Niveshak Sept10

Niveshak
THE INVESTOR VOLUME 3 ISSUE 9 September 2010
Corporate Debt
Restructuring
The Commonwealth Extravaganza pg.09 Indian Bank Base Rate PG.12
FROM EDITOR’S DESK
Dear Niveshaks
Niveshak Heartiest congratulations to all of you. We, Niveshaks, have completed an-
Volume III other circle round the sun and have stepped into our 3rd year of existence with
ISSUE IX glory and pride. There have been many learning opportunities for all of us and I am
glad to note that we have not missed any significant one in the last one year. Par-
September 2010 ticipants of all B-Schools of India and some renowned foreign universities, through
Niveshak, captured the essence of all happenings and analysed their implications
Faculty Mentor on the world of finance. During the last 12 issues, we received more than 700 arti-
cles (including approximately 110 articles for the August anniversary issue) from the
N. Sivasankaran
top 30 B-Schools of India. We are extremely thankful to all our article contributors
across all B-Schools and to all our subscribers who supported and encouraged us
through their appreciation mails and by increasing the count of our subscription.
THE TEAM We are also thankful to Public Relations committees of all B-Schools of India who
have circulated Niveshak among their participants. For all our readers who are not
Editor aware of Niveshak’s second anniversary issue’s launch ceremony, here is the news.
Bhavit Sharma General J J Singh, ex- Indian Army chief and incumbent Governor of Arunachal
Pradesh graced the launch ceremony by releasing Niveshak which got covered
and praised by some major media houses like Times of India and Telegraph. Thanks
Sub-Editors to all of you.
Durgesh Nandini Mohanty The beginning of 3rd year of Niveshak coincidently started with something
Hitesh Gulati else also to cheer about. SENSEX recently scaled 20k figure after 32 months and
Sumit Kedia have entered a new bull run with 20% gain from 2010 lows and so have other
emerging markets as investors from developed nations chase returns. BSE Sensex,
Tanvi Arora
few days back, gained nearly 800 points (4.2%) in just 5 trading days which was
Upasna Agarwal
the biggest weekly gain for the index in over a year while on percentage basis this
was the biggest up-move in the last 10 months. With the BSE benchmark Sensex
breaching the 20,000-level and still going strong, we have good reasons to believe
Creative Team that Indian markets have entered a bull phase and persistent FII inflows may push
Bhavya Aggarwal the index past its highest mark of 21078 in the coming days.
Swarnabha Mukherjee The cover story for this month focuses on Corporate Debt Restructuring
which is often perceived as the saviour of firms distressed by an unhealthy propor-
tion of debt in their capital structures. The article explains the procedure of CDR
Special Thanks in detail and emphasizes on its relevance in the recent past by picking examples
Vivek Priyadarshi from the airline and retail industry. This edition also brings to you something inter-
Vishal Goel esting which has been the talk of the town for the last few weeks. We present to
you an article on 2010 Commonwealth Games which are going to be the largest
multi-sport event conducted in India to date. Nobody in 2003, when India won
the bid for hosting the event, would have thought that the games will be hit by
bad weather and criticism of the facilities and village in the last few days before the
All images, design and artwork inauguration. But things aren’t in good shape as of now and the next 15 days are
are copyright of going to tell us whether India will be able to prove itself as a capable host or not.
IIM Shillong Finance Club I hope the issue will definitely stimulate and keep you engrossed in the world of
finance. Looking forward to your comments and wishes to bring out more interest-
ing issues in the future.
©Finance Club Start following us on facebook and twitter.
Indian Institute of Management
Shillong
Bhavit Sharma
www.iims-niveshak.com (Editor -Niveshak)
Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Niveshak Times
04 The Month That Was
Finsight
06 Banking on banking
Stocks
20 Corporates in the
Cover Story Banking Sector
15 Corporate Debt
Restructuring
Fingyaan
22 Anatomy of the “Tulip Bulb”
Crisis
Article of the month

12 Indian Bank Base Rate: An
Overview
PERSPECTIVE
09 The Commonwealth
Extravaganza: True Claims?
False Hopes?
Finlounge
25 Entry Load Abolition: Is the 28 Crossword
Consumer Really
Empowered ?
www.iims-niveshak.com
The Niveshak Times

CITI BOARD TO RAISE CEO PANDIT’S
SALARY ABOVE THE TOKEN $1 IN ‘11
nitish sanadhya
IIM, Shillong
Blackberry allows India monitor to its ser- like MCX and MCX-SX in India was rung by Mon-
vices etary Authority of Singapore (MAS) Deputy MD Ong
After a lot of tussle and negotiations with In- Chang Tee. Singapore is already the largest place for
dian government, Blackberry phone maker Research dealings in foreign currency after Tokyo and more
in Motion (RIM) faced with the Indian government’s than 280 major global trading companies are pres-
deadline of August 31, have finally agreed to give ent here. To start with, SMX will offer trading in gold,
access to Indian security agencies to monitor all its euro/US dollar currency futures and WTI crude oil fu-
services. tures. SMX will be the first pan-Asian multi-product
commodity and currency derivatives exchange.
Nearly two months after insisting that it does
not have the provision and due to other privacy con- 3G Capital to buy Burger King for $4 bn
cerns on granting access for such monitoring, RIM 3G Capital declared that it has
made certain proposals for lawful access of Black- entered into a definitive agree-
Berry Enterprise Services (BES) and BlackBerry Mes- ment with Burger King under
senger Services (BBM) by the law enforcement agen- which 3G Capital will acquire the
cies. stock of the company for $24
RIM’s response came after the per share or $4 billion, including
The Month That Was
Union home ministry made it clear the assumption of the company’s

that BlackBerry has to shut down its outstanding debt. Under the terms
operations in the country from Sep- of the deal, 3G will pay a 46 per cent premium to the
tember 1 if it failed to provide access company’s share price before September 1, the day
to monitoring of its messenger ser- the buy-out talks surfaced.
vices. Burger King which is the country’s second larg-
The ministry will review the situ- est hamburger chain after Mc Donalds, specified
ation within 60 days by which time that it may still solicit superior proposals from third
the Department of Telecommunication parties for a period of 40 calendar days until October
(DoT) is expected to submit its report. 12, 2010.
Singapore Mercantile Exchange (SMX) During the transition period, Burger King’s
launched Chairman and CEO John Chidsey will continue in his
current capacity and subsequently assume a posi-
In the first major
tion of co-chairman of the Board along with Beh-
international exchange
ring upon the closing of the transaction. Investment
business initiative by
firms TPG Capital, Bain Capital and Goldman Sachs
an Indian entity, a new
Capital Partners bought Burger King in 2002 for about
commodity and currency
$1.5 billion from the spirits major Diageo PLC, but
bourse, Singapore Mer-
entered the capital markets in 2006.Post the Burger
cantile Exchange (SMX)
King’s deal with 3G, the private equity firms still own
started which offers
31 per cent stake in the company and have entered
comprehensive platform
into agreements with 3G Capital pursuant to which
for trading a diversified basket of commodities like
they will tender their shares into the offer..
gold, crude oil, precious metals, future and options
contracts and Euro-US dollar. The opening bell for IMF expands credit line to avert future
the new bourse, part of Mumbai-based Financial crisis
Technologies group, founded by engineer-turned- The International Monetary Fund has unveiled
entrepreneur Jignesh Shah which runs exchanges new credit facilities for member countries to secure
4 NIVESHAK VOLUME 3 ISSUE 9 september 2010

The Niveshak Times

HSBC CHIEF EXECUTIVE MICHAEL GEOGHEGAN
TO STEP DOWN AT THE END OF THE YEAR
financial assistance in a timely manner, which will Reliance Infratel Ltd.—said that it is now in talks
help prevent financial crises in the future. with “strategic and financial investors” for a similar
In recent times, the multilateral lending agency transaction aimed at reducing its $6.2 billion debt.
extended financial aid to crisis-hit nations such as The notice, however, didn’t say why the two compa-
Greece and Romania. nies couldn’t stitch together a deal that would have
created an independent tower entity with an enter-
The IMF’s executive board has approved a new
prise value of more than 500 billion rupees (around
Precautionary Credit Line that would allow countries
$10.75 billion) and more than 80,000 towers.
having sound fiscal and monetary policies to take
loans quickly in times of crisis. Google acquires SocialDeck
In addition, the lender will increase the dura- Internet search
tion, as well as the credit available through existing giant Google has ac-
Flexible Credit Lines. quired social games
The ‘insurance-type instrument’ is aimed at website SocialDeck
encouraging countries to approach the fund in a for an undisclosed
more timely fashion to prevent a crisis. amount, in a move to
The Month That Was

strengthen its social
Mahindra-Ssangyong Deal networking service.
Automotive giants Mahindra & Mahindra is The transaction
aiming to bring Ssangyong Motors of North Korea comes within days of Google’s acquisition of Angstro,
under its fold and has decided that the buyout will which makes applications to discover new photos on
be debt free. Facebook and create a real-time social address book.
Mahindra & Mahindra will infuse nearly $400 The deal is one of several acquisitions in the
million as equity into Ssangyong to acquire a con- past month through which Google is hoping to build
trolling stake and these funds will also be used to a social-networking service to counter rival Face-
clear all long term debts which are around $320 mil- book.
lion as of now. Once the buyout is complete M&M
SocialDeck, a Canadian start-up, has launched
will emerge as one of the
several games titles for Facebook, Apple’s iPhone
world’s largest SUV makers
and Research In Motion’s BlackBerry devices and
with a combined turnover of
Google is optimistic to use the same for their an-
over $4 billion.
droids and their social networking site.
Reliance Com, GTL Infrastructure Split
Capgemini buys 55% stake in CPM Braxis ,
After much hype over the last two months over Brazilian firm
a deal to merge their telecom towers businesses,
Capgemini will buy majority stake in Brazilian
Reliance Communications Ltd. and GTL Infrastructure
CPM Braxis for 233 million euros $299 million) in a
Ltd. have called it off. The deal would have been
bid to boost its presence in the emerging markets.
India’s largest in terms of tower assets transferred,
The deal is expected to close by October and it will
beating GTL Infrastructure’s deal to buy 17,500 tow-
be funded through the company’s net cash position.
ers from mobile firm operator Aircel Ltd. earlier this
CMP Braxis has an enterprise value of 437 million
year. Despite efforts, both parties have neither ex-
euros and it forecasts 450 million euros revenue in
tended the term sheet nor entered into any defini-
the full year.
tive transaction agreements as envisaged therein.
Consequently, the process of merger as originally
contemplated would not take place,” the notice
added. On its part, Reliance Communications—which
runs its tower business through the 95%-owned unit
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

BANKING ON BANKING STOCKS ??
Ankit Maheshwari
Business Analyst, Global Decision Management - Advanced Analytical Solution, Citibank
The global financial crisis cre- in regulations that have included
Banks have been the ated havoc around the world with strengthened prudential norms, in-
stalwarts of India’s colossal financial systems failing tegration of regulations between
resilient financial rather dramatically. In such times of commercial and co-operative banks
system. The bank- distress Indian Banking Industry did and better payment system. Also,
hold up unlike its peers of the west. the increase in competition has led
ing index has grown Be it on account of regulation of RBI to better rates being offered along
at nearly twice the or prudent lending by the banks with much more innovative products
rate of the market themselves, the banks came out that satisfy the needs of different
in the last decade. relatively unscathed from the cri- customers. According to RBI, over
sis. However the stock prices of the the past few years Indian banks have
This article delves
banks did fall a bot on account of performed well on account of accel-
into the two prob- rising concerns about high NPAs and eration of nominal GDP, rising sav-
able reasons behind loan restructuring. But the economy ings rate, increas-
this phenomenon, is settling down and regaining its ing proportion
striving to decide growth momen- of bank deposits
tum with the in total financial
whether it is due to growth savings, and in-
the actual strong b e i n g flow of non-
fundamentals of the broad- based retaildeposits.
sector or the market across sectors. The banks are
has exaggerated the This has fuelled well capitalised
expectations in both public
growth fundamen- of higher and private
tals of these banks fund require- sectors with
resulting in mere ments by the corpo- good asset
speculation. rates to fund their growth and quality and low NPAs. The
hence the banking sector is rather vi- latest Basel 3 norms, brought
brant with such expectations. Bank- into the picture in order to ensure a
ing sector is said to be the proxy of more resilient financial system, will
growth of all sectors. This has made not impact Indian banking system
the investors extremely bullish on much. The initiative by RBI to imple-
this sector. ment the system of base rates has
FinSight
Over the past decade the bank- also been welcomed by all banks.
ing index has grown at a CAGR of While the profitability of the bank-
51% compared to 27% growth of the ing system has not been impacted
entire market. A lot of this can be as such, there is an increased level
attributed to the strong fundamen- of transparency.
tals. The sector has become much The BSE Bankex rose 9.58% to
more resilient with notable changes close at all-time high, with 13 of the
Just jumping in the bandwagon may lead to some gains in a short horizon but the rally will not
continue for most banks. One should stick to banks like HDFC Bank, ICICI Bank, SBI and Axis
that are likely to remain strong in the future

14 Bankex scrips advancing. The recent rally in the India with a CASA level of 47.5% among Public Sector
Bankex is one seen after a period of 7 years. The banks.” However whether the banks will be able to
growth momentum that propelled the Sensex to continue with such high degree of CASA in the com-
cross 19000 in recent times has become a point of ing year is questionable.
discussion for everyone. The question is – whether Secondly, there has been significant tightening
the banking index will sustain its growth momentum of monetary policy compared to last year in order
or can the market soon expect a correction. Most of to bring down the inflation rate, with growth of the
the banks are trading close to their highest P/E mul- economy not being a cause of worry for the Central
tiple achieved historically indicating that the rally Bank anymore. The latest rise in the repo rates in
will not extend for too long and one can soon ex- the mid term quarterly review was also expected
pect a brake in the rally. The private sector space in by the market.The repo and reverse repo rates were
particular have seen its valuation going way beyond increased 25 bps and 50 bps respectively. The CRR
the historical average with some banks trading at was left untouched. However for most of the banks
3-5 times their price to book value. The rally has over this time horizon of one year, the PLR has not
led to all banking stocks even the ones with poor kept pace with the rise in interest rates. This shows
asset quality to perform better than expected. This that the cost of funds has risen but the rise in inter-
has led to doubts that the market has exaggerated est income from deposits is not commensurate with
the growth fundamentals of these banks. There are the rise in cost.
expectations that this rally will soon be corrected as Hence, even though it is quite possible that the
the rising interest rate and NPA manifest them and increase in interest rate may lead to worsening of
the market observes the actual asset quality that is NIM, but one can expect higher revenues on account
in the system. of higher credit growth, fee income and reduction in
For a bank to perform well one has to observe NPAs. However one still needs to be cautious about
the growth of its prime activity that is, lending. FY10 banks that have lower CASA ratio in such a scenario.
wasn’t good in terms of the loan disbursal. Credit Betting on banks with strong fundamentals like ones
offtake was rather stagnant as the economy was still with high CASA ratio and lower duration investment
trying to recover from the aftermath of the crisis. books are better bets. Just jumping in the bandwag-
According to RBI, Third Quarter Review of Monetary on may lead to some gains in a short horizon but the
Policy 2009-10, non-food bank credit growth deceler- rally will not continue for most banks.
ated significantly from its peak of over 29 per cent On the whole I suggest that one should stick to
in October 2008 to a little over 10 per cent in October
banks like HDFC Bank, ICICI Bank, SBI and Axis that
2009. Thereafter, it recovered to over 14 per cent by are likely to remain strong in the future. Not only
mid-January 2010.The credit growth rate is expected do they have a higher CASA which will keep the NIM
to stay robust as there is growth in sectors like in- from falling, they have good capital adequacy and
frastructure and manufacturing. Banks are well capi- will tend to have higher credit offtake compared to
talised to increase their long term lending to these the other banks. Mid-size banks may underperform
sectors. with their net interest margin coming under pres-
However it is the growth prospects of Net inter- sure. Hence instead of, just jumping the band wagon FinSight
est margin (NIM) that is not looking so good. NIM for one has to be judicious in picking the stocks of this
most banks rose last year with the increase in CASA sector.
deposits. According to CARE rating, “The overall me-
dian CASA as a proportion of total deposits improved
to around 32.6% vs 30.4% a year ago, led by CASA
growth in Public Sector banks. HDFC Bank continues
to dominate CASA race among Private Sector banks
with 49% CASA level, matched only by State Bank of
The question is – whether the

banking index will sustain its
growth momentum or can the
market soon expect a correction.

The Commonwealth
Extravaganza
vinod duhan
IIM Shillong
The Commonwealth Games Year Budget Revised
(CWG), symbolising India’s strength When the common-
2005-06 45.50 45.50 wealth games are
as an economy in the world scenario
are in fact becoming a matter of na- 2006-07 150 150
just round the cor-
tional shame. As serious corruption 2007-08 150 307.72
charges eat away the very edifice of
ner, there are press-
2008-09 356.74 967.74
the commonwealth games, is there a ing questions like:
2009-10 2264.42 2883
point really, in India, looking towards will the extravagan-
2010-11 2069.52
these games to establish a sense of za be held on time
self confidence as a country. The Common Wealth Games –Union Budget
budget for the games has undergone Allocation and will it be held
several revisions since India won the Reasons For cost Escalation at all? The author
bid for the Games in 2003. People Though it is difficult to esti- tries to answer this
are asking questions whether these mate the cost of games, but the er- through this article.
Perspective
games are commonwealth games, ror as humongous as this, indicates
corruption wealth games or com- that the scope and spread of the
mon man wealth games. Here is an games was not fully grasped while
overview of what conspired between estimating. One of the reasons for
2003 -2010 in the chapter of CWG. cost escalation of such proportion
Budgetary Allocation for was that some things which were
Games essential for successful delivery of
games were not there in the initial
Originally an expenditure of
budget of the organising commit-
Rs.296 crore was indicated in the bid
tee like City operations, Security,
for the CWG by the Indian Olympic
Sustainability and Environment, ac-
Association. But in the same year
creditation etc. Change in the scope
bid document was updated estimat-
of the work and cost escalation in
ing a total expenditure of 1835 crore
respect of Accommodation, Catering,
including the operational expenses.
Opening and Closing Ceremonies,
The union budget for commonwealth
Protocol and CGF Relations, Queen’s
games increased from Rs.45.5 crore
Baton Relay, Rent for OC Office, Com-
in 2005-06 to Rs.2883 crores in 2009-
munications, Image and Look, Tech-
10. A massive 6235 % increase in
nology, Risk Management-Insurance
budget! These figures exclude the
and Technical Conduct of Sports also
cost to build infrastructure indirectly
led to overall cost escalation.
linked with the CWG. Social sector
spending in India has never wit- Financing the Commonwealth
nessed such a rise, even when the Games
need for increased budgetary alloca- Estimating the actual cost of
tions for essential services has been CWG is not an easy question to an-
critical. swer because the work involves vari-
able sectors and the money is being
(All values in ` crores)
The Commonwealth Games, while being portrayed as a global event that would contribute to India’s
“national prestige” and international repute, have on the contrary already resulted in negative conse-
quences that serve to challenge this presumption.

Total Amount likely to
Name of be spent (includes the
S.No. Implementing Agency
Stadium / Project amount that has already
been spent)
1 Sports Authority of India / Central Pub- SAI Stadia 2418.00
lic Works Department (CPWD)
2 University Of Delhi Competition/ Training Venues 306.41
3 All India Tennis Association R.K Khanna Stadium 65.65
4 Central Reserve Police Force (CPWD) Kadarpur Shooting Range, Gurgaon 28.50
5 Organising Committee CWG -2010 Conduct of the Games 1620.00
6 Ministry Of Youth Affairs And Sports Preparation of teams 678.00
7 Delhi Development Authority Games Village/ Competition and training venues 827.85
8 New Delhi Municipal Committee Competition And training Venues 260.00
spent by a bewildering morass of multiple agencies. projected expenditure of Rs.1,620 Cr on the conduct
To know about the CWG organisation, one must be of Games through the collection of above revenue.
prepared to enter into a labyrinth of overlapping The Government has guaranteed to meet the short-
controls - Ministry of Sports, Ministry of Home Af- fall between revenue generation and expenditure, if
fairs, Ministry of Urban Development, Ministry of any, of CG Organizing Committee.
Tourism, Government of Delhi, Planning Commis-
sion, New Delhi Municipal Corporation (NDMC), Mu- Financial Legacy of the 2010 Games
The long-term financial effects of the CWG on
Perspective
nicipal Corporation of Delhi (MCD), Sports Authority

of India (SAI), Delhi Development Authority (DDA), the city of Delhi and the country are difficult to pre-
the Organising Committee to name a few. dict. The financial legacy of the Games will depend
The details of funds allocated for common- on the extent of losses or debt that the government
wealth games till date are shown in table above. incurs. The excessive expenditure on the CWG, how-
While projects at S.No.1 to 6 are being funded by ever, has already begun to impact the economy with
the Ministry of Youth Affairs & Sports, the remaining implications on resource allocation, especially for
two projects at S.No.7 & 8 are being funded by the the city of Delhi. The Delhi Government is already
concerned organizations. facing a financial crunch due to the CWG projects,
and has no money to pay for the third phase of
According to Mr Jaipal Reddy, the minister of the Delhi Metro. Citing financial crunch due to heavy
Urban Development, Rs.28,054 crores have already spending on Commonwealth Games projects, the
been spent on these games. An amount of Rs.16,560 Delhi government, in the last six months, has hiked
crore was given to Delhi government for upgrading bus fares and water tariff, withdrawn subsidy on LPG
the capital infrastructure and building of various sta- cylinders, and increased VAT on a number of items.
dia.
If we talk about the Asiad Games of 1982, it
Of the Rs.11,494 crore spent by the centre, took the organisers 25 years to sell off the players’
Rs.2,934 crore was spent on sports infrastructure, buildings and 20 years to sell off the Asiad Village.
Rs.678 crore on training of teams, and the rest was For the CWG, if I say that it may take 30-40 years to
given to various ministries like Ministry of Urban De- break even, then I think I will not be exaggerating.
velopment and Health ministry. Major part of this Also whole world knows that how the economy of
money has been spent on infrastructure develop- Greece was effected by the Olympic Games in 2004.
ment of the capital, which is not directly linked to Greece is still under debt to repay the expenses of
the games. Government has also given Rs.2, 394 the Olympic Games.
crore as loan to the organising committee, which is
to be returned by them after the games. Questions left Unanswered
The quantum of revenue likely to be generated • For a country like India, Rs.10,000 - 30,000
during the Commonwealth Games is expected to be crore being spent on the extravaganza is a lot of
of Rs. 1708.00 Crore from (i) International / Domes- money; is it being spent well?
tic Broadcasting : Rs. 298.70 Crore; (ii) Sponsorship • Why an approximate correct estimate of
: Rs. 960.00 Crore; (iii) Ticketing : Rs. 100.00 Crore; money as well as time could not be prepared in
(iv) Licensed Merchandise : Rs. 50.00 Crore. There initial stages?
would also be some revenue collected through tour-
• Who will gain most from it - the Capital,
ism which can not be judged before the games. The
India’s sportspersons or politicians and builders?
CG Organizing Committee is likely to offset the entire

• Given the excessive costs involved in host- mon man, this is not the time to put allegations
ing the Games and the persisting socio-economic against each other but instead perform a few small
problems that India is plagued with, how does the things expected from us as Indians, such as being
Government of India justify such expenditure? good to our visitors, and following the rules. Even
• How much the common man would have these small things leave a positive impact as India
been benefited if the same amount had been spent in known for its hospitality from ages. We had prom-
on education, basic infrastructure and development ised the world a successful Commonwealth games.
of rural India? The time now is to celebrate the “delivery of the
Games” and that people of the country should get
These are some of the questions which will
exposed to some positive vibes.
resurface time and again. The organising commit-
tee will have to answer the people of India. This is Conclusion
the duty of the authorities to evaluate beforehand The Commonwealth Games, while being por-
the resources whether in terms of man, money or trayed as a global event that would contribute to
time and be prepared to handle them in the most India’s “national prestige” and international repute,
efficient way and to keep country’s gain before their have on the contrary already resulted in negative
petty personal gains. The management has to im- consequences that serve to challenge this pre-
prove from grass roots to top authorities, as the sumption. There is a large gap between targets
harm such as this can not be undone soon. The achieved and the targets that could have been
authorities should beware that after the successful achieved. The much pro-
completion of the games, they will have to give the claimed infrastructure
Perspective
account of each and every penny of taxpayers’ mon- development has been
ey. Although this is not the right time to raise such hurried and over expen-
matters as games are just a few days away, but one sive. The whole game
cannot ignore these questions. event has been
Promises To Keep poorly planned.
The commonwealth games are anticipated as
a means to energise the city of Delhi, providing its
residents with a common purpose, enhancing the
city’s image and providing an impetus to develop-
ment of infrastructure. But relentless digging is all
that Delhi has to show in the name of the Common-
wealth Games. Everything else is hidden - shrouded
in mystery and intrigue. Amid all the troubling talk
But the
of corruption and a benumbing lack of transparency,
execution
there are pressing questions the nation is asking:
part still re-
will the extravaganza be held on time and will it
mains.
be held at all? London has already completed the
preparation for the Olympic Games that will be there Hope the com-
after two years. They are ready to host the games monwealth games are
even a year in advance whereas we are coming to conducted and executed
know about a related scandal every other day at a well, as all
time when the games are just round the corner. Al- is well that
though, time is less and a huge is task at hand for ends
the organisers, but still I think that a lot of damage well!!
control can be done if we channelize the resources
in the best possible way with proper planning in
executing these games. Whereas for us as the com-
The budget for the games has

undergone several revisions
since India won the bid for the
Games in 2003.

Indian Bank Base Rate:
An Overview
Debasis Kumar Dash
IIM Kozhikode
Introduction higher rates from small borrowers in
All banks are sup- the retail, small business and agri-
The base rate will be the new
posed to declare a reference rate for determining lend- culture segments which led to cross-
base rate to the cus- ing rates for banks. It was imple- subsidization. There have also been
mented from July 1 across all banks cases when the SMEs faced discrimi-
tomers, with effect nation due to the credit policies of
in India.
from July 1st, 2010. Private Banks.
The net impact of What is the base rate? Recent trend has been that
AoM
this for the retail cus- If you borrow money to buy whenever RBI has raised policy rates
a Mercedes car or a computer or and reserve ratios, banks have been
tomer will not be a plush bungalow in Mumbai sub- quick to increase their loan rates.
much as the cost of urbs, you need to pay interest rate But, when RBI reduces policy rates
funds for banks will to the lender. The base rate is the and reserve ratios, banks have been
not change drastical- minimum rate that a bank will offer very slow to respond. This leads to
you. It is like a floor below which the downward stickiness in rates and ad-
ly. Big corporates will RBI will not allow the banks to lend versely impacts the monetary trans-
be the biggest losers you money. Previously, banks used mission mechanism in the banking
in the process as they to give the loans based on a com- system. One important aspect also
had the advantage plex system called the benchmark is that the BPLR was set on the his-
prime lending rate (BPLR). Each bank torical market rates. It was backward
of getting loans at had its own BPLR calculation system looking rather than forward looking
sub-base rates while which made it difficult for borrowers and was thus not able to capture the
the biggest gainers to compare rates across banks. present market condition and inter-
est rates. Cost of Deposits prevalent
would be the small Why was Base Rate introduced?
in current market scenario was ne-
and medium firms Banks in India generally charge glected in fixing the rate.
who used to get raw their largest corporate borrowers
Standardization of rates was
less than published prime rates,
deals from banks. another issue for the RBI. The Public
which they will not be able to do on
Banks may end up banks were lending in the range of
the new loans from July 1st, 2010.
11-12 %, private players were lend-
losing market share The RBI had expressed concern over
ing at 14-17% whereas foreign banks
in the short term but banks offering short-term loans well
used to lend in the range of 14-16%.
below their prime rates to compa-
there is going to be nies and mortgage borrowers. Similar
Major Corporates still preferred pri-
greater transparency vate banks due to better customer
pattern had given rise to Sub-prime
service, credit policies and sub-
and trickling down of crisis in 2008 which led to finan-
prime lending for big projects. One
policies made by RBI cial downturn. Due to competition,
huge reason with the introduction of
banks have been offering loans to
across banks due to first class borrowers with high credit
BRS as explained by experts is that it
will help the Reserve Bank of India to
the base-rate system. rating at rates much below the BPLR
transfer the changes in policy rates
in a non-transparent manner.
(Repo and Reverse Repo under LAF)
However, banks were charging in a better manner to the banks. Un-
With the introduction of base

rate, the RBI will be able to
transfer the changes in policy
rates in a better manner to the
banks

der the BPLR, monetary policy transmission is weak
due to the lack of transparency. This has been de-
tailed out elaborately by Deepak Mohanty Commit-
tee’s Report. Now, with the BRS, RBI expects that
banks will respond immediately to RBI’s policy rates Fig-4- Variation of Rates across Public Banks
Base Rate Implementation and Impacts:
After the implementation of the new loan pric-
ing system, existing borrowers would continue to
pay at existing rates, while the base rate would ap-
ply to the new customers. The actual lending rate
Fig-5- Variation of Rates across Foreign Banks
charged to borrowers would be the base rate+ bor-
rower-specific charges including operating costs, ac- Effects on Banks
cording to draft guidelines on the RBI website. The The graphs shown above indicate that the dif-
AoM
base rate will be more as it will be a function of ference between BPLR and Base rate is highest for
the banks’ costs on its capital (or cost of deposits), Private Banks. Clearly they are at a loss compared
operating costs, statutory requirements (CRR, SLR to Public and foreign Banks. The problem for private
etc), credit-risk of the borrower, and the allowable banks is their high cost of Funds and Deposits. So
profit margin. The graphs below give trends across ideally their base rates should be higher compared
the various players in banking sector with respect to to Public banks. But if they would have set base
costs associated with deposits. rates higher, it would have resulted in loss of cus-
tomers. So the Net Interest Margin (NIM) for private
banks will be affected in the short term. The biggest
gainers definitely are foreign banks who have the
least difference between BPLR and Base rate. Cus-
Fig-1- Variation of Cost of Deposits tomer attrition should be at a minimum for these
banks as change is not significant. Public Banks nor-
mally have lower cost of funds and thus can afford
lower base rates. There is not much change in NIM
expected for them due to the changing rates.
Private Banks can cut competition by offering
Fig 2- Variation of Cost of Funds premium service levels. They can attract corporates
The trend clearly shows that Cost of deposits is by offering value added services and concessions.
highest for old private banks. Thus by logic, the base The other strategy can be to give priority to clients
rate should be highest for these banks. Similarly, the who are financing projects of national importance.
base rate can be expected to be low for foreign and
public banks. The biggest impact will be that the Effects of Base-Rate Loans for Customers
new Base Rates from private banks may be lower Let us see three major players in the customer
than the existing Benchmark Prime Lending Rates segment- Retail, Corporate and SME. The critical thing
(BPLR). Due to heavy competition in the industry, is that the interest rates are not going to change
some aggressive public banks, whose cost of de- much for the retail customer. The method of calcu-
posits/funds is lower compared to industry levels, lating interest rates will be clear to a retail customer
may peg their Base Rates very low. However the RBI but there will not be much effect on the EMI for a
Governor as well as several Banks heads is of the retail customer. There will also not be much impact
opinion that base rate is not going to vary much for on banks interest spreads. Banks will still have the
retail customers from BPLR. flexibility in controlling loan-pricing elements, like
The following graphs show the base rate, BPLR credit risks premium and product specific operating
and differences between the rates for the 3 major costs. As per various analyses done by experts, cost
players. of borrowing for retail customers may decrease in
the short term but not significantly.
Large private corporates will be biggest losers
in this process. They were able to get away with sub-
prime lending rates in the past due to their higher
negotiation skills. But with BRS, the corporate might
have to go for Bond markets in the short term. The
Fig-3- Variation of Rates across Private Banks other alternatives before them are ECB which have
lower borrowing costs. Use of Commercial paper has

also shown significant growth in the first quarter of to higher base rate , thus payoff of corporate de-
this year. It clearly indicates that banks lose high net creases.
worth customers to cheaper sources of finance. Long 3.
term impact will be that higher rating companies will
have more negotiating power. Customer
Retail Corporate SME
Let us say Bank A offered loans at 6% previ- Foreign
ously to Corporates. Now base rate becomes 7.5%. BPLR 10.,8 10,10 10,5
Bank
So they now can’t be given short term loans below Base 10,10 7,7 10,5
say 8% for a period of 2 years. Now say in money The retail customer and SME are not affected.
market, CP (Commercial Paper) is being offered at SME are not big market-share holders of foreign
rates of 6.5%. Big corporates will thus move towards banks and hence do not affect payoff. Corporates are
the debt market. It will result in loss of market share leaving foreign bank, thus payoff of banks decreas-
and credit loans for banks and will also lead to in- ing whereas larger base rate means lesser payoff for
tense competition. corporate who are staying with public banks. The
AoM
SME’s will be biggest beneficiaries of this proj- decrease however is not as significant as of private
ect as they will be better compensated than before banks due to reasons explained earlier in the paper.
whereas earlier they were getting short-changed be-
Main advantages of Base rate system
cause of better deals for big corporates. Now they
will be willing to go to banks for getting loans. As • Greater control for RBI in transferring effects
SME’s form substantial market, so market share of of Repo rates to banks
banks will increase. • More transparency for customers in know-
ing about base rate as it is based on the cost of
Game Theory Applied to Base Rate Implemen- funds
tation
• Stoppage of sub-prime loans to bigger cor-
Below are Payoff Matrix applied to 3 categories porates
of Bank and 3 categories of Customer.
• Small and Medium Enterprises (SMEs) may
1. get better rates. The SMEs and small borrowers are
Customer subsidizing the corporate loans.
Retail Corporate SME • Deregulation of interest rates as banks will
Public stop lending at lower rates to loans below Rs 2 lakhs.
BPLR 10.,8 10,10 10,5
Bank
Base 10,9 8,5 8,10 RBI has given freedom to banks to charge commer-
cial rates for loans below Rs 2 lakh at rates linked to
The retail customer is having higher payoff but
the base rate. With this, RBI wants to increase the
it is not significant. SMEs are largest beneficiary.
credit flow to small borrowers.
Corporates are leaving public bank, thus payoff of
banks decreasing whereas larger base rate means • Increase in liquidity of banks. As loans are
lesser payoff for corporate. not doled out on sub-prime rates, more money is
left with banks.
2.
Customer
Retail Corporate SME
Private
BPLR 10.,8 10,10 10,5
Bank
Base 8,9 5,5 5,10
The retail customer is having higher payoff but
it is not huge. Significantly, there is lower payoff
for Private banks due to high cost of funds and ris-
ing competition from debt market. SMEs are largest
beneficiary. Corporates are looking for alternatives
Due to competition, banks have been offering loans to first class borrowers with high credit rat-
ing at rates much below the BPLR in a non-transparent manner. The biggest gainers would be
the foreign banks who have the least difference between BPLR and Base rate.

c
o durgesh nandini mohanty & Tanvi arora
Team Niveshak
r
Cover Story
p
o
r r
a e
t s
debt
r
u
c
t
u
r
i
n
g
Introduction CDR occurs when the firm is short of finances and
If a firm filing for bankruptcy which has stake- cannot pay off its present and perhaps, short term fu-
holders, the probability of them getting pennies to the ture liabilities. This allows a debt-laden person or sole
dollar is high. In such cases, the company can either proprietor, who still has significant income, to submit
file for bankruptcy or go for debt restructuring. But if an orderly plan to the court to pay back debts over
a business does not want to file for a rehabilitation a few years. Doing so can provide advantages to the
bankruptcy, then Corporate Debt Restructuring (CDR) debtor not found in other forms of bankruptcy, such as
can be used, which is the most widely accepted way of preventing the foreclosure of a residence.
dealing with financial distress related to debt. One of the main hurdles is that 75% of the lend-
Corporate debt restructuring, as the name sug- ers to a particular borrower have to come together to
gests, is the reorganization of a company’s outstanding trigger the CDR mechanism.
liabilities. It is generally done to spread out its credit Process of CDR
obligations with smaller repayment amounts and a lon-
If a company does seek corporate debt restructur-
ger time with which to pay off obligations. This allows a
ing and first goes directly to its creditors, there may or
company to increase its ability to meet the obligations.
may not be an agreement to a solution. The next step
Also, some of the debt may be forgiven by creditors in
for a company that cannot find relief from a personal
exchange for an equity position in the company.
The Reserve Bank of India came

to the rescue of the debt-strapped
airline companies recently. RBI
has granted all the necessary
permission to the banks to help the
troubled airline companies.

encounter with a creditor is to present its plan to the lenders would be restructured under the second cat-
judicial system. In that case, the court may end up egory (Category 2). In this category, if a minimum of
deciding in favor of the company’s original plan or 75 per cent (by value) of lenders satisfy themselves
may devise a plan of its own. But in any case, the of the viability of the account and consent to such
Cover Story
court will appoint an overseer, often called a trustee, restructuring.

to observe and even manage the plan’s unfolding
CDR in News - The Dilemma of Debt
and implementation. The bottom line is an outsider
will be poking around the company’s formerly pri- Debt financing could shove companies to bank-
vate business and watching with great interest, the ruptcy. Not just companies. Even sovereign countries
court’s plan being implemented. So before a corpo- are subject to the slavery of debt. Take for instance,
rate debt restructuring plan is actually proposed, a the Dubai Debt Crisis that caused a global brouhaha
failing company may hire an outside consultant to in November 2009 when Dubai World, the entity that
come in and study the company and make changes manages the investments of the Dubai government
that can head off the drastic step of actually going declared that it would have to delay the repayment
to creditors. of its debt of $ 26 billion by 6 months. In such situ-
ations, the only rescuing force is Debt Restructuring.
The CDR system in India has a three-tier
When companies undertake it, it is called Corporate
structure: i) the CDR standing forum and its core
Debt Restructuring or CDR.
group; ii) the CDR empowered group; and iii) the
CDR cell. The CDR standing forum lays down policies Let us take for instance, the firms in the Indian
and guidelines and monitors the restructuring. The airline industry. Though it is one of the fastest grow-
empowered group decides the acceptable viability ing aviation industries in the world, it is plagued
benchmark levels, and the CDR cell assists in all the by a horde of problems like high aviation turbine
functions. fuel (ATF) prices, increasing labor costs, dearth of
skilled labor, rapid fleet expansion, and intense
There are two categories of debt restructuring
price competition among the players. Last but not
under the CDR system depending on the accounts’
the least they are all helplessly debt-strapped. They
treatment in the book of the lenders. Accounts, which
need debt as a constant source of capital to main-
are classified as `standard’ and `substandard’ in the
tain their working capital needs and continue their
books of the lenders, are restructured under the
operations. Jet Airways which led the band of debt-
first category (Category 1). If the account has been
distressed airline companies, had a debt burden of
classified as standard/substandard in the
Rs 13,500 crore as on June 30 and had to annually
books of at least 90 per cent of the
repay around Rs 1,000 crore for the next three years.
lenders (by value), the same
Another key player, Kingfisher Airlines was reeling
would b e
under a debt of around Rs 6,000 crore. The situa-
treat-
tion deteriorated so much that the banks
ed as
which had sanctioned loans
stan-
to the airline industry
dard/
were not at all posi-
sub-
tive about recover-
stan-
ing their lent money
dard
to this sector. This issue
only
aroused a lot of concern
for the
from the banks with
purpose of judging the account
significant exposure to
as eligible for CDR in the books of the remaining
the aviation sector.
10 per cent of the lenders. Accounts which are clas-
sified as `doubtful’ in the books of the
When the reports are pub-

lished about company’s inten-
tions and plans with respect
to restructuring, the market
perceives it positively.

Corrective Measures by RBI Rs 50,000 crore. To add to this, another reason add-
The Reserve Bank of India ing to the banks’ discomfort for employing the cor-
Cover Story
came to the rescue of the debt- porate debt restructuring mechanism is that it in-
strapped airline companies re- volves arriving at the consensus of 75 % of lenders
cently. RBI has granted all the to a borrower. Hence they have asked RBI to allow
necessary permission to the recast of airline loans without classifying them as
banks to help the troubled airline companies, on a non-performing assets (NPAs). The RBI has agreed
case-by-case basis. The banks will restructure or re- to this request of the banks. Now the banks are re-
schedule the loans given by them. This news has lieved that they would be able to re-structure the
brought about a new gust of hope to both the banks loans without adding on to their pile of NPAs. Simul-
and to the airline companies alike. RBI Deputy Gov- taneously, the airline companies will get some leg
ernor, Usha Thorat said on September 9, 2010 that space to repay their loans in a longer period of time,
the central bank has “communicated” whatever it with smaller amounts, and hence are not forced to
had to “communicate” to the banks. However, the raise costly debt to continue running their day to
details of the instructions given to the banks by the day operations.
apex-bank were maintained confidential. The reason The Case of Vishal Retail
behind this relief measure taken up by RBI is the
One of the country’s largest discount retailers,
perception that the airline industry is visibly going
Vishal Retail was facing financial problems around
through a phase of return to growth, but it will take
a year ago. To avert further trouble, the company
some more time before that comes
had undergone a corporate debt re-
about. Hence the sector needs to be
structuring programme to restruc-
given some special concessions on
ture its huge debt capital of Rs 730
behalf of the government that will
crore. The lenders of Vishal Retail
encourage its speedy recovery.
who had consented to take part
Reaction of Banks in the CDR proceedings were State
After RBI’s declaration, M Nar- Bank of India, HSBC, HDFC Bank Ltd.,
endra, Executive Director of Bank of ING Vysya Bank, UCO Bank and Bank
India said the bank had lent around of India. The problem in repayment
Rs 4,000 crore to airline companies. O P Bhatt, Chair- of loans for Vishal got tougher due to the slowdown
man of State Bank of India (SBI), said that, “The that the entire economy was victim to in 2008-09. It
communication is that RBI has allowed in the case had borrowed money to develop its scale of opera-
of the aviation sector, as a special case by the vir- tions and win a majority share of the retail sector
tue of the powers vested in them, that the bank- in India.
ing industry could, on a case-by-case basis, subject Consequently, it had signed a MoU with Texas
to the guidelines and parameters given by the RBI, Pacific Group (TGP), its Private Equity Partner indi-
look to see how these industries could be helped cating to the firm’s lenders that it would take over
a part of Vishal operations and restructure the busi-
via rescheduling, restructuring, etc.” SBI is the larg-
est lender in the country which alone has loaned Rs ness. To further this process, Vishal Retail recently
3,000 crore to the aviation sector. sold off its retail trading business to Chennai-based
In order to ease their debt burden, the loanee Shriram Group, which deals in property, finance and
companies will have to bring in more equity to re- insurance.
store peace in their capital structure. However, this Lending a helping hand
being an expensive affair often makes banks wary
Debt-strapped companies appoint specific ad-
of it. Analysts have estimated the entire cost of re-
visors to help them out of the credit trap by success-
structuring loans to the airline sector to be around
fully implementing Corporate Debt Restructuring.
Corporate debt restructuring,

as the name suggests, is the
reorganization of a company’s
outstanding liabilities.

Some banks have distinct departments rendering set or for revenue expenditure purposes. This could
Restructuring Advisory to business houses. For in- affect corporate debt restructuring activities in the
stance, Kotak Mahindra Investment Banking has an economy. Many tax experts have opined that the
arm called the Restructuring Group which has ex- clause concerned is quite broad and vague, which
Cover Story
perts in Turnaround and Restructuring Management. could lead to litigation.

Their bevy of services provided includes Financial
Our Perception - Airline industry Post-CDR
Restructuring, unlocking value from non-core assets,
arranging special situation funding, sourcing and ar- CDR definitely benefits a firm in the short run,
ranging Private and Institutional Equity etc. In line but in the longer run it hurts their credit ratings. This
with this, Kingfisher has appointed SBI Capital Mar- makes it harder for them to raise fresh debt or dilute
kets Ltd to advise it on debt restructuring. their equity share.
The effect on the balance sheet and income
Investor Attitude towards CDR
statement would be minimal. Cash outflows in all
When the reports are published about compa- future periods would significantly reduce because of
ny’s intentions and plans with respect to restructur- the concessions that may be allowed on interest and
ing, the market perceives it positively. That is, there principal payments. Stockholders are already find-
seems to be an increase in stockholder wealth. In ing this arrangement favorable because their equity
other words, management’s decision to undergo re- interest will be maintained thus preserving powers
structuring, when announced, is welcomed by the that they currently enjoy. Creditors may also find
stock market. this scheme safe because the liquidity and solvency
This proves to be consistent with the notion position of the company remain unaffected by the
that the fund raising will take care of company’s modification of the debt terms.
cash flow crunch for the time being. Further, the It is important for companies to assess how
restructuring as a percentage of the company’s total debt restructuring will affect certain aspects of the
assets is proportional to the stock price reaction. business. Debtors must be aware that debt restruc-
Impact of DTC on CDR turings affect cash flow, performance measures and
key balance sheet accounts. These consequences
When the Direct Tax Code becomes applicable
should not be overlooked. Management need to un-
from April 1, 2012, it will have a significant impact
derstand the impact of debt restructuring on their
on the companies that choose to undergo Corporate
company’s key financial indicators and how various
Debt Restructuring. The new tax code will make the
stakeholders will view the results.
business houses more averse towards altering their
debt structures. This is because the DTC states that
loans waived by lenders will be treated as income
in the hands of the borrowers and taxed accord-
ingly. This will increase the taxable income of the
victim companies and hence their tax payable, an-
other blow to their already crumbling financial back-
bone. Though CDR packages do not always involve
waiver of loan repayments for the loanee, but there
are plenty of cases where a partial waiver is agreed
when loans are rescheduled. This happens when the
creditor is opting for an equity position in the com-
pany by letting go a portion of the debt.
The loan waiver which is to be treated as ad-
ditional income will be taxed irrespective of whether
the loan was utilized for acquisition of capital as-
Corporate Debt Restructur-

ing is often perceived as the
savior of firms distressed by an
unhealthy proportion of debt
in their capital structures.

Corporates in the Banking Sector
Sourav Das & Sria Majumdar
IIM Shillong
Introduction to set up a bank. 50 per cent shares
While the RBI is set- Reserve Bank of India’s (RBI)of RRBs is with the central govern-
ting up the stage Discussion Paper on the entry of ment, 35 per cent with the bank and
for the entry of new new banks in the private sector has15 per cent with the state. This defi-
been well received by the corporatenitely poses to be a problem for cor-
banks in the private porate houses. To change sharehold-
houses. The paper which is consid-
sector, the authors ing rules there is a need to amend
ered to be balanced is open for pub-
emphasize the need the RRB Act. Currently, there are 86
lic feedback. In light of this paper,
RRBs sponsored by government-
of ensuring strong most business houses are evaluat-
ing their own stand, weighing theirowned banks. Barring a few, most of
monitoring apart them are making losses. Naturally,
plans based on the capital require-
from insisting on ments that RBI may specify for the corporates and NBFCs interested in
a diversified share- new entities. a new banking licence would rather
have their own network of branches
holding pattern RBI has recognised areas of
with rural focus than pitching for
through this article. concern such as minimum capital
RRBs.
required, caps on shareholding and
permissible foreign shareholding. A figure of Rs 500 crores is
deemed as minimum and mandato-
Also, promoter contribution, the de-
ry, while RBI proposed a range from
sirability of giving licences to indus-
trial houses, allowing Non-Banking Rs 300-Rs 1000 crores. The problem
Financial Companies (NBFCs) to en- is the higher the capital require-
ment, the entry point becomes nar-
ter the sector and the business mod-
els are issues under consideration.rower. It is agreed that the bank
The paper clearly shows that the should be started with at least 40
apex bank wants to set stiff terms per cent promoter stake holding to
for new bank licences and has takenensure confidence and responsibility
for public investments.
a very cautious stance on the situa-
tion. RBI seems to have learnt from There are country specific mod-
mistakes made in the past such as els based on its needs and require-
ments. India is taking a closer look at
giving licences to individuals which
has led to the collapse of banks orCanada, where the promoter holding
the promoter has made a huge pile declines with the rise in the share
of money by selling the licence in capital. RBI is pondering over a 50
per cent cap overall with a decade
a short period of time. It is evident
FinSight
that RBI wants to be safe and sure long lock-in as against the existing
this time. rules on the foreign investment in
new banks, where banks are allowed
What it means for Business up to 74 per cent. The RBI is also
Houses very clear about keeping out real es-
RBI has proposed that corpo- tate business houses from trying for
rates could acquire Regional Rural bank licences.
Banks (RRBs) before allowing them
In the first-ever Index of Financial Inclusion, India has been ranked 50 out of 100 countries. Only
34% of Indians have access to banking services. To improve the extendibility of financial services to
all sections, the Reserve Bank of India took innovative steps.

RBI is looking at strong parentage, promoters’ nificant financial services business and have a his-
capacity to pump in funds in times of stress, capac- tory of high morals and ethics. Keeping all this in
ity to give rural thrust and sufficient track record in mind, RBI may issue a very few licences as a cau-
the financial sector. Companies which have subsid- tious step.
iaries in the financial sector can leverage on their
expertise to enter banking successfully, provided A point to be considered is that a low capital
capital is not an issue. Many institutions have ex- requirement will lead to better resource allocation
pressed interest in the idea and eagerly await the and utilisation but it may result in large number of
final decision by RBI. non-serious companies entering the sector. On the
other hand, a high minimum capital would invite
Financial Inclusion- The Need for Corpo- only serious players into the banking space but it
rate Houses could move bankers away from their motive of finan-
Financial Inclusion (FI) means availability of cial inclusion, as they would focus more on profit.
banking services at an affordable cost to the low-in- The banking sector consists of 22 private-sec-
come groups. In India, FI means extending a savings tor banks in India. Many are of the opinion that not
or current account to the entire population. Need- enough has been done to enhance the operation of
less to say, it’s a herculean task as lack of banking the old private banks. Most have remained small
services in remote areas, inadequate technology and despite being around for more than half a century.
high intermediation costs are involved in the whole Detractors feel that new banks may not solve the
process. problem of FI as past experience has showed that
In the first-ever Index of Financial Inclusion, all new banks have centralized their operations in
India has been ranked 50 out of 100 countries. Only urban areas.
34% of Indians have access to banking services. To On the downside, there are major problems
improve the extendibility of financial services to all with big business houses coming into banking. Fail-
sections, the Reserve Bank of India took innovative ures have occurred in history due to the collapse
steps. New branches of regional rural banks and ‘No of the corporate governance culture. There hasn’t
Frill’ Accounts are just some of the measures taken been much change till date. If a company having 200
by banks in India. subsidiary companies starts a bank, there is bound
FI has become a cause of concern due to the to be a conflict of interest between the bank and the
lack of a regular or substantial income and non- sub groups. Conflict of interest is a major issue that
availability of collaterals to avail loans. Proximity of RBI must reckon with.
the financial service is an issue that leads to in- Contenders
creased transportation costs and loss of daily wages.
The low income individual is forced to turn to local To mention a few, companies like Sriram Trans-
moneylenders. port Finance, Reliance Capital, Aditya Birla Nuvo and
Indiabulls are reportedly planning to enter the bank-
Financial inclusion is a great step to alleviate ing space. LIC Housing Finance Ltd (LICHFL), M& M
poverty in India. But to achieve this, the govern- Financial, SKS Microfinance etc are the big players
ment should provide an atmosphere in which banks touted to enter the industry. Edelweiss, which deals
are free to pursue the advances necessary to reach with broking, asset management etc. is considered
the bottom-of-the-pyramid consumers and still earn a strong contender to become a bank.
FinSight
profits. With FI as the main objective, RBI had this
recent discussion. Conclusion
Pros and Cons If and when RBI chooses to allow industrial
groups to set up banks, they must ensure strong
Other than financial inclusion, positives from monitoring apart from insisting on a diversified
the proposition include abundant capital, manage- shareholding pattern to ensure a balance. Most im-
ment expertise and strategic direction that business portantly, a bank sponsored by the group should be
houses could bring to the sector. ‘ring-fenced’ from other subsidiaries. There is cyni-
In other countries, the experience of allow- cism in the industry over the larger goal of achieving
ing industrial houses to promote banks is varied. financial inclusion, which is one of RBI’s objectives
Canada, UK and South Africa allow business houses for issuing the new banking licences. The question
where as America does not. South Korea used to al- of the day is whether banks and promoters will find
low it until the East Asian financial crisis divulged FI lucrative. It remains to be seen if this venture will
that banks had ignored conflict of interest norms. be successful, should it be approved by RBI. Only
However, in India we have some industry houses time will tell.
which inspire trust in people, who have set up sig-

Anatomy of the ulip Bulb Crisis
Jasvinder Singh Aujla
FMS, Delhi
If you think that the recent fi- i s
Juxtaposing the nancial crisis is the first time when April
recent financial crisis the derivatives have created may- & May
with the Tulip mania hem in the financial markets, then and shortly tulip bulb ap-
the answer is a big NO. There were fi- pears. The tulip can be up-
of 17th century, the nancial bubbles using derivatives as rooted and moved in the month to
article exemplifies early as 17th century. Where there is June to the market. This is the period
that the basic mech- a market there is a bubble. One such when people speculated and bought
anism of bubbles massive bubble because of specula- tulip futures (underlying asset was
tion was the “Tulip Bulb Crisis” or TULIP BULB which will be blooming
remains the same. “Tulipomania”. One wonders how a in the next bloom season one year
Notwithstanding the simple and soft flower like “tulip” ahead) as the price of tulip was al-
span of 4 centuries, can bring down the resilient Dutch ways expected to go up because it
Economy. was fast becoming a symbol of sta-
the crisis offers the tus in Netherlands.
Since it happened in 17th cen-
same lessons to the tury, very little literature is available With the introduction of deriva-
policy makers requir- on this crisis but it is imperative for tive products, the trading of flower
ing a critical balance all the analysts to understand the (which used to happen only in June)
between fuelling flow of events that triggered the cri- now started happening throughout
sis. This is how it happened!! the year (buying and shorting con-
real growth and cur- tracts on tulip bulb). This further in-
In the early 1600s, lots of tu-
tailing speculation lip flowers were taken to Nether- creased the uproar in the market for
lands for cultivation. The beauty of the tulip bulb.
the flower resulted in lot of interest Tulip bulb speculation
FinGyaan
among the people and very soon it

Where there is a market, there
became a status symbol. The tulip
are speculators. This adage holds
flower was a symbol of royalty. An-
true for the tulip bulb market as
other event which occurred during
well. Traders started speculating the
that time was a virus attack on the
price of the underlying flower higher
tulip flower, which made spectacular
and higher and the entire market
shades on the flower, making it look
was overtaken by these speculators.
more beautiful and thus its value in-
Needless to say many people (hold-
creased.
ing the futures contract) made a hell
Emergence of tulip futures lot of money on this speculation
By the mid 1600 century, the wave. Soon these future contracts
tulip flower has created a lot of buzz were named as “wind handel” which
in the market and people wanted to means “wind trade” as underlying
have tulips, this sudden demand in tulip bulb was not changing hands
the market and rising price of the but only the contracts written on
tulip flower gave birth to “Tulip bulb them traded furiously.
Futures”. Blooming period for tulips Soon, everyone started trading
If one looks at tulip crisis and the recent financial crisis, there are lots of similarities which can be
drawn. On both those occasions, following the trend and expecting it to continue forever lead to
bubbles

(rather speculation) in these exotic flower deriva- as this was a clear signal from the authorities that
tives. Farmers started mortgaging their land to buy the price is going to go down further.
contracts (in huge no.) on this flower bulb. The fi-
nancial insanity gripped all classes of people.
Tulip price index after the fall
Tulip price index over a period of 4 months The tulip mania or Tulipomania as it is some-
The craze of the flower was so immense that, times called, has been a prime example of “mad-
the nomenclature used for distinguishing different ness of crowd”, a theory that hypothesis that people
varieties used the military titles like, “admiral” , often behave irrationally.
”general” and ”major”. Learnings from the Tulip Mania
As price began to rise exorbitantly, new and If one looks at tulip crisis and the recent finan-
less knowledgeable traders jumped into the market cial crisis, there are lots of similarities which can be
of tulip bulb trading. Another event which did not drawn. On both the occasions, following the trend
serve in stopping speculation was the contract size and expecting it to continue forever lead to bubbles
which was later designed to have as low as 3-6 tulip (tulips in one case and real estate in another). An-
bulbs. This sparked of a mad race for having tulip in other commonality between these bubbles was that
one’s portfolio and fueled the speculation. Soon en- derivative instruments were involved. Derivatives are
trants in the market multiplied with the aim of mak- a tool rather than a cause and their effectiveness is
ing some good moolah quickly, the bubble began to determined by their usage. Also, if one carefully ana-
grow. Prices skyrocketed to 10 times or even more to lyzes the sequence of events, that happened with
FinGyaan
their value. People started selling their property to TULIP bubble like “first the supply was short, virus
have possession of the exotic tulip contract. With all attack which made the flower even more beautiful,
this, the inevitable was only getting delayed. good harvest in neighboring countries leading to im-
Bubble burst port and increasing supply which resulted in busting
of the market” if happened in isolation would not
What goes up has to come down. With rising
have resulted in such a bubble bust. Such sequence
demand and good harvest in neighboring countries,
of events could not have been controlled.
soon the supply of the flower started increasing. The
hardcore trader on the market realized these trends The more you interfere with the free market
and squared off their positions from the heavily and try to manipulate it, the more the ferocity and
overpriced tulip bulb contracts. Middleman, farmer intensity with which it cracks, like in the recent fi-
community still unaware of the developments main- nancial crisis where inevitable was being delayed by
tained their positions and even increased their hold- pumping in money and bailing out the companies
ings. Soon the “lightning struck” and the inevitable and their junk assets.
happened and the price of the flower backed by high The learning from the tulip mania and other
supply (imports) and exit in positions started falling. crises for that matter is that, the sequence of events
Quickly after this there was mayhem in the will continue to happen and every now and then
market and everyone started realizing that tulips such bubbles will be there, only thing which could
were not worth their prices. People were holding have been different is the impact of the bubble bust
contracts which has lost all their sheen and value and that depends on how regulated the markets are
and that too by selling off their property, houses and how greedy the investors are.
and cattle.
Interfering with the free market forces, it was
decided that all the contracts open after 1936 will
have an “option” to protect the holders. Whenever
one plays with the free market, jitters are always felt

Entry Load Abolition
Is the Consumer Really Empowered ?
amogh m. & namita dhepe
IIM Lucknow
On June 30, 2009, SEBI took a which the scheme is being recom-
key step for the empowerment of in- mended to the investor. The various mea-
vestors and generating more trans- sures by the govt.
Why the change?
parency in payment of commission and the Finance
and load structure. Implementable • Transparency – In the past
regime, entry load was instituted as Ministry by abolish-
from August 2009, changes have
been made in the commission struc- a means of compensating the finan- ing the various entry
ture to make it more aligned with cial advisor for the advisory services loads and also modi-
the level of service and to incen- and the selling expenses incurred in fying the exit load
tivize long term investments. The making the mutual fund available to policies were primar-
changes include - the consumer. But it was not clear ily targeted towards
to the investor what he was being
1. No entry load for mutual empowering the
charged for, since the charges were
Perspective
fund schemes: The scheme applica-
embedded in the cost of the prod-
customers and retail
tion forms shall carry a suitable dis- investors like you
uct.
closure to the effect that the upfront and us. This article
commission to distributors will be With the advent of the new re-
provides a good
paid by the investor directly to the gime where the commission that the
distributor, based on his assessment investor pays will be over and above
look through into
of various factors including the ser- the cost of the product, the investor the various kinds of
vice rendered by the distributor. knows very clearly as to how much impact and also the
he was charged for the services of various advantages
2. Of the Exit loads charged
the financial advisor. This way the and disadvantages
to the investor for early exit from
consumer can insist on the services
schemes, a maximum of 1% of the that all the stake-
that he deems are due from his ad-
redemption proceeds shall be main-
visor and pay him for the same un-
holders involved in
tained in a separate account which these decisions.
der mutually acceptable terms.
can be used by the AMC to pay com-
missions to the distributor and to • Alignment with international
take care of other marketing and norms – Entry loads in mature mar-
selling expenses. Any balance shall kets such as the US and UK are much
be credited to the scheme immedi- lower, which range from 0.5 % to 1%.
ately. While loads have fallen, the busi-
ness for financial advisors who dis-
3. The distributors should dis-
tribute these funds has not reduced
close all the commissions (in the
significantly. The reason for this is
form of trail commission or any
that the main source for financial
other mode) payable to them for
advisors internationally is advisory
the different competing schemes of
fees, which is charged in return for
various mutual funds from amongst
“Fund houses that pushed mutual funds through commissions will now need to communicate their
competence to investors directly and have to pull them towards them via superior fund perfor-
mance.”

the advice they provide. A similar model in India too that 2.25 % of an investor’s money that was for-
has been envisaged as one beneficial to investors merly deducted upfront as commission will now be
and advisors alike. deployed as investible funds means the investor will
• Incentivize smaller fund houses – SEBI ob- reap superior returns for his money. This is good
served that larger fund houses manage to capture news for investors, since the additional returns over
vast amounts of the shelf space of fund distributors long periods of time do add up,
through the promise of higher commissions. With • Fewer avenues for purchase of mutual funds
these commissions on the way out, fund houses - With the promise of hefty commissions gone, fewer
are at liberty to target consumers directly. With this financial services firms including banks, brokerages
move from a Push model to a Pull model, SEBI felt etc. are willing to deploy staff and resources to dis-
that all fund houses will be on a level playing field. tribute mutual funds. Investors as a result will have
• Incentivize longer term investments – While to contact the AMC directly for their products, which
abolishing entry loads, SEBI has authorized the ap- have far fewer outlets.
plication of exit loads on investors who choose to • For example , the India Post Office – the “na-
exit from their funds earlier than 6 months. This en- tional distributor “ in the real sense – with an ex-
sures that consumers are invested for long term. The pansive distribution channel covering over 210 post
old structure failed to differentiate between short offices , has informed Mutual Funds that it wouldn’t
term and long term investors, and hence had no engage in selling schemes , until there’s clarity on
mechanism to discourage short term investing. the distribution commission .
Perspective
Impact of the decision – • Numerous other investment options - With

commissions no longer on offer for sale of mutu-
Impact can be seen from 3 perspectives:
al funds, distributors have taken recourse to other
1. Consumer - The consumer would tend to be products including ULIPs, insurance plans, pension
happy, because all the money he gives in the fund, plans etc. In many cases, distributors have been
is taken as investment, unlike in the past, where a caught mis-selling ULIPs as an alternative for a mu-
percentage of it was deducted as commission fees tual fund, but with far superior benefits. Investors
for the trader who got you the fund. However, since are not told about the fat up front commissions the
there is no assured incentive to the distributors to advisors earn at the cost of investors for the sale of
make people invest in MF, they wouldn’t be very these products.
enthusiastic and advice to customers will decrease.
For Fund houses
2. Mutual Funds / Asset Management Com-
• Move from a Push model to a Pull model
panies - A major change in commission structure
– Fund houses that pushed mutual funds through
is under way for these firms, with some instituting
commissions will now need to communicate their
“trail commission” usually about 0.75% per annum
competence to investors directly and have to pull
of the value of funds.
them towards them via superior fund performance.
3. The Distributors - The Distributors now need This is great news for superior fund houses since
to look for alternative sources of revenue since com- their performance would speak for itself and thus
missions are no longer available. The past year has attract investors. Further, fund houses will be forced
seen the different distributors using different advi- to perform or perish under this model, since few-
sory fee models including - er downstream players would push their funds for
A. Flat amount per investment made. them
B. Percentage of the invested amount. • Revamp of distribution channel - With the
C. For free and depend on trial commissions of exodus of distributors from mutual fund houses in
AMCs as only source of income. favor of other options such as insurance and ULIPs,
the mutual fund industry has been thrown a for-
Pros and Cons of the decision – midable challenge of designing cost effective distri-
For investors bution channels. While online sales to attract tech
• Lower costs to the end investors – The fact savvy investors and sales via stock exchanges that

has been newly initiated have in part filled the gap, direction, many more such steps are necessary to
it is clear from the numbers from the industry that it make financial inclusion a reality.
will take a while before mutual funds return to their
past path of growth.
Next Steps
• While the intentions of SEBI to abolish loads
in noble by all counts, it has come under heavy
criticism for a number of reasons, not least its tim-
ing. India is financially under penetrated market
with less than one in two Indians having a bank CROSSWORD SOLUTIOS
account. At this time, the removal of a major chan-
nel of growth for the mutual fund industry is viewed August 2010
as a major setback in India’s path towards financial
inclusion. How would this be set right? The following
steps would be absolutely essential to realize the
goals of SEBI’s initiative – Across
• Harmonization of commission structures 2. Mezzanine
across industry - A major grouse of all mutual fund
Perspective
5. Stagflation
houses is the fact that they are not on a level play-
ing field with other financial products such as insur- 6. LIFO
ance, or for that matter even provident fund and 8. Beta
post office savings schemes. Schemes in ULIPs have
very high commissions despite regulations that have 9. Inventory
come in place to reduce them. This has led to cases 10. Yuan
of misselling of insurance products as investments.
• A major step in financial regulation for all
financial regulators would be to harmonize the load
structures among financial instruments in order to Down
ensure that investors foot the same bill irrespective
of what they may purchase. The recommendations 1. Derivatives
of the Swaroop panel do make the right noises, and 3. Factoring
it is now up to the government to ensure that the
4. Bovespa
same are implemented.
• A focus on financial literacy - While a move 7. Options
away from a push model to a pull model is always
welcome, the prerequisite of a pull model in the
form of an informed investor seems to be lacking
in many parts of the nation. Investor education pro-
grammes need to be instituted to cover villages in
the hinterland and empower common men to make
informed investment decisions.
• Development of low cost distribution chan-
nels - With over two third of India still deprived of fi-
nancial services, it is the duty of the regulator to fa-
cilitate the creation of low costs distribution models
to make financial services accessible to the masses.
While the use of stock exchanges as platforms to
buy and sell mutual funds is a welcome step in this

CROSSWORD
Down
1. Sale of securities to a
relatively small number
of selected investors
3. I am a measure of Risk
Adjusted Returns
4. Offer in which a share-
holder is given the op-
portunity to purchase
stock at a price lower
than the current market
price
5. To have me is to have
the ability to sell an as-
set at short notice with-
out significant loss of
value
7. Father of Technical
Analysis (‘person’)
(Note: All the clues given refer to Financial terms and not personalities
unless explicitly mentioned)
FinLounge
Across
2. They blame me for the Pound currency Crisis (‘person’)
6. Plot of interest rates of bonds with varying maturities
8. Market in which currencies are traded
9. Option that allows underwriters to sell more shares than the original number set by
the issuer
10. Who says Return and Risk go hand in hand, practicing me gives profits with zero
risk
All entries should be mailed at niveshak.iims@gmail.com by 10th October,2010 23:59 hrs

One lucky winner will receive cash prize of Rs. 500/-

ANNOUNCEMENTS
ARTICLE OF THE MONTH
The article of the month winner for September 2010 are
Debasis Kumar
of IIM Kozhikode
He receives a cash prize of Rs.1000/-
Crossword Winner
The Crossword Winner for the month August 2010 is
Amit Mundra
of IIM Bangalore
He receives a cash prize of Rs.1000/-
CONGRATULATIONS!!
ALL ARE INVITED

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for original articles related to finance & economics. Students can also contrib-
ute puzzles and jokes related to finance & economics. References should be
cited wherever necessary. The best article will be featured as the “Article of the
Month.” and would be awarded cash prize of Rs.1000/-
Instructions
»» Please submit your article with the file name and the email subject as <Title of
the Article>_<Institute Name>_<Author’s name/Group’s name> by 10 Oct 2010.
»» Article must be sent in Microsoft Word Document (doc/docx), Font: Times New
Roman, Font Size: 12, Line spacing: 1.5
»» Please ensure that the entire document has 1500-2000 words
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Niveshak

THE INVESTOR VOLUME 3 ISSUE 9 September 2010

Article of the month

The Niveshak Times

Union home ministry made it clear the assumption of the company’s

4 NIVESHAK VOLUME 3 ISSUE 9 september 2010

The Niveshak Times

The Month That Was

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

6 NIVESHAK VOLUME 3 ISSUE 9 september 2010

The question is – whether the

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 7

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 9

nicipal Corporation of Delhi (MCD), Sports Authority

10 NIVESHAK VOLUME 3 ISSUE 9 september 2010

The budget for the games has

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11

With the introduction of base

12 NIVESHAK VOLUME 3 ISSUE 9 september 2010

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 13

14 NIVESHAK VOLUME 3 ISSUE 9 september 2010

The Reserve Bank of India came

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 15

court will appoint an overseer, often called a trustee, restructuring.

When the reports are pub-

16 NIVESHAK VOLUME 3 ISSUE 9 september 2010

Corporate debt restructuring,

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 17

perts in Turnaround and Restructuring Management. could lead to litigation.

Corporate Debt Restructur-

18 NIVESHAK VOLUME 3 ISSUE 9 september 2010

20 NIVESHAK VOLUME 3 ISSUE 9 september 2010

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 21

among the people and very soon it

22 NIVESHAK VOLUME 3 ISSUE 9 september 2010

Tulip price index after the fall

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 23

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 25

Impact of the decision – • Numerous other investment options - With

26 NIVESHAK VOLUME 3 ISSUE 9 september 2010

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 27

All entries should be mailed at niveshak.iims@gmail.com by 10th October,2010 23:59 hrs

28 NIVESHAK VOLUME 3 ISSUE 9 september 2010

ALL ARE INVITED

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