The Focus June10

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June 2010

The IBS ECOBIZZMagazine

Inside this issue:

Greek Debt Crisis 3

Role of PrivateEquity

6

Bhopal Gas

Tragedy

8

BP Oil Spill 10

FundamentalValuation

12

IFRS Convergence 14

Playing withDerivatives

16


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From The Editors Desk

Hello Everyone!

Hope all of us had a great stint getting introduced to the corpo-

rate world. I believe everyone has got back to enjoying life in

campus after the SIP.

It gives me immense pleasure in presenting the first issue in the

third semester as the senior batch of IBS, Hyderabad. This issue

has gainful insights on Greek Debt Crisis, Private Equity, Funda-

mental Valuation, BP Oil Spills, Bhopal Gas Tragedy, and so on.

As we all know the juniors, class of 2010 - 2012 has joined. It

feels great to welcome them to the campus. I with the complete

EcoBizz team wish them all the best and a great learning experi-

ence in our young and dynamic business school.

Regards,

Kriti Pant

Editor, The Focus


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The Global Financial crisis which plagued the major

economies of the world in 2008, which continued in

2009 and it just seemed to find the horizon when

there was another wave coming this time in the

form of a Sovereign Debt crisis from one the partner

in the European Union (EU).

The Greeks are the one responsible for the current

Euromess. Greece got Euro status in 2001 and cur-

rently is one of the 16 member countries which

have Euro as their currency. To get Euro status or

adopting Euro as the currency requires the EU

countries to meet some macro economic conver-

gence criteria called the Maastricht criteria in order

to adopt Euro as their currency. The rules call for

budget deficits not to exceed 3% of GDP and debt

not to exceed 60% of GDP. These are some strin-

gent conditions the EU country needs to adhere to

get the status. Greece is a relatively small country,

GDP of around $400Bn as compared to the other

EU members.

During the decade preceding the global financial

crisis, Greeces government borrowed heavily from

abroad to fund substantial government budget and

current account deficits. Between 2001 and 2008,

Greeces reported Budget deficits averaged at 5%

per year and Current account deficits averaged at

9% per year, compared to a Eurozone average of

2% and 1% respectively. Many attribute the budget

and current account deficits to the high spending of

successive Greek governments.

Greece funded these twin deficits by borrowing in

international capital markets, leaving it with a

chronically high external debt (115% of GDP in

2009). Both Greeces budget deficit and external

debt level are well above those permitted by the

rules governing the EUs Economic and Monetary

Union (EMU). In October 2009, the new socialist

government, led by Prime Minister George Papan-

dreou, revised the estimate of the government

budget deficit for 2009, from 6.7% of GDP to 12.7%

of GDP.

Due to Greeces reliance on external financing for

funding budget and current account deficits left its

economy highly vulnerable to shifts in investor con-

fidence. Before the crisis, Greek 10-year bond

yields were 10 to 40 basis points above German 10-

year bonds. With the crisis, this spread increased to

400 basis points in January 2010, which was at the

time a record high. High bond spreads indicate de-

clining investor confidence in the Greek economy.

The Greek Sovereign Debt Crisis & The Eurozone


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Despite that the government was able to success-

fully sell 8 billion ($10.6 billion) in bonds at the end

of January 2010, 5 billion ($6.7 billion) at the end

of March 2010, and 1.56 billion ($2.07 billion) in

mid-April 2010, albeit at high interest rates.

To finance the further maturing debt of the country

mainly external, the Eurozone member states have

pledged to provide financial assistance to Greece in

concert with the IMF.

In April 2010, the details of the proposed financial

assistance package for this year were released: a

three-year loan worth 30 billion ($40 billion) at 5%

interest rates, which is well above the normal rate in

EU and another $15 billion from the IMF.

Investor jitteriness spiked again in April 2010, when

Eurostat released its estimate of Greeces Budget

deficit. At 13.6% of GDP, Eurostats estimate was

almost a full percentage higher than the previous

estimate released by the Greek government in Oc-

tober 2009. In late April 2010, the spread between

Greek and German 10- year bonds reached a re-

cord high of 650 basis points, and one of the major

credit rating agencies, Moodys, downgraded

Greeces bond rating.

The crisis has contributed to a weakening of the

euros foreign exchange value, and a fear that

deepening crisis could spread across Europeanbond markets and draw in countries such as Spain,

Portugal, Italy, and Ireland. The cost of providing

financial assistance to Greece is relatively low.

Greeces total outstanding debt approximately 300

billion ($399 billion).

Greeces current economic problems have been

caused by a mix of domestic and international fac-

tors. Domestic factors: Firstly, High government

spending and weak Government Revenues, a large

and inefficient public administration in Greece,

costly pension and healthcare systems, tax evasion,

and a general absence of the will to maintain fiscal

discipline as major factors behind Greeces deficit.

Weak revenue collection coupled with tax evasion

has contributed to Greeces budget deficits. Sec-

ondly, Structural Policies and Declining International

Competitiveness, was another reason why Greek

industry is suffering from declining international

competitiveness. Relatively high wages and low

productivity is the primary factor.

International factors: Firstly, Increased Access to

Capital at Low Interest Rates Greeces adoption of

the euro as its national currency in 2001 is seen by

some as a contributing factor in Greeces buildup of

debt. The perceptions of stability conferred by euro

membership allowed Greece, to borrow at a more

favorable interest rate than would likely have been

the case outside the EU, making it easier to finance

the state budget and service existing debt. If the

market had discouraged excess borrowing by mak-

ing debt financing more expensive, Greece would

have been forced to come to terms earlier with the

need for austerity measures and reform. Secondly,

Issues with EU Rules Enforcement, the lack of en-

forcement of the Stability and Growth Pact is alsoseen as a contributing factor to Greeces high level

of debt. In 1997, EU members adopted the Stability

and Growth Pact, an agreement to enhance the

surveillance and enforcement of the public finance

rules set out in the 1992 Maastricht Treatys

convergence criteria for EMU.


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In an effort to restore investor confidence in the

Greek economy, the Papandreou government has

pursued a series of wide-ranging fiscal austerity

measures. However, that the mix of tax increases

and sharp spending cuts could lead to higher unem-

ployment and deepen an ongoing recession in the

country. The Greek government cutting large gov-

ernment budget deficits (contractionary fiscal poli-

cies) and stimulating the economy during cyclical

economic downturn (expansionary fiscal policies)

are at odds with each other.

In addition to austerity and financial assistance from

Eurozone member states and the IMF, Greece

could finance its budget deficit and increase the

competitiveness of its exports by exiting the Euro-

zone and adopting and devaluing a new national

currency.

However, most consider this an unlikely policy

course as both Greek and European leaders appear

committed to ensuring that Greece remain a Euro-

zone member and exiting the Eurozone could make

future borrowing costs much higher for Greece.

Its geographic location, particularly as a potential

hub for regional trade and investment in energy and

transportation networks; the renewable energy sec-

tor; and already strong global shipping and tourism

sectors would help Greece in increasing exports

and the much needed competitiveness.

Another aspect of the Greek crisis lies with the big

Investment Banks, Greek governments debt had

been underwritten by prominent financial institutions

including Goldman Sachs, and used complex finan-

cial instruments to conceal the true level of

Greeces debt so that Greece could get the Euro

Status by simply using an accounting loophole in

the system. For example, the government of Papan-

dreous predecessor is alleged to have exchanged

future revenues from Greeces highways, airports,

and lotteries for up-front cash payments from inves-

tors. Likewise, it is reported that the Greek govern-

ment borrowed billions by trading currencies at fa-

vorable exchange rates. Because these transac-

tions were technically considered currency swaps,

not loans, they did not need to be reported by the

Greek government under EU accounting rules. The

Federal Reserve is currently investigating the role

that Goldman Sachs and other U.S. financial institu-

tions played in the buildup of Greeces debt.

If Greece defaults, there is a risk of contagion to

other Southern European countries, including Portu-

gal, Ireland, Italy, and Spain (which, along with

Greece, have been nicknamed the PIIGS. Con-

cerns about a spillover of Greeces crisis to its

neighbors are rooted in memories of the Asian fi-

nancial crisis in 1997-1998, where it is believed that

investor Herding behavior contributed to the spread

of the crisis throughout the region.

By: Nikunj Doshi


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Private Equity (PE) has emerged as a potential

source of corporate financing in addition to the tradi-

tional sources of fund mobilization such as public

equity issues, bank loans, private placements, euro

issues and external commercial borrowings. Techni-

cally PE is the capital that is not listed on the stock

exchange. It consists of funds and institutional in-

vestors who commit large amounts of money with a

long term perspective. The investments made are

directed either into private companies or for buyoutsof public companies which results in delisting of

public equity. The funds generated through PE can

be used to expand the working capital of a firm, to

carry on an acquisition activity, to provide new tech-

nologies or to strengthen the balance sheet of a

company. The various categories of PE include

Venture Capital, Leverage Buyouts, Growth Capital

Distressed Investments and Mezzanine Capital.

PE in India is relatively a recent phenomenon. PE

funds are customizing their India strategy keeping in

mind the local realities, the relatively small size of

companies seeking capital, promoters reluctance to

cede control, and local takeover regulations, among

others. The performance of PE in past few years

was disappointing due to the impact of global reces-

sion. The deals decreased by 38% in 2009 over

2008 levels and 45% over 2007. India accounted for

6% of total global PE deals volume in 2009 while

only 2% in terms of deal value. However, it is esti-

mated that the sector would achieve an annual

growth of 15-20% by 2011.

The factors contributing to the growth potential of

the sector are the possibility of higher returns in

comparison to alternative investments, capital re-

quirements in growing sectors like education, infra-

structure, power and the regulatory reforms in the

primary market which widens the exit scope for the

PE firms. According to a recent report by Goldman

Sachs, India requires USD 1,700bn over the next

decade for maintaining its existing growth rate. One

third of the estimated Rs. 1,700 bn is expected to

be funded by the PE sector. However, the PE play-

ers cannot invest more than 33.33% of its investible

funds in equity of listed company.

The regulation of PE in India is at an evolving stage.

Currently, there is no regulatory body established to

frame standards and policies for PE in India, how-

ever, indigenous and foreign venture capitalist are

regulated by SEBI(Securities Exchange Board ofIndia) Regulation, 1996 and Foreign Venture Capi-

tal Funds Regulations, 2000. PE fund investments

from other countries are required to adhere to the

restriction on foreign capital inflows.

In first Quarter of 2010:

PE Sectoral Break Up - Utilities, Consumer Dis-

cretionary & Financials were the most targeted

sectors for investment with deals worth $484million, $440 million and $403 million respec-

tively in Q1 2010. Together, they accounted for

more than 68% of total private equity deal value

during the quarter.

Role of Private Equity Sector in India


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Major PE Deals - The major private equity deals

were investments in Star Health & Allied Insur-

ance, Coastal Projects Pvt. Ltd., Tikona Digital

Networks Pvt. Ltd., Coffee Day Resorts & Ho-

tels Ltd. and Asian Genco Pte Ltd.

In India the major PE players are ICICI Venture -

Indias largest private equity fund, Chrys Capital,

Kotak Private Equity Group, IDFC Private Equity

and 2i Capital. Leading global players include

Texas Pacific Group (TPG), Goldman Sachs Capital

Partners, The Carlyle Group and the Kohlberg

Kravis Roberts. There is massive difference in the

amount of fund raised between the global PE firms

and Indian PE firms,. One of the factors that can be

identified is recent inception of PE sector in India.

The top global players have a long standing history

and robust experience which differentiates it from

Indian Players.

PE is a transformational and value added invest-

ment strategy. Also, for sustaining the projected

growth rate of 8-8.5% India requires $1.3 trillion

over the next three years. PE firms can play a piv-

otal role in providing funds for the pending project.

Although, there is a growing acceptance among

various business owners, however, large business

entities are yet to embrace this potential source of

capital.

By: Bharti Bajaj

$440

$95

$26$403

$82$131

$134

$35

$112

$484

PE Investments - Q1, 2010

Consumer

DiscretionaryConsumer Staples

Energy

Financials

Health Care

Industrials

Information

TechnologyMaterials

Telecommunications

Services

Utilities


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Soccer seems to be the flavour of the season and

Soccer Mania seems to have grappled all the

countries across the globe with the ongoing FIFA

world cup in South Africa. However, India seems to

be indifferent to this African carnival, not because

India isnt a qualifying team at the world cup but

because theres another game which has kept Indi-

ans busy at the home grounds. The game is well-known and as you will browse through the morning

newspapers and surf the news channels you will

realize that it seems to be the talk of the town. The

game is Blame game and it has already been mak-

ing great waves throughout the nation with the

prominent parties and politicians playing it superbly

under the wake of 1984, Bhopal Gas massacre.

Indian politics about which it was once said that it

was facing danger of criminalization, is presently

witnessing unassailed politicization of criminals. If

we call anything alarming this sure is!

More than a quarter of century has passed since

the worlds greatest industrial disaster swiped out

thousands of families after tonnes of poisonous

methyl-isocyanate (MIC) gas leaked from the Union

Carbide pesticide plant on the night of December 3,

1984 killing about 4000 people instantly, thousands

severely injured and handicapped with the death toll

rising sharply to 10000 within 72 hours. However

the worst part to all this is that the main accused i.e.

Mr. Warren Anderson who was the then CEO of

Union Carbide Corporation will never ever be extra-

dited.

BJP which is the opposition party has demanded an

explanation from the Congress on who had let War-

ren Anderson escape from India. According to them

Bhopal gas tragedy was the result of indifference

and nexus of the then ruling party i.e. Congress for

which Arjun Singh (then CM of MP) and Rajiv Gan-

dhi (then PM of India) both are being considered

responsible. Obviously a man who was responsible

for killing thousands of innocents could not be al-

lowed to get away by Arjun Singh on his own. Also,

there was no law and order problem in the city at

that time which Arjun Singh is citing as the reason

for all this. But then hardly any point in discussing

the wrongs committed by successive governmentsin the past. Be, it the congress or BJP, they have all

conspired to let the Americans get away as a favour

or for money. In 1985 we allowed Anderson to get

away and after 26 years of trial the seven surviving

accused of Union carbide India Limited have been

given just two years of punishment and they have

been left on bail after submission of bonds and a

security payment of Rupees twenty five thousand

only. To further frustrate us, Chief Justice Magis-trate has given the verdict and told that the justice

has been delivered. The judgment was not only a

mockery of justice as it came so late but it also let

the main accused go scot-free.

Bhopal Gas Tragedy-

A Reflection of sickened Indian System


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Also, what has fuelled the wrath of the people is

that the company deliberately sacrificed the safety

of its workers in Bhopal. CBI officials who handled

the investigations at the site have enough evi-

dences to prove that that the management knew

that the Carbide plant was unsafe. In 1981, a gas

leak had killed one worker. In 1982 again, 25 work-

ers were hospitalized after another gas leak. Two

years later, Union Carbide sent its US experts for a

safety audit of the Bhopal plant. The team discov-

ered 30 hazard spots but still the management ne-

glected it which ultimately led to dangerous

amounts of water entering a tank containing methyl

isocyanate gas forcing toxic fumes to vent, choking

and strangling thousands of people. However the

death of innocent lives do not really matter to US as

the President Barack Obama has stated that this

case is now an internal matter of India which means

that neither can Anderson be tried for his crimes nor

will Dow Chemicals which has bought Union Car-

bide will pay a dime more for compensation. All this

and more only proves that perhaps we as Indians

are minor push-overs whose lives really dont mat-

ter. Hypocrisy and dirty politics can be seen at its

pinnacle with Obama safeguarding an American

with the manipulated laws and at the same time

asking for compensation above the liability cap

(including the financial loss) for the loss of eleven

lives in Louisiana from BP chief Tony Hayward for

the oil spill. Can anybody answer as to why Mr.

Obama has different standards for people of differ-ent countries? Is twelve thousand rupees that have

been given in case of Bhopal gas tragedy to the

victims next of kin enough for the life of an Indian?

Do they sound fair? They do not but surely they are.

He has done what was expected out of him in ca-

pacity of being the First person of a nation for safe

guarding the interests of his citizens and its pride.

Also, why should he agree to compensate a country

where its judicial system requires 25 years to take a

catastrophic case into consideration. We wish if In-

dian Government too had the same attitude and

support towards its citizens. MP Chief Minister

Shivraj Singh Chauhan blames the legal system for

the entire outcome. He feels that though the court

gave what was possible, the quantum of punish-

ment to the accused in such a huge disaster was

not enough.

Thus, the parties are busy playing blame games

with each day formulating new and further attacks

to dismantle peoples confidence in the other party

and gain peoples trust for themselves at the cost of

peoples innocence. Another example of this is the

nuclear liability bill which the Congress government

is planning to bring in the parliament, which says

that in the event of an accident the entire responsi-

bility for an accident will be that of the Indian com-

panies, not of American companies. Also, the liabil-

ity has been capped at Rs 300 crores and the over-

all liability at Rs 2200 crores implying that the Indian

company would pay a maximum compensation of

Rs 300 crores and the rest would be paid by the

Indian govt. or in other words it will go from our tax

money, with the Americans again getting away scot

free. However, instead of going into the critical

analysis of the tragedy we should focus on what

can we look forward to, as a part of our future ef-forts.

Though, nothing much can be done to undo the

harms caused, however, some steps can definitely

be taken to set off the issues as our sympathetic

concern for the people who have suffered due to


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the tragedy. One of the bleak hopes in such sce-

nario is to cash the golden opportunity when

Obama comes to India in November and influence

him to extract some large amount for our people.Also, rather than playing ridiculous blame games,

the govt. of India along with the nation as whole

should join hands to accelerate the ongoing reha-

bilitation processes in Bhopal. Bills like the nuclear

liability bill should include laws like sharing of

the liability by both Indian and the parent company

in case of an accident so that families of all the vic-

tims can receive succor. Last but not the least,

there is an urgent need for revision in the Indian judicial system norms so that no tragedy ever be-

comes a Judicial tragedy.

By: Anuradha Upadhyay

The BP Oil Spill - A Closer View

Human efforts since time immemorial have been

guided towards understanding natural phenome-

non, using them, molding them and changing them

for human gains. However, most of these efforts

have often resulted into a war with nature which has

long lasting impacts with bearings on generations to

come.

One such resultant activity is oil spill-a release of

a liquid petroleum hydrocarbon into the environment

which has been result of careless or planned hu-

man activities. It often refers to marine oil spills,

where oil is released into the ocean or coastal wa-

ters. There had oil spill crisis most famous of them

are Exxon Valdez oil spill of March, 1989 and the

Gulf of Mexico oil spill in April, 2010.

BP is one of the largest energy companies in world.

It deals in fuel, energy products and petrochemical

products. BP was in the news headline worldwide

on April 20, 2010 for the oil spill from its nine year

old mobile offshore drilling unit Deepwater Horizon

in Mississippi Canyon.


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The spill started on April 20, 2010 when an oil well

blew out. According to statement of president

Barack Obama, the reason for it was negligence

and lack of responsibility on the part of BP and its

associated companies- Transocean and Halliburton.

The explosion in the oil well caused explosion of

Deepwater Horizon. According to BPs internal in-

vestigation, the reason of the explosion was the

leakage of Methane gas from the well that ignited

after expanding out of the well. One more reason

that is tabled is the cost cutting by BP on mainte-

nance activities causing explosion as an end result.

The size of spill is not yet fully determined different

estimates have come. Initial BP estimates were

1,000 barrels of oil per day (42,000 gallons) gushing

forth from the broken pipeline. By June 14, a gov-

ernment panel announced that the rig was jetting as

much as 2.5 million gallons of oil per day into the

Gulf. This makes the spill near to be worst spill ever

seen.

Effects of explosion are multi dynamic. They can be

traced from politics, economics, social, business to

environment. The very first effect seen was political

in nature which questioned President Obamas de-

cision to open new regions for offshore drilling.

The next in line are environmental issues. The oil

spill threatened the most productive and fragile ma-

rine ecosystems in the US. About 25% of nationswetlands lie in the Mississippi River Delta, a habitat

for nesting seabirds and resting migratory birds.

The Gulf is home to dozens of threatened and en-

dangered species, and commercially important fish,

crab, and shrimp that act as basis to Gulf Coast

economy.

The economic and social impacts were seen soon

and their overall costs are yet to be estimated. The

prices of the seafood rose by 10% to 30%. The sea-

son is best tourist season. However the hotels, res-

taurants, clubs, resorts and airlines saw cancella-

tion of booking. Hotels and resorts are losing money

- between $100,000 and $200,000. Gulf Coast saw

a 50% decrease in sales and hotel occupancy as

low as 15-19%.

Fishermen and boat owners are looking now for

alternate sources of income. The social life is seen

as misbalanced with families more stressed to fund

daily living sustainable and cutting regular expendi-

ture.

Overall U.S. oil production next year will drop by an

estimated 2%. Further high oil crude oil prices, rise

in oil imports is expected for US economy.

The impact of crisis is seen on BPs finances. The

company has been imposed with fines, lawsuits

apart from the relief measures it took. As of 18 June

2010, the gulf oil spill has cost BP an estimated 1.6

billion USD. This figure can be itemized as follows:

25 million USD in grant money given to the

states of Alabama, Florida, and Mississippi,

60 million USD allocated towards the construc-

tion of barrier islands off the coast of Louisiana

1.4 billion USD accrued as of 18 June 2010 incleanup efforts (tabulated at a rate of 33 million

USD per day since the incident).


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This does not include lawsuits or the over 6700

compensation claims filed costs, although 1000

claims have been settled. Energy analysts

at Barclay Capital project losses worth 22.6 billion

USD will be incurred by BP, including cleanup

costs, worker compensation, legal fees, and lost

revenue. On 6th June, 2010 BP announced cut in

capital expenditure bill and suspend dividend pay-

ments until September 2011 to pay for the 20 billion

USD claims fund imposed upon the company by the

United States.

Although government is attempting to overcome the

impact and boost economy of area time will decide

success of such measure. While BP is seeing

nearly 34-40% stock price decline and going though

post crisis management and image makeover as a

responsible company, it will take time for it to win

back customers trust and clean brand image. To

overcome such situations in future a strong initiative

on the part of government and corporate is needed.

Since such oil spills effect are not limited to one na-

tions boundaries so an international level directive

is need of hour. Today we need global guidelines

stating what precautions and security standards are

to be followed for oil rigs. Further, an international

body is needed to regulate oil refining in sea and

oceans at global level. We also need more respon-

sible corporate behavior guided towards efficient

management, maintenance and surveillance of off-

shore rigs. An efficient crisis management team

with corporate and government joint efforts is

needed to timely redress any crisis. Although, future

remains uncertain such efforts can hedge risks of

playing with nature and human life.

By: Garima Shukla

FUNDAMENTAL VALUATION:

A move towards reality

Investors in stock markets often hear a phrase

called- Fundamental Valuation. What exactly is

Fundamental Valuation? In brief one can say that

its the real worth of the company or the intrinsic

value of the company. There are different ways of

determining it. The most common is the Discounted

Cash Flow (DCF) method.

While the purpose of DCF valuation is to determine

the intrinsic value of the company (in other words

the justified price for the company), the most com-

mon method brokerages use for giving recommen-

dations is relative valuation, pricing an asset relative

to its competitors . But does Fundamental valuation

really matters while going for an individual invest-

ment decision?


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The answer to this question depends upon the mar-

ket maturity and investors motive.

In 1990s, Indian stock market consisted of investors

investing in stocks only with the aim of speculation

and an opportunity of getting higher returns not for

their interest in the company and its growth. Stock

Market was considered a place to gamble in antici-

pation of higher returns. In Indian stock market,

speculative motive of investors had made the mar-

ket unpredictable which also meant that no valua-

tion worked. In past, most of the stock brokerages

in India were not even looking at companys funda-

mentals to value the firm, they were merely going

by the trends in the stock market for their recom-

mendations (in fancy words by technical analysis).

Due to the speculative culture which prevailed in thestock market many retail investors suffered huge

losses and many investment firms went bankrupt.

With growth and the maturity of Indian Stock mar-

ket, the fundamental valuation of companies is gain-

ing prominence. More or less fundamental valuation

plays a major role when it comes to any acquisition,

takeover or merger decisions or when it comes to

long term investment decision. However, for giving

calls in intra day transactions or for short term in-

vestment decision, usually relative tools are found

to be more effective. In relative valuation, you are

assuming that the whole market is rightly priced. In

case the stock is not moving in the direction of mar-

ket, it considered to be mispriced. The work of an

equity researcher is to find out the scrip which is

performing differently from the market average,

thereby giving recommendations to buy or sell a

share.

Now as markets have started moving towards the

maturity phase, the significance of fundamental

valuation is gradually rising. The importance of Fun-

damentals can also be observed in the speeches of

the worlds richest investor Warren Buffett. His

investment choice always depends upon his knowl-

edge of the sector, functioning of the company and

its fundamentals. Realizing this, even back home in

India, a number of portfolio managers have started

following the practice of assessing a companys

fundamentals prior to making any long term invest-

ment decisions.

Thus, promoting a culture of making sensible in-vestment decisions based on DCF of fundamental

valuation.

By: Lakshya Mehta


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IFRS Convergence

A Road Map for Opportunities

From the April 1, 2011, India will join 120 countries

across the globe that allow or require preparation of

financial statements in accordance with the Interna-

tional Financial Reporting Standards (IFRSs). In

India, the convergence process is expected to be

over by 1st April, 2014. However, different dead-

lines have been set for different sectors:

insurance companies from 1st April, 2012,Banks and NBFCs from 1st April, 2013 and

all remaining listed entities from 1st April, 2014

The companies start preparing their financial state-

ments in accordance with the Accounting Standards

(AS) converged with IFRS as per the road map and

guidelines issued by the Ministry of Corporate Af-

fairs, Government of India in consultation with the

Institute of Chartered Accountants of India (ICAI).

By 2015, more than 150 countries including USA

will move to the IFRS. Thus, IFRS will emerge as

one single language of financial reporting ensuring

comparability of financial statements prepared all

over the world. This will facilitate cross-border

movement of capital at lower cost. Also, it will en-

hance the mobility of professionals and professional

services internationally. India, as an emerging econ-

omy has great appetite for foreign investment in

various sectors of economy and convergence with

the IFRS will definitely go a long way in moving

capital in favor of India. In addition to this, with the

world proven skill set, the financial reporting is

touted as the next big thing for the Indian Economy

and for Indians definitely, after technology and out-

sourcing.

While the benefits of global convergence cannot be

doubted, this requires considerable groundwork to

be done to make the country ready for a new setup.

In this direction, all players involved in the formula-

tion, implementation and enforcement of the con-

verged accounting standards have to play a pivotal

role.

ICAI as the formulator of AS has already reached

advanced stage of formulation of AS corresponding

to all IFRS guidelines and has been regularly updat-

ing the same. These Standards are also in the proc-

ess of consideration by the National Advisory Com-mittee on Accounting Standards (NACAS) for rec-

ommendation to the Central Government. The Gov-

ernment in-turn would notify the same under the

Companies Act 1956. To ensure that the Account-

ing Standards corresponding to the IFRS do not


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conflict with various requirements of the Companies

Act 1956, the relevant provisions thereof are being

amended and for which the Government of India

has setup a specialized committee. It is expected

that the amendments in the Act will be in place

much before the end of this year.

Certain areas have been addressed from the indus-

try perspective for ensuring the consistency be-

tween various regulations and AS converged with

the IFRS. However, the regulators such as Reserve

Bank of India (RBI), Insurance Regulatory and De-

velopment Agency (IRDA) and Securities Exchange

Board of India (SEBI) have also identified areas in

their regulations which are not consistent with the

AS converged with IFRS and thereafter are required

to be ammended.

Another area which needs to be addressed from the

industry perspective is to ensure that the AS are as

tax neutral as possible so that there are no adverse

tax implications for the individuals as well as the

corporate. To make a country ready for IFRS con-

verged accounting standards, the extent of prepar-

edness of the professionals in carrying out the tasks

related to audit of financial statements with the stan-

dards is pivotal. A massive training program by ICAI

has already been started for its members in industry

as well as in practice. Also, a number of seminars

and conferences on IFRS are frequently conducted

to discuss various aspects related to implementa-

tion of IFRS.

Ministry of Corporate Affairs in association with the

ICAI has recently undertaken a task to conduct

workshops at 58 centers across India. While the

Institute, Government and the Regulators are per-

forming their allotted tasks, it is also imperative for

the entities to prepare themselves to change their

accounting and other systems to be fully ready to

implement the accounting standards converged with

the IFRS.

The country, professionals as well as the compa-

nies should take this as an opportunity of another

leap to capture the entire accounting and financial

reporting arena across the globe. Its time to gear

up.

By: Sudhanshu Pandey


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16

Playing with Derivatives

A range of sophisticated toys available in the finan-

cial markets are The Derivatives. Derivatives are

innovative financial instruments which are primarily

used for two purposes one for Risk Management

and the other for Speculation. Use of derivatives

as the latter might create a havoc, however, its use

as the former can really help in effective functioning

of an enterprise. Although, using Derivatives for

speculative purposes can also result in huge profit,

however, the possibility of losing the game is way

higher than the possibility of winning.

Lets understand what exactly are Derivatives?

Derivative is a contract between two or more parties

whose value is determined by the rise or fall in the

value of underlying assets. The underlying asset

could be a stock, a bond, a commodity or a cur-

rency. The most common types of derivatives are

Forwards, Futures, Options and Swaps.

One can say that a Derivative challenges the uni-

versal truth future is uncertain, it gives the investor

an opportunity of living the current in future.

Initially, derivatives were introduced with the aim of

Enterprise Risk Management. Risk Management is

safeguarding the possibility of future losses. In case

any possibility of loss is anticipated then it can be

averted with Derivative instruments. An investment

in Derivative is primarily to ensure that the benefit

derived from the regular trade contracts should

never reduce below the ascertained levels.

Enterprise use derivative instruments to hedgeagainst market risks such as interest rates risk, cur-

rency risks and so on. Say for example if an enter-

prise is to obtain goods from another entity located

abroad and the payment for goods is to be made in

a foreign currency at a later date. We know that

Currency is subject to fluctuations. Therefore, the

enterprise making payment can book a Buy posi-

tion of a derivative contract (forward, future, option)

and safeguard against the possibility of loss due to

unfavourable exchange rate fluctuations. Lets say a

speculator expects that the shares of a company

called AB Communications will rise in future. There-

fore, a contract of buying 1000 shares of AB Com-

munication at a future date is booked at current

price. Currently, the share price is at Rs. 1,000 per

share and it is expected that it will rise to Rs. 1,300

per share. Now on the due date, in case the share

prices move as expected by the derivative investor,

he gains Rs. 300,000. However, contrary to the ex-

pectation the price of the same share falls to Rs.

700 per share the same investor looses Rs.

300,000. Therefore, the probability of gain comes

with an equal probability of a loss.

While with Swap the enterprise can exchange

equivalent value of its foreign currency obligation

with that of another enterprise having its obligation

in the enterprises domestic currency.

Interestingly, we have derivative instruments for

Energy, Weather and Insurance. These instruments

are used for management of risks associated with


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prices of energy products (crude oil, electricity and

natural gas), safeguarding industries where per-

formance is affected by unpredictability of weather

and the risk of excessive insurance claims due to

natural calamities.

Currently, the Derivative investments are increas-

ingly used for speculation. Using Derivatives for

speculation is the other extreme of the same chord.

While speculating, the complete game is based on

the expectations and market sentiments. What you

believe is how you invest and if the belief comes

true there is profit else a loss. The prime intention of

speculative investments is to leverage the profits.

One example of speculative practice is the invest-

ment in Collateralized Debt Obligations (CDO), the

assets underlying these financial instruments were

the loans approved by the commercial banks. Huge

volumes of CDOs were traded in the stock market

and profits were reaped by many. However, the

complexity of these instruments and the little under-

standing of the same to the speculators engulfed

the complete American economy into economic de-

pression and eventually the rest of the world.

An investment into derivative markets requires a

deep rooted understanding of the financial instru-

ments and an excellent foresight about the future

market development. Exiting the market at the ap-

propriate phase is an essential for profiting in realterms.

Of late more and more sophisticated derivative in-

struments like Swaptions, Leaps, Baskets and so

on are introduced in the financial market. They are

usually a blend of two or more than two vanilla de-

rivatives. More than Risk management these de-

rivatives are increasingly used by the enterprises to

make speculative gains and enhance their invest-

ment earnings.

The latest innovation in the derivative market is the

Media Derivatives. Recently in US, Commodity Fu-

tures Trading Commission (CFTC) has approved

the trading futures contract for movies in the com-

modity market. Imagine you bidding for the box of-

fice success or failure of a forthcoming movie.

All in all, derivatives when sensibly used with the

purpose of Risk Management prove to be an excel-

lent tool for safeguarding against losses. However,

when the same instruments are used with a specu-

lative intent then the results could be other than

gains. Despite such possibilities enterprises have

been increasingly indulging in investment into such

contracts. Hope they are keeping in their minds - to

win while paying the game is to play smart and play

intelligent!

By: Kriti Pant


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TEAM ECOBIZZBATCH OF 2011

EDITORIAL

EVENT

CREATIVE

From Left to Right:

Sudhanshu Pandey

Anuradha Upadhyay

Garima Shukla

Kriti Pant

Lakshay Mehta

From Left to Right:

Sonal Agarwal

Vivek Narang

Aanchal Agarwal

Shivalika Singh

Shubhra Chaudhry

Bharti Bajaj

Nikunj Doshi

Prasanna Sawarkar

From Left to Right:

Ashmita De

Sweta SinghaniaRishi Vagrecha


19/19

marketing

From Left to Right:

Anjum Daniels

Sumair Riyaz

Aditya Manishi

Kunal Bhatia

Mansi Unadkat

Y.V. Sai Shanmukha

Mohil Mishra

Amit Vohra

ITFrom Left to Right:

Manish Patel

Ankit Jain

The Focus June10

Documents

Transcript of The Focus June10