FINFAILS FINVIEW MOVIE REVIEW Harshad Mehta Nitin Mathur & Ajit The Rogue Security scam Bhide – Tavaga Trader Page - 19 Page - 26 Page - 31
DECEMBER 2018 EDITION || VOLUME XII || ISSUE XI NIVESHAK Finance and Investment Club
THE BIG EXIT RBI Governor resigns citing personal reasons
The New Era Business Machine learning & Ease of doing business & its Investment banking impact on the economy Dear Niveshaks, investors. Is there any chance 2018 has been indeed very of harmony between the interesting. There are a host of government and the regulator? events that one can look back Or India will have to deal with too. From the sizzling high such exits. The article of the profile Bollywood weddings, month, written by S Arun assembly elections and Vignesh of IFMR, helps us political controversies, understand the concept of landmark victory with section ease of doing business and its 377 and much more. The impact on the economy. Going financial world had its share of ahead with developments in stories, people’s interest was FinTech, this month’s edition invested in a variety of interviews Mr. subjects, ranging from Nitin Mathur & Mr. Bitcoin prices, budget Ajit Bhide of 2018, mergers and Tavaga. Tavaga is acquisitions, etc. a Robo investment Niveshak wraps up for platform which you the happenings in essentially uses the last month of the algorithms to year. This month’s manage their cover story describes un nouveau départ clients’ investments the most unexpected automatically. They event, the exit of the RBI run us through the latest governor, Mr. Urjit Patel. The developments in the Indian rift between the government economy and how fintech can and the RBI has a long history, affect the growth of the sector. perhaps a problem with no The movie review section talks solution. Be it the about Nicholas William "Nick" Chidambaram-Subbarao era or Leeson, former English the Jaitely-Rajan era; things derivative broker responsible haven’t been smooth between for bringing down Barings the top two bodies. No matter Bank, the UK’s oldest what happened in the past, a merchant bank into bankruptcy. sudden resignation of a The Rogue Trader is a film that professional of his calibre beautifully describes this instils fears in the minds of the tragedy. Every stock market perhaps has its own ‘Nick Leeson’, for India, it was Harshad Mehta. The latest Nirav THE Modi scam has a high resemblance to what happened TEAM to the Indian stock market and the Indian banks in the year 1991. The finfails section describes one of the biggest Aayushi stock market scam of India till Abhishek Soni date, the Harshad Mehta Arpit Murarka securities scam. A fraud so Bhushan Bavishkar diligently crafted that it Mahesh M completely upturned the markets. Priyanshu Gupta Harshad Mehta was by far the Samprit Shah most cunning broker that India ever had, his complicated yet Sheshav Dosi simply executed method of Sriya Gupta embezzling money from the two Aman Jain parallel markets forced the Harsh Jain market regulator, SEBI to reform Rajat Magotra the entire process. It is an Rohit Garg exciting read for those who wish Shreyansh Parakh to understand the loopholes in Suchitra Mandal the stock market and the Trisha Waghela changes that this scam brought Vinti Singla in the workings of the same. Yukti Rajpal
As we come to the end of this All images, design and artwork are copyright of year, we hope to have kept you IIM Shillong Finance Club abreast with the latest developments and events in the financial world. Now it’s time for © the new beginnings. Wish you all Finance Club a very Happy New Year! Indian Institute of Management, Shillong
Stay Invested, Disclaimer: The views presented are the Team Niveshak opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever. Contents
NIVESHAK: DECEMBER 2018 06 08 10 The Niveshak Article of the Month Investment Month: Machine That. Was Fund. learning. & IB 14 18 22 Cover Story: FinFail: FinGyaan: Ease of The Big Exit Harshad Mehta doing business . Security. Scam . 26 29 31 FinView: Mr. Classroom: Movie Review: Nitin Mathur & Index Calculation The Rogue Trader Mr. Ajit.Bhide . . NIVESHAK | DECEMBER 2018 TMTW
State assembly elections 2018 THE MONTH conclude: Congress emerges back
With Madhya Pradesh's nail-biting fight THAT WAS ending earlier this morning, results of all the five states' polling are finally out. Shaktikanta Das appointed In Madhya Pradesh, Rajasthan, Governor of RBI Chhattisgarh, Congress emerged as the single largest party, while BJP had to take the trailing seat. However, in Rajasthan, INC fell one seat short of a clear majority, and two seats in Madhya Pradesh. In Telangana, TRS won with a bang. The Mizo National Front (MNF) overthrew the reigning Congress party out of power in Mizoram. Image credits: Business Standard Shaktikanta Das was named as 25th Governor of the central bank on 11th December. Within 24 hours of Urjit Patel's resignation, the government appointed Shaktikanta Das as the new governor of the Reserve Bank of India. Das resigned from the 15th Finance Commission, to take over his new post. Urjit Patel resigned on 10th December citing personal reasons, following months of strained relations between the central government and RBI. He was the economic affairs secretary from 2015 to 2017, a staunch supporter of demonetization. Das is the first non-economist RBI Governor since 1990. S Venkitaraman was the last non-economist appointed to the post. Unlike his predecessors Urjit Patel and Raghuram Rajan, who were economists, Das pursued post- graduation in History from Delhi University and financial management program from IIM Bangalore.
[6] NIVESHAK | DECEMBER 2018 TMTW
Qatar to withdraw from OPEC in President’s rule. President Ram Nath January 2019 Kovind has signed the proclamation, in Qatar’s Energy Minister Saad Sherida the follow-up of PM Modi making the al-Kaabi on December 3, 2018 decision earlier that week. announced that the country will withdraw from the Organization of the Petroleum Exporting Countries (OPEC) in January 2019. This decision to quit OPEC was confirmed by Qatar Petroleum, the state oil company. Qatar’s pure strength is the production of Gas. Qatar is the world's biggest supplier of Liquefied Natural Gas (LNG), producing almost 30 percent of the world total. Qatar also shares the Image credits: India Tribune world's largest known natural gas field Vijay Mallya on a tweeting spree; the ‘North Field’ with Iran. says ready to repay 100% amount Tweeting regarding the allegations against him, Vijay Mallya said that he wishes to put an end to the allegations "that he stole money" from the lenders. He further appealed the banks to "Please take the money". The 62-year old had tweeted on 5th December that he has "offered to repay 100% of the principal amount to them (the banks)". Mallya also claimed that since 2016, Image credits: Business Standard his offer on the table is being refused, President's rule in Jammu and pasting a defaulter's image on him. Kashmir With the six months of governor's rule ending in the state, Jammu & Kashmir was under President's rule starting from midnight 19th December 2018. In June, BJP had withdrawn its support to the Mufti-led PDP government, following which the state had come under Governor Satya Pal Malik's rule. On Monday, Malik had recommended the central government to impose Image credits: twitter.com
[7] NIF PERFORMACE EVALUATION
As on December 31, 2018
November Month's Performance of NiveshakAs on 31th July 2017 Performance of NIF Investment Fund since 265 255 Inception 103 245 102 235 101 225 100 215 99 205 98 97 195 96 185 95 175 94 165 93 155 92 145 135 125 115
105
09-Dec-18 05-Dec-18 07-Dec-18 11-Dec-18 13-Dec-18 15-Dec-18 17-Dec-18 19-Dec-18 21-Dec-18 23-Dec-18 25-Dec-18 27-Dec-18 29-Dec-18 31-Dec-18 03-Dec-18 95 Scaled Sensex Scaled Portfolio Sensex Scaled values Portfolio Scaled Values Value Scaled to 100 Total Investment Value: 10, 00,000 Risk Measures: Current Portfolio Value: 20,42,990 Standard Deviation NIF: 35.49 Change in Portfolio Value: 104.29% Standard Deviation Sensex: 19.20 Change in Sensex: 76.00% Sharpe Ratio: 2.83 (Sensex: 3.75) Cash Remaining: 37,788
Comments on the Equity market and NIF’s Performance: The Indian equity markets outperformed the global markets in December 2018, aided by lower oil prices, the government’s recapitalization measure and Reserve Bank of India’s liquidity-boosting efforts. Though there is some nervousness amid weak global factors. Fundraising through the initial public offering (IPO) route plunged as compared to 2017, largely on the back of weak market conditions. It has been a challenging year for markets, with benchmarks rising 3-5 percent this year. Around 24 companies took the IPO route to raise funds, amounting to Rs 30,959 crore. This is a fall from 36 companies that raised money last year. Of the total amount of Rs 63,744 crore, the fresh capital amount was Rs 29,224 crore (46 percent); the remaining Rs. 34,520 crore being offers for sale. Markets will now look for further cues from the third quarter earnings season starting in January. The budget will also be closely followed and the markets may act cautiously if the government takes populist measures to woo voters ahead of 2019 general elections which may lead to a fiscal deficit. The mid-cap valuation premiums over large caps have come down in 2018 making the former attractive yet again. Private banks, construction materials, specialty chemicals, and consumer food sectors are expected to outperform led by healthy demand and earnings growth. NIF PERFORMACE EVALUATION
INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE Monthly Performance Portfolio Weight
TOP GAINERS FOR THE MONTH • Westlife Development (11.42%) • Nelco (10.36%) • Mannapuram Finance (9.43%) TOP LOSERS FOR THE MONTH • Bharat Forge (-9.95%) • Asian Granito (-9.46%) • Paramount Comm (-7.85%) NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH Evolution of Machine Learning Machine Learning: Investment Banking
- Deepak Rawtani KJ SIMR The journey of ML started in 1952 when it was still stuff of science Introduction to Machine Learning fiction but gathered pace after the 1980s. Initially started with developing a computer learning program based on the game of checkers, the journey’s critical moment was in 2016 when an algorithm developed by Google managed to win 5 games out of five in a Chinese board game! A big achievement is the world of technology. There are 2 reasons for this transition. First, the tools used Most of you might be familiar with the earlier were more straightforward in company name Ola! In marketing approach and secondly, from 1995- words, it is now regarded as the top- 2005, the focus was on the search, of-the-mind recall. What attracts in natural language, and information the picture is the brand positioning retrieval. This combined with Human “Reach on time or get your money Capital development and investment back” along with the estimated ride in basic infrastructure helped in the time. Ever wondered how your ride’s evolution of ML. estimated time and arrival time is measured? Well take your time and think something related to Industrial Revolution 4.0. The answer to my very own is MACHINE LEARNING. In layman terms, Machine Learning or ML is a category of an algorithm that allows software applications to act, learn and improve without being monitored. [10] NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH
In layman terms, Investment Banking A) Trade processing or IB is a special branch of banking Its core application revolves around operation that helps organizations or identifying systematic investment individuals to raise capital or provide strategies and automatically financial consultancy to them. executing trades over several global An investment Bank helps its client financial markets. Apart from this, perform the following main things:- identifying patterns in the trade that can lead to failure. In layman terms, A) Buy or sell assets or companies – Machine Learning optimizes trade Mergers and Acquisitions execution from different channels. B) Raise capital from Equity Capital These channels can be external Markets (ECM) dealer algorithms, internal execution C) Providing financial services such algorithms or the firm’s trading desk. as trading securities, derivatives Thus, not only efficient but also cost trading, and FICC (Fixed Income optimization. Instruments, Currencies, and Commodities) B) Predictive Analytics D) Raise Capital from Debt Capital The core competency of Predictive Markets (DCM) Analytics to help and guide traders E) Restructuring to improve the make a better and faster decision by efficiency of business deciding what price to quote when buying and selling bonds for their Apart from the above core clients based on real-time and competencies of IB, it covers 2 types historical data. A recent tool called of groups i.e. Product and Coverage Katana was launched by ING is In simple terms, Product means based on predictive Analytics. working in a group that specifically does a transaction in one the following C) Automated Market Data Collection platforms (M&A, DCM, and ECM) ML can be helpful to detect certain while on the other hand coverage changes in the market without any means you focus on a particular human intervention. Obtaining industry ranging from consumer retail market information from different to heavy industry and Telecom to sources by automating the process Textiles. and then using algorithms to filter out the most relevant information for Machine Learning in Investment clients is the brain behind this Banking: Current Applications Automated Market collection Despite IB being slow to catch up with procedure. ML, a lot of current applications have been outsourced to ML. All the current Machine Learning in Investment application of ML in IB has been Banking: Challenges clubbed into 3 groups- Machine learning provides organizations
[11] NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH
decide which area is to be automated. Anyways, the easiest process to automate is the one that can be carried out manually with no output while on the other hand, complicated process requires in- depth introspection before going for automation.
C) Commencing without good data with the knowledge to make data- The first and foremost problem driven decisions that are leaner and faced by ML is the quality of good faster than traditional approaches. data. Noisy, incomplete and, dirty Below are some common classes of data are the biggest obstacles of an ML problems ideal machine learning. IB is a division where data from the range A) Lack of Skilled Resources of services from underwriting, The backbone of any economy is its trading, financial advisory, raising skilled labour. ML is a new technology capital, issuance of shares and and there is a shortage of skilled bonds, research, to the advisory on labour to develop and manage mergers and acquisitions colludes. analytical content for ML. The problem However, all the data one get is not gets aggravated when Data Scientists suitable for ML. The solution to this an organization hires lacks how problem is in-depth analysis and financial markets work. Understanding separation of healthy and useful the economics of data is key for data for ML processes. successful correlation of ML and IB. D) Inadequate Infrastructure B) Classifying the areas that need ML requires vast amount of a data Automation processing capabilities. This For organizations and enterprises, it is coupled with the complexity increasingly becoming difficult to associated with Investment Banking separate facts from fiction of ML today. and lack of financial market Before one decides which AI platform knowledge of Data Scientists takes to use, one needs to evaluate the a toll on already built infrastructure. areas of investment. Banking one is The potential is up-gradation of looking to solve. Areas like current infrastructure and financial market financial positions, research, issuance training of Data Scientist. history, market conditions, & historical data are up for grab for Automation. Conclusion However, not all areas need With the IB industry becoming data automation. It is for the organization to heavy and number crunching, Machine
[12] NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH
Learning can come handy in coming inadequate infrastructure, and years. The core concept of Automation classification of data are minor is the brain behind the early success hiccups but they too will become a of ML in IB. However, a few thing of past if the ML moves with an roadblocks like lack of skilled manpower, upward trajectory in coming years.
[13] COVER STORY THE BIG EXIT NIVESHAK | DECEMBER 2018 COVER STORY
“Personal Reasons” is what the now While Mr Patel has resigned and is former RBI governor Urjit Patel cited only the third governor to do so in while resigning on 10 December independent India, but in his tenure he 2018, about nine months before his has seen everything from expected tenure completion. It is not a demonetization, NPAs, banking scams secret that his tenure was not a as well as Non-Banking ones and of smooth sailing boat but a rocky path course the election year bought with it with regular clashes with the its own share of tantrums. It won’t be incumbent government. And it is also fair to say that he had his share of ups a no-brainer that while the ex- & downs because as it seems, the governor cited personal reasons, the downs far outweighed the ups. bumpy ride and the recurring intrusion is exactly what led him to resign. The Exit was the cherry on the top that the Banking sector awaited to end the A speech by Viral Acharya, Deputy year after witnessing a series of major Governor that he gave a couple of exits & unprecedented controversies. months ago hinted at just that, Chanda Kochhar and ICICI Bank, “Governments that do not respect Shikha Sharma and Axis Bank, Rana central bank’s independence will Kapoor and Yes Bank just to name a sooner or later incur the wrath of few. Before Mr Patel, Benegal Rama financial markets, ignite economic Rau was also one of the Governors to fire, and come to rue the day they resign mid-term six decades ago due undermined an important to reasons similar to Mr Patel. regulatory institution.”
Source: https://isupdate.com/govt-vs-rbi-jaitley-man-mocks-banks-dy-governor/
[15] NIVESHAK | DECEMBER 2018 COVER STORY
it was just a series of unfortunate events.
The downfall of the Infrastructure Leasing and Financial services was another nail in the coffin. Other issues included easing rules of lending under the PCA framework with the government wanting to decrease the pressure on SMEs but the RBI being cautious about the unrequired need for cleanups it would later create. Additionally, NPAs and their classification and creation of a separate payments regulator were other points of contention.
As the pressure of the upcoming elections mounted on the incumbent government because of the resultant liquidity crunch the nation faced, the central bank simultaneously faced mounting pressures to ease it out. However, these ordinary pressures and pushes seldom bore fruit when it came to the RBI who rarely had the tendency to cater to the whims and Source: www.insightsonindia.com/2018/11/12/insights- into-editorial-independence-and-accountability-on-rbi/ fancies of the government with its own long term agenda of maintaining the But the exit was not a result of recent inflation and a stable monetary policy conflicts; it was Building and brewing coming to the fore. And that is exactly since the PNB scam came into light when the government decided to take and maybe even before that. But the out the Big Gun in the form of Section PNB Scam was the first significant 7. A section which in the history of the event when the Independence and RBI has never been invoked was autonomy of the Central Bank came called out by the government which under fire. It was then that under empowered it to Direct the RBI on whose purview does the matters of “Public Interest”. accountability of the national banks fell came under dispute with both the Which poses very imperative central bank and the government questions such as, Was the situation pointing fingers at each other. After that so urgent? Or was it just a show of
[16] NIVESHAK | DECEMBER 2018 COVER STORY power? And why exactly does this look There is no dispute over whether or like a repeat of what so many Indian not the government has the best institutions currently are fighting for interest of the public in mind, but the which is autonomy and freedom from application and the intent were lost its very own government? along the way when its own vested interest became more important. As India had faced numerous instances the speech by the deputy governor of financial instabilities before as well indicated that the government looks but never was an extreme step like for the short term whereas the RBI invoking section 7 was deemed maintains its position with a vision of necessary, which brings another the long term. pertinent question to the fore and that is who decides what is “Public The appointment of Shantikanta Das, Interest” in matters of economic who previously held position of the stability because that is exactly what Union Economic affairs secretary and the purpose of RBI is. was also actively involved during the demonetization phase may not seem The Preamble of the RBI reads, “To like the most obvious choice with his regulate the issue of Bank notes history of no economics however he and keeping of reserves with a view might just be the right choice to securing monetary stability in especially with the government’s India and generally to operate the history of hiring allies as aides in the currency and credit system of the top most Public institutions. country to its advantage; to have a modern monetary policy framework The only thing that is left to be seen is to meet the challenge of an whether this will be a temporary Blow increasingly complex economy, to or will it leave one of the most maintain price stability while prestigious and premium institutions of keeping in mind the objective of growth.” the country handicapped.
[17] FINFAILS Harshad Mehta Scam NIVESHAK | DECEMBER 2018 FINFAILS
Mumbai, Mehta joined The New India Assurance company as a Harshad Mehta salesperson. It is here that he got interested in the stock markets. He 1992 Security soon quit his job and joined a brokerage firm in 1981. This was the beginning of the journey to the biggest Scam stock market scam in the country.
The 1992 securities scam in India is India’s two parallel markets one of the scams which had a During the ’90s, India had two different profound effect on the retail investors but parallel markets in operation. One of the country. It was a cunning game was related to security transactions, played by the well known Gujarati which was the interbank government broker Mr Harshad Mehta, who security market. Here the volume of colluded with the bank officials and transactions was large. However, this other market players to inflate the market had fewer brokers, just over a stock market and raise the prices of dozen who had the license to work in select stocks by more than 4000%. this market. The scam was exposed by Sucheta Dalal, who later narrated the entire On the other hand, the corporate episode in her best selling book securities or the stock market had a “Scam”. large number of brokers, close to 50 at that time. The required return on funds was much higher when compared to the government securities market. The existence of these two parallel markets created the opportunity for arbitrage, which was exploited by Harshad Mehta to earn massive returns on his bets.
Colluding with banks The banks at that time were desperate Image credits - Quint to make money since they were losing Who was Harshad Mehta? business to other competing products Harshad Mehta was born in 1954 to a like money markets and portfolio lower-middle-class Gujarati family in management services. The banks Mumbai. He moved to Raipur, where wished to tap the high cash reserves he finished his schooling before of the Indian corporate sector, moving back to Mumbai. After particularly the oil and gas public graduating from Lajpat Rai college in sector units.
[19] NIVESHAK | DECEMBER 2018 FINFAILS
The Modus Operandi was transferred in the brokers’ Mehta’s scheme was simple in account, the broker then found essence. He devised a plan to divert another bank who had excess security huge sums of money form the security and made the exchange. Often it was market and invest in select scripts in difficult to transfer the securities from the stock market. The huge returns one bank to another; hence instead of earned from the stock market was exchanging actual securities, the used to settle the security market banks issued BRs (bank receipt) as transactions, and the remaining profit proof of having received the securities. was pocketed by him and his team of When the holding period of the crony investors. To better understand security was over, the banks would the mechanism, one needs to sell back the security to the broker at a understand the concept of BR, or bank discount. The difference between the receipts, which was the main purchase and sale amount was the instrument used to embezzle the profit of the bank, and the broker funds. A bank receipt is a proof or received a commission for facilitating acknowledgement of the deposit such a transaction. received by a bank from an investor. Harshad colluded with certain banks Those days, banks were required to and started issuing fake BRs. These invest a certain portion of the deposits BRs were given to the banks instead in government securities. These of actual securities. The banks could investments were subject to regular not validate the authenticity of such fortnightly checks by the regulator. BRs since they did not know who the Failing to maintain the desired level of counterparty was. Also, Mehta had investment attracted penalties. Thus if established a strong reputation among a bank had a low level of security the banking community, so one investment, it would purchase the questioned his moves. He used the government bonds from another bank money received from exchanging which had a shortage of funds but an these BRs to rig the markets. He excess amount of securities. The bond invested heavily in certain stocks, and fund exchange was done for a especially cement stocks like L&T and short period. The role of a broker here ACC. The prices of these stocks was to bring such banks together, and only the banks would undertake the transactions.
Harshad Mehta stepped in this system and developed a new market where the banks essentially dealt only with the broker, unaware of who the other bank was. In this system, the money Image credits - Quint [20] NIVESHAK | DECEMBER 2018 FINFAILS skyrocketed and so did the Sensex. prison. He complained of chest pain Harshad had a Midas touch; his every one night and was admitted to Thane move was tracked by the retail Civil Hospital. He died following a investors. As the market rose, retail brief heart ailment, at the age of 47. investors began pumping in more money into the market. There were many litigations still pending against him. A total of 28 Exposed cases were registered against him, The discrepancies in Harshad’s out of which only one has been operation was discovered when SBI closed. This was a complicated reconciled its balance sheet with the scheme, played out in a very simple PDO (Public Debt Office) managed by way by a mastermind broker of all RBI. On further scrutiny, SBI realised times. that it had the bulk of BRs in the books but no real security was ever received, and it had been shelling out thousands of rupees to purchase the securities. All these transactions were facilitated by Harshad Mehta. Gradually, more such discrepancies were identified. The two small banks with whom Harshad Mehta had colluded were Bank of Karad (BOK) and the Metropolitan Co-operative bank, fraudulent operations of these banks came into light by an investigation led by Sucheta Dalal.
The Aftermath As the scam broke out, the stock market crashed. People lost their savings due to the sudden collapse. The situation worsened when few investors who were heavily leveraged committed suicide as a result of the fallout.
Harshad Mehta was arrested by the CBI on 9th November 1992 for misappropriating more than 2.8 million shares of about 90 companies He was under criminal custody in the Thane
[21] NIVESHAK | DECEMBER 2018 FINGYAN
A succinct exposition Ease of Doing Business (EDB) Ranking and India: of Ease of Doing India has moved by 23 places to 77th Rank from 100th position in EDB Business & its impact rankings from the previous year. on the Economy Under the leadership of Prime By: S Arun Vignesh Minister Narendra Modi, India has IFMR, GSB made a leap of 65 (142nd to 77th) places from 2014 to 2018. Introduction: Factors that turned around the picture for India are: •Digitalization and consolidation of multiple procedures for starting a business •One Tax regime I.e., Implementation of Goods and Services Tax (GST) •Elegant construction permits and quality controls •Fast and cheap availability of Source: Forbes.com electricity •Improved cross border trade policies South African born billionaire- and entrepreneur Elon Musk once quoted •Effortless credit availability “It always seemed like when there was cool technology or things Though the figures mentioned in happening, it was kind of in the United table 1 look satisfying, research States. So, my goal as a kid was to proves that EDB and economic get to America basically”. This growth do not always go hand in illustrates that Ease of Doing hand. Business is one of the key parameters that entrepreneurs look for in a Table 1. Factors affecting the EDB Ratings Economy India country, one that provides a hassle Global Rank 77 free environment and social protection Starting a Business 137 for doing business. New businesses Dealing with Construction Permits 52 bring in more revenue and Getting Electricity 24 investments, in turn providing more Registering Property 66 job opportunities and economic Getting Credit 22 Protecting Minority Investors 7 growth. Paying Taxes 121 Trading across Borders 80 In reality, does it really affect Enforcing Contracts 163 economic growth? Let’s find out. Resolving Insolvency 108 Source: doingbusiness.org
[22] NIVESHAK | DECEMBER 2018 FINGYAN
Growth Models and approaches: 1 and USA stands at 8th position out Which one is right? of 190 countries. Intuitively, we can According to the research paper “The establish that, there is a positive Ease of Doing Business Rank: An correlation between EDB ranking Assessment of its Macroeconomic and per capita income. Also from the Relevance (June 2016)” by Professor second chart, we establish that per Vivek Moorthy and Research Analyst capita income has negative Arul Jason, of IIM Bangalore, two correlation with GDP growth rate. growth models/approaches have been discussed. One of which is the 1. Ease of Doing Business conventional Solow’s model of growth Ranking and Per Capita (Solowian’s Model). It focuses on Income. (Chart 1) savings and thereby investment and 120 capital stock as a major factor for long 100 term growth. It takes into account the
2017 2017 in 80 - following factors. Thousands 60
•Labour 40 Dollars) •Capital Stock 20 •Technology 0
PerCapita (2007 0 50 100 150 200 Whereas, EDB focuses on Sotovian EDB 2019 Ranking approach (called after Peruvian 14.9 Economist Hernando de Soto), that is 9.9 not mathematical but relies on
underlying policies and property rights 2017) 4.9 New - as a factor for growth. -0.1 (2007 (2007 0 50 100 150 Thinking on similar lines, analysis has Thousands been done for the latest data fetched Average GDP Growthrate Chart 2 Per Capita Income (2007 - 2017 in Dollars) from World Bank database for 162 countries. The above two charts 2. Ease of doing business establish the relationship between Ranking and GDP growth rate: EDB 2019 ranking vs. Per Capita (Chart 3) Income (from 2007 to 2017) and per 12 capita income vs. average GDP 10 growth rate (from 2007 to 2017). As 8 2017) 6 claimed in the original article, - 4 developed countries such as USA and 2 New Zealand have higher per capita 0 rate (2007 rate -2 0 50 100 150 200
income compared to developing Growth GDP Average -4 nations like India. It is also to be noted EDB 2019 Ranking that New Zealand has an EDB rank of
[23] NIVESHAK | DECEMBER 2018 FINGYAN
The EDB ranking vs. average GDP of poor countries tend to reach the growth rate chart illustrates that, levels of richer countries over time. As countries with higher per capita mentioned in the research work, from income have lower GDP growth rate. a period of 1880 – 1985, all the 52 Developing nations like India and states of America showed a negative China having higher growth rate tend correlation to per capita income and to have lower EDB ranking. growth rate. Thus, it proves the negative impact of high per capita Stringent labour laws with upper limit income and labour force. Therefore, in working hours and higher wages Solovian approach (EDB Ranking) along with incentives for overtime, in cannot be attributed to economic developed countries restrict growth in the long run. productivity and hence lead to reduced output. This leads to When it comes to growth in the EDB reduction in the size of labour force ranking of India, the rise in position thereby reducing growth which is can only be attributed to the political very well in contrast with the first scenario of the country with newer observation that showed higher per reforms and regulations. The number capita income attributing to higher of days for construction, electricity EDB ranking. and credit availability has considerably reduced from the Outcome of the Analysis: previous year which is pretty much in Over the years, developed countries sync with the policies of the have had stable political situations, incumbent government. Trading better development opportunities, across borders has also seen a jump rules and regulations that paved a from 146th to 80th position from the way for businesses to flourish, which previous year. is in sync with the Sotovian model. However, higher per capita income FDIs and EDB Ranking: and lower population led to stagnant Considering foreign direct or stable growth due to market investments (FDIs), EDB ranking is saturation and reduced labour force used as an important measure to as noticed in developed countries. attract investors. But this necessarily People here, have higher purchasing doesn’t mean that higher ranking capacity and hence it is harder to fetches higher investment. According produce new products that would to Ruchir Sharma, a writer and Chief drive the consumer to increase Global Strategist at Morgan Stanley, consumption which contradicts the analysts are hired by countries to previous statement. To further enable them to move up the EDB support the Solowian model and rankings. He further adds that, conditional convergence hypothesis, Russian President Vladimir Putin had studies showed that per capita income set a goal of raising Russia’s EDB rank
[24] NIVESHAK | DECEMBER 2018 FINGYAN rank to top 20 in 6 years. Russia Hence, foreign investors are succeeded in reaching the 51st requested by experts not to make position in 2015, ahead of developing investment decisions solely based on nations such as China, Brazil and EDB rankings. India. He then catechizes the ranking methodology for its simplicity in Conclusion moving the rank up easily. Russia To conclude, Ease of doing business currently stands at 31st position in the rankings do act as an indicator that 2019 rankings. clears the air of doubt about the institutional establishment, rules and Finally, a counter argument by World regulations that prevail in a country in Bank Economist Mary Hallward- setting up a business venture and Driemeier and Harvard University acting as a guardian for small and Economist Lant Pritchett say that the medium scale industries. But the real EDB rankings are de jure and not de question about the relationship facto. I.e., it is the difference between between EBD rankings and its things that happen according to law economic implication depends on a (de jure) and the ground reality (de multitude of factors. facto) in a country. It includes actions that go around the law, to get things From the evidences and analysis done. World Bank relies on data made we can say that, the growth in obtained from lawyers and economy doesn’t depend entirely on accountants with respect to written the EBD rankings, so are the Foreign down rules and regulations. But in Direct Investments. More importance practice, this is not always the case. should be given to ground realities Moreover, the data is collected from and other factors such as political major cities - Delhi and Mumbai. This stability and the conventional growth clearly doesn’t paint the complete model that play a crucial role in picture about actual happenings and assessing the growth of an emerging practices in other states and cities. economy for a country like India.
[25] NIVESHAK | DECEMBER 2018 FINVIEW
Mr. NITIN MATHUR frontation“ essentially stems from the & Mr. AJIT BHIDE difference between the two systems - the democracy and markets-based Mr. Nitin Mathur is an Indian system of the United States and the entrepreneur from Mumbai & CEO centralized authoritarian state of Tavaga Advisory Services, a capitalism model adopted by China. robo-advisory platform. He has And how the world order will get regularly featured on television & affected by a shift from a US- print media for his analysis of the dominated institutional framework to Indian Consumer Sector. Mr. Ajit one dominated by multiple actors Bhide is an alumnus of IIT including China. This long-term Kharagpur, and MS in financial confrontation is far from over and will mathematics from The University of likely be played out over the next Chicago. He has more than 10 decade and beyond. Over the short years of diverse experience in term as well, US is concerned about equity derivatives, quantitative the trade deficit, intellectual property research, algorithmic trading, theft issues and China's increased portfolio investment & is currently predatory interference in the political the Chief Product Officer at Tavaga. affairs of other countries via debt trap diplomacy. Have these issues been Q1. What implications do you see resolved at G20 summit? Hardly so, of the USA - China truce on the rather only an agreement has been Indian economy? reached to discuss some of these There are two aspects to this issues over the next 90 days. Further, question. One is the US-China this agreement was later followed by relations, and the second - the certain adverse actions by Trump impact of changes in US-China administration. Therefore, we expect relations on the Indian economy. The increased volatility in the markets question inherently assumes that the surrounding these negotiations over US and China were at a the short as well as long term. confrontation at the outset and that a truce has happened during the The second part of your question is bilateral negotiations on the sidelines related to the effect of these of the Dec 2018 G20 summit. Both of developments on the Indian economy. these statements are exaggerations. India being a net exporter to the US and a net importer from China, India is The reality is that China is US's likely to be only marginally affected to largest trading partner as of now and the extent of second or third order there is no outright confrontation effects - one being the impact on between them aside of the nominal overall global risk appetite and second tariff impositions. The long-term "con- coming directly from the imposition (or
[26] NIVESHAK | DECEMBER 2018 FINVIEW
lack thereof) of trade tariffs. While lack of governance & transparency both these effects are marginal, a in the recent past. What measures US-China truce would be marginally in your view should be adopted by beneficial to India in the short term the government or RBI to fix the as it will boost global risk appetite. situation? On the other hand, in the long term, We believe that the government and the situation will be driven more by the RBI should include the private geo-political interests rather than sector in its planning process. While purely economic interests, in which we feel that PSU banks have a case, India would still be in the certain role to play in the middle path with an independent development of the rural economy, foreign policy. Therefore, it will be the government should incentivize only marginally affected in the long the private sector within the banking term as well. system as opposed to the PSU sector going forward. Providing Q2. Given the high volatility that incentives for financial inclusion via the markets have experienced as private sector initiatives would be the of late, which sectors do you feel right path forward. can be a safe bet for the investors? Similarly, technologically advanced Recent market volatility has players like Robo Advisors and P2P highlighted some of the concerns in lenders can provide alternatives to the NBFC sector led by ILFS related the banking system to convert issues and continued lack of savings into investments. Other resolution around major banking methods to reduce the dependence sector related issues (surrounding on the banking system would be to NPAs). During times of market stress initiate reforms to develop the like the present one, usually the municipal, state and corporate bond consumer sector (like ITC, HUL) markets further. These are again remains by and large insulated. alternatives to the banking system to Similarly, the IT sector is likely to perform the function of conversion of affect by different considerations that savings to investments. are unrelated to the present market stress? Thus providing diversification Q4. What role would Robo- benefits. We, however, recommend Advisors play in the future for a Investors take exposure to these common investor? volatile markets through Exchange Advancements in the Robo advisory Traded Funds (ETFs) only. space are happening at a rapid pace. Presently, Robo-advisors like Tavaga Q3. We have seen many have started disrupting the investment commercial banks struggle due to advisory landscape - democratizing
[27] NIVESHAK | DECEMBER 2018 FINVIEW
the investment advice (like cross- products are likely to become asset allocation) earlier only redundant, the opportunities for available to sophisticated and large value-added services will continue to investors. In the future, we expect increase going forward. this trend to continue with common investor getting increased access to While Fintech will bring increased value-added services like smart beta democratization of existing via Robo-advisors. investment solutions, it will also enable portfolio managers and Q5. Along with the benefits of the existing advisors with a larger and use of technology comes the fear better set of tools that they could that it may ultimately lead to job potentially make available to their losses. Your views on how FinTech clients to generate alpha. Thus, job may affect job opportunities in the opportunities for qualified and financial sector? knowledgeable financial Every major change in technology is professionals are likely to only likely to generate large benefits for increase as investors needs move society overall and we believe the from pure distribution to more same is true with fintech. While pure advisory focused and more alpha- distribution approaches to investment focused.
[28] NIVESHAK | DECEMBER 2018 CLASSROOM
market for a particular script are INDEX multiplied by the current price of the script to arrive at the current market CALCULATION capitalization of the stock. The same is then done for all scripts included in the valuation of the index and the There are three prevalent methods of total market capitalization is Index Calculation: calculated. This is then compared to • Market Capitalisation Weighted the market capitalization at base Index year prices to arrive at the index • Price Weighted Index value of the stock exchange. This • Equally Weighted Index method makes sure that each stock can influence the index only by the Out of these, the Market proportion of its market value. Capitalisation Weighted method is the most popular, which is used in Formula the calculation of a number of important indices like SENSEX, Total current market NIFTY, S&P 500, NASDAQ, Hang capitalization Seng, etc. Also called the Market Index = ------× Base Value Weighted Index, it calculates Total base market Index the index such that each individual capitalization stock affects the index in proportion to the market value of the stock. Example The following example will provide a The number of equity shares in the better understanding of this method:
EQUITY CURRENT CURENT MARKET BASE BASE MARKET SHARES SHARES PRICE VALUE PRICE VALUE
A 20,000 250 50,00,000 150 30,00,000
B 50,000 630 3,15,00,000 250 1,25,00,000
C 70,000 800 5,60,00,000 200 1,40,00,000
D 10,000 180 18,00,000 110 11,00,000
TOTAL 9,43,00,000 3,06,00,000
[29] NIVESHAK | DECEMBER 2018 CLASSROOM
Here, we assume: • Issue of bonus shares by a • The exchange considers these 4 company considered in index stocks for computation of index calculation • The base index is equal to 100 • Conversion of debentures, bonds • There is no change in the number etc. into shares of shares and no dividends have been issued Criteria The index department of the BSE The current and base market index considers certain criteria for capitalization is calculated by selection of stocks for its various multiplying the number of shares with indices. These include: the current and base market prices • The stock should be among the respectively. Now the current index top 100 companies classified by can be calculated using the formula: market capitalisation • The stock should have a market 9,43,00,000 capitalisation of at least 0.5% of Current Index = ------× 100 the total capitalisation of the 3,06,00,000 index • The stock should have been = 308.17 traded on every trading day in the past one year Stock Selection • The stock should be among the Every stock exchange sets up an top 150 companies classified by index panel or committee whose job is average number of trades per to identify and select the stocks which day in the last one year will be considered for the calculation • The stock should give a fair of the index of the exchange. The representation of its sector and panel holds frequent meetings to industry and must be a leader in consider any alterations in the index their group calculations. Some scenarios in which • The stock should have been the panel would need to revise the listed on the exchange for at least index could be: one year • Issue or buy-back of shares by a • The stock should have a good company considered in index track record in the opinion of the calculation committee
[30] NIVESHAK | DECEMBER 2018 MOVIE REVIEW ROGUE TRADER
The film tries to remind us that there is In the interim, back in the City, the something about England that is anti- respected toffs at Barings – headed by cinematic. Nick Leeson demonstrated John Standing – have been hesitant to a Midas-in-Reverse touch wherein he pull the attachment on their whizz- single handed destroyed his child's subsidizing in light of the fact employers, Barings Bank by running that he is by all accounts making them up debts of over 800 billion pounds on so much dosh. The film, the Singapore stock exchange. James disappointingly, skims over this Dearden chose to portray the story astounding blend of idiocy & around a plodding biopic rather than eagerness, as if Dearden were the various genres this film could have hesitant to paint any of his characters been in such as the top hole farce of as something besides adorable tragedy or anything along the lines. duffers. Less skimmed over but rather more not referenced at all are the A wan Ewan McGregor plays Leeson normal financial specialists who as the original Man Behaving Badly – probably lost their funds in the fiasco. a Watford barrow boy who likes drinking & dropping his pants out in The escalation of a relatively small open. His significant other Lisa, played debt into an implacable black hole is by Anna Friel, is considerably more carefully charted, and the nuts and cursorily portrayed; everything she bolts of Leeson's scam are does is work out at the exercise assiduously laid out. But we're left center, mooch around in their none the wiser, because Rogue Singapore level, have an unnatural Trader doesn't seem to be actually birth cycle & – when her better half at about anything; it's just the long last possesses up to having lost 8 indifferently edited highlights of its bn yen – shout, "Gracious, Nick!" just protagonist's giddy career. A criminal as he'd spilt breakfast grain down his tie. waste of a brilliant story.
[31] Fin. ANNOUNCEMENTS
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