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July 13, 2014
Volume 3
Moving on with the legacy
Club FinNiche would like to take the opportunity to welcome all the
juniors to the clubs and committees in IMT Ghaziabad. It is exciting to
see the flare with which the juniors are taking the new leadership
roles and carrying forward the IMT legacy. With the academic year
going at full speed, seniors have their presentations lined for the
weekend whereas the juniors are studying hard to excel well in their
quizzes and mid term.
This week we bring to you opinion about the much talked Union
Budget 2014-15 and have a critical view of the same. The magazine
highlights the need for SLR and CRR Exemption in the Infra sector,
whether such regulatory norms are required or not? To enhance the
financial knowledge, we bring to you LBO (Leveraged Buyout) as the
term of the week.
We hope you enjoy reading the articles in this edition of FinXpress.
Looking forward to your acknowledgements and suggestions for
improvements.
Happy Reading!!
Regards
Team FinNiche
From The Editorial FinXpress Volume 3
July 13, 2014
FinXpress
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
FinNiche
July 2014 Page 1
CONTENTS In Focus: CRR and SLR
Exemption: A much
needed fillip in the in-
fra sector
Opinion: Union Budget 2014-15
Term of The Week: Lev-eraged Buyout
Market This Week
News
Fun Corner
Page 2
In Focus
The newly elected NDA government has
often emphasized that reviving
infrastructure is one of its priorities. The
budget presented by Mr. Jaitley on the
10th of July was a step in the right
direction. In a move described by HDFC
Chairman, Deepak Parekh, as
revolutionary, the finance minister has
proposed that banks be allowed to raise
funds to finance infrastructure loans
without having to maintain cash reserve
ratio (CRR) and statutory liquidity ratio
(SLR) requirements for such funds.
CRR requirement pertains to the
proportion of deposits (currently set at
4%) that banks have to keep with RBI
and on which they get no interest
whereas the SLR requirement pertains to
the proportion of deposits (currently set
at 22.5%) that banks must invest in
government securities.
This proposal, when implemented, will
also have the added effect of freeing such
funds, raised through long term bonds,
from priority sector lending requirements
as infrastructure is a component of the
priority sector. The main benefit that will
accrue from this proposal is better
management o f asset— l iabi l i ty
mismatches in banks which had become
a major problem for some public sector
banks. This is because the cost of funds
for banks issuing long term bonds for
infra lending will be reduced as a result
of CRR and SLR exemption, which will
compensate the banks for any premium
that they would have to pay for such
bonds due to their long tenor.
However, the euphoria among banks over
this proposal may not last long. RBI is
already planning to come up with strict
standards to regulate the implementation
of the proposal. It is planning to allow
this leeway to banks only as long as the
loan remains healthy. If such a loan
becomes an NPA, the bank will have to
set aside the SLR and CRR requirements
for the entire exposure. The central bank
is also planning to set strict project
appraisal standards for banks wanting to
avail of this facility, so that such fund
raising is only allowed for viable projects.
These steps are being taken by the RBI
because many within the central bank
believe that banks are already
overexposed to the infra sector and any
more exposure might lead to an increase
in credit risk. Infrastructure is among the
five sectors (the others being textiles, iron
and steel, aviation and mining) that the
RBI has identified as stressed. Also, the
RBI is apprehensive about losing a
certain amount of control on monetary
policy as it controls the money supply in
the economy by adjusting the CRR. After
the implementation of this exemption, the
RBI won’t have the authority to tinker
with such funds.
Whichever side of the debate one chooses
to take, what cannot be denied is the fact
that a strong infra sector is urgently
required for sustained growth and at
least the government has set the ball
rolling in the right direction.
FinNiche
CRR & SLR Exemption : A Much Needed Fillip For
The Infra Sector
July 2014
—- By Arunav Chakraverty
Page 3
Opinion
The much awaited Modi’s Union budget
2014 is out to address the impending fiscal
consolidation and the infrastructure
bottleneck challenges faced by the Indian
economy. Let us have glance over its major
highlights and their possible impact.
The fiscal deficit target for FY15 is pegged
at 4.1%, which the Government looks to
achieve by bolstering its revenues by
increasing its tax ambit (in particular
indirect taxes) and with an increase in
disinvestment proceeds. The measures like
introduction of long term capital gains tax
on debt mutual funds and further increase
of customs and excise duties on imported
electronics and tobacco products are all
intended in achieving the same.
Capital expenditure is budgeted at 18.8%
with a significant increase towards power,
ports and shipping, which are critical for
fuelling a sustained growth in the
economy. However not just awarding these
projects but also the implementation of
these projects by addressing the ground
issues like environmental clearances and
land acquisitions will be crucial.
The proposed 10 year tax holiday for the
power sector will benefit almost 18-20GW
(~10% of total generation capacity of India)
projects which are currently in various
phases of construction. However, the
current budgeted allocation for the
renewable and excise duty cut on its
imports is only expected to have a minimal
impact.
Banks are also allowed to raise long term
funds for the infrastructure lending which
will address their issue of asset-liability
mismatch. Providing autonomy to the
PSB’s and reducing the attractiveness
towards debt mutual funds (as mentioned
above) will enable banks to attract more
funds from customers. However the
proposed capital infusion of INR 112 billion
in the PSB’s, which is less than previous 4
year average, is not an encouraging sign
particularly when they are grappling with
increased NPL ratios.
The proposal of setting up an INR 100
billion venture capital fund, lowering of
investment allowance (to INR 250 million)
and designing a new legal framework for
exit are all expected to boost the flagging
small and medium enterprises segment.
The construction sector has also witnessed
an increased allocation in this year’s
budget which is expected to boost the
country’s employment levels, as this sector
is one of the largest employers in India.
However, all these steps of increasing the
consumer expenditure and boosting
manufacturing sector could yet be undone
by poor monsoon and consequential poorer
agriculture output. Along with this, its
possible spill over effects on the industry
and service sector would only worsen the
woes of already stagnating economy. This
is really a big challenge for the new
Government for achieving its promised
“Ache Din aane wale hain” motive.
FinNiche
Union Budget 2014
—- By V V Raviteja
July 2014
Page 4
FINANCIAL KNOWLEDGE
LBO stands for Leveraged Buyout which
means acquiring another company with the
help of leverage. The term is widely used in
Mergers and Acquisitions when one
company uses some form of leverage like
issuing debt, bonds and other instruments
and uses the proceeds to obtain or acquire
a company or any real asset. Generally, the
assets purchased are used as collateral in
order to obtain the leverage to the debt
holders.
The entities which use this form of takeover
strategy are not restricted to corporations.
In fact, funds like private equities and
hedge funds also use this form of strategy
to enhance their returns. Financial
sponsors are firms supply equity to fund
houses who then will combine it with
leverage to carry out the transaction
thereby enhancing the return. Leverage in
the form of debt is a cheap source of
financing and therefore increases the
return that can be attributed to the
shareholders. However, using too much
leverage increases the debt-to-equity ratio
which adds to the risk profile of the firm. So
there is a trade-off between the riskiness of
a deal and the cost of funding.
LBO’s are a win-win situation for both the
financial sponsor and the banks as the
sponsors get the means to carry out the
deal and the banks are able to earn a better
margin on their services than a normal
corporate lending. The debt issued can also
be divided into several tranches and sold off
according to the requirements of an
investor. The senior most tranche gets a
lower margin whereas lower tranches are
compensated for the risk in the form of
higher margins.
The first LBO can be dated back to 1955
when McLean Industries purchased Pan-
Atlantic Steamship Company. McLean
during this transaction borrowed US$ 42
million and issued preferred stock worth
US$ 7 million. These days you will see
several transactions involving LBO. The
latest deal which came into picture
involving LBO was the Dell’s buyout.
Motivations behind LBO:
Lower cost of funding
Enhanced returns from the buyout
Some of the risk transferred to the
debt holders
Risks involved in a LBO:
Risk profile of the acquiring company
increases due to increase of leverage
If too much leverage is used
sometimes cost of funding increases
when the optimal capital structure is
breached
Legal risk sometimes increases if the
debt holders are not treated properly
and fairly
A specific form of leveraged buyout is
Management Buyout or MBO where the
management of the company acquires the
company from the shareholders using
leverage provided by the owners itself.
MBOs are generally supported by owners
when they want to retire or liquidate their
equity position. MBO’s also create a conflict
of interest when the management is looking
for a lower price for the purchase and are
employed by the owners who would prefer a
higher price.
FinNiche
Leveraged Buyout (LBO)
July 2014
Page 5
FINANCIAL KNOWLEDGE FinNiche
Market This Week
Equity benchmarks plunged over 3.5% during previous week amid heavy profit booking
post the Railway Budget and the Union Budget. Both benchmarks touched new all-time
highs (26190/7808) on Tuesday’s session before succumbing to selling pressure. A
strong wave of selling pressure swept the index off its feet leading to its biggest percent-
age fall in 15 months. The broader markets bore deeper cuts as the BSE midcap
and small cap indices remained under the profit booking spell and ended down 7.00%
and 7.80% respectively. The 30 share S&P BSE Sensex closed down by 937 points or
3.61% at 25024, while the NSE Nifty settled at 7459, down by 292 points or 3.77%. In-
ternationally major European markets ended the week losing 3-4%. The Asian markets
traded mixed but maintained a negative bias taking cues from the weak US and Europe
markets.
SENSEX Simple Moving Averages
BSE SENSEX
CNX Nifty
July 2014
Thirty Days 25347.68
Fifty Days 24733.81
Hundred Fifty Days 22486.98
Two Hundred Days 21986.50
Page 6
FINANCIAL KNOWLEDGE FinNiche
Bank Rate 9%
Repo Rate 8%
Reverse Repo Rate 7%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 22.5%
INR / 1 USD 59.92
INR / 1 Euro 81.68
INR / 100 Jap. YEN 59.25
INR / 1 Pound Sterling 102.74
Commodity Unit Rs / Unit % Change
Gold 10 grams 28315 2.65%
Silver 1 Kg 46068 2.25%
Crude Oil 1 bbl 6070 -2.52%
Base Rate 10.00%-10.25%
Savings Deposit Rate 4.0%
Term Deposit Rate 8.0%-9.05%
Nifty Simple Moving Averages
Commodities
Lending / Deposit Rates
Thirty Days 7574.96
Fifty Days 7386.00
Hundred Days 6705.74
Two Hundred Days 6549.41
Key Policy Rates and Reserve Ratios
Exchange Rates
July 2014
FINANCIAL KNOWLEDGE FinNiche
NEWS
July 2014 Page 7
India’s Forex reserves up by $614
million
India's foreign exchange reserves rose by
$614.6 million to $316.39 billion for the
week ended July 4, Reserve Bank of India
(RBI) data showed. The reserves had
increased by $856.6 million to $315.77
billion for the week ended June 27, led by
a sharp jump in overseas currency assets.
According to the RBI's weekly statistical
supplement, foreign currency assets, the
biggest component of the forex reserves,
jumped by $760.6 million to $286.57
billion. The foreign currency assets had
grown by $850.9 million to $288.81
billion for the week ended June 27.
Wall St edges up; indexes post losses
for week
U.S. stocks managed to score modest
gains on Friday, but the S&P 500 posted
its biggest weekly drop since April as
investors showed only mild enthusiasm
after getting their first glimpses of
earnings. Shares of Wells Fargo & Co.,
which fell 0.6 percent to $51.49, were in
the spotlight as the biggest U.S. mortgage
lender was the first major U.S. bank to
report earnings. Wells Fargo's results will
be followed next week by earnings from
Citigroup, Goldman Sachs, JPMorgan
Chase and Bank of America.
Internet names ranked among the day's
biggest gainers, with shares of
Amazon.com Inc up 5.6 percent at
$346.20, and eBay Inc up 2.3 percent at
$51.50. The Dow Jones industrial average
rose 28.74 points or 0.17 percent, to end
at 16,943.81. The S&P 500 gained 2.89
points or 0.15 percent, to 1,967.57. The
Nasdaq Composite added 19.29 points or
0.44 percent, to 4,415.49. For the week,
the Dow ended down 0.7 percent, the S&P
500 slid 0.9 percent and the Nasdaq
tumbled 1.6 percent. A sharp drop in oil
prices slammed energy shares, with U.S.
crude futures settling down more than $2
a barrel. Shares of Exxon Mobil were
down 0.8 percent at $101.74 and were
the biggest drag on the S&P 500.
German business lauds India’s budget,
ready to invest in country
German companies are ready to invest in
India at the first signs of growth recovery,
while Finance Minister Arun Jaitley's
maiden budget shows the NDA
government is taking the right direction,
German business leaders said here
Friday. Germany is India's biggest trading
partner in Europe and ranks among the
top 10 countries by origin of foreign direct
investment (FDI) into India.
What has impressed the German industry
heads is that the government intends to
facilitate private business and foreign
investment. The union budget for 2014-
15 has raised the FDI cap in defence and
insurance upto 49 percent, with majority
control of ventures being retained in
Indian hands.
Apple holds iWatch release till
November
Apple iWatch is not likely to enter the
market until November. Earlier, it was
rumored that the much-awaited gadget
would probably see an early launch but a
report said that the launch date has been
deferred owing to both hardware and
software related complications. According
to the Mashable, KGI analyst Ming-Chi
Kuo has confirmed the delay and said
that the estimated time of iWatch mass
production has been extended from late
September to the middle or end of
November.
Page 8
FINANCIAL KNOWLEDGE
Aerospace jamboree on tenterhooks
over F-35 fighter, Airbus jet revamp
Suspense over the appearance of
America’s newest combat jet, a diplomatic
chill between the West and Russia and
the re-launch of an Airbus jet with a
surprise tweak in its name could make
the Farnborough Airshow one of the least
predictable for years.
While the world’s largest aerospace event
is traditionally a cauldron for new
technology and dazzling flying displays,
technical problems forced the F-35 Joint
Strike Fighter to withdraw from a warm-
up event and Farnborough's aircraft list is
already crossed through with several high
profile no-shows. The July 14-20
gathering will go ahead without the brand
new Bombardier (BBDb.TO) C-Series or
popular Russian fighter displays. Qatar
Airways has withdrawn its Airbus A380
superjumbo, saying the still undelivered
plane is not yet ready.
China demands wall around wealth
management sector to cut risk
Chinese banks must create a firewall
around increasingly popular wealth
management services, the country's
banking regulator urged, in order to avoid
any contagion from higher risk products
spreading to normal bank loans. Banks
must establish a separate department to
carry out wealth management business
by the end of September, the China
Banking Regulatory Commission (CBRC)
said on its website on Friday.
Thirsting for higher returns, China's
wealth management sector has exploded
in recent years, hitting around 12.8
trillion yuan ($2.06 trillion) by the end of
May. But the opaque nature of the sector
has fed concerns about its health. New
rules require banks to set up separate
departments for risk management,
accounting and statistical analysis for
wealth management services, and give
details for each wealth management
product individually.
Stock indices flat as Portugal fears
ease; oil down sharply
Major global equities markets steadied
and the yen stabilized against the U.S.
dollar on Friday as worries about
Portugal's biggest bank ebbed, while oil
prices dropped on easing concern about
supply losses in the Middle East. MSCI's
All-World Index, however, was still down
1.6 percent for the week, while the
Standard & Poor's 500 index was on track
for its worst week since April.
Early U.S. earnings reports sparked some
caution for U.S. stock investors, with Well
Fargo's shares down 1.2 percent after the
bank for the first time since 2009 did not
increase its earnings-per-share from the
preceding quarter.
US sets duties on South Korean steel
pipe in about-face
The U.S. Commerce Department on
Friday set duties on South Korean steel
pipe used in the oil and natural gas
industry, reversing itself in one of the
most contentious trade disputes in years
after hefty lobbying from U.S. producers
and lawmakers. The turnaround cheered
domestic steel companies battling a surge
in imports from foreign rivals looking to
cash in on surging demand for the
specialist pipes due to a boom in U.S.
shale drilling.
Duties will lift pipe prices and tighten
supplies, helping companies like United
States Steel Corp.
FinNiche
NEWS
July 2014
FinNiche
Fun Corner
FinQuiz 1. A —— loan is a short term loan availed until a longer term financing is obtained? 2. A certificate of debt is called ———-? 3. The measure of continuous rise in the worth of an asset is called ———-? 4. The value of an asset based on its original cost of purchase excluding the deprecia-
tion and other devaluing costs is called ———? 5. ———- is funds available for borrowing?
CARTOONS
FUN CORNER
Page 9
Rush in your entries to : finniche.imt@gmail.com The right entries will get their name featured in the next issue of FinXpress. So hit the quiz fast & get yourself visible among 1000 odd in the campus.
Feel free to write to us at : finniche.imt@gmail.com
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Publisher: Mukul Gupta
July 2014
Last Week’s Answers
1. Linkers 2. Baldev Singh 3. The Taj palace and tower 4. Spicejet 5. Tata Indica
Last Week’s Quiz Winners
Kushal Kapoor Ravi K
Sarthak Awasthi Mili Handa