Niveshak

THE INVESTOR VOLUME 4 ISSUE 5 May 2011

OSAMA
SENSEX

SCAMS
will euro be saved or doomed PG.06 Are we debt worthy? PG.12
FROM EDITOR’S DESK Dear Niveshaks,
The dull and mixed result season has come to an end amidst a month
which saw results of five assembly elections, RBI raising interest rates by
50 basis points and the petrol prices being increased by Rs. 5 per litre. The
Niveshak increase in petrol price, which the oil firms had been holding since Janu-
Volume IV ary even though crude oil had touched a two-and-a-half-year high, came
ISSUE V a day after election results of five state assemblies were announced. This is
the eighth hike in petrol price since the June 2010 decision of deregulating
May 2011 the petrol price. The rate increase by RBI which was more than expected
caused both stock and bond markets to decline on fears of lesser than ex-
pected growth in GDP due to tough interest rate scenario. The headline
inflation has eased a bit in April due to lower manufacturing prices but
Faculty Mentor the prospect of rising energy costs will keep pressure on the RBI to raise
Prof. N. Sivasankaran rates going ahead. The wholesale price index, the country’s main inflation
gauge, rose an annual 8.66 percent in April, above the median forecast of
8.48 percent rise. However, the softening of inflation seems temporary as
the hike in diesel and LPG is likely to be announced by the OMC’s in the
THE TEAM coming weeks to reduce their under-recoveries.
The stock markets which posted smart gains in March 2011 on expec-
tations of good Q4 FY11 results, slid down recently due to disappointing
Editor
corporate earnings results, rising inflation and the most recent one being
Rajat Sethia the RBI’s aggressive rate hike with a view to curb inflation. The fall in the
markets was exacerbated by the continued FII selling due to concerns over
the impact of the rate hikes on the overall growth. The RBI move to hike
Sub-Editors rates by 50 bps is a departure from its calibrated approach in recent times
Alok Agrawal and should help in taming inflationary pressures. This move which is ex-
Deep Mehta pected to put some pressure on the GDP for FY12 could cause some near
Jayant Kejriwal term pain to the markets due to the concerns over slowdown in growth.
Mrityunjay Choudhary However, the proactive move was warranted considering the spiralling in-
Sawan Singamsetty flation in India. Events which could have a bearing on inflation would be
the monsoon forecast and the end of the quantitative easing (QE2) in June
Shashank Jain
which could see a dollar rebound and consequent cool off in commodity
Tejas Vijay Pradhan prices.
This issue brings to you some more interesting and insightful topics.
The cover story this month focuses on the big news of this month – the
Creative Team
death of Osama and its impact on financial world in general. The article of
Vishal Goel the month explores the history of world’s second strongest currency Euro ,
Vivek Priyadarshi what went wrong with it and how the wrongs can be corrected. Another
article in this issue focuses on the importance of SHG’s and their role in
‘Banking the Unbanked’ in the country . The issue also features an article
All images, design and artwork on the current state of Indian debt market and the way it can improve go-
are copyright of ing in the future for corporates to be able to use it effectively to raise funds
IIM Shillong Finance Club quickly and fuel their growth. Lastly, the Classroom this month explains the
topic of ETF’s.
Hope you find the issue an interesting read.
©Finance Club Stay invested.
Indian Institute of Management
Shillong Rajat Sethia
www.iims-niveshak.com (Editor -Niveshak)

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
 CONTENTS
Niveshak Times finsight
04 The Month That Was 12 Are we debt worthy?

Cover Story
9 OSAMA, SENSEX &
SCAMS

PERSPECTIVE
16 SHG Model for microfinance

Classroom Article of the month

17 Exchange Traded Funds 06 Will Euro be Saved or
Doomed?

FINLOUNGE
18 Fin-Q
 www.iims-niveshak.com

The Niveshak Times

BESIDES IMPROVING REVENUE COLLECTIONS THROUGH TAX REFORMS, STATES
SHOULD ALSO FOCUS ON THE EXPENDITURE MANAGEMENT

TEAM NIVESHAK
IIM, Shillong

RBI ups the ante against inflation Brand Godrej valued at $3 billion
In an unexpected move RBI Godrej, furniture to
increased the repo rate by personal care
50 basis points to 7.25% products master
in an aggressive move brand has been
to tame inflation. The valued at $3 b i l - lion
move indicates RBI’s in- (around Rs.13,000 crore) as part of
tent to sacrifice growth the brand valuation exercise undertaken by the
for reining in on inflation 114-year-old Godrej Group for the first time. Godrej
which the RBI felt would had hired UK-based brand consultancy firm, Inter-
r e - main at an “elevated level” brand, for valuing the master brand along with the
of 9 per cent in the first half of the current finan- sub-brands in the group.
cial year before moderating to 6 per cent by March,
2012. The market which was expecting a 25 ba-
Microsoft expands its internet space with
sis points hike reacted negatively to the hawkish
Skyp acquisition
stance of RBI with SENSEX plunging 463 points on
the day of announcement of the upward rate revi- Microsoft and Skyp
The Month That Was

sion. The next day five major banks including PNB, have reached an
OBC and Yes Bank followed suit increasing their agreement central
respective interest rates by half percentage points to which is the
making all loans costlier. By the end of week ICICI acquisition of
and Union Bank also hiked their interest rates by popular web
50 basis points. However RBI provided some relief calling service
to small savers as it increased the saving rate to by Microsoft for $8.5 billion. Skype
4% from 3.5% now. will become a Microsoft business unit
and Skype CEO Tony Bates will be president of the
Microsoft Skype Division. The acquisition being fi-
Top management at Infosys undergoes a nanced by Microsoft’s huge cash pile is company’s
change largest, surpassing the purchase of AQuantive for
Veteran about $6 billion in 2007. Microsoft will connect
banker, KV Skype to its Outlook e-mail, Xbox game console,
Kamath Windows mobile phones and corporate-phone
took over software. The acquisition is an attempt on the part
as posi- of Microsoft to attract more web users and narrow
tion of chairman of Infosys from com- pany’s Google’s lead in Web advertising.
founder Narayana Murthy. The appointment of
new chairman was followed by two more changes-
Cabinet nod to FDI in LLP
S D Shibulal currently the company CFO has been
appointed CEO and MD while the incumbent S Go- The Cabinet Committee on Economic Affairs (CCEA)
palkrishnan was promoted to the post of executive allowed foreign direct investment (FDI) in limited
co-chairman. Murthy has been made the chairman liability partnership (LLP) firms. CCEA suggested
emeritus, a non executive chairman as a token of a calibrated approach towards implementation of
respect for his invaluable contribution towards the FDI in LLP beginning with the ‘open’ sectors where
organization. monitoring is not required and would be subject to
some conditions. LLP is a hybrid form of partner-

4 NIVESHAK VOLUME 4 ISSUE 5 May 2011

 www.iims-niveshak.com

The Niveshak Times

IT IS POSSIBLE TO MAINTAIN INFLATION AT REASONABLE LEVEL

ship in which each partner faces a limited liability. profit declined by 2% to Rs 569 crore.
The provision of limited liability has been included
to provide encouragement to small business enti-
Rajaratnam held guilty in insider trading
ties to engage in larger ventures.
trial
The biggest insider trad-
Apple surpasses Google as most valued ing trial in the history of
brand SEC that had been going
A valuation report released by WPP Plc. Mentioned on for past two months
Apple as the most valued brand ahead of search came to an anticipated
engine behemoth, Google. The introduction of I Pad turn as the accused hedge
tablet and launch of new versions of iPhone and fund manager, Raj Raja-
iMac catalyzed the almost doubling of company’s ratnam was found guilty
sales and profit in last quarter. Apple’s brand value by Manhattan federal jury
surged 84% in past year to $153.3 billion. on all 14 conspiracy and securities fraud charges of
O n the other hand Google’s insider trading. Galleon Group hedge fund founder
brand value decreased could face 15-1/2 to 19-1/2 years in a federal prison

The Month That Was

2% to $111.5 billion. under sentencing guidelines. Defense team’s per-
sistent claim that Rajaratnam’s trades were guided
by a trove of research and public information, not
Export posts 34% growth in April
secrets leaked by highly-placed corporate insiders
The beginning of financial year augured well for In- proved futile as the jury was in agreement with
dian export sector as it witnessed a rise of 34.4%. the prosecutors who alleged that money manager
The engineering goods sector emerged as the top played a central role in the most sweeping probe
performer registering a 109% growth and total of insider trading at hedge funds on record.
shipments were estimated at $6.8 billion. Export of
petroleum products grew 53% to $4.3 billion and
gems and jewellery exports rose 39% to $2.9 bil- Greece suffers another credit rating down-
lion. On the flip side, a few sectors such as iron ore grade
and marine products showed a decline. There were S&P’s cut Greece’s credit rating further into junk
more worrying signal as imports increased 14.1% territory, reflecting growing doubts that the euro
to $32.8 billion. The increase in imports left India zone’s most fragile economy can manage its debt
with a deficit of $8.9 billion in April. without imposing losses on private bondholders.
One year into an international bailout, Greece is
struggling with weak revenues and a deep reces-
HUL net profit down 2%
sion, fuelling speculation that even a more lenient
FMCG major Hindustan Unilever rescue deal with the EU and IMF won’t be enough
(HUL) posted a more than ex- to pull it out of the fiscal mess.
pected 14% increase in sales to
Rs 4,899 crore-driven entirely by
volumes. HUL’s home and per-
sonal Care business grew by
13.6%, while soaps and detergents grew at 11.4%
during the quarter. The volume growth of 14%
which drove sales offset the increase in input costs
to reflect a consistent improvement in the health
of the business. However, due to an extraordinary
item in fourth quarter ended March 31, 2011, net

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

 Will uro be Saved OR Dommed?
PRANAY SINGH
FMS, New Delhi
Euro was intro-
duced to challenge
and dethrone dol-
lar supremacy. The
common monetary
AoM
policy in the euro-
zone countries, and
an integrated capital
market with finan-
cial institutions was
the vision of euro
but despite all the
optimism it failed to
achieve its objective.
The current article
explores how the
Euro was formed
and what went
wrong with it.
The interest rate futures market lacks liquidity mainly because banks are allowed to use them
6 NIVESHAK VOLUME 4 ISSUE 5 May 2011
The refrain of award winning
song in 1990 “Together: 1992” was
Unite, unite Europe. Shortly there-
after European Union was formed
by Treaty of Maastricht in 1993. The
next wave of unification came in
1998 when European Central bank
was formed and in 1999 when Euro
was adopted as common currency
of European Union. With introduc-
tion of euro it was proposed and
hoped that it will be a efficient
tool to narrow and erase out the
economic differences between the
members countries of the European
Union. The euro was meant to be a
monetary union, but not a political
one. It was established for achiev-
ing the aim of that the differences
in wealth, would diminish as well in
the member states.
The participating states es-
tablished a common central bank,
but they explicitly refused to ad-
here to a common authority and
common rule for taxation. But also
at the time of Euro’s creation, many
worried about its long-run viability.
And as we can see that after the
common currency’s first decade,
increased divergence, rather than
rapid convergence, has become the
norm within the euro area, and ten-
sions can be expected to increase
further. So what went wrong with
a common currency which was in-
troduced to challenge and dethrone
dollar supremacy in the financial
systems?
only for hedging exposures and not trading
EARLY BEGINNINGS, EARLY
PROBLEMS
Differences between member
states were already very large a
decade ago when Euro was intro-
duced. The euro became the com-
mon currency of very wide plethora
of countries which were both Da-
vids and Goliaths of economic world
. On one hand there were wealthy
countries like Germany and Nether-
lands while other end of spectrum
had countries like Greece and Por-
tugal. It also became the currency
of innovative and flexible market
of Finland and also of Italy which
lacked both.
In 1999, the difference in low-
est and highest inflation figures be-
tween the euro-zone countries was
two percentage points. The differ-
ence had almost tripled, to 5.9 per-
centage points at the end of 2009.
Also for the newly established
European Central Bank (ECB), which
had to determine the appropriate
interest rate for all members so as
to propose a one size fits all policy.
But with the passage of time and
increasing differences among euro
countries the ECB’s policy changed
to be described as one size fits
none.
THE FORMING YEARS OF CRISIS
The common monetary policy
in the euro-zone countries, and an
integrated capital market with fi-
nancial institutions was the vision
of euro but despite all the optimism it failed to
achieve its objective.
The second problem was the smallness of the
EU’s budget relative to those of the member states.
The vast part of government activity took place on
a national level. But different governments had dif-
ferent degrees of fiscal policy and measures.
Italian, Greek, or Portuguese public debt be-
came high. But Ireland, with previously modest
deficit and debt levels, also suddenly and unex-
pectedly faced the same kind of issue, owing to
the government’s need to take over private debt
from the banking sector. France and Germany had
an inherently strong fiscal position.
The Greek government turned out to be a liar.
In 2004, Greece admitted that it had lied about the
size of its deficit ever since 2000 which were pre-
cisely the years used to assess Greece’s application
to join the euro zone.
THE TRAGEDY COMES CALLING
Today Italy and Greece face serious debt is-
sues amid financial market concerns about the
possibility of default or their leaving the euro zone.
The gaps between German bond yields and Greek
yields are currently reaching at record levels . The
price of default insurance has tripled.
At 14% of GDP, Greece’s latest fiscal deficit is
the largest of the euro-zone countries after Cyprus.
Its debt-to-GDP ratio stood at 113% by the end of
2009.
The imminent risk is that Greece will not be
able to find the €53 billion it needs to service its
debt falling due in 2010 the estimated additional
€30 billion to finance the new debt resulting from
its projected budget deficit. The Greek disaster was
made possible because its government deceived its
European partners for years with faked statistics.
The Euro zone is currently wrestling with fis-
cal imbalance and sovereign debt risk and fiscally
fragmented and only partly unified politically.
Ireland grew in part due to large credit in-
flows into its “Banking Real Estate Complex.” The
Irish banking system’s external borrowing reached
roughly 100% of GDP. When the world economy
dove in 2008-2009, Ireland’s dived deeper.
The Bond market has been
plagued by lack of participa-
tion and skewed nature owing
to prohibition on short-selling
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
POSSIBLE AFTER EFFECTS
The fear of contagion and failure can spread
over Europe. Greece can be the potential first dom-
ino to fall in a scenario that can result in a situation
which can unfold the Greek austerity measures do
not suffice, the debt crisis deepens, and the risk
of a sovereign default spreads to other European
economies. As the Greek domino falls, countries
like Portugal, Spain, or Italy will start to tumble,
and a small economy’s crisis can turn into a major
European calamity.
The sovereign debt crisis might hit the real
economy, with Europe ending up in a vicious circle
AoM
of even higher deficits, lower growth rates, explod-
ing unemployment, and decreasing competitive-
ness.
THE IMMEDIATE SOLUTIONS
The rescue packages were put together on
May 8-9 in Brussels. European created a European
Financial Stability Facility (EFSF). A “special purpose
vehicle” (SPV) has been established in Luxembourg,
and can already count on hundreds of billions of
Euros in guarantees from member states. There is
€80 billion program already agreed for Greece, the
European Union countries agreed on a €500 bil-
lion credit line for other distressed countries. The
International Monetary Fund added a further €280
billion
AND EURO CAN BE SAVED
The ECB can and will become scapegoat for
failing of Euro. If it keeps its interest rate too low
for too long, countries like Germany and the Neth-
erlands will protest and are protesting. If it hikes
the interest rate, the southern euro-zone countries
like Italy will complain. In that case, support for the
euro, already fragile, will erode further, weaken-
ing the common currency and fuelling even greater
tensions. So what are the possible solutions that
can save Euro?
Possibly creation of a common “European
Transfer Union” for the benefit of the deficit coun-
tries, including Portugal, Spain, Ireland and Italy
with funds for this purpose provided by European
Union can be a help.
The second option is also a viable one i.e.
7
 Greece going through a depression, and simultane-
ously reducing its wages and prices of commodi-
ties. Finally, Greece can leave the euro and accord-
ing to its economic situation devalue its currency FIN - Q
accordingly.
But in the end Europe will have to realize that APRIL 2011
the most promising for all is to implement the in-
stitutional reforms, including the necessary fiscal
framework that should have been in place when
1. Long Term Equity Antici-
the euro was launched. Pation Security
The basic flaw is that a member of the euro
zone cannot be expelled under current rules, al- 2. Chicago Mercantile Ex-
lowing countries like Greece to lie, manipulate, change
blackmail, and collect more and more EU funds.
AoM

In the long term, this will be disastrous for greater

European cooperation and development ,because
3. Index futures
public and inter governmental support will contin-
ue to erode questioning the existence of European 4. 1.2%
Union itself.
There should be provision of fines. For any 5. Paul A. Samuelson
country if their debt-to-GDP ratio exceeds the
Maastricht Treaty’s 60% limit should pay the fines
or even if their budget deficit exceeds the limit of 6. b,c,d
3% of GDP. The fines could be suitably and reason-
ably decided ranging from the interest premium 7. 3.79%
which country would have to pay in the absence
of help, which will ensure that the benefit of en-
hanced stability under the euro should reached to
8. 156.75
every country of European Union.
A Euro crisis can be avoided. Europe should 9. Adjustable Rate Mort-
be ready for facing the high short-term costs of gage
changing the rules of its elite and prized union. If
expelling even one member could establish a more
credible mechanism for guaranteeing fiscal disci-
pline in the euro zone the price would be more
than worth it helping EU immensely.
It is not too late for Europe to implement
these reforms because solidarity alone will not do
anything. But if Europe cannot do so, then it is
better to admit failure and be ready to face a high
price in unemployment and human suffering in the
illusion of a economic model which is flawed but
was hailed as visionary.

One of the flaws is that a

member of the euro zone can-
not be expelled under current
rules

8 NIVESHAK VOLUME 4 ISSUE 5 May 2011

 OSAMA

Cover Story
SENSEX
How Good is
GOOD for the
markets?

SCAMS Deep mehta

IIM Shillong

Osama, Sensex and Scams
What a month it has been! A turely roller coast-
er ride for the sensex with no sense of direction
whatsoever! And yes, can we forget THE news story
of the month - Most wanted terrorist Osama Bin
Laden DEAD...finally! Remarkable and inevitable as it
may seem - the impact of this event on world econ-
omy is much debated. So, why miss a chance, we at
Niveshak would do that too, but in a more holistic
and an unbiased way. This event along with Air India
pilot strike seems to unlock something more dra-
matic.Will it? Is the Air India scam something bigger
than the 2G spectrum scam? What about the Sensex?
Where will Q4 results lead the markets? Read on...
Part 1 - Osama and the World
10 years. $3 trillion spent on the war on terror.
World economy collapsed twice in the period. Reces-
sion - is it still there or are we recovering? Many an-
swers for many questions..One thing that concerns
all of us is whether US would pull out troups from
war ravaged Afghanistan. This war has hurt them
badly - widening deficit, lower interest rates that
is fueling world inflation, unemployment and hence
lower consumption. Who worries as a result? - Chi-
na. Yes, one hand biggest benefeciary of the war
has been China, which had catapaulted to world No.
2 while US continues to be sunk in debt, partisan
politics apart from recession.But, they certainly dont
want a bankrupt United States aas demonstrated by
$45 billion worth of deals back in January!! Beijing
needs American consumers, the relative security of
American bonds, and the occasional stability provid-
ed by American troops. All eyes will be on what are
the next steps o f
the Obama
adminis-
tration..
next tar-
get?..next lo-
cation..will
it be Mid-
dle East?
Whatever
be the case..speculations will rise and continue to
impact world economy.
On the day, Osama news were announced,
reactions across the world were that of joy . But
world markets were expected to sky rocket on break-
ing of such “positive” news were rather quite (apart
from occasional initial spikes). Oil went southward
- as expected. But large number of industries need
to have a close eye on what the “Black gold” does.
Developments in Middle East is other important re-
gion trend for all of us to keep an eye on.
Analyst believed that Osama death would mod-
erate terrorism and hence reduce oil uncertainity and
hence would send oil prices down. BUt apart from
the first day after announcement, analysts figuered
out that Al-qaeda hardly ever impacted oil supplies.
Result - Oil back up again !! Petrol price hikes in our
country also points to a rather Neutral effect of Osa-
ma on economy. Inflation continues to be a menace
for the government and with the recent 50bps hike -
its getting worse with borrowing cost increasing and
possibilty of firms passing on the cost to end users.
This is certainly Osama independent.
Breifly put - we dont think any single Arab
leader or a slain terrorist mastermind will have any
impact on world economy. BUt what we
definitely think is that the following
are Winners emerg- ing from the
event -
1. Obama. O b a m a .
Obama !
2. Oil traders - More specu-
lation. More profits!
3 .
People of
Afghanistan
and Pakistan
- drone strikes
w o u l d
end..or
wouldn’t
it?

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 9

 and for the losers - many of them :
Pakistan and ISI. Less powerful countries - will
US invade them with their might? \
Cover Story
Most central bankers and WE the common man
- as uncertainity almost never ends!
Part 2 - Sensex
Up at the opening bell. Down mid-way in the
session. Immense intra day volatility in the name of
Q4 results, RBI monetary policy, F&O expiry, crude
oil,etc,etc. This is what the month has been like. So,
where are we headed? This question puts “best of
the best” analyst in an uncomfortable and an em-
barrasing situation. Yet, as always, the answer is a
filled with ambiguous statements that lead an inves-
tor NOWHERE!
The ride of Silver, Gold to all time highs and the
retreat that followed adds to the above.
And what’s more in store for all of us - Q4 re-
sults.
Recap – The Ride
BSE sensex was at 19600 levels at the start of
April after a superb bull run from below 18,000 levels
just during the third week of March - that is a gain
of more than 10% in 10 trading sessions! A correc-
tion was inevitable as many went on saying even
when the sensex was at 18500 levels and the same
at 19000 levels..but Sensex hardly obeys logic and
rules!
But volatility was then to take the lead. The
ride saw BSE falling to just about 19000 levels twice
before rising again. Next 9 sessions saw the bear
take the lead with sensex crashing to 18200 levels
with interest rates rising along with many scams rul-
ing the roost. Uncertainity is at its peak. Q4 results
as a result were badly needed to atleast provide a
sense of direction to the market.
The Scorecard
What we did not
certainly expect was In-
fosys opening the earn-
ings results season with
a BANG! And what a bang
it was - Top management
re-jig in the form of res-
ignations, new CEO and
chairman - badly affected
sentiments. Reliance In-
dustries showed increase
in revenues by 26% YoY,
better than estimates, but contraction in OPM by
242bps due to fall in contribution from oil and gas
segment and lower EBIT margins. TCS was better
than Infy with almost the same OPM qoq and 24%
10 NIVESHAK VOLUME 4 ISSUE 5 May 2011
growth in PAT YoY. A plus for IT sector as a whole
was robust hiring indications by TCS which currently
stand at about 60,000 for FY12.
While SBI results are still pending, banking sec-
tor showed good loan growth led by PNB and Bank of
Baroda in public sector. While a positive is a growth
in non-interest income a negative remains deterio-
rating asset quality. Sensex movement would de-
pend a lot on the reactions of these banks to 50bps
hike in rates by RBI. But, reactions till now have
been gloomy for economic growth as most banks
hiking loan rates with SBI sending a shockwave by
raising rates by 75bps!
HUL showed good set of numbers but a con-
cern for most companies in these space remains
compressing margins. Manufacturing growth (cur-
rently at 7.5-8%) is likely to be affected due to ris-
ing interest rates and crude oil. Estimates say that
if manufacturing growth falls to 6% then it could
take off 0.4 points of the GDP. India’s manufacturing
output contributes about 16% to GDP. Another worry
for the markets continues to be inflation (currently
at 8.98%). Industry estimates that raw material costs
as a proportion of net sales rose to 52.9% in the
March quarter, the highest in two years, for India’s
top 100 firms. Thus, margins would be under pres-
sure. The numbers in turn affecting bottomline and
as a result BSE index. Tea, coffee, synthetic fibres,
wood products, transport equipment and fuel seg-
ments are sectors which face huge pressure in prof-
it margins. Companies belong to steel and cement
segment which have sluggish demand also suffer as
they find it tough to raise prices despite a spike in
the prices of raw materials such as petroleum coke
and power.
For Auto, picture is good as shown by Maruti
very positive sales growth and strengthening do-
mestic demand.
Having said this,
it seems unlikely that a
sense of direction can be
provided by mixed set of
numbers. And thus factors
such as impending election
results, company specific
reaction to Q4 results and
a narrow range for markets
is what is expected. All we
can do is - keep our fingers
crossed and hope for the
best!
Part 3 – Dhoka : the Hidden Picture!
10 agonizing days, thousands of stranded fli-
ers and more than 150 crore LOSS for Air India. Only
after this, was the strike by Air India pilots called off too.
after government agreed to consider their demand Air India has accumulated losses of Rs.20,000

Cover Story
of pay parity between Indian Airlines and Air India crores! In fact, consultancy firm Centre for Asia Pa-
counterparts. For most of us, the story ends there cific Aviation (Capa) expects Air India’s accumulated
with a more negative image of Air India and a few losses to be $4 billion to $5 billion (Rs 18,000 crore
curses for wasting our precious little time. But for to Rs 22,500 crore) by 2015-16, which is as high as
the investigators and critical thinkers, it surely does current levels. What’s going on? For the operations
not! Why did the government not interfere earlier? bit - Air India’s cost per km is near Rs 3.70 while
What’s the point of dragging the situation for so comparable, full-service carriers like Jet and King-
long? Maharaja has turned into a pauper with heavy fisher have costs of Rs 2.9-3.10 per km. Most airlines
debt burden and surging losses. Why? Why? Read on of comparable size have an employee-to-aircraft ra-
to know what has been happening with our national tio of 100. In Air India’s case, it is at 222. Consider
carrier which we don’t know… that for annual wage bill. How inflated it would be!
Air India’s debt is currently a staggering Rs. And what’s worse – the government rejects all sug-
40,000 crores. Annual interest outgo – Rs.1800 crores. gestions of cutting force and wants to recruit more!
Workforce – 38000+. Is all these justified? No. It does not end here. The revised restructuring plan
Not at all. Air India ordered 100 aircrafts in 2005 at a of Air India suggests increasing the fleet size to 245
time when no airline in the world had done it! The aircraft by 2015. Logic seems to take a backseat.
requirement of such an order is still not justified. Doesn’t it?
The burden of this annual liability leaves Air India What about cutting fares and competing with
with no option but to borrow, and borrow BIGTIME. others? Not possible now after such huge debt bur-
What about the rescue plan? Simple in words - den. Plus, it sends out a negative signal to custom-
enhance revenues by Rs 5,000 crore annually; to cut ers. It’s market share is dwindling and it stands
costs by Rs 4,000 crore per annum; and to turn prof- fourth in domestic scenario.
itable by 2015. The financial restructuring package is Reports from various magazines mention a
prepared by SBI Caps and examined by consulting fact that many board members were not allowed to
firm Deloitte. It contemplates a further infusion of function and did complain to government. But, all
equity, conversion of short-term loans to long-term of it was kept beneath the carpet. Merger
loans with lower interest rates, and raising funds between Air India and Indian Airlines
through government-guaranteed bonds. was objected and it was definitely ques-
The problem – It awaits clearance by several tionable. The qualifications of top
government ministries, the Planning Commission man- agement are for any-
and the RBI. More delays are inevitable! one to research and see
for themselves.
Also, how can you achieve it when you have
Is this scam
let go most routes to rival airlines in the name of
much
inefficient ones when they have turned out to be the
most lucrative for others!? The management’s claim
that it does not have the money to increase pay
sounds hollow when there are numerous instances
of not only wasteful expenditure by management
big-
but non transparency in the process.
ger than the
The airline’s management has indicated that 2G scam and
it needs around Rs 18,000 crore in financial support will the 10 day strike
throughout the turnaround phase: around Rs 10,000 go in vain? Is there
crore in paid up equity, and Rs 8,000 crore as work- a hidden agenda to
ing capital loans. But will the government be ready cripple the 100 year
on sinking any more money into the bleeding PSU? old carrier? It’s certainly
Twice in the last 18 months it has injected funding, time for the government to
taking Air India’s paid-up equity from Rs 145 crore to stand up and take action.
Rs 2,145 crore. It also needs to sign off on the car-
rier’s proposal to raise Rs 4,500 crore through bonds
to meet working capital needs for the next one year.
The airline owes up to Rs 3,500 crore to airport op-
erators and oil companies. They are getting restless

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11

 Are we debt worthy?
Analysis of Indian Debt market
Vishisht Dubey
NMIMS, Mumbai
During the pre 90s era, the In-
In a country like dian G-Sec Market was lagging in ef-
ficiency; the interest rates on bonds
India aspiring for
were mostly administered/fixed by
double digit growth, the government. Against this back-
companies need a drop, a series of measures were in-
mechanism to raise troduced to make the market more
efficient.
funds quickly to fuel
Post 2001, a series of further
their growth. Having reforms were introduced which
a well established were aimed at enhancing the li-
government & cor- quidity, safety and development of
the payment infrastructure. Some
porate bond market
of the measures taken were estab-
helps to achieve lishment of an efficient clearing and
these funding re- settlement system, introduction of
quirements. Here, short sales and when issued mar-
ket, operationalization of Negotiated
we look at the state Dealing System (NDS) and Clearing
of the Indian debt Corporation of India Ltd (CCIL), al-
market and suggest lowing G-Secs to be traded on stock
improvements for exchanges, permitting non banks to
participate in the repo market etc.
the same
As a result, today debt market
sees an active participation from
various players as listed below.
Though all these measures
have helped in improving the G-Sec
market in India, it still lags in certain
aspects like restrictions on FIIs for
investing in G-Secs, lack of exchange
traded interest rate derivatives, lack
ISSUER INSTRUMENT
FinSight
Central Treasury Bills
Government
State Gov- Dated Securities
ernment
PSUs Bonds
Corporates Bonds and Debentures,
Commercial papers
Table 1: Players in Debt Market
Infrastructure financing can’t
be done with help of equity
capital alone; exploring Debt
markets is the next best option
available
12 NIVESHAK VOLUME 4 ISSUE 3 mARCH 2011
of active participation by retail inves-
tors in the government bond market
etc. Also State government bonds
enjoy less liquidity when compared
to the Central government bonds
which is a cause of concern.
Now if we talk of corporate
debt market in Asian countries, un-
like developed countries market, the
corporate bond market is lagging
behind government securities mar-
ket in terms of volume and scale.
The size of corporate bond market
is 3.9% of GDP compared to 39.1% of
GDP for the government bond mar-
ket. Even this amount is in part due
to the increased investment of for-
eign institutions in corporate bond
market in past 8-10 years. Various
developments have taken place in
the corporate bond sector but still
the Indian corporate debt market
suffers from illiquidity.
Patil Committee, 2005 and Ra-
jan Committee, 2008 were set up to
find the hindrances for corporate
debt market. Their key findings are
stated here:
• Corporate bond issuers pre-
ferred foreign debt through External
Commercial Borrowings due to the
low borrowing cost
MATURITY MAJOR INVESTORS
2-30 years; 91/364 RBI, Banks, Mutual Funds,
days PDs
5-10 years Insurance Companies,
Banks, Provident Funds
5-10 years Provident Funds, Mutual
Funds, Individuals
1-12 years, 15 days Banks, Mutual Funds, Cor-
to 1 year for CPs porates, Individuals
 • Companies prefer loans to bond issuance
due to mark to market requirement in bonds
• Government regulations set an upper limit
for foreign institutions in corporate bond investment
• Insurance companies and mutual funds are
not allowed to hold certain assets in their portfolio
thereby eliminating them from the corporate bond
market
• Need for an amendment to the bankruptcy
code so as to protect the creditors in case of a crisis
• Low demand due to few institutional inves-
tors and less number of quality issuers is hindering
the development of a healthy corporate bond market
From the above analysis we have seen that the
government securities market is relatively better de-
veloped than the corporate bond market but there
is a scope for improvement in both the sectors. This
will ultimately improve the Indian debt market and
support India’s growth.
Recent trends show that some investors pre-
fer debt markets to equity markets to protect them
against volatility in equity markets. Government and
Corporate houses are increasingly becoming more
interested in the Debt markets because of increas-
ing investment in Infrastructure development. To
maintain the 8% plus growth rate, Indian Economy
has to heavily invest in Infrastructure. Investment in
Infrastructure sector is targeted at Rs. 41 lakh crore
in the 12th Five Year Plan. This means an investment
of about US$200 bln per year from 2012 onwards. In
comparison, FDI inflows were US$ 7 bln into Infra-
structure sector in 2010. Clearly it can be seen that
all the infrastructure financing can’t be done with
help of equity capital alone. So exploring Debt mar-
kets is the next best option available.
Constraints in the Development of Debt
Markets in India
Firstly the ceiling on the foreign investment
in both government and corporate bond markets is
limiting the market volume. Current limit is $5 billion
for government securities and $20 billion for corpo-
rate bonds. These limits need to be revised but at
the same time the financial stability should also be
considered in terms of capital account convertibility.
Absence of foreign denominated sovereign bonds is
also responsible for the interest of foreign investors
in equity market rather than debt.
The corporate bond market
is lagging behind government
securities market in terms of
volume and scale
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
Secondly, in developed bond markets like in
USA, around 25-30% volume is captured by feder-
al agencies securities, municipal agency and asset
backed securities. In India according to 12th finance
commission the state governments would now not
be looking to central government for funds. They
would be going directly to the market. Apart from
this as municipal agencies develop and expand they
would also feel the need to enter the debt market.
Currently, most of the Interest rate derivatives
like Forward Rate Agreements (FRAs) and Inter-
est Rate Swaps are traded Over the Counter (OTC).
Though there has been significant increase in the
number of contracts, participation in this market re-
mains restricted to a few foreign and private banks.
The introduction of exchange traded derivatives is
expected to improve the interest rate derivatives
market in India. In connection with this, it is neces-
sary to ensure that efficient risk management prac-
tises are followed by the market participants and
more transparency should be bought in OTC market
to prevent any catastrophe like the one recently en-
countered by the western world.
Another issue of concern which has been
raised in various corners is the conflict of interest
inherent in RBI’s role as both the monetary policy
manager and the intermediary for government debt
management. For e.g., certain monetary tools like
SLR will affect the cost of borrowing by governments.
But as RBI has been effective in both these roles in
the past, we believe it is too early to separate the
Government debt management role from the RBI,
though more transparency can be bought in this re-
gard.
Thus on a concluding note, Indian debt mar-
kets has come a long way since the economic re-
forms which were initiated in 1991. Even though the
reforms in G-Sec market have been impressive, cor-
porate debt market still lags behind when compared
to the developed nations. Since equity capital alone
FinSight
is not sufficient to fund the bullish expansion plans
of all the companies in India, a lack of funding is one
of the major constraints hindering our progress. An
efficient corporate debt market is thus very essential
for sustaining India’s growth engine.
13
 SHG Model for micro finance
Perspective

Gopal Kumar Singh & Rahul Sachdev

Xavier Institute of Management, Bhubaneswar

The reasons for a Micro-finance institutions are fully. In the 1980s, policymakers
large part of the well-recognized world over as an took notice and worked with devel-
effective tool for poverty alleviation opment organizations and bankers
population to stay and improving socioeconomic sta- to discuss the possibility of promot-
outside the realms tus of rural poor. In India too, mi- ing these savings and credit groups.
of banking vary from cro-finance is making headway in State governments established re-
logistics to cost of its effort for reducing poverty and volving loan funds which were used
empowering rural women. Micro- to fund SHGs. By the 1990s, SHGs
transactions, lack of
finance works through the network were viewed by state governments
financial literacy and of cooperatives, commercial banks, and NGOs to be more than just a
products that meet regional rural banks, NABARD and financial intermediation but as a
the requirements of NGO’s and is largely supply-driven. common interest group, working on
the unbanked. The Villages are facing problems other concerns as well. The agenda
related to poverty illiteracy, lack of SHGs included social and political
importance of SHGs issues as well.
of skills, health care etc. These are
(Self Help Group) problems that cannot be tackled The SHG’s became a regu-
and microfinance individually but lar component of
becomes all the can be better the Indian finan-
more important, to solved through cial system since
group efforts. 1996. The SHG’s
save these people
Today these are small, infor-
from hungry money- groups known mal and homog-
lenders. With more as Self Help enous groups.
than 4 crore house- Groups (SHGs) These groups have
holds being pro- have become proved as cyclic
the vehicle of agents of develop-
vided credit through change for the poor and marginal- ment in both the rural and urban
SHGs, this model ized. Self help group is a method of areas. The SHG’s after being formed
acts as a great step organizing the poor people and the start collecting a fixed amount of
towards ‘Banking marginalized to come together to thrift from each member regularly.
the Unbanked’ and solve their individual problems. The After accumulating a reasonable
SHG method is used by the govern- amount of resource, the group
can be one of the ment, NGOs and others worldwide. starts lending to its members for
biggest contribu- Emergence of the SHG Move- petty consumption needs. Later,
tors towards India’s ment as the group stabilizes it is linked
growth in the com- with a bank for serving greater
In the early stages, NGOs
loan needs. If the bank is satisfied
ing decades. played a pivotal role in developing
with the group in terms of genu-
the SHG model and in implementing
ineness of demand for credit, credit
the model to develop the process

..
488 districts in all the states/
UTs have been covered under
SHG Bank Linkage Program
(SBLP) program me

14 NIVESHAK VOLUME 4 ISSUE 4 April 2011

handling capacity, repayment behavior within the
groups and the accounting system and mainte-
nance of the records, it extends a term loan of
smaller amount to the group.
According to the NABARD, at the end of March
2007, 2.92 million SHGs cumulatively received bank
loans of Rs 180,410 million (US$4.5 million). In total,
40.95 million poor households have been provided
with credit from formal financial institutions. And,
given that the average size of the Indian family
is five, this indicates that over 200 million people
have been provided credit by the banking sector
through SHGs, though not all of them would be
active borrowers. Also, at the end of the year 2008-
2009, 5,63,530 SHGs were formed under the Swarna
Jayanti Gram Swarozgar Yojna in India.
The spread of SHGs led also to the formation
of SHG Federations which are a more sophisticat-
ed form of organization that involve several SHGs
forming into Village Organizations (VO) / Cluster
Federations and then ultimately into higher level
federations (called as Mandal Samakhya (MS) in
AP or SHG Federation generally). SHG Federations
are formal institutions while the SHGs are informal.
Many of these SHG federations are registered as
societies, mutual benefit trusts and mutually aided
cooperative societies. SHG Federations resulted in
Over 200 million people have
been provided credit by the
banking sector through SHGs
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
several key benefits including:
• Stronger political and advocacy capabilities
Perspective
• Sharing of knowledge and experiences
• Economies of scale
• Access to greater capital
The SHG Model
Structure of SHG
A SHG is a group of about 10 to 20 people,
usually women, from a similar class and region,
who come together to form savings and credit or-
ganization. They pool financial resources to make
small interest bearing loans to their members. This
process creates an ethic that focuses on savings
first. The setting of terms and conditions and ac-
counting of the loan are done in the group by des-
ignated members.
SHG Federation
As mentioned previously, SHGs have also fed-
erated into larger organizations. In the figure below,
a graphic illustration is shown of a SHG Federation.
Typically, about 15 to 50 SHGs make up a Cluster
/ VO with either one or two representatives from
each SHG. Depending on geography, several clus-
ters or VOs come together to form an apex body or
an SHG Federation.
15
 At the cluster and federation level, there are cause these institutions have very different institu-
inter-group borrowings, exchange of ideas, sharing tional goals. With this in view, a series of initiatives
of costs and discussion of common interests. There is being planned in the coming months for putting
Perspective

are typically various subcommittees that deal with in place a more vibrant micro finance dispensation
a variety of issues including loan collections, ac- environment in the country where complementary
counting and social issues. and competitive models of micro finance delivery
There are certain models recognized by the would be encouraged to co-exist.
RBI in delivering of credit through SHG and microfi- However, some experts also view the success
nance linkage. The RBI also, monitors the success of SHGs in delivering financial inclusion to the poor-
of SHGs in the view of model wise disbursement of est of the poor with a pinch of salt. According to
loan. The models are termed as Model I, Model II them, the outreach of SHG-bank linkage may seem
and Model III. impressive, but in the context of the magnitude of
Model I suggests extending credit facilities poverty in India and the flow of funds for poverty
by public sector banks directly to SHGs without in- alleviation, it represents a very small intervention.
tervention/facilitation of any NGO. This model ac- Thus, the SHG model for providing micro-fi-
counts for 16% of the total loan disbursement to nance in India has been, to a large extent, a very
the SHGs. successful initiative. Currently as well, there are a
Model II suggests giving credit directly to number of initiatives being taken up and huge sup-
SHGs with facilitation by NGOs and other formal port is being rendered to these SHGs. Many SHGs
agencies. This model is currently most famous and in Andhra Pradesh are flourishing after taking up
widely used model as it accounts for 75% of the micro-finance initiatives. Hence, we feel that this
loan disbursed to the SHGs. model can further be explored and taken up by
various other groups across the country.
Model III suggests extending financial linkage
through NGO as facilitator and financing agency.
This represents only 9% of the total linkage.
While 488 districts in all the states/UTs have
been covered under SHG Bank Linkage Program
(SBLP) programme, 444 banks including 44 com-
mercial banks (including 17 in the private
sector), 191 RRBs and 209 co-operative
banks along with 2,155 NGOs are now deliv-
ering credit to the poor and marginalised
by way of using either of the above
mentioned models via SHG model.
Keeping these validated mod-
els for delivery of credit to the poor
and the unorganized sector in
view, RBI is moving towards
a systems perspective for
providing effective policy
support not only because
a number of different in-
stitutions, viz. banks,
MFIs, NGOs & SHGs are
involved, but also be-

Micro-finance works through the network of cooperatives, commercial banks, regional rural banks,
NABARD and NGO’s and is largely supply-driven

16 NIVESHAK VOLUME 4 ISSUE 5 May 2011

 CLASSROOM Exchange
FinFunda
of the
traded
Month
funds
Sawan singamsetty
Team Niveshak

Welcome students! Today we’ll talk Sir, u just mentioned one difference
about Exchange traded Funds (ETFs). So, has between mutual funds and ETFs. Is that
anyone heard about it until now? the only difference?

Sir, I just know that it is similar to Good that you asked because it is
stocks and mutual funds that can be traded important to know. Trading in ETF takes

Classroom
on stock exchanges. place on the stock exchanges during trad-
ing hours. The mutual fund units are how-
ever purchased from the Mutual Fund at
Well, you are correct, but let’s just de-
NAV at the end of the day. The expenses are low in
fine it once again. EFT is defined as a secu-
an ETF since there is no active fund management
rity that tracks an index, a commodity or
involved as in case of mutual funds. The costs in
a basket of assets like an index fund but
mutual funds are higher in short term since they are
trades like a stock on an exchange. ETF are often called
subject to load fees, annual management fees, exit
as index shares, are a hybrid of index mutual funds
fees etc. Dividends are rarely made in EFT whereas
and stocks
there are frequent dividends made depending upon
the stocks the mutual fund is holding.
What is the process for issuance of
ETF?
Sir, What are the different types of
ETFs available?
The issuance of EFT is just like a pri-
mary market IPO or a mutual Fund NFO.
Oh. There are many!! Broadly ETFs
Shares are issued by the Fund manager and
can be classified into Global ETFs, Fixed
listed on the exchanges. Investors can buy
Income ETFs, Commodity ETFs, Currency
and sell these shares from the secondary
ETFs. We can discuss about all these in
market through their brokers.
detail later. FYKI, there are ETFs focussing
on entire countries too!!
What is so special about ETFs? What
benefits does it offer?
How popular is ETF in India?

Good question. The beauty of ETFs lies

Hmmm. ETF is not a new con-
in the fact that it offers investors the ability
cept in India. There have been two ETFs
to diversify over an entire sector or market
launched in India one is based on Sensex
segment in just a single investment. ETFs
which was called Spice and another was
are special because they are diversifiable
launched with Nifty as an underlying as-
like mutual funds and also can be traded
set, it was gold Nifty Bees. However both these in-
like stocks. Mutual funds cannot be traded each day
struments failed to attract the attention of investors.
like a stock. Further, ETFs involve low cost, offer trans-
ETFs are regulated by SEBI in India.
parency and multiple strategies can be applied while
trading.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 17

 FIN-Q
1. He is the youngest-ever financial editor of Forbes magazine and could be
considered as Father of Science of Technical Analysis. Identify the person.

2. “A Trend Is More Likely to Continue than reverse” is the basic tenets of

which famous theory?

3. Unleveraged Cash Flow is better known as ______________. Name the term.

4. A legal process to pay the creditors of a corporation declared to be insolvent

is known as____________

5. If there is no corporate income tax, cash flow depends on the depreciation

policy .True or False? Explain in one line.

6. If there is no corporate income tax, the leverage effect of debt does not ex-
ist. True or False?

7. Which two person are founder of the Dow Jones Industrial Average?
FinLounge

8. Name the index which used to detect the Bullish or Bearish trend in stock
market?

9. What does Chalu Upla mean in stock trading?

10. Which is the first foreign company listed on NYSE?

All entries should be mailed at niveshak.iims@gmail.com by 12th June, 2011 23:59 hrs
One lucky winner will receive cash prize of Rs. 500/-

18 NIVESHAK VOLUME 4 ISSUE 5 May 2011

ANNOUNCEMENTS
ARTICLE OF THE MONTH
The Article of the Month winner for April 2011 are
Pranay Singh
of FMS Delhi
They receive a cash prize of Rs.1000/-

FinQ Winner
The FinQ Winner for the month April 2011 is
Pooja Beria
of IIM Raipur
She receives a cash prize of Rs.500/-
CONGRATULATIONS!!

ALL ARE INVITED

Team Niveshak invite articles from B-Schools all across India. We are looking
for original articles related to finance & economics. Students can also contrib-
ute puzzles and jokes related to finance & economics. References should be
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Month” and would be awarded cash prize of Rs.1000/-

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