InFINeeti August2014 Annual Edition

8/11/2019 InFINeeti August2014 Annual Edition

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Dear Friends,

Greetings from Team InFINeeti

A lot has changed since the last me we interacted. A new government has been formed, the Union budget has been pre-

sented, the Sensex has touched a new high of 25000 and many more events. Before the elecons, a slogan from BJPs

naonal campaign had become famous, Ache Din Aane Wale Hai. The masses have voted for the party and aer three

decades, a single party has won a majority in the Parliament. There were high expectaons from the new government.

The rst test of the new government was to present a balanced budget which clearly lays down the roadmap for econom-

ic growth in India in both-short and long term. So, our theme for the magazine this me is based on the slogan of BJP:

Union Budget: Has budget met the expectaons of Ache Din ?

Technology, nowadays, is touching every sphere of business. Banking is no excepon. We have tried to analyse the role of

technology in shaping the banking industry. Also, we are hearing about GST for long enough. One of our arcles analyses

the future of GST in India. Many people believe that the one of the reasons for the fall of the last government can be

aributed to populist schemes by the centre and corrupon emanang from those schemes. We have tried to analyse

whether populism or raonal economic policies work in the longer term.

Financial sector is in dire need of reforms. Most of the laws are archaic and date back to the Stone Age. In this backdrop,

FSLRC commiee was formed which tabled its recommendaons. One of our arcles analyses the recommendaons

made by the commiee. In our constant tryst to innovate, we have tried to amalgamate two unrelated events into one.

One is the recently concluded FIFA World Cup and the other one is M&A. How football and M&A can be related? We have

an interesng arcle on it. The magazine also contains the analysis of dividend distribuon tax and FDI in Insurance, and a

discussion on whether they are good or not. This is the me of the year when B-school students have returned from their

summer internship. So, we have captured the experience of one of our colleague regarding how summer internships are

important to understand the nuances of business in a MBA students life. We then have tried to get an insight into the

Indian Agriculture sector and Rural Finances by conducng an interview with a dignitary from NABARD. We have also in-

cluded an arcle on implementaon of IFRS in India.

Besides the insighul arcles, the edion also features regular columns like FIN Trivia, FIN-lingos and News Chronicles.

We have also added a new regular column on equity research. We hope readers will nd it useful.

From the next me onwards, the readers will be greeted by our new team and we, the current team, have a sense of

pleasure, pride and at the same me are poignant as it was an excellent opportunity given to us to handle this esteemed

magazine. We hope that we have done a good job.

Till then we hope that you will enjoy reading this annual budget edion.

Do write to us regarding any suggesons, feedbacks or recommendaons.

Goodbye & Happy Reading !!!

FROM THE EDITORS DESK 3


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CONTENTS2 CONTENTS4

>>> P 26 >>> P 36 >>> P 56

Football MA:

A M&A

5

Budget plus 3.0:H

IIFT

9

Future of gst:A & - - GST

12

Top events of 2014:Rw 2014

24

Role of technologyin banking:

A - , &

26

COVER

STORY

N LYSISOFTHE

UNIONBUDGET

Does the budget meet the

expectations of Ache Din

8

Fslrc recommenda-tions:

Hw FSLRC -

-

45

EXPERT SPEAKS

FIN LINGOS16

EQUITY RESEACRH PRE-CURSOR36

49

Ifrs implementation

in india:

B IFRS

53

NEWS CHRONICLE

R

40

Dividend distribu-tion tax:

Hw

.

A -

?

32

Facultys corner:

FDI I

Populism: A neces-sary evil?

I-

Summer internshipexperience:

S Aw

RBI

61

56

60

63 FIN TRIVIA


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5

INTRODUCTION

Football has oen been used as a powerful image

represenng hope, as a vehicle that binds people and

encourages them to funcon as one, giving them a

sense of purpose and direcon. There is even an ad-

versement that shows kids playing football with a

rag ball in a poverty stricken locality in Africa, a strong

testament to the overwhelming senmental appeal

and sway that football holds over the masses. Club

football has cashed in on this popularity and has

transformed itself into elaborate money making ma-

chine that is on par with the leading corporate giants

of present day, in terms of revenue streams and mar-

keng campaigns.

SOURCES OF REVENUE

How do soccer clubs make money? It is a very simple

queson that many fans of the game oen wonder

and postulate but seldom fully understand. Most rst

answers to this queson would be match-day sales,

but there are those with a deeper understanding of

the industry that know that this is not quite the full

story. Deloies Football Money League reports the

revenue of top football clubs by broadly classifying

the revenue into 3 main segments: Match-day Reve-

nue (gate receipts), Broadcasng Revenue (domesc

and internaonal), and Commercial Revenue

(sponsorship and merchandise). As per a 2013 report,

Real Madrid earned revenue of $675 million during

the last year and has a team value of $3 billion as of

May 2014, of which $1.12 billion (32.6%) is to beearned through commercial sources, another $1.12

billion from Broadcasng, $710 million (20.6%)

through Match Day revenue and the remaining $484

million through brand value.

It is important to understand the growing similarity

between corporates of the nancial world and foot-

balling clubs. For the laer, assets are-players, broad-

cast rights, kit sponsorship deals and franchise deals,

and these are used by the club to make money, not

so markedly dierent from the way corporates make

money. Another curious similarity that can be struck

is the concept of mergers and acquisions (M&A).

FOOTBALL PLAYER TRADE VIS--VIS

CORPORATE M&A

BY-BRAJESH M & NITESH SINGH, IIFT


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6

The idea of M & A, though in circulaon for a long

me, has started gaining purchase over the past few

months, with several big cket deals being an-

nounced; Whatsapp-Facebook, Shire-Abbvie, Myntra-

Flipkart, to name a few.

FOOTBALL TRANSFERS AND CORPORATE M&A

The footballing world is no stranger to the idea of

M&A, though in an enrely dierent context. It is not

possible for football clubs to buy each other, so acqui-

sions are limited to people: the manager, the players

and the markeng and support sta. In fact, the

transfer market, which facilitates the acquision of

players, is the most talked about topic when transfer

windows open, and is fuelled by incessant speculaon

and hecc negoaons. Before we further develop

this analogy, lets take a step back and try and under-

stand why companies in the nancial world go in for

M&A. Though the reasons for such acvies would

vary from case to case, they can be broadly grouped

under a few categories, like capability enhancement,

expansion into other markets, reducon in compe-

on, nancial survival etc. A close examinaon of

transfer deals in football reveals striking similaries

with these points.

CAPABILITY EXPANSION

Capability expansion refers to a companys eorts in

shoring up its resources and improving resistance to

possible weaknesses. One of the major reasons be-

hind acquision is to appropriate some capability that

the target company has and that the acquirer wanted

or needed. Comcasts 2002acquision of AT&T

Broadband (so it could oer more comprehensive tel-

ecommunicaons services) and Walt Disneys 2006

acquision of Pixar(to extend its animaon capabili-

es and add new lms it could market to its estab-

lished audience) come under this bracket. Premier

League clubs have spent more than 4.4bn on players

since the transfer window was introduced 12 years

ago with this summer's spending set to cross 500m.

Post 2008, when Abu-Dhabi-based oil magnate Sheikh

Mansour bin Zayed Al-Nahyanbought Manchester

City FC, the clubs total cash outlay was 930.4m, of

which only 365.3m was generated from their own

operaons. Chelseas acquision of Diego Costa is a

clear indicaon of Mourinhos intenon to adding

some repower to his long depleted strike force, and

providing support to Fernando Torres who oen cuts

a lone gure up front. Luke Shaws move to Manches-

ter United to plug deciencies in le back can also be

viewed similarly. Other familiar names among big

spenders are Barcelona and Real Madrid, who are

constantly on the lookout for promising new talent, to


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maintain their reputaon of being football power-

houses. Roman Abramovich's billions have made Chel-

sea the Premier League's biggest spenders over the

past decade with 681m going on transfer fees.

EXPANSION

Another main movaon behind M&A is to expand

into a new geographic locaon. Examples include the

acquision of Lucent (U.S.) by Alcatel (France) in 2006,

Bhars deal with Zain to buy the Kuwai rm's mobileoperaons in 15 African countries in 2010 and South

African Breweries purchases of Miller (U.S.) in 2002

and Bavaria Brewery (Colombia) in 2005. Extrapolang

this argument to the world of football, a clubs mone-

tary fortunes are linked to the following that it enjoys

across the world.

The more popular a club is throughout the world, the

more point of sale opportunies it will have for fans to

purchase merchandise, thereby lling the coers of

the football club. It would be pernent to talk about

Manchester Uniteds eorts in building up a fan basein Asia, ranging from ocial websites in local lan-

guages (manutd.cn, manutd.jp) to e ups with local

mobile networks for access to free content. All of their

promoonal adversements feature Shinji Kagawa,

their Japanese midelder, in an aempt to connect

with their fans in Japan. Another instance of clubs try-

ing to build their image in new markets is the estab-

lishment of soccer training camps and youth leagues,

as entry points to an expansion in the future.

Many a mes, the raonale behind M&A is to expand

your market share by buying out compeon. Acquisi-

on of Thums up by Coca Cola in 1993 falls under this

category. Thums Up had an 85% market share when

sold, and it made sense for Coca Cola to swoop in and

bring Thums Up under its wings. There are endless

examples for this when it comes to football. A case inpoint is Borussia Dortmunds midelder Mario Gotzes

move to rivals Bayern Munich last summer, followed

by striker Robert Lewandowskis exit to the same club.

Juan Matas move to Manchester United constutes a

rather curious move by Chelsea to purportedly make

life dicult for its contenders Arsenal, Liverpool and

Manchester City.

7

Source:www.wowtechy.com

Source: www.thesportsbank.com


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LEVERAGED DEALS

Many M&A deals take shape of a leverage deal in

which the whole, or a part of a struggling business

enty is taken over by an acquirer, oen one aligned

with its eld of work, so as to open up the possibility

of collaboraon with the acquired business. Mi-

crosos acquision of Nokia, Sun Pharmaceucals

taking over of struggling Ranbaxy are examples for

the same.

A lot of football clubs resort to this measure so as to

avert the risk of nancial crisis. Cash strapped Ju-

ventus, for instance, is trying to make some money

out of the signicant interest that the other clubs

have in key midelder Arturo Vidal. Chelsea veteran

Frank Lampard being ooaded to rivals Manchester

City, is akin to companies geng rid of streams that

are no longer considered core to their business.

CONCLUSION

Having talked of M&A in companies and their similari-

es with transfers in Football, it is important to sound

a word of cauon; the path to a successful deal is lad-

en with numerous obstacles in all shapes and sizes.

Instances of failed deals and failed transfers are many

in number; America Online (AOL) and Time Warner in

2007, Sprint and Nextel Communicaons in 2005,

Motorola and Google (2012); the list is depressingly

long. A Forbes arcle states that the probability of

success of an M&A deal is about 50%, a coin toss. The

football world is also replete with instances of failed

transfers; Marouane Fellaini to Manchester United,

Fernando Torres to Chelsea, Andriy Shevchenko to

Chelsea, Mario Balotelli to Manchester City. It is

therefore imperave to understand to the last detail,

the implicaons of a possible merger, or a player ac-

quision, for a deal once signed cannot be undone soeasily.

Source:www.etoro.com/www.manutd24.com

Source: www.iamwire.com

8


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OVERVIEW

The third edion of the annual budget analysis ses-

sion, Budget Plus 3.0, was organized at Indian Ins-

tute of Foreign Trade, Kolkata. The esteemed discus-

sion panel included Dr. K. Rangarajan, Head, Kolkata

Center, Dr. Ranajoy Bhaacharyya, Professor of Eco-

nomics, IIFT, Dr.Saikat Sinha Roy, professor of eco-

nomics, Jadavpur University, Mr.Pankaj Agarwal and

Mr.Akash Mansinka from Ernst and Young. The discus-

sion was moderated by Dr. Bibek Ray Chaudhuri,Pro-

fessor, IIFT.

Dr. K Rangarajan welcomed everyone and said that

the Budget aects everyone from a housewife to a

business tycoon and how everyone has diverse views

on it. He added that IIFT has invited academicians,

faculty and industry experts to have a discussion on

the budget and what it holds for every one of us.

The Student Body gave an enlightening presentaon

on the highlights of the budget. It was a succinct over-

view, throwing light on the various schemes and ini-

aves taken by the Government. Dr. Bibek Ray

Chaudhuri threw light on the developmental per-

specves and spoke on how he looked forward tothe economy geng back on track with higher

growth, stable inaon and prudent policy system,

9
http://cc.iift.ac.in/docs/iift/profile.asp?id=7http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=7


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although the Consumer Price Index, being double-

digit, was sll a major issue of concern. The Budget

lays out the roadmap to achieve a growth rate of 7 -

8%. According to him, The Government is targeng

small savings".

Dr.Saikat Sinha Roy analyzing the budget

Dr.Saikat Sinha Roy spoke as to how, for the last two

years, the economy has not been performing well.

The trust of the investors in the Economy needs to

be restored. According to him, the budget is a docu-

ment of intent. The current government manifesto

included the need for an overhaul of infrastructure

by which the Government will get revenue. He said

that subsidies should be phased out for the Indian

economy to compete with the other economies.

Although the current government is perceived to beindustry friendly, yet retrospecve taxes have not

been taken o. According to him, one of the fea-

tures of the budget dierent from the earlier ones is

that most of the changes are for more than two

years and no meline has been specied. Moreover

tax benets have been given to the industries that

have their own power units. Dividend distribuon

tax, the tax paid by a company on its dividends paid,

needs to be grossed up".

Students listen as experts dissect every aspect of the budget

Mr. Pankaj Agarwal spoke on the indirect taxes which

comprises the customs, excise and service tax. He en-

lightened the gathering on how Service Tax, though

introduced only in 1994, garners the highest tax reve-

nues for the Government.

He also pointed out the iniaves taken to incenvize

the use of renewable energy resources. The decision

of the Government to levy taxes on the services pro-

duced by the educaonal instutes will add to the

revenues of the Government.

Dr. Ranajoy Bhaacharya took a dierent stance from

the other panelists and remarked that he was

disappointed by the budget. He said that the Gov-

ernment had missed a huge opportunity. Having been

elected with an overwhelming mandate, it

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was me to take some hard measures. According to

him, the budget was a pure eyewash. He quesoned

the transparency of the Government and its aempt to

surrepously reduce expenditure behind the

scenes, referring to the reducon in the expenditure

on Agriculture, Rural Development and Social sector.

He remarked that Agriculture is the main boleneck

in India and enlightened us on the fact that Agricul-

ture employs 55 percent of the populaon yet ac-

counts for only 14 percent of the GDP. This structural

aw needs to be addressed.

The audience, comprising of students from IIFT, were

very parcipave and had various quesons ranging

from the duraon of the long term capital gains to

increasing FDI in defense.

The panel concluded that though the budget was

welcoming, yet more was expected of it. They

called in for simpler tax administraon that would

lead to larger tax compliance.

All in all, the session was quite enriching and informa-

ve as students, both from the rst year as well as

from the second year got to understand the nuances

of the budget and also understood how to dissect the

niy-griy of the budget. So, from next me onwards

they would know what to look for in the budget and

would be in a beer posion to analyze it.

By Mohd Zeeshan -IIFT

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INTRODUCTION

The most awaited Goods and Services Tax (GST), a

major reform in the Indian taxaon system with re-

spect to indirect tax, has been announced in the Un-

ion Budget of 2014. Every industry is looking forward

to this transformaon with the posive hopes. There

are quesons in the minds of people from every sec-

tor of economy regarding the impact of the changes

that would be brought by GST. The manufacturers,

wholesalers, retailers and the consumers are waing

to know their stake associated with the reform.

BACKGROUND

The current tax system is inecient and complicated

due to the tussle between the central and the state

governments to generate maximum revenue forthem. Central government levies tax on the manufac-

ture of goods through CENVAT, on services through

Finance Act and on the sale of goods through Central

Sales Tax Act (CST). States again levy taxes on the

sales of good that is independent of the tax levied by

the Centre. This mul-layered tax system leads to the

cascading eect on the indirect taxaon system.

However, aer the introducon of VAT in 2005, the

cascading eect has been reduced to a certain ex-

tent. Moreover, the bulk of the tax revenue goes to

the central government. So in order to compensate

the state government it levy mulple indirect taxes

on the revenue generated from goods, for example

inter-state sales tax, octroi etc.

The proposed GST is aimed at replacing mulple indi-

rect taxes like central excise, VAT, service tax with the

common taxaon system. And this can have major

implicaons on the Indian economic growth. GST

would bring in higher revenue for the government by

broadening the tax base and minimizing exempons.

This would also redistribute the tax burden equitably

between the manufacturing and the service industry.

THE PROPOSAL OF DUAL GST

The current proposal of dual goods and service tax

will not disnguish between goods and services. And

the central and the state GST would be levied on the

taxable value of the transacon. Except few assump-

ons, all the goods and services would be covered

under this scheme.

Currently the indirect taxes on goods is around 20%

and services are taxed at around 10%. But once the

GST IS THERE ANY

FUTURE?

BY-SNEHA SHRIVASTAVA,

IIM-RAIPUR

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T

GST is implemented, the nal rate for GST is expected

to be around 14-16%. Further, the proposal has been

put for the dual tax structure which will impose single

tax rate for services and mulple tax rates for the

goods.

WHAT WILL EXACTLY HAPPEN?

The implementaon of the goods and services tax

would impose a single tax on the goods and services.

At the end the amount of tax the consumer has to

pay will remain almost same in the short run. But the

distribuon of taxes would be equal on both the

manufacturing and services sector. This will reduce

the extra burden that the manufacturing sector is car-

rying. Moreover, it will broaden the tax base by mini-

mizing exempons and scope of corrupon by mak-

ing the taxaon system more transparent. The cas-

cading eect of the taxes imposed by the centre and

the state would disappear.

IMPACT ON THE SUPPLY CHAIN AND LOGISTICS:

Currently due to the complex tax structure the inven-

tory and the distribuon decisions are taken so as to

avoid as much tax as possible. The manufacturers

maintain warehouses in dierent states to save on

central sales tax imposed on inter-state movement of

goods. This leads to the operaonal ineciency. Fur-

ther, the impact of the increase in the number of

warehouses is borne by the end consumer in terms of

cost or they have to sacrice on quality.

But the GST will bring a common and centralized mar-

ket for the sales of goods and services across the coun-

try. This will increase the operaonal eciency of the

supply chain and the benet will reach to the end con-

sumer as well.

IMPACT ON GDP:

Due to the transfer of major share of indirect tax col-

lected to the centre, state levies mulple indirect taxes

on the goods and services. To avoid this the taxpayers

play with the loopholes in the tax structure and try to

avoid paying the tax, leading to larger number of ex-empons. This leads to losses for the government.

But, the implementaon of GST would bring in trans-

parency and reduce complexity. It will broaden the tax

base and would redistribute the burden between the

manufacture and service sector. Further, under GST all

the goods and services would be covered and the num-

ber of exempons would be reduced. And this will gen-

erate more revenue for the government.

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T GST

The center and state will have their xed share and

there would not be scope of either unnecessary tax

imposion or tax avoidance. This will bring more in-

vestment, generate more employment and would

promote exports. All this together would add to the

GDP of our country.

IMPACT ON THE MANUFACTURING SECTOR:

As discussed above the manufacturing sector has

been pressed with the extra burden of tax as it pro-

vides the scope for mul-stage taxaon. This has

made this sector less aracve for investment.

But the GST would release the ailing manufacturing

sector from the heavy tax burden. This would make

this sector as a protable opon which would spur its

growth. As a result, cost of producon will decrease

and export will increase.

IMPACT ON THE PRICE OF GOODS:

In the long run, the price of goods would decrease as

the prot earned in the upper end of the supply chain

would be transferred to the consumers as well.

IMPACT ON THE SYSTEM:

The reform will increase the eciency of the system

by bringing in transparency. The dierent sectors

would be treated equally and the consumers would

have to pay the fair price for the goods and services.

The transparency will bring compliance to the govern-

ment norms and would reduce corrupon.

For example, in case of the goods manufactured, sup-

pose the consumer pays the GST of 6% while buying

the product. Here the tax amount paid by the consum-

er would be shared by the manufacturers, wholesalers

and retailers equitably based on their cost of manufac-

turing or services.

ANALYSIS-FOR THE FUTURE OF GST

With respect to the prior experience -Implementaon

of VAT in 2005-2008:

The implementaon of value added tax (VAT) in 2005

had increased the income tax revenue for the govern-

ment of India to 5.9% of GDP in 2008 when compared

to the 3.7% of GDP in 2004. Working on the

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similar lines of VAT, GST could also reduce the com-

plexies in the tax structure which gives the scope of

corrupon. It will bring transparency which will in-

crease the revenue generated from the income tax.

WITH REFERENCE TO OTHER COUNTRIES:

According to the report published by the Naonal

Council of Applied Economic Research, implementa-

on of GST would increase GDP by 0.9%-1.7%. Canada

experienced 1-2% increase in GDP aer the imple-

mentaon of GST. On the similar lines, when GST was

introduced in New Zealand in 1987, it increased the

revenue generated from tax by 45%.

Currently, there are 160 countries in the world who

have adopted GST.

WITH RESPECT TO THE BJPS ELECTION MANIFESTO:

BJP government is strongly in the favor of bringing

transparency in the tax system and the growth and

development of all the sectors of economy. The evi-

dence collected from the implementaon of VAT in

India in 2005 and the implementaon of GST or VAT in

other countries shows the brighter picture. It reveals

that the centralizaon of the taxaon system and the

single tax rate for both the goods and services would

reduce the complexity and would bring in more trans-

parency. It would reduce the scope of red tape and

tax avoidance or exempons, which is otherwise pos-

sible in the exisng taxaon system.

CONCLUSION

To summarize, the implementaon of GST would not

have direct impact on the consumers in the short run,

as they have to pay almost same tax for the consump-

on of goods and services. However, in the long run

the benets earned by the manufacturers, wholesalers

and the retailers would be passed on to the consumers

and they have to pay lesser on the purchase of goods.

Moreover, the burden on the manufacturing sector will

get reduced as there will be equitable distribuon of

tax between the manufacturing and services. This will

encourage investments in the manufacturing sector,

which is currently lagging behind in our country. The

boost in the manufacturing sector will create the col-

lateral benets like increase in employment, exports,

investments opportunies, FDI etc.

All these factors would together add to the revenue

generated from the indirect tax and would accelerate

the growth of the country.

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16

CHINESE WALL

It is the communicaon barrier

that should exist between

dierent departments of a -

nancial instuon to avoid any

possible conict of interest.

For example, if a rm oers both brokering and cor-

porate advisory services, the client should be able to

trust that the sensive informaon which it is shar-

ing with the advisory department would not be used

by the brokering department to make undue nan-

cial gains.

INVESTMENT GRADE

It is a rang system that indicates the risk of default

for a bond issued by a company or a sovereign.

There are bond rang agencies such as Standard &

Poors, Moodys and Fitch among others that assign

rangs to corporate, municipal or sovereign bonds.

These rangs correspond to the risk involved in buy-

ing these bonds.

CLUB DEAL

It is a private equity buyout in which the controlling

interest in a company rests with several dierent

private equity rms. This

group pools its assets togeth-

er and collecvely makes the

acquision. PE rms do this

in order to acquire expensive

companies which they would not have been able to

acquire going alone. Also, it is an eecve risk man-

agement strategy since the risk is now distributed.

CONDITIONS PRECEDENT

The set of condions that a borrower must meet

before he can request that credit facilies be madeavailable to him. These condions are a part of the

lending agreement that the borrower might have

with a bank or nancial instuon.

Fin Lingo


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FALLEN ANGEL

It is a security which was once in-

vestment-grade but has since been

downgraded to junk status. Not all

fallen angels are securies of com-

panies headed towards bankrupt-

cy. For example, a company with

strong fundamentals may temporarily lose investor

condence due to extraneous factors. This may result

in a downgrade of credit rang.

EXCHANGE TRADED FUND

An investment fund that holds stocks, bonds or com-

modies and is traded on an ex-

change like a regular stock. An ETF

tracks an index and tries to replicate

the return provided by it. For exam-

ple, when one buys into an ETF

tracking the Sensex, they are buying into a porolio

of stocks being traded there. The objecve here is not

to outdo the performance of the Sensex but to match

it.

CALL SWAPTION

Call Swapon is a category of op-

on which gives the owner a right

but not the obligaon to exercise

a swap. If exercised the buyer would have the right to

receive a pre-determined xed interest rate. Swap-

on is short for call swap opon. It is a hedging tool a

buyer might use if he believes the interest rates are

likely to go down.

PITCHBOOK

A book of graphs, charts and market data along with

recommendaons for the

market presented to prospec-

ve clients by bankers and

nancial instuons. The ob-

jecve is to land a mandate to

handle the clients funds.

MATERIAL ADVERSE CHANGE (MAC)

Material Adverse Change (MAC) is a condion that is

usually included in loan agreements,

providing protecon to lenders

against changes that may have a sig-

nicant eect on the business, nan-

cial condion and assets of the bor-

rower. Aer the occurrence of a

MAC event prior to closing of a deal, lenders usually

reserve the right to modify the interest rate or other

terms of the agreement. For already closed deals,

lenders may refuse any further drawing of cash and

demand immediate debt repayment.

Fin Lingo

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COVER STORY 14


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COVER STORY 19

INTRODUCTION

Elecon 2014 was a very high voltage aair where

many promises were made by our policians to bring

the economy back on track. The current government

carries the expectaons of a billion plus populaon to

salvage the economy from the deep economic mess it

is currently in. With this backdrop the Union budget

2014 was tabled on 10th July in Parliament by our Fi-

nance Minister Mr. Arun Jaitley. The Finance Minister

had limited me at his disposal to come up with any

big bang reforms. Nevertheless he was successful in

making some good decisions in the Union Budget. The

Finance minister announced a slew of measures for

correcng the economy in elds of manufacturing,

job creaon, educaon, banking and infrastructure.

So, although the budget measures may not be the big

cket reforms that people were expecng but these

same measures have the potenal to cause transient

but crical changes in the system. Some of the key

measures that the government took could have a very

posive eect on the economy.

MANUFACTURING BOOST

The Budget has specied a number of measures to

recfy the manufacturing sector and bring it back on-

to the growth track. The budget has announced steps

to raise private consumpon and make manufactur-

ing industry the future wheel that will drive the econ-

omy. Steps such as extending excise duty cuts on vari-

ous products like auto and consumer durables can

help in raising the private consumpon and spruce up

capacity ulisaon.

Source: Ministry of Stascs and Programme Imple-

mentaon

Infrastructure push in the form of beer road connec-

vity could push the demand of automobiles in our

country thus giving a boost to the industry that has

been in stagnaon for the last couple of years. The

biggest advantage of the growth of manufacturing

sector is that the eects are more prominently visible

in the rural areas than the urban areas.

BUDGET ANALYSIS : KYA ACHE

DIN AANE WALE HAI?

BY SURYANARAYAN PANDA

-IIFT


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So, manufacturing is the best tool to reduce the Urban

-rural income divide.

INFRASTRUCTURE PUSH

A greater thrust on the infrastructure was unmistake-

able in the Union budget. The overall spending for in-

frastructure is budgeted to increase by 24% to

210000 crores. The government has allocated 7060

crores to setup 100 smart cies. This will not only

boost the infrastructure sector but will also provide

low cost housing opons to the millions of poor peo-

ple who cannot aord proper housing.

Source: Ministry of Finance

The Budget has also focussed on ways to fund the In-

frastructure push by seng up of 3P India enty and

Infrastructure bonds. This could create a massive push

for beer infrastructure and the direct beneciaries

would be the Engineering, Procurement and Construc-

on (EPC) companies. The government has idened

that 40% of Indians do not have basic sanitaon facili-

es and the government has not provided its share of

facilies. The basic infrastructural issues like sewage

drain and access to roads could be addressed in the

Infrastructural push of the government thus improv-

ing the standard of life of average Indians.

INCREASE OF TAX EXEMPTION

The Finance Minister increased the basic tax exemp-

on rate from the current 2 Lac to 2.5 Lac for all

individuals. For women and senior cizens between

the age group of 60 to 80 years the basic exempon

rate is increased from 2.5 Lac to 3.0 Lac. The invest-

ment related deducon under secon 80C has also

been increased from 1.0 Lac to 1.5 Lac. These in-

creased tax exempon rates may cause a revenue loss

of 22000 crores to the government. However, the

increased tax exempons will ensure greater money

with the consumers, thus increasing the disposal in-

come with the general public. This will increase con-

sumpon and this will get reected as higher econom-ic acvies. The indirect beneciaries of the raising of

tax exempon could be FMCG, consumer durables,

two wheelers companies as well as the housing indus-

try in the form of increased consumpon.

EASE OF DOING BUSINESS

Investor senment is very important for the accrualof required investments to fund our economic growth.

Hence, the ease of doing business is a very important

factor that any country should keep in mind. Sadly,

India ranks at 134 out of 189 countries in the Interna-

onal Finance Corporaons Ease of Doing Business

index. The Finance Minister has taken a few steps in

this regard to give a llip to the overall operang envi-

ronment for an investor. These steps should incenv--

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COVER STORY 21

-ise value addion, generate income and create more

jobs for an average Indian thus improving the overall

environment for doing business. Moreover it couldalso make the Indian investment story aracve for

foreign companies and could aract highly needed

foreign funds.

Source: Ministry of Finance

INCREASE IN FDI IN DEFENCE

The Union budget presented a 12.43% hike in de-

fence budget to 229000 crores of rupees. The Finance

Minister, who also holds the porolio of the Defence

ministry talked about the important task of indige-

nous producon of defense equipments. To boost

home producon, the Finance minister hiked the FDI

in the defence sector to 49% from the earlier 26%.

The government has taken a sound decision by de-

linking FDI up to 49% for transfer of state of the art

technology. The primary focus of the government isto reduce the dependency of the security of the na-

on on supplies by other countries. Given the large

domesc market and advantage of operang out of

India this new policy could give an impetus to domes-

c manufacturing of defence equipments by domes-c companies. It could also aract those foreign com-

panies that were looking to invest in Indian defence

manufacturing as part of the earlier Defence Oset

Policy.

PUSH TO EMPLOYMENT CREATION

The budget has allocated 330 crores to set up 6

mega clusters around the country to boost the em-

ployment opportunies in the country. The budget

has also reduced the excise duty in labour intensive

sectors like footwear from 12% to 6% for footwear

priced between 500 to 1000 and few specic foods

packaging industries from 10% to 6%.


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COVER STORY

The small and medium enterprises (SME) sector em-

ploys 8% of all the employees in our country. Giving a

boost to the SMEs of our country, the nance minis-

ter announced a 10000 crores fund to back early

stage companies. This is a huge respite for start-ups

in need of money and this will boost their ability to

survive.

Another employee intensive industry that receivedgood government aenon is Tourism. The budget

has proposed to create ve tourist circuits at a cost of

500 crores and proposed to launch the E-Visa facili-

ty. Such small incremental steps like E-Visa facility for

foreign tourists can create a vast change in the num-

ber of foreign tourists arrivals especially when the

number of foreign tourists arrival proporonate to

populaon of our country is one of the lowest in the

world and there is a huge upside to achieve on this

front.

In our country where the working populaon cons-

tutes 64% of the enre populaon, tourism and man-

ufacturing are two spheres that could create enough

jobs. Moreover, due to requirement of less invest-

ment in tourism sector, our country can aord to in-

vest and develop this sector. The skill requirements

for an employee working in a manufacturing rm arefar less than the skill requirements of an employee

working in the service sector. Hence, boosng the

manufacturing industry could be a pragmac way to

create low skilled or middle skilled jobs so that peo-

ple could move away from agriculture related low

paying jobs to beer paying manufacturing jobs.

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TAME INFLATION

The government has encouraged states to allow

seng up of private agriculture market in order to

keep a check on the state sponsored APMCs. This will

increase eciency in terms of mely delivery of pro-

duce as well as will reduce the food wastage. Key

measures like price stabilisaon fund and higher

budgetary allocaon for rural infrastructure and

warehousing were announced in the budget that will

improve the supply chain of agriculture products as

well as will ensure the mely arrival of essenal sea-sonal crops like onions etc.

ACHE DIN AANE WALE HAI

The measures undertaken by the government in the

Union budget shows the serious eorts put in by the

government. The measures may be small and incre-

mental but such small measures will go a long way in

transforming our economy locked in low growth and

high inaon. I believe that the government has put its

sincerest eorts in making the budget a pragmac

budget that touches the life of every Indian in a posi-

ve way and hence I believe that the elecon promises

of Ache Din Aane Wale Hai that was made by our poli-cians seem quite plausible.

COVER STORY 23


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MR. ARUN JAITLEY BECAME THE FINANCE MINISTER

Mr. Arun Jaitley took over the oce of the Finance

minister under the cur-

rent NDA rule in the 16th

Lok Sabha. Mr Jaitley,

who holds a Law degree

from the University of

Delhi, got the plum post

along with the Defence porolio.

AIRASIA ENTERS INDIA

Asia's biggest low-cost

carrier, the Kuala Lumpur-

based AirAsia, oated a

joint venture with Tata

Sons, the holding compa-

ny of India's largest con-

glomerate, and Telestra

Tradeplace, an investment vehicle of the Bhaa fami-

ly, to launch a new airline in India called as Air Asia

India. AirAsia will have 49% stake, Tatas 30% and

Bhaa will hold 21% in the company, which will be

headquartered in Chennai.

VISHAL SIKKA TO BE THE NEW CEO OF INFOSYS

Infosys appointed its rst out-

sider to head the company, hop-

ing new blood will help in its

struggle to stay compeve, as

it tries to evolve from a low-cost

outsourcing company into a

global technology brand. India's second-largest so-

ware exporter said Vishal Sikka, a veteran of Ger

man soware company SAP, will take over as manag-

ing director and chief execuve.

FLIPKART ACQUIRES

MYNTRA

Flipkart India Pvt Ltd, the

countrys largest e-

commerce rm, ac-

quired rival Myntra.com

in the largest-ever deal in the countrys e

-commerce

market. Though the two Bangalore-based companies

did not disclose the merger amount, analysts es-

mates suggest the cash-and-stock deal is likely to val-

ue online fashion retailer Myntra at more than $330

million.

$100B BRICS FUND TO

TURN CONCRETE IN RIO

The BRICS naons formally

announced the seng up

of a $100-billion fund,

which will help member

countries de over a cur-

rent account decit crisis, at their h summit in Bra-zil. China will be the largest donor to this fund and is

expected to contribute around $41 billion. India, Rus-

sia and Brazil will contribute $18 billion each with

South Africa bringing in the remaining $5 billion.

SUBRATA ROY IN TIHAR JAIL

Subrata Roy, the amboyant chairman of the nan-

cial services group Sahara India Pariwar and owner

TOP FINANCIAL EVENTS OF 2014

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of properes such as New

Yorks Plaza Hotel and a

stake in Indias only For-mula One racing team,

surrendered to police

aer the naons top court issued a warrant in a

probe into whether he failed to refund US$3.9 billion

to his depositors.

FLIPKART VALUED AT $7 BILLION

Indias biggest online retailer has

received as much as $1 billion in

fresh capital from its exisng inves-

tors including Tiger Global, Naspers and Singapore's

sovereign wealth fund GIC. Singapore's GIC became

the latest investor to put its faith in India's largest

online retailer. The fund raising, the largest-ever by

an Indian start-up and among the largest-ever by any

Internet start-up globally, values Flipkart at over $7

Billion.

TCS AT RS 5 TRILLION

TCS, Indias most valuable company based on market

cap, crossed Rs. 5 lakh crores in market value, a big

achievement considering the tough business environ-

ment it has been operang in. It has also found itself

a berth among the global top ve business soware

companies. The market value of TCS is more than

that of the next four Indian IT companies combined,

and exceeds that of the other

Tata Group rms put together as

well. Sustained growth momen-

tum over the past four years rel-

ave to peers is the key factor that has kept the

stock buzzing. In addion, a special dividend of 40

declared last week has aracted investors.

INDIA BLOCKS WTO DEAL ON TFA

India sculed the Trade Facilitaon Agreement (TFA)

which is part of the Bali

package at the WTO be-

cause it was not sased

with the progress on

nding a permanent solu-

on to the issue of allow-

ing it higher public stockholding of food grains. Last

ditch aempts to meet the 31 July deadline to

make the TFA a WTO rule failed as India did not sup-

port the move. At the heart of the problem is a rule

that caps subsidies to farmers in developing countries

at 10% of the total value of agricultural producon,

based on 1986-88 prices. Developing countries com-

plain that the base year is out-dated and that they

need to be provide food security

to the poor.

MICROMAX BEATS SAMSUNG

Home-grown domesc phone

vendor Micromax has unseated Samsung in India as

the top handset seller in the 2nd quarter of 2014. A

study conducted by technology market research rm

Counterpoint Research says that with a 16.6 percent

share of the mobile market, Micromax is followed by

Samsung with a 14.4 percent market share. However,

in the Smartphone segment, Micromax is sll placed

second with Samsung holding nearly 25 % market.

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INTRODUCTION

Shabby interiors, grilled counters, disinterested o-

cials, ceiling touching les, never ending queues to

spick-and-span oces, open counters and data hun-

gry computers, this has been challenging journey for

banking industry.

Ever since the incepon of banking system in India

from the early establishment of Bank of Hindustan in

1770 to its current state; banking system has con-

stantly been evolving. Naonalizaon of major pri-

vate banks in 1969 was one of the leading milestones

in the history of banking in India that made bank ac-

cessible to unbanked populaon of India. But the

most signicant change was the opening of Indian

economy towards the global economy that brought

the paradigm shi in the banking system in India. Lib-

eralizaon broke the shackles of the sector which ll

then operated in restricted mode. With the arrival of

foreign tech savvy banks, the public sector banks

were forced to restructure the banking operaons to

have a compeve edge.

ROLE OF TECHNOLOGY IN CHANGING

THE BANKING INDUSTRY

BY AVIRAL VERMA &

SANJEEV RANJAN

-IIFT

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EVOLUTION OF BANKING STRUCTURE

Technology has power to transform the fundamental

economics of any industry and banking is no dierent.

The banking industry has taken enormous strides with

the use of technology. Most of the banking transac-

ons can now be conducted over the internet. Along

with it, technology has reduced the barriers and

changed the economics of delivery.

KEY MILESTONES IN BANKING INDUSTRY

ATM: Addion of facilies such as fund transfer, bill

payment and account maintenance has reduced the

fooall at the bank branch which has brought down

the operaonal costs. Branches are now able to cater

more customer base from a single branch. As per

forecasts, ATMs per million populaons will increase

from 85 to 170.

P M- C D C: The biggest

game changer in the banking industry was the intro-ducon of plasc money. Debit and Credit card pay-

ments through payment gateway revoluonized the

banking sector and provided the individuals hassle

free transacons. Visa, which is a global payment

technology company, processes 47,000 transaconsper second reliably, conveniently and securely. Pres-

ence in 200 countries with $2.2 billion Visa cards and

2.1 million ATM (as of December 31, 2013) it accounts

for a total of 91.6 billion transacons worth $4.5 tril-

lion on 31 March 2014.

NEFT: Naonal Electronic Funds Transfer facilitates

electronically transfer of funds from any branch to

any individual or rm. NEFT has an upper ceiling of

50,000 per transacon.

RTGS:Real me gross selement system means con-

nuous selement of funds by an individual or by an

order within a span of 30 minutes. No upper ceiling in

transacon makes it the most favorable online trans-

fer mode of payment in case of larger transacon.

M : Over the years it was felt to have a

technology which goes beyond ATM. In context of In-

dia which boast of a mammoth subscriber base of 900

million mobile users this was even more necessary.

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Mobile banking inially provided SMS alert facility but

later added services such as account enquiries, bill

payment, and fund transfer and loan requests. This

helped in enhancing customer experience and con-

venience.

CORE BANKING SOLUTIONS

With the arrival of computer and internet, manual

ways found their way out. IT revoluon equipped the

banking sector with CORE (centralized online real-

me electronic) banking soluons. It helped in reduc-

on of operaonal cost as prinng and backup be-

came centralized. CORE banking reduced the man-

power requirement and increased eciency by reduc-

ing the transacon cycle me. It provided to custom-

er the much required freedom to transact anywhere.

It facilitated accurate and quick implementaon of

banking policies. All this helped in increasing business

opportunies which led to reducon in legal expenseand penales.

Cq T S: CTS introduced cheque

clearance using MICR. It helped in reducing the turna-

round me in clearing of cheques and curbing cheque

frauds.

ECSElectronic Clearing Service enabled repeve and

periodic transacon such as interest payment, salary

and pension payment towards electricity, phone and

water payments.

DATA ANALYTICS IN BANKING

Data analycs is the buzz word today.The highly com-

peve market requires banks to convert vast

amount of data into meaningful informaon which

could help them in generang sales and dierenated

customer experiences. Banks ulize data analycs to

improve customer retenon, cross selling, opmizing

price structure, gain customer insights and implement

real me event management.

Most private banks ulize their business analycs to

ne tune their campaign and markeng eorts. These

analycs provides insight and help to idenfy new

customers and reduces markeng spend per custom-

ers.

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FUTURE JOURNEY AHEAD

Bhas emerged strongly as an alternave to con-

venonal internet banking. Marketed as an open

source and decentralized technology, it is nding its

user base at an exponenal rate. The inclinaon to-

wards Bitcoin comes due to the fact that it poses no

restricon on the transacon amount and is free from

bank charges. This is why it has been witnessing in-

creasing acceptance around the globe. It is currently

values at 584 US Dollar/ per Bitcoin

The nancial bodies have me and again raised con-

cerns over the use of Bitcoin as a full-edged tool for

transacons. Currently the user base is quite small,

which limits its use as a normal currency. It is highly

volale and as a result its value experience high oscil-

laons. Also, the soware behind it is sll under beta

phase and a major poron is under development.

R: RBI launched Indias rst ever domesc card

scheme RuPay on March 2012 with an entry level ac-

ceptance at ATMs. Its long term aim is to evolve as

an alternave to MasterCard and Visa, but before

that it sll has to cover a lot of ground.

CONCLUSION

The pre and post liberalizaon era has witnessed

huge changes in the banking sector and the advent of

technology in this sector has spread new colors. Now

technology has become the integral part of the bank-

ing sector right from driving the basic banking ser-

vices to the introducon of several new products and

services. It is quite evident that what we see today

wont stay the same in coming years. Banking indus-

try will keep chasing the fast paced technology for its

beerment.

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INTRODUCTION

Decisions about the Dividend pay-out by far have

been a subject of great curiosity and interest for the

analysts, researchers and academicians for a long

me now. The objecve of the Dividend Pay-out is to

determine the extent to which the company is distrib-

ung the dividends to its shareholders out of the

earnings of the company.

Both the investors and the corporate houses were

expecng the abolion of the double taxaon on divi-

dend income ever since the Government of India had

iniated nancial reforms in 1991. In the budget of

1997, the Finance Minister announced the abolion

of tax on dividend income in the hands of the share-

holders. However, the budget also proposed a new

tax on the companies when they declared, distribut-

ed or paid dividend. This new corporate dividend tax

was also called as Dividend Distribuon Tax (DDT).

The main objecve of this was to discourage compa-

nies from increasing the dividend oulow signicantly

leading to lower capital formaon. Even though this

system exempted investors from paying any direct

tax, it required them to pay an indirect tax on the div-

idend at a prescribed rate.

This new system also ensured that the administraon

of tax on dividend would be more ecient and eec-

ve. The DDT aimed to improve economic growth

and exibility by eliminang the tax bias against equi-

ty-nanced investments thereby promong saving

and investment. It also aimed at reducing the tax bias

against capital gains in the earlier tax system encour-

aging investment and enhancing the long term

growth potenal of the economy.

DIVIDEND DISTRIBUTION TAX (DDT) & DOUBLE

TAXATION:

There is a common noon that the dividends are

oen taxed twice. There is a school of thought that

argues for tax exempon for dividend income. The

basis of their argument is that the taxaon of divi-

dend income amounts to double taxaon. The expla-

naon behind this concept is that the corporate

prots are subject to corporate tax. Since dividends

are paid out of the prot earned which is already

taxed, if the dividends are taxed again, it amounts to

double taxaon.

REFORMS IN DIVIDEND DISTRIBUTION

TAX : IS THE STEP BY GOVERNMENT

TAKEN IN THE RIGHT DIRECTION?

BY MOHNISH KHAINI

-IIM, SHILLONG

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This logic can be challenged on two grounds:

There is a legal disncon between the corporaon

as an enty and the individual shareholders who own

the company.

Tax rates currently in place were set with the

knowledge that there was taxaon at the corporate

and individual level. This means that if there is a mor-

al objecon to double taxaon, then, the remedial

acon would also require an increase in the corporate

tax rate.

IS IT UNFAIR TO RETAIL INVESTORS?

Its been over a decade that investors have been argu-

ing that taxing dividend is unfair and it leads to double

taxaon. The argument is well grounded in a sense

that dividend is a source of income for the sharehold-

ers and it is distributed aer the corporate tax is lev-

ied from the gross earning of the rm. Hence, imposi-on of tax on distribuon is injusce to them. Howev-

er, is it really an injusce to shareholders?

In my opinion, it does not lead to double taxaon.

Why? As per our legal system, a company and its own-

er both are separate enes. Various benets are ac-

crued to the owners because of this. For example,

when a company faces in a crisis, its owners are not

liable to pay any debt from their pockets. Considering

that, when the gross earnings of a rm are taxed it is

deemed as an income tax paid by the rm and not by

its owners. Moreover, when dividends are taxed,

earnings of owners are taxed. Hence, the argument of

double taxaon is denitely fallacious.

REFORMS IN DIVIDEND DISTRIBUTION TAX IN THE

UNION BUDGET 2014 15

The reforms brought in by the newly elected govern-

ment with respect to the direct tax will denitely be a

shot in the arm for corporate. However, the only

dampener would be the amendment made in the divi-

dend distribuon tax. The amendment made was with

respect to secon-115O of income tax.

This secon was introduced in income tax act in 1997

which made corporates liable to pay DDT while distrib-

ung prot to the shareholders. The recent amend-

ment in the act will increase the eecve dividend dis-

tribuon tax as the basis for calculaon of tax will be

gross distributable surplus rather than net distributa-

ble surplus.

T w -

:

Lets assume, in 2013, Infosys made Rs.200 Crore prot

and it distributed the enre prot to its shareholders.

In this case, the DDT that Infosys is subjected to pay

would have been as follows:

D : R.200 C/1.16995 =

R.170.95 C

(The eecve rate of 16.995% includes Educaon cess

and surcharge as well)

T P: R.170.95*16.995% = R.29.05 C

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In contrast, Post amendment, suppose the prot g-

ures are considered to be same for Infosys as per the

example above, the tax that Infosys has to pay in 2014

would be,

T : R.200 C*16.995% = R.33.99 C

D D A: R.200 R.33.99 = R.

166.01 C

Thus this example shows that a minor tweak in the cal-

culaon of DDT can result in high income that the gov-

ernment is going to earn from it.

IMPLICATIONS OF CHANGES IN THE DIVIDEND DISTRI-

BUTION TAX

1 -I :

There is an inverse relaon between dividend distribu-

on tax and companys dividend pay-out rao. When

dividend distribuon tax is higher, companies prefer to

retain most of their earnings for future spending. Re-

tained earnings can be used to invest in high growth

project which will help in following manner:

Need for external nancing will be less which will

reduce the cost of capital for the rms.

High growth projects will give an opportunity to rms

to earn more prots which will be reected in their

share price in the secondary markets.

2 -I :

Plethora of research has been done on what do small

shareholders prefer: capital gain or cash dividends?

Majority of them claim that shareholders are more

sased with capital appreciaon than cash dividends.

They do not raise any objecon if company retains all

the earning and invest it in high NPV project as it ul-

mately aects the share price of the company in sec-

ondary market.

Furthermore, if shareholders demand any dividends,

rms can distribute stock dividends in lieu of cash divi-

dends. Stock dividends provide many benets to both

shareholder and a rm.

It doesnt enforce tax liabilies on shareholders. Firms

dont have to share its earnings and can invest in new

projects to expand quickly. Stock dividends provide

more liquidity to the stock in the secondary market.

Hence, this proposed change will hardly be a cause of

concern for the shareholders.

3 -C :

Clientele hypothesis claims that certain type of inves-

tors prefer cash dividends since their marginal tax ondividend is less than their income from other sources.

It is more prevalent in India as compared to the devel-

oped economies.

For example: In

2013, the maximum

salary that Reliance

can give to Mukesh

Ambani, as agreed

by shareholders, is

Rs. 38 crore. But

Mukesh Ambani

withdrew only 15 crore as a salary. However, the

amount he received from cash dividend is massive Rs.

1,240.7 crore. The raonale behind this is that his sala-

ry is taxed at 30% while the earnings through dividends

are taxed only at 15%.

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The above table shows the dividend earnings of busi-

ness persons in the nancial year 2011.

This clearly shows the presence of clientele eect. Top

managers, who have a nal say in dividend policy of

the company, have personal advantage in cash divi-

dends which might lead them to incline towards cash

dividends. The proposed change will not limit the gap

completely, but will surely reduce the gap.

CONCLUSION:

Tax is one of the main sources of revenues for the Gov-

ernment. Decisions regarding taxes are always given

paramount importance during the budget since these

decisions set the stage for the economys growth dur-ing the course of the year. Well aware of these intrica-

cies of taxes, the new government, during its maiden

Union Budget has brought in small but eecve chang-

es in key policies which would assist in streamlining the

cash ows of its treasury. small tweak in the calcula-

on of the Dividend Distribuon Tax can generate huge

revenues to the government. At the rst instance, this

change gives an impression that it is going to play a

spoil sport for the corporates and investors but dwell-

ing deep into this maer, the changes also present an

opportunity for the corporates to look out for beer

growth oriented projects and thereby providing share-

holders beer returns on their investment by way of

capital appreciaon. Hence it can be said that in spite

of having negave aspects, the posive aspects of the

proposed change outweighs the shortcomings of the

same.

P C FY11 (R. C)

Azim H Premji Wipro 1345.1

Mukesh Ambani RIL 1240.7

Rahul Bajaj Bajaj 917.4

Anil Agarwal Vedanta 790.2

Keshub Mahindra M&M 312.2

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WHAT IS EQUITY RESEARCH?

The purpose of investment research is to help inves-

tors decide which asset class cash and cash equiva-

lents, xed interest securies, real estate, commodi-

es, currencies and derivaves amongst others-

would make a good investment. In Equity Research, a

sub-set of investment research, the universe of assets

is limited to stocks. There are two types of profes-

sionals in this eld, namely- Sell-side analyst who

work at brokerages and independent equity research

rms, and Buy-side analyst who work for money man-

agement rms and present stock pitches to porolio

managers.

Source: Moneycontrol

WHATS N IT FOR YOU?

InFINee from now on launches a new secon, called

EQUITY RESEARCH, to this magazine which will solely

be dedicated to publishing an equity research report

on one of the happening stocks of the quarter every

edion. We, acng as a sell-side analyst, through our

reports will give you our recommendaons on wheth-

er to BUY, HOLD or SELL the stock.

BUT HOW IS EQUITY RESEARCH DONE?

Before you start invesng, it is best that you know

how Equity Research reports are made. Hence, in this

edion, we put forward A Prelude to EQUITY RE-

SEARCH so as to get you an understanding of it be-

fore you actually dive into invesng.

HOW TO MAKE EQUITY RESEARCH REPORTS?

While doing an Equity Research for a parcular share

or stock, the work in itself requires one to split it into

research and then future projecons or esmaons.

For doing so, the basic framework involves one to un-

derstand the business model of the company, read its

nancial statements, use rao analysis techniques to

compare its nancial performance with those of its

closest comparable peers, value it using both intrinsic

(absolute) and relave valuaon approaches, and

EQUITY RESEARCH :

A PRECURSOR

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nally, prepare a complete equity research report

with a recommendaon to BUY, SELL or HOLD the

stock at its current price.

Equity Research starts with carrying out the Funda-

mental analysis of the company followed by the rao

analysis and then nally valuaon is done.

FUNDAMENTAL ANALYSIS:

Equity Research and analysis begins with an aempt

to understand the business and nancial characteris-

cs of the given company. This implies the analysis of

the industry and the company. To start with, doing

the Fundamental analysis of the company becomes

extremely crucial. When analysing an investment,

Fundamentals of a company are the actual numbers

that cause movements in its stock price. In this case,

the analyst is interested in analysing rm specic data

to have an understanding of the big picture, rather

than looking at the technical aspects of an invest-

ments market chart.

One of the two approaches goes into the doing of

Fundamental analysis namely Boom-Up approach or

Top-Down approach. Boom-Up approach focuses

primarily on the individual stocks rather than on the

external factors impacng the economy. The Top-

Down approach, on the other hand, is a step wise pro-

cess starng with the analysis of the external environ-

ment using PEST analysis, then examining the industry

of the company using models like Porters 5 forces or

Porters Diamond depending upon the underlying fac-

tors involved and eventually analysing the company

using the popular SWOT analysis. Aer doing the

above analysis, the analyst or the investor gets an un-

derstanding on the fundamentals of the company and

can qualitavely give a rang to the company. If fun-

damentals of the company are strong, even if the

market goes wrong, the company will come back to itsposion.

A simple framework for understanding the Business

Prole of the company:

FINANCIAL/RATIO ANALYSIS:

Once an overview of the business prole is done, the

nancial health of the company is to be looked into.

While analysing the nancial prole, one has to crical-

ly look into the aspects of Size, Protability, Growth

prole, Return on Investment and the Credit prole of

the company. Rao analysis helps in evaluang various

aspects of a companys nancial performance such as

its eciency, liquidity, protability and solvency. This

requires the analysis of the nancial statements,

namely the Balance Sheet, Prot & Loss Statement,

and Cash Flows Statement of the company. But the

numbers in the companys nancial statements carry

lile meaning in themselves as it doesnt tell us how

good the business is at converng resources to earn-

ings and this is where the raos come into help as they

provide meaningful relaonships between individual

line items in the nancial statements. Another im-

portant aspect of rao analysis is that the raos can be

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IFIN | A I | A 2014

compared across dierent companies within the same

sector or sub-sector to get an overview of the perfor-

mance of the company against its competors or the

industry as a whole. In the coming edions of ourmagazine, we intend to restrict our use of rao analy-

sis to the nding of raos that will help us evaluate

ve aspects of the company namely its operang per-

formance, acvity levels, liquidity posion, leverage

and valuaon mulples.

Example of important raos used for Power Industry:

From the above table one can easily do a comparave

analysis of the companies against the important raos

and approximate an average rao for the industry.

From this, one can nd out how the company is per-

forming in tandem to the industry in general.

The list of important raos used:

Source: -www.moneycontrol.com (for the year 2011)

VALUATION:

Having done the two analyses, one moves to the last

and the most important aspect of Equity Research

which is Valuaon. The nal stage in the research of

the target company is nding out what is the compa-

nys total worth. As the name goes, valuaon is the

process of determining the current worth of the equi-

ty, asset or company. Valuaon is the esmaon of

an assets value based either on variables perceived to

be related to future investment returns (usually cash

ows) or on comparisons with similar assets. It is

needed in not just doing Equity Research but also in a

number of other things like Mergers and Acquisions,

investment analysis, capital budgeng and many

more. The valuaon models are used in making invest-

ment decisions as to which assets are undervalued

Operang

Perfor-

mance

EBITDA

Margin

Return on

Assets

Return on

Equity

Acvity

Levels

Asset

Turnover

Inventory

Turnover

Operang

working capi-

tal Turnover

Liquidity

Posion

Current

Rao

Quick Rao Cash Rao

Leverage Debt/

Equity

Net Debt/

Equity

Net Debt/

Capital

Stock Val-

uaon

Mulples

P/E P/S EV/EBITDA

38

Year 2011 NTPC Power

Grid

Reliance

Power

Face Value 10 10 10

Protability Raos

Operang Prot

Margin (%)

27.09 83.85 24.66

Net Prot

Margin (%)

15.57 28.81 55.59

Liquidity And Solvency Raos

Current Rao 2.48 1.05 1.94

Quick Rao 2.23 1.02 2.26

Debt Equity

Rao

0.76 2.05 0.44


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IFIN | A I | A 2014

or overvalued. It is through Valuaon one can quan-

tavely rate the company.

Approaches to Valuaon as put forth by Aswath Dam-

odaran, professor at NYU Stern:

Intrinsic Valuaon: The value of an asset is esmated

based upon its cash ows, growth potenal and risk.

The most widely used valuaon model here are:

Discounted Cash Flow (DCF)

Dividend Discount Model (DDM)

In a DCF model, the forecasted future cash ows are

discounted to get to the present value. The other valu-

aon method in usage is Dividend Discount Model

(DDM). But this can be used only when the company

pays out dividends. Once the intrinsic value or the fair

value of equity is obtained, it is compared with the

Current Market Price of the share and based on this

the analyst comes to a conclusion whether the stock is

overvalued or undervalued.

Relave Valuaon: Esmates the value of an asset by

looking at the pricing of comparable assets relave

to a common variable like The above picture indicates

that the Intrinsic price of the equity is more than that

of the Current Market Price which tells us that the

stock is currently undervalued and has potenal,

hence should be a BUY.

The tools of equity valuaon is used to address a

range of praccal problems like judging whether the

securies are fairly valued or under/overvalued, infer-

ring market expectaons, evaluang corporate like

events mergers and acquisions, divestures, spin-

os, management buy-outs (MBOs), leveraged recapi-

talizaons etc.

Summary of the steps of Equity Research:

Understand the companys business prole and

do the company and industry analysis

Forecast companys performance

Select the appropriate Valuaon model

Make investment decision based on the funda-

mentals and valuaon.

While making an investment decision, both the Funda-

mentals and Valuaon of the company maers. Finally

on the basis of the rangs of these two parameters,investment is made. This above menoned framework

for doing Fundamental analysis, Rao Analysis and

nally Valuaon is an essenal starng point but is by

no means exhausve. There are many other factors

like the price movements (Technical Analysis) which

are taken into account before making an investment

in the equity.

Now that an overview is given, InFINee Team inaugu-

rates the secon on EQUITY RESEARCH. Please do look

forward to the next edion so as to start invesng

-

BY GAYATHRI BHUVANGIRI, IIFT

39

C M P: Rs. 250

I P: Rs. 262


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KEY RECOMMENDATIONS & THEIR IMPACTS

Let us discuss the key recommendaons of the Com-

mission and their impact on the Indian Financial r-

mament.

UNIFIED FINANCIAL AUTHORITY (UFA): - One of the

loudest amendments proposed by the Commission is

the formaon of a U F A re-

placing SEBI, IRDA, PFRDA and FMC (the Forward

Markets Commission). According to the FSLRC, the

incumbent nancial regime with mulple sectorial

regulators creates conicts of interest and leads to

overlaps and gaps in regulaon at the same me. For

example- while Ponzi schemes are not regulated by

any agency as of now, Securies market is regulated

by SEBI and RBI both. It makes economic sense and

creates synergy to merge regulatory bodies into one

and remove the problems of inter-regulatory turf-

wars. The FSLRC establishes a new seven agencymodel to regulate and control the nancial sector in

India.

It will regulate and control all acvies of the nan-

cial market other than what is to be regulated by the

RBI. The proposed agency will be carrying out all the

responsibilies of all the exisng regulators (other

than the RBI) like SEBI, FMC, IRDA, PFRDA etc. TheUFA will also be the rst consumer interest protec-

on regulator in the nancial sector with the excep-

on of banking and payment systems which will be

under the ambit of the RBI.

ROLE OF RBI: -The RBI gets to keep most of its pow-

ers and connues to guide the naons monetary pol-

icy and regulaon of its banking industry. It also per-

forms the funcon of regulaon and enforcement of

the payment systems and enforcement of the pro-

posed consumer protecon law. However, it loses its

power of managing public debt. Also, its monopoly

over monetary policy formulaon is in danger as the

commission proposes that the central government, in

42

P R T ( FSLRC)

RBI RBI ( though with reduced powers)

SEBI

FMC

IRDA

United Financial Agency (UFA)

S A T Financial Sector Appellate Tribunal (FSAT)

D I C

G C (DICGC)

Resoluon Corporaon (RC)

F S D

C (FSDC)

It remains as it is.

Nw Debt Management Agency (DMA)Nw Financial Redressal Agency (FRA)

T 2: P I F R S


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IFIN | A I | A 2014

consultaon with the RBI Governor, set a monetary

policy target and hold the Central Bank accountable

in case of its failure to achieve these objecves. The

icing on the cake, at least for the Government, is the

fact that the Commission wants the Central bank to

deliver on the monetary policy front by adopng a

Monetary Policy Commiee having the Governor as

its Chairman and six other members.

Only one of these members will come from RBI. Of

course the Central Bank can advise the Government

on the appointment of two other members while the

remaining three members will be appointed by the

Government. Thus, the Commiee eecvely dilutes

the Central Banks autonomy on monetary policy

maers of the country. It rather places its faith in a

government which is prone to reducing rates in an

elecon year and is, otherwise too, gullible to being

populist at the expense of the economy.

Addionally, it places the RBI, and all regulators for

that maer, under judicial review, a step unprece-

dented in the history of India. Dr. Raghuram Rajan

has correctly warned that this provision will result

into constant quesoning of regulatory decisions thus

creang paralysis of analysis as regulators will go slow

on decision making. There is also the danger of

shrewd parcipants in the nancial system exploing

the loop-holes to their own advantage by going for

excessive ligaon.

FINANCIAL REDRESSAL AGENCY: -Consumer interest

protecon is one of the key concerns of the Com-

miee. To this eect, the FSLRC recommends the cre

aon of the Financial Redressal Agency (FRA) to

aend to consumer complaints in the nancial sector

(except the banking sector) across the naon. The

FRA will replace all sector-specic Ombudsmen pre-

sent now. All nancial service providers are required

to set up internal mechanisms for consumer griev-

ance-redressal and to educate the consumer of their

right to seek redressal. If the consumer is unsased

with the appropriate handling of their issues by the

rm, they can approach the FRA.

FINANCIAL SECTOR APPELLATE TRIBUNAL (FSAT): -

Financial Sector Appellate Tribunal (FSAT) is the all-

important pillar proposed by the Commiee, for ap-

peals against the acons of the RBI, the FRA and the

UFA. The exisng Securies Appellate Tribunal will be

merged into FSAT, to which the consumer can appealagainst all nancial sector regulators. FSAT will have

powers of jurisdiconal oversight on the acons of

the regulators. This places regulators in a ght spot,

for their decisions are not always based on the surety

of events but more on their likeliness to happen since

they cannot wait for a tragedy to strike before acng

on it and defanging it.

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IFIN | A I | A 2014

S: -L

FINANCIAL STABILITY AND DEVELOPMENT COUNCIL

(FSDC): - The Financial Stability and Development

Council (FSDC) is the only exisng regulator, apart

from the RBI of course, that stays on. It will oversee

the various systemic risks and will suggest ways to

bring them down. The Commiee wants to establish

a nancial data cell whose primary job will be to look

for the systemic risk in the nancial sector and report

the same to its parent body, the FSDC. The FSDC, be-

ing a statutory body, will then measure and manage

the risks in the system. The FSDC will be empowered

to undertake all required intervenons for reducing

the systemic risks.

PUBLIC DEBT MANAGEMENT AUTHORITY: -The Pub-

lic Debt Management Authority to manage public

debt is an altogether new instuon to manage gov-

ernments debt in the proposed regime. A Resoluon

Corporaon has also been proposed to handle the

resoluon of nancial rms.

ANALYSIS & CONCLUSION

FSLRC has produced one the most far-reaching re-

ports based on its recommendaons and possible

outcomes. Its stress on having a clear framework for

monetary policy-making was what prompted the GoI

to form the Urijit Patel Commiee. The Commis-

sions rap to the service-providers and the regulators

for unfair and not-so-consumer friendly pracces may

begin a new era of consumer proteconism in the In-

dian nancial sector and may force the authories to

revisit their approach to the consumer and consider

mending their ways. In proposing to create a Dra

Financial Code for India, the commiee has tried to

bring in some fresh air to the laws governing the -

nancial sector of this country.

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In trying to amalgamate various regulators into one

body, it has tried creang the much-needed synergy in

regulaon. By proposing to make RBI and other regu-

lators responsible to the parliament, it has tried to

make them answerable to the people of this country.

In increasing the weight of the government in formu-

lang Indias monetary policy, it has tried to bridge

the gap between the countrys

monetary and scal policies and has made the govern-

ment further answerable to the people of India. In the

words of Dr. Raghuram Rajan, though he himself is

one of the biggest cric of the commiees recom-

mendaons, FSLRC report is one of the most im-

portant, well researched as well as well-publicized re-

ports in Indian Financial History. The reports inu-

ence will be felt for many years to come. Enough

said.

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INTRODUCTION

Internaonal Financial Reporng Standards (IFRS),

previously known as Internaonal Accounng Stand-

ards (IAS), is a set of standards, framework and expla-

naons adopted for preparaon and presentaon of

nancial statements.

In present scenario of globalizaon and liberalizaon,

the world has become a small place. Many corporates

in emerging economies are looking to enhance their

access to the global markets to full their need of cap-

ital funding. Thus, it is of paramount importance that

there exists a system or a set of guidelines which is

consistent all across the globe, and here in lies the

importance of IFRS. Many countries have already

moved towards convergence of their respecve ac-

counng principles with IFRS, while others are sll

passive with their approach.

IFRS IN INDIA

In India, Accounng standards are formulated by Ins-

tute of Chartered Accountants of India (ICAI), through

its Accounng Boards Standard. Thereaer these ac-

counng standards are considered by Naonal Advi-

sory Commiee on Accounng Standards (NACAS)

which then recommends it to the Central govern-

ment. At present, 28 Accounng Standards, with cer-

tain dierences, have been noed under the Compa-

INTERNATIONAL FINANCIAL

REPORTING STANDARDS (IFRS)

BY-DHAWAL LACHHWANI

-IIFT

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the Companies Act, 1956.

ICAI, in 2007, commenced the pro

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