When the last edition of The Financial was released, the whole nation was in

the eager anticipation of a new era in the history of India Inc. Five months
have passed and India Inc has not disappointed us. With upbeat markets and
skyrocketing indices, we are now into - as the word on the street goes - the
largest Bull Run ever witnessed. Hence, it is now safe to assume that Indian
Capital Markets has finally arrived which reflects the theme of this edition
of The Financial.

Greetings from Team Finomenon!

Dear Readers,

Editor-in-Chief

Ajit Nayak K V

Happy Reading!!

At Financial, we believe in involving readers in the magazine to make it as

interactive as possible. Hence we encourage our readers to get back to us or
the writers with any comments or criticism. I hope this edition makes for a
great reading experience. Heres hoping for a great year ahead with all you
fellow readers.

The Financial has always been a melting pot of finance which makes for
great reading. Sections like Grassroots, Fin-knowledge, Fin-themes introduces one to conceptual finance in a simplistic manner.

Being true to its identity of a B-school finance magazine, we have introduced

a Complete Summer Prep Guide which includes a primer on Summers Prep, a
guide to Careers in finance and to sum it up we have industry experts (an Ibanker and a Consultant) sharing their experiences with you. This would
give you the right set of tools to take on those interviews and GDs.

We are very excited to bring to you this new revamped edition of The Financial. The new edition has been designed to cater to the B-school diaspora. We
start off this edition with the theme Rise of the capital markets which
chronicles the eventful journey that Indian Capital market has traversed
these years and the renewed enthusiasm with which it is now seen in the
markets.

Editors note

THE FINANCIAL

es

The first of the seven deadly sins is the establishment of a strong single party reformist government at the centre which
is signaling a decline of the shaky coalition era. It has reassured investors that
here is a government which can govern
the nation with its own reformist agenda

It was way back in 2007 when we heard

steel magnate L.N. Mittal asking this
question Has Indian capital markets finally arrived?. But this question was never repeated in the intervening seven
years and being asked only now. Why
so? Well there are seven reasons, seven
deadly sins as we call them which had
shackled our markets earlier, but are all
now conspiring to take us to newer
highs. We will examine them all one by
one in decreasing order of priority.

Second factor is the taming of deficits.

India along with a host of other developing countries has been struggling with
ballooning fiscal deficits ever since the
beginning of sub-prime crisis. We were in
a vicious cycle wherein our expenditures
were constantly rising on account of burgeoning subsidy bill while our revenues
were drying up on account of low

without being bogged down by the pulls

and pressures of coalition politics. Factors like increasing FDI in defence and
retail, land & labor reforms, which were
considered blasphemous earlier have
been enacted at lightning speed and
there are talks of opening up of other
sectors like insurance, railways. This
speedy delivery of reforms has been music to the ears of investors.

With Sensex and Nifty hitting the roofs, we take stock of the Indian Capital markets
current bull-run and analyze whats in store for the investors in the coming days though
our cover article.

Then there was double whammy of stubbornly high inflation and a depreciating
currency. Consistent high inflation has
forced Reserve bank of India to maintain
an ultra hawkish stance on interest rates
which on its part was also choking
growth. In addition to this problem mix
was the volatility in currency markets with
currency slumping to a low of 69 Rs per
dollar which forced RBI to take extreme
capital control measures.

Thirdly, our growth rate was constantly

declining. We had weathered the crisis
well initially but then squandered the opportunity and succumbed to less than 5%
growth rate, a figure not heard in past
several years. Such was the magnitude
of pessimism that FIIs were actually pulling out money in hordes out of Indian
markets.

growth. But the priority of new government is shifting firmly to controlling the
subsidy bill. This has led to increased confidence and optimism in capital markets.

All these seven factors were strangulating Indian capital markets for long. But
not anymore. The table seems to have
turned post elections.

Last but not the least, there were global

factors beyond the control of Indian government. Aggressive tapering by U.S. Fed
had spooked the emerging markets all
over and India was no exception to it.
Added to it were geopolitical concerns
in a number of countries including Iraq
and Syria.

IIP numbers was the final nail in the coffin. IIP numbers have remained either
negative or just slightly positive, closer to
zero for most part of the last two to three
years barring a few exceptions. Consistently lower IIP numbers was having multiplier effect on a number of fronts leading
to lower growth, lower productivity, higher deficits, higher inflation and weaker
currency.

86

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85

The impact of Budget on the markets

was important primarily because of Indias position in the business cycle, the
huge anticipation created by the India
Inc, and the fact that this was the first
non-Congress government in a decade.
Nifty touched a new high of 7,700 and
markets were also overbought aided by
a relentless rally since May 16, with the
Nifty climbing about 16 percent, Midcap
Index and Small Cap Index rising 26 percent and 35 percent respectively. Sensex
hit 26,000 for first time amid Pre-Budget
Rally.

PRE-BUDGET PERFORMANCE

As the Narendra Modi lead Bharatiya Janata Party (BJP) won by a tremendous
margin, SENSEX and NIFTY soared to new
highs. The measures taken by the outgoing UPA and the Reserve Bank of India
had stabilized Indian markets in recent
months, but gains had accelerated since
BJP named Narendra Modi as its candidate for Prime Minister in mid-September.

In the annals of Indian Political system, for

the first time, we have a single party majority government which is perceived to
be growth oriented.

THE CURRENT BULL RUN

The indices such as BSE Realty, Power,

and Capital Goods had gained 5 per
cent, 1.1 per cent, and 0.2 per cent respectively on the Budget day. Further,
India Infrastructure Index had gained 2
per cent. But the budget lacked the
path breaking reforms and impacted the
Indian stock markets as they plunged by
500 points on a single day.

Indian stock markets had always closed

in the green line on the day immediately
after the budget 9 times in the previous
13 years. But on July 11, 2014, SENSEX had
not responded favorably to the pragmatic budget due to high hopes being
pinned on Mr. Jaitley. During the period
under review, a total of six budgets had
been presented by Fin min Chidambaram followed by Pranab Mukherjee
(4), Yashwant Sinha (2), Jaswant Singh
(1). Out of the six instances (SENSEX performance on the next day of Budget)
when Chidambaram had presented the
budget, SENSEX had gained on four different occasions. The market closed in
red after the first NDA Budget, closing
down 1.40%.

Budget Impact on Stock Market: 10th July 2014

Sensex Chart (May August 2014)

After the tumultuous 5 years of stagnancy, India is finally looking at a

The world says, Growth is facing east!

FUTURE OF CAPITAL MARKETS IN INDIA

tive expectation from the Pro-Business

government, the markets could be bullish. However the corrections in between
could be sharp. There would be opportunities to exit the underdogs which
have performed and switch to fundamentally good stocks.

Ni y Chart ( May-August 2014)

Among the global indices, BSE SENSEX

was one of the leading losers for the first
week in August but benchmark share
indices ended their 3 weeks losing streak
and gained 3% as FIIs poured the capital. The current scenario in the markets is
attributed to technical as well as global
uncertainties. The markets remained
positive overall, but lack of strength currently should signal us to be on the sidelines and show patience and discipline.
Last 3 months, there has been a strategy
to buy on dips and sell on rallies, thereby, taking a short position. With a posi-

Adjusting for inflation, Warren Buffett

was a millionaire by age 25
In December, a start-up called Contrail Systems was purchased for $176
million two days after it launched
According to Bloomberg, "The 50
stocks in the S&P 500 with the lowest analyst ratings at the end of 2011
posted an average return of 23 percent [in 2012], outperforming the index by 7 percentage points."
Two news headlines published on the
same day last September summed up
the
U.S.
economy
perfectly:
"U.S. Median Income Lowest Since
1995, " and "Ferrari sales surge to record highs."
According to economist Glen Weyl,
"Of Harvard students graduating in

x

x

x

x

x

84

Four of the richest countries in the

world with some of the highest personal income, Bahrain, Brunei, Kuwait,
and Qatar, have no tax at all.
Known as the Detroit of Asia, Chennai
accounts for 35-40 per cent of India's
total automobile industry
Credit card numbers conform to the
Luhn algorithm, which is just a simple
check sum test on the number. What
you do is start from the right and double each second digit (1111 becomes
2121), then add them all together,
and you should end with a number
evenly divisible by ten. If it doesnt, its
not a valid credit card number

x

x

x

early '90s and pursuing careers in finance, 1/3 were making over $1 million a year by 2005."

At The Financial, we make fin fun and mundane facts into exciting trivia. From the
exciting world of finance, we present a few not-so known facts that will pop your eyes
off their sockets.

As per a moneycontrol.com poll, the July

CPI is expected to increase to 7.6%. Vegetable prices might be the major contributor, as the mandi prices of key commodities like tomatoes, potatoes are up
by 30.0% on a month-on-month basis,
due to deficient rainfall and supply shortfall.

weightage might balance the increase

as there is enough buffer stock available.

83

Rachit Kasera is pursuing MBA at NMIMS, Mumbai. He is a member of Finomenon, the Finance cell at NMIMS. He has completed his Honours in Commerce from NMIMS, Mumbai . He has worked as a Financial Analyst for Tresvista Financial Services Ltd.

Keshav Bagri is pursuing MBA at NMIMS, Mumbai. He is a member of the Editorial team in Finomenon, the Finance cell at NMIMS. He has completed his
Honours in Economics from St Xaviers College, Kolkata. He is interested in
creative writing and Rajasthani Folk Music

Inflation in milk, vegetables and fruits is

usually in double digits, contributing to
high inflation in India. Lower monsoon
was expected to push up prices. However, cereals, which have the highest

In the last 4 months, rupee traded in the

range of 58-62 to a dollar. Rupee appreciated mainly on the back of industry
and street expectations of a stable government with a promise of taking back
India on a growth path

India Inc brought in Rs. 12,569 crore

through QIP and Rs. 418 crore through IPP
(institutional placement programmes) in
the first quarter of FY 2014-15. Reports
suggest that the funds gathered via QIPs
in Q1 showed a 10-times increase when
compared to that in Q1 of 2013-14.

The Reason for Hope

steady period of growth. The info-graph

referred below (Source: Deloitte report)
states the key factors enabling and encouraging the growth of capital markets
in India.

The manufacturing sectors like consumer

durables, textiles and automobile will
gain from economic revival.

Factors adding industry growth

The unclogging of domestic policy logjam as well as improved global growth

prospects along with an improved private consumption demand will initiate a
revival in industrial growth up to 4% in the
given fiscal year and assure stronger
growth in the coming future.

Labour regulations in India not being

favourable for capital intensive approach

Diplomatically neutral steps taken

towards revival of economy

Heavy weakening of Rupee

x

x

x

Anshukumar Sinha is
pursuing MBA at
NMIMS, Mumbai. He
has completed his
Engineering
from
NIT,Surat
He was
previously working
as a Fixed Income
Analyst at Futures
First.

RBIs stronghold policies to fight inflation

x

Rupali Singhania is
pursuing MBA at
NMIMS,
Mumbai.
She has completed
her
Engineering
from Pune University. She has worked
as a Technical Analyst in J.P Morgan.

The gestation periods for the growth

story are generally very long

x

Some of the key indicators pointing to

slow recoveries are:

Removal of supply-side constraints for

various industries, mainly in the power
and steel sectors will add to the revival.
Measures in the budget will have a positive impact on many services sectors,
key ones being trade, transport and
banking. Optimism aside, the coming
year is of crucial importance as it is
termed to be the Year of fragile recovery by CRISIL.

Indias credit rating not so encouraging

Quantitative easing in US had reduced the cash flow coming in the

emerging markets
Highly volatile Investor sentiments Overseas investors have pulled out
nearly Rs 53,000 million from the Indian debt market since the beginning
of August14

x

x

Krishnakumar Mohta is pursuing MBA

at NMIMS, Mumbai.
He has completed
his honours in Commerce from Pune
University. He has
completed his CA
from ICAI in 2011.

Abhishek Shah is
pursuing MBA at
NMIMS, Mumbai. He
has completed his
Engineering
from
Sardar Patel University. He is interested
in palmistry, debates and reading.

The scenario until now resembles that of

a dawn, with our economy moving from
the phase of night into the bright morning. The markets and industry have repositioned themselves. One must agree,
Indian Capital Markets has finally arrived and it is here to stay.

Miles to go before you reap

Global economies still on path to revival

x

Impact of global front:

x

The next best performing sector was Metals, which was up by 29.2%. Other infra-

The largest percentage increase (by

30.1%) was seen in Consumer Durables
sector. The consumer durables industry
does well when the economy grows. So
with improving macro-economic outlook,
investors expect a spike in discretionary
income. The focus on reducing high inflation eating into household savings alongwith stabilising rupee further added to
positives of the sector.

The historic win by the National Democratic Alliance (NDA), led by Bhartiya
Janta Party (BJP), with a promise of stable governance and economic redevelopment has attracted a lot of interest from investors, local and foreign. It
has restored the confidence in Indian
growth story. On the back of this, the
benchmark index, Sensex increased by
15.3% in period April-July 2014.

82

Investor confidence can be observed

from the following analysis of the Equity
Market Segment in Apr-14 to Jul-14
against same period in 2013. Major indicators of 2014 have increased on a
month-on-month basis as compared
2013.

structure related sectors like Power, Realty and Capital Goods performed better
than Sensex. The new NDA government
has stressed on improving the infrastructure of this country to boost economy
and employment. The government in the
budget has announced that it will provide funds for financing long-term infrastructure projects. Other initiatives viz. setting up airports, improved order inflow
from road and port projects, developing
existing ports & harbour, establish 7 industrial cities in the country has boosted the
confidence of the investors in these sectors.

81

The historic win by the National Democratic Alliance (NDA), led by Bhartiya
Janta Party (BJP), with a promise of stable governance and economic redevelopment has attracted a lot of interest from investors, local and foreign. It
has restored the confidence in Indian
growth story. On the back of this, the
benchmark index, Sensex increased by
15.3% in period April-July 2014.

How has the NDA win affected the share markets? And what about the latest data of
performance of the Indian economy? This is your comprehensive guide to what the ins
and outs of the market in the last few months.

10

Answers on the last page

Psychometric tests (Optional)

Group Discussion

Personal Interview

x

x

x

It starts with companies organizing PrePlacement Talks where HR team briefs

about job profile, work culture etc. The
selection process usually consists of G.D.
and a few rounds of interview.GD involves discussion on a wide range of topics ranging from abstract to technical.
Interview generally consists of rounds
varying from one to four. They may either
be technical, HR or mix of both. Few
companies also take psychometric tests
to judge your maturity and organizationperson fit.

Pre Placement Talk

x

Generally, the procedure for internship

consists of:

11

For a company, it is a means for finding

talent beforehand and giving them experience of working in a corporate culture. With stiff competition in finding best
talents, companies are constantly looking for selecting and training students
and molding them for future roles. The
benefit might be in the present (using
the services of capable individuals without having to make a hiring obligation),
or it might be in the future (the supplementary ability to choose an individual
who will work out well as a future employee as well). Participating in an internship is an important experience to
complement the learning that you get in
the classroom. It gives an opportunity to
test drive a career option whether the
given field is right for you.

Now the biggest question- Why is an internship important for both company as
well as students?

Finally, that time of the year has arrived! Companies will be flooding the campus with
their offers for internships. To stay ahead of competition, we bring you a short primer for
your reference for the upcoming summers.

the consent of its members for the closure of

the exchange. The resolution to effect the
closure was duly passed.

80

endra Modi announced his plan to replace

Ahmedabad Stock Exchange (ASE) to close the Planning Commission which guided Indown ASE, the countrys second oldest dias policies since independence with a
stock exchange (established in 1894) held more modern institution.
an extraordinary general meeting to seek

Energy are mentioned as key cooperation

New Fund After the runaway success of areas.
Goldman Sachs PSU Banks Exchange Traded Fund, the government is actively con- Reduction in Free Usage of ATMs RBI retemplating launching another such fund.
duced the free usage of non-home banks
ATMs from 5 to 3 per month. ATMs have inUnion Budget Arun Jaitely presented the creased from 27000 seven years earlier to
first non Congress union budget after a dec- 160000.
ade. Gross Fiscal Deficit was capped at
4.1%, setting a target of 3.6% and 3% for Planning Commission to be disabled In his
2015-16 and 2016-17 respectively.
first Independence Speech at Red Fort, Nar-

Cadbury India buy back - The Bombay High

Court has ordered Cadbury India to pay
Rs.2,014.50 per share to buy back its stock.
Possible delay in Sun-Ranbaxy Merger The This is 50% more than its original offer of Rs
merger of Sun Pharma and Ranbaxy is under 1,340 made in 2009.
study by SEBI and CCI. Since the two comAugust
panies have competed against each other
in past, it might require a detailed investiga- Fall in retail Inflation Annual retail inflation
tion by CCI.
in India fell to 7.8% in August compared to
8% in July mainly due to slower increase in
Hero Motocorp to set up new plant Hero prices of fuel, light and clothes.
Motocorp will set up a new plant in Southern
India in a bid to raise its annual manufactur- Lupin expands in Canada Indias fourth
ing capacity of two wheelers.
largest drugmaker by sales announced that
it has entered into an exclusive deal with Salix Pharmaceuticals Inc. to market some of
July
its products in Canada. Lupins majority of
BRICS nation to have own development sales come from the US market.
bank Brazil, Russia, India, China and South
Africa have agreed to set up their own De- Modis Japan visit - Narendra Modi visited
velopment bank by pooling in cumulative Japan towards the end of August to
$100BN in capital. It will be headquartered in
strengthen political and business ties. This is
Shanghai, China and will be headed by an
his first major foreign trip since he assumed
Indian.
power. Manufacturing, Infrastructure and

KFA lenders invoke USL shares In an effort

to get back Rs.6000 crores lent to now defunct King Fisher Airlines, IDBI Trusteeship Services, the lenders trustee has invoked a little
over 4.93 million shares of United Spirits that
were pledged as collateral.

Google under CCI Lens: Google is facing an

antitrust investigation in India by the fair
trade watchdog, Competition Commission
of India. It can face a penalty of upto $ 5.0
billion, if found guilty of violating norms. The
case is mainly on the back of allegations
that Google abused its dominant position in
the internet search engine space.

Mineral Production Declined: Mineral production has cumulatively declined during

Apr-13 to Feb-14 period. The index of mineral
production and quarrying has gone down
by 1.1% in the period.

Big Buyout in Pharma Industry: Sun Pharma

has agreed to buy generic drug maker
Ranbaxy Laboratories for USD 3.2 billion. The
deal comes against the backdrop of sanctions by FDA in USA due to manufacturing
concerns in units in India. Currently the deal
is under the lens of Competition Commission
of India.

growth rate of 13.0 % - 15.0% in the current

year.

79

Infosys Outlook: Infosys warned of a lower

revenue outlook for the year, due to turnaround plan in progress. While the software
lobby body Nasscom forecast an industry

Hike in railway fare and freight In one of

the steepest hikes of recent times, railway
fare was increased by whooping 14.2% while
freight rates have gone up by 6.5%.

PSU ETFs Launched: The government

launched Public Sector Undertaking ExMay
change Traded fund. The ETF will hold shares
Chinas Twitter: Twitter-like messaging service of 10 major PSUs and would be an open
Weibo corp has filled for IPO to raise $ 500.0 ended scheme. Retail investors will get a bomillion. Alibaba also owns a stake in Weibo. nus of 1 unit on every 15 units held, if they
remain invested for a lock-in of one-year.
Demand for Aircrafts in India: Boeing and
June
Airbus forecast an increase in demand for
aircrafts in India over the next two decades. Import duty on sugar raised As a big relief
India will need 1,600 new aircrafts, valued at to sugar manufacturers, the government in$205.0 billion in the next 20-years. Indian air- creased the import duty on sugar from 15%
lines carried 61.42 million passengers in 2013 to 40%. Government has also given some
compared with 58.81 million in 2012.
other benefits to sugar producers.

Airtel Raised Money: Bharti Airtel raised INR

2,453.2 crores by selling six-year bonds at a
coupon rate of 3.0% and maturity in 2020.
The money was raised in Swiss Francs and
the largest ever money raised by an Indian
firm in Swiss Francs.

Airline fare-wars: Spicejet started a fare war

by announcing base fares starting at INR 1.
The DGCA has asked the carrier to scrap the
scheme. Other airlines followed the suit. This
trend was seen throughout the quarter as
the summer season is usually a lean season
for airline companies as well as entry of new
competitors like Air-Asia.

Samsung Chairman Case: The Supreme

Court has asked Samsung Electronics Chairman Lee Kun-Hee, to surrender before a local court in Uttar Pradesh in connection with
a $1.4 million cheating case.

Ajay Piramal invests in Shriram Capital: Ajay

Piramal has agreed to buy 20.0% stake in unlisted Shriram Capital for $334.0 million,
strengthening its presence in financial services.

This can be a tricky question to answer.

Some of the probable reasons for opting
for finance could be that since you

2.Why have you opted for finance as a

specialization?

These are some of the common questions that you would have faced in
some form or the other. Its a vague,
open-ended question which everyone
really dreads! Dont go in a monotonous
tone repeating already on C.V. Tell
them something unique about yourself
or try mentioning about your key
strengths so that you can drive your interview around those points. For example: You are a good team worker, start
by mentioning the recognition you got in
work for being a good team worker. Its
about speaking creatively and breaking
from other peoples patterns. You can
mention your talents like singing or
dancing. They make you stand apart
from the rest.

1.Tell me about yourself./Guide me

through your CV./ Tell something about
yourself not mentioned on your CV.

HR QUESTIONS

For example-you might be unsure

whether investment banking, notoriously
famous for its long working hours and requiring an analytical bent of mind, is fit
for you. An internship will help you to
give a real corporate experience about
what we can expect from the job in future. Moreover, networking and accumulating new skills are the other benefits
that one can reap from his/her internship.

12

You must have been definitely asked this

question before entering B-School. This is
an opportunity for you to show how wellprepared you are. You can weave your
answer around how the values of the
company align with your own skill-sets
and strengths and how the company
will help you in your growth. Of course,
knowing about the company, in depth,
goes a long way in making your chances of getting selected brighter.

3.Why do you want to join us?

come from a commerce background

and have been exposed to quite different fields, you feel that you have the analytical bent of mind that is required in
Finance. Also, your grasp on the basics
will make you a better candidate than
most others. You can also mention
about your interest in Finance that you
could have developed irrespective of
your background, say because of some
event.

There isn't a right or wrong reply to interview questions about what motivates
you. The interviewer wants to know you
and is trying to understand the key to
your being successful in the job he is interviewing for, and wants to make sure
it's a good fit. Whatever you say, you
need to substantiate with examples from
your studies, work and extra-curricular
activities, and it should relate to the requirement of the job.

6.What motivates you?

Now you want to get hired by these

companies and the HR knows that quite
well! But however to reach that position,
you have to justify why you are a fit for
job as well as organization. Start by giving instances of teamwork, hard work,
and stress management. Read about
companys value system and align your
set of values with their objectives. Justify
that you are a right fit by playing on your
strengths.

5.Why should we hire you?

A fresher can relate aspects of his/her

graduation to the requirements of the
position and how this can serve as an
opportunity to learn and excel in a field
he/she had wanted to join.

13

They want to know how you have responded to different situations in past by
showing presence of mind as well as patience.

If you have worked before in a similar industry, you can answer this question by
mentioning this fact and how it has
helped you to develop a good understanding of the industry and a network
which will help you to create new business opportunities for the employer.

Now we all know Time management

and multi tasking is something that is integral to us! So try to mention something
that is different and unique. You can
mention your experience of living in a
new city, value from course curriculum
as well as competitions; you can talk
about people with whom you have networked. Try to introspect and come up
with unique learnings.

9.What new things have you learnt in the

past six months?

They want to identify how flexible you

are in terms of accommodating their
needs even when it might be to your
own detriment in other words how
committed you are to your work. So one
should tow the thin line and give an answer that you value both- your work as
well as your life.

8.How do you feel about working long

hours and/or weekends?

Are you a self-starter? Give me examples to demonstrate this.

Do you prefer to work alone or in a

group? Why?

Where did you show your leadership or

initiative or stress management or team
work?

Can you give me an example of an experience of failure?

7.Situation based questions

4.Why are you interested in this position?

78

Diageo offer for USL: Diageo PLC, the worlds

largest distiller, has offered to pay $1.9 billion, at INR 3,030 per share, for an additional
26.0% stake in United Spirits Ltd. If successful,
it will own 54.78% of USL. Indias liquor market is poised for growth, with beer volumes
expected to grow at a CAGR 10.0% in 201217.

TCS Q4 FY 2014 Results: Net Profit increased

2.3% sequentially to INR 5,297 crores. The
management sounded confident of a far
better year ahead. It became the first Indian IT company having more than 300,000
employees on its roll.

3G National Roaming: Reliance Communications became the first operator to offer

3G national roaming services. It has entered
into a tripartite agreement with Tata Teleservices and Aircel to provide services to
each others customers. RCom and Aircel
have permits for 13 out of 22 circles while
Tata is present in 9 circles.

April

Alibaba to IPO on US Exchange: Alibaba

which dominates the online shopping market in China, and makes profit of $1.4 billion
on a sale of 3.1 billion in only one-quarter, is
soon going for an IPO. Yahoo owns a 24.0%
stake in Alibaba will see its investment value
grow 52 times, as the share sale will likely
value Alibaba at $130.0 billion.

Ben Bernanke in India: Former Us Federal

Reserve chairman Ben Bernanke backed RBI
governor Raghuram Rajan, with respect to
independence and responsibility if central
bank. Though, he countered Rajans critique of the spillover effect of US monetary
policy.

QoQ: A measuring technique that calculates the change between one financial
quarter and the previous financial quarter. - Investopedia

The different positions held by BRICS

countries like headquarter in China,
President from India, Chairman of
Board of Governors from China and
Chairman of Board of Directors from
Brazil may not all agree on same decisions.

China may dominate above all in enforcing any proposition. It was natural
to have headquarter2 at Sanghai as
China outshines its peers in terms of
GDP and forex reserves which are
greater than India, Brazil and Russia
combined. Also China has larger contribution of $51 billion to Contingency
Reserve Account. China continues to
be a major trading partner for other
BRICS countries and hence China is
going to dominate the decisions. At
first sight, it may seem to be attractive
to borrowing nations which will not be
subjected to conditions with nonfinancial obligations by BRICS bank.
This will potentially lead to challenge
good governance and sustainable
development. Infrastructure projects
are fraught with environmental, social

x

x

BRICS Bank should serve as a bridge to

channel the global liquidity and savings
into essential infrastructure projects by
partnering with the Multilateral Investment Guarantee Agency (MIGA) and
other financial and non-financial institutions that can make otherwise high-risk
investments more attractive through insurance arrangements, inflation hedges,
and other tools.

To achieve success, BRICS bank need to

focus on two things: Risk management
and coordination. For this the monitoring
and surveillance mechanism needs to be
strengthened and default loan to be
kept minimum. It should develop an independent redress mechanism to address complaints and ensure compliance
to international laws.

Donating $10 billion is no less amount. It is

six times the amount the government
spends on its health care scheme last
year in India. It is the price with which Indian Air Force can buy Rafale fighter. This
money can be spent to finance bullet
trains between Mumbai and Ahmedabad. People in India will agree that these
projects are more important than lending
to BRICS which will lend it for development of some other economies.

and local complexities. BRICS nation

might not consider this. They will
adopt ways of doing things based on
their own culture and socio-economic
needs.

77

Abhishek Agrawal did his B.Tech in Computer Science & Engineering from College of Engineering and Technology, Bhubaneswar. Worked in TCS for 23
months and joined Xavier Institute of Management (XIMB) for MBA.Email:
U113003@stu.xim.ac.in

Even if NDBs capital rises to $100 billion including those given by non
BRICS countries, it will fall short in
meeting worlds infrastructure need as
World Bank has estimated that South
Asia alone will require around $2.5 trillion over next ten years.

x

Negative implications:

3. Candidates should also go through

the company website thoroughly and
try to know as much as possible. This
could include areas like company history, leadership, profiles being offered, in-

2. It is very important for people with

work experience to be fully conversant
with the work they were doing and the
projects they last handled.

1. Be very thorough with each and every word you mention on your CV.

SOME TIPS TO ACE THE INTERVIEW:

There isn't a right or wrong reply to interview questions about what motivates
you. The interviewer wants to know you
and is trying to understand the key to
your being successful in the job he is interviewing for, and wants to make sure
it's a good fit. Whatever you say, you
need to substantiate with examples
from your studies, work and extracurricular activities, and it should relate
to the requirements of the job.

10. Can you describe a typical day or

week in the position?

14

4. You could also be asked about the

stock market movements like the level
at which SENSEX or NIFTY closed, maybe
on the interview day. The interviewer
can also ask factual questions about the
current GDP or GDP growth rate of India, FDI inflows in the past one year or
any recent government legislation that
had an impact on the company or the
industry.

3. One also needs to know what is happening around the world. Here, one
should adopt a multi-pronged approach i.e. not just focus upon the current happenings in all the areas but also
any such event that had a direct impact on the company or the industry of
which you are being interviewed for.
You should also go through the newspapers of the last 2-3 days including the
one on the day of the interview itself.

dustry standing and the value culture at

play in the organisation. Also, be very
thorough with the kind of work you are
required to do under each profile being
offered.

One should be formally and professionally dressed. Men can go for suits or formal shirts and trousers .Preferable colours are blue or black. Try to avoid
wearing bright colours. Here is an im-

2. APPEARANCE

One should maintain a neutral posture.

Leaning back suggests boredom or
lack of interest. Similarly, leaning forward may indicate being over solicitous
or even threatening. So one should
maintain an erect and straight posture.

1. POSTURE

Every person has physical habits. You

can call them grooming gestures, fidgeting or simply postural things like a
slouch. In everyday life, these things do
not count but these may cost you a
job. So, here are some tips for you:-

BODY LANGUAGE

15

For ladies, this can vary from a trouser,

dress or skirt suit. Colours should ideally
be black or blue. However, you can
choose any neutral colour. If wearing a
skirt or dress suit, pay attention to the
length; it should not be too short.

age giving complete information about

what to do on your interview day.

BRICS Bank can lobby for greater influence in International Financial Institutions (IFI) and raise voice on international security concerns.
The Contingent reserve arrangement
of $100 billion will help during financial
crisis like that of 2007-08 Great Recession.
It will add pressure for reform at the
existing institutions by challenging the
leadership of World Bank and IMF
over issues as emergency assistance,
policy lending, funding for basic services and funding to conflict affected
states.
BRICS bank could offer cheaper loans
for power projects. India sources power equipment from China for at least
25% of its power generation capacity.

x

x

x

x

Positive Implications:

76

Developing countries will have an alternative source of finance during Balance of Payment crisis.
Intra-BRICS transactions will be held in
local currencies which will help control volatility.
Large gap in lending to infrastructure
sector will be abridged.
As infrastructure projects are at the
forefront of BRICS nations, it will benefit in economic development.
Enhance trade between BRICS nations.

x

x

x

x

India will play a major role in structuring and policies as the first bank president will be from India.
x

x

With US discouraging World Bank to

lend for coal-based power projects,
borrowing from BRICS bank will help
India in this regard.
x

Figure 4. Political interest in formation of BRICS Bank

Figure 3 shows East India and Pacific are

require largest fund for infrastructure development. In sectors, largest need is in
electricity sector. Although 5-10% fund is
required during preparation and design,

Figure 3. Annual Infrastructure Needs

Stringent conditions in lending by IMF

and World Bank: IMF does not give due
representation to developing economies
and imposes strict requirements while
lending emergency loans. IMF imposes
strict conditions on use of funds lent and
dictate on any fund they give to developing economies. Nations who received
loans from them were forced to privatize
public services which made no sense.
This resulted in private companies mostly
in west to get fat contracts.

BRICS Bank assigns one vote to each

member country and hence provides
equal voting rights to all participating nations.

75

Political angle in BRICS Bank: Formation

of NDB can also be thought of from the
perspective of gaining political advantage by the leader of BRICS nations
as summarized in the figure below:

it is the most important feature of the

planned BRICS Bank.

Need for Infrastructure and more Sustainable Development: It is evident that infrastructure development will bring about
economic growth and reduce inequality
levels. It also fulfils the basic needs of
poor people. Use of renewable energy
on developing infrastructure is an important initiative.

World Bank and IMF have structures

weighted heavily in favor of US and Europe. BRICS are an important force for
incremental change and reform of current institutions toward more representative and equitable governance."

A person should speak more to get selected: Completely wrong! A person

can speak a lot by repeating the same
points. So speak sense and be concise.
There have been instances when a person who just made a single valid point

MYTHS ABOUT GD

Group discussions are an integral part of

any companys internship selection process. It involves discussion on a wide
range of topics ranging from abstract to
technical .We have provided you with
some GD topics to start with! Happy preparing and keep on thinking about
more as you go through current affairs
material

GROUP DISCUSSION

In general, your arms should not be very

active, crossed, touching your face, under your body, or fiddling with anything.
You can use your hands to substantiate
a point that you might be making. One
option is to keep your hands on your lap
throughout the interview. If you know
you tend to get wildly carried away with
hand gestures -- or if nerves make your
hands shake -- try firmly holding a pen. It
makes you look poised.

3.HAND MOVEMENTS

16

The first one to speak always has a better chance: It might happen with you.
You are sitting in a GD, have been given
a two-minute window to think and suddenly some person starts with all bangs,
catchy lines and you are like oh god, he
is surely in! Completely wrong. Yes, there
is an advantage that a person comes
across as an initiator but it doesnt always guarantee that he is in. So, try
adding relevant points once a start has
been made.

One should speak in favor of the topic:

This is a very common perception held
by people that if they speak in favor of
the topic, they stand a better chance of
getting selected. However, one should
explore all angles and try to bring a fresh
perspective. There is no thumb rule that
speaking in favor will get you any
brownie points. One has to be aggressive: Though one should be audible,
there is no way a person should be loud
or aggressive. Grab the initiative to
speak calmly with right kind of pitch and
tone. Dont butt in when someone else is
making a point. Remaining calm and
composed throughout the GD is surely
going to give you an edge.

has been selected and the one who

spoke the most has been rejected.

Also, try forming your own opinion on

each and every issue; make sure you
are not only stating the facts but also
giving your analysis of it.

Make sure that you read a little bit

about your dream companies every
day. Like what are its areas of operation, what are the values it adhere to, its
performance in the past five years.

Try learning term of the day from sites

such as investopedia.com.

Regularly go through major business

news and their impact on economy.
Keep an eye on international happenings .Make sure you note them down
and go through them regularly.

SOME TIPS!!

sideiim.com bjnocabbages.com , relevant companies' websites.

17

Kanika Sriivastava is pursuing MBA at NMIMS, Mumbai. She is a member of the

Editorial team in Finomenon, the Finance cell at NMIMS. She has completed
her Honours in B.Com from Jesus And Mary College, New Delhi. She had secured first position in innQuizitive, by Deloitte.

Soumya Singh is pursuing MBA at NMIMS, Mumbai. She is a member of the

Editorial team in Finomenon, the Finance cell at NMIMS. She has completed
her honours in Commerce from SRCC, New Delhi. She is interested in blogging, reading and travelling

www.investopedia.com,www.moneyco
ntrol.com,
www.mrunal.org,
in-

Magazines-Business Today, Forbes India

magazine, Outlook magazine

Newspapers-Business Standard, Business

line, The Economic Times, The Financial
express, Mint

WHERE TO PREPARE FROM?

It is crucial to memorize all the facts and

figures
to leave an impression:
One should remember that GDs are
about exchange of ideas; they are not
about hardcore data. It is essential that
you have a larger picture of the topic.
So, it is helpful if you have some macrostatistics at hand but you certainly don't
have to pack yourself with the minor details. Also, quote exact facts and figures
only when you are fully confident of
their veracity .

behind

BRICS

74

nearly 40 percent of total voting power

at these institutions, even if they constitute only about 10 percent of the worlds
population, while BRICS countries like India and China, with approximately 20
percent of the worlds population each ,
are given only 2-3 % of the voting power.

Figure 2. State of BRICS nations

Frustration with existing system: Voting

rights in IMF are assigned based on the
countrys relative size in the global economy as measured by GDP. Decisions are
made on what the richest people want

Rationale
Bank:

and not on what most people want. This

means that the top five shareholders (the
US, Japan, Germany, the UK and France)
hold

Figure 1. Contribution of BRICS nations to NDB fund.

Initial authorized capital will be USD $100

billion and subscribed capital of USD $50
billion

Financing:

Bank of the South (BancoSur)

2009

73

Chiang Mai Initiative by 10 ASEAN na- Failure of IMF to stop currency speculations plus China, South Korea, Japan
tion during Asian crisis.

Early 2000s

Response to enforcement of conditions on

countries seeing emergency loans by Bretton Woods.

To bypass stringent rules imposed by

World Bank on infrastructure loans.

Development Bank of Latin America

1960

Reasons

New Institution Name

$50 billion and $100 billion in emergency

stabilization fund. The bank will provide
an alternative global institutions to the
western dominated World Bank and IMF
to finance development and infrastructure projects across the developing
economies.

Year

Brazil, Russia, India, China, and South Africa the so called BRICS nations which
constitute 40% of worlds population and
more than 25% of worlds GDP last month
announced the formation of New Development Bank (NDB) in the 6th BRICS Summit. The bank will have an initial fund of

The whole world watches when India

and China meet.

An acronym for the economies of Brazil, Russia, India and China combined. The
general consensus is that the term was first prominently used in a Goldman Sachs
report from 2003.

So its obvious that companies make

money and a lot of it. Of course, someone has to manage that money for effective running of the company. That's
where the role of corporate finance
team becomes important. So, if you are
in corporate finance, youll be with maximizing shareholder value through longterm and short-term financial planning
and the implementation of various strategies.

Profit, Cash, Money. This is all what a business is about. Many argue that it exists for
CSR too. But one thing is sure that for
most business, making profit, that too in
terms of cash is very important and only
earning cash is not enough, there is always a room for utilizing this cash and investing in such a way that we earn more
of it!

18

Advice regarding cost of projects, evaluate company revenues and expenses, put
together investments deals that will sup

Help organizations in generating funds essential to sustain and expand business operations

What does the corporate finance person

do?

The term Corporate Finance is often used

to describe two different areas. The first is
within a corporation, where finance professionals work on an extensive variety of projects pertaining to the financial requirements of their firm. The other area is commercial and investment banking. The corporate finance teams of these banks serve
the financial requirements of corporate clients by providing investing, financing options and other services such as advisory

CORPORATE FINANCE

Equity research, portfolio management, CRM, AnalystHave you heard these terms?
But are unsure of what they mean? We, at The Financial will give you the clarity to
choose your career path in the Financial Universe. Read on!

through internal sources or external sources

For example lets say Samsung wants to release a new personal media device; lets
call it the S-Box. They want to know how
much it will cost for R&D, production, advertising, thats where corporate finance team
come in. They crunch the numbers and give
a projection of what the companys cost
and benefit will be in monetary terms.
Corporate Development / Business Development

A clear thinker: Ability to find way through

complexity and explain solutions clearly to
others.

Good Interpersonal Skills: One should have

ability to interact and network with people

19

Good with numbers: One should have a

Manufacturing: Work in a plant or closely knack for using numbers to understand patwith manufacturing to understand the costs terns that influence business.

Cost Analysis

Industry Specific: Within various industries a

financial analyst may support one or more
brands or product lines, providing financial
support when a new product launch or promotion strategy is being considered

Projects: Complete projects for different have the following qualities:

functional areas of the companies.eg: de- Analytical: To succeed in this career one
termining the feasibility of entering a new need to understand small details as well as
market
the bigger picture.

New Product Development: Help team creCapital Budgeting: Take decisions regarding ate business case, develop financial models
buying and selling of long term assets by for new projects
comparing discounted cash inflows and Mergers & Acquisitions: Do valuation of M&A
outflows
deal
Budgets: Forecast revenue and expenses for
annual budget and analyze the most recent Is a Career in Corporate Finance for You?
performance against forecasts
Go ahead for Corp fin if you believe you

Financial Analyst

JOB PROFILES

Risk Management: Make sure that the right

steps are taken to safeguard corporate assets by using insurance policies or currency
hedges.

Investments: Determine how to invest the

firms excess funds

Identify different ways to increase a companys liquidity, profitability, reduce unwant- Service: Determine the cost of providing a
ed expenditures and free up capital for fur- service and price of product
ther uses.
Treasury
Cash management by ensuring adequate
Financing: Assess the firm's funding needs
cash on hand to meet its daily requirements
and work with banks to fill those needs

of products and locate opportunities to reduce costs and improve processes.

port a companys growth.

revival are pinned on this rising sector in the

72

Dhrubak Banerjee is pursuing Masters in Management degree from NMIMS. A

mechanical engineer graduating from FIEM, Kolkata, he has two years of
work experience in L&T Construction in site execution and project management.

About the author

financial market as it is poised to be the

wings of the rising Phoenix, that is the Indian
Considering the stagflation we are facing,
economy.
financing activities from banks will be very
limited. Hence our hopes of an economic

ahead.

glance at the share price of shows the way

71

NBFC have seen a steep rise in NPAs, slow

loan growth and high funding costs couple
with a stringent regulatory environment. This
seemingly doesnt augur well for the future
of this sector in India. However, there is an
active effort from the regulators, policy
makers and the industry to integrate NBFC

So we see despite having so much potential to grow, the sector project dismal performance indicators and even estimated
FY15 arent really rosy.

Lets take a look at the key performance

indicators of the sector over the past few
years as well as the estimated ones:

The past gone, the present and the future

arrives:

Business manager roles include seeking out

prospective business/corporate clients, listening to their needs and goals and propose
recommendations on how they can meet
these goals. Apart from such role, maintaining consistent communication and assisting
clients with services and products such as
cash management, loans, letters of credit,
interest rate swaps, insurance, foreign exchange,

Business manager/banker

Running through customers plans and proposals and suggesting probable options to
market services and using them to grow
their business.

Equipment lending: structure customized

loans and leases for a range of equipment
used by companies in diverse sectors such
as manufacturing, transportation and information technology.

These announcements are sure to stimulate

the realty, power & infra sectors in the coming years warranting more investments,
thereby leading to good business for the
NBFCs. And the trend is evident. A quick

20

Business banking consultant

version requirements.

They offer the following products and serSmall business adviser: Job profile includes
vices to corporations and other financial inresponding to initial business enquiries,
stitutions:
sourcing new clients, following up leads and
Loans and other credit products: It is one of meeting business customers face-to-face.
the major area of business within corporate Apart from it, small business adviser also probanking, and one of the biggest sources of vide personal service and expert advice to
profit and risk area for a bank.
clients. A financial adviser gives advice on
Treasury and cash management services: how to structure company, insure ones busiThis area is used by companies for manag- ness, and protect employees financial welling their working capital and currency con- being.

matters such as helping overseas subsidiaries to minimize tax paid ,managing foreign
exchange rates risks, or coming up with new
ways to finance the construction of a brand
new theme park. Corporate bankers target
different industries, such as retail, public sector or healthcare, and therefore often carve
out unique areas of expertise. Corporate
bankers provide important and very personal support to small and medium sized businesses in particular.

Commercial real estate: It includes services

A company earns a lot of money, but it such as real asset analysis, portfolio evaluation, debt and equity structuring.
doesnt have time and expertise to look for
options where it can invest this money and Trade finance: It involves services such as
generate better returns. To fill in this gap, providing letters of credit, bill collection, and
corporate bankers come in. Corporate factoring.
banking is a broad term applied to the variEmployer services: Services such as group
ous banking services offered large and small
retirement plans and payroll are typically ofto medium-sized (SME) companies.
fered by specialized departments of a bank.
It spans the relatively simple business of issuing loans to corporate, to more complex JOB PROFILES

CORPORATE BANKING

For infra, INR378b earmarked for 8500km of

national and state highway projects, while
INR10b is kept aside for development of railways in NE states.

Power sector got tax holiday for projects

commissioning till FY17, a dedicated fund
of INR 5bn for distribution reforms of DISCOMs

For realty sector, tax exemption limit increase from 1.5 lakh to 2 lakh, providing rupees 70.6bn for developing 100 smart cities,
easing off of FDI are some high points from
the budget this year.

The sluggish growth and policy paralysis ailing infrastructure, power, realty & auto sectors among others, NBFCs were looking at
hard times FY14 onwards. But with change
in government and fast tracking of projects
stuck due to environmental clearances,
NBFCs got a new lease of life. The Union
Budget brought more reasons to smile.

(1) Meeting the funding requirement of the

sector adequately
(2) Maintaining the existing NPA classification norms
(3) Bringing NBFC sector under the ambit of
the SARFAESI Act
(4) Addressing concerns on Capital Adequacy requirement
(5) Resolving tax related issues

to the banking business. CII in January 2014

presented its 5 point agenda for orderly
growth of NBFC sector. It talks of:

pressure of interest repayment in regular intervals hovering over your head and what if,
you require funds in a way similar to issuing
equity shares. Heres where private equity
companies and venture capitalists come to
your rescue.

to go public, what if you do not want the

Suppose you own a company which is not

listed on the stock markets and your company is in need of funds. Now, how do you
go about raising funds; (1) issue of shares
(IPO), (2) issue of debentures, (3) loans from
financial institutions, (4) loans from commercial banks, etc. But what if you do not want

Private Equity and Venture Capitalist

PRIVATE EQUITY OVERVIEW

Time management: Ability to prioritize, manage time and work under pressure

large amounts of information and come up

with solutions to help customers.

21

Private equity provides capital that is both

committed, and long-term, to help unlisted
companies succeed and experience more
growth. Private equity can help if you want
Is a Career in Corporate Banking for You?
to (1) start up a company, (2) expand the
You can choose this path if you are comfortbusiness, (3) buy out a portion of the parent
able with the following:
company, (4) revive or turn around a comAbility to deal with numbers: One has to be pany, or (5) buy into a company.
ruthless number cruncher.
Raising private equity for your company is
Communication skills: One should know how very different than applying for a loan from
to present information in a cogent way and a bank or other lender. If you receive fundhow to spot key growth opportunities is also ing from a lender, whether your business fails
a mark of a good corporate banker.
or succeeds, the lender has a legal right to
all of the interest on the loan as well as on
Attention to detail: One need to synthesize

A Business relationship management (also

known as client relationship management of
simply relationship management) is focused
on building relationships with a wide range
of customers, clients or businesses. One
could be working for a large bank or financial services organization, looking after business clients and making sure they have the
right financial products, services and advice
or one could be working for a employment
firm, developing new industry opportunities
and building relationships with recruiters.
Maintaining ongoing relationships with customers, frequently reviewing their business
and product needs is another aspect of the
job. Relationship managers have a support
team, so when the company has requirement of finance, the relationship management team also provides transaction and
structuring advice. Relationship managers
are the winners and diners of the banking
world. They spend a lot of time meeting
companys finance directors and chief executives in an effort to succeed and keep
their business.

Business relationship manager

Ministry of corporate affairs, GoI

To streamline banks & NBFC, RBI has suggested that NBFCs apply 90 day rule to classify a
loan as NPA, when it does so if the default is
for 180 days as against 90 days for banks.
This move has been criticized since NBFCs
cater to unbanked customers who have no
collaterals and it faces irregular cash flows
putting strains on the sector.

70

While the strict regulations in the banking

sector seem to be deterrent to its growth,
when we put NBFC in perspective, the
growth seems to be more robust. While the
statutory deposit requirements are not applicable to NBFCs, it also doesnt have access
to low cost demand deposits. Hence, cost
of funds is always high, resulting in thinner Apart from the above, many other regulatointerest spread and subsequently lower prof- ry steps have been taken up by RBI, as enuitability. It is estimated that delinquencies for merated by the diagram given below.

Nidhi Companies

be at least 75% of its total assets and the in- NBFCs due for 180 days have increased from
come derived should not be less than 75% of 1.3% in FY13 to 1.9% in FY14 according to an
its gross income.
ICRA report. And the situation appears to
grow worse in FY15 due to asset quality isWhile the above eight categories come unsues. Due to the high leverage operations
der the jurisdiction of the RBI, the following
that NBFCs carry can cause an asset liability
categories are exempted from registering
mismatch that can pose serious risks to the
with RBI under Section 45-IA of the RBI Act,
investors and depositors alike and wreak
1934 subject to certain conditions and are
havoc to the sector they are part of.
regulated different bodies as enumerated.
Apart from the high leverage concerns,
Regulations
there have been certain entities which camCategory of Companies
Regulator
ouflage deposit by different names and acChit Funds
Respective State Govt.
cept deposit although they are not entitled
Insurance companies
IRDA
to do so. Another reason why RBI is tightenHousing Finance Companies
NHB
ing the regulatory noose is to curb such
VC Fund/Merchant banking & stock
SEBI
fraudulent activities.
broking companies

Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a

non-deposit NBFC which extends unsecured
loans to a rural household with annual income not exceeding Rs. 60,000 or semiurban household with income not more
than Rs. 1,20,000. It is also defined by the indebtedness of the borrower, the loan
amount, the tenure and the repayment period (weekly/fortnightly/monthly instalments)

Infrastructure Debt Fund: IDF-NBFC is a company registered as NBFC to facilitate the

flow of long term debt into infrastructure
projects & they raise their resources by issuing Rupee or Dollar denominated bonds of
minimum 5 year maturity. Another constraint
is that only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

69

Investment Company (IC): ICs are primarily Non-Banking Financial Company Factors
involved in the business of acquisition of se- (NBFC-Factors): The principal business of this
curities.
type of NBFCs is factoring. Factoring is a fiLoan Company (LC): Its principal business is nancial transaction where a business sells its
to provide finance through loans or advanc- accounts receivable to a third party (i.e.
es or otherwise for any activity other than its factor) at a discount to meet its present &
immediate cash requirements. It requires
own or any other activity listed for AFC.
that assets in the factoring business should

Asset Finance Company (AFC): The principal

business of AFCs is to finance physical assets
supporting productive/economic activity
like general purpose industrial machines.
Mandate requires that the aggregate of financing real/physical assets supporting economic activity and income arising from it
should not be less than 60% of the total assets and total income respectively.

NBFCs depending on the type of liabilities

handled.
b) Non-deposit systemically important and
other holding companies (NBFC-NDSI and
NBFC-ND) depending on the size.
c) AFC, IC, LC etc based on the kind of activity they conduct.
Within this broad categorization the different
types of NBFCs are as follows:

Infrastructure Finance Company (IFC): IFC

should deploy at least 75% of its total assets
Housing Development Finance Corporation
in infra loans, has a minimum Net Owned
Ltd (HDFC)
Funds of Rs. 300 crore, a minimum credit ratPower Finance Corporation Ltd (PFC)
ing of A or equivalent and a CRAR of 15%.
Rural Electrification Corporation Ltd (REC)
National Bank of Agricultural and Rural De- Systemically Important Core Investment
Company (CIC-ND-SI): CIC-ND-SI is an NBFC
velopment (NABARD)
Sriram Transport Finance Corporation Ltd carrying on the business of acquisition of
shares and securities if it accepts public
(STFC)
funds & asset size is more than 100 cr. 90% of
Categories of NBFC
this asset should be in the form of investment
Following are the categories of NBFC as giv- in equity & preference shares or debts/loans
in group companies, the latter accounting
en by RBI:
a) Deposit and Non-Deposit accepting for not less than 60% of total assets.

Some popular NBFCs

Venture capital is a subset of private equity.

It involves equity investments, normally in
comparatively newer companies as compared to typical private equity investments
which are just launched or planning a startup or for expansion of a business. Venture
Capital funds invest in young companies often developing a new product or technology.

VENTURE CAPITAL OVERVIEW

If we have a look at the early history of some

of the most successful companies of recent
decades, youll often see venture capital
funding being one of the crucial factors in
the run-up to them being successful. Apple,
Google, Facebook and Twitter are just some
of the big names to have gotten a jumpstart from venture capitalists. Recently, you
have seen Flipkart raising funds from venture
capitalists like Accel India and Tiger Global.
So what is exactly a venture capital? Lets
have a look at it.

and industry experts.

An intuitive decision making ability

JOB PROFILES

22

In short, investment professionals must be Venture capitalists are obligated to perform

able to identify and assess attractive invest- due diligence on potential business investment opportunities and build relationships ments. They must go through records,
with management teams, external advisers

Entrepreneurs often come up with ideas and

products that require substantial amount of
capital in the start-up stage or for the first
SKILLS SOUGHT
few years. Entrepreneurs who do not have
Outstanding business and investment judg- enough capital to finance the business by
themselves seek outside financing. Venture
ments
capital is most appropriate for businesses
x Great analytical skills
with large capital requirements which canx Strong relationship skills.
not be financed by cheaper alternatives
such as debt.
x A strong work ethic

In a private equity fund youll start out as an

analyst looking for possible investment targets. You would typically be involved in a
combination of four activities: (1) spreadsheet analysis of the economics of a potential investment target, (2) sourcing of new
deals through industry research and screening of potential buyout candidates, (3)
preparation of materials for a senior partner
on a potential investment target or company already subject to investment or (4) coordination of the many diligence and research items required to carry out a transaction. After working as an associate, you
then move into the role of principal, appraising whether a deal is worth pursuing and
sorting out legal issues. At the top are originators, usually partners in the firm, who do
the deals.

JOB PROFILES

the interest on the repayment of the capital.

When private equity is invested in your company, the shareholders hold a stake in your
company. This means that the amount of
money an investor earns is dependent on
the profit and growth of your company.

Conduct thorough market research

Strong communication skills required for
meeting up with potential entrepreneurs,
managers and investors.
Must be comfortable in selling their ideas
and opinions to high-level managers and
investors.

x
x

x

100 million to 10s of billions for big

PE funds; 10+ million for small funds
& individuals

6 to 10 years

Control (o en 100%) of company

Equity and debt

Investors may be passive with respect to management, unless purpose of acquisi on is to improve
company performance

Investment size ($)

Liquidity horizon

Share acquired by investor/fund

Funding structure

Investor ac ve?

23

Depends on inherent risk of specific

Many failures, some solid returns, a
firm and industry. Target can be 20%/ few spectacular successes. Expectayr. over five years, more likely 10%/
ons must reflect the risks.
yr. or less

ROI expecta on

Investors provide advice, connecons, distribu on; monitor cash

burn; etc.

O en equity only, but can be structured to fit needs of both par es

Usually minority stake in company

4 to 7 years

Less than 10 million

High-growth industries like high-tech,

biomedical, alterna ve energy

All industries, usually with established marketplace for the product or

service

Target industries

Start-ups, early-stage companies,

usually pre-revenue

Venture Capital

Attention to small details.

x

Mature companies, o en underperforming or under-valued

Private Equity

Ability to read and understand the ramifications of financial records.

x

SKILLS SOUGHT

which theyve taken a stake.

Target companies

Comparison Chart: PE and VC

financial statements, ask questions and talk

to people at all levels in an organization.
They perform these tasks to formulate an informed opinion as to whether a business
shows enough potential profitability to warrant investing. Many of these business opportunities are unproven start-ups that could
quickly go out of business or become highly
successful. The venture capitalist must weigh
in all the facts to arrive at a final decision.
Venture capital firms often require a seat on
the board of directors of an organization in
which they invest. The firms employees fill
these seats to help steer the company in

68

business includes agriculture or industrial ac- Another major issue of difference is in regutivity; or the sale, purchase or construction of lations. Banking sector is more heavily regulated than the NBFC sector. Unlike banks,
immovable property.
they are not required to maintain CRR or SLR
Conventionally, NBFCs in India extend loans
giving them greater leeway in terms of availto infrastructure, realty, auto and power secable funds and low cost operations. Also
tors which are primarily utilized in the expansimplified sanction procedures, flexibility and
sion & development projects in these 4 sectimeliness in meeting the credit needs are
tors. Although NBFCs are registered as priresulting in the NBFCs getting an edge over
vate companies, their operations are regubanks in providing funding.
lated by Indias banking regulations.
The regulatory differences give NBFCs anAccording to a committee formed by RBI
other added advantage is the sourcing of
and headed by former Deputy Governor
funds of such firms and how they utilize it. An
Usha Thorat, India has about 12,500 NBFCs. example of the advantage can be PE firms
More than 70% of NBFC assets are with those which bring in capital - proprietary or borthe RBI classifies as systemically important. In rowed from foreign banks - at 3-4% interest
a period of 4 years, the number of NBFCs in- rates and lend to Indian companies at intercreased from 151 in 2006 to 295 in 2010 with est rates as high as 18-24%
their assets doubling to Rs 5.67 trillion from Rs
Adding to the competitive advantage of
2.51 trillion - staggering figures for a sector
NBFCs over banking is the market volatility.
which goes relatively unnoticed and has the
In such situation promoters of companies
potential to pull the growth engine through
are reluctant to sell shares to meet their
hard times. This goes to show why theres
funding needs. And without proper security
been a hue and cry about reforming this secbanks reluctant to give loans to companies
tor.
due to rising bad loans. NBFC structure gives
PE firms the flexibility to offer structured debt
NBFC vs Conventional Bank:
and mezzanine financing with unique prodSo now we know the entity called NBFC. But ucts where debt is converted into equity if it
the question remains, if banks also lend then is not paid in time.
how are NBFCs different? The next few
points give the major difference would clear To top it off, there are sector specific NBFCs
which can better cater to the demands to
that doubt:
that sector. Coupled with better penetration
NBFC cannot accept demand deposits;
and project loan approval skills, NBFCs have
NBFCs do not form part of the payment and shown to fare better than their banking
settlement system and cannot issue peers in growth terms. Since the 90s crisis the
market has seen explosive growth, as per a
cheques drawn on itself;
Fitch Report, the compounded annual
Deposit insurance facility of Deposit Insurgrowth rate of NBFCs was 40% in compariance and Credit Guarantee Corporation is
son to the CAGR of banks being 22% only.
not available to depositors of NBFCs, unlike
banks.

67

Non-Banking Financial Companies or NBFC

as they are popularly known has been reported to account for 11.2% of assets of the
total financial system according to the
Economic Survey 2010-11. With the expectation that these figures are set to rise,
NBFCs are poised to be an integral part of
the Indian financial system. They bring diversity and competition in the financial sector. The companies comprising this sector
can be effective in spreading risks during
financial distress and are recognized as a
complementary of banking system giving
competitive prices. With the growing importance assigned to financial inclusion,
NBFCs are regarded as important financial
intermediaries particularly for the smallscale and retail sectors. In a country reeling
under high WPI & CPI, the central bank of
the country is reluctant to reduce interest
rates. Hence scope of capital infusion into

Present Scenario

Non-banking financial company or NBFC,

is a company registered under the Companies Act, 1956 of India, engaged in the
business of loans and advances, acquisition of shares, stock, bonds-purchase, insurance business, or chit business: but does
not include any institution whose principal

According to RBI

What is NBFC?

But before we discuss any further about its

significance, just what is an NBFC? How is it
different from a bank? Why is it considered
to be an alternative to the banking system? We will answer such questions and
more in the following sections.

the economy through debt is limited, thus

limiting the extent of investments. Under
such circumstances, NBFCs have grown in
importance and relevance, as the country
is slowly and surely making its way to go
back to hey days.

When we speak of banks, the term NBFC isn't normally a very common term. Most
retail customers are unaware of this form of banking. And where there is ignorance,
there are speculations. The Financial aims to lay some speculations to rest.

x

Stamina for long work-hours

Core Attributes Required

Analyst > Associate > Vice-President > Director > Managing Director

An investment bankers career usually progresses on the following standard path:

Career Path

Back Office: This part includes operations

and IT and is responsible for providing support to the other arms of the organization.

24

An I-Bank is typically structured according to

Structure of an Investment Bank

Boutique: These I-banks generally specialize

in one or few sectors or services. Examples
of such banks are: Spark Capital
(institutional broking, advisory and wealth
management), Veda Corporate (M&A and
structured finance), O3 Capital (Crossborder advisory, M&A and private equity)
etc.

Broadly, equity research aims to communicate the volatility, risk and value of stocks to
investors thereby helping them decide
whether to buy, sell or hold the stock under
consideration. The work is divided into

Equity research (ER) involves the professionals to perform in-depth analysis of particular
companies, sectors, industries and economies. It can be a part of both buy-side or sell
side firms.

x Mental and emotional stability

Bulge: These I-banks deal in almost all industries and types of I-banking services and in- x Valuation estimation prowess
clude some of the worlds most powerful fi- x Inter-personal skills
nancial services firms like: Goldman Sachs,
EQUITY RESEARCH
Morgan Stanley, Credit Suisse etc.

Types of Investment Banks

Referred to as Masters of the Universe in

The Bonfire of the Vanities by Tom Wolfe, investment bankers are primarily involved in
helping corporations, governments and
wealthy individuals raise money. Besides
commanding celebrity pay packages and
working for insane number of hours each
week, investment bankers get the satisfaction of working with the top rung of the corporate ladder while underwriting securities
or negotiating mergers and acquisitions.

Middle Office: This part is responsible for ensuring the health and smooth functioning of
Global Management, Nexus Venture Partthe bank and includes roles like risk manners, DFJ Venture, etc.
agement, corporate treasury, financial conINVESTMENT BANKING
trol etc.

PE, TPG Capital, Apollo Global.

Blackstone Group, ChrysCapital, Morgan Front Office: This part of the organization is
Stanley PE, Jacob Ballas Capital, O3 Capi- directly responsible for revenue generation
for the bank and includes sales & trading,
tal,
Motilal Oswal PE, Citi Venture Capital, Kotak investment banking and research.

PRIVATE EQUITY AND VENTURE CAPITAL FIRMS job functions as follows:

Financial and Valuation Modelling: The

company is valued using various valuation
models.

tion of company accounts is performed to

understand how financially sound the company actually is.

Interpersonal skills
Analytical mind
Attention to detail

Strong networking abilities

x
x

x

Passion for the stock markets

x

x

25

Nikhil Asrani is pursuing MBA at NMIMS, Mumbai. He is a member of the Editorial team in Finomenon, the Finance cell at NMIMS. He has completed his Engineering from Watumull Institute, Mumbai. He maintains his own blog, and has
been a district level table tennis player.

Siddhanth Awasthi is pursuing MBA at NMIMS, Mumbai. He is a member of

the Editorial team in Finomenon, the Finance cell at NMIMS. He has completed his Engineering from VIT He is interested in parasailing, yoga and playing
cricket.

Soumya Singh is pursuing MBA at NMIMS, Mumbai. She is a member of the

Editorial team in Finomenon, the Finance cell at NMIMS. She has completed
her honours in Commerce from SRCC, New Delhi. She is interested in blogging, reading and travelling

Analysis of Financial Statements: An evalua-

Analysis of the Company under consideration: The cause and effect of management
decisions of the company and their impact
on the companys future along with daily
business operations are studied.

industry under consideration is studied.

The following steps usually form a part of the Reporting the findings: The equity research
analyst prepares an in-depth report of the
equity research process:
findings.
Analysis of the economy: The current state
of the economy and market forces is ana- Recommendations to investors: Recommendations to investors are made based on the
lyzed.
findings.
Analysis of the industry: The influence of political, market and economic factors on the Core attributes required

The ER Process

two parts: research and projections. Researchers are expected to be multi-faceted

and well versed not only in finance but also
in corporate strategy, accounting and latest regulations in the industry.
Lastly, as you progress in your consulting
career, you will increasingly need to
spend your time on client and people
management. While in some countries,
professionals can continue to work as
consultants i.e. as domain specialists
throughout their career and get remuneration as per their seniority, this trend is
still to pick up in the Indian industry.
Hence, you will need to network with clients, mentor your juniors, assist in resolving people issues, get involved in recruit-

66

The author, Akshay Purkayastha, is a

Senior Manager in Deloitte Touche
Tohmatsu India Pvt. Ltd. The views / opinions expressed in this article are solely his
personal views.

Hopefully, these five points have given

you a better idea of what a career in
consulting entails.

ment activities, follow up on bill payments etc. Managing a business will become an integral part of your work.

Secondly, while consulting does have diverse opportunities for finance students,
one needs to be mindful of the fact that
it is not necessary that you will be doing
pure finance related work in consulting.
Depending on the division you are working in or the engagement you are working on, there is a chance that finance is
only a component of your scope of work.
For instance, you may be engaged in a
transaction advisory engagement for
which financial modelling and analysis is
necessary. However, such an engagement would involve various other modules such as regulatory analysis, market
sounding, bid process management etc.
While it is good to have a specialisation,
you should be open to working on a variety of tasks.

Each of these areas has numerous service offerings. For example, corporate
finance advisory includes services such
as assisting clients in raising capital, business plan preparation, inducting investors
into companies and divestitures. Forensic
& dispute services include fraud investigation, anti-fraud consulting, foreign corrupt practices consulting, dispute resolution etc. Project structuring would involve
generating different modes of implementation of a project, evaluating the same
against agreed parameters and selecting the most suited mode after optimally
allocating risks. In this regard, while there
is no doubt that majority of learning takes
place on the job, it is very important to
have strong fundamentals. At the entry
level, technical ability is perhaps the
most essential barometer for success. This
will also hold you in good stead throughout your career.

65

Fourthly, marketing is very important in

consulting, even if you are doing finance
related work. Marketing is important from
two perspectives. The first being winning
new business. Your organisation may
have a separate business development
division. However, even then, you and
your team are the best ambassadors of
your work and will have to play a major
role in winning new work. Generating
sales is crucial for career progression. The
second reason for marketing being important pertains to getting recognition.
Bear in mind that you will be working in a
dynamic environment with intelligent
and motivated colleagues. You will need
to market yourself to stand out from the
crowd.

Thirdly, travel cannot be avoided in consulting. Interacting with clients is essential

in front-end consulting. Some engagements are undertaken from client site
while in others, limited client interaction
or other modes of interaction such as
conference calls, video conferences etc.
are preferred. Depending on your client
and your organisation, the duration of
your travel may vary. However, you will
have to travel. In case you are not open
to travelling, consulting may not be the
best career for you.

vices bleed many financial institutions questioning their right to exist in the highly competitive environment. These institutions are
perceived to be serving anything but business purpose, submissive to the politics than
economics . A resurrection for these oncepowerful growth engines which pulled the
economy up the slope can be possible only
through their regulated introduction into the
competitive arena dominated by banks.

26

The recent approval by RBI facilitating entry

of IDFC along with Bandhan Financial Services Pvt Ltd into the banking system in India
is worth analysing to understand the complex issues pertaining to bankability of such
financial institutions. IDFC, which has been in
infrastructure project financing for a more
than a decade and a half is preparing for its
transition to the new suite of a retail bank
overcoming lack of sector expertise while
The ever increasing cost-to-income ratios in leveraging the prevailing economic and
project financing compared to banking ser- regulatory environment.

Globally, in this age of

"equitisation", the very
existence of financial
institutions
rendering
traditional
financial
functions is under fatal
threat.
declining cost
hreatt. Financial
Fiina
in
n
na
anc
nci
n
ciia
c
all innovations,
in
iinn
n
nno
securitisation
of sec
of
cu
urrritissati
uri
atti
a
tio
on
n and
and
an
nd increasing experience
market
participants
of mar
of
arket
ket p
pa
arti
rtttiic
ciip
cip
i antt coupled with technological
ogica
ogi
ica
al progress
progres
rog
ro
o res
res
re
ess has
has brought down cost of
capital
capita
cap
itall a
and
nd squeezed
squeez
squ
eezed
ed interest rate margins.
This
his is pushing leading project financing institutions
utions to de-emphas
de-emphasise project lending and
rely
ely more on retail b
banking and non-fund
based income. Suppo
Supporting this trend, deregulation of financial sector is causing financial
intermediaries to blur their own set divides,
become customer - centric from productcentric and cross-sell products with diminished emphasis on top-line growth.

IDFC, Indias leading infrastructure finance player providing end to

end infrastructure financing recently got the banking license from
RBI. But is it bankable?

infrastructure projects with long gestation

period.

27

tions were a meagre 15,277 crores and dis- THE NEW OPPORTUNITY AWAITING
bursements were a modest 5,243 crores
The investors have been bullish on IDFC
which was very low compared to that of
stock ever since the Modi government
competitors of comparable function.
came into power at the Centre hoping
growth revival on infrastructure sector. Their
propensity of risk taking has increased and
number of stock transactions has doubled,
indicating positive market sentiment for
high exposure to infrastructure sector
(Figure 3). However, what drives the prevailing market sentiment is the future gain expected from bank licence granted to IDFC
in August 2013 and the 18 months allotted
Fund deployed by Infrastructure Development Ins tu ons
to accomplish the banking sector guidefrom 1997 to 2002
lines. IDFC had fought stiff competition from
In addition, IDFC was not successful in fos- twenty five high profile applicants like Birlas,
tering long-term debt market in the coun- Tatas, L&T and Reliance in obtaining the litry which was envisaged as its resource cense.
strategy at the time of inception to finance
Adding fire to investors belly, the govern-

IDFC was conceived on December 1997

with an initial capital base of 1,650 crores.
This consisted of equity investment worth
1,000 crores and a 650 crores subordinated
debt from the Government of India and RBI.
The financial institution was formed primarily
to meet the inadequate mechanisms then
existed for infrastructure financing and
switch the governments role from that of
project promoter to prudent regulator. MaBorrowings profile lender-wise as of 31 Mar 2014
jor foreign financial institutions like the Asian
Development Bank and Commonwealth The Central Government too failed to
Development Corporation also held initial sculpture a strategic plan for an institution
shares worth 400 crores in it.
of prime importance like IDFC. When IDFC
However, the government funded institution was formed, the key positions were occuwhich was expected to funnel private capi- pied with senior officials of the IDBI, who
tal into infrastructure projects in India have brought in with them a culture that suits a
not performed well since its inception. Till government institution than that of a profit
September 2003, IDFC's cumulative sanc- driven private entity.

THE LACKLUSTRE PROGRESS REPORT

Having spent more than eight years in

the consulting industry, I still cannot claim
to know all that a career in consulting
entails. However, now that I have a fair

Consulting and Investment Banking

these were the most sought after jobs for
finance students when I was in business
school. We all wanted to do this even
though we did not necessarily know
what it entailed. Such was the buzz that
was built around these jobs.

64

At the outset, I would like to state that

the consulting industry has diverse opportunities for finance students. These opportunities include strategy, financial analysis
& project structuring, corporate finance,
merger & acquisition transactions, valuation, forensic & dispute services, reorganisation services etc.

idea, I will attempt to briefly cover five

points in the subsequent paragraphs.

A consultant is a professional who provides professional or expert advice in a

particular area such as security, management, accountancy, law, etc. An interview of
a consultant undertaken by Kanika Srivastava, MBA 1st Year, NMIMS, Mumbai

Where will another round of funding

come from in that case? What will happen if there are actually huge fraudulent
practices undergoing in Espirito Santo
and this event creates a ripple effect
across other businesses? Is there more
pain in store for the Portuguese economy
at a time when it is on a cusp of successful transformation? Only time could answer these questions.

In addition to that, there is still less clarity

on the whether the funds provided are
sufficient enough, given the banks exposure to rest of the Espirito Santos businesses. In case other businesses start faltering,
as has been the case with 3 of its holding
businesses charged with accounting
fraud, it could be deleterious for the Portuguese government and entire Eurozone
as such.

This will again create a situation where

there is less availability of capital in the
country for businesses thereby hampering
growth prospects. Moreover Portugals
current sovereign debt stands at 129% of
GDP and it has only just exited from its
bailout program, so raising debt at this
time could be detrimental for the economy.

gal would need 10bn cash buffer at the

start of 2015 to meet its target. In case
the loan is not repaid through Novo
banks sale, Portugal would then need to
raise cash through bonds.

63

Email 13shikharsharma@imt.ac.in

Shikhar Sharma is currently pursuing PGDM at Ins tute of Management and Technology, Ghaziabad.

To some extent, the plan has been able

to control the spill over effects of crises
and has brought in some kind of relief
and stability to Eurozone banking sector,
albeit for a short term. However there are
always 2 sides of a coin. The Bank of Portugals claim that the bailout comes at
no cost seems misleading. The fund has
been bolstered using the EU and IMF
money that was provided during the
2011 bailout of Portugal, through a bank
resolution fund. The loan provided would
remain at risk and will even divert funding
from other planned activities. Also, Portu-

Under the new structure the BES has been

split into a good bank and a bad
bank, with the former named Novo
bank. BES will remain as a bad bank
housing shareholders and subordinated
debtors who will be written down against
the bad assets formed mainly of exposure to the rest of the Esprito Santo.
Banks other activities which includes its
deposits, senior debts and assets would
be transferred to the newly created
bank, called Novo bank. Novo bank
would be capitalized by 4.9bn from the
bank resolution fund and would continue
its operations. The bad bank would be
liquidated subsequently.

Banks Restructuring and the way forward

Earlier in July, 2014 rating agencies S&P

and Moodys drastically downgraded
Banco Espirito Santos long term debt ratings.

THE MASSIVE CHALLENGE AHEAD

Diversifica on profile of IDFC

The historical dependence of the firm on few

large clients has resulted in very high beta of
the firms stock. The transition into a commercial bank will alter this reality by exposing the
bank to shorter term financing like working
capital, diversifying its clientele base to add
SMEs to its portfolio and extending loans to
sectors other than infrastructure.

reach.

28

sides, they are investing a lot of money in

creating buzz in digital space to have virtual

IDFCs stock prices were bullish immediately

after the granting of banking licence but later turned bearish owing to uncertain sentiments in the market on key profitability
measures of the infra financier in near and
medium-term. IDFC's ROA and ROE are expected to drop sharply due to SLR, CRR and
priority sector lending requirements even
though the new policy guidelines of GovernThrough the years, IDFC has built a credible
ment implying concession on the mandatory
platform with good track record to be a
reserves for infrastructure financing schemes
trusted player in mutual fund sector. This will
may ease the situation to certain extend.
enable the new bank to be on the top
league by becoming a household name The operational cost for IDFC bank is also exand a stronger retail brand. IDFC already has pected to be significantly high as it should
its physical presence in 40 cities in India. Be- invest in recruiting employees and develop

Another critical advantage IDFC would enjoy

due to the transition is ability to access low
cost fund sources- Current Accounts and
Savings Account (CASA). It will also have
more funds available for lending with projected capital adequacy requirement of 9%
compared to the current 15%. These features
will help to lend at higher margins eventually
pushing the bottom-line higher.

The new bank is lucky enough to have head

start with 60,000-70,000 crore loan profile
rendering strong balance sheet from the day
one. IDFC is expected to benefit from the financial management skills as well, which it
had exhibited during the global events post
2008. Despite low ROE, the institutions
maintenance of high ROA reflects excellent
asset management practices which would
be extended to the new banking business as
well.

-ment issued new guidelines exempting longterm resources raised by banks for financing
infrastructure projects from conforming to
RBIs mandatory reserve requirements. It was
anticipated earlier that when IDFC becomes
a bank, it will have to comply with norms like
CRR, SLR and priority sector lending, leading
to very low return on equity (ROE). With the
new guidelines, these concerns have receded.

The asset movement from IDFC parents

balance-sheet to the new banks balancesheet is positive signal from capital requirement perspective. But the fact that nonperforming assets and all provisions for bad
loans of the parent will also be transferred is
a matter of concern.

banking solutions will also eat a major chunk

of investment along with spending on data
analytics and devices.

29

IDFC will also face high competitive intensity

in retail banking from private and public
sector banks which have unmatched experience in brick-and-mortar type banking
thus challenging its ability to scale up via
Outstanding Disbursement profile of IDFC as on 31 Mar 2014
branch expansion thus impacting its finanAdding to the woes, a J-curve trajectory of cials.
earnings is expected over the next three THE 9 YEAR PLAN
years in earnings which may continue until
the new banking platform stabilises and IDFC Ltd has proactively prepared and announced a detailed nine-year plan for its
business picks up.
new-born baby. Phase 1, planned for the
The new bank will have to rebalance the initial three years, would emphasise on
foreign institutional investment (FII) limit also
compliance with RBI banking norms and exas regulations mandate that the promoter
perimenting the new business model. It inmust be a domestic entity. IDFC presently
cludes the eighteen month grace period
has foreign investments of 53%, which must
given by RBI until September 2015 for adherbe brought below 50% by preferential allot- ing to regulatory norms. Majority of loans on
ment to domestic investors. Raising funds at the parents balance sheet will be moved
low cost is also likely to be a distant dream, to the new bank's books, branches will be
given the experience of YES Bank (the last opened in urban and rural areas and
bank to be issued banking licence) which achieving priority sector lending target will
took 10 years to build a 20% CASA.
be given due importance rather than botFrom management angle, the existing tom line growth.
bandwidth of management expertise is not
In phase 2 (from fourth to sixth year), the
appropriate for stepping into highly com- bank will consolidate its activities based on
petitive market as a bank. Proper blending learning and expand further. Then, the bank
of existing management and a new team will climb the growth trajectory in Phase 3
will be another hurdle. The development of (after the sixth year) and give competition.
Information Technology framework for core

new branch network especially in nonurban areas which is mandatory as per RBI
norms. Maintaining credit costs at sufficiently low levels and maintenance of acceptable credit risk will be important as it starts
lending to diverse non-infra sectors.

The ownership structure is a mess. BES is

25% owned by Espirito Santo Financial Group, which is 49% owned by
Espirito Santo Irmaos SGPS SA, which in
turn is fully owned by Rioforte Investments, which is fully owned by Espirito
Santo International (ESI). The exposure
between these levels is equally

restructured the bank, following the

heavy losses it made during first half of
the year. According to some analysts,
the problem lay with how the bank was
financing its holdings. The Espirito Santos
family avoided raising money from outside investors so as to maintain its controlling stake. So the bank had to use
borrowed funds even though the cost
of borrowed capital was significantly
higher during the Eurozone crises. The
bank then kept on rolling over its debt
with short maturities and higher interest
rates thereby postponing the crises situation. Many analysts point out to the
complex shareholding structure that
Espirito group as a whole had, which
they felt was purposefully done in order
to dupe the investors and investigating
agencies. According to one of the
Forbes analyst

However its reign ended on 3rd. August

2014 when the Portuguese government

the Portugals second largest private

financial institution in terms of market
capitalization and net assets, with a client base of 2.1 million. The bank was
highly revered across European countries with its history spanning decades.

62

The Banco de Portugal, Portuguese

central bank too spoke of a fraudulent
funding scheme run by Esprito Santo
companies outside its jurisdiction. It has
also accused its former bosses of committing criminal acts of money laundering and tax evasion.

The downgrade of BESs standalone

financial strength rating to E/ca from
E+/b1 reflects the risks associated with
the banks direct exposure to the Espirito Santo Group and the likelihood that
it may become liable for any further obligations stemming from the group.
These concerns are heightened by the
lack of information on BESs ring-fencing
against these risks.

Earlier in July, 2014 rating agencies S&P

and Moodys drastically downgraded
Banco Espirito Santos long term debt
ratings with Moodys pointing out

opaque, with the WSJ highlighting back

in December, 2013 that ESI was utilising
different branches of its structure, including BES, to fund itself up to the tune
of 6bn.

These kind of headlines have been dominating the European newspapers, ever
since the troubled bank BES reported a
bigger-than-expected first-half loss of
3.6bn (2.8bn) that wiped out its existing
capital buffer of around 2.1bn and took
it to below the minimum level required by
regulators. The event took the world markets by storm with the indices of major
economies falling, on fears of another

61

THE Esprito Santos are a banking dynasty,

built over a century, whose name was
synonymous with quality and reliable
banking across Europe. The bank came
into existence in 1920 as a public limited
liability company and since then has
grown into a behemoth, with its operations spanning across 25 countries. It was

Espirito Santo Fall from grace

European crises brewing. The stock price

of the bank plunged close to 82% in 2
days, before the trading was finally
aborted by the Portuguese authorities on
1st. August 2014. Simultaneously the Portuguese stock markets fell 3% and bond
yields rose to 3.78% on expectations that
Governo de Portugal, would need to recapitalize Banco Espirito and bail it out.

The Fall of the House of Esprito Santo, Banco Espirito woes reignite eurozone
fears as shares drop 80pc in two days Revisiting the terror

Reinstating its serious foray into commercial

retail banking space and projecting that
the firm is bankable, IDFC has already
roped in people from the domain for senior
positions like Ajay Mahajan (founding
member of YES Bank) and Avtar Monga
(former director, Bank of America). IDFC
has also got leading consulting firms like
McKinsey, Accenture and the BCG to finalise its business blueprint.

600 to 2,000 in the initial two years.

30

Dean Israel is pursuing Post Graduate Diploma in Management at IIM Indore specialising in Finance. An alumni of TKM College of Engineering Kerala, he has two years of work experience at MRF Ltd in automated production line design and project execution. He is the runner-up of CRISIL Young
Thought Leader-2013.

About the author

Under the proposed restructuring, IDFC, the

parent firm will head the group with a
NOHFC (Non-Operating Financial Holding
Company) below it which will control four
subsidiaries - banking, asset management,
investment banking, and alternate assets
businesses. IDFC shareholders would be allotted shares of the new bank on proportionate basis. The new bank will hire 10 to15
senior management people initially and will
increase employee base from the current

Since 2007, Online retail market in India

had a compounded growth rate of 56%

In 2007, when Flipkart was founded,

online retail sector in India was in
its infancy. Internet was not an
a v a il a bl e
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Flipkart
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Flipkart also adapted tto the Indian conditions by introducing cash on delivery,
knowing there is very le
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in India at
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time.

31

every year and Flipkart outperformed this

rate every year. As of 2014,In India, online
retail is just 0.5% of overall retail and 7.9%
of overall organized retail sector. This also
indicates that online retail has much
growth potential in India.

FlipkartThe darling of the Indian e-commerce industry has

seen its valuation reach skywards lately. But is all the hoopla
surrounding this loss making firm justified? Or is it overvalued?

SIPs garner the power of ETFs. ETFs, Exchange Traded Funds, are a relatively new
phenomenon that hold underlying assets
like stocks, debt, commodities etc. This
gives the consumer the much needed diversification at a very low cost.

p.a. If we stay consistent with the index

growth of 19.43% as witnessed from 1991 to
2008 a staggering Rs.2.03 crore return obtained, on a net of Rs.3.6 lakh.

60

Amruth Jayaram is pursuing MBA at NMIMS, Mumbai. He is a member of the

Editorial team in Finomenon, the Finance cell at NMIMS. He has completed
his Engineering from Amrita Vidyapeetam. He is interested in debates, Jamming and quizzing.

If Stan Lee ever wrote a book on investing

he would probably say, With great risk
comes greatest returns. SIPs are relatively
low-risk vehicles thus would give comparabeaten the Sensex.
tively give lesser returns in a bull market visPower of SIPs
-vis a standard well-managed portfolio.
An amount of Rs.1000 invested monthly, Nevertheless it still remains the best option
systematically over a period of 10 years, for the general public to get a SIP of the
can lead to returns of Rs.22.79 lakh at 10% market.

SIPs investing in ETFs have shown impressive

returns, in fact many market pundits suggest that investing in ETFs is the path of
least risk when it comes to investing in gold.

The speciality of ETFs is that they do not

have a minimum investment amount unlike
mutual funds thus they are very accessible
to SIPs. ETFs can also be a composition of
A SIP is bigger than the cup?
assets of a single sector, thus making its
It seems so. SIPs as shown below have not performance more dependent on the seconly given inflation beating returns but also tor than the individual entities comprising it.
The fact that ETFs can be bought and sold
in the stock markets, making it very similar
to stocks even in terms of brokerage.

A PAN card and KYC form are all that is

needed for an SIP account. Since they
function like mutual funds a demat account is not a necessity. But those having
existing demat accounts can access SIPs
through them. Fixed monthly investments
from amounts as much as Rs.500 and
thereof, in additional multiples of Rs.100,
can be dedicated to this vehicle.

How do I open an SIP account?

that the investor needs to be less concerned with the day to day happenings
of D- Street.

Systematic Investment Plans, the SIPs, is

perhaps the window to the markets for

What are SIPs?

Stock markets, at least in the Indian

context, are seen as an elitist tool to
make money. You really cant blame
people for the stigma, considering the
fact that we have more than half a
dozen business news channels bandying terms that are esoteric and just beyond the interest or know how of the
average viewer. With one sitting in front
of the television one does begin to get
a feeling of markets being a high risk
avenue with the terms bet, short and
call (everything possibly lifted from
gambling) being used to describe the
stock markets. Besides it is disquieting to
see India, with a median age of 26.7
years (2013 stats) and a sizeable middle
class, having only 18 million participants
in the stock markets.

59

Consider those who have invested lump

sums in the 2007-2008 rally, most of
them have still not recovered their losses and faith in the Indian markets (the
current bull-run is largely fuelled by FII
inflows, with local investor sentiments
remaining far from favourable). These
huge risks are offset by disciplined investments in SIPs as volatility becomes
an advantageous factor, the fund buys
fewer units at higher prices and more
units at lower prices. This also ensures

the common man. It involves a disciplined investment of amounts that can

be as less as Rs.500 a month. So when
the NAVs are low they get to buy more
units but when they are high they buy
fewer units. This periodic investments
generates an averaging factor that
gives us the coveted Inflation Beating
Returns, thus making money work as
hard as we do.

SIP or Systematic Investment Program is a product by mutual funds to allow investors

to save regularly. But despite its relevance to the Indian retail investors, it's yet to be
popular, as its associated with the elitist stock markets. Lets dispel this myth.

The e-tail giant is presently in the growth

phase and is making no profits, a common phenomenon observed in all the
start-ups and young growth companies.
As we know that the company with continued negative earnings and cash flows
doesnt have any value, young growth
companies like Flipkart are expected to
make revenues in the future. The expected revenue growth at Flipkart will be
the composite effect of factors like expected growth rate in Indian online retail
business and expected market share of
Flipkart in the future. As, Flipkart is keen in
making its presence across the countries,
it is expected that its revenue is not only
dependent on just Indian online retail
market but also the global market. At
present Flipkart has the market share of
nearly 32% in the Indian online retail market and is assumed to grow to 40% within
10 years . Therefore Flipkart will have 40%
of Indian online market share and also
20% of its revenues from outside India (as
Flipkarts founders aspire to take the firm

Revenue Growth

32

Operating margin

With all these amazing prospectus of Flipkart and Indian online retailing, is the valuation figure attached to Flipkart is justified?

Growth is nothing but how much we reinvest (Reinvestment rate) and how well it is
invested (Return on Reinvestment). As the
revenues of Flipkart are expected to
grow heavily in the near future, there is a
need to reinvest in the business in proportion to the expected revenue growth.

Re-investment

Flipkart at present have negative operating margin of nearly 4.62%. It has invested
huge capital (both its revenues & Capital
raised from VCs) in supply chain, advertising and developing applications and
website to increase its market reach.
Online retail is the sector in which all the
players offer products with similar discounts for the same pool of customers.
The firm can differentiate itself from others
in the area of delivery mechanism and
reliability. This eventually results in the lower operating margins. Flipkart since its inception, has reinvested huge amounts of
capital to enhance these areas that created them an absolute competitive advantage. Flipkart with its effective supply
chain management and competitive advantage is expected to have an operating margin of 10% by 2025,

global). Analysts project that the Indian

retail market will cross $100 bn by 2025.
Thus, revenues of Flipkart is projected to
be at $50 bn by 2025, which are just 35%
lower than that of Amazons 2013 revenues and 20% below the Googles revenues in 2013 and 4.6 times greater than
Facebooks 2013 revenues.

In recent years, mobile commerce is

playing an important role in online retail
industry in addition to social networks.
New sites are exploding every day and
the mobile commerce plays an important
role in expanding the market and it overcomes the internet connectivity issues in
towns and villages.

33

Cost of Capital of Flipkart is presently at

16.86% considering the risk of the company, present risk free rate and risk premium. With the new government in power,
the Indian macroeconomic conditions
are expected to be in a better shape atleast by the next ten years. Thus Flipkart s
Cost of capital would be reduced to
13.77% at its stable growth period due to
reduced risk premium and risk free rate
by the time it evolves as a matured company with low beta.

Cost of Capital

Till now, Flipkart has done reinvestment

both in terms of technology and acquisitions. Globally, online retail firms have
sales to capital ratio of 2.26, means every
rupee reinvested in the business generates 2.26 rupees as incremental revenues. This number can be adapted in the
case of Flipkart too, due to its efficient
past growth.

Flipkart is overvalued by nearly 98.4%.

One of the main reasons for overvaluation is investors high expectation of
growth in Online retail sector. In the same
way, they are pricing (relative valuation)
Flipkart by comparing it with Amazon and
Alibaba, in terms of estimating the future
growth and market share.

Picture below shows the Flipkart valuation

Summary

Taking all the above factors and estimations into consideration, Flipkart is valued
through discounted cash flow valuation
and the value of the firm (or equity, as no
debt) obtained is $2.52bn, way below its
$7bn Valuation. In addition to this, Flipkart
also has given stock options to its employees, which further reduces the value
(ESOP were not deducted, due to unavailability of data)

The Valuation

Q: What are your views on joining small

boutique Investment banks in the initial
years of ones career? Does working in
a

A; The industry has certainly changed a

lot in the last 10 years. We have seen
the euphoric run from 2005 through
2007 where equity markets created
enormous wealth for the country, the
currency hit 40 against the USD and
nothing could go wrong. Then 2008 put
the fear of god in people as retail investors ran for cover and a lot of big banks
went down and it did not seem all that
easy anymore. We have come out
stronger, with renewed focus on use of
capital, importance of credit quality
and regulators putting a stop on some
of the excesses.
The single most important thing, in my
opinion to survive in this profession
would be discipline knowing when to
cut your losses.

Q: Having been in the industry for 10

years, how do you think the industry
has evolved? What according to you
is/was important now / then to be a
successful Investment banker?

58

A: Do not join an investment bank because of glamour or the fact that it is

the hottest thing in campus placements. There is no denying that the rewards are high but so are the risks. The
industry requires a particular skill set
and every person should be honest in
answering to themselves whether they
have it or not.
The work, however, is very exciting and
immensely satisfying. Be honest to yourself and if you think you have it in you,
please do give it a shot.

Q: What are your suggestions to Bschool students wanting to take up Investment banking as a career option?

A: Small boutique banks are a good

place to start your career as the exposure one gets is enormous and end-toend. There are a number of such small
banks that have come up in the recent
past and a more than proportionate
increase is expected in the coming few
years keeping in mind the positive market sentiment. This surge will increase
the popularity of small banks among
the student community with many of
them looking for careers at these
banks. This is a good sign given the holistic experience the smaller banks will
be able to give to the students as well
as the talent that these banks will acquire, which is crucial in the initial stages.

holistic environment of a boutique investment bank pay off?

The industry has certainly changed a lot

post the crisis. There is much more focus

A: In my opinion the next few years will

be a honeymoon period for IPOs. With
the new government showing clear intent to revive the economy, the next
few years could see the biggest bull
market India has seen. It will then be
easy for companies to raise capital by
accessing equity markets, given the euphoria all around.
Has the Investment banking industry recovered from the financial crisis? Are
there any changes in the industry post
crisis?

Q: How to do you see IPO market evolving in the coming months?

It is intellectually stimulating, one has to

be alert all day and there is no place
for emotions. Trading is done in a disciplined manner, continuously monitoring
the risk and stop-loss and take-profit targets. Some days you are the pigeon,
some days the statue. No one makes
money in every trade one does. Idea is
to make money more often than you
lose and make more money than you
lose.
The industry is extremely rewarding as
well as brutal. Remuneration would be
highest across industries, if you are doing well. To give an analogy, only three
professions in the world pay so much
Professional sports, Professional entertainment and Investment Banking. Risk
reward is extremely high in this career.
On an average, the burn-out rate in this
industry, given the pressure, is about 8-9
years.

57

Also, given the discount being attached to pure investment banks by

analysts / markets, due to the volatility/
risk in projecting trading income, most
of the banks now want to be seen more
as commercial banks with steady income and concentrating more on
flow income rather than proprietary
trading income, the former being more
sustainable.

on regulations with regulators tightening

their noose on IB firms. Capital has certainly become expensive with the new
Basel rules and return on capital is the
new
mantra.
Also
focus
on
compliance has increased a lot given
the excesses of the past. It is ok to lose a
deal, lose revenue, make less money,
than to be on the wrong side of the regulator, as opposed to focus being on
just making money.

Many analysts compare Flipkart with

Alibaba in terms of both valuation and
growth, as they are market leaders in the
ecommerce business. Though both of
them belong to the markets that are
growing at high CAGR, there are many
differences between them in terms of

Comparison with Alibaba

Any sector cannot have high growth

throughout its life span. Similar to the firms,
sectors too attain stable growth after substantial high growth period. Online retail
sector being no exception, is in its stable
growth stage in US at present. This is the
reason why investors are flooding funds to
Indian online retail sector in the recent
years rather than funding US online retail
start-ups. But one should note that Indian
online retail market too will reach its stable growth period. Investors and founders
of e-Commerce Companies are now
banking high on Mobile Commerce. Inspite of the high mobile phone penetration, growth in the m-commerce may not
be in par because of the conservative
nature of the Indian customers who prefer
to buy goods offline.

Misjudging the Market Growth

34

Amazon was also valued in its initial days

at very high price, but later market prices
it correctly, thats for the dot com bubble
for correcting the valuation. After watching Amazon and Alibabas success, investors are betting high on Indian market
and Flipkart. In both US and China, those
respective companies were able to gain
absolute monopoly till day in terms of
market share. In 1994, Amazon entered
with the unique business model, and it
was the first of such kind in the e commerce business. It is also important to
note that it is one of those dotcom companies survived
the dotcom bubble
burst. Thus Amazon has

The Amazon Story

market share and operating margin. Unlike Flipkart, Alibaba has a its presence in
different e-commerce segments like Business to consumer, consumer to consumer,
mobile market and online payment segments in china. In all these four segments,
Alibaba is a market leader with huge
presence. In addition to this, Alibaba has
big operating margin of 50% at present
and is expected to continue with the
same in future too.

35

Flipkart, though it lead other firms in

terms of market share in India at present,
it definitely lacks the monopoly that Amazon and Alibaba have. Flipkart will face
problem in gaining such a huge market
share in India in future, mainly due to new
entrants and strong existing players like
Snapdeal and Amazon who already
have considerable market share and are
going good in terms of both revenues
and strategic investments. In 2007, Flipkart
was started with the same idea and business model of Amazon but made changes according to Indian market. After few
years, Snapdeal also worked with the similar model and was successful in gaining
the market share. Therefore it is the adaption to the market that is gaining market

not only gained high market share but

also perfect monopoly in the online retail
business.

Although intrinsic valuation determines

the value of the company by considering
all the fundamentals like growth rate, risk
in the company and estimated cash
flows every year, Most of the investment
banks and Investors value the company
on the basis of relative valuation, as it is
easy and simple method to value the
company by comparing with other companies in the sector by using multiples like
number of clicks obtained or revenues
generated. The company on relative valuation gets overvalued if the sector itself
is overvalued.

Relative valuation perspective

share in India. So, there is lot of chance

for firms with deep pockets like Amazon
to snatch away market share from Flipkart. May be, it is the big expectations on
the growth potential that is making Flipkart look big for investors.

Were sure that majority of the readers

of this magazine want to be investment
bankers. Some of them know where
they want to land up, some are still
grappling with the plethora of options
within the arena of investment banking
and some are still trying to differentiate
capital from cash. While you swim
through this seemingly never-ending
confusion, The Financial brings to you
excerpts from an interview with a professional in one of the most lucrative
and thrilling sectors in investment banking -trading. Trading is the buying and
selling of securities with funds of financial institutions in order to make profits
on the arbitrage. A number of securities
can be traded, foreign exchange being one of the most volatile and hence
intellectually exciting ones.

56

A: Not sure about glamorous, but if I

were to use a word for this profession I
would use exciting. Every day brings
new challenges and no matter how
long you have been around, there is always a surprise around the corner.

Q: Is Investment banking as glamorous

as perceived? Paint us the real picture.

IIM Calcutta alumnus. Hes been a trader for almost 10 years now, and having
worked in front end international offices
of global banks, he carries with him myriad stories and experiences to share. In
conversation.

The interviewee is Mr.Vikram Mahajan,

Vice President of the foreign exchange
trading desk of Deutsche Bank and an

Foreign exchange Interesting topic. Arbitrage in forex markets An even more

interesting topic. Learn from the masters of the Forex trader about how the interesting
beget profit. The interview was conducted by Arunima Sodhani, a member of editorial
team at Finomenon.

The fact of the matter remains, the business is viable, once the above factors
are taken into account. The business as
absolutely no cash flow problems, almost minimal maintenance expenses
and fairly low chances of take over. The
word of mouth means of marketing is
an added advantage. The interested
investor, it seems, must have the stomach for it, and the will to see it through.

There are franchises available in India,

like Madhuloka, Drops and other tie ups
with retail brands. They have the advantage of having a brand associated
with them. They also have the disadvantage of being cash hungry. I.e. The
operating costs of a large 1600 sq ft retail out let of liquor is very high, specially
because they need to be located near
busy corners with ease of parking and
availability from the road. The franchise
alone costs considerably high, and the
margin is also quite low. Where the franchise model of Madhuloka trumps however, is the huge range available to the

55

Partho Sarathi Ghosh is pursuing MBA at NMIMS, Mumbai. He is a member of

the Editorial team in Finomenon, the Finance cell at NMIMS. He has completed his Engineering from Techno India Salt Lake, Kolkata. He is a published
writer and enjoys research.

There is one exception, our host

adds, Gold. If I had opened a jewelry
store, I could be making more. But then
again, I know nothing about jewelry, I
know a lot about drinking!

customer. From Zula to Jagermierster.

From Antiquity blue to Glen Morgen.
The complete spectrum of the golden
liquid is available. Our host, however
seemed uninterested in making such
long term corporate bonds , as he had
well defined his target buyers as the
straight-from-the-bottle-Kingfisher category of ethanol enthusiasts.

volumes etc. which are usually a one

off. The garage sized shop stores more
worth of goods per square feet than
any other possible business. E.g. The
same store could be a grocery store, a
vegetable monger store, a simple book
store etc. But the value of the volume of
the store would be very low compared
to that of the liquor store.

comparable firms, Flipkarts Valuations

were done solely on the market expectations and belief.

36

Tejesh Thota did his engineering in Electronics & Communications at Vellore

Institute of Technology. Currently he is pursuing PGDM IInd Year in Finance at
IMT Ghaziabad. His areas of interest are Valuation & Corporate Finance. He
did my Summer Internship & Short term projects in same area at Dollar Industries Ltd & Amara Raja Batteries Ltd. Email ID ft13tejesht@imt.ac.in

About the author

This comes true in the case of Indian

online retail sector. Being in young
growth sector, with less number of

37

Federation Internationale de Football Association (FIFA). This global governing body

The recent world cup organized by the
organizes the world cup once in every four
emerging economy Brazil, has unfolded
many interesting facts to think about. The years. To get the right to host the future
football game played with all the glitz and world cup, the countries compete through
glam has attracted the attention of many a bidding process run by FIFA. The countries promise to provide the best infrastrucpotential investors. The showbiz had provided ample opportunity for the participat- tural facilities for the event and the winner
gets the opportunity to host the future
ing countries to boost their economy. But
world cup.
this is not the complete picture because
the facts say a slightly different story. And Economic impact of the world cup on Brahence to know the complete picture and zil- A case study
to study the economic impact of the
After 1950, this was the second time that
World cup, it is imperative to analyse the
the developing economy, Brazil had got
case from different perspectives.
the opportunity to host the FIFA world cup
FIFA- The bidding process
of 2014. During these 64 years, Brazil has
gained the status of emerging economy
The football world cup is an international
football competition organized by the sen- and is being preferred by the investors because of its promising market prospects.
ior mens national team, the members of

Background

Undoubtedly, the biggest extravaganza of the sporting world. But what behind the
scenes of the last edition in Brazil in 2014? How justified is it to pour money into such an
event for a developing nation? Is it worth it?

License: The trickiest bit of the game, hitherto unheard of without bureaucratic insider support. The License , it is fabled, is

Land: the location might be a little tricky

to get right. A larger audience might be
targeted, like the support service class.
Then, the shop must be preferably in the
ground floor of a busy market place,
open to the road. This enables drive in facilities and advantages for the already
intoxicated to make purchases.

Capital/ Initial Budget: The Owner explains how the beginnings of the outlet
came along.

Operating Budget: The Retail end of the

shop works like any other Distribution system. The Main difference lies in the limited number of intermediaries. Shops located in premium places with direct contracts with certain companies receive
very few intermediaries and thus quite
royal margins. Again like any retail establishment, there is an inventory, which is a
source of sale. The good itself (Alcohol) is
not a high maintenance object, thus
warehousing costs in the shop is relatively
easy. The Issue is however that of safety.
The good is always at a very high risk of
pilferage and misuse by personal staff.
This requires a sufficiently well paid employee/loyal employee. The Owner explains how the support staff are actually
an asset of appreciating value.

Idea: The Concept of a liquor shop is fairly

old, and the appeal being so high in certain markets, the competition is quite
high.

54

The host made a vital point about this

business. The retail nature of the business
indicates that sales are directly related to
footfalls. He cannot trust big sales, huge

I see no reason why not to. Show me another shop my size, that needs to stay
open effectively 4 hours a day and earn
the months expenses in just a single
weekend. You cannot.

The owner was then asked, impertinently,

would he say he is in a good business,
and would he recommend the same to
others.

Market stigma: The obvious stigma associated with every vice industry is a constant
reminder of the duplicity of the Indian Society, where people blame the alcohol
and not the alcoholic for the demeanour.
This makes entry into the market a psychologically difficult task.

Goods and inventory contacts: This is fairly

easy to acquire in the leading metros today. If te area chosen is profitable
enough, many beverage companies enter into exclusive franchises and the like,
with providing better margins than rivals
to promote sales. Thus a shop with limited
alcohol choices is promoting a particular
brand, and is not endorsing the fact that
the rest are sold out.

unachievable through bribes. The shops

are vied as long term investments, or hens
laying golden eggs, by many bureaucrats. The owners of most shops have their
arms twisted until they agree for an under
the table cut for Protection and
Donation.

How many?

Sir, do you have chilled cans of Foster?

The morning market greets our host with

the Molten Bombay August Sunlight. He
looks ahead; the owner of a medicine
shop meanwhile has his hands full with
women flocking in his stores. They were
probably stocking up on flu meds, our
Host presumes. The Morning rolls on to
afternoon, and the tea seller and newspaper vendor are his only visitors. The
evenings feel even more lonely as there
appear to be people everywhere walking about the marketplace, yet his store
is conspicuously avoided by almost all
of them. Comes closing time, a car pulls
up.

53

The Liquor shop in India is like almost

any other retail industry, with its own
fluctuating demand, supply and vulnerability to market factors. Our in depth
discussions with the liquor shop owner
explains the procedure as to how to enter the market:

The Average day described above is

how the business day for our host usually is. The slow markets, empty roads,
avoiding/judging customers can all be
ignored, if they make that one sale for
the day.

Lets see,2, no that would not be good

enough for the night, 3. Yes 3 dozen.
And knock in a couple of 20 packs of
Cigarettes. About 4 packs. Hurry up! We
need to be off in 5 minutes!

50 lac rupee and a penchant for beer. Interesting combination? What do you think
you want to do with it? Read on for a low-down on what happens at the grassroots of
India

38

Now the world cup is over and the visitors

have left Brazil. The host country is left with

The preparation for the world cup required

huge investments which comprised $2.9
billion in media, $2.1 billion in stadiums, $1.4
billion in hotels, $1.2 billion in reurbanization, $763 million in safety and
$648 million in highways.

According to the research analysts, the

world cup was supposed to bring $64 billion dollars to the country, in the form of impact on final demand ($13 billion) and impact on the production of goods and services ($51 billion). This had resulted in the
creation of 3.63 million jobs per year between 2010 and 2014.

According to the Brazils tourism Minister,

Vinicius Lages, the world cup was supposed to be the source of $13.6 Billion in
2014. An
d the cost of the tournament
was estimated to be around $11 Billion.

Apart from the economic pressure and the

benefits, the host country gets the branding, the recognition and the attention of
the investors.

pain for the country which is difficult to

manage because the huge infrastructure
created remains underutilized.

39

visitors. The maintenance cost is another

The host promises to provide the best stadi- Critical Analysis

ums, hotels and other infrastructural facilities
to the participating countries and the visi- The Pros
tors, during the event.
The development opportunity for different
And once the world cup is over, FIFA looks sectors: After being put in the spotlight the
for another target host, while the previous host country gets a kick to work on the improvement of infrastructural facilities. And
host is left with the burden of huge bills.
this provides the opportunity for the develHost country: The host country has to bear
opment of different sectors. The country
the cost of millions of dollars, which is spent
work on the development of airports,
on media, stadiums, hotel complexes, urtransport services, telecommunication serbanization, safety, highways etc. In return
vices. All these sectors get the economic
the host country gets the opportunity of creboost and the impact continue to last even
ating millions of jobs to build the required after the end of the event.
infrastructure. Moreover, the game brings
lots of foreign currency during the matches. Global recognition: The brand of the host
The tourism industry gets the edge as mil- country gets the worldwide recognition
lions of foreign visitors come and spend dur- and the attention of the foreign entrepreing the event. The GDP of the country tends neurs who come during the event to do
to rise. But once the match is over, the host business. This brings the opportunity for the
country is left with the huge bills to pay for international trade for the country and inthe lavish infrastructure and other facilities creases the chances of increase in foreign
that were created to woo the FIFA and the trading.

Winning country: The country taking the

The economic impact of the game on dif- world cup gets all the attention of the globferent stakeholders
al investors. The market sentiment of the
FIFA: The organizer association of the game country gets a boost. Investors confidence
is always in a win-win situation. Since 1930, increase considering the fact that the
FIFA has created its brand image and a big country has the sufficient man power and
fan following which keeps the association financial resources to win the international
on the dominant side of this entire deal. championship. This gives a high feeling to
FIFA conducts the bidding process to the countrymen and their confidence level
choose the host for the future world cup. increases for the domestic market.

the big football stadiums and other renovated infrastructures which would remain
underutilized. The maintenance cost of
these infrastructures would be high and
that is going to add pressure on the countrys economy. The current food for thought
is whether the billions of dollar spent for the
event was worthy.

E. NSE.IT Ltd. offers end-to-end Information Technology (IT) products, solutions and services and has expertise in a
wide range of business applications
sector.

remain ahead of competition. The various application systems that NSE uses
for its trading as well clearing and settlement and other operations form the
backbone of the Exchange.

52

Kanika Srivastava is pursuing MBA at NMIMS, Mumbai. She is a member of

the Editorial team in Finomenon, the Finance cell at NMIMS. She has completed her Honours in B.Com from Jesus And Mary College, New Delhi. She
had secured first position in innQuizitive, by Deloitte.

Nikhil Asrani is pursuing MBA at NMIMS, Mumbai. He is a member of the Editorial team in Finomenon, the Finance cell at NMIMS. He has completed his
Engineering from Watumull Institute, Mumbai. He maintains his own blog,
and has been a district level table tennis player.

D. NSE Infotech Services Limited

(NSETECH) stresses on innovation and
sustained investment in technology to

C. DotEx International. Ltd. (DotEx) it

provides the data and info-vending
products of NSE. DotEX also offers
"NOW" a fully managed, secure and reliable trading gateway, providing immediate, scalable and seamless access
through internet to members and internet investors.

SENSEX index represents about 25% of

the free float market capitalization of
the stocks listed on the BSE while the
Nifty Index represents about 65% of
the free float market capitalization of
the stocks listed on NSE.

NSE offers more than 10 asset classes

and has taken many initiatives to
strengthen the securities industry and
provides several new products like Mini
Nifty, Long Dated Options and Mutual
Fund Service System. In response to market needs, NSE has introduced services
like DMA, FIX capabilities, co-location fa-

1. SERVICES AND INSTRUMENTS OFFERED

SALIENT FEATURES OF NSE

The National Stock Exchange of India

Limited has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges. It recommended promotion of a National Stock
Exchange by financial institutions (FIs) to
provide access to investors from all
across the country on an equal footing.
Based on these recommendations, NSE
was promoted by leading Financial Institutions at the behest of the Government
of India and was incorporated in November 1992 as a tax-paying company unlike
other stock exchanges in the country.

ORIGIN OF NATIONAL STOCK EXCHANGE

x

51

(IISL) IISL provides a variety of indices. It

maintains over 80 equity indices broadbased benchmark indices, sectoral indices and customised indices.

B. India Index Services and Products Ltd.

tion Limited (NSCCL) is the first clearing

corporation to be established in the
country and the first clearing corporation
in the country to introduce settlement
guarantee.

A. National Securities Clearing Corpora-

NSE has 5 companies under it. All are

subsidiaries of NSE. They are:-

3. GROUP COMPANIES

NSE plays an important role in helping

Indian companies access equity capital
by providing a liquid and well-regulated
market. NSE has about 1400 companies
listed which represent the length,
breadth and diversity of the Indian Economy. NSE has a market capitalization of
more than US$1.5 trillion and Number of
securities (equities segment) available for
trading are 3,091 as on June 2014.

2. NUMBER OF COMPANIES LISTED

cility and mobile trading to cater to the

evolving need of the market and various
categories of market participants.
Conclusion

for the growth and development of stadiums, roads, highways, hotels etc. sounds unrealistic and unfair.

40

Sneha Srivastava is a PGP 2nd year student in IIM Raipur. She has a 2 years of
work experience as a business analyst in Mu Sigma Business Solutions Private
Ltd. She is presently pursuing finance and analytics. Her mail id is
pgp13110.sneha@iimraipur.ac.in

About the author

And in this situation, channelizing the funds

The world cup brings lots of opportunities for

all the stakeholders, but at the same time the
host country is burdened with the huge bills.
How much is the net gain for the host country
during and after the entire event has always
been estimated. But the true monetary picture has not been very clear. The FIFA and
the winning country gets the win-win situation
The Cons
whereas there is a lot of skepticism about the
The game full of losses: Even though the host countrys economic benefits in the long
glamour created by the game brings lots of run.
economic opportunity for the host country,
The dark side of the analysis says that the
the impact of the event is limited till the
crazy expenditures to take the limelight in the
game is over. After that the country is burglamorous event, brings the possibility of
dened with the bills of the expenditures
economic downfall and inflation in the long
made during the event and the mainterun. Though it gives an economic boost to
nance cost of the underutilized infrastructure
the host nation, it is overshadowed by the
after the event.
huge spending by the government in the low
priority sectors. The opportunity of foreign
Channelization of funds in the infrastructural
trading increases for the country and the
projects that is less on priority: The countries
like Brazil and South Africa who have hosted country tends to get benefitted in the long
the previous two world cups are the devel- run. But the basic needs of the majority of the
oping economies. They do not have basic population remains unfulfilled. So although
infrastructural facilities like hospitals, schools, the mass benefits in the long run, the short
sanitation, houses etc. for their countrymen. run hurts them badly.

Skill enhancement
While the country prepares to host the world
cup, the preparation requires skilled workers
to satisfy and please the visitors. And in order
to do so, the organizations train their people
to meet the existing requirements. This gives
them the opportunity to earn more in future
with their enhanced skills. For example, the
proficiency of English language is required to
entertain the visiting guests. The organizations
train their people for that, which is good for
them and their people in the long run.

41

Derivatives in India is not a recent phenomenon. It dates back to 1890s when there
were only futurebased markets with commodities, which comprised mainly of agricultural commodities, as the underlying. By
1930, a booming future market on commodities existed in India. The Govt. of India
came up with two specific legislations- the
Forward Contract Regulation Act (1951)
and the Securities Contract Regulation Act
(1952) which effectively shut down the entire derivative market in all sectors. These
two were brought in to prevent speculation on the prices of agricultural commodities. In the case of equity markets, an unofficial and, therefore, unregulated market
existed in the form of Badla trading, a system that had significant risks involved for
participants but was reasonably well accepted by the market participants. The
Badla was a unique system of carry forIn case of mismatch in purchase and
sale position, the financer and stock
lender would step in and contribute capital or stock to complete the deal and
take a small fee for the service rendered.
Obviously, investor protection was the
weakest link, and there was no mechanism to ensure the interests of small investors. Risks of this kind of an informal system came to the fore with the Harshad
Mehta scam in. 1992

4. The Stock Lender

3. The financer

2. The short seller- a sell position without delivery in hand.

1. The long buyer- a buy position in a stock

without the capacity to take delivery of the
same

ward of transactions involving four parties:

A derivative is a security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between two or more
parties. - Lets move beyond mere definitions and understand the Indian perspective.

x

It is considered as a global best practice in index construction.

x A Free-float index reflects the market
trends more practical and rational as

Advantages of free-float market capitalization:

NIFTY is calculated in a similar way.

100/50000 and the SENSEX value become

10000000 * (100/50000) = 20000.

For example: If the total free-float market

capitalization of all the 30 companies on
1st April, 1979 was 50000 and its respective value today is 10000000. The index
divisor becomes

The range is so that frequent minor

changes of a company's free float rarely
alters its categorization Now, add up the
free-float market capitalization of all the
30 companies in the SENSEX and divide it
by a number known as the Index Divisor.
This index divisor is the link to the original
base period value of the index. (For the
Sensex, the base value period as mentioned above is 1978-79).

Remember, to round the free-float factor

up to the closest multiple of five to determine the category band for that company. For example, if a company has a free
float factor of 0.43 (or 43%), round that up
to 0.45.

royalty, or company insiders. The value of

the free-float factor lies between 0.05
and 1.00. So, the free-float factor of company A is 0.70 as 70% of the shares available for trading to general public. So, the
free-float market capitalization of company A is 0.70 * 100000 = 70000 rupees.

50

x

x

The other major difference is that

SENSEX is comprised of 30 stocks, while
Nifty is comprised of 50 stocks.

The major difference between SENSEX

and Nifty is that SENSEX is the stock
market index for BSE, while Nifty is the
stock market index for NSE.

Differences between SENSEX AND NIFTY:

If the value of Sensex is 25,000 and SBI

holds a weightage of 10% then SBIs value as a portion of the Sensex is 2500. So, if
SBIs share price increases by 5%, its value
of 2500 will also rise by the same percentage to 2625. As a result, the Sensex will
also rise by 125 points.

The weightage of a company in the

Sensex or Nifty depends on its free-float
market capitalization. It is a percentage
of the total market capitalisation of the
index. So, if the market capitalisation of a
company is Rs 1 crore, while that of the
index if Rs 200 crore, its stock has a
weightage of 0.5%. For this reason, higher
the free-float market capitalization of a
company, greater is its weightage on the
index.

SENSEX was calculated on the concept

of Total market capitalization from 1986
to 2003. In 2003, they switched to freefloat market capitalization.

it takes into consideration only those

shares that are available for trading in
the market.
x Free-float methodology makes the index broad-based by reducing the
concentration of top few companies
in Index.

Final Rank: The scrip should figure in the

top 100 companies listed by final rank.
The final rank is arrived at by assigning
75% weightage to the rank on the basis of
three-month average full market capitalization and 25% weightage to the liquidity

Trading Frequency: The scrip should have

been traded on each and every trading
day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

Listed History: The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if the total
market capitalization of a newly listed
company ranks among top 10 in the list of
BSE universe.

Like this, the total market capitalization of

a number of companies (30 for SENSEX) is
calculated. The general guidelines for the
selection of constituents to make up the
30 companies in SENSEX are as follows:

Example:
Suppose company A has a total of 1000
outstanding shares: 300 held by the promoters, government, strategic holding
and other locked-in shares and rest 700
available for trading to the general public.
Now we first calculate Total Market capitalization for company A, which is nothing but
=1000100
=100000rupees
Therefore, Company As total market
capitalization on 9th August 2014
=Rs.100000

49

held" shares owned by the government,

The free-float factor is determined by the

BSE based on the information submitted
by the companies. The free-float factor for a company is the proportion of
outstanding shares that are held by the
general public, as opposed to "closely

CALCULATION OF FREE-FLOAT FACTOR

The total market capitalization of each

company is then multiplied to the freefloat factor to arrive at the free-float market capitalization of each company.

Track Record: In the opinion of the BSE

Index Committee, the company should
have an acceptable track record.

Industry/Sector
Representation:
Scrip selection would generally take into
account a balanced representation of
the listed companies in the universe of
BSE.

Market
Capitalization
Weightage:
The weightage of each scrip in SENSEX
based on three-month average free-float
market capitalization should be at least
0.5% of the Index.

rank based on three-month average daily

turnover and three-month average impact cost.

The trading of a derivative security involves the trading of the right or obligation to take further strategic action with
re-

A derivative is a financial instrument

whose value is derived from the attributes
of the underlying asset or security on
which it is based. The different derivative
securities are available in Indian markets
are forwards, futures, options, rights, warrants and swaps. The underlying may be
Stocks and stock indexes, bond prices
and interest rates, foreign exchange, and
commodity prices

After amendments to the laws the FCRA

(1951) and the SCR (1952) were made in
the late 1990s and early 2000s, all derivative activities again took a fresh start, this
time on a more organised and standardised platform i.e. from NSE (National Stock
Exchange). NIFTY futures started trading
from June 12, 2000 and NIFTY Options by
June 4, 2001 while futures on individual securities started at NSE from July 2, 2001
and options on individual securities in November, 2014. Currency derivatives with
INR introduced with some restrictions in
April 1997 credit policy. In April 1999 credit
policy permitted to use INR interest rate
derivatives.

42

Derivatives can be broadly classified as

equity derivatives, currency derivatives
and bond futures. Derivatives come in
different forms for example, forwards, futures, options, rights etc.

OTC) trade, directly between two parties.

Given their complex nature and the riskiness of derivative securities when compared with other securities, such as stocks
and bonds, these securities have traditionally been the domain of institutional
investors and hedge funds.

spect to the underlying asset or security.

However, that the derivative itself trades
independently of the asset or security on
which it is based. This trading can takes
place either on a formalized exchange
or as an over-the-counter (

A future contract is an agreement between two parties in which one party, the

2. Futures:

However, Forward markets worldwide are

afflicted by several problems like Lack of
centralization of trading, Illiquidity, and
counterparty risk.

OTC market is a private market where individuals/institutions can trade through

negotiations on a one to one basis.

Forward contracts are traded only in

Over-the-Counter (OTC) market and not
in stock exchanges.

The buyer is often called the LONG and

seller is often called the SHORT.

It is a commitment by two parties to engage in a transaction at a later date with

the price set in advance.

A forward contract is an agreement between two parties in which one party, the
buyer agrees to buy from the other party,
the seller, an underlying asset or other derivative, at a future date at a price established at the start of the contract.

1. Forward:

43

Futures can be used by hedgers, speculators (or jobbers) or by an arbitrageurs.

Hedging is done to offset the exposure
which the investors has in cash market
(bonds and securities) which is equal to
the price of an asset. In a speculation the
trader has no exposure to offset. He bets
on the future movements in the price of
the asset. Arbitrage involves taking a position in two or more different markets to
lock in a profit.

As a result, futures contract have a secondary market, meaning that previously

created contracts can be traded.

The exchange, rather than the individual

parties, sets the terms and conditions,
with the exception of price.

Unlike a forward contract, however, a futures contract is not a private and customized transaction but rather a public
transaction that takes place on an organized stock exchange. A futures contract
is standardized.

buyer, agrees to buy from the other party, the seller, an underlying asset or other
derivative, at a future date at a price
agreed on today.

4. Similarly, all the sell orders are aggregated to form and represent the upward sloping supply curve.

3. All the buy orders are aggregated to

form and represent the downward sloping demand curve.

2. In the call-auction mechanism, orders

are invited from both the buyers and
the sellers and are entered continuously
into the auction order book which is an
online system. The duration of the order
entry period is about 7-8 minutes beginning at 9:00 a.m. uptil 9:07 or 9:08 am.

1. The stock market functions on the basis

of the simple mechanism of demandsupply equilibrium, technically referred
to as the Call-Auction mechanism.

48

First, let us learn the concept of Free-Float

market Capitalization:

The base value of CNX Nifty index is taken

as 1000 on November 3, 1995.

The base value of the S&P BSE SENSEX is

taken as 100 on 1 April 1979, and its base
year as 197879.

But have you ever wondered how this value of 26300.17 or 7840.95 is calculated?
Well, if you havent, we will make your job
easier. So, lets have a look at the way
how this value is arrived at.

Sensex recently reached lifetime high levels of 26300.17 points and Nifty 7,840.95
points.

The term, Sensex, was coined by Deepak

Mohoni, a stock market analyst.

Sensex is an index or a benchmark which

gives an idea about the movement of the
major stocks as well the movement of the
Bombay Stock Exchange as a whole.

4. WHAT IS SENSEX?

5. The point where the demand and the

supply curve, represented by the aggregate of buy orders and sell orders respectively, intersect gives the equilibrium quantity traded and the price.

In addition to the above instruments, BSE

also provides a platform for trading in
equities of small-and-medium enterprises
(SME). This has facilitated the growth of
the Indian corporates by helping them
raise capital, efficiently, over the past
139 years.

x

x

Equity
Debt Instruments
x Derivatives
x Mutual funds.

BSE provides an efficient and transparent market for trading in various instruments. These include:

1.SERVICES AND INSTRUMENTS OFFERED:

FEATURES OF BSE

1957: Becomes the first stock exchange

to be recognized by the Indian Government under the Securities Contracts
Regulation Act, 1956.
1980:
The
exchange
moves
to
the Phiroze Jeejeebhoy Towers at Dalal
Street, Fort area.
1986: BSE SENSEX Index developed giving a means to measure the overall performance of the exchange.
1995: Switches to online, automated,
screen-based electronic trading platform called BOLT( BSE On-line Trading)
2000: Derivatives market launched using
SENSEX itself, trading SENSEX Futures
Contract.
2002: SENSEX Options and equity derivatives launched.
2007: Singapore
Exchange
Limited enters into an agreement to invest
in a 5% stake in BSE.

LANDMARK EVENTS

47

So now let us take a look at how exactly

trading takes place on any day on the
BSE.

3. DAY TO DAY FUNCTIONING:

BSE has one more in its list of the many

firsts. It is the first exchange in India and
the second in the world to obtain an ISO
9001:2000 certification and the Information Security Management System
Standard BS 7799-2-2002 certification for
its On-Line trading System (BOLT).

More than 5000 companies are listed on

BSE, making it the world's top exchange
in terms of listed members. Taking the
data as of March 2014 into account, the
total number of companies listed on the
BSE are 5,381 of which 1294 are suspended and the rest 4087 companies are eligible for trading. The total market capitalization of the companies listed on the
BSE is USD 1.51 Trillion as of May
2014. Additionally, it is also one of the
worlds leading exchanges (3rd largest
in March 2014) for Index options trading.
Index options are the options whose underlying stock is not a single stock but an
index comprising of several stocks.

2. NUMBER OF COMPANIES LISTED:

x

x

Risk Management
Clearing
x Settlement
x Market Data Services
x Education.

BSE also provides a host of other services

to capital market participants. These include:

Ambiguity with choosing an option strategy:

A correct view on the market could give

the investor substantial benefit. However,
an investor needs to take a calculated
risk while buying or selling an option. There
are various ways to limit the risk like one
can exercise limit sell if his view on the underlying stock or index goes wrong.

The seller is obliged to sell the underlying

to the buyer at the EXPIRATION, at the
price agreed on the start of the contract

The buyer gets the right to buy the underlying at a later date, the EXPIRATION, at a
price agreed on at the start of the contract.

Simply stated, an option is a contract that

gives right to the investor to buy or sell
specified quantity of the underlying security at a predetermined strike price on or
before expiration date. The option becomes worthless, if not exercised, before
the end of expiration date. Unlike Futures,

3. Options:

44

x

How much risk the investor is willing to

take?
x Decide the risk- reward profile which
suits the investors best
x Analyze the market condition
However, choosing the best strategy is
half work done only, applying the best
strategy to exchange traded options is
equally important. Then, purchase the
specific stock option on the company
you decided to invest and then wait for

Few pointers while choosing the best option strategy:

Option trading is perceived to be a complex or riskier investor by a nave investor.

This is so because due to the complexities
involved in options trading, they are not
able to take advantage of the concept
of leverage. But truth is that if managed
and used properly, option strategy cant
be used just to limit the loss but can also
be used to make more profit compared
to an equivalent position in stocks. This is
where choosing the best options strategy
comes into picture

So, different types of derivatives facilitate

the investor to take advantage of both
upside and downside potential of the
market, interest rate fluctuation, currency
fluctuation and etc. However, the key is
to use a particular derivative instrument
at right time after calculating the risk beforehand by various methods/techniques
available at hand to maximize the gain.

Rights are valued separately and traded

in secondary market just like shares till the
subscription period.

45

Manish Kumar is currently doing PGDM in finance from T A Pai Management ins tute, Manipal (TAPMI) and strives to become an investment banker in the year to
come. Before that, he was a System Enhancement Engineer with almost 2 years
experience at Accenture, Mumbai .He completed his B.Tech in EXTC from NMIMS,
Mumbai in 2011 and was chosen the best student in his 2nd year of engineering
and awarded by Mr. K. V. Kamath. Email Id: manishk.15@tapmi.edu.in

About the author

5. Warrants: Warrant is a certificate issued

by a company in which the owner gets
the right to purchase the underlying security at a pre-determined price. Unlike
option, in warrant physical transfer of the
shares take place. The issuer is obligated
to deliver shares after it is exercised. Warrants are favorable from an issuers perspective as he can issue either preferred
stock or bond at a lower interest rate. The
holder is also benefitted as he can participate in the potential appreciation of the

4. Rights: In rights the existing buyers are

given rights to buy newly issued shares
before the company goes to public so
that they can maintain disproportionate
ownership in the company. It allows the
right holders to buy shares at discount i.e.
less than the market price.

One can however allow the option to expire if it doesnt reach the expected
price.

issuers equity securities at a considerably

lower cost and maintain the downside
loss of the bond.6. Swaps: Swap is an arrangement between two parties in which
two financial instruments are exchanged
at a predetermined time. It is customized
arrangement (Over-The-Counter market)
and hence not traded on an exchange.
The retail investors hardly a participants in
swaps. Largely, it is used to hedge interest
rate and currency risk. Big financial institutions and large funding houses go for
swaps due to commercial needs and
comparative advantage.

the underlying stock to reach target price

and then exercise your option to buy or
sell the stock at the current market prices.

Being the oldest exchange in Asia, it

traces its history to 1855, when four Gujarati and one Parsi stockbroker would
gather under banyan trees in front of

The Bombay Stock Exchange was established in 1875 and is not the only one of
Asias fastest stock exchanges, with a
speed of 200 microseconds but also one
of Indias leading exchange groups.

ORIGIN OF BOMBAY STOCK EXCHANGE

One such marketplace is the Bombay

Stock Exchange or the BSE, founded in
1875 and headquartered in Mumbai and
the other is the National Stock Exchange,
established in the mid-1990s and also
headquartered in Mumbai. Let us firstly
look at the BSE.

A stock exchange is a marketplace

which provides services to the investors
and
stockbroke rs
to
buy
or
sell stocks, bonds, and other securities.

46

BSE is the first stock exchange in the

world to introduce centralized internet
trading system (BSEWEBx.co.in), allowing
investors from all over the world to trade
on the BSE platform.

Mumbai's Town Hall. But as the number of

brokers increased, the group eventually
moved to Dalal Street in 1874 and in 1875
was renamed "The Native Share & Stock
Brokers Association".

"Emerge as the premier Indian stock exchange with best-in-class global practice in
technology, products innovation and customer service." - Vision of BSE