Volume 2, Issue 1 November 30, 2010

Research & Scholastic Development Team

The Beacon

Inside This Issue

Increasing FDI Limits in 2

India

Jargon Corner 6
Straight Drive
Great Marketing is Kids 7
Stuff?
When asked by a reporter as to his At once conveying a solidity of
fascination for Mount Everest and fact and implying an ambiguity of
Book Appetizer 9 why he insisted on climbing it, the purpose, it serves them and by
Should Corporates be 10 English mountaineer George Mal- extension, serves them all that
given banking licenses? lory’s reply was - “Because it is cannot quite lay a finger on the
Crossword 14 there”. They are justly called the origins of attachment.
four most famous words in moun-
Rattle Your Brains 15 The great thing about Mallory’s
taineering.
answer apart from its sheer brev-
Mountaineering is a discipline that ity is that it represents a lifeline
finds its men racking their minds for anyone who has had to ex-
for convincing answers when plain a certain longing or passion.
asked about their fascination for
Like running an eZine!
the dangerous sport. When some
can find no all-explaining logical
explanation, they probably turn to
Mallory's answer.
 The Beacon
Student Opinion: Increasing FDI Limits
in India
Rakhee Sinha
MBA-II, Operations
INTRODUCTION
“Foreign Direct Investment (FDI) refers to cross-
border investment made by a resident in one econ-
omy (the direct investor) with the objective of es-
tablishing a lasting interest in and enterprise (the
direct investment enterprise) that is resident in a
country other than that of the direct investor.” -
OECD, 2008.
An investment is regarded as an FDI and not as a
Portfolio Investment when the parent firm has at
least 10% of the ordinary shares of its foreign affili-
ates or if the investing firm owns voting power in a
business enterprise operating in a foreign country.
SIGNIFICANCE OF FDI IN THE INDIAN STORY
FDI plays a complementary role in overall capital
formation and in filling the gap between domestic
savings and investment. At the macro-level, FDI is a
non-debt-creating source of additional external
finances. At the micro-level, FDI is expected to
boost output, technology, skill levels, employment
and linkages with other sectors and regions of the
host economy.
Page 2
For India, FDI has been playing an important role
in the process of globalization since the mid 80’s.
It may be attributed to significant changes in
technologies, greater liberalization of trade and
investment regimes, and deregulation and privati-
zation of markets, which were done as a part of
the economic reforms.
POSITION OF INDIA IN ATTRACTING FDI
According to the United Nations Conference on
Trade and Development's (UNCTAD) publication,
World Investment Prospects Survey 2010–2012,
India will be the second-most popular destination
for foreign direct investment (FDI) globally over
the next two years.
The 2009 survey of the Japan Bank for Interna-
tional Cooperation released in November 2009,
conducted among Japanese investors continues
to rank India as the second most promising coun-
try for overseas business operations, after China.
Given below is the FDI inflow data for India over
the last 2 decades (1991-2010).
 The Beacon

Student Opinion: Increasing FDI Limits in India

INDIA OVER THE LAST TWO DECADES (1991—2010)

Annual
Amount Amount Growth YoY Growth
Period Rs.Crore US$ million $Value %
1991-92 375 129
1992-93 1051 315 144.2 180.27
1993-94 2041 c586 86 94.20
1994-95 4241 1314 124.2 107.79
1995-96 7317 2144 63.2 72.53
1996-97 10170 2821 31.6 38.99
1997-98 13317 3557 26.1 30.94
1998-99 10550 2462 -30.8 -20.78
1999-00 9409 2155 -12.5 -10.82
2000-01 18404 4029 87 95.60
2001-02 29269 6130 52.1 59.04
2002-03 24681 5035 -17.9 -15.68
2003-04 19830 4322 -14.2 -19.65
2004-05 27234 6051 40 37.34
2005-06 39730 8961 48.1 45.88
2006-07 103037 22826 154.7 159.34
2007-08(P)+ 137935 34362 50.5 33.87
2008-09(P)+ 159354 33613 -2.2 15.53
2009-10 123378
August 91- Mar 2000 58471 15483
April 2000-Mar 2009 559474 125329
August 91 - Mar 2009 617945 140812

India’s strengths as an investment destination rest on its strong fundamentals which include a large
and growing market; world-class scientific, technical and managerial manpower, cost-effective and
highly skilled labour; an abundance of natural resources; a large English-speaking population; and an
independent judiciary. This is now recognized by a number of global investors, who have either al-
ready established a base in India or are in the process of doing so. Ongoing initiatives, such as further

Page 3
 The Beacon
Student Opinion: Increasing FDI Limits in India
simplification of rules and regulations and im-
provement in infrastructure, are expected to pro-
vide the necessary impetus to increase FDI inflows
in future.
FDI LIMITS IN INDIA
According to the Department of Industrial Policy &
Promotion under the Ministry of Commerce & In-
dustry, "FDI upto 100% is allowed under the auto-
matic route in all activities/sectors including the
services sector, except a few sectors where the ex-
isting and notified sectoral policies do not permit
FDI beyond a ceiling. FDI for virtually all items/
activities can be brought in through the Automatic
Route under powers delegated to the Reserve
Bank of India (RBI), and for the remaining items/
activities through Government approval. Govern-
ment approvals are accorded on the recommenda-
tion of the Foreign Investment Promotion Board
(FIPB)."
PROPOSED INCREASES IN FDI LIMITS AND RA-
TIONALE BEHIND SUCH MOVES
In the recent years, there have been various pro-
posals to increase the cap on FDI in certain sectors
of the Indian economy, which had been closed
erstwhile. While most moves have been wel-
Page 4
comed, protectionist Sentiments and security con-
cerns have led to cause a lot of resistance in final
implementation.
FDI IN DEFENCE SECTOR
The FDI limit for the defense sector is proposed to
be increased from the current levels of 26% to
almost its triple i.e. 74%.This new limit will help to
attract state of the art technology delivered by
the foreign companies in defense. According to
Department of Industrial Policy and Promotion,
the present cap has impeded India’s access to
high end technology since foreign manufacturers
are averse to licensing their technology to a local
company in which it doesn’t have much say or
stake. India is the 10th largest defense spender in
the world but imports the majority of its arms be-
cause its three major defense equipment manu-
facturers – Hindustan Aeronautics Ltd., Bharat
Electronics Ltd., and Mazagon Dock Ltd. – cannot
match the country’s defense demands. India’s de-
fense budget has been increasing each year. Still
it has not been able to upgrade as quickly and as
efficiently as it wants and replace the obsolete
ammunition. Also, setting up these manufacturing
facilities in India is expected to provide a fillip for
ancillary industry, generating employment and
 The Beacon
Student Opinion: Increasing FDI Limits in India
increasing our manufacturing capabilities. It might
prove a better option than importing the equip-
ment from abroad in the long run.
FDI IN RETAIL SECTOR
Retail is another sector raring for cash infusion.
The organized retail sector is crumbling due to se-
vere liquidity crunch eg Subiksha going bankrupt.
The expansion plans of players like Bharti Enter-
prises being stuck because of the current restric-
tions on FDI in the sector inspite of having a joint
venture with the world retail Giant Wal-Mart. Cur-
rently, FDI up to 51% is allowed in single-brand re-
tail and not permitted at all in the case of multi-
brand formats such as Wal-Mart or Tesco. Allowing
FDI in Retail would boost growth, and, therefore,
employment and infrastructure development down
the chain in the form of warehousing and cold stor-
age chains. Additionally, it can create jobs, which,
in turn, could lead to more domestic consumption
which is a major driver of Indian economy.
FDI IN INSURANCE SECTOR
The Insurance Bill seeks to increase the FDI cap
from 26% to 49%. This will allow private insurers
like Bajaj Allianz Life and ICICI Prudential Life Insur-
ance who have joint ventures with foreign partners
Page 5
to bring in more money, by hike their stakes upto
49%. FDI in insurance and consequent growth in
policies sold could lead to long-term funds flow-
ing into the sun-rise “infrastructure” sector. But
not expediting this move has led to other reper-
cussions such as the Insurance Companies delay-
ing their IPOs.
FDI IN CIVIL AVIATION SECTOR
Aviation sector has been reporting losses for sev-
eral consecutive years now. Aviation hence, is
also in line for some help. In January 2009, the
Cabinet Secretary moved a proposal by the Minis-
try of Civil Aviation to allow foreign airlines to pick
up 25% stake in domestic airlines. Allowing FDI in
Indian carriers would give debt-laden Indian air-
line companies better chances to woo foreign
capital into their cash-strapped businesses. As a
result of some prior initiatives, FDI in Civil aviation
up to 74% is now allowed through the automatic
route for non-scheduled and cargo airlines, as also
for ground handling activities. 100% FDI in aircraft
maintenance and repair operations has also been
allowed. But the big one, allowing foreign airlines
to pick up a stake in domestic carriers still has to
see the light of the day.
 The Beacon
Student Opinion: Increasing FDI Limits in India
CONCLUSION
India has the capability to attract even more FDI
than ever into its various sectors. Some of these
sectors are lucrative to the foreign investors be-
cause of their inherent profitability accorded to
rising demand, whereas others are in dire need of
some fresh capital infusion to expand and com-
SERIOUS
Fiduciary - One who is in a position of trust.
If one is said to have a fiduciary obligation, it
means that one is acting in trust for other
parties.
Quorum - The minimum number of people
which can attend a meeting (such as a Board
Meeting) in order for the meeting to be offi-
cial and for business to be properly con-
ducted.
Restrictive Covenant - A provision in a
contract excluding key employees from work-
ing for competitors in a certain geographic
area and for a certain length of time.
Backhaul - Transportation term that de-
scribes the activity of picking up, transport-
ing, and delivering a new load while on a re-
turn trip from delivering another load.
Blanket Insurance - An insurance policy
under which more than one property can be
insured in more than one location.
If you have a funny spin or take on an established jargon and would like to share it with
one and all, mail us at rsdt.sibm@gmail.com with the same
Page 6
pete. The need for raising these limits cannot be
ignored but only when the stakeholders too are
satisfied with the outcome. Hence, adopting a
middle path is very much the demand of the
hour. The government should rise to this chal-
lenge and push these limits to the next level for
the greater good of all.
FRIVOLOUS
Desk Dive - The painful crawl underneath
your desk to unplug equipment or fetch a
dropped item. Often accompanied by a few
grunts if one is overweight.
Vubicle - A cubical that abuts a window; a
cubicle with a view. When offices aren't
available, it's the little things that help
managers feel superior.
Chinese Wall - Procedures to guard infor-
mation
Compliment Sandwich - A pointed criti-
cism delivered between two compliments to
dull the blow. Build them up, tear them
down, then leave on a positive note.
Anecgloat - A story of one's exploits that is
intended to impress. May be partly fictional.
Meanderthal - A person who has difficulty
expressing themselves succinctly. They of-
ten give long, unfocused presentations.
 The Beacon
Student Opinion: Great marketing is
kids stuff?
Yogesh Agarwal
MBA-I, Marketing
I first came to the hills of Lavale in June. Hot and
thirsty from an 11-mile hike, I emerged from the
trail onto a city main road. Up ahead of me, I saw a
lemonade stand. I had to shake my head to make
sure that I wasn't seeing a mirage in the dust but
there it was. Two little girls with glass pitchers and
paper cups. They were sitting on a table beneath a
tree, and suspended between the branches was a
sign advertising "Cool, Refreshing Lemonade."
In the past years I've encountered many such bill-
boards and road signs but nothing has ever
grabbed and focused my attention like that sign.
These girls had whipped up an appealing product,
placed it in a prime location and come up with a
catchy slogan. They had a product with a strong
identity. They may have diversified to include ap-
ple juice or iced tea, or perhaps even an occasional
pack of cookies, but they were clear on their con-
cept. Their enterprise illustrated one of the basic
tenets of marketing, "determine what you do best;
and then set out to do it."
I doubt that their elementary school curriculum
included sales or advertising.
Page 7
However, I was going through that place after
about 40 days and to my astonishment, in their
place, I saw a shop selling Pepsi, 7 up, Mirinda,
Coke, Thumps Up, et al. Hiding behind all the as-
tonishment was a pertinent question – "Who was
their competitor?". The biggest lesson of market-
ing starts here – “Competitors are ubiquitous.”
For a Kirana shop today, competitors are not only
other Kirana shops but also e-market space.
Now who is the biggest competitor of coke? Your
guess is likely to be Pepsico or Dr Pepper (7-Up).
The answer is: none of the above. The winner is
water. So now what prevents coke to replace wa-
ter for thirst? Nothing at all.
Try this. Which is the biggest watch selling brand
in India?
It may be Esprit, Deluxe, Rolex (duplicate) etc, as
60% of the Indian watch market consists of the
unorganised sector. The point here is not who is
today’s competitor. That is obvious. Who is to-
morrow’s? This is not. Now how to win the race.
 The Beacon
Student Opinion: Great marketing is
kids stuff?
You can't just beat a competition; you have to
leave a lasting impression in their minds so they
never want to see you again.
There was a small book shop in front of my college.
It had great sales. With development, soon a big
Crossword store opened at the left side of the
shop. The competitor couldn’t be left behind and
an Oxford Book Store opened at the right side of
the small shop. Then 15% discount was announced
from the left of the small shop. To counteract,
there was 15% discount from the right side as well.
In the process the discounts raised to around 30%.
The small shop owner wondered what to do. On
the left he had a big hoarding with red base and
white font- Times New Roman ... and on the right
another big one with blue base and black font-
Comic Sans MS ... reading 30% discount. He knew
he had to act. He put up a small hoarding reading
Page 8
‘entry from here’.
The above example serves to reemphasize why it
is important to understand the competition and
the relevance of marketing in it.
In one of the seminars at my college the person
addressing the audience asked us - How did Col-
gate have a jump in its sales couple of years back?
The answers were because it diversified into dif-
ferent flavours; different packet sizes and the
most relevant one was it came up with paste in a
gel format. However the answers were far from
reality. He said - catch hold of a Colgate tube and
see the increase in the diameter of the nozzle. So
every time you brush, you increased consumption
and eventually sales. Great marketing maybe dif-
ferent things but it most certainly is not kids stuff.
 The Beacon

Book Appetizer
THE STORY OF AMERICAN BUSINESS
From the Pages of The New York Times
Nancy F Koehn, Editor, Harvard Business Press

Do you know Alvin Toffler’s

notion that future organization is
going to be “ad-hoc-racy”? The
particular things he says is that
hierarchical management, hierar-
chically distributed ...

"… power will be unable to cope with the rapidity of change in environment and
business conditions and technology. Therefore a fluid movement of power will
have to move back and forth from a hierarchical distribution to knowledge-based
distribution, and back and forth.

One of the most difficult tasks is to make sure decisions are made by the most
appropriate people to make decisions. Wait a minute, somebody says; decisions
get made by a management chain. They really are not; you may go through the
motions of making decisions, but you really aren’t”
- Excerpt from an NYT article titled “Talking Business With Grove of
Intel” dated December 23, 1980

Page 9
 The Beacon

From the Should Corporates be given Banking

team desk Licenses?
The finance minister announced in the budget Indian Banking system because 14 major com-
speech earlier this year that the RBI may issue mercial banks were nationalized. This was to en-
fresh bank licenses to private sector players to en- sure that priority sectors like agriculture and small
sure that the banking system in India grows in size scale industries which had been hitherto ne-
and sophistication to meet the requirements of a glected would get adequate credit flow. This also
modern economy. The RBI in its discussion paper expanded network of banks in rural and semi-
has highlighted the pros and cons of allowing busi- urban areas.
ness houses into Banking sector, banking being a
highly leveraged business dealing with public As on March 2009, the Indian banking system
money. comprises of 27 public sector banks , 7 new pri-
vate sector banks , 15 old private sector banks ,
INDIAN BANKING SYSTEM - AN OVERVIEW 31 foreign banks , 82 regional rural banks , 4 local
Modern banking in India started with the establish- area banks, 1721 urban co-operative banks, 31
ment of a limited number of banks by British state co-operative banks, and 371 district central
agency houses, which were largely confined to port co-operative banks. The average population cov-
centers, for financing of trade. Indian enterprises ered by a commercial bank branch in urban areas
entered this sector in the early twenties largely has increased from 12300 in 2005 to 9400 in 2010
due to the Swadeshi movement. The economic and in rural and semi-urban areas from 17200 in
power was concentrated in the hands of a privi- 2005 to 15900 in 2010. Though this is an impres-
leged few and the needs of priority sectors were sive growth, large segments of the Indian popula-
neglected. It was only after the establishment of tion still have no access to formal banking sys-
five year plans that the banks changed their poli- tems. So there is a need for more number of
cies. Recognizing the importance of banking in an banks to promote financial inclusion.
economy, the government introduced the scheme
of ‘social order’ over banks in 1967 with a view to Various opinion makers have expressed views
make banking an effective tool of economic devel- about the desirability of permitting new banks
opment. July 1969 was a milestone in the history of (including local area banks), allowing conversion

Page 10
 The Beacon
From the Should Corporates be given Banking
team desk Licenses?
of NBFCs into banks and whether large industrial
and business houses should be allowed to set up
banks. A number of issues, however, bear consid-
eration. These include:
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirement or promoters
contribution was ` 100 crore in 1993 which was
later revised to ` 200 crore in 2001. Having a low
minimum capital requirement may result in non-
serious entities entering banking sector. It could
also lead to banks running out of capital early lead-
ing to increased risk. In India, since licenses are
given to only full-fledged banks, adequate mini-
mum capital requirement of ` 1000 crore may be
necessary to ensure that the banks operate on a
strong capital base. Such banks would be able to
play a more meaningful role and would have the
advantages of scale. Another option would be to
prescribe a minimum capital requirement of ` 500
crore with a condition to raise the remaining
amount within a period of time.
MINIMUM AND MAXIMUM CAPS ON PROMOTER
SHAREHOLDINGS
The 1993 and 2001 RBI guidelines on entry of new
private sector banks sought to reduce the control
Page 11
of functions of banks by the promoters. In India,
the promoters have been allowed to bring in
higher stake (minimum of 40 percent of the paid-
up capital of the bank) at the time of licensing of
banks with a lock-in period of 5 years. For other
significant shareholders, it is limited to maximum
of 10%. The February 2005 Ownership and Gov-
ernance (O & G) guidelines require promoters and
other shareholders of the banks to divest/dilute
their shareholding to a level of 10 percent or be-
low of the bank’s share capital within a specified
time frame.
The main intention was to have a stable capital
base, and strong professional management, but
without any interference or control of manage-
ment by the promoters. If this clause is main-
tained then large shareholdings by promoters in
the initial stages would ensure promoter’s stake
in development of bank while the dilution re-
quirement would bring down his control on the
functions of the bank gradually. On the flip side
the dilution requirement would be unattractive to
promoters. The RBI has to strike a right balance in
such a way that the dilution requirement would
not lead to concentrated shareholdings which
would be detrimental to the depositor’s interest
 The Beacon
From the Should Corporates be given Banking
team desk Licenses?
FOREIGN SHAREHOLDINGS IN NEW BANKS
The 2001 guidelines on entry of new banks permit-
ted NRIs to participate in primary equity of a new
bank to the maximum extent of 40%. But for a for-
eign bank or finance company, it was restricted to
20%. In 2005 the GOI stated that the aggregate for-
eign investment from all sources (FDI, FII, and NRI)
in private banks cannot exceed 74% of its paid up
capital. Since the government is aiming at creating
a strong domestic banking sector, it would be bet-
ter if the investment by foreign players is capped at
a suitably low level and locked in for an initial pe-
riod of say 10 years to prevent sudden outflow of
funds.
ELIGIBLE PROMOTERS
Prior to nationalization of major commercial banks
in 1969, the industrial and business houses, having
control of the banks, diverted bulk of the bank ad-
vances to industry, while the needs of vital sectors
like small-scale industry, agriculture and exports
were neglected. The 2001 licensing guidelines pro-
hibited promotion of new banks by industrial
houses. However, individual companies, directly or
indirectly connected with large industrial houses
were permitted to acquire by way of strategic in-
vestment shares not exceeding 10 percent of the
paid-up capital of the bank. One way of identifying
Page 12
eligible business houses would be to ensure that
only those with sufficiently long and sound track
record are allowed to promote banks. Also before
issuing licenses, thorough checks on the back-
ground of the promoters and top executives must
be done. The regulator must also make sure that
that other parameters like corporate governance
standards and compliance to other standards is
duly met by the business house. The merits and
risks of allowing corporates into banking are dis-
cussed next.
MERITS
Industrial houses are an important source of capi-
tal and management expertise. Apart from indus-
trial and business houses, there may not be many
entities that could bring in the capital required for
banks. Business houses have already been permit-
ted to operate in other financial services sectors,
such as insurance companies, asset management
companies etc. and are already competing with
banks both on the assets and liabilities side. Their
management talent could be gainfully used to im-
prove banking sector. They also have a long his-
tory of building and nurturing new businesses in
highly regulated sectors such as Telecom, Power,
Automobiles, Defense, infrastructure projects etc.
 The Beacon
From the Should Corporates be given Banking
team desk Licenses?
Equity of large industrial and business houses is
widely held and is accordingly subject to Compa-
nies laws, SEBI laws and regulations on transpar-
ency, disclosure and corporate governance.
RISKS
Even though Industrial and business houses are
already permitted in other areas of financial ser-
vices, banks are special as they are highly lever-
aged fiduciary entities central to the monetary sys-
tem. Banking being highly leveraged business and
dealing with public money, it makes sense to keep
Industry / business and banking separate. Also
there is a great risk of diverting the funds to liquid-
ity constrained operations of the group. Further, as
industrial and business groups are involved in vari-
ous types of activities they may be able to rotate
funds from one entity to another, which makes it
difficult for the supervisors / regulators to trace
source and utilization of funds. Major operations of
Page 13
the industrial and business group may not be well
regulated which makes it difficult to assess the ‘fit
and proper’ status of the industrial / business
group.
TAKING OVER RRBs
In the early 1970s, to address the issue of credit
to priority sector, the government set up Regional
Rural Banks which were owned by the central
government, state government and sponsor bank
in the ratio 50, 15 and 35%. However most of the
RRBs underperformed. Presently there are just 82
RRBs in India. As an alternative option, industrial
houses could be allowed to take up some of the
weaker RRBs. This would give them an opportu-
nity to prove their competence in promoting
banks as well as improving banking in the rural
badlands. Also in case of RRBs, the effect of any
negative externality would be limited.
 The Beacon

Crossword Mail your solutions to

rsdt.sibm@gmail.com

ACROSS
5. Identify the print advertiser

7. Came out with the tagline ‘Even the Odds’ when

it introduced odd numbered shirt sizes (39, 41,
43) for the first time in India

9. Identify

10. How do we better know Barbara Millicent Rob-

erts ?

11. Espoo is the Headquarters of _____

12. What does a Notaphilist collect?

14. The first recipient of this Indian icon was Lord

SOLUTION TO CROSSWORD
Venkateshwara of the Tirumala temple.
September 4, 2010
15. After the Great Fire of London in 1666, Nicholas
Barbon opened an office to offer the version
that we now know of which previously existing
service?

DOWN
1. Paltry Lions, Jim (Anagram)

2. Brand ambassdor for this can be frequently

heard to say "There is so much to hear"
3. Identify the company from the
logo

4. Tagline - "That was easy"

6. What was inspired by the stu-

dent directory at the Philips
Exeter Academy?
8. _____ exits the iconic glass bottle at .028 miles
per hour. If its viscosity is greater than this
speed, it is rejected for sale.

13. The inventor of this could remember 6 digits

but upon testing it on his wife, found that she
could only remember 4. What is being referred
to?

Page 14
 The Beacon

Rattle Your Brains Mail your answers to

rsdt.sibm@gmail.com

3 sets of visuals. No wordplay here. Just connect the visuals in each set to arrive at
an answer.

Rattle Your Brains

1. Answers: Sep 4, 2010

1. Lacoste
2. Carlsberg
3. Cox & Kings
4. Colgate

COCA COLA

1. Enron
2. Tupolev
3. Accor
4. Reckitt Benckiser

2. ACCENTURE

Top Score - 10 on 10
Nitin Madhogaria
MBA-I, FINANCE

3.

Page 15
 Research and Scholastic Development Team

Send us your feedback on:

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E-mail: rsdt@sibm.net

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Gram Lavale
Pune-411042

Edited by:
S Team:
Raveendra Singh (Finance)
Kapil Parab (Marketing)
Aditi Uppal (Marketing)
Hakim Allanabanda (Finance)

J Team
Mridula Muraleedharan (Finance)
Jaikishore Sharma (Operations)
Surabhi Vashisht (Marketing)
Niket Khaitan (Finance)