THE INVESTOR VOLUME IX ISSUE IX … THE INVESTOR VOLUME IX ISSUE IX September2016 The Telecom War in...

NiveshakTHE INVESTOR September2016VOLUME IX ISSUE IX

The Telecom War in

India

How Jio will affect the

market

Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears

no responsibility whatsoever.

F R O M E D I T O R ’ S D E S K

NiveshakVolume IXISSUE IX

September 2016

Faculty Chairman

Prof. P. Saravanan

Aaron Keith Rego

Abhishek Jiaswal

Aditya Kumar Jain

Anisha Khurana

Ankit Singhal

Ankur Kumar

Anoop Prakash

Devansh Sheth

Shreyans Jain

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshak

The month of September saw the benchmark Sensex falling 557 points or 1.96% rom the start of the month. The month did not see any major economic events or policy announcements by the government. The most talked about topic this month was the new RBI governor who would replace Dr. Raghuram Rajan.This month also the news came that the country’s GDP grew by 7.1% in the irst quarter of this iscal year. This reairmed the India’s position as the fastest growing major-economy in the world. Also on the governance ront, there was some good news. Our Babu-led bureaucracy has inally energised themselves and has started competing among themselves to get the status best performing states. Many states have also hired big consulting irms to help them understand the process of evalua-tion and ind ways to improve their rankings. On policy-ront the government is tak-ing its initiative further and is giving major boost to the Uniied Payment Interface (UPI). There was also one initiative that could be the irst of the million steps needed to revive the inancially-drain Indian Railways (IR). The IR has started the dynamic surge-pricing for ticket booking for some of its premium trains.On magazine ront, this month we have covered HUL for our Equity Research Report. HUL being a behemoth FMCG company provides a wide view of the Indian rural sector economy also. Article of the month talks about talks about the Uniied Payment Interface (UPI). The author talks about why how the UPI is diferent rom Payment Wallet system and who it is another step to make a cashless society. Our cover story talks about the Telecom batle which has started with the launch of Jio at rock-botom price. On the FinGyaan, the author gives views on the GST and how it could help in removing the parallel economy running in the country. FinRewind sec-tion talks about the WorldCom Scandal in the year 2002. While for FinSight we have a topic on the robust BRICS economy. The author illustrates how these ive nations could be the engine of growth for the world economy. On Classroom this time we are explain the concept on Margin Trading.For FinView, this time we have brought the interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz. He gives his views on investment philosophy, how we can convert the insurance industry into a pull-based selling model and how IoT can add value to the Insurance industry. Finally, we would like to thank our readers for their immense support and encourage¬ment. You remain our prime motivation factor that keeps our spirits high and gives us the vigour and vitality to keep working hard. We hope you had a great inancial year and wish you the best for the new one. Stay invested Team Niveshak

C O N T E N T S

Niveshak Times

04 The Month That Was

Article of the month

12 Uniied Payment Interface and Its Impact on Payment

Cover Story

24 WorldCom Scandal, 2002

Finsight

28 BRICS - The Fuel to the World’s growth Engine

CLASSROOM

33 Margin Trading

FinGyaan

20 GST Impetus for Indian Econ-omy

FinRewind

16 Telecom Data War

FINVIEW

30 Mr. Tapan Singhel, MD & CEO of Bajaj Allianz

Equity Research Report

10 HUL

MAY 2016

GDP grew by 7.1% in Q1

Indian economy grew by 7.1% in the irst quarter

of this iscal. Though this reairms the India’s

positions as the fastest major economies in the

world, the growth is below expectations. This also

diminishes the hope of achieving 8% growth for

the whole year. Also this growth is also slow than

the 7.9% growth achieved in the Q4 of FY16.

Indian economy needs to grew by 8% consistently

if it needs to create job, reduce poverty and uplift

the life of people. This slow growth might also put

some pressure on the central bank to cut interest

rate in the monetary policy meeting on October

4th. But that hope is also tied to the inlationary

pressure in the economy.

The April – July iscal deicit was registered at 73.7%

of the whole year’s budget which is slightly above

than the last year’s igure of 69.3%.

Sony to Acquire Ten Sports

Sony Pictures Network Limited (SPN) will buy Ten

Sports for INR 2600 crore from Zee Entertainment

Enterprise (ZEE). This would add muscle to the

already large portfolio of SPN.

SPN currently owns channels like Sony Six, Sony

Six HD, Sony ESPN and Sony ESPN HD. By acquiring

Ten Sports it will add channels like Ten 1, Ten 2, ten

3 etc.

ZEE had also acquired Ten Sports from Dubai-

based Abdul Rahman Bukhatir’s Taj Group for INR

500 crore.

Adding Ten Sports channels to its portfolio to

its already diversiied channels will make SPN’s

portfolio quite strong. Also SPN holds broadcasting

right to the Indian Premier League (IPL). The

biggest advantage would come from channels like

WWE (World Wrestling Entertainment).

States Competing to Get the Best Ranking

Competition would even get the babu-culture

moving was little unexpected. But that has actually

happened among the states.

Indian states are competing among themselves

to get the best ranking among themselves.

These ranking are updated continually. As soon

any reform or initiative has been veriied by the

concerned department, the same is fed into the

dashboard. This is done on a real time basis.

To understand the process and to improve their

rankings, states have hired top-notch consultants.

The consulting irms would also help these states

on how they could improve their ranking.

There have been some disagreements about

the method. While some states have questioned

the process of evaluation, DIPP has also raised

question about the reforms initiated by some

states contemplating whether these reforms

should qualify for consideration in the evaluation

process or not.

Moves to Revive Construction Sector

In a major step to boost the economy and take

it to the path of growth trajectory, government

has taken slew of measures that will boost the

construction sector. As this sector is linked to the

heavy-metals industries, revival in construction

sector would have direct efect on the improvement

in other sectors.

Speciically, the government has taken steps to

improve the process of release of funds stuck in

the arbitration process. As per the data release

government agencies, pending claims from

government bodies are the major reason for the

burgeoning debt in the construction sector. These

pending claims account for about 150% of the

total debt.

The government has also given approval to the

100% FDI in the food sector.

Under the steps taken by the government, the

government would pay around 75% of the claim

amount to an escrow account. For faster settlement

the disputes would also be transferred to a new

arbitration process.

Push for Financial Inclusion: UPI to Get Major Boost

In a major push for the inancial inclusion that

would help sort the last mile connectivity problem,

the government has given major push to the

The Niveshak Times


IIM Shillong

Team NIVESHAK

NIVESHAK4T

he

Mon

th T

hat

Was

Uniied Payments Interface (UPI). UPI could rope in

as many as 1015 ecommerce players.

The concept of UPI is almost same as that of the

mobile wallet system Paytm. But there is a slight

diference. While payment apps like Paytm does

not require one to have bank accounts, UPI system

would work with bank account. However the other

functionalities and workings are almost same.

This would act both as advantage as well

disadvantage. While advantage would be in the

form of people would be opening bank accounts

and thus inancial inclusion while this same

advantage couls be its biggest stumbling block

since a large section of people still do not have

proper documents to open bank accounts.

Employees Could Hold Large Share in a Company’s

IPO: SEBI

In order to increase retail participation in the

companies market regulator Security Exchange

Board of India has increased the participation of

employees in the company in which they work.

As per the earlier guidelines, employees could bid

up to INR 2 lakh for their company’s IPO. But with

the revised guidelines, the employees would be

able to invest unto INR 5 lakh in their company.

This has been done to improve the participation

and increase the retail base in the company’s IPO.

In 2010, SEBI had hiked the employee participation

up to INR 2 lakh. But from then there has been

devaluation in rupee. So to ofset that efect of

rising inlation SEBI has taken decision to increase

the limit.

Dynamic Surge Pricing in Railways

Railways has taken a step that would help it mop

up little more cash. It has introduced surge pricing

mechanism for premium trains like Rajdhani,

Satabdi and Duronto.

Under the proposed mechanism, the railways price

would increase with the increase in the number

of the reserved berth. With every 10% reservation

in the birth, the price would increase by 10% of

the base price. Also the maximum price has been

capped to 1.5 times the base price. This means

around 50% of the total seats would be sold at

1.5 times the base price. This would be done only

on the base fare. Other charges like reservation

charges, IRCTC charges etc. would be levied in

addition to the above hiked charges.

Railways oicials said that this would help Indian

Railways mop up around INR 500 crore for this

iscal. Also they contended that when other modes

of transportation have dynamic price mechanism

then why not Railways should have.

The Niveshak Times

www.iims-niveshak.com 5NIVESHAKT

he M

on

th T

hat W

as

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

SEPTEMBER 2016

6C

ov

er

Sto

ry

NIVESHAK6A

rtic

le o

f th

e M

on

th

MARKET CAP (IN RS. CR)BSE Mkt. Cap 1,10,73,648

CURRENCY RATESINR / 1 USD 66.66

INR / 1 Euro 74.75

INR / 100 Jap. YEN 66.05

INR / 1 Pound Sterling 86.42

INR/ 1 SGD 48.84

POLICY RATESBank Rate 7.00%

Repo rate 6.50%

Reverse Repo rate 6.00%

Market Snapshot


RESERVE

RATIOSCRR 4.00%

SLR 21.00%

LENDING / DEPOSIT

RATESBase rate 9.30%-9.70%

Deposit rate 7.00% - 7.30%

Source: www.bseindia.com

www.nseindia.com



Date as on September 30th

Mark

et S

nap

shot

-2,000

-1,000

0

1,000

2,000

3,000

4,000

27200

27400

27600

27800

28000

28200

28400

28600

28800

29000

29200

01

-09

-20

16

02

-09

-20

16

06

-09

-20

16

07

-09

-20

16

08

-09

-20

16

09

-09

-20

16

12

-09

-20

16

14

-09

-20

16

15

-09

-20

16

16

-09

-20

16

19

-09

-20

16

20

-09

-20

16

21

-09

-20

16

22

-09

-20

16

23

-09

-20

16

26

-09

-20

16

27

-09

-20

16

28

-09

-20

16

29

-09

-20

16

BS

E

FII

, D

II N

et

turn

ov

er

(in

Rs.

Cro

res)

BSE DII FII

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

INR/1 USD Euro/1 USD GBP/1 USD JPY/1 USD SGD/1 USD

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

7C

ov

er

Sto

ry

NIVESHAK 7A

rticle of th

e Mon

th7

Co

ve

r S

tor

y7

Mark

et Sn

ap

shot

BSEIndex Open Close % change

Sensex 28459.09 27865.96 -2.08

MIDCAP 13236 13167 -0.52

Smallcap 12665 12781 0.91

AUTO 22043 22232 0.85

BANKEX 22683 22046 -2.81

CD 12488 12549 0.48

CG 15195 14582 -4.04

FMCG 8828 8461 -4.61

Healthcare 16144 16181 0.23

IT 10457 10229 -2.18

METAL 9943 9764 -1.80

OIL&GAS 11080 11378 2.68

POWER 2103 1990 -5.40

PSU 7511 7462 -0.65

REALTY 1542 1512 -1.93

TECK 5764 5631 -2.32


Market Snapshot

% CHANGE

Sensex, -2.08%

AUTO, 0.85%

BANKEX, -2.81%

CG, -4.04%

CD, 0.48%

FMCG, -4.16%

Healthcare, 0.23%

IT, -2.18%

METAL, -1.80%

MIDCAP, -0.52%

OIL&GAS, 2.68%

POWER, -5.40%

PSU, -0.65%

REALTY, -1.93%

Smallcap, 0.91%

TECK, -2.32%

1

% Change

Information Technology(10.91%)

Done on 30/6/14

Pharmaceuticals

(9.78%)

Dr Reddy’s Labs

Wg: 3.83%

Gain: 5.77%

Lupin

Wg: 5.95%

Gain : 29.94%

FMCG(21.84%)

BritanniaWg: 7.26%

Gain: 236.36%

Misc. (12.07%)

Amara Raja

Wg: 4.67%

Gain: 45.84%

Titan Company

Wg: 4.26%

Gain: 5.39%

Auto (9.94%)

Tata Motors

Wg: 5.27%

Gain: 26.15%

Infosys

Wg: 3.33%

Gain: 24.76%

HCL Tech.

Wg: 3.84%

Gain : 7.79%

Niveshak Investment Fund

ColgateWg: 5.62%

Gain : 26.70%

TCS

Wg: 3.74%

Gain : -3.91%

HULWg: 4.28%

Gain: 24.57%

Bank (7.05%)

ITCWg: 4.69%

Gain: 4.30%

Chemicals

(9.31%)

Asian Paints

Wg: 9.31%

Gain: 88.38%

HDFC Bank

Wg: 7.05%

Gain: 38.92%

Midcap Stocks (12.55%)

Bharat Forge

Wg: 3.93%

Gain: 3.74%

Kalpataru

Power

Wg: 4.01%

Gain: --2.53%

Natco Pharma

Wg: 4.61%

Gain: 17.67%

Textile

(6.56%)

Page Indus.Wg: 6.56%

Gain : 46.54%

Godrej Consm.

Wg: 7.81%

Gain: 86.44%

Risk Measures:

Standard Deviation : 19.21 (Sensex 9.93)

Sharpe Ratio : 3.34 (Sensex : 3.22)

Cash Remaining: 58,000

Performance EvaluationAs on 30th Sep 2016

Value Scaled to 100

Comments on NIF’s Performance & Way Ahead: The month of September saw

the markets remaining relatively tepid with not much movement in the markets.

The markets saw a bit of volatility due to the Fed meeting initially and later on

the tensions between India and Pakistan saw the market take a nosedive

The coming month will see the focus shift towards the company quarterly results

and the Reserve Bank of India monetary policy meet whose decision on key

interest rates could cause turmoil across the Indian markets.

The top performers during the month in the NIF were Natco Pharma and ITC

which saw a gain of 12% and 8% respectively whereas the laggards were Bharat

Forge and Amara Raja Batteries which fell by nearly 6% and 4% respectively.

95

105

115

125

135

145

155

165

175

185

30-01-2014 18-08-2014 27-02-2015 03-09-2015 16-03-2016 27-Sep-16

Performance of Niveshak

Investment Fund since Inception

Scaled Sensex

Scaled NIF

95

96

97

98

99

100

101

102

103

1/9 4/9 7/9 10/9 13/9 16/9 19/9 22/9 25/9 28/9

Sep Performance of Nivehshak

Investment Fund

Scaled Sensex Scaled NIF

Opening Portfolio Value : 10,00,000

Current Portfolio Value : 1681889

Change in Portfolio Value : 68.18%

Change in Sensex : 35.94%

10 NIVESHAKC

ov

er

Sto

ry

10E

qu

ity R

esea

rch

Rep

ort


Co

mp

an

y

Ba

ckg

ro

un

d

Bu

sin

ess

De

scrip

tio

n

Co

rp

ora

te

Go

ve

rn

an

ce

Rating Buy

Target Rs. 1114

Current Market price Rs. 868

Target Period 6-7 months

Potential Upside (Annualized) 28% (53%)

Rating Matrix

Gro

wth

D

riv

ers

EQUITY RESEARCH REPORT – Hindustan Unilever Limited Date: 30th September

Ticker (BSE) 500696

Ticker (NSE) HINDUNILVR

Sector FMCG

M- Cap ₹ 191257 Cr.

Basic Information

• Organised sector growth is expected to grow as the share of unorganised market in the FMCG sector fall with increased level of brand consciousness

• Growth in modern retail will augment the growth of organised FMCG sector

• Availability of products has become way more easier as internet and different channels of sales has made the accessibility of desired product to customers more convenient at

required time and place

• Rural consumption has increased, led by a combination of increasing incomes and higher aspiration levels, there is an increased demand for branded products in rural India

• Investment in this sector attracts investors as the FMCG products have demand throughout the year.

Jun - 16’ Mar – 16’ Dec – 15’

Promoter 67.20 67.21 67.21

Public 32.80 32.79 32.79

Others 0.00 0.00 0.00

Total 100.00 100.00 100.00

Shareholding Pattern (As per BSE)

Hindustan Unilever Limited (HUL) is an Indian consumer goods company based in Mumbai, Maharashtra. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast

moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of €48.4 billion in 2014. It is owned by Anglo-Dutch Company-Unilever

which owns a 67% controlling share in HUL. HUL's products include foods, beverages, cleaning agents, personal care products, and water purifiers.

HUL’s business falls primarily under 5 segments: Soaps, Detergents and Household Care, Personal Products, Beverages and Packaged foods. The primary sources of revenue for HUL

are Cosmetics (48.87%), Tea (25.92%) and soaps (16.19%). They have several brands such as Lux (Soap), Surf Excel (Detergent), Clinic Plus (Hair Care), Lifebuoy (Soap), etc. of which

the first 3 brands rank in the top 10 of ACNielsen Brand Equity list. A total of 16 brands of HUL feature in the list. The company has 35 brands spanning 20 categories of the FMCG

business & over 16,000 employees. Innovation has always been HUL’s key strengths.

The company has 5 independent directors out of total 9 members in board of directors. It follows

a differential remuneration policy for Non-Executive Directors, with the maximum limit of

remuneration payable to them is Rs 150 lakhs, for the period from 1st April 2013 to 31st March

2018. The Company has adopted the policies in line with new governance requirements

including the Policy on Related Party Transactions, Policy on Material Subsidiaries, CSR Policy and

Whistle Blower Policy.

HUL ER Report

Equity Research report


11C

ov

er

Sto

ry

NIVESHAK 11E

qu

ity R

esearch

Rep

ort

In

du

stry C

om

pe

titio

n

Co

mp

ara

ble

Va

lu

atio

n

Te

ch

nica

l

An

alysis

Method Value/Share Weight Fair Value

Discounted Cash Flows 1067.13 0.33

963.07Relative Valuation 779.41 0.33

Residual Income Valuation 1042.66 0.33

Valuation Summary

Threat of New Entry – Medium

• Substantial investments are necessary to

achieve growth and economies of scale

Buyer power – High

• Consumers are generally willing to

experiment & brand loyalty is low

Supplier Power – Low

• Large number of suppliers are locally

available

• Raw material can be sourced locally

Threat of Substitutes – High

• Consumer needs are continuously shifting

• Newer products are being rapidly launched

by competitors

Using technical analysis we can estimate a short term target of 910 which is nearly a 5% upside from

current levels as the 50% retracement levels of the downtrend is around that level. The RSI and

MACD also indicates an oversold position and the likelihood of a bounce back is on the cards. In the

long term the stock may find resistance at the 950 level which is its 52 week high and approximately

near our expected target price.

Industry Rivalry

The industry is highly cluttered and there

are lots of companies competing for the

same market

In

du

stry

Fig

ure

We have calculated the stock’s intrinsic value based on a weighted average of DCF, Residual Income

and Relative multiples based valuation. Starting FY17, growth in revenues have been estimated at a

gradually declining rate averaging 15% for the first 5-yr and 3% for the next. Due to the non-cyclical

nature of business, the sensitivity of HUL stock is below 1, indicating a defensive nature with a WACC

of 6.9%. The fundamental value stands at Rs. 963 and given a CMP of Rs. 868 as on 30th Sep, ’16, the

stock is undervalued.

The near term profitability might be impacted by entry of competitors in the market however HUL

continues to enjoy a market leader position in many segments of the FMCG market and will continue

to earn a sizeable margin despite stiff competiton.

BUY: If stock is expected to deliver more than 10% annualized returns over holding period

NEUTRAL: If stock is expected to deliver (-)10% - 10% annualized returns over holding period

SELL: If stock is expected to deliver less than (-)10% annualized returns over holding periodRa

tin

g

De

fin

itio

n

EQUITY RESEARCH REPORT – Hindustan Unilever Limited Date: 30th September

The consumer durables market is expected to reach US$ 12.5 billion in 2015 and US$ 20.6 billion by

2020. Urban markets account for the major share (65 per cent) of total revenues in the consumer

durables sector in India. There is a lot of scope for growth from rural markets with consumption

expected to grow in these areas as penetration of brands increases. Also demand for durables like

refrigerators as well as consumer electronic goods are likely to witness growing demand in the

coming years in the rural markets as the government plans to invest significantly in rural

electrification.

The FMCG sector has grown at an annual average of about 11 per cent over the last decade. The

overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$ 110.4 billion

during 2012-2020, with the rural FMCG market anticipated to increase at a CAGR of 17.7 per cent to

reach US$ 100 billion during 2012-2025.Food products is the leading segment, accounting for 43 per

cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) come next in

terms of market share.

SEPTEMBER 2016

12C

ov

er

Sto

ry

NIVESHAK12A

rtic

le o

f th

e M

on

th121212

IIM UDAIPUR

Siddarth Bhargava & Karan Verma

maintaining the history of inancial transaction. It will further integrate inancial inclusion of Indian society.

UPI is a type of payment system within standard set of Application Programming Interfaces (APIs) to facilitate online immediate payment systems, which leverages on increasing smartphones demand and Internet penetration. Unlike NEFT/RTGS/IMPS, the system is far more structured and standardized across other banks. This system will surely compete against the mobile wallets with much lesser transaction details to be inserted. The architecture of UPI is built on IMPS.

How does it Works?

The system is hassle free and it eiciently

Introduction

As soon as the Uniied payment interface was launched by Reserve bank of India, the speculations have been rife that this shall mark the end of payment wallets in India. The objective of this article is to understand Uniied Payment Interface or UPI and its diferent features along with understanding the impact of UPI on payment wallets.

Uniied Payment Interface (UPI)

With the motto “Power to Empower”, Digital India campaign was launched. National Payments Corporation of India (NPCI) brought this innovative idea of Uniied Payment Interface (UPI) to further digitize India and make it a cashless society. The digital systems help in removing opacity of cash while

Uniied Payment Interface and Its Impact on Payment


13C

ov

er

Sto

ry

NIVESHAK 13A

rticle of th

e Mon

th1313


13

removes the hectic steps of entering account number, account type, bank name and IFSC code. Once the UPI enabled banks connects the individual to the system, the transaction can be initiated by inserting either of Aadhaar Number, mobile phone number or virtual payment address. The addresses are of two types – global and local. Global address includes Aadhaar, bank account number and mobile number. Local address is a virtual address, which is being provided by banks and resembles similar to email ID (xxx@icicibank).

The process is robust enough to complete transaction on inserting virtual number itself. The authentication by providing MPIN (Mobile Personal Identiication Number) and not OTP (One Time Password) further removes the inconvenience of waiting for the password to lash out. Successful transaction message will prompt up to complete the process. At back end, NPCI will maintain a database of customer’s mobile number, Aadhaar number and bank details. This central mapper (central

repository) will route out payment instructions based on the details. The ABPS (Aadhaar Payment Bridge System) will share this mapper for NACH (National Automated Clearing House) and impart subsidies or direct beneits to the individual.

Key Drivers of UPI

NPCI ideated of implementing UPI in order to simplify and bring down everything on a single payment interface. The key drivers are: -

Simplicity – Receiving and paying payment as smooth as swiping phonebook or making call is the primary motive. An account holder can pay the identiier with the “payment address” (Aadhaar Number, Virtual Payment Address, Mobile Number etc.) and not by illing account/bank details every time. The solution can be initiated from either side, which further eases down the process.

Adoption – Given the projection of Mobile and

NIVESHAK 13

SEPTEMBER 2016

14C

ov

er

Sto

ry

NIVESHAK14A

rtic

le o

f th

e M

on

th1414

Internet penetration in the upcoming year, the model is scalable. Pilot operations should allow gradual adoption of smartphones and feature phones. The consumer who is not yet using mobile application should also be getting beneited. Interoperability with diferent identiiers should not crash down the solution.

Innovation – The model allows innovations to be done on both side i.e. payee and payer side. Apart from it, the application providers should have advantage of enhancing mobile devices, providing integrated payments across diferent platforms, newer authenticating process which is hassle free etc.

Security – With the increasing cases of phishing, risk scoring etc. in this technological world, an individual always has concern about security of their data. The solution should provide end-to-end robust security and data protection. As per note speciied by NPCI, 1-click 2-factor authentication has been ofered in the solution that can be further improvised.

Cost – In a cost-conscious country like India, the costly product doesn’t long last. As mobile phones are being used for credential capture, virtual payment addresses and third party authentication schemes like Aadhaar, the cost is likely to be driven down for both the acquiring and issuing side.

Diferentiating features

Although we had payment wallets in the existing market, the solution ofers some of the contrasting features to scale it at large.

“Pay by Date” feature is added in the interface, which makes collective request to individual or group for payment on due date. Additionally snoozing option has been provided to pay the request before expiry date to escape from services being blocked.

Multiple recurring payment options with higher credit limit. Unlike payment wallets, the solution provides transaction for higher monetary value i.e. up to one lakh.

NPCI has indicated a charge of 0.50 INR per transaction, which will appear in bank statement as IMPS transaction. AP Hota, CEO & MD NPCI said, “Already a few banks (Yes Bank) out of 29 banks have gone live with UPI to serve their customers. A few other banks are

NIVESHAK

also likely to incorporate this game changing experience for their customers.”

Impact of UPI on Payment wallet

Ever since the launch of UPI by RBI, speculations have been rife that UPI will mark the end of payment wallets in this country. Since none of the banks have actually rolled out or integrated the platform to their existing apps, it’s very early and uninformed speculation to declare sudden deaths of wallets. Even today the number of wallet users in India is much more than the users base of any of the mobile banking app. Although the new interface seems to provide promising results in the future, but the impact on payment wallets is yet to be assessed properly.

As more and more banks integrate their existing apps with UPI, more and more customers are expected to use these apps for cash transfers. Majority of the people opting for these services are expected to be people who frequently transact with. As we understood that the main beneits of payment wallets are limited liability exposure and ease of transactions, the wallets to be impacted the most are the ones with just these value propositions. Wallets will have to evolve themselves to come up with better value propositions to make them more attractive.

Wallets have become main stream today with Paytm alone having more than 122 million users. The main hurdle for the UPI to overcome is cash which due to its iniquitousness, is the most famous medium for transactions. The ticket size of payments through UPI is expected to be not very high and equivalent to that of wallets.

With the growing internet and smartphone penetration, the number of wallet users have increased manifold due to the ease of usage and convenience. With the UPI integration in banking apps, the bank apps will add convenience of wallets but with added advantages of a bank account. The acceptability and ease of usage of banking apps will play a crucial role in deining the future course of UPI and its impact on payment wallets.


15C

ov

er

Sto

ry

NIVESHAK 15A

rticle of th

e Mon

th

But implementation and integration of UPI isn’t that simple with current banking apps. Training staf, upgradation of technology and changing perceptions of the people will include huge investments. Building trust among the consumers may also be a challenge for the banks for using UPIs.

UPI is essentially just an architecture for payments and rather than a competition, may as well act as enhancer of increasing acceptance for payment wallets. Currently most of the wallets either add money via Debit card, internet banking or cashbacks. The irst two modes of loading the money into wallets require a customer to have internet banking or debit card. With the introduction of UPI, this will no longer hold. People with a bank account, using a mobile banking app can transfer funds seamlessly to their wallets.

Since these wallets allow customers to pay to many merchants, the acceptance of bank apps and consequently UPI by the customers is important for the success of UPI architecture. Although the process of transferring money doesn’t require either of the recipient to share his/her account details and hence has a better chance to gain trust of the customers.

The major hindrance for the wallets is the fact that the commission structure is very huge and makes their model diicult to operate, in wafer thin margins. Payments of wallets through net banking or cards include transaction fees of two percent that is usually split between bank and wallet. The wallet gets a share of 0.4-0.5% which makes their business diicult to operate in. Huge transaction charges is another why many merchants, especially the smaller ones haven’t yet moved to online modes of payment. This is where RBI is working with introduction of UPI.

With more than 50 million small registered business, and two million of them paying service tax, wallets have been able to partner with only a fraction of them (30,000). There are still a lot of low hanging fruits in the market up for grab. The acceptance of UPI by these small merchants can go a long way in digitizing the economy and reducing physical cash.

As the economy moves more towards digitization, and with increased acceptance of online modes of payments, and if the wallets decide to evolve themselves into more than just a cash alternate, the UPI can be a game changer for the economy.

The most critical factor for the success of UPI is the seamless integration of it with banking apps and ease of use to increase the usage among the consumers. The technological framework seems to be the only challenge that the banks will have to overcome in order to make UPI a success.

To conclude, it’s too early to declare the death of payment wallets via UPI architecture. Although UPI does provide a plethora of opportunities in the digitization of money transfer in India

With the introduction of UPI, the adoption is highly dependent upon the customer touch point that is the banking apps. The banking apps will have to evolve to be as user friendly and convenient as the payment wallets and their apps are. Although the new customer base will be the one that comes from untapped market or cannibalized from wallet users is yet to be seen.

For wallets this is a technological breakthrough that will disrupt the payment wallets market. The UPI architecture can also provide the wallets an opportunity to tap the untapped market and bring more users to its platform, and at the same time they will have to evolve from just a digital wallet and provide more services to consumers like doorstep pickup of cash, micro-credit, hyper local transactions etc. to make the space more competitive.

But the real winner of the whole new evolved system will be RBI, which will be one step closer to creating a cashless society. At the same time Indian consumers will have the real ease and convenience of carrying any amount of money without the actual cash risk.

SEPTMEBER 2016

16 NIVESHAK

Co

ve

r S

tor

y

population have access to mobile phones. Next big challenge is the internet. Hence, Reliance Jio has invested Rs.15000 crores in laying down the optical ibre network all across India. Charging for SMS and voice will be redundant as many apps provide these facilities for free. Hence, telecom companies see potential customer base in the internet segment.

Reliance JIO Business Model

To target the India’s $50 billion telecommunication industry Reliance Jio has come up with various plans. The underlying rationale behind the business model of Reliance Jio is the more data you use, the cheaper it will be for you. Reliance Jio is promising to provide 1 GB data for as low as 50 rupees and subscription to all reliance Jio apps for free for one year. Another big feature of Reliance Jio plan is the free voice calling. In the

Mukesh Ambani at the Reliance Industries’ 42nd annual general meeting on 1 September’, 2016 made an announcement on Jio, RIL’s telecom venture, including its data tarif plans and the free voice call services across India. The 45 minutes speech resulted in 9800 crores and 2450 crore market capitalization loss for the two telecom giants Airtel and Idea Cellular respectively. The underlying business model of increasing the ‘willingness to pay’ for the customers so that they happily pay little more to get attractive services has triggered the price war with existing telecom operators.

Importance of 4G

Of 1 billion mobile users, only 34% have access to the internet, and only 10% of mobile users use 3G or above. Telecom companies have realised that there is not going to be movement in a voice now as 80% of the Indian

IIM SHILLONG

Ankit Singhal

Telecom Data War


17C

ov

er

Sto

ry

NIVESHAK

network providers, free data at night, access to JIO apps they are tempting users to pay more. The target of Reliance Jio is to get Rs 300 from

each customer by the year 2017.

Retaliation from other Telecom Carriers

As of now Reliance Jio has not been commercially rolled out. It will be available from Jan 2017, and then the number portability

year 1995, per call charges was INR 32 per minute but surprisingly after 21 years customer will get “free calls.” Also, they are providing unlimited data at night for 3 hours to attract the customer and eliminating the concept of roaming and SMS charges. Providing unlimited data won’t cost much as they have already laid down the optical ibres, ranging over 2.5 lakh kilometres so that it won’t cost them much. The average monthly revenue per user (ARPU) in India is Rs 150, and they have kept the lowest monthly plan of Rs 149 with all the facilities like SMS, voice calls

and roaming for free. By keeping the lowest monthly plan of 149, they have made sure to

earn at least the current average revenue from each customer. Their other monthly plans for the data users and with attractive facilities like 4G, more data compare to other telecom

SEPTMEBER 2016

18 NIVESHAK

Co

ve

r S

tor

y

option will also be available. So, other telecom operators have three months to make sure that they maintain their customer base or attract new customers with their pricing strategies.

Reliance Jio customers are reporting a huge

number of call drops, and big traic of call volumes is between Reliance Jio and Airtel. Reliance Jio released the live data on call drops its users are experiencing due to Airtel, Vodafone, and Idea not providing enough connectivity.

Airtel: Reliance Jio accused Airtel of ‘anti-competitive behaviour.’ Airtel, in turn, accused reliance Jio of not cooperating to cover up technical issues from Reliance Jio’s side.

Reliance Jio is providing free data, voice calls, and text services for the year 2016. To counterattack this scheme, Airtel has come up with 90 days of 4G service for Airtel 4g customers which is priced at 1495 starting from October 1, 2016.


19C

ov

er

Sto

ry

NIVESHAK

Beneits for the customer

Whenever tarif war has unleashed it has always beneited the customer, and the same will happen this time around too. The healthier the competition, better it would be for the customers. Customer will receive better service quality, 4G internet services at afordable prices. Current telecom war will ensure that internet speed will be faster than what has been previously provided by various telecom providers. The charges for roaming, SMS, voice calling won’t be taken from the customer. In the coming months, telecom operators may come up with even better plans to increase or retain the customer base. In the end, the quality of service provided by the telecom operators will decide the winner of this telecom war.

BSNL: BSNL came up with the plan of providing unlimited data for Rs 249 at a download speed of 2 Mbps. Consumers can download 300 GB of data and per Gb price will be less than Rs 1 which is very cheap for the Indian market. But unlike Jio’s ofer that is available for 4G customers, BSNL plan will be open for 2G and 3G customers.

Vodafone: Vodafone and BSNL signed a 2G intra-circle roaming agreement to use each other’s assets and network strength across the country. This strategic partnering will help BSNL in expanding its reach in urban areas and will help Vodafone in expanding its reach in the rural areas.

Vodafone has launched a scheme of ofering 10 GB 4G data at the cost of 1 GB for three months for the new handset (handset which has not used Vodafone sim in last six months).

Vodafone Group has pumped in Rs 47,700 crores of overseas investment into its Indian operation, to reduce the unit’s debt and to prepare for the upcoming auction. The move signals Vodafone’s aggressive intent in the spectrum auction for 4G waves.

Impact on upcoming Spectrum Auction

The aggressive price wars will have an impact on October’s spectrum auction. The mountains of debt along with the aggressive price war may result in $74 billion loss for the government in October’s auction. Some operators have decided to sit out of the auction, and some have decided not to go for certain wavelengths. India was planning its biggest sale of spectrum that can bufering on videos and can speed up download speed for 1 billion plus users in world’s 2nd largest smartphone market. Government generated $18 billion revenue from last year’s auction and $9.8 billion from the auction held in 2014 and this year they were planning to raise $83 billion from the auction. But, companies will spend a fraction of what they have spent in the previous auction to fend of the new market model of Reliance Jio and aggressive price tactics employed by other telecom carriers.

But, Vodafone is looking to spend big in this year’s auction and may spend up to Rs.16300 crores to boost 4G services

20 NIVESHAK2020 NIVESHAK20

SEPTEMBER 2016

and Credit Utilization leading to a complete overhaul of the current indirect tax system. GST will have a strong impact on almost all aspects of business operations, for instance, pricing of products and services, optimization of supply chain, IT, accounting and tax compliance systems. This comprehensive tax will cover all stages right from production to the sale and will be levied only on the value added at each stage of the process.

GST has been commonly accepted around the

world having acknowledgement of more than

GST is the biggest reform in the indirect tax structure of India since the economy began to be opened up 25 years ago. The Constitution Amendment Bill for Goods and Services Tax (GST) passed in the Rajya Sabha on 3 August 2016 will rework the taxation powers of the Centre and states, set up a GST council and roll out the new tax regime from April 2017. With the roll out of GST, a common Indian market will be developed and the cascading efect of tax on the cost of goods and services will be reduced. GST will impact the Tax Structure, Tax Computation, Tax Payment, Compliance

Fin

Gyaan

GST Impetus for Indian Economy

IIT BOMBAY

Vipin Sirohi

21C

ov

er

Sto

ry

21F

inG

yaan

NIVESHAK


Reform Measure

• Economic Union of India: Goods

can be easily moved across the country with

difused state boundaries which will encourage businesses to focus on pan-India operations.

• Simpler Tax Structure: By merging all

levies on goods and services, GST acquires

a very simple and transparent character with

less paperwork and reduction in accounting

complexities. A simpler tax regime will make

the manufacturing sector more competitive and

save both money and time.

• Reduced Tax Burden: Under the

present tax structure of India, a company has

to pay multiple taxes to the centre and state

governments, which results in the tax costs for

a business going up by many folds. However,

under GST, the cascading impact of these

multiple taxes will be eliminated.

140 countries and the tax rate is between 15%-

20% in most of the countries.

Taxation under GST

GST shall be levied concurrently by the Centre

(CGST) and the States (SGST). Both CGST

and SGST will be levied on the basis of the

destination principle. Thus, exports would be

exempted from domestic taxation, and tax on

imports would be levied in the same manner

as domestic goods and services. Inter-State

supplies within the country would attract an

Integrated GST (aggregate of CGST and the

SGST of the destination State). All the things

useful for the poor are expected to be kept out of

the tax bracket.

Achievements Expected of GST as a Policy

SEPTEMBER 2016

22C

ov

er

Sto

ry

NIVESHAK22A

rtic

le o

f th

e M

on

th • Uniform Tax Regime: To attract

industries and drive the economy of the state,

many states ofer complete or partial exemptions from the taxes. However, with only one or two

tax rates across the supply chain, state speciic advantages/disadvantages will be gone, thus

ofering a level playing ield for all stakeholders. • Greater Tax Revenues: A simpler taxation

regime will bring greater compliance thus

leading to increase in the number of tax payers

and in turn tax revenues for the government.

• Competitive Pricing: The total tax

component of any product manufactured in India

is about 25-30% of the cost of the product. After

implementation of GST, the tax paid by the inal consumer will come down in most of the cases

and it will help in boosting consumption, which

is further beneicial to companies. • Push to Exports: India is expected to

climb up the Ease of Doing Business ladder

quickly with a uniformed tax structured. The

competitiveness of Indian goods in international

market will increase with the fall in production

cost in domestic market. This bodes well

for exporters, who compete with global

manufacturers that operate on very diferent cost structures.

• Prepares for Ease of Doing Business:

With a uniformed tax structure under GST,

everyone expects India to better its Ease of

Doing Business ranking quickly. The reduced

tax on the manufacturing and procurements will

help reduce the price for exports and support

make in India campaign by making Indian

goods competitive in the global market. It will

help reduce compliance cost and make the time

taken for refunds shorter. This will thus, have an

overall favourable impact for the exporters in

terms of working capital funds and compliance,

this would indirectly help in boosting exports.

Also, uniformity in tax rates and procedures

will give the much needed conidence to foreign irms that are looking at investing in India. Impact on GDP and Inlation • A study by the National Council of

Applied Economic Research shows that GST

will boost India’s GDP growth by 0.9% to 1.7%.

• Global examples like that of Malaysia

and Canada show that in spite of careful planning,

there has been a spurt in prices following

the introduction of GST. In a research note,

Goldman Sachs, found that Asian countries,

which brought in GST between 1977 and

2015, reported an average increase of 1.1% in

inlation during the year of its implementation. Sachs, based on cross-country evidence and the

evidence from state VAT implementation, also

estimated that if the GST rate was 20% in India,

Fin

Gyaan


23C

ov

er

Sto

ry

NIVESHAK 23A

rticle of th

e Mon

th

retail inlation could rise 0.9% points. Retail food inlation has already built up over the years and in such scenario, any further increase in

inlation is likely to be a burden on the populace. • In July, retail inlation touched a 23-month high of 6.07%; wholesale price

inlation accelerated to 3.55% , the fastest in 23

months, led by rising prices of both food and

non-food articles. However, the Government,

through the FRMB act, is determined to balance

the revenue and deicit of states. For the irst time, by law, the inlation target will be ixed at 4% (+/- 2%).

Roadmap

• A GST Council will be formed within 60

days of the enactment of the Bill consisting of

representatives from the Centre as well as State.

The Council will make recommendations to the

Union and the States on model Goods & Service

tax laws, Place of Supply rules rates including

loor rates with bands of goods & service tax and any other matter relating to GST as the Council

may decide.

• Detailed outline of Joint Committee

constituted by Empowered Committee of the

State Finance Ministers on return and registration

refund, business processes of payment under

GST have been formulated and put in the public

domain for suggestions.

• The draft GST Law was formulated and

put in public domain for suggestions in June

2016.

• GST Network, an IT support of GST,

Fin

Gyaan

which will facilitate tax payment, online

registration and return iling, will be launched.• States will draft their respective GST

Legislations to enable them to implement GST,

which will be in line with the Central GST

Legislation.

Conclusion

In terms of growth, price and current account,

the macroeconomic impact of introduction of

GST will be signiicant. Although there will be a short-term narrow price impact on the larger

economy. However, a larger impact is expected

on the administrative compliance cost of GST

which is expected to increase the tax revenue

from “parallel” or “black” economy. With a

lourishing services sector and a high economic growth trajectory of India, a shift in income-

based tax to consumption-based tax is going

to provide substantial stimulus to source of

revenue.

SEPTEMBER 2016

24C

ov

er

Sto

ry

NIVESHAK24A

rtic

le o

f th

e M

on

th

It was the June of 2002 when WorldCom, the second largest company in the long-distance telecommunications, admitted to overstating its earnings by more than 3.8 billion USD in 2001 and the irst quarter of 2002. Not only that, later in the year it also announced about manipulating its reserve accounts to the tune of another 3.8 billion USD.

WorldCom began as Long Distance Discount Services Inc. in 1983, in Mississippi. By 1989, the shares of the company were being publicly traded and it had become a public limited corporation as an outcome of being merged with Advantage Companies Inc. In 1985, its name was changed to LDDS WorldCom and the head oice was shifted to Clinton, Mississippi.

The company witnessed rapid growth in the 1990s by making a series of acquisitions that boosted its reported revenues, rising from 154

million USD in the year 1990 to 39.2 billion USD in 2001. This rapid growth resulted in the company being ranked 42 in Fortune 500 list of companies.

The company’s name was changed to MCI WorldCom with the takeover of MCI in 1998, making it the second largest long-distance carrier in the United States. Later in 2000, the company’s name was changed to WorldCom.

Along with WorldCom, there were other telecommunications companies as well which were in inancial trouble, Qwest Communications, Global Crossing, Lucent Technologies, Enron, and Adelphia to name a few. The basic problem with all of these companies lied in the overly optimistic predictions of the market in the 1990s, driven by the internet growth and the dot-com bubble. As a result of this, when these

IIM SHILLONG

Aditya Jain

Fin

Rew

ind

WorldCom Scandal, 2002


25C

ov

er

Sto

ry

NIVESHAK 25A

rticle of th

e Mon

thF

inR

ewin

d

companies faced reduced demand as compared to the expectations of everyone, after the end of the dot-com bubble, their investors sufered major losses.

The market value of WorldCom fell from 150 billion USD in 2000 to 150 million USD in 2002, and the company iled for bankruptcy, admitting to overstating its earnings by classifying revenue expenditure as capital expenditure.

WorldCom paid other companies for using their communication networks (these costs are called line costs), and it classiied these payments as capital expenditure instead of revenue expenditure, reducing its expenses and thereby increasing proits, falsely overstating its earnings.

Line costs consist of access fee and transport charges for WorldCom customers’ messages. As reported, around 3.055 billion USD in 2001 and 797 million USD in 2002 Q1 was classiied under capital expenditure. By doing so, the company was able to spread its current expenses evenly in the coming years, increasing both its net income and assets in 2002.

In July 2002, WorldCom said that there might be a possibility of irregularities existing in its reserve accounts and that it was investigating the same. Reserve accounts are meant to provide a security for predictable events, like future tax liabilities, and the management is not supposed to tamper

with the reserve accounts with the purpose of changing its reported earnings. In August of the same year, WorldCom further admitted to using its reserves in improper ways. They had reduced the reserve accounts to provide credits against the line costs.

The motive of top management behind committing this fraud was pretty clear. After the dot-com bubble had ended, the economy was down in recession and all the telecommunications witnessed a reduction in the demand, including

WorldCom. Revenues were at an all-time low, far below the expectations of the investors; and to top all of this, WorldCom had taken a lot of debt to expand its operations. The market value of WorldCom had plunged and therefore, the management had a powerful motive to conceal bad news by engaging in false accounting practices.

So who discovered the fraud? Cynthia Cooper, the then WorldCom’s internal auditor, found that line costs were being treated as capital expenditure in the May of 2002. This matter was discussed between the auditor, the chief inancial oicer of WorldCom, Scott D. Sullivan, and the company’s controller, David F. Myers. The internal auditing team often worked secretly at night to reveal the fraud.

The head of the audit committee of WorldCom’s Board of Directors, Max Bobbitt, was also informed about the matter by Ms Cooper on or about June 12th. Max Bobbitt sought the intervention of the company’s external auditor, KPMG into the matter (KPMG replaced Arthur Anderson as the external auditor of WorldCom in May 2002).

Soon after the fraud was exposed, the CFO was dismissed from the job, the controller resigned himself, and the company’s previous auditor, Arthur Anderson, immediately withdrew its audit opinion for 2001, stating that it was not notiied about line costs being treated as capital expenditure. The Securities and Exchange Commission of the United States began investigating the matter on June 26, 2002.

In July 2002, Tauzin, chairman of the House Energy and Commerce Committee, announced that the internal documents of the company and the mails exchanged between the executives clearly indicated that the executives knew about the fraud from as early as the summer of 2000.

WorldCom iled for bankruptcy protection under the Chapter 11 on July 21, 2002, making it the largest such iling in the history of United States at the time. The company paid 750 million USD to the SEC in the form of cash and stock by the bankruptcy reorganization agreement.

In the deal concluded between SEC and WorldCom, it was agreed that WorldCom would pay a civil penalty of 2.25 billion USD. Former SEC chairman, Richard C. Breeden, was appointed by Jed Rakof, the then federal judge, to oversee WorldCom’s compliance with

SEPTEMBER 2016

26C

ov

er

Sto

ry

NIVESHAK26A

rtic

le o

f th

e M

on

thF

inR

ewin

d

the agreement between them and the SEC. Breeden prepared a report, “Restoring Trust” for Rakof. He suggested a lot of corporate governance reforms as part of an efort to “cast the new MCI into what he hoped would become a model of how shareholders should be protected and how companies should be run”.

Some of the Consequences

Even before the announcement in June 2002, the share of WorldCom had fallen from 64.50 USD in 1999 to less than 2 USD per share which further declined to below 1 USD a share after the announcement and then it went down the

drain to a few pennies per share after the news that there were further irregularities in the accounting practices followed by WorldCom.

Many employees of WorldCom who held stock in the company also sufered huge losses. About 32% or 642.3 million USD of WorldCom retirement funds were in company stock at the end of 2000. By 2002, this had fallen to less than 18.7 million USD or 4% of the funds.

The company cut 17,000 employees of from its workforce of 85,000 in 2002.

In the August of 2002, a group was formed by the name of exWorldCom 5100. It consisted of 5100 former employees (who were dismissed on June 28, 2002 before the bankruptcy petition by WorldCom) of the company with the objective of receiving full payment of

severance pay and beneits according to the WorldCom Severance Plan.

Post-Bankruptcy

By the end of 2003, according to the estimates, the value of total assets that had been inlated by the company stood at about 11 billion USD. This resulted in the WorldCom scandal being the largest accounting fraud in the history of America until 2008.

In 2004, with close to 5.7 billion USD in debt and 6 billion USD in cash, WorldCom emerged from the bankruptcy under Chapter 11. Half of the cash was meant to pay the claims

and settlements that were due. Previous bondholders were paid 35.7 cents for every dollar due, that too in the form of bonds and stocks of the newly formed company, MCI Inc. All of the stock of previous shareholders was cancelled, making it completely useless for them.

There were creditors waiting for 2 years for payment, they were yet to be paid; these also included some of the employees who were dismissed during 2002.

In February 2005, Verizon Communications acquired MCI for 7.6 billion USD.

Bernard Ebbers, who was the CEO of WorldCom at the time when the scandal happened, was found guilty of every charge against him and was convicted of fraud, conspiracy, and iling false documents with regulators, on March


27C

ov

er

Sto

ry

NIVESHAK 27A

rticle of th

e Mon

thF

inR

ewin

d

15, 2005. All of this was related to the 11 billion USD accounting scandal. He received a sentence of imprisonment for 25 years. At that time, Ebbers’s age was 63 years. He surrendered himself in September of 2006 to the Federal Bureau of Prisons prison at Oakdale, Louisiana to serve his sentence.

In March 2005, 16 out of 17 former underwriters of WorldCom reached settlements with the investors. Citigroup had settled for an amount of 2.65 billion USD.

In December 2005, an announcement was made by Microsoft that MCI will be joining it by providing “Voice over Internet Protocol” (VoIP) service to Windows Live Messenger users for making telephone calls. This was called MCI Web Calling and it was MCI’s last new product. After the merger with Verizon, this service was renamed as Verizon Web Calling.

Sarbanes-Oxley Act (SOX)

As a reaction to a slew of corporate scandals, including that of WorldCom, Sarbanes-Oxley Act was passed which is the most sweeping set of new business regulations since the 1930s.

According to the Act, the accuracy of inancial information must be individually certiied by the top management. Additionally, penalties have been made more severe for any fraudulent inancial practice committed. Also, the independence of statutory auditors has been increased.

The Act contains 11 sections which range from telling about the duty of the Board of Directors to the criminal penalty that can be awarded to a person being involved in a fraud. It also requires the SEC to implement rulings on requirements for complying with the law.

The Act was approved by the House by a vote of 423 favouring, 3 opposing, and 8 abstaining, and it was approved by the Senate with a vote of 99 favouring and 1 abstaining. The law was signed into by President George W. Bush who stated that it includes “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt. The era of low standards and the false proits is over; no boardroom in America is above or beyond the law”.

There was a perception that there is a need for stricter inancial governance. This resulted in SOX-type regulations being subsequently enacted in Germany, Canada, South Africa,

Australia, France, India, Japan, Israel, Italy, and Turkey.

There has been opposition to the Act as well. Opponents argue that the bill has reduced the international competitive edge of America against foreign inancial service providers by introducing an overly complex regulatory environment in the inancial markets of America.

On the contrary, the proponents consider the bill to be a godsend. They believe that it has improved the conidence that one can display in the trustworthiness of corporate inancial statements.

WorldCom scandal was one of the biggest scandals in history and was among those which resulted in the inception of Sarbanes-Oxley Act which made laws more stringent and made it diicult for the companies to commit such frauds as in the case of WorldCom.

SEPTEMBER 2016

28C

ov

er

Sto

ry

NIVESHAK28A

rtic

le o

f th

e M

on

thF

insi

gh

t

Introduction

BRICS refers to an acronym given by the Chief Economist, Mr O’Neill, of Goldman Sachs in 2001. It refers to a bunch of emerging economies -Brazil, Russia, India, China and South Africa. According to him these economies held a lot of potential to become the next superpower because these countries were developing at a rapid pace. These economies also looked attractive to investors because of their expanding middle class and massive development in terms of infrastructure. Added to this these countries also encompass 25% of the world’s land coverage and 40% of the world’s population. Each country was unique in itself it had its own capabilities and strengths. For example- Brazil is blessed with immense natural resources,

agricultural products to be speciic. Russia has huge deposits of oil, natural gas and coal. India’s strength lies in its natural resources as well as its labour force which is skilled and its IT sector. China is a manufacturing hub and is a export driven economy. It has a huge potential for hydropower as well.

From BRIC to BRICS:

South Africa was not a part of BRIC it was added only in 2010. The economists felt that there should be a representation from the African nations because Africa was second largest and most populous continent after Asia. Even though South Africa was smaller than Nigeria it became a part of BRICS because it had abundant natural resources, developed infrastructure and was a business hub. China was the one

TA PAI MANAGEMENT INSTITUTE, MANIPAL

Keerthana Raghavan

BRICS - The Fuel to the World’s

Growth Engine


29C

ov

er

Sto

ry

NIVESHAK 29C

lassro

om

Fin

sigh

t

that pushed for South Africa’s entry into BRICS because China has a huge stake in South Africa across diverse sectors such as banking, infrastructure, transport and renewable energy. China and South Africa are good trading partners and it is expected in future that China will diversify its investment in South Africa by investing in sectors ranging from biotechnology to IT. South Africa adds strategic value by being a part of BRIC because of its mineral wealth and ofers highly specialised mineral- related professional services.

Expectations when BRICS was created:

The idea was BRICS was that the countries would help each other in facilitating trade and cooperate with each other in trade, investment opportunities and other such areas. Basically it was meant to improve the bond between the emerging counties which was initially weak. The objective was met by holding high proile meetings once in a year to discuss important issues and to improve trade relations. The move was somewhat successful because when Russia was about to be excluded from G20 the BRICS criticised the West for its attempts. It saved Russia from being isolated both economically and politically. Thus, in

this way BRICS grouping has played an important role in international afairs.

One of the initiatives taken by the BRICS member countries was to establish NDB (National Development Bank) for infrastructure funding of the emerging economies. The news of establishment came as a major shock for World Bank and IMF (International Monetary Fund) because they felt that their control over emerging economies was eroding gradually because the now these countries would be self-suicient. NDB was created because of the discriminatory attitude of the West towards countries like India and China. But the initiatives came with a cost. It was feared that China would try to exert its inluence and hence take up more resources than required for funding its needs.

Current scenario/reality of BRICS

The intentions behind grouping a couple of emerging economies was pretty noble but it did not operationalize because each country was too diferent, they did not have the synergy. Each one of them is facing a unique problem right from economic slowdown to steep fall in commodity prices. Ever since the Federal Reserve said that the American economy is doing well,

SEPTEMBER 2016

30C

ov

er

Sto

ry

NIVESHAK30A

rtic

le o

f th

e M

on

thF

insi

gh

t

the investors are pulling out money from emerging economies and shifting it to the developed economies. The other smaller countries like Mexico, Indonesia etc. are expected to do well. The situation is bad in China because it could not sustain its

growth rate of previous decade.

Russia on the other hand is facing its own set of troubles because of its high dependency in its oil and gas sector because exporting oil and gas is its major source of revenue. Hence, steep fall in commodity prices has had a huge negative impact on Russia. The Ukraine Crisis added to its woes and Russia was isolated both politically and economically. When trade relations with other countries are impacted, the growth of the country gets impacted. The Russian central Bank also raised its Interest rates so as to save its falling currency (Ruble).

Brazil is undergoing a political turmoil with the President Dilma Roussef stepping down and there has been a recent scandal linked to state oil and gas irm Petrobas. Economically there is a huge iscal deicit and the economic growth has been at a turtle’s pace. The iscal deicit has arisen due to non-repayment of loans that the government had borrowed from the government banks. The Central Bank of Brazil has not been very eicient in curbing the non-discretionary spending. It is clearly a case wherein a iscal crisis has led to economic crisis. Another reason is slowdown in China and Brazil being the largest exporter was hit the largest. The unemployment levels are high, inlation around 9% and Zika virus that became famous which could potentially have an impact on sales of tickets.

India looks pretty decent compared to others because its economic conditions have improved. Various iscal and monetary

policies have worked well and it is the favourite destination for the investments in the current scenario. Japan and China have also invested in India especially in infrastructure.

The Road Ahead for BRIC Nations:

The greatest lesson from the emergence of the BRICs is that no rise is complete without the triumph of the middle class. The record across these four countries is exceptional, but there is still considerable room for growth. The US should cooperate and work to improve the NDB that was established. The BRICS can be successful if they grow, provide investment opportunities for outside investors, and interact smoothly with International Financial Institutions (IFIs). The BRICS bank can work and cooperate with Asian Development Bank and World Bank. The BRICS face the challenge of containing China’s drive to control institutions that were supposed to give each partner an equal voice during critical decisions. The BRICS will hold a minimum stake of 55 percent in the bank but some analysts say China could increase its hold by bringing in new member countries from its sphere of inluence hence end up getting more say and decision making power. Other than BRICS there are N-11 countries as well that are poised to transform the world economy. US being the world superpower can become a thing of past if the emerging economies (BRICS) work together in a collaborative manner and strive to be the best by working on their major weakness which is corruption and capitalism.

Fin

Gyaan

Fin

Gyaan

31C

ov

er

Sto

ry

31F

inV

iewNIVESHAK


condition is moving up. When one has surplus

funds, which is left behind once the disposable

income has satiated all utility buckets, then

one starts thinking about health, life and other

assets, that brings the pull automatically.

The insurance industry has to make it very

convenient for the consumers. Whenever

the need arises, the industry should be at its

tip. Today, the Uber’s and Ola’s are providing

nothing but convenience. They are not

investing in physical assets. The shift for the

insurance industry too, has to be towards

providing convenience to the consumers. The

tipping will happen on its own.

Insurance business is based on relationship

management. We have changed our tagline

to say “Relationship beyond insurance”. In the

industry, claims are not very frequent. The

maximum is in the car segment which is one-

third. For homes, it is one in hundred. For health,

it is one-tenth, which means that 90% people

do not experience insurance beneits. Hence,

they lose charm in insuring. But, we have seen

historically that the year when people remove

the cover, is the year they end up needing it. In

such situations, all their assets get wiped-of.

Hence, the relationship aspect of the insurance

industry is very important. We need to provide

convenience, accessibility and go beyond

claims. For example, in a health product, we are

adding beneits like pharmacy discounts, gym

discounts, spa discounts, wellness tips – these

are the services you usually pay for. So, even

if you don’t have claims, throughout the year

something is beneitting you. In car insurance,

How does Bajaj Allianz go about planning its

investment? What is their security selection

philosophy?

Investment managers make their decisions

based primarily on fundamental research.

One of the things which investment managers

often overlook is the emotional aspect of

the markets. Emotions play a big role in

deciding the stock movements and the overall

behaviour of the market. Most of the time,

we do calculations on how the industry is

performing, where do the valuation ratios

stand. These are important factors which

contribute to 70-80% of the performance but

it’s the human aspect of the market which

often provides the alpha. However, in the long

run, it is extremely diicult to beat the market.

I once had the privilege to interact with Mr.

Warren Bufet and his points of advice were:

• Put your money in which you think

is long term. Invest primarily in non-cyclical

companies which are say recession-proof

• Gauge the sentiments, the strengths

and the management of a company before

investing

In the Indian Insurance industry, currently lot of

transactions happen via push selling initiated

by the insurance company correspondents.

Many people view insurance products as

investment tools and not as vehicles to hedge

against risk. How can we convert the market to

a pull-based selling model?

This would come naturally. When a country’s

economic condition improves, the insurance

penetration goes up. In India, the economic

Mr. Tapan SinghelMD & CEO

Bajaj Allianz

32 NIVESHAK3232 NIVESHAK32

Fin

Gyaan

SEPTEMBER 2016

Talking about the market, what are the kind of

events that create volatility and how can the

market players safeguard against it?

Perception has a big role to play in market

volatility. What exactly is recession – people

unwilling to buy because they are unsure

about their future earnings. When people are

in a positive mood about the economy, the

car sales pick up. So, volatility is caused mostly

by human emotions. A good fund manager

needs to observe the sentiments of the masses

through all possible news vehicles – social

media in particular as it captures the reactions

well. The days of the fund manager reading

only reports and balance sheets are gone.

Today, there are so many online tools available

to analyse the trends of the consumers. It

is important to combine fundamental and

technical research with customer sentiment

analysis in today’s dynamic conditions.

support in new projects and beneiciaries

we have added beneits like replacement of

punctured tyres, batteries etc. and other forms

of road-side assistance.

We have gone much beyond claims as that

is a small segment of the population. The

experience should be beyond claims and

that is how the industry will evolve. The focus

should be on solution-orientation rather than

selling products as such because when you are

pushing something, nobody wants to buy.

With the advent of technology, can Internet

of Things (IoT) add value to the insurance

industry?

IoT has a big role to play in the insurance

industry. If you look at telematics, though

the manufacturers have put it in the car for

analysing the engine damages and issuing

pre-warnings to the customer, the insurance

industry in developed countries has started

making big use of it. Selected insurance

providers can now it this clever device into

your car that measures how well you drive.

By having the device installed in your car, it’s

possible for you to prove that you drive safely.

Your premiums are then based on how safe

and conscientious a driver you are instead of

paying for insurance based on the average

driver.

Look at the wearable devices for health

monitoring. The devices track your physical

training, your itness levels and guide you

on the same. So, IoT and insurance are going

to be heavily integrated. The only challenge

is customer data privacy as the customers

have to give access to their data. This would

help us analyse their trends and customise

our oferings. Now, even this challenge has

softened a bit as the customers are opening up

and the issue of data privacy is being taken care

of due to their habit of going online for most of

their needs. They know that the Google’s and

the Amazon’s of the world already have a lot of

their data. So, the future looks very promising

in terms of IoT.

Fin

Vie

w


33C

ov

er

Sto

ry

NIVESHAK 33C

lassro

om

Sir, what is margin trading?

Margin trading allows an investor to

buy more stock and shares than one would

normally be able to with their own money. Efectively, trading on margin is like borrowing money from a

broker to purchase stock. Usually, trading on margin

is carried out through a separate account called a

margin account.

Sir, is there a cost associated with

borrowing?

Yes, it is in essence, a loan from the

broker which carries a ixed rate of interest. Therefore, an investor would enter into margin trading

only if he sees gains which beats the interest costs.

Further, the securities purchased with the borrowed

sum will act as collateral.

But what if the anticipated increase in

price does not take place? Who bears the

loss?

The investor is the risk taker, acting

beyond his normal capacity with a view to enjoy

substantial gains, but at the possible cost of substantial

losses. It is like trading with leverage. Thus, should

there be a decline in price, the efect on the investor is increased due to borrowing additional capital.

Sir, and if the loss is beyond the

capacity of the investor to cover, how does

the broker ensure his interests are covered?

This is where a margin requirement

comes into play. The investor does not use only

borrowed money for trading. Before approaching the

broker for additional money, the investor is required

to deposit an initial investment (set as a percentage

or a minimum amount or a combination of both)

which serves as a capital lock-in. Thus, if the price

of the security falls, the initial investment serves as

a cushion for the lender to ensure that his money is

secure.

With computerization, the margin requirements

is constantly updated at the terminal of the broker.

As stock prices decline, the margin requirements is

updated and if the value of the stock goes below a

predetermined threshold, a margin call is made and an

amount is to be deposited by the investor (borrower) to

make good any unrealized loss. This amount is called

the maintenance margin. If the additional amount is

not deposited, the broker has the right to sell a part of

the stock to cover the requirement.

Are brokerage charges any diferent under margin trading?

No, brokerage and DP charges are

the same and equivalent for normal delivery. Further,

margin trading is not allowed on derivatives.

CLASSROOM

FinFunda

of the

Month

Margin Trading

IIM ShillongAnoop Prakash

3434

W I N N E R S

Article of the MonthPrize - INR 1500/-

Siddarth Bhargava & Karan VermaIIM Udaipur

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invites articles from B-Schools all across India. We are looking for

original articles related to inance & economics. Students can also contribute puz-

zles and jokes related to inance & economics. References should be cited wherever

necessary. The best article will be featured as the “Article of the Month” and would

be awarded cash prize of Rs.1500/- along with a certiicate.

Instructions

» Please send your articles before 15th May, 2016 to [email protected]

» The subject line of the mail must be “Article for Niveshak_<Article Title>”

» Do mention your name, institute name and batch with your article

» Please ensure that the entire document has a wordcount between 1500- 2000

» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing:

1.5

» Please do NOT send PDF iles and kindly stick to the format

» Number of authors is limited to 2 at maximum

» Mention your e-mail id/ blog if you want the readers to contact you for further

discussion

» Also certain entries which could not make the cut to the Niveshak will get ig-

ured on our Blog in the ‘Specials’ section

SUBSCRIBE!!Get your OWN COPY delivered to inbox

Drop a mail at [email protected]

Thanks

Team Niveshak

35


THE INVESTOR VOLUME IX ISSUE IX … THE INVESTOR VOLUME IX ISSUE IX September2016 The Telecom War in...

Documents

Transcript of THE INVESTOR VOLUME IX ISSUE IX … THE INVESTOR VOLUME IX ISSUE IX September2016 The Telecom War in...