FROM EDITOR’S DESK
Dear Niveshak
Niveshak
Volume X
ISSUE II
February 2017
Faculty Chairman
Prof. P. Saravanan
THE TEAM
Aaron Keith Rego
Abhishek Jaiswal
Aditya Kumar Jain
Akshay Kaushal
Anand Mittal
Anisha Khurana
Ankit Singhal
Ankur Kumar
Anoop Prakash
Arjun Bhargava
Devansh Sheth
Dhruvika Chawalla
Girraj Goyal
Pratibha Sapra
Sankeerth Bondugula
Saurabh Gupta
Shreyans Jain
Vinay Gundecha
All images, design and artwork
are copyright of
IIM Shillong Finance Club
©Finance Club
Indian Institute of Management
Shillong
This month we bring to you Donald Trump – The Era of Uncertainty as
our special coverage. Economy will be at the top of Trumps agenda as President and will serve as the most important barometer of his performance.
His business origins and his affluent lifestyle will have a huge impact on
what he perceives the country to Trump hallmarks are his unaccountability and impulsive remarks which have become his primary identification marks.
After enjoying the upshots of Demonetization for few months, Paytm recently raised another $200 million from Alibaba Group Holding and the venture capital fund SAIF Partners in order to expand its online retail business
in the domestic market, which is predominantly conquered by Flipkart and
Amazon. The deal is expected to value Paytm E-Commerce at close to $1 billion.
On the regulatory front, the Securities and Exchange Board of India (SEBI) plans to further tighten the regulations for algorithmic trading to minimize instances of misuse of
such systems that can be used to execute complex trading strategies at a very high speed.
On the magazine front, the Article of the Month talks about the fault lines in the
world economy as a whole, pondering upon various important questions such as
what went so wrong that the American people, who have long championed liberalism and free markets are suddenly building walls all around? Why are the British
people so eager to leave the EU? Why are so many European countries angry with the
world? Why is Japan, once the hallmark of growth, striving endlessly to come out of a
bruised and stagnant economic rut? And more broadly, why has the global economy
and demand become so sticky that no matter how much money is pumped into it,
there are no visible signs of a robust growth? Hence, the author is determined to find
out the reasons why the world economy is behaving the way it is and what role does
the political risk is playing in all this. In the finsight, the author talks about the most
coveted work visa i.e. H-1B visa which is an employment based, non-immigrant visa
in the United States and allows US employers to temporarily hire foreign workers in
specialty occupations. However, with the recent undergoing reforms in the Trump regime, the Indian economy is expected to take a hit as India happens to be the largest
recipient of H-1B visas in the world. In the FinGyaan section, the author talks about the
Financial Health Clinics, which are the organizations specifically providing services
to the sick industries for their revival. The main motive of these type of organizations
is to provide the preventive and revival strategies which will create a safe guard to
the sick industries by providing them a turnaround measures to follow for financial
restructuring. The classroom section specifically talks about IPO valuation and the
risks associated with an IPO. It will also help in developing a perspective as to how the
valuation and done and what are the different factors that affect an IPO valuation.
Finally, we would like to thank our readers for their immense support
and encouragement. You remain our prime motivating factor that keeps
our spirits high and gives us the vigour and vitality to keep working hard.
We hope you had a great month and wish you the best for the new one.
Stay Invested!
Team Niveshak
Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility
whatsoever.
CONTENTS
Niveshak Times
04 The Month That Was
Cover Story
Equity Research
10 Cummins india
Article of the month
12 Houston, We Have a Problem!
15 Donald Trump - The Era of
Uncertainty
FinGyaan
17
Financial Vaccinations: A Prevention Approach by Financial
Health Clinics in Industrial Distress
Handling
FinaFame
20
Michael Burry: An Outsider
Hedge Fund Manager
FinSight
22
H-1B Visa: A Non-Zero Sum
Game
FinView
26 Mr. Sandeep Kumar - RBI
Classroom
27 Initial Public Offering
4
The
MonthStory
That Was
Cover
NIVESHAK
The Niveshak Times
Team NIVESHAK
IIM Shillong
PayTM raises $200 million from Alibaba, SAIF
Partners
PayTM recently raised $200 million from Alibaba Group Holding and the venture capital
fund SAIF Partners, in order to expand its online retail business in the domestic market,
which is predominantly conquered by Flipkart and Amazon. The deal is expected to value PayTM E-Commerce at close to $1 billion.
Alibaba.com Singapore E-Commerce Pvt. Ltd
picked up a 36.31% stake in PayTM E-Commerce
for investing $177 million, while SAIF Partners invested $23 million for a 4.66% stake in the company. Following the deal, the stake of Alibaba and its
affiliate Ant Financial (the parent company of Alipay) in PayTM E-Commerce will increase from the
current 40% to 62%. Alibaba and its associates are
also the largest shareholders in One97 Communications, which has a stake in PayTM E-Commerce.
The funding round will mark Alibaba’s formal entry into India’s crowded e-commerce market. The
deal is expected to shake up the country’s e-commerce sector, which is already witnessing a cutthroat rivalry between Amazon, Flipkart and Snapdeal. Interestingly, Alibaba also owns a tad over
3% in PayTM’s rival Snapdeal. Earlier this week,
PayTM launched a separate app and website for
its online marketplace business, PayTM Mall.
SEBI tightens Algo trading framework
The Securities and Exchange Board of India (SEBI)
plans to further tighten the regulations for algorithmic trading to minimize instances of misuse of such systems that can be used to execute
complex trading strategies at a very high speed.
Algorithmic trading refers to the use of software
programs to execute trading strategies at a much
faster pace. On the National Stock Exchange
(NSE), Algo trades accounted for close to 16% of
all trades. On the BSE, it was 8.56% in January.
There have been concerns that Algo traders
who locate their servers on exchange premises—called co-location—get an unfair advantage over others who don’t have such access.
Former SEBI chairman, U.K. Sinha said that while
FEBRUARY 2017
India was one of the few countries in the world
to regulate algorithmic trading — popularly called
Algo trading — the market watchdog is looking to
further strengthen the norms so that instances
of flash crashes that have happened overseas,
and also in India a few times, could be minimized.
“India is one of the very few countries in the
world which have some mechanism for controlling the misuse of Algo. SEBI has been able to
come out with some minimal regulations on Algos. For instance, we have provided for high
order to trade ratio penalty system. We are
reviewing whether that penalty should be enhanced further,” the outgoing SEBI chief, whose
tenure ended on Wednesday, told reporters.
Jaitley headed GST council clears IGST, CGST bills
– Government aims for July rollout
TThe GST Council unanimously approved the
draft central GST and integrated GST laws in its
11th meeting. The Centre wants to bring these
bills in the second half of the Budget session as it
wants to stick to the July 1 deadline to rollout GST.
“The GST Council has cleared the final draft of CGST,
IGST law and the approval of draft of state-GST
(SGST) which is to be cleared by state assemblies
is on the anvil,” Finance Minister Arun Jaitley said.
“CGST, IGST and Union Territory-GST (UTGST)
law to be taken to Parliament in the second
half of Budget session starting March 9,” Mr.
Jaitley said. “UTGST and SGST draft bills will
be taken up for discussion and approval at the
council’s next meeting on March 16,” he added.
Finance Ministers from the states, however,
say every state government will have to pass
their own state-GST and classify tax rates for
each item that is sold in the market -- also
called fitment -- before GST can be rolled out.
Last month the Council cleared the draft compensation law, according to which the Centre will have
to fully compensate states for any revenue loss for
five years after migrating to the new tax system.
NIVESHAK
It has been evident, at least since April last year,
that all isn’t well between some of the founders of Infosys and the current management
and board. The issue blew up in mid-February,
with Murthy choosing to air his grievances in
public. His strategically timed outburst came
months after D.N. Prahlad, a former Infosys
employee and a relative of Murthy’s, was appointed to the board—an attempt of sorts by
the Infosys board to buy peace with the founders—and subsequently named to the Nomination and Remuneration Committee of the board.
“My relationship with the founders? It is wonderful.”
- Vishal Sikka
Murthy told in an interview that corporate governance at the firm is down amid concerns about
pay hikes and the severance packages of the
top management. Murthy said that such payments raised doubts whether the company is
using them as hush money to hide something.
This brings to head tensions between the promoters (founder and co-founders) of Infosys and
the management team and board members.
Among the former is CEO Vishal Sikka while the
latter consists of chairman of the board R Seshasayee and independent director Jeffrey Lehman.
Infosys has dismissed reports of a rift between
Murthy and the management, calling them
mere media speculation and its board is “fully
aligned with the strategic direction” of Sikka.
N Chandrasekaran to be TCS Chairman
Tata Sons Chairman-designate Natarajan Chandrasekaran also started to hold the chairmanship of the group’s crown jewel Tata
Consultancy Services from 21st February.
The country’s largest software services provider has
also named V Ramakrishnan as its Chief Financial
Officer to succeed Rajesh Gopinathan, who will take
over as the CEO and MD of the Tata Group company.
“TCS has received a letter from Tata Sons, in exercise of the powers under Article 90 of the Articles
of Association of the Company, nominating N Chandrasekaran as the Chairman of the Board of Directors of the company in place of Ishaat Hussain, with
effect from February 21, 2017,” it said in a BSE filing.
Introducing Chadrasekaran to the people of Jamshedpur, Ratan Tata expressed confidence that
Chandra (Chandrasekaran) will take the group as
well as the city to a new level of progress and growth.
The bitter boardroom battle between the Tatas and
Cyrus Mistry had led to Tata Sons removing him
as the Chairman of TCS. Tata Sons then appointed
Ishaat Hussain as TCS Chairman on November 11.
TCS had said Hussain would hold office as the Chairman until a new Chairman is appointed in his place.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
TheCover
Month Story
That Was
Infosys board and management at a rift
5
6
NIVESHAK
29000
10,000
BSE
DII
FII
8,000
28800
6,000
28600
4,000
2,000
28200
0
BSE
28400
-2,000
28000
-4,000
27800
-6,000
28/02/2017
27/02/2017
23/02/2017
22/02/2017
21/02/2017
20/02/2017
17/02/2017
16/02/2017
15/02/2017
14/02/2017
13/02/2017
10/02/2017
09/02/2017
08/02/2017
07/02/2017
06/02/2017
03/02/2017
02/02/2017
01/02/2017
27600
FII, DII Net turnover (in Rs. Crores)
Market
CoverSnapshot
Story
Market Snapshot
-8,000
Source: www.bseindia.com
www.nseindia.com
LENDING / DEPOSIT
RATES
MARKET CAP (IN RS. CR)
BSE Mkt. Cap
1,17,59,367
Source: www.bseindia.com
CURRENCY RATES
INR / 1 USD
INR / 1 Euro
INR / 100 Jap. YEN
INR / 1 Pound Sterling
INR / 1 SGD
INR/1 USD
2.00%
1.50%
1.00%
0.50%
Euro/1 USD
GBP/1 USD
66.72
70.85
59.55
82.91
47.69
JPY/1 USD
SGD/1 USD
Base rate
Deposit rate
9.25%-9.65%
6.50% - 7.00%
RESERVE
RATIOS
CRR
SLR
4.00%
20.50%
POLICY RATES
Bank Rate
Repo rate
Reverse Repo rate
6.75%
6.25%
5.75%
0.00%
-0.50%
Source: www.bseindia.com
-1.00%
-1.50%
FEBRUARY 2017
Date as on February 28th
NIVESHAK
BSE
Index
% change
Open
Close
Sensex
7.95%
26626
28743
AUTO
6.07%
20257
21486
BANKEX
13.18%
20749
23482
Capital Goods
12.21%
13665
15333
Consumer Durables
22.62%
11237
13779
FMCG
8.23%
8131
8800
Healthcare
4.46%
14728
15385
IT
1.97%
10176
10376
METAL
17.64%
10109
11893
OIL&GAS
11.38%
12152
13534
POWER
10.48%
1988
2196
REALTY
18.29%
1264
1495
TECK
4.85%
5498
5765
Smallcap
13.65%
12046
13691
MIDCAP
12.64%
12031
13552
PSU
10.05%
7691
8464
% Change
TECK, 4.85%
Smallcap, 13.65%
REALTY, 18.29%
PSU, 10.05%
POWER, 10.48%
OIL&GAS, 11.38%
MIDCAP, 12.64%
1
METAL, 17.64%
IT, 1.97%
Healthcare, 4.46%
FMCG, 8.23%
Capital Goods,
12.21%
BANKEX, 13.18%
Consumer Durables,
22.62%
AUTO, 6.07%
Sensex, 7.95%
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Market
CoverSnapshot
Story
Market Snapshot
7
Equity
CoverResearch
Story
10
NIVESHAK
FEBRUARY 2017
NIVESHAK
11
Equity
CoverResearch
Story
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
NIVESHAK
Article
of the
Month
Cover
Story
12
Houston, We Have a Problem
ShashankSharma
IIFT
Donald Trump’s recent inauguration as the 45th
President of the US was a black swan event. For
many, it was like a nightmare come true. The inauguration speech was more or less free of any explosive announcements (probably because someone fixed up his speech well enough to not leak
any outrageous plans). But as soon as he got to
work, he was out with blazing guns. And the first
few shots that he fired have, in essence, killed a
lot of the hard work that America has done in the
past. USA, under Obama, spent quite a lot of time
and energy in getting the Eastern partners like
Japan on board the TPP, but Mr. Trump quashed
the whole build up with just an announcement.
Looking southwards, Mr. Obama had for long kept
relations with Mexico quite friendly. It was business as usual for the people and corporations until
Mr. Trump signed an executive order to build a
wall bordering Mexico. It would be of significantly
bad consequence to the world if he makes good
on all of his protectionist election promises.
are suddenly building walls all around? Why are the
British people so eager to leave the EU? Why are
so many European countries angry with the world?
Why is Japan, once the hallmark of growth, striving endlessly to come out of a bruised and stagnant economic rut? And more broadly, why has
the global economy and demand become so sticky
that no matter how much money is pumped into it,
there are no visible signs of a robust growth?
The most probable reason for this has to do with
the shock that the globalized and interlinked global
economy faced in 2007-08. The world economy
was plunged into a recession as world GDP growth
fell. And it may seem funny that the root cause of a
disaster of this scale was a pair of innocuous sounding financial derivatives, namely CDO and CDS. Financial engineers “invented” derivatives, or “weapons of mass destruction” as Warren Buffet fondly
calls them, to make money literally out of thin air.
Lee Hsien Loong, Prime Minister of Singapore, put
it perfectly when he said “When you start thinking
A few questions worth pondering upon are: what that you can create something out of nothing, it’s
went so wrong that the American people, who very difficult to resist.” The Wall Streeters working
have long championed liberalism and free markets at the biggest financial firms could not resist falling
FEBRUARY 2017
NIVESHAK
shifted from a consumption binge to a more traditional, savings mindset. These results may not
tally at the micro level if people are personally interviewed, as being parsimonious is considered by
many to be a sign of financial distress. But when we
look at the broader picture, at the macro level, this
behavior change is quite
visible, as evidenced by
the graph below. The
savings problem is even
more exacerbated as
populations around the
world age and save for
post-retirement days.
(The next graph, taken
from World Bank website shows how the
GDP deflator has fallen
to record lows. It was
around 1.6% for 2015
data which is lower than
healthy levels. The current value is expected to
be even lower.)
(The graph is taken from World Bank website. It
clearly shows the huge blow to the world economy
around 2008-09. The graph rises immediately after
that as governments around the world scrambled
money and power through bailouts and deals. But
the afflicted wound was much deeper. The governments could only do so much. As soon as the stimulus started reducing, the GDP growth again started
to falter, as can be clearly seen.)
When the crisis hit, two things happened. The
obvious tremors of financial damage didn’t take
much time to spread to almost every country of
the world, thanks to the linked economies. But the
less obvious tremor hit the confidence of the general population. People were suddenly jolted back
to reality. The real-estate market, which many “experts” believed would only go up, suddenly came
crashing. The governments and economies that
they believed to be virtually “bomb proof” suddenly started to appear rickety. The venerable banks
and other financial institutions started falling like
dominoes. It had a doomsday-ish feel to it, with everything seemingly going down.
Wary of the possibility of such incidents, people
The case of Japan is a
particularly sorry one.
We all know about the
lost decade (though it
has actually been 25
years since the economy
saw any sunshine). BoJ’s
current interest rate is 0%, a value which would
have been laughing stock a decade ago but now is
an ugly truth. The CPI is a meagre 0.3%. Japan has
been stuck in a rut for a long time now. Paltry interest rates have kept capital investment low, the
population is aged, domestic demand is very low,
and the country has lost its competitive edge. Abenomics was brought in to resuscitate the economy.
The BoJ, under the ETF program, bought stocks at
an unprecedented rate to boost stock prices, investor sentiment and support growth. But this led to
huge distortions in the way a central bank should
function. In April 2016, BoJ shocked the world by
becoming the top-10 shareholder of 90% of Japan’s
stock market. Still the economy is in doldrums and
by now Mr. Kuroda may be starting to give up on
the economy.
There are many issues that cloud the possibility
of a rebound any time soon. One of them is the
huge proportion of aging population around the
world, especially in DCs such as Japan. This part of
the population has either retired or is going to retire soon. Those who have retired are holding on
to their savings, wary of losing their investments
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
Article
of the
Month
Cover
Story
for the juicy bonuses that were in store if they took
risks on complex derivatives. Moral hazard and unbelievably huge bonuses clouded their decisions
and ultimately the whole world had to pay, and is
still paying through its nose for these misdeeds.
13
Article
of the
Month
Cover
Story
14
NIVESHAK
2008-style. The aged working population is inefficient and slow in transitioning to the digital-world
order, thereby weighing down on productivity. Corporations around the world are replacing these
workers slowly with automation, effectively erasing
the prospective jobs for the next generation. Also,
in China for example, as parents living in the countryside age, the children working in the cities are
having to leave for home to take care of the family, in what is still a society with traditional-leaning
values.
China satisfied the consumption binge of the world
for the last few decades and drove the world trade
and economy. But it has faltered badly. And the
degree of slump in the economy may have been
understated in the press, given the secrecy that
shrouds the collection and processing of the key
economic indicators in the country. There were
open revelations of malpractice in the Liaoning
provincial office that is responsible for collecting
and passing on statistics to the central agencies.
And even people as high up the political ladder as
Premier Li Keqiang were aware of this. This kind of
data fudging can probably be seen as a desperate
effort to regain investor sentiment at a desperate
time when the slowdown in the economy has become obvious.
The idea of global corporation is going down, and
FEBRUARY 2017
there is no one to save it. Huge corporations have
already started shifting, or have plans to shift, manufacturing facilities back to the west as rising wages in China and lower global aggregate demand,
among other issues, have eaten into profits. Adidas,
the German multinational sports equipment manufacturer is slowly shifting mass production of its
shoes back home, on the back of automation and
availability of more efficient production technologies such as 3-D
printing. Global food
giants such as McDonalds and KFC have taken
a beating internationally. Profits and market
shares have dwindled to
unprecedented levels.
They are planning radical transformations and
are pulling out of many
markets where they are
competing against the
rise of local competitors. The list is really, really long to be discussed
in a single article.
For most of us B-School
students, it is for the
first time in our lives
that we are looking at an
economy that is being
hammered and bruised
so badly for such a long time, especially because
of the rise of populism and protectionism around
the world. The two biggest exhibits of this are the
Brexit vote and Donald Trump’s election as the US
President. Elsewhere for example, in France Marine Le Pen has vowed to hold a referendum similar
to the Brexit vote if she wins. And going by what is
the current trend, it would be foolish to bet on the
European Union not collapsing real soon.
Markets are generally robust as they can take measures against known or measurable risks. But we
are currently living in a world dominated by political risk. And it is well known that political risk is very
difficult to measure as the factors affecting such
risk are really difficult to quantify. It is more leaning towards pure uncertainty and bizarre results as
we saw in the case of Brexit vote and the US elections. Looking at the roller-coaster ride that the
world economy is facing, the bad times, they aren’t
a changin’ anytime soon.
NIVESHAK
15
Cover Story
Donald Trump – The Era of Uncertainty
SankeerthBondugula
IIM Shillong
Breaking all expectations Mr. Donald Trump
emerged victorious in the recent US Presidential
elections and was inaugurated as the 45th President of the world’s oldest democracy – USA, becoming perhaps the most unanticipated figure to
ever enter the Oval Office. Economy will be at the
top of Trumps agenda as President and will serve
as the most important barometer of his performance. His business origins and his affluent lifestyle will have a huge impact on what he perceives
the country to Trump hallmarks are his unaccountability and impulsive remarks which have become
his primary identification marks. While Trump has
some grandiose ideas and equally lofty rhetoric to
accompany them, deciphering the exact nature of
his economic policies is a complex task. Given his
stance on the existing policy structure and his future plans, it’s hard to imagine that he will have a
smooth sailing in congress, despite its remaining
under Republican control.
Immigration
His primary focus would be on immigration reform
where he proposed to build a wall between Mexico and United States and demanding the deporta-
tion of 11 million undocumented immigrants. His
immigration stance has put many businesses in
uncertainty which could cost USA dearly, as business have no incentive to operate from US when
trade and immigration policies are tightened.
American Action Forum estimates that enforcing
the immigration law as suggested by Trump would
cost the fed nearly $500 billion. It potentially could
shrink the labor force by 11 million workers, reducing the real GDP by $ 1.6 trillion.
The agriculture sector, along with many labor-intensive sectors, would be devastated which might
lead to a fall in farm income and a sharp rise in
food prices. Immigration is an enormous source of
vitality, it will have an effect of both the supply and
demand. Companies that sell to immigrant population will lose revenues and be forced to cut down
a sizeable chunk of American jobs. Research suggests that each immigrant creates 1.2 local jobs in
America, all of which could be washed away is they
were deported abruptly.
Legal Immigrants are also under Trump’s scanner. He proposes to increase the prevailing wage
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
Cover Story
16
NIVESHAK
requirements for H-1B visas, which he believes
would force companies to give jobs to domestic
employees instead of overseas workers. This might
benefit a few Americans but will certainly be a loss
for USA and American corporations.
er, that is not as easy as US is legally bound to the
Paris Agreement for four years.
Added to all this lets also look at what effect
Trump’s presidency is likely to have on India
Major Tax Code Overhaul
Impact on India
Trumps tax plan unveiled during his campaigning is
perhaps the most detailed proposals he put forth
till date. Its pro rich and anti-poor is what his opponents criticize it as. One of the most distinguishing
feature of his proposal is his hard cap on business
at 15%, which might be especially appealing to
freelancers and the self-employed. The proposed
tax plan would reduce the revenues enormously
and inevitable skyrocket the federal budget deficit.
Maintaining the entitlement programs like Social
Security and Medicare is a very expensive affair for
the fed, which would turn into a major burden if
there aren’t any spending cuts with the proposed
tax plan.
To start off, President Trump speaks warmly of
Russian President Vladimir Putin and clearly states
his stance of wanting to strengthen the relationships with Russia. Good relations between Russia
and USA is good for India because we can then
pursue closer relations without contradiction. On
the other hand, Trump has opened the one-China
policy for reconsideration and the country might
be penalized for currency manipulation.
Revamping Obamacare
The Republican Party has already taken steps to
begin the process of rolling back the Affordable
Care Act. During his campaign, he also emphasized
on the allowance of purchases of health insurances across state lines and block-grant Medicaid to
states.
Renegotiating NAFTA
NAFTA which allows free trade between Canada,
USA and Mexico and Trans Pacific Partnership
which allows free trade among 12 countries are on
the Trump’s radar too, which he is fiercely critical
about. USA is one of those 12 signatories to sign
the TPP which was just finalized in Feb 2016. President Trump announced his plan to withdraw from
TPP and also has signed a Presidential Memorandum to the same effect.
Going by the affinity he displayed towards Hindus
and India during his campaigns he is in favor of
strengthening the existing relationships between
India and USA. On the issue like, membership of
the Nuclear Suppliers Group or a permanent seat
of the Security Council, we can be optimistic of
Trump taking a favorable stance for India.
The biggest concern to India is about the H1B visas. Tightening the H1B visa rules poses a threat
to the Indian IT Sector as 60% of the $110 Billion
exports go to the US. US companies themselves
will be effected due to this move as it will increase
their employment costs drastically. If Trump and
his administration has American citizens best Interest in mind, he will rethink his stance and approach towards this.
Trump’s attitude to American companies that establish factories abroad is also a factor of concern
for India. Ford has three manufacturing facilities in
India and exports most of its cars, similarly other
American companies which have establishments
in India exports majority of their production, all
these companies must rethink their strategy. Given the uncertainties and questions yet to be anClimate Change Stance
swered, everybody has their fingers crossed on
Climate Change Regulations and Paris Climate how things will pan out in the future. We can only
Agreement also is under attack by President wait to discover what will happen, once it has hapTrump. He has sworn to do everything in his power pened.
to reverse the climate change regulations. Howev-
FEBRUARY 2017
NIVESHAK
17
FinGyaan
Cover
Story
FINANCIAL VACCINATIONS: A PREVENTION APPROACH BY FINANCIAL HEALTH CLINICS IN INDUSTRIAL DISTRESS HANDLING
ParagRay
NIT Warangal
INTRODUCTION
Industrial illness is of considerable significance today
which is differently identified as corporate sickness.
A developing country like India has more than 1,000
nos. of large and medium sized units and more than
1,00,000 nos. small units which are sick. These units
have been provided millions of rupees by different financial institutions which cannot be recovered. We can
have the significance proof of large scale units’ sickness
is already aggravated in India in comparison to small
and medium scale units. We can find the exponential
growth rate of illness of these sectors which cause the
decrement of the in financial strength and economic
reserve of India. Among these unhealthy organizations have already risen back from their sickness only
by their strategic management techniques and mathematical analysis. Along with it many cases have not
been able to achieve their past strength till now.
OBJECTIVES
1.
To study about financial health clinics and their
approaches for corporate restructuring.
2.
To propose a proper financial vaccination schematic model for distress prevention.
FINANCIAL HEALTH CLINIC
Financial health clinics are the organizations specifically providing services to the sick industries for their revival. The main motive of these type of organizations is
to provide the preventive and revival strategies which
will create a safe guard to the sick industries by providing them a turnaround measures to follow for financial
restructuring.
IMPLICATION FOR THEORY & PRATICES
BRIEF EXPLANATION OF PROPOSED MODELS
In the above proposed model if mainly for every sick
industry which will help that industry to revive and regain its strength. Through this model it has been tried
to show the methods and factors of become healthy
and the process of sustaining it. The regular review and
systematic following of the above model steps definitely make a distressed unit revive from the sickness and
make it healthy. In the model the upper part is showing the factors and the methods to make the particular
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
18
NIVESHAK
FinGyaan
SCHEMATIC VACCINATION MODEL OF PREVENTIVE MEASURES TO REMOVE FINANCIAL DISTRESS
industry healthy. The process of sustaining the healthiness has been described in the lower part of the model.
FINANCIAL DISTRESS HANDLING BY PROPER FINANCIAL VACCINATION
In the next diagram, we are trying to show the continuity of a process to apply the turnaround strategies for
revival sick industries in India. The whole model is talking about the steps and points to be followed for revival of the financially distressed industries. First, as a part
of rehabilitation process the industry should focus on
the opportunity for it in the market by engage its R &
FEBRUARY 2017
D team intensively in the market to do market research
which will help them to repositioning their product
newly in the market. It will fetch immense profit to it.
To start the process, the fixation of a bench mark as a
goal and the higher limit which need to be achieved by
establishing the break even for the process. Financial
restructuring need to be done by establishing the relationship between achieving cost and the asset efficiency. Financial restructuring should be done prior before
this by manpower adjustment and sale of unproductive
assets from the company which are the one-time steps
toward revival.
NIVESHAK
FUTURE SCOPES
The future scope of this research is to collect all the
information and exact practical implementation of the
revival strategies and steps by health clinics or financial
restructuring companies and their impact on financial
strength building in India.
CONCLUSION
The more and more financial health clinical attempts
on Indian sick industries will definitely help in creating
healthy industrial environment in India the main steps
of this institutions are Analyzing the financial strengths
and weaknesses faced by a company ,Helping it raise
its debt or equity capital, Sustaining the growth of
an organization through strategic planning, Increasing shareholder value through efficient and corporate
governance, Helping you to adapt to the unexpected
changes in consumer preferences, Optimizing working
capital and cash management and analyzing various
transactions taking place while structuring or restructuring are for better and for improved performance.
this vaccination techniques and preventive measure
will help MAKE IN INDIA vision successful by providing
a sustainable financial strength to the Indian industries.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
FinGyaan
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PROPOSED MODEL FOR ADOPTION OF TURN ARROUND STARTEGIES
19
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FinaFame
NIVESHAK
Michael Burry: An Outsider Hedge Fund Manager
SaurabhGupta
IIM Shillong
Introduction
A successful investor has a deep insight about
the investment and has the patience to materialize the plan to their advantage. Michael Burry
is one of the greatest examples where a person
demonstrates such investor’s traits, his profound
insights and patience helped him earning the significant amount of return when everyone else in
the financial world was making massive losses.
Personal Life
MMichael Burry is the founder of the hedge fund
Scion Capital, which he named after his favorite book – The Scions of Shannara. He pursued
medical and started his career as a physician after graduating from Vanderbilt University School
of Medicine. Since he has an inclination towards
investment, he began investing as a personal interest which later on developed as full-time work.
From his early days, he used to work hard studying
for medical as well as for the particular interest of
financial investing. So much was his dedication to-
FEBRUARY 2017
wards work, that once he fell asleep and crashed
onto the oxygen tent which was built around the
patient during treatment. While working as a
neurosurgeon at Stanford Hospital in 1990’s, as a
resident at the hospital, he used to write his ideas
about various investment strategies onto a message board where professional money managers use to copy his ideas and profit free of cost.
Obsession turned profitable
In the initial days, a hedge fund offered him $ 1
million for his investment firm, which was established by investing a few thousands of dollars
contributed by his parents and siblings. Another firm offered him $ 10 million dollars for the
same investment firm. Michael Burry used to do
value investing and invest according to overpricing and underpricing of the assets. The value investing helped him earned profits of around 55
per cent in 2001 as compared to negative returns
of S&P 500 of around 12 percent, and he was
able to make a similar streak of profits in coming years where he continuously beat the market.
NIVESHAK
21
Story behind the success
“ My natural state is an outsider. I’ve always felt outside the
group, and I’ve always been
analyzing the group. “
The default rates of mortgages started rising at
a fast pace but their prices remained stable for a
long period of time. It was in early January 2007,
the index of subprime bond fallen one basis point
and the market showed signs of risk of crisis. Sooner, the large banks realized their mistake as they
noticed a growing number of defaults in the subpeople with limited or even with no ability to pay prime mortgages and tried to buy back the swap
back loans were provided with the loans and such contracts that were sold initially, in the endeavors
loan is pooled with good quality loans and sold to to protect them from further losses. By that time,
the investors. Such Mortgage backed securities Michael realized that he holds the upper hand and
were given ratings of investment grade by the vari- refused to sell back the swap contracts. The wait of
ous rating agencies when they were bonds of junk over 2 years was over for Michael and he started
grades. Michael Burry was amongst the few inves- to make a large amount of profit. Finally, Michael
tors who was able to figure out the overheating walked away with a huge chunk of profit which is
of housing prices combined with the junk quality calculated to be 489.34 per cent from November
of MBS and felt that the collateral damage would 2000 to June 2008.
lead to catastrophic events which would be of a
devastating magnitude that anyone would ever Exceptional investment career
think of. In the year 2003, he estimated that bonds Michael story justified him to be a great investor
based on these mortgages would crumble within 2 and his ability to carefully study the financial maryears when people convince themselves that the kets made him earn a future. Opportunities are
prices of houses are not correct and when sub- rare to come and one who recognizes and grab
prime mortgages backed securities starts to fail. that opportunity will make tremendous returns.
The strong mental ability combined with great
Strategy and winning tickets
emotional control, he demonstrated that other
Michael followed an unconventional way to short investment pundits and advisors would not afthe mortgage backed securities using swap strat- fect his decision and he sticked to his research inegy by persuading the likes of the big bank Gold- sights and strategy. By not jumping on to another
man Sachs to sell him the Credit Default Swap strategy even after 2 years of losses, he showed
against subprime securities which he estimated to discipline which is highly critical in the field of inbe of no value. The names of few other banks he vestment. Michael Burry is one of the greatest
approached are Deutsche Bank, Bank of America, heroes in the financial world that led to show that
Bear Sterns and Credit Suisse, where he was able short selling is a tool if handled with utmost care
to make successful deals. The uniqueness of such can bring in lots of success. He was the paragon of
transactions is that Michael did not have to have courage and virtue.
the bonds to insure it, and over the time the return
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
FinaFame
from the declining of values of the securities will
profit him although he has to pay a large amount
Michael’s obsession of searching the underval- of money in form of CDS payments which is kind of
ued companies led him to find that current pric- insurance premium to the banks. Michael faced a
es of houses are overvalued, and even his home huge resentment from the investor of Scion Capiat San Jose at California was overpriced. The ex- tal because of the insurance premium payments
tensive research made him realized that a large since they were making consecutive losses and
amount of the homes are overvalued, and thus nowhere the fall in the bond prices was noticed.
a housing bubble is created which will burst any- Many of the worried investors left the hedge fund
time sooner or later. The price of houses heated firm and withdrawn their amounts, and some of
up because of the easy availability of loans to the them also threatened to suit Michael. He used unborrowers. The easy availability of loans is done orthodox and questionable methods to retain the
through a process known as Mortgage-backed investors and to make them stay invested in the
securities commonly known as MBS, where the firm. He knew that the table would turn someday
loan on the houses are pooled together to form and believe that he made right decisions. The mara single security and exchanged in the market as ket tested his patience. By the end of June 2005,
regular bonds trading. These MBS are of 2 kind Goldman Sachs was writing some huge amount of
in nature – Prime and sub-prime. The sub-prime CDS contracts to Burry which were in the range of
MBSs were one with a low quality of loans. Thus, $ 100 million.
22
FinSight
NIVESHAK
H-1B VISA: A NON-ZERO SUM GAME
Sakshi & Aswathy
NMIMS Mumbai
Introduction
The H-1B visa, the most coveted work visa, is an
employment based, non-immigrant visa in the
United States, which allows US employers to temporarily hire foreign workers in specialty occupations. The number of H-1B visas that can be issued
in a year is 65,000 but an additional 20,000 visas
are given to foreigners with advanced degrees from
US universities. In the year 2016, the US Citizenship and Immigration Service announced that they
received 2,36,000 H-1B visa applications within
5 days of opening the process. This is more than
thrice the mandatory cap of 65,000 H-1B visas that
can be issued. Most of these visas issued are taken
by employees of major Indian Technology firms.
PROCESS OF APPLYING FOR H-1B VISA
H-1B visas are issued only for ‘Specialty Occupation’. These occupations require the application
of highly specialized knowledge in the fields including but not limited to engineering, mathematics, biotechnology, social science, medicine
and health. The foreigner worker must possess
a bachelor’s degree or its equivalent in-order
FEBRUARY 2017
to practice in this field. Also, H-1B visa is strictly
limited to employment by sponsoring employer.
To apply for an H-1B visa, the employer submits a labor condition application with the Department of Labor (DoL). The applications that
are approved by the DoL, are reviewed by the
United States Citizenship and Immigration Services (USCIS), which then grants the H-1B visas.
As the applications received every year for H-1B
visa exceeds the cap of 65,000, the USCIS has been
granting visas using a computer generated lottery
since 2004. The lottery system makes the entire
process unbiased, but the catch is that, while every
employee is allowed to submit only one application, there is no limit on the number of applications
that can be submitted by the employer. Therefore,
a big firm can improve their odds by nominating large number of candidates for one job in US.
PROBLEMS ASSOCIATED WITH THE H-1B VISA ALLOTMENT PROCEDURE
There are various problems identified with
the current procedure of allotting H-1B visas:
NIVESHAK
2. Labor substitution rather than innovation:
There is a dominance of foreign workers holding
only a bachelor’s degree in the H-1B visa category. This indicates that these workers are bought
for replacing the domestic worker and they are
laration is waived if the annual salary of H-1B employees is greater than $60,000 and interestingly,
the median salary of most of the H-1B employees of
most outsourcing companies hover near $60,000.
This shields them from making such a declaration.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
FinSight
1. Outsourcing based IT firms have a big not involved in any cutting-edge innovation.
share in H-1B visa applications: The rising
share of H-1B visas awarded to outsourcing 3. Employers waiving declaration requirements:
based IT firms indicates that they firms may Under US federal law, employers are required to
have found a way to tackle the lottery system. declare that employing foreign workers is not displacing the domestic workers. However, this dec-
23
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FinSight
NIVESHAK
CHANGES PROPOSED BY PRESIDENT TRUMP IN
H-1B VISA
President Trump, whose election campaigns
centered on protectionism of US, had proposed
various changes to H-1B visa allotment. According to him, H-1B visa is a bad program, as it takes
away the country’s best jobs from the citizen of
US for the convenience of the wealthy corporations. Some of the changes proposed by President Trump in the allotment of H-1B visa are:
make a good faith effort to recruit Americans first.
• Preference to be given to US educated students
for H-1B visa rather than depending on computerized lottery system.
• Prohibit spouses of H-1B visa holders from working in US.
• Prohibit companies which have more than 50
employees, of which at least half are H-1B and L1
holders, from hiring more H-1B visa holders.
• Doubling the minimum salaries of H-1B visa
holders to $1,30,000.
IMPACT OF PRESIDENT TRUMP’S PROPOSED
CHANGES IN H-1B VISA
• 20% of H-1B visas are reserved for small and
start up employers.
These changes clearly highlight the emphasis on
“America First” goal being pursued by the new
government under Trump but nations supporting
H-1B visas argue against them saying that this program does not take away any jobs from Americans
as there are not enough skilled Americans avail-
• Removal of ‘per country cap’ for H-1B visas to
ensure equal distribution.
• Firms that want to hire H-1B visa holders must
FEBRUARY 2017
NIVESHAK
IMPACT ON USA
The Indian exports to US especially in pharmaceuticals, textiles, gems and jewellery and auto
product industry would be deeply hurt. Such embargoes or restrictions would weaken US as the
operational cost would rise enormously and the
goods produced would become expensive for its
consumers. The ability of US to attract the world’s
best and brightest talent has always helped them
in attaining and maintaining the status of a global
leader and thus, any reforms restricting this inflow
of talent will surely harm the nation in the long
run. Medical and Pharmaceutical Research teams
working on multiple projects for the welfare of
mankind in US would be greatly impacted as they
are constituted by the great minds from across the
globe but the new proposed reforms do not encourage non-Americans to work in US.
The new government also needs to realise that
since not enough people with the required qualifications are present in US to fill these jobs, there
are only two choices in their hands: either the jobs
remain unfulfilled or companies outsource these
jobs. The second option necessitates the distribution of H-1B visas. Also, contrary to the popular
belief, Indian IT industry has actually been creating more jobs in the US and promoting economy
growth as often H1-B workers bring their families
along and in turn, bring additional business for
other industries like real estate, banking, hospital-
ity to name a few.
IMPACT ON INDIA
FinSight
able to perform these jobs. Many US employers
have complained that American universities fail to
produce enough mathematicians and engineers
to keep pace with an economic sector producing
150,000 new jobs a year. Also, it is a well-accepted
fact that the use of protectionist measures will
only make it more difficult for employers to hire
the best available talent for the job in today’s era
of globalisation and open trade.
25
These reforms would jolt the Indian economy the
most as India happens to be the largest recipient
of H-1B visas in the world. In 2016, 70% of the
85,000 H1-B visas worldwide went to Indians. The
Indian IT industry, contributing 9.3 percent to the
country’s GDP, draws around 60% of its revenue
from the US market using its offshoring model and
hence, is deeply concerned with these changes.
IT sector provides employment to around 3.7 million people and is one of the largest private sector
employers. United States is also the second largest
source of remittances for India and hence any restrictions on hiring Indians would adversely impact
the country.
IMPACT ON INDIAN IT INDUSTRY IN LONG TERM
It is also important to highlight that though the
proposed H-1B visa reforms are challenging for India’s IT firms in the short run but these can serve
as catalyst for their transformation into global
players. The fundamental source of competitive
advantage for this sector has been its labour cost
but the with current trend supporting and encouraging automation, technology shifts, commoditization and increasing protectionism, their global
delivery model is being undermined. They need to
abandon this cost arbitrage and shift from renting
out IQ to creating intellectual property. This threat
from the US government might impel this sector to
start moving more decisively, to look out for new
avenues for growth, focus more on innovation and
automation, localize work forces and turn themselves into global hubs. If Indian IT services are
able to seize this window of opportunity, they can
easily transform themselves into global technology giants who do not need visas to succeed.
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
26
Fin View
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NIVESHAK
Mr. SandeepKumar
General Manager, Reserve Bank Of India
Mr. Sandeep Kumar is the General Manager at Shillong Branch of RBI. He is Chartered Associate of Indian Institute of Bankers, and diploma holder of IIBF with specialisation in Treasury, Investment and Risk Management. Mr. Sandeep holds MBA from Faculty of Management Studies,
Delhi University.
Budget 2017 allocated 10000 crore for reSince BHIM app has already been rolled
capitalisation of bank. How such small amount out by NPCI, what are your expectation with the
will able to deal with in the Huge NPA prob- same. How substantially is it going to impact relem of banking sector? tail payment system in India?
In a candid
interview with
Team Niveshak, Mr Sandeep shares his
views about
the Indian
Banking Industry and current
happenings in
banking space.
He also presents his views
about various banking
Norms.
near term?
The allocation of 10k crore is
as per the indradhanush plan,
but it is evidently not adequate given that indradhanush plan was released in August 2015 and in the interim
period a lot of developments
have taken place including
Asset Quality review. RBI has
been requesting the government to allocate more as we
are of the view that there is
need for adequate recapitalization of PSBs. Even the
government has indicated in
the budget that it is open to
making more provision for
capital as the year progress.
How does RBI planning
to implement BASEL III limits by 2019. What additional
measure we can expect in
The implementation of Basel III is already laid out
by the RBI. The regulations are in place. However recapitalization is the key to implementation.
As mentioned earlier we have requested government for that. In the meantime RBI has made certain changes like recent changes in the definition
of capital (including reserves relating to revaluation of fixed assets, deferred tax liabilities as part
of Tier I capital) which will further allign Indian
definition of capital closely with the Basel norms.
FEBRUARY 2017
MPC is a body that is formed for the implementation of the flexible inflation targeting framework.
It constitutes of 6 members, 3 from RBI (including
Governor, DG, ED) and 3 members nominated by
the government. In case of tie, Governor has the
casting vote. MPC has been operational in deciding
the policy stance since October 2016. It is responsible for deciding the repo rate which is the operating instrument and align the operating target
(weighted average call money rate) as close as possible to operating instrument. The idea is to meet
the glide path such that CPI combined inflation rate
is 5% by March 2017 and 4% (+/- 2%) thereafter.
NIVESHAK
FinFunda
of the
Month
Initial Public Offering
Yo Mr. Fin! BSE Ltd recently came up
with an IPO! Could you tell me what an IPO
is all about, and how do they come up with
the value of the Shares? I haven’t really
been able to keep up with all this techy stuff.
Hey Sam! An IPO, or an Initial Public Offering
is simply the process through which a private
company, when in need of funds, can come to the
stock market and offer its shares to the public,
following which it becomes “publicly-traded” on
a stock exchange. Once a company goes public,
its ownership then lies with the investors, or
shareholders, who purchase the company’s shares
when they are offered for sale in the market.
Most of the investors, however, have real exposure
to the IPO process only a few weeks prior to the
IPO, when the public at large is informed through
media sources. How exactly the shares of a
company get valued remains a mystery, except
to the investment bankers involved & some
investors who had been tracking the company’s
performance through their own contacts.
Sweet! Maybe not the exact process,
but could you elucidate the factors that are
considered when an IPO is valued?
TWell you could fundamentally divide
the components that are considered into two
categories. I’d tell you more about these in detailFirst, come the quantitative components. Just like
any sales pitch, the success of an IPO is dependent
on the demand for the shares of that company.
A strong demand for the company’s stock would
enable the investment bankers to price the shares
at a relatively higher value. As an extension to the
same point, the timing of an IPO holds significant
importance too. The valuation of the IPOs of two
companies, who might have similar financials,
Anand Mittal
IIM Shillong
could be totally different merely because of the
timing of the IPOs and the corresponding market
demand and sentiments. You might recall the roofhitting valuations that tech companies had got
during the peak of demand for technology.
Second, but not any less importantly, come the
qualitative components. A company may not have
very strong financials at the time of the IPO, but it
might have a product or a service that can bring
innovative disruption. In this context, recall the
high valuations that internet stocks got back in the
90s.
Insightful! Do the industry trends
also affect the valuation process?
Indeed! If the company that is coming up
with an IPO operates in an industry that
already has comparable publicly traded companies,
the IPO valuation may be linked to the valuation
multiples that are assigned to these competitors,
the rationale behind this being that investors would
be willing to pay more or less similar amounts for
this IPO as they would have to currently pay for the
existing companies.
Umhm! Well considering the huge amounts
and the quantum of people involved, there might
be some risks associated with IPOs as well, I reckon?
You’re a sharp lad, Sam! The risks that exist are
for the companies, as well as the investors. For
instance, if the IPO is mistimed, that is, it comes
at a time of weak demand, it might not be able
to attract investors (Stock Exchange regulators
across the world set the percentage of minimum
subscription required for an IPO to be valid) and the
IPO might lapse. However, this risk can be mitigated
through the help of underwriters, who buy the
balance of the shares that remain unsubscribed.
Cool! That certainly helped me develop a
perspective. Thanks, Mr. Fin!
Cheers, Sam! Stay inquisitive, stay invested!
© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
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CLASSROOM
27
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