDUSTRY SPEAKS

You spend money and then pay only the 5%

minimum that is required on your card

payment. This is debt. Rates on credit cards

vary between 24 and 36%, while a typical

home loan would cost you about 10 to 11.5%.

Cards add up debt for wrong reasons, unlike a

home loan which is for a good reason. So

control your buying impulses, control the card

expenditure and don't stack up debt on cards.

Also, repay the debt as early as you can.

Because compounding works in reverse too.

The best thing to do is to repay your debt

before doing anything else.

S

It's extremely important to plan for any

eventuality - for the Security of your Family!

For instance, when you have a house in a

corporative society it is important to have a

nominee or the house should be in two persons'

name. Even investments – fixed deposits, bank

accounts etc. should have either nominations or

joint holders, because if something were to go

wrong, the process of getting that money

becomes much easier for the family. Second,

everyone should have a will, so that your

property (whatever you have; you needn't be

rich) can be amicably divided. Third,

insurance: you must have life and medical

insurance. Also, if you have debt, make sure

your insurance policy will pay off your debt.

To leave behind debt to the family would be

very, very cruel. Any insurance policy you take

should protect at least 60-70% of your current

income, because protecting the family if

something unforeseen happens is an extremely

important part of Good Money Habits.


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BOTTOMLINE INDUSTRY SPEAKS

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32

The slowdown of BRICS BY BHANUPRIYA GUPTA


BOTTOMLINE

INTRODUCTION

BRIC(S) was one such idea, when Jim O’Neil,

coined the term in 2001. These five emerging

economies (Brazil, Russia, India, China and

South Africa) today account for roughly 33%

of the world’s population and 25% of GDP.

But that confidence seems to be dwindling

now with the BRICS economies facing

challenges like slowing growth, falling

markets, reducing investments which have put

brakes on their growth.

WHY BRICS LOOKS UNATTRACTIVE

NOW

BRICS along with other emerging economies

were dependent on foreign investments, but

they are feeling the global financial heat with

investors fleeing away from these markets.

The economic growth in the BRICS countries

has slowed down. The MSCI BRIC Index had

tumbled about 17% so far this year and about

37% from its 2007 peak. According to EPFR,

between 2001 and 2012, BRICS attracted an

inflow of $ 184.1 billion in the capital markets

against an outflow of $ 13.4 billion since

January this year.

HSBC expects the GDP of BRICS nations to

expand at 2.4% for Brazil, 2.5% for Russia,

5.1% for India and about 7.4% for China.

Even the research by CME group also shows

how the GDP growth for these economies is

slowing year over year.Factors responsible for

this slowdown are:

Global economic slowdown has led to

the recent drop in investments.

Eurozone recession along with

volatility in global markets and

exchange rates due to murmurings

about the ‘tapering’ of financial

stimulus by US Fed has resulted in

shifting of investor’s sentiments from

the uncertain markets (like BRICS)

towards relatively stable US market

(due to strengthening dollar, record

setting performance of equity market

and improvements in labour market).

STUDENTS SPEAK

This article has been contributed by Bhanupriya

Gupta, a PGDM student at Indian Institute of

Management Raipur.


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BOTTOMLINE

BRICS nations are finding it difficult

to attract investments due to factors

like lack of promptness and

transparency in government operations,

infrastructure bottlenecks, corruption

and under-development of the modern

legal framework.

Factors like inflation, depreciating

local currencies, rising commodity

prices and asset bubbles in these

economies have resulted in the social

and financial upheaval, further

deteriorating the condition as evident

from the figure below.

OTHER OPTIONS

Some other emerging markets like

MIST and other N-11 nations look

attractive.

Significant investments are taking

place in Mexico, Indonesia, South

Korea and Turkey (MIST) due to the

improved business climate, ease of

doing business, extensive trade

agreement networks and increasing

population with growing purchasing

power.

Indonesia demonstrated stable growth

of around 6%, surpassing even India,

and attracted a total of $34.1bn

investments in 2012. Similarly, South

Korea had maximum FDI inflow

growth among the four MIST nations

as depicted below:



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STUDENTS SPEAK

Today it is BRICS, tomorrow it could be MIST

and day after it could be any other destination.

The bottom-line is that investors look forward

to generate value for their investments. Any

nation can assure this with right policy and

legal framework, by improving ease of doing

business, stronger infrastructures, extensive

FTA networks and such other initiatives to

attract investments and propel ahead on the

path of growth.


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BOTTOMLINE

REFERENCES:

The Rise of BRICS FDI and Africa,

UNCTAD Report (2013)

MIST: The next big thing or just hot

air?, Grail Research Report (2012)

BRIC Country Update: Slowing growth

in the face of internal and external

challenges, CME Report (2012)

How Solid are the BRICS?, Goldman

Sachs Report (2005)



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STUDENTS SPEAK

http://www.efinancialnews.com/story/2

013-07-17/cracks-appear-in

brics?ea9c8a2de0ee111045601ab04d6

73622 Accessed on 28.08.2013

http://blogs.ft.com/beyond-

brics/2013/01/22/indonesia-fdi-rolls-

on/#ixzz2d6SyOkCZ Accessed on

28.08.2013

http://www.chinadaily.com.cn/cndy/201

3-07/29/content_16844825.htm

Accessed on 27.08.2013

https://ktwop.wordpress.com/2013/08/2

0/brics-is-losing-bis-as-the-financial-

crisis-bites/ Accessed on 29.08.2013

http://money.cnn.com/2013/08/04/inves

ting/bric-markets/index.html

Accessed on 28.08.2013

http://growingcapacity.blogspot.in/201

3/05/indonesias-gdp-and-fdi-success-

story.html Accessed on 28.08.2013

http://www.businessweek.com/articles/

2013-03-21/bric-investors-lose-their-

taste-for-stocks Accessed on

30.08.2013


http://www.businessweek.com/articles/2013-03-21/bric-investors-lose-their-taste-for-stocks



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32

ISLAMIC BANKING: A CATALYST TO

FINANCIAL INCLUSION IN INDIA?

BY Y. VENKATA ACHYUTH KUMAR

“The non-availability of interest-free

banking products results in some Indians,

including those in economically disadvantaged

strata of society, not being able to access

banking products and services due to reasons

of faith.” - Raghuram Rajan (A

Hundred Small Steps)


BOTTOMLINE

This was the view expressed by

Raghuram Rajan in ‘A Hundred Small Steps’,

which was the report of his committee on

financial sector reforms, published in 2008.

Financial inclusion came into lime light in

India, after the recommendations of Khan

Commission (2004) were incorporated into the

mid-review of RBI’s 2005-06 policy. In

simple words, financial inclusion is the

delivery of financial services at affordable

costs to vast sections of disadvantaged and low

income groups. In ‘A Hundred Small Steps’,

the committee felt that provision of interest-

free banking is the most important area in the

ambit of financial infrastructure for financial

inclusion. The main purpose of inclusion is to

expand the coverage of the financial system in

the country, which is the key objective for the

emerging economies.

Islamic Banking, an alien concept in India’s

conventional banking system, is a Sharia Law

based banking system which promotes profit

sharing, but prohibits the charging and paying

of interest. Islamic banks are operational in 75

countries with assets touching $1.1 trillion and

have grown at a rate of 15%.

These countries include non-Islamic nations

like UK, USA, Germany, France, Singapore

etc. These developments across the world seem

promising for implementing the same in India.

Recently, the RBI gave nod to Kerala

government to launch financial institution

following Islamic finance.

Currently, India has a network of 82,000

branches of commercial banks across the

country, but only 5% of villages are catered for

where 70% of the population resides.

‘Mudarabah’, a kind of financing agreement,

involves one party supplying the capital and

the other supplying the labour, with both the

lender and the borrower sharing the risk.

STUDENTS SPEAK

This article has been contributed by Y. Venkata

Achyuth Kumar, a 2nd

year PGDM student at Indian

Institute of Management Raipur.


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This is helpful to the low income group,

especially less wealthy farmers who otherwise

would not be able to provide collateral. ‘Riba’,

which means a ban on interest payments and

collections, prevents the accumulation interest

payments, when the farmer or business person

becomes bankrupt. This is possible because,

the Islamic banks not only share profits but

also losses thereby preventing the pile-up of

interest.

According to Sachar Committee report,

Muslims avail just 4% and 0.48% of the credit

from NABARD and SIDBI respectively. And

the Muslims credit deposit ratio is only 47%

compared to the average of 74%. In places like

Lakshadweep with 95% Muslim population,

the credit deposit ratio is mere 9.3%. This

reflects injustice in part of Indian Muslims to

utilize their savings for economic growth.

On the flip side, devising a regulatory

framework satisfying both Islamic and

conventional banking systems would be a

challenging task for RBI. Educating the people

about the new banking system would be tough,

given the low awareness levels of conventional

banking system. There is a serious dearth of

Islamic banking experts in India who can

manage the banks in the current competitive

environment. Nevertheless, the interest-free

solutions of Islamic Banking could restore

equilibrium in Indian society by providing

succour to debt ridden farmers, labourers and

other marginalized groups. Hence, Islamic

Banking has potential as a tool of financial

inclusion.



o here.

STUDENTS SPEAK

.

References:

1. ‘A Hundered Small Steps’, Report of the

Committee on Financial Sector reforms,

Planning Commission, Government of

India.

2. ‘Why India need Islamic Banking’ thought

paper, Infosys Finacle.

3. http://www.scief.es/blog/shariah-banks-

look-to-farmers-2011-04-04/

4. http://www.dnaindia.com/analysis/1877270/

standpoint-why-islamic-banking-in-india-is-

a-good-idea

5. http://www.businessworld.in/news/finance/b

anking/rbi-allows-non-bank-islamic-

finance-firm/1040826/page-1.html

6. http://www.ethicainstitute.com/webinar/Ach

ieving_Financial_Inclusion_For_Indian_M

uslims.pdf

7. http://www.economicinitiatives.com/Indian_

Economy/Inequality_in_Disbursement_of_

Credit_among_various_states.html


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32

QE TAPER– THE IDEA THAT SHOOK

Q2

AKSHAT SINHA


26

BOTTOMLINE

It was May 22 afternoon. The environment

was brimming with expectations – investors,

TV reporters, government officials – everyone

was anxious to listen to the Director of the

much talked thriller, FOMC QE3, Mr. Ben

Bernanke. However, when he did come out

and speak, the audience all over found their

dreams shattered – the Dow finished the day

1.4%, lower, at 15,112 while the S&P 500

dropped 1.4% to 1,629 -the Director had

announced plans of QE tapering through the

FY 2013-14.

But before we discuss what went wrong and

why the market reacted the way it did and

when the tapering would actually start, let’s

start with the basics – What is this QE and

why should I care? Well, we all must have

used a photocopier, right? So QE employs

exactly the same principle. Whenever the Fed

wants to increase money supply and the

conventional interest rate approach doesn’t

work (well, it’s already 0.1%, how much lower

can you have it?), it loads papers into the tray,

currency onto the glass panel, and presses

copy. The number of copies depends on your

requirement. In this case, it has been around 85

billion. So essentially “pretending money” out

of thin air.

.

After the financial crisis in 2008 and the post

crisis recession that slumped US growth, the

Fed had to resort to asset purchases such as

government securities, MBS etc. to ensure easy

credit for industries and businesses and

increase consumption. To give you a feel, the

Fed has expanded its balance sheet by a

whopping $2900 billion since 2009. But now,

according to Mr. Bernanke, the US economy is

"continuing to grow at a moderate pace" and

"risk that the economy has entered a substantial

downturn appears to have diminished over the

past month or so".

Akshat Kumar Sinha is a first year student of IIM Bangalore. He has worked in the financial technology

space after graduating from IIT Kharagpur

STUDENTS SPEAK


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BOTTOMLINE

But if the US economy is on the uphill, then

why should we be anxious? The problem is not

here. It lies in the fact that this “copying

process often creates a vacuum of hot gases

around”, particular in form of hot money in

super-funded industries. Given the low interest

rates and stagnant economy in the USA (and

Euro Zone), much of this easy credit was

leaked out in the form of capital outflows to

emerging countries where yields were higher.

Thus most of the emerging countries,

particularly India, with high FII investment

and capital inflow, could weather off the

economic recession in 2009-11. But the

announcement has led to large scale sell-off in

these markets as people fear tapering is going

to happen sooner than later, and with these

economies already reeling with high CAD and

increasing inflation, this declaration has

slumped growth trajectory and caused the

markets to become bearish. The announcement

was backed by recent reports showing

encouraging signs for inflation and

unemployment rate, and was meant to act as a

forward guidance and signal, but it failed

miserably in shaping expectations as it did not

give a timeline for the tapering to start. This

resulted in extreme hysteria in the market and

no one was sure when tapering would begin.

However, the Fed was quick to realize this

mistake, and soon came up with the famous

“Evan’s Rule” for guiding the tapering

process. According to this, Fed will start to



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STUDENTS SPEAK

slowdown its LSAP program once the

unemployment level reaches below the 6.5%

target and inflation crosses the 2% mark. With

the inflation hovering around 1.7% and the

unemployment rate nearing 7%, the period that

followed was one that of speculation – Will it

happen in September, or December, or Mid

2014, or will it begin no earlier than Early

2015? The period through June and July added

to this hysteria as the US economy grew at a

modest rate and the unemployment rate

reached 6.7% (“temporarily” vindicating Fed

of its announcement). Though many started the

“Sep taper” cry, yet a few pointed out fallacies

in industry data. While the unemployment rate

had reduced, employment hadn’t increased – it

was just that the labor force participation rate

had declined. This created a perplex situation

for the Fed – People wanted to know whether

Fed will continue with its tapering decision

even in the backdrop of this new finding. It

was argued that even the inflation levels are

quite low, and a decision to slowdown might

lead it to lower levels. Moreover, it was

suggested that decision should be postponed

until December, when we will have a better

assessment of the economic momentum. The

Fed played sensibly, and on Sep 18th

announced that it will postpone its tapering

plan until conclusive evidence about the upturn

is found. While this decision has surely calmed

a few nerves, but December is not far away,

and only time will tell whether the taper will

happen this year or not.


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Credit unwinding and EM growth

BY RAHUL GHOSH


BOTTOMLINE

Since the “great recession”, most of the

economies around the world launched stimulus

programmes to spur growth. The low interest

rates and the unconventional monetary policy

increased the debt to gdp ratio of these

countries. Off late they have started or are

planning to decrease their debt. The United

States (US) Federal Reserve (Fed) has already

started planning its gradual exit from the

quantitative easing (QE) program. At the same

time China, whose ratio of credit to gross

domestic product ballooned from about 134%

in 2008 to 173% at the end of 2011, is also

deleveraging. This dual unwind can have

severe consequences on the EM economies. It

affects their capital accounts and hampers their

growth prospects directly.

Unwinding US Quantitative Easing

The Fed continued its QE program, to boost

the feeble US economy. Of late, recent US

economic data have started pointing towards

an improving economy with unemployment

rate at 5 year low. Moreover, the incremental

benefits of QE are being questioned.

In other words each additional dollar being

pumped into the US economy is producing

diminishing benefits. All of these factors

combined with the greater risk in the economy

.

caused by the drastic increase in US liabilities

have caused Fed to consider a gradual exit

from the QE program. This results in a base

case of higher real interest rates in US and an

appreciating US dollar (USD). As a result of

the rising interest rate in the US, the capital

that flew into the EMs in search of a higher

yield will flow back into the US. This will

deteriorate the capital account of the

economies. Not only is this true for the already

committed capital but also for any new

investments that are about to enter the EMs.

Rahul Ghosh is a first year student of IIM Bangalore. He has worked in the financial

trading space after graduating from IIT Kharagpur

STUDENTS SPEAK


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BOTTOMLINE

Additionally, the higher USD results in

depreciation of the EM currencies. To protect

the currencies the respective central banks will

tighten their respective monetary policies

further in order to attract foreign capital.

Higher real rates could trigger a faster unwind

of credit growth. This will hurt growth

particularly in economies where the credit

growth has been ‘excessive’ (Higher interest

rates make refinancing debts more difficult).

Hence, the higher US interest rate will attract

capital back into the US and the strengthening

USD will cause the EM central banks to

tighten their money supply. Both the factors

will result in slowdown in the EM economies.

Unwinding China’s leverage:

China achieved a massive credit fuelled

growth. As it attempts to achieve a “beautiful

deleveraging” act, it restricts the availability of

cheap money and hence curbs demand. This

affects the EMs in three ways.

Firstly, the countries that export manufactured

goods to China are witnessing a decline due to

reduction in import demand from China.

Countries such as Taiwan and South Korea

that export large quantities of manufactured

goods to China are affected most due to this

factor. Secondly, China has been a massive

importer of commodities from certain EMs

during its rapid growth phase.



o here.

STUDENTS SPEAK

The deleveraging is causing a reduced demand

for commodities and countries such as Chile

and Brazil that are primarily commodities

exporting economies are suffering.

However, there are certain countries that have

low export exposure to China and are net

importers of fuels and hard commodities. They

will stand to benefit from China’s slowdown as

commodity prices will cool off due to reduced

overall demand from China. India and Turkey

are among such economies. Therefore, the

impact of China unwinding depends on the kind

of trade relationship a country has with China.

While some countries are at a greater risk of

current account degradation, some other

countries are actually benefitting from it

through reduced commodity prices.

Hence, the primary fear that the EM economies

face right now is what will happen if both the

factors strike simultaneously. The effect of the

change in Fed’s stance in its monetary policy

will cause flight of capital from EM economies.

Moreover, those economies that followed the

path of strong credit led growth and are net

exporters to China seem to be at the greatest

risk whereas those which contained credit

expansion and are not large exporters to China

will benefit on this front.

References

http://online.wsj.com/article/SB1000142405270

2303360504577411151135639534.html

http://www.bls.gov/news.release/pdf/empsit.pdf


http://online.wsj.com/article/SB10001424052702303360504577411151135639534.html

http://online.wsj.com/article/SB10001424052702303360504577411151135639534.html

http://www.bls.gov/news.release/pdf/empsit.pdf

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Networth - The Finance Club of IIMB | [email protected]

BOTTOMLINE



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FINANCIAL TECHNOLOGY

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Treasury Management in Banks:

A Technological Perspective

ROMIL JOHRI

Romil is a first year student at IIM Bangalore. Prior to

this he has worked for two years in the financial

consulting space, after graduating from IIT Kharagpur.

Treasury Management in Banks:

A Technological Perspective

Over the years, Treasury management has

come to play an increasingly important role in

banks and in general for the financial industry.

It serves various purposes such as maintaining

liquidity for the bank, managing the financial

and operational risks, and maximising the

bank`s profitability through funding and

investments in various financial products.

Treasury Department Structure

Primarily the treasury has the Fixed Income

desk, Foreign Exchange desk and the Equities

desk to handle transactions in these asset

classes. Often banks have other desks

allocated for various other types of asset

classes as well. A bank`s treasury structure can

be broadly divided into Front Office, Middle

Office and Back Office. Front Office is

responsible for the generation of trades,

Middle office for the analysis and risk

handling of trades and Back Office for the

daily valuation and payment transfers for these

trades. Each of them is an extremely crucial

pillar for the growth of the bank.


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A deeper look into Treasury Operations Treasury departments are supported by software

systems called the Treasury Systems. Thousands of

transactions happen on a daily basis by the bank`s

treasury. These trades are booked on various

complex derivatives and Kondor Plus, Calypso etc.

Banks buy these systems from the vendors and

implement them by customizing them to their

requirements.

Treasury Systems in detail These systems provide various functionalities such

as trade repositories, deal booking functions, risk

management tools, payment handling, market data

integration, static data capabilities, database

management etc. Usually they are very large and

comprehensive in their coverage but different

Treasury Systems are strong and weak in different

aspects. Two most commonly used treasury

systems are detailed in Fig-1.

In India Murex and Kondor Plus are two primary

systems used by various private and public banks.

Some of the examples are: ICICI uses Murex, ING

Vysya uses Kondor plus, Kotak Mahindra uses

Kondor Plus; internationally ANZ uses Murex and

United Overseas Bank uses Wall Street. Often

banks decide on these Treasury systems based on

the kind of product-trades they are involved with.

Murex for instance offers a very wide range of

financial products that can be handled by it ranging

from simpler loans/borrowings to more complex

ones such as the accumulators. Hence banks

dealing with such complex products find it suitable

to use Murex. Kondor Plus is generally considered

very effective in Forex Trades.


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With the advancements in the financial models

and mathematical analysis in today`s banking

industry, role of these Treasury systems have

increased manifolds. Post the financial crisis,

the risk management capabilities of these

systems are being used extensively to analyse

the credit and interest rate risks. This analysis

is required for effective hedging of trades and

deciding on the capital allocation for the

trading desks. Methodologies such as Credit

Value Adjustment are becoming increasingly

prevalent to mitigate credit risk. Efficient

implementation of these in treasury systems

allows banks to monitor such risks. No

successful bank can afford to ignore the

strategic importance of a robust and state-of-

the-art treasury management system esp. in

today’s challenging regulatory environment

Data Sources: Company Websites, Wikipedia



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Provides functionalities for a

several Interest Rate Derivatives.

Very useful for banks dealing in

complex IR derivative products.

Efficient models for cross asset

structured products

Clients:

ICICI Bank

ANZ Bank

UBS



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Considered very strong in handling

Forex Trades.

Easy integration with external third

party pricing tools.

Efficient straight through processing

and flexible platform

Clients:

Kotak Mahindra Bank

ING Vysya Bank

Maybank


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ALGORITHMIC TRADING: INTERVIEW

with Mr. Saurabh Das from Silverleaf

Capital Services:

About Silverleaf Capital Services:

Silverleaf Capital Services is a Mumbai-based

firm that has emerged as one of the leaders in

the High Frequency Trading space in India

within one short year of rolling out operations.

Our work combines Machine Learning,

artificial intelligence techniques and

mathematical modelling with in-house low

latency trading capability.

About Saurabh Das:

Saurabh is a co-founder of Silverleaf Capital

Services. He is a self-taught developer who

has worked in the fields of algorithmic trading

and agent-based computational economics.

Prior to forming Silverleaf, he has worked at

KPMG in Business Consulting and at Morgan

Stanley. He has a PGDM from IIM

Ahmedabad and a Bachelor’s Degree in

Engineering Physics from IIT Bombay.

How did the idea of entrepreneurship come

about? Why algorithmic trading?

The idea of entrepreneurship didn't pop up in a

day - it's a process that took time and a lot of

thought. As with all of us who have had the

luxury of a best-in-class education, it is oft-

times difficult to drop out of cushy jobs and

into the uncertain world of entrepreneurship.

The prime reason for algo-trading was that the

financial markets are excellent proving-

grounds. It is a very level playing field for new



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entrants as compared to most industries. Given that

I would know whether my company is succeeding

or failing in a relatively short time span,

entrepreneurship and algo-trading was very

enticing and I took the plunge.

What are the current trends that are popular in

the area of algorithmic trading? What does

Silverleaf Capital Service specialize in (solution

offered to client)?

Most firms in India are still running regular trend

following and simple statistical arbitrage systems

(dealing in underlying and its associated F&O

contracts). Market-making on incentivized illiquid

exchanges and commodity arbitrage between CME

and MCX has become popular. More advanced and

latency focused firms are detecting and trading

based on very short term patterns in the order book.

Silverleaf, drawing on our skills in mathematical

modelling, hardware & software design, specializes

in finding patterns to identify opportunities and in

building low latency infrastructure to capitalize on

them.

How is the algorithmic trading business shaping

up in India and how do you see Algotrading

business changing in future as Indian financial

markets develop further?

Brokers are now much more willing to invest in

technology for High Frequency trading than they

were a few years ago. A lot of them are investing in

developing in-house expertise rather than buying

software and hardware from vendors.

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The share of algorithmically generated volumes

is growing very rapidly leading to increased

liquidity and turnover which is normally a good

thing for algorithmic trading. Most exchanges

are providing colocation facilities for HFT.

NSE has started providing tick by tick data

along with traditional snapshot data. We expect

other exchanges to start providing tick by tick

data feeds soon because that should

automatically increase algo trading

participation and turnover

How is HFT different from Algo Trading?

Broadly speaking, algo trading is execution of

trades using an algorithm. Latency is not

necessarily critical. For example, if a mutual

fund wants to buy a very large quantity of a

stock it can run an algorithm to execute the

trade by placing orders slowly over the day to

minimize losses because of market impact.

HFT is the latency sensitive subset of algo

trading. A fraction of a second delay in

execution could cause you to either lose a

trading opportunity or even create a trading

opportunity for your competition - usually other

HFT firms.

What are your views on High Frequency

Trading (HFT)? How do they affect stability

in the markets?

In India and worldwide, it has been shown that

bid ask spreads and trading costs (market

impact) are going down because of HFT. For

example if a contract is being traded on

multiple exchanges HFT firms are competing to

ensure that a person wanting to buy the

contract, with access to just one exchange gets

a price as close as possible to the lowest among



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all the exchanges. Research has even shown HFT to

be driving out market manipulators too.

What are the regulatory constraints you face as a

part of the business?

HFT has introduced a few new risks to market

stability for which regulations are being modified.

As per SEBI regulations exchanges ask firms to

demonstrate strategies before they are approved.

Audit trails of strategies have to be maintained and

the systems are audited regularly. New measures

like penalties for a low trade to order ratio have

been introduced. Immediate or Cancel orders have

been banned in commodity exchanges.

Regulators round the world have concerns about

the systemic risks of algorithmic trading on inter-

connected financial system. There have been

instances of malfunctions and increased volatility

in the markets. What is your opinion on that?

Most algorithms are based on models which have

been trained only for very normal market

conditions. In extreme market conditions with low

liquidity these algorithms can cause short lived

volatility. Malfunctioning algorithms can also

trigger big market moves in a very short span of

time. This is where the regulators are stepping in.

Measures like tighter circuit filters have been put in

place. Regulators have defined mandatory risk

measures which all algorithms need to have in

place. The exchanges check the functioning of

each of these risk measures before approving a

strategy to run.

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SECTOR TALK


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Current Scenario

The Indian retail sector is one of the key

drivers of the Indian economy. Contributing to

a mammoth 15-20% of the GDP and around 8-

10% of the total employment, Indian retail is a

$500 billion industry and has been growing at

around 11% for the past 3 years, with

organised retail contributing to around 8% of

share of the total retail market. A vertical –

wise break-up of the organised retail sector in

India is as under.

Beauty & Personal

Care 3%

Footwear 4% Clothing

and Apparel

33%

Jewellery 6%

Food 9%

Home and

interior 5%

Mobile & telecom

11%

Pharmacy

2%

Consumer

Electronics 8%

Others 19%

Share in Indian Organised Retail Market



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SECTOR TALK

The attractiveness of the apparel sector in

organised retail can be explained as under:

Retail Vertical Revenue/ sq ft. (per store per day)

Food, Grocery and Beverages

5000-7000

Footwear 8000-10000

Apparel 10000-12000

Consumer durables 20000-25000

The apparel vertical thus not only has a

superior revenue per square feet but also

enjoys a higher margin when compared to

other verticals, making apparel retail the most

attractive vertical especially in organised retail.

Top players – Indian retail sector:

Aditya Birla group

Over 512 supermarkets and 16 hypermarkets. Has become a bigger player after the recent acquisition of Pantaloon retail

Shoppers Stop

Around 3.5 million square feet of store area over 25 cities and around 50stores

Tata Trent

Around 120 stores with an average store area of 40000 sq feet across its 3 major formats Westside, Star Bazaar & Landmark

Spencers Retail

Store area of around 1 million sq ft over over 45 cities and 200 stores

Reliance retail

More than 1300 stores servicing around 2.5 million customers every week


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Online Retail:

Currently, a $1.6 billion market, the Indian

online retail market has grown rapidly due to

increasing internet penetration, development

of the financial services sector, increased

adoption by the youth, ease of use, additional

payment options like EMI and cash on

delivery, discounts offered, time savings,

customisation options, testimonials, reduced

inventory and real estate expenses, transparent

return policy and easy comparison shopping.

Source: Euromonitor, Mckinsey

Among the top players, only 2 players have

seen positive returns as per the latest

financials. Thus, declining margins has been a

trend in the Indian retail sector, especially in

organised retail, adversely affecting the

profitability of the players. The recent deals in

the retail sector, (Aditya Birla & Pantaloon

retail; split up of the Walmart-Bharti JV,

postponement of IKEAs entry in India etc.)

can in short be attributed to strategies to

counter dwindling profit margins

108 302 543 930 1355 2054

2005 2007 2009 2011 2013 2015 (exp)

Internet Retail in India ($ millions)



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SECTOR TALK

Aditya Birla – Pantaloon Retail

Deal to acquire 50.01% in Pantaloon retail via Aditya Birla Nuvo Ltd. (deal size estimated to be 13 times EBITDA and around Rs. 3200 crs)

Walmart JV exit Walmart exits after a 6 year long partnership with Bharti retail

Flipkart PE funding

A $ 200 mn PE funding (6th round of PE funding), from its existing investors, the largest raised by any e-commerce company in India.

Myntra PE funding

Raised around $25 million from existing investors, Accel partners and Tiger global

Arisaig India - Trent

Acquires 2.36% stake in Trent retail increasing it’s overall ownership to 9.88%

Arvind Lifestyle – Debenhams, Nautica & Next Business

The acquisition has enabled Arvind to diversify into luxury and speciality retail in the apparel sector

IKEA – entry into India

Investment proposal of Rs. 10,500 crs, approved by the cabinet via the FDI route. However, first store not likely to open before 2016


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FDI in Retail:

Source: AT Kearney Report: Global Retail

Development index

Though the government in 2012 has allowed

100% FDI in single brand retail and 51% FDI

in multi-brand retail, the reforms are yet to

yield a substantial impact in foreign currency

inflows. In 2011, India was seen to be one of

the favourable destinations for retail. However

India’s rank has slipped in the wake of

prevailing corruption, policy paralysis and

absence of transparent regulation with regards

FDI in retail due to unclear procurement

policies and opposition by various states

294 536 391

567 551

2008-09 2009-10 2010-11 2011-12 2012-13

FDI -Retail & Wholesale trade (USD

mn)

FDI -Retail & Wholesale trade (USD mn)



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SECTOR TALK

FDI inflows from retail have been stagnating in

the recent years. Also, even though the FDI

inflows into the retail sector have doubled in

the last 5 years, it just constitutes 4% of the

total FDI inflows, which isn’t substantial given

that the sector contributes to around 15% of

India’s GDP

Future Expectations:

Short term growth

The immediate growth of the industry is

heavily dependent on macro-economic factors

affecting consumer sentiment. With persistent

inflation, growing current account and fiscal

deficit and negative investor sentiment may

well impact the short term growth of the sector.

Long term Growth and challenges

The long term growth of the sector is expected

to robust, with a CAGR of 15-20% for at least

the next 5-10 years, with demand fuelled by

higher purchasing power, growth of the Indian

financial sector, changing consumption

patterns, higher investments and better

technology.

36%

7%

15% 9%

3%

3%

17%

4%

6% FDI % share

Manufacture


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Organised retail in India has been growing at a

rapid pace. Despite its low current penetration

of around 8%, organised retail is expected to

constitute around 20% of the retail market in

the next 5-7 years. Also within organised

retail, food and grocery retail is expected to

grow the least, due to lowest penetration of

organised retail, very low margins, affecting

profitability of new entrants struggling to

break-even. On the other hand long run growth

in apparel, footwear, jewellery, pharmacy,

beauty and healthcare and consumer

electronics and durables are expected to be

more robust. The vertical-wise growth

predictions of the India retail sector are as

under.

The Indian online retail industry is expected to

double in the next 2-3 years and is expected to

grow at a CAGR of around 20-25% at least for

the next 10 years.

With regards FDI in retail, Investor confidence

is still not high, this is proven by the fact that

IKEA, even after getting the cabinet approval

has decided not to open its first store before

2016. Thus just policy announcements are not

adequate. Steps have to be taken to ensure a

positive signalling effect, to encourage

investment in the retail sector, one of the

largest contributors to the GDP. This is even

more critical given India’s current account

deficit, so as to at least ensure capital inflows,

so as to strengthen the balance of payments

position and the depreciating rupee.

The retail sector in India faces huge

challenges from the point of view of financial

constraints and inferior supply chain

infrastructure. Financial constraints are faced

more by the retailers in the unorganised retail

sector.



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SECTOR TALK

Low profit margins, lack of credit and huge

investments needs are the 3 key problems

faced by the retailers especially in the un-

organised sector. With unorganised retail

currently constituting a substantial 92% of

Indian retail, these problems need to be

seriously addressed, or else the sector may get

adversely affected making the businesses

financially unviable with the entry of new

players in organised retail. Protectionist

policies should not be implemented, but the

government should ensure that this sector is

given priority access to credit and should

encourage banks and other financial

institutions to extend credit to the unorganised

retail sector.

Supply chain challenges are a huge hindrance,

especially in the food and grocery retail

segment. Supply chain losses are of around 20-

30% are can be said to be one of the prime

causes of food inflation in India. Also the low

margin based food and grocery retail vertical

needs a boost and supply chain infrastructure

development can be factor reducing

procurement costs and thus increasing margins

and making food and grocery retail more

attractive. The assumption of improved supply

chain with the entrance of foreign players via

the FDI route is also flawed. Pro-active

investments in supply chain need to be

undertaken to encourage foreign players to

invest in the retail sector. Thus overcoming the

financial and supply chain challenges would

indeed further bolster the growth of the Indian

retail sector, which plays a critical role in

India’s growth story.

Data Sources: www.rbi.org, Bloomberg,

Reuters, www.michealpage.com


http://www.rbi.org/

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MERGERS AND ACQUISITIONS

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OVERVIEW

The erratic pattern of the M&A industry since

the financial crisis has led to lukewarm

performance throughout the bulge bracket,

boutique and other firms across the globe. A

brief synopsis of the past 12 months (October

’12 – September ’13), gives the following

global picture.

Number of Deals 27059

Value $ 2.63 Trillion

Average Disclosed Deal Size

$175.75 Million

Average Premium 28.31%

Without any surprise U.S. is at the heart of

deals, while industry wise Telecom has been at

the core of consolidation – both in terms of

acquirers and targets, clearly visible in the

following charts.

.



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Topping the M&A deal table of the 10 largest

deals (globally) is the Vodafone – Verizon

deal, with a whopping deal size over $130.1

billion. Another news maker has been the

strategic deal between Microsoft and Nokia,

poised to be a game changer for Microsoft. It

has been discussed in greater detail in the next

section.

The following page contains the table with

reference to Oct- ’12 to Sept- ’13 for the top

10.


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Following is the league table which is led by the

bulge bracket firms, announced in the same time

frame.

Adviser Rank

(Market

Share)

Total Deal

Size

($Millions)

Average

Deal Size

($Millions)

Deal

Count

Goldman

Sachs &

Co

1 653,787 1,981 330

JP

Morgan

2 573,344 2,559 224

Morgan

Stanley

3 573,221 1,997 287

BofA-ML 4 560,118 2,569 218

Barclays 5 440,799 2,182 202

Citi 6 344,374 1,655 208

Deutsche

Bank AG

7 341,387 2,081 164

Credit

Suisse

8 331,441 1,563 212

UBS 9 317,194 2,143 148

Lazard

Ltd

10 235,541 1,126 209

Date Target

Name

Acquirer

Name

Seller

Name

Deal

Value

($millio

n)

02-

09-

2013

Cellco

Partnershi

p

Verizon

Communica

tions Inc

Vodafo

ne

Group

PLC

130,100

15-

10-

2012

Sprint

Communi

cations

Inc

Softbank

Corp 39,739

15-

04-

2013

Sprint

Communi

cations

Inc

DISH

Network

Corp

37,723

03-

10-

2012

T-Mobile

USA Inc

T-Mobile

US Inc

Deutsch

e

Teleko

m AG

28,976

22-

10-

2012

TNK-BP

Ltd

Rosneft

OAO 28,000

14-

02-

2013

HJ Heinz

Co

Berkshire

Hathaway

Inc,3G

Capital

27,403

22-

10-

2012

TNK-BP

Ltd

Rosneft

OAO BP PLC 26,379

15-

07-

2013

French

Republic

Caisse des

Depots et

Consignatio

ns

23,361

09-

08-

2013

Koninklijk

e KPN NV

America

Movil SAB

de CV

22,695

25-

03-

2013

Dell Inc

Blackstone

Group LP,

Francisco

Partners 21,228


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Announced Date 03-09-2013

Target Name Nokia (Devices and Services Business)

Acquirer Name Microsoft Corp

Announced Total Value $ 7.2 billion

Acquirer Financial Advisor

Goldman Sachs

Target Financial Advisor JP Morgan

Deal Sector Technology

In a game-changer, world’s largest software

maker by revenues - Microsoft Corporation

announced on 3rd

September, 2013 that they

will purchase largely all of Nokia's Devices &

Services business, license its patents, and

mapping services.

The transaction terms require Microsoft to pay

€ 3.79 billion to purchase almost all of Nokia's

Devices & Services business, € 1.65 billion to

license Nokia's patents, for a total transaction

price of € 5.44 billion in cash. Funding will be

sourced primarily through its cash resources

outside US. Nokia will pay the software giant

€ 37.9 million if its shareholders do not

approve the deal. Approximately 32,000

people are expected to transfer to Microsoft.

Nokia will retain its patent portfolio and will

grant Microsoft a 10-year non-

exclusive license to its patents. Microsoft will

grant Nokia rights to use Microsoft patents in

its HERE (formerly Nokia Maps) services.



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In addition, Nokia will grant Microsoft an

option to extend this mutual patent agreement

in perpetuity. As part of the transaction, Nokia

is assigning to Microsoft its long-term patent

licensing agreement with Qualcomm, as well

as other licensing agreements.

The deal revolves around increased synergies,

faster innovation, unified branding and

marketing for Microsoft. Numerous reports

have dubbed Steve Ballmer’s attempt to

synchronize mobile hardware and software

services as replicating Apple’s. Nokia’s

shareholders were expecting it to make a

strategic shift to the leading mobile operating

system Android for the past one year.

Analysts’ insights suggest that poor numbers

from the exclusive Windows OS strategy

initiated in February 2011 as a major reason for

the deal.

Nokia alone constituted more than 90% of

Windows phone sales in the first half of 2013.

However Microsoft aims to leverage the

success from Lumia range of phones. Lumia

phones accounted for more than 75% of

Windows phones across the globe in 2012-13.

Lumia handsets have grown in sales in each of

the last three quarters, with sales reaching 7.4

million units in the second quarter of 2013.

Another reason doing the rounds is the close

relationship between Nokia CEO Stephen Elop

and Microsoft, with the former being erstwhile

head of Business Division in Microsoft

credited for launching Office 2010. In fact,

Nokia expects that CEO Stephen Elop and

MICROSOFT-NOKIA DEAL


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others would transfer to Microsoft at the

anticipated closing of the transaction.

A sneak peek into numbers illustrates that

operations planned to be transferred to

Microsoft generated an estimated € 14.9

billion, or almost 50 percent of Nokia's net

sales for the full year 2012. Microsoft expects

the deal to be accretive to adjusted earnings

per share in FY 15.

As part of the deal, Microsoft will procure the

Asha brand and will use the licensed Nokia

brand with existing Nokia mobile phone

products. Nokia will continue to own and

manage the brand. This provides an

opportunity to Microsoft to extend its service

offerings to a larger consumer base across the

globe, while letting Nokia's mobile phones to

serve as a platform for Windows OS phones.

It will take over Nokia's Mobile Phones

division which had sales of 53.7 million units

in Q2 of 2013.Microsoft will also immediately

make available to Nokia € 1.5 billion of

financing in the form of three € 500 million

tranches of convertible bonds.

Another important part in the deal is the

restriction up to end of 2015 from further

licensing the Nokia brand with respect to

mobile devices sales. Furthermore, the

restriction is on using the brand on its own

devices as well, which implies Microsoft will

call the shots. Fingers are crossed over the

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VODAFONE-VERIZON DEAL

Announced Date

02-09-2013

Target Name Cellco Partnership (Seller – Vodafone Plc)

Acquirer Name Verizons Communications Inc

Announced Total Value

$ 130.1 billion

Acquirer Financial Advisor

BofA ML/ Barclays/ Guggenheim Partners/ Adviser/ JP Morgan/ Morgan Stanley

Target Financial Advisor

Goldman Sachs/ UBS

Deal Sector Communication

September 2, 2013 marked a historic day in the

world of Mergers & Acquisitions when

Verizon Communications Inc. announced that

it will acquire Vodafone's 45 percent

ownership in Verizon Wireless for a whopping

$130 billion, making it the 3rd

largest M&A

deal ever. The deal size is worth more than the

GDP of more than 70% of the countries on this

planet!

It is the largest deal in more than a decade. The

previous largest deal was worth $203 billion

when Vodafone acquired Germany’s

Mannesmann AG in 2000. M&A advisory

league tables have shaken up globally with six


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investment banks leading the deal as

mentioned in the table. The transaction is

expected to be incremental to the company's

EPS by 10 percent approximately

immediately.

Verizon also announced an increase in

quarterly dividend by 53 cents per share

simultaneously with the deal. This increases

Verizon's dividend 6 cents per share, from

$2.06 to $2.12 per share YoY.

The bulk of the proceeds from the deal - 71% -

will go to Vodafone shareholders, who could

cash in their Verizon shares to take the entire

windfall as cash. The transaction would

provide Verizon with 100 percent ownership

in the US after 13 years of partnership with

Vodafone. Chairman and CEO Lowell

McAdam claims that as a wholly owned entity,

Verizon Wireless will be able to exploit the

continuing progress of consumer demand for

wireless, video and broadband services, and

also get the most out of the changing

competitive dynamics in the market. He

expects the transaction to close in the first

quarter of 2014.

Verizon Wireless’ sheer size can be adjudged

from 100.1 million retail connections, largest

4G LTE network, 73,400 employees and more

than 1,900 retail locations in the US, as of the

end of Q2 2013. It was started in 2000 as a

joint venture of Verizon and Vodafone. It

reported $75.9 billion in operating revenues in

2012, $39.5 billion in the first half of 2013,

and an impressive operating income margin of

28.7 percent in 2012 and 32.6 percent in the

first half of 2013, as per company reports.



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The deal break up is as follows: The common

stock portion valued at approximately $60.2

billion will be distributed to Vodafone

shareholders, with a minimum price of $47 and

a maximum price of $51. The cash portion of

$58.9 billion will be funded by a $61 billion

bridge credit agreement with several banks.

The bond issue is the largest ever above

Apple’s bond issue of $17 billion. In addition,

Verizon will issue $5 billion in notes payable

to Vodafone.

Analysts suggest that Verizon was keen

towards the deal due to anticipated economic

recovery in US and rising interest rates. Also,

Verizon would no longer have to operate its

wireless and wire line business separately, and

helps it take decisions much faster. However

analysts are worried about the high price paid

at a time when growth is slowing in US

wireless industry and smaller rivals are

competing aggressively on price. Shareholders

have not been enthusiastic after the deal as

reflected by the stock prices.

Vodafone too, has been focused towards

reducing debt levels and facilitating

acquisitions particularly in Europe. The deal

also involved Verizon giving out its 23% share

in Vodafone Italia for a value of $3.5 billion as

part of the consideration. Its stock prices

indicate a positive response from the

shareholders.

Data Source: Bloomberg (including charts and

tables)


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PERSONALITY PROFILES

Patrick Dlamini Xi Jinping

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PATRICK DLAMINI

CEO, Development Bank of Southern Africa

(DBSA)

The Chief Executive Officer of the

Development Bank of Southern Africa, Patrick

Dlamini got recognized this year by

Worldwide Who’s Who for his dedication,

leadership and excellence in banking and

financial services.

Having 16 years of organizational experience,

he assumed his current position as chief

executive officer of the Development Bank of

Southern Africa in September 2012. Strategic

formulation, business management and

financial modeling are some of his areas of

expertise. He is responsible for overseeing the

management of the bank on a day-to-day basis

and implementing the financial institution’s

strategic vision.



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Mr. Dlamini has previously held high-level

management roles including chief executive

officer of the Air Traffic and Navigation

System, business unit executive at Transnet

and

While the establishment of a BRICS

development bank was suggested at the Fourth

BRICS Summit last year, Mr. Dlamini

welcomed and appreciated the establishment of

this bank from the BRICS bloc. He believed

that it would play a critical role in advancing

infrastructure funding to promote development

and regional integration on the continent.

“This bank would ensure that the infrastructure

development needs of member states, in

particular Africa, would receive the much-

needed infrastructure funding to fill up the

infrastructural gaps of the continent" Mr.

Dlamini suggested. Also the bank would

establish a pool of money, called Brics

contingent reserve arrangement, for the

member states to be cushioned against any

economic shocks in future and lessen their

dependence on Western institutions further.

Although these aims challenge the traditional

roles of the International Monetary Fund and

the World Bank, institutions that in their 50-

year life have been dominated by Europe and

the United States.

The underlying motivation is to assert the

collective interests within the BRICS, though

they are hard to define, and do so against

established Western ones.


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XI JINPING

President of the People's Republic of China

Xi Jinping is the President of the People's

Republic of China, the General Secretary of

the Communist Party of China, and

the Chairman of the Central Military

Commission. He is also an ex officio

member of China's de facto top decision-

making body, the CPC Politburo Standing

Committee.



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In spite of the fact that China's GDP outweigh

the combined GDP of the other four members

of BRICS, it has avoided dominance being a

cause of political strife with its partners. Xi

Jinping has been a strong proponent of

strengthening communication and

coordination, and safeguarding common

interests within the BRICS Nations. He

understands and highlights how the economy

of these countries plays a crucial role in

contributing to the joint development,

stimulating the global economic growth and

countering international financial crises.

In an informal meeting of BRICS leaders on

Sept. 5, 2013 in St. Petersburg, the Chinese

leader exchanged views and coordinated

positions on cooperation with BRICS

countries, as well as major regional and

international issues.

The strengthening Africa-China has been

another focus point in his realm. The bilateral

strategic mutual trust and support and practical

cooperation between China and Russia have

been enhanced further with President Xi

Jinping's recent visit to Russia

He has also been a promoter for speeding up

the establishment of the BRICS Development

Bank, and making a contingent reserve

arrangement as soon as possible. He is a true

believer that BRICS countries should

strengthen collaboration to pursue the common

interests.


http://en.wikipedia.org/wiki/President_of_the_People%27s_Republic_of_China



http://en.wikipedia.org/wiki/General_Secretary_of_the_Communist_Party_of_China

http://en.wikipedia.org/wiki/General_Secretary_of_the_Communist_Party_of_China

http://en.wikipedia.org/wiki/Chairman_of_the_Central_Military_Commission

http://en.wikipedia.org/wiki/Chairman_of_the_Central_Military_Commission

http://en.wikipedia.org/wiki/Ex_officio_member

http://en.wikipedia.org/wiki/Ex_officio_member

http://en.wikipedia.org/wiki/CPC_Politburo_Standing_Committee

http://en.wikipedia.org/wiki/CPC_Politburo_Standing_Committee

http://www.chinadaily.com.cn/china/Xi-Jinping.html

http://www.chinadaily.com.cn/china/Xi-Jinping.html

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BEZOS, AMAZON’S FOUNDER, TO BUY

THE WASHINGTON POST

The Washington Post, the newspaper whose

reporting helped topple a president and

inspired a generation of journalists, is being

sold for $250 million to the founder of

Amazon.com, Jeffrey P. Bezos, in a deal that

has shocked the industry. Donald E. Graham,

chairman and chief executive of The

Washington Post Company stressed that Mr.

Bezos would purchase The Post in a personal

capacity and not on behalf of Amazon the

company. The $250 million deal includes all

of the publishing businesses owned by The

Washington Post Company, including the

Express newspaper, The Gazette Newspapers,

Southern Maryland Newspapers, Fairfax

County Times, El Tiempo Latino and Greater

Washington Publishing.

The Washington Post company plans to hold

on to Slate magazine, The Root.com and

Foreign Policy. According to the release, Mr.

Bezos has asked Ms. Weymouth to remain at

The Post along with Stephen P. Hills,

president and general manager; Martin Baron,

executive editor; and Fred Hiatt, editor of the

editorial page.



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FED DECIDES NOT TO BEGIN

TAPERING QE3

The Federal Reserve announced in its

September Federal Open Market Committee

(FOMC) meet that it would not being to taper

its $85 billion a month bond-buying program

known as Quantitative easing (QE3). The Fed

will continue to purchase mortgage-backed

securities at a pace of $40bn a month and

Treasury securities at a pace of $45bn a month.

It made no change to its 6.5 per cent

unemployment rate threshold for a rise in

interest rates. The vote for the decision was 9-1

in favor.

The Fed cut its growth forecast and

confounded expectations that it would start to

slow its third round of quantitative easing as

the rate-setting FOMC said it would “await

more evidence that progress will be sustained

before adjusting the pace of its purchases”. It

further stated “The tightening of financial

conditions observed in recent months, if

sustained, could slow the pace of improvement

in the economy and labor. market.”


http://www.ft.com/topics/themes/US_Quantitative_Easing

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The decision suggests the Fed was alarmed by

the sharp rise in long-term interest rates that

followed its June announcement of a likely

scenario for tapering its QE3 programme and

wanted to push back against markets and by

the prospect of a big fiscal showdown in the

US Congress in the coming weeks.

Q2 ROUNDUP S&P 500

Total earnings for the S&P 500 companies

were up +2.5%, with 62.6% beating earnings

expectations and a median surprise of +2.9%.

Most of this growth has come from top-line

gains, with total revenues for the companies up

+1.9% and 50.1% beating revenue

expectations, with a median revenue surprise

of +0.2%.

Strong results from the Finance sector played a

big role in giving respectability to the

aggregate Q2 data. Total Finance sector

earnings are up 30% on 8.5% higher revenues,

with beat ratios of 76.9% for earnings and

65.4% for revenues.

Excluding finance the total Q2 earnings

growth for the S&P 500 turns negative – down

2.9%. Weakness in the Technology sector

spotlights the broad growth challenge outside

of Finance, though Basic Materials (total

earnings down 11.1%) and Energy (-12.7%)

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Total Technology sector earnings are down

10.1% on 0.4% higher revenues, the weakest

performance from the sector in a while. The

hardware and software industries individually

bring in roughly 45% and 35% of the

Technology sectors total quarterly earnings.

Excluding Technology, total S&P 500 earnings

would be up 5.4% in Q2.

SAC CAPITAL INDICTED FOR INSIDER

TRADING

SAC Capital Advisors LP, the $14 billion

hedge fund founded by Steven A. Cohen, was

indicted for perpetrating what prosecutors

called an unprecedented insider trading scheme

that was revealed as part of the government’s

six-year crackdown on Wall Street crime.

SAC was charged with four counts of

securities fraud and one count of wire fraud in

an indictment unsealed in Manhattan federal

court. The alleged scheme, which involved

more than 20 companies and went back as far

as 1999, helped reap hundreds of millions of

dollars in illicit profits, the U.S. said.


http://topics.bloomberg.com/steven-a.-cohen/

http://topics.bloomberg.com/wire-fraud/

http://topics.bloomberg.com/manhattan/

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The charges and related regulatory action may

result in the firm’s dissolution. While Cohen,

57, wasn’t charged in the indictment,

prosecutors described him as “the fund owner”

and said he “encouraged” SAC employees to

obtain trading information from company

insiders while ignoring indications that it was

illegal. The U.S. described separate insider

trading schemes by at least eight former SAC

fund managers and analysts, including Noah

Freeman, Donald Longueuil, Jon Horvath,

Wesley Wang, Mathew Martoma, Richard

Choo-Beng Lee and Michael Steinberg.

BLACKBERRY TO BE ACQUIRED BY A

GROUP LED BY FAIRFAX FINANCIAL

BlackBerry Limited announced on 24th

September that it has signed a letter of intent

agreement (“LOI”) under which a consortium to

be led by Fairfax Financial Holdings Limited

(“Fairfax”) has offered to acquire the company

subject to due diligence.

The letter of intent contemplates a transaction in

which BlackBerry shareholders would receive

U.S. $9 in cash for each share of BlackBerry

share they hold, in a transaction valued at

approximately U.S. $4.7 billion.



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NEWS ROUNDUP

The consortium would acquire for cash all of

the outstanding shares of BlackBerry not held

by Fairfax. Fairfax, which owns approximately

10 percent of BlackBerry’s common shares,

intends to contribute the shares of BlackBerry it

currently holds into the transaction. However,

Blackberry said it was not in exclusive talks

with Fairfax and would continue to "actively

solicit, receive, evaluate and potentially enter

into negotiations" with other potential buyers.

Back in 2008, Blackberry was a $83 billion

company. Currently it is around $4.4 billion.

Just three years ago, BlackBerry had a market

share of nearly 70% among business customers

in North America, according to the research

firm IDC. This year, that figure has dropped to

around 5%, IDC says. Globally, BlackBerry's

business market share has slipped to around 8%

from 31% in 2010, according to IDC.

DETROIT FILES FOR BANKRUPTCY

The city of Detroit filed for Chapter 9

bankruptcy on July 18, 2013. It is the largest

municipal bankruptcy filing in U.S. history by

debt, estimated to be $18–20 billion,

exceeding Jefferson County,

Alabama's $4 billion filing in 2011. Detroit is

also the largest city by population in the U.S.

history to file for Chapter 9 bankruptcy, more

than twice as large as Stockton, California,

which filed in 2012. Detroit’s population

has declined from a peak of 1.8 million in 1950.

Numerous factors over many years have

brought Detroit to this point, including a

shrunken tax base but still a huge, 139-square-

mile city to maintain; overwhelming health care

and pension costs; repeated efforts to manage

mounting debts with still more borrowing.


http://en.wikipedia.org/wiki/Government_of_Detroit

http://en.wikipedia.org/wiki/Chapter_9_bankruptcy


http://en.wikipedia.org/wiki/Jefferson_County,_Alabama

http://en.wikipedia.org/wiki/Jefferson_County,_Alabama

http://en.wikipedia.org/wiki/Jefferson_County,_Alabama#2011_Bankruptcy_filing

http://en.wikipedia.org/wiki/Detroit


http://en.wikipedia.org/wiki/Stockton,_California

http://en.wikipedia.org/wiki/Stockton,_California#Bankruptcy

http://en.wikipedia.org/wiki/Decline_of_Detroit

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US UNEMPLOYMENT RATE AT 5 YEAR LOW

The Labor Department said Friday, September 6th

that

the unemployment rate dropped to 7.3 percent, the

lowest in nearly five years. But it fell because more

Americans stopped looking for work and were no

longer counted as unemployed. The proportion of

Americans working or looking for work fell to its

lowest level in 35 years.

Data suggested that most of the hiring in August was

in lower-paying industries such as retail, restaurants

and bars, continuing a trend that began earlier this

year. Retailers added 44,000 jobs and hotels,

restaurants and bars added 27,000. Temporary hiring

rose by 13,000. Manufacturers added 14,000, the first

gain after five months of declines. Construction jobs

were unchanged in August. Auto manufacturers

boosted hiring in August. Some of the jobs were

workers who were rehired last month after being

temporarily laid off in July, when factories switched

to new models. Americans are buying more cars than

at any time since the recession began in December

2007. And U.S. factories expanded in August at their

fastest pace in more than two years.


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ACTIVITIES OF TEAM NETWORTH:

Networth operates under four broad verticals:

I. Events

Animal Spirits: A series of 4 intersection

competitions for PGP1 batch to give them a

flavor of various finance domains. These

include trading events like “The PIT” &

“Munaafa”, finance quiz “FinQ” & stock

pitching “Stock 20-20”.

Vista Events: Networth conducts 3 events at

Vista, the IIMB Business festival. These

include game-theory based Get-Nashty,

portfolio trading based Master the Market, and

Convexity Calls.

Corporate Events: We aim to reach out to

market participants (buy/sell side) to conduct

workshops/seminars for the students.

Fin Gyaan Sessions: We conduct sessions for

the PGP1s to help them prepare for finance

interviews for summer internships.

II. Publications: Half-yearly IIMB finance magazine

“Bottomline”

Weekly business digests: quick overview of

the financial world through the week

Biweekly Deal-Fix: Fortnightly review of

M&A deals, new capital market offerings

Compilation of interview experiences and

questions from last year’s summer placements

Compilation of current macroeconomic

happenings around the world in “Fin Fastrack”

Budget Review


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MARKET DATA

Index

Q2 2013

Open Q2 2013 Close % Change

Q3 2013

Open Q3 2013 Close

%

Change

Half Yearly %

Change

US Markets

DJIA 14578.54 14909.60 2.22

14911.60 15129.67 1.45 3.78

S&P 500 1569.18 1606.28 2.31

1609.78 1681.55 4.27 7.16

Nasdaq Composite 3268.63 3403.25 3.96

3430.48 3771.48 9.04 15.38

Russels 2000 951.41 977.48 2.67

981.30 1073.79 8.61 12.86

European Markets

STOXX 50 2697.77 2604.51 -3.58

2604.51 2776.23 6.19 2.91

FTSE 6411.74 6215.47 -3.16

6215.47 6462.22 3.82 0.79

CAC 40 3729.28 3738.91 0.26

3763.17 4143.44 9.18 11.11

DAX 7806.12 7959.22 1.92

8000.02 8594.40 6.92 10.10

Asian Markets (excluding India)

Shanghai Composite 2229.46 1979.21 -12.64

1965.99 2174.67 9.60 -2.46

Hang Seng 22203.93 20803.29 -6.73

21004.56 22859.86 8.12 2.95

Nikkei 225 12371.34 13667.32 9.48

13746.72 14455.80 4.91 16.85

FTSE Straits Times 3308.10 3150.44 -5.00

3150.44 3167.87 0.55 -4.24

Indian Markets and sectoral Indices

Nifty 5697.35 5842.20 2.48

5834.10 5735.30 -1.72 0.67

Sensex 18890.81 19395.81 2.60

19352.48 19379.77 0.14 2.59

BSE Midcap

BSE Smallcap

Bankex 11414.95 11617.25 1.74

11597.45 9617.80 -20.58 -15.74

BSE IT 6898.91 6255.10 -10.29

6206.07 7839.26 20.83 13.63

BSE Auto 9978.50 10715.77 6.88

10690.42 10996.59 2.78 10.20

BSE Metals 8757.85 7753.76 -12.95

7760.49 8371.23 7.30 -4.41

BSE Healthcare 8032.92 8845.26 9.18

8853.74 9463.81 6.45 17.81

Commodities

WTI Crude ($/bbl) 97.36 96.56 -0.83

96.58 102.33 5.62 5.10

Brent Crude ($/bbl) 110.15 102.16 -7.82

101.90 108.37 5.97 -1.62

Comex Gold ($/oz.) 1596.80 1233.70 -29.43

1232.90 1326.50 7.06 -16.93

CRB Commodity Index 296.39 275.62 -7.54

276.76 285.54 3.07 -3.66

Copper 340.00 305.05 -11.46

303.20 332.30 8.76 -2.26

Natural Gas 3.97 3.57 -11.33

3.55 3.56 0.37 -10.30

Exchange Rates

USD INR 54.29 59.39 8.59

59.47 62.62 5.03 15.34

GBP INR 82.42 90.51 8.93

90.35 101.07 10.60 22.62

EUR INR 69.83 77.65 10.07

77.48 84.52 8.33 21.04

INR JPY 1.73 1.67 -3.60

1.67 1.57 -6.25 -9.04

Government Bond Yields

US 10 Year Yield 1.87 2.49 24.73

2.50 2.61 4.16 39.49

German 10 Year Yield 1.29 1.73 25.41

1.73 1.78 2.98 38.01

Japan 10 Year Yield 0.59 0.85 30.36

0.89 0.69 -29.74 15.49

India 10 Year Yield 7.98 7.46 -6.87

7.42 8.76 15.27 9.85


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