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ARTHAARTH ISSUE I

2Page

INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR FINOMINA

ndia finds herself in a rapidly changing economic scenario

today. The general business landscape is more complex,

more competitive and unpredictable than ever before. We have

achieved such high levels of globalization that decisions made

in the West influence the way business is done in the East, and

policies implemented in the East affect the global business strat-

egies of corporations in the West. This dynamic environment

requires managers to have a working knowledge of various is-

sues, knowing how they affect each other and the various in-

dustries and services that depend on them.

Indian Institute of Management, Udaipur has been able to put in place, along with the traditional andnecessary disciplines, subjects and issues that are most relevant to the current times and that will help

shape future trends. It is imperative that future managers get to know of the current trends in the in-

dustry and how the various macro-economic and micro-economic factors interact to affect the way

business is done all over the world. There is a growing need to have the dissemination of this infor-

mation from the restricted forums where it is available right now and empower the youth and stu-

dents to participate in these discussions and increase their own knowledge and awareness.

Arthaarth is the latest initiative by Finomina – the Finance Club of IIMU, which aims at easing the

transformation from being thought leaders, rich in ideas to becoming opinionated, knowledgeable ac-tion leaders capable of steering the organizations they work with and the society as a whole towards

success. I hope it becomes a catalyst in this process of transformation.

Wishing them the best in all their future endeavors.

Prof Janat Shah

IIM Udaipur

From the Director’s Desk,



FINOMINA INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR

3 Page

ARTHAARTH ISSUE I EDITORIAL

ncertainty, and how to effectively cope with it, is the chal-

lenge of today’s business. The financial climate world over is

replete with examples of volatile markets, uncertain demands and

befuddling trends in stocks and bourses. All these play devastatingly on the health and stability of trade, industry and business. In this

maiden issue of Arthaarth, we try to look back at what major devel-

opments the world has experienced due to these uncertainties and how these have ex-

erted serious implications in the world of business and economy.

It seems globalization is finally showing its true impact. The Eurozone crisis and finan-

cial troubles in the US amply demonstrate the phenomenon of global interdependence

and inter-connectedness in today’s complex world economy. Thus, what happened in

one part of the world caused all-out economic repercussions, reverberating across oth-er parts of the world as well.

The exposé of LIBOR rigging in the United Kingdom brought out the urgent need to put

in place effective monitoring and regulatory mechanisms in the banking system. This is

essential to safeguard the colossal amount of public funds that are subjected to clever

manipulations by unscrupulous elements. Talking about regulations, the conversation

capsule with Prof Sanjeevan Kapshe extensively covered various aspects of statutory

mechanisms required to ensure their optimum functioning, protecting their integrity

and adhering to financial propriety.The volatility of the Rupee-Dollar exchange rate saps off the energy from the business

houses and entrepreneurs involved in the EXIM business from India. The role of Gov-

ernment in orienting its fiscal policies, such as easing on FDI restrictions in multi brand

retail, effectively managing fiscal deficit and removing a slew of ambiguities of GAAR

and other restrictions, is expected to make desirable impact on the market economy. It

will be quite interesting to see how the RBI also could play its role in this direction.

The budding managers may benefit themselves by being well aware of the efferves-

cence and incertitude involved in all these business elements. Let me invite you to aninvigorating read ahead as I sign off with these few words-

Ceteris Paribus , stability is presumed,

As growth predictions go unbound.

But cruel are the financial worlds’ rules,

Nothing is sure, neither a stable ground.

Editorial Team:

Abhinandan Ghosh &

Manish Jain

Front Cover Design:

Prateek Shukla

Magazine Layout

and Design: Ajith

Pancily & Vivek

Pandey

Printing & Publish-

ing: Aditya Arora,

Aditya Raghunath,

Ajith Pancily

Distribution: Aditya

Raghunath

Content

Fiscal Integration in

the Eurozone: Shiv

Marwah & Vinay

Tejasvi

LI(E)BOR &

MIBOR: Aditya

Raghunath & Aman

Agarwal

Rupee’s Roller

Coaster Ride: AjithPancily, Khushboo

Goyal, Kunal Kochar,

Rahul Agarwal, Ratika

Mittal

FCCB Redemption

Pressures: Varun

Mediratta

Face2Face with

Dr. Kapshe : Aditya

Arora, Aman Agarwal

MoneyRatnam:

Vivek Batra & Vivek

Pandey

Logophile: Rahul

Agarwal & Ratika

Mittal

Back Cover Design:

Ajith Pancily & Vivek

Pandey

From the Editor’s Desk,



Fiscal Integration in the Eurozonetool to deal with the adverse macroeconomic condi-

tions. This means that policies made for the EU are

based on the average of these rates in its member

countries and individual countries can only adjust

their fiscal policy if they wish to tackle their infla-

tion and unemployment rates. To adjust unemploy-

ment rates, the government had to increase fiscal

spending which further aggravated the already dis-

mal fiscal deficit condition. This led to rising public

debts in these countries and they could not even de-

value their currency to boost exports as the Euro-zone follows a common currency.

To eliminate such institutional problems and pre-

vent more members of the Eurozone from defaulting

on their debts and to avoid another wave of instabil-

ity in the European banking sector the establishment

of the ESFS (European Financial Stability Facility) is a

step in the right direction and in its latest assessment

of the crisis, the IMF has called for greater economic

integration and proposed the formation of a fiscalunion to add stability to the monetary union.

What will the fiscal Union do?

The fiscal union will create a common budget plan

for nations. It would allow for economic support

being provided conditionally where the ECB or the

IMF can closely monitor the actions of the debt rid-

den governments. Governments will have to obey

and go by the rules put in place with regards to tax-

ation and expenditure and will need to make budget

amendments in their constitutions to provide for

this. A regular review to judge the bankability of

these nations will be carried out so as to decide the

future flow of funds to these nations and to vary the

size of the European rescue fund commensurately.

ARTHAARTH ISSUE I

4Page

GLOBAL ECONOMY

he Eurozone’s troubles began in 2009 with the

debt crisis in Greece and have since spread to

other countries in the EU exposing high debt levels

and fiscal deficits, economic recession that has led to

high unemployment rates, spending cuts on welfare

schemes and trade imbalance among the member

states. Recently, credit ratings of France, Italy and a

few other Eurozone nations were downgraded by

Standard & Poor’s.

After a lot of deliberation over the appropriate

course of action to be taken, the IMF has proposed

the formation of fiscal and banking unions in the

Eurozone to bolster the already existing monetary

union.

Why do they need a fiscal union?

At present, the European Central Bank (ECB) manag-

es the monetary policy of the Eurozone. It makes all

the decisions regarding the money supply in the

market with the principal aim of managing the in-

flation and unemployment levels in the Eurozone.

Thus, the countries cannot use monetary policy as a





What does this mean?

The Eurozone will have a centralized authority that

will create a common budget plan for all the na-

tions. Member states will give up control over theirnational budget and let the ECB control their

spending.

Implications in member nations

When bailouts were initially announced in the

form of assistance packages to Greece, Ireland and

Portugal, they faced stiff opposition to using the

money of tax payers in well-off nations in order to

rescue them. Adoption of austerity measures in

many countries were met with public outcry and

political backlash, as was evident in the case of

France where the incumbent president Nicolas Sar-

kozy was beaten by François Hollande who criti-

cized his austerity measures. Even the newly elect-

ed Greek parliament has requested for slackening

the strict austerity measures imposed by the EU and

the IMF.In case of the establishment of a fiscal union, the

reaction to spending cuts will be no different. Gov-

ernments may have budgetary constraints imposed

and a change in tax collection laws may also not be

easily accepted. Public support for these measures,

among fiscally strong countries like Germany and

Finland, like for transferring taxes collected to oth-

er countries may be negative. It remains to be seen

if all members of the Eurozone would even agree to

austerity measures fearing political upheavals. Also,

the division of monetary resources among member

nations would become a point of contention while

nations try to outdo themselves in acquiring great-

er spending power.

Impact of the Eurozone crisis on the US

Firstly, The continuing crisis of the European Union

can directly have a negative impact on the US

economy. The first direct impact will be on exports.

A slow growth for countries in the Eurozone willaffect US exports to the Eurozone and the sales of

US companies operating in European markets,

which would in turn impact the country’s GDP

growth. As of January 2012, the US and Eurozone

economies together account for 40% of the world’s

GDP. The two economies have a bilateral relation-

ship with each other, where each acts as a major

source of foreign direct investment for the otherand represents a major market for the export of

goods and services.

Secondly, The European banking system has a high

level of exposure to countries like Greece, Italy and

Spain and faces the major risk of default by these

countries. These banks are closely related to US

banks, the concern is that in the event of default

these banks would not be able to absorb the losses

and may in turn default on what they owe to the

US banks.

Finally, With the Euro declining against the dollar

the US might look at other markets for investment

as investments in Europe will result in lower profits

on conversion to dollars.

5 Page

ARTHAARTH ISSUE I GLOBAL ECONOMY



LI(E)BOR and MIBOR

rates with the motive of making substantial profits

on their large portfolios linked to the LIBOR interest

rate.

Estimates of how much money is tied to the LIBOR

vary from $350 trillion to $800 trillion (From a scale

perspective, $350 trillion would pay for all U.S gov-

ernment spending for about 96 years!) Moreover, a

one basis point change in LIBOR could potentially

result in an additional cash flow of 2 million pounds

to the member banks.

The member banks of BBA followed the pollingmethod to arrive at the LIBOR rates wherein a set of

banking partners provide the rates at which they

trade or at one which they speculate. At the heart of

it, this is an honor system, which some banks lever-

aged to artificially inflate or deflate their rates, de-

pending on what would benefit them the most. As it

turned out, the numbers provided by the organiza-

tions were not based on trade data but guesstimates,

which were stated in conjunction with others or on

their own; and depending on the clout they had to

maintain a certain rate.

LIBOR and India

Since this was tied to humungous amounts of mon-

ey, it had major repercussions on consumers and

financial markets worldwide. Many Indian compa-

nies that rely on external loans in dollars or euro

pay interest rates based on LIBOR. RBI has imposedan upper ceiling of 200 basis points above the LI-

BOR on trade credits and other loans up to three

years. If the rate was manipulated on the higher end,

companies would be paying huge amounts as inter-

est payments.

The motive and the action taken by Barclays to rig

ARTHAARTH ISSUE I

6Page

COVER STORY

he LIBOR scandal involving Barclays and the

Bank of England has created waves in the fi-nancial world. Some of the pertinent questions that

are often asked are: Why did they do it and what has

been the impact of the scam? Is it possible for such

an event to occur in the Indian banking industry?

LIBOR (London Inter-Bank Offer Rate) is an interest

rate benchmark on which many financial instru-

ments are pegged, ranging from commercial loans to

mortgages and money-market instruments like de-

rivatives. There are several speculated reasons for

the rigging of LIBOR by Barclays and the16 member

banks.

Reasons for Rigging of the LIBOR

Probably the foremost reason for the same could

have been Barclays’ fear of nationalization. Barclays

might have reported lower rates to the BBA (British

Bankers’ Association) due to the fear of nationaliza-

tion after the Lehman Brothers collapse which creptin. The reasoning behind this was that if the bank

reported higher borrowing costs, the government

may doubt its ability to raise capital and nationalize

it for systemic reasons.

The second reason, a more obvious one, is that of

profit. The member banks had understated their




the LIBOR compels us to reflect whether this is some-

thing exceptional or could it be replicated for MIBOR.

MIBOR refers to the Mumbai Interbank Offered Rate

set by Reuters and NSE every morning and is the local

rate over which Overnight Indexed Swaps are based.

The volume of trade happening in India on the basis

of MIBOR is miniscule when compared to that of LI-

BOR denominated trade which runs into several hun-

dred trillions of dollars.


7 Page

ARTHAARTH ISSUE I COVER STORY

So, should one even worry about a rigged MIBOR?

The answer is a definite “Yes” because it is the central

benchmark rate for majority deals struck for Interest

Rate Swaps, FRA’s and Floating Rate Debentures in

India.

However, the rates in MIBOR may not be rigged be-

cause of two main reasons. First, the motivation to rig

the MIBOR is missing. Barclays did so because they

didn’t want themselves to be nationalized whereas

the main contributing banks to MIBOR in India are

themselves nationalized (ex. SBI, PNB, UBI among the

pool of 31 banks and dealers commanding close to75% of the overall bank deposits).

Second, and more importantly, there is a difference in

the way LIBOR and MIBOR are calculated. To start

with, both the rates are calculated by taking a poll of

the rate at which the banks can or are expected to

raise capital overnight. The polled rates are then

cleared of outliers by taking the 2nd and 3rd quartile

of the rates into the consideration set and doing away

with outliers. British Banks Association reports themean of the rates in the mentioned quartiles and

publishes it on daily basis. NSE goes a step ahead and

verifies the polled rate through bootstrapping, which

involves drawing up of a sample of mean data

(pooled) and finding the efficiency of this mean value

by computing the standard deviation. The mean of

the sample with lowest standard deviation is report-

ed to be the MIBOR.

The verification of MIBOR through bootstrapping

ensures that the noise in reporting rates by banks is

nullified. Moreover, the value of n (sample size)

drawn each time is dynamic, which makes sure that

any attempt to rig the MIBOR via cartelization is

taken care of. In spite of using all technical jugglery

there are apprehensions in the market that the MI-

BOR could still be rigged. So the banks around the

country along with CCIL are considering a move

towards determining the rates through the screen

based trading system. This looks like a credible solu-tion as all the deals in government securities are ex-

ecuted through Negotiated Dealing System (NDS)

and any deal executed outside the NDS is supposed

to be reported within 15 minutes. Unlike a voice

based system used for trading money market instru-

ments in other countries, it is an easier option to

switch to system wherein the MIBOR would be de-

termined by actual rates rather than the polled ones.

NDS is an electronic trading platform operated by RBI which facilitates the exchange of government

securities and other money market instruments.

To conclude, the argument that the value of deriva-

tives linked to MIBOR is miniscule and therefore

rigging the MIBOR does not matter is flawed. This is

because of the fact that these rates (LIBOR and MI-

BOR) are set and traded upon in the market on the

basis of trust. If these benchmark rates are manipu-

lated then it would make the whole financial indus-

try vulnerable and prove to be a breeding ground

for arbitrageurs.



Indian Rupee’s Roller-Coaster Ride

ARTHAARTH ISSUE I

8Page

MACRO ECONOMICS

upee depreciation seems to be the current buzzword

in the country – with people ranging from the Prime

Minister to the friendly neighborhood paanwala talking

about it. Its effects are everywhere. Although the Indianrupee has strengthened from its all-time low of over Rs.57

to a dollar, it makes sense to explore the reasons behind this

volatility and try to project the future movements in the

currency.

To start with, the rupee depreciation can be attributed to a

host of factors which can be broadly classified into internal

and external factors. Internal factors are those factors which

are intrinsically linked to the Indian economy- from gov-

ernment policies, the bulging fiscal deficit, current & trade

deficits and the RBI policies to something as uncertain as the

effect of monsoons. External factors are those factors which

are not directly under Indian control such as the Euro crisis,

the effect of oil prices and the inflow of FDI and FII in India.

In the following sections, a variety of factors have been dis-

cussed which have played an important role in determining

the rupee movements.

Current Account and Trade Deficit

Widening current account and trade deficits were the pri-

mary reason for the dramatic depreciation in the value of rupee. India is an oil-deficient country and subsequently,

India ends up importing close to 80% of its crude oil con-

sumption. Although this has been the story for many years

now, the situation has worsened due to an unprecedented

increase in global crude oil prices as well. If we talk in ab-

solute terms, every 10 dollar increase in the price of an oil

barrel increases the Indian current account deficit by

roughly $6.5 billion dollars.

Owing to the circumstances discussed above, the Indian

current account deficit has reached 4.2% of GDP in 2011-12 with a trade deficit of 10% of GDP. Crude oil represents

30.1% of the total Indian imports in dollar value. However,

an interesting point to note is that Gold & Silver represent

10.1% of the import basket. This fetish for Gold & Silver is

unique to India and has created a serious problem for the

RBI governor on the current account deficit front. Econo-

mists talk about the J curve coming into play when imports

will eventually become expensive and thus their demand

will decrease. But, the problem in India is that huge subsidies

are given on petroleum products which have resulted in ine-

lastic demand for crude oil. Consequently, the domestic de-mand for petro products has not been influenced much by the

depreciation of rupee. Hence, it will be difficult for the J curve

to function as expected. If the conditions do not improve

quickly then the WPI figures are headed north again which

will bring the rupee under further pressure.

Government Policies

Policy paralysis has been widely cited as a reason for rupee

depreciation. The government has failed to ease FDI re-

strictions in multi brand retail. The GAAR, which are aimed at

reducing tax avoidance by introducing rules that will penal-ize investors wanting to route their money through tax ha-

vens have dissuaded foreign investors from investing in India.

This has resulted in the drying up of dollar inflows into the

country and reducing the demand for rupees. An area where

the government can support the rupee is through the imple-

mentation of business friendly policies such as GST. Imple-

mentation of GST is expected to boost the business environ-

ment in India and will help increase the level of foreign in-

vestments which in turn will support the rupee. Till now, the

government has just managed to take a few small steps likeincreasing the limit for foreign institutional investments in

government securities and increasing import duty on Gold to

support the plummeting rupee. On the other hand, RBI has

taken steps such as tightening the norms for rupee forward

contracts, raising interest rates on non-resident deposits and

announcing relaxations in external commercial borrowings

to support the rupee. Media has been criticizing the RBI for





9 Page

ARTHAARTH ISSUE I MACRO ECONOMICS

perceived as the ultimate safe haven by the investors. This has

also resulted in investors pulling out from Indian investments

in favor of dollar denominated securities. The rupee now in

unchartered territory, has the market momentum firmly

against it, and shall require strong policy support from the government.

not using its Forex reserves in the open market but past expe-

riences indicate that a central bank can’t offset the market

trend using its reserves. It is bound to fall short as in the case

of the Bank of England in 1992.

Fiscal DeficitIndia’s huge fiscal deficit at 5.6% of the GDP has put a huge

pressure on the government to reduce its spending on items

such as petrol and fertilizer subsidies. But due to the populist

measures taken by the government and the pressures of coali-

tion politics, it has been unable to reduce this spending. In

fact, the government has increased the outlay for public ex-

penditure in some areas. Now, some might wonder how this

is connected to rupee depreciation. The government has two

ways to bridge the fiscal deficit: raise money using bonds or

ask the RBI to print more rupees. The former method leads toan increase in interest rates making business difficult in the

country. Also, it might lead to a downgrade by rating agen-

cies, if the debt to GDP ratio is out of control. The latter meth-

od leads to an increase in money supply leading in an in-

crease in inflation. It is evident that both the methods will

result in conditions which make the country unattractive for

foreign investors.

Global Economy

Although external, this factor plays a very important role in

deciding the fate of a currency. The United States of America

(11.9% of the exports) and Europe (19% of the exports) have

always been a vital market for Indian exports. Therefore, any

economic issue with these regions adversely affects the Indian

economy. Low growth rates in these markets have diminished

the demand for Indian exports, hence, worsening the current

account deficit. Furthermore, the sovereign crisis in Europe

and the possibility of “Grexit” (Greek Exit) from the European

Union have weakened the Euro substantially and a capital

flight started happening towards the US dollar. USD is being

Future Outlook

The situation looks quite gloomy after looking at all the fac-

tors that are playing a role in the fall of the Indian currency.

However, everything is not that bad. India is still growing at a

rate of 6.5% which is by no means a bad performance com-

pared to the developed countries. Investors still believe in the

Indian growth story and as a result India has managed to be

the third largest recipient of FDI in the last year. The inflows

have reduced this year but still they form a significant num-

ber in dollar terms. On the current account and trade deficit

front, currency depreciation has opened a treasure trove for

India by making the exports extremely competitive. Once the

exports start growing and the import of non-essential goods

is controlled, the current account deficit will take care of itself

and the rupee will stabilize.

However, the Indian government will find it difficult to con-

trol fiscal deficit given that 2012 will witness elections in

Gujarat and Himachal Pradesh. Also, the coalition politics islikely to impose more pressure on the government to take

populist decisions and, thus, subsidies will continue. Moreo-

ver, the government is now trying its best to remove as many

policy barriers as it can to attract more foreign investors. The

change in the finance ministry and the flak that the govern-

ment has received from around the world gives a sense that

the situation will improve in the coming months. On the

global economy front, the European Central Bank has been

firm in its support to the Eurozone nations and has main-

tained that the European Union will stay. Steps towards a fis-

cal union and collaborative political effort by the European

leaders give a signal that the conditions will improve.

In a nutshell, holding all factors under consideration, the ru-

pee is not expected to touch 60 in the next six months. How-

ever, it is equally unlikely that it appreciates to 50. The move-

ment will be less volatile than it had been in the last six

months and the equilibrium range of 53 to 56 is estimated to

prevail.



FCCB Redemption Pressures

ARTHAARTH ISSUE I

10Page

MICRO ECONOMICS

foreign currency convertible bond (FCCB) is

defined as a bond which is issued in a curren-

cy other than the issuer’s home currency and theinvestor has an option to convert the bond into eq-

uity at a predetermined price and after a predeter-

mined period of time. Therefore, it is attractive to

both issuers as well as investors since the conversion

option lowers the coupon rate for the issuer in addi-

tion to preventing immediate equity dilution. For

the investors, it presents a unique opportunity to

take benefit of an appreciation in the share price

while the downside risk is limited since the coupon

payment is guaranteed even if the option ends up

being out of the money.

One of the biggest risks that companies

which raise capital via the FCCB route face is cur-

rency risk. This is because of the fact that in case the

conversion option expires worthless, i.e., the current

market price of the share of the issuer company is

lower than the predetermined conversion price; the

FCCB will be redeemed at the prevailing exchange

rate. Therefore, if the currency in which the FCCB is

issued appreciates significantly against the issuer’shome currency, the total outgo for the issuing compa-

ny at the time of redemption will rise.

This is exactly what has happened with many

of the Indian companies. Many Indian companies

raised capital via the FCCB route during 2006-08

since they were able to raise debt at an average rate of

5% as against the domestic market cost of debt of

close to 9%. According to Bloomberg, FCCB’s worth

close to Rs. 31, 500 Cr. issued by Indian corporates

will be up for redemption in 2013. Of these, FCCB’s

worth Rs. 22, 000 – 24, 000 Cr. may not get convert-

ed since the current stock prices of the issuing com-

panies are significantly below their conversion prices.

Some of the big companies facing redemption pres-

sures include Suzlon ($536 million), Jaiprakash Asso-

ciates ($524 million), JSW Steel ($392 million), GTL

Infrastructure ($321 million) and Sintex Industries($291 million) (source: Bloomberg). Adding to this,

the rupee was at 40/$ at the time of issuance but since

then, the currency has taken a serious knock and has

fallen to 56/$ (closing quote as of July 30 th, 2012 =

55.6111/$; source: Bloomberg), a close to 40% drop.

At the time of issuance, the cost of debt for the issue

was in the range of 5% - 6% but now, the cost of debt

has gone up to 12% - 15% which represents an im-

pact of close to 700 basis points on the back of ad-verse movement in the currency market. This point

can be further substantiated by looking at bonds is-

sued by Jaiprakash Associated and Tata Steel with

yield to maturity of 5.3% and 8.1% at the time of issu-

ance respectively (source: Bloomberg); at the time of

maturity in 2013, will be 12% and 15% due to the





11 Page

ARTHAARTH ISSUE I MICRO ECONOMICS

and replace foreign debt by domestic debt will go up

substantially which will definitely have an effect on

their bottom-lines going forward.

The steep increase in the redemption value of

the FCCB’s due to a substantial depreciation in the

rupee could have been negated if the FCCB issuing

companies had entered into a derivatives contract at

the time of issuance in order to hedge against the

currency risk. There are various options available

with the company such as entering into a futures or

forward contract, buying a call option or entering

into a swap agreement which will ensure that the

company does not get hit on the currency front. Themost suitable alternative out of the above mentioned

options in this case would be to enter into a fixed rate

swap agreement with a multinational company

which has a large exposure to rupee debt. Entering

into a fixed rate swap agreement where the compa-

nies can swap their interest payments as well as prin-

cipal repayment will be beneficial for both the com-

panies since it fixes the exchange rate and avoids any

kind of volatility.

In the present scenario where the companies

have no option but to redeem their outstanding

FCCB’s at whatever is the spot exchange rate, the best

way to do this would be to raise funds via the private

placement route, also known as a QIP (Qualified In-

stitutional Placement) which will ensure that the fund

raising via the equity route is done at a fair valuation

and thus, minimizing the equity dilution. Refinancing

via the debt route does not make sense at this point of

time because of high interest rates prevailing in the

country and a slowing economy and thus, additional

debt will further increase the interest burden and ul-

timately impact profitability. Also, internal accruals

should be used to be the maximum extent possible for

repayment of the outstanding FCCB’s.

rupee’s fall. This has had a huge impact on the profit-

ability of these firms since the interest and repayment

cost has shot up. As a result, raising capital via the

FCCB route which was considered to be a cheap

source of funds has turned out to be costlier than thecost of raising debt in the domestic market. Since the

interest rates are also ruling high in addition to the

rupee depreciation, the refinancing of FCCB’s by rais-

ing domestic debt is very difficult for some of the

smaller companies. And if these companies try to re-

vise the conversion price downwards, it will cause asharp equity dilution which will lead to further pres-

sure on the share price of the company.

Due to the above mentioned factors, some de-

faults on FCCB repayments have already started. Pyr-

amid Saimira Theatre Ltd., Wockhardt and Zenith

Infotech defaulted on their FCCB redemptions recent-

ly. Zenith Infotech had defaulted on FCCB’s worth

$33 million due in September 2011 and the stock fell

close to 79% during the next three months as a result

of the default (source: Bloomberg). According to

Standard and Poor’s estimates, almost half of the 48

companies whose FCCB’s are up for redemption in

the current year might go for restructuring or might

even default on the repayments. The interest costs for

the companies that decide to restructure their debt



A Cuppa with Dr. Sanjeevan Kapshefter completing B.E. (Electronics) in 1985, Prof.

Sanjeevan Kapshe started his career as EDP En-

gineer with BHEL Bhopal. He joined Indian Railway Service of Signal Engineers (IRSSE), 1986 Examina-

tion Batch and worked on large construction projects

on (old) Central Railway. After his doctoral work in

derivatives from IIM Bangalore, he was Professor

(Management Studies) at Railway Staff College, Vado-

dara for several years. He joined SEBI on deputation

from Indian Railways as Officer-on-Special-Duty

(OSD) to play the role of Chief General Manager and

Head of Derivatives and New Products Department.On return to Indian Railways – before dedicating

himself to academics – he was Chief Signal and Tele-

communication Engineer (Projects) on West Central

Railway, Jabalpur .

Recently, Team Finomina had a freewheeling in-

terview with Prof. Sanjeevan Kapshe where he

covered a wide range of issues relating to regula-

tions in general and financial markets in India.

laws reflecting the changing needs of the society, the

primary role of the executive is to implement these

laws through framing of suitable rules and regula-

tions, and the role of judiciary – in this context – is

to see that the laws are interpreted in the spirit they

were enacted. This system of working goes well inthe normal situations; however there are situations

which require specialist knowledge of the subject

matter where every executive or bureaucrat – typi-

cally a generalist - may need advisors to play the

role. This may not be either possible or efficient all

the time; therefore we have ‘regulators’ as inde-

pendent organizations, of course, working under

same constitutional framework. As such, a regulato-

ry body is created under a specific law enacted by the legislature. And, typically, this law gives legisla-

tive, executive, and judicial powers – within a lim-

ited sphere to the regulators.

In the times to come, we may see more regulators

depending on the degree of specialization required

to carry out certain tasks – something that we en-

ARTHAARTH ISSUE I

12Page

FACE2FACE

Q. What is the role of regulation bodies / regulators

in India?

A. Well, before we could get to the answer of this

question, we need to understand the context in

which we (in India) are working. What we can asso-

ciate from our course work is that we have a gov-

ernance system established by the Constitution of

India. The Constitution of India talks about various

things: citizens and their rights & duties; legislative,

judiciary and executive arms and the distribution of

power amongst them; the centre and state govern-

ments and their relationships, among many other

things.

While the primary role of the legislature is to enact





13 Page

ARTHAARTH ISSUE I FACE2FACE

countered in our course on organization theory.

So, with this background knowledge, I come back to

your question: In India, regulators play a critical role

to sector specialists and carry out the mandate given

to them. Today, there are many regulators in India.

For example – SEBI in securities markets, IRDA in

insurance, RBI as central banker and banking or fi-

nancial sector, TRAI for telecom sector, among oth-

ers.

Q. So, SEBI plays the same role like SEC in the United

States of America?

A. Yes and No! It plays the same role of regulating

securities market in India like SEC does in USA. But

there is a key difference which places SEBI in unique

position – it has a mandate ‘develop’ markets in In-

dia apart from its usual regulatory function.

Q. How does SEBI respond to scams in Indian mar-

ket?

A. One thing we may recall from our course work on programming courses is ‘no software is can re-

main bug free forever’. Likewise, no market can re-

main, in your words ‘scam’ free forever. Someday,

some situation may arise which was not foreseen

when certain rules and regulations were framed. To

respond to such emergent situations regulators are

given powers. And SEBI has used these powers effec-

tively. SEBI is an example of a ‘learning organiza-

tion’ in our management jargon, one may say.

Q. How can the companies contribute towards

healthy governance and make the work easier for

the regulators?

A. Well, once again, before going to the specifics of

your question, we need to understand the two basic

approaches to regulation, called as: ‘principle-based

regulation’ and ‘rule-based regulation’. Under the

first approach – regulators spell out, build consensus

about certain ‘core’ principles which are to be fol-lowed, observed, implemented, etc. by all the market

participants on voluntary basis and industry associ-

ations, etc. play the role of ‘self-supervision’, in some

sense. If any major issue or point of departure from

the agreed upon principles comes up, then the regu-

lator may provide suitable direction, guidance, sup-

port, etc. to the market participants. Essentially, what

we are saying is: a regulator is more like a

‘facilitator’ in this situation.

A contrasting scenario is in the ‘rule-based’ work-

ing: regulators prescribe the rules for possible eve-

rything in great detail and failure to comply with

these rules could lead to suitable penalties, punish-

ments, etc. In this role a regulator is like a

‘policeman’, a ‘referee’ – one may say…

So, to contribute towards healthy governance the

companies have to make efforts to move towards‘self -regulation’. In India, the (stock) Exchanges play

the role of front-line regulators. There are associa-

tions or voluntary organizations like AMFI (for mu-

tual funds), in India, which provide support as SROs

(Self-Regulatory Organizations) to a particular seg-

ment. Further, at each firm or company level there is

a role of ‘compliance officer’, in some sense, who

plays the role of regulator’s representative in the

company. Finally, it is responsibility of each investor

to be vigilant and keep the regulator informed about

anomalous situations in the markets. That is the best

form of regulation – coming straight from the inves-

tors .



To Infy or not to Infy?

ARTHAARTH ISSUE I

14Page

MONEY RATNAM

oney Ratnam scratched his head for the ump-

teenth time in the last minute, pondering over

the 34th article he had read about Infosys Limited. He

knew the time had come to summon all the investorspirits to answer the question echoing in his mind, “To

Infy or to not to Infy ”.

In the annual results announced in the quarter ending

Mar ’12, Infosys had failed to meet their annual guid-

ance, after almost two decades. Money Ratnam's eye-

brows had barely settled to their mode height, Jun ’12

results were announced. Infosys could not meet its

quarterly guidance, lowered the y-o-y guidance from

8-10 % to 5%, against the NASSCOM guidance of 11-14 % for the sector. It had also stopped the practice of

giving guidance, a practice it championed even when

it was not mandated by the law. It was clear that the

poster boy of the Indian IT industry was no longer the

bellwether, something that did not please Money

Ratnam.

Unflustered by the predictions of the doomsayers,

Money Ratnam started looking at the situation more

objectively. Currency fluctuations led to a loss of Rs.7280 crore. Persisting slowdown in US and European

markets, which contribute 85.6 % of the total revenue,

impacted the revenue. The Banking & Financial Ser-

vices which contribute about 34 per cent to the com-

pany’s revenues declined by 1 per cent. Money

Ratnam rubbed his eye and in a moment of true in-

sight realized that these factors are common to all the

IT companies. Deeply engrossed in thought, like Rus-

sell Crowe in “A beautiful Mind”, he declared, “I mustlook through, find company specifics”. In the wake of

the challenging global environment, Infosys has not

been able to command a high profit margin. Reluc-

tance from the client side meant that discretionary

spending by them had gone down, reducing the pric-

ing by 3.7 percent in the latest quarter. The operating

profit margins have shrunk from 34.56% in 2009-10

to 31.78% in 2011-12. The company had shifted its fo-

cus from playing the role of an IT vendor to that of a

strategic partner. The company, in alignment with this

shift, had increased its focus on System Integration and

Consulting. Being a relatively new entrant, the company

has not been able to reap benefits from these more prof-

itable avenues. In wake of recent VISA issues, the com-pany had to increase the local hiring at onsite locations

leading to higher expenses. “But should I be swayed by

these concerns or is there something on the brighter

side as well?” Money Ratnam thought.

In the quarter ending Jun 2012, Infosys had added 51

new clients. One of these projects was a Rs. 700-crore

project aimed at transforming the financial operations

of India Post, clearly indicating a renewed focus on the

domestic market segment. Zero debt and huge amountof cash at hand (Rs.20591 crores) meant that the com-

pany could invest heavily in major reorganization activ-

ities.


Infosys 3.0, with the aim of making the organization

leaner and focused on systems integration and consult-

ing, looked at transforming Infosys from a technology

Continued in Page 15




15 Page

ARTHAARTH ISSUE I THE LOGOPHILE

Across

1.India's New Chief Economic Advisor (8)

6.100 shares, basic trading unit for stock (8) (2 Words)

7.Company acquired by Infosys (9)

11.Average price for blue chip industrial companies on

NYSE(acronym) (4)

12.One of the five PSUs beung disinvested by GOI(acronym) (4)

13.W. Buffet's first investment in India (8)

15.Pricing model used for risky securities (acronym) (4)

16."The world's local bank" (4)

17.Partnership between bank and insurance company (13)

18.Debt package that is highly unlikely to be repaid (5)

19.Traders who play for high stakes (4)

Down

2.Current president of ECB (11) (2 Words)

3.Required rate of return in a discounted cash flow analy-

sis (6)

4.A cozenage of 1920, noted in Charles Dickens' 1844novel Martin Chuzzlewitt (5)

5.A acquires B, the quantifiable premium value of B (8)

8.Company asked to refund Rs.17400 crore to investors (6)

9.Amortisation of oil field would be termed as (9)

10.Canadian investment research firm creating waves in

India (7)

12.Leading a suit againt major banks involved in the LI-

BOR scam (9)

14.Regional form of promissory note (5)

service provider to a strategic partner for clients. Reaf-

firming Money Ratnam’s belief in the efforts being taken

towards Infosys 3.0 was Infosys's recent acquisition of a

leading global management consulting firm, Lodestone

Holding AG, for 330 million Swiss francs. The step, ac-

cording to Money Ratnam's understanding of the matters,

meant adding more than 200 clients and 750 front endconsultants into Infosys's kitty and touching $1 billion in

revenues from SAP Consulting, positioning it as one of

the global leaders in SAP Consulting. Money Ratnam was

optimistic about the impact of this structural change and

was also hoping for similar inorganic growth steps, in

sync with the organic growth, to fasten the growth plan

in systems integration and consulting.

Money Ratnam could not ignore all these latest develop-

ments. The market price of Infosys share has been hov-

ering in the range of around Rs. 2300 to Rs. 2550 over

the past month. Money Ratnam, without any further de-

lay, opened his laptop and logged into his demat ac-

count. The figures on his computer screen, "Average

Price Rs. 2437”, against Infy s truck his eye. This was theaverage price of his investment in Infosys's stock for the

last 2 years. A slight shake of head and he knew what he

had to do. With the time nearing for his analyses to

come to fruition, he clicked on “buy 100 shares”.

Money Ratnam : To Infy or not to Infy? (Contd.)



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