Niveshak Feb15

Niveshak
THE INVESTOR
VOLUME 8 ISSUE 2
FEBRUARY 2015
FASTEST
GROWING ECONOMY?
FROM EDITORS DESK

Niveshak
Volume VIII
ISSUE II
February 2015
Faculty Chairman
Prof. P. Saravanan
THE TEAM
Abhishek Bansal
Akanksha Gupta
Apoorva Sharma
Bhawana Saraf
Gaurav Bhardwaj
Jatin Sethi
Kocherlakota Tarun
Maha Singh Gulati
Mohit Gupta
Mohnish Khiani
Palash jain
Prakhar Nagori
Priyadarshi Agarwal
Ramesh Jaiswal
Rahul Bajaj
Sandeep Sharma
S C Chakravarthi V
Vishal Khare
All images, design and artwork

are copyright of
IIM Shillong Finance Club
Finance Club
Indian Institute of Management
Shillong
www.iims-niveshak.com
Dear Niveshaks,
The month of February has seen many events taking place in India in politics, economics as well as in the corporate sector. Results of Third quarter earnings declared
this month ended up disappointing the investors as annual profit growth has been
the worst in last five quarters, with the aggregate net profit of 2,941 companies declining 16.9 per cent. The January WPI inflation dropped to a five and a half year low of
-0.39% on falling prices of manufactured products and fuel items. Inflation in fuel
and power segment was negative at -10.69%, while for manufactured products it was
1.05%. On the Make in India front, PM Narendra Modi inaugurated American multinational General Electrics (GE) first manufacturing plant in India. The plant will
manufacture a range of diversified products for sectors such as energy, aviation, and
oil & gas transportation. On the e-commerce front, Alibaba signed a deal to buy a
25% stake in Indian mobile payments and ecommerce platform Paytm. On the political front, AAP leader Arvind Kejriwal took oath as the eighth chief minister of Delhi,
promising to make Delhi the first corruption-free state and act against communal
elements. The AAP had won 67 of the 70 seats in Delhi decimating Congress and
leaving only three seats for the BJP. The government announced the a capital infusion
of Rs 6,990 crore in nine state run banks based on new efficiency parameters such as
return on assets and return on equity.
US technology giant Apple Inc. became the first company to reach a market value of
$700 billion. Earlier in January 2015, Apple Inc had recorded highest quarterly profit
of 18 billion US dollar in corporate history worldwide after the company sold 74.5 million iPhones in quarter ending December 2014.
The government changed the base year for GDP calculation from 2004-05 to 2011-12.
This resulted in sharp revision of the Indias 2013-14 GDP growth numbers to 6.9%
from 4.7%. The cover story of this issue delves deep into parameters behind GDP revision providing various angles to look at this revision. Flipkart is gearing up to raise
the largest Indian IPO by raising $4 billion dollars. Our article of the month discusses
the valuation of Flipkart and the hypothesis of it being overvalued. In 2013-14, India
had topped the chart of remittance inflows, by receiving a whopping $69.6 billion,
followed by China with $60 billion and the Philippines with $25 billion.
Fingyan article Outside Money Inside Economy will take you through the intricacies
of remittance and its impact on the Indian economy. Finsight discusses the impact of
Basel III norms on the Banking sector. FinView has the excerpts from Dr. Madalasa
Venkataraman who gives her views on Real Estate Investments. Classroom section
shares knowledge on Swaps.
To end this brief note, we would like to thank our readers for their immense support
and encouragement. You remain our prime motivation factor that keeps our spirits
high and give us the vigour and vitality to keep working hard.
Stay invested!
Team Niveshak
Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Cover Story
Niveshak Times
04 The Month That Was
Article of the month
10 Is flipkart over valued at $7

Billion
14 India The fastest growing
economy in the world: true or

just an eye wash
FinGyaan
18
OutsideMoney
Economy
Inside
Finsight
26
The Basel Capital Accord:

The Journey and Way Ahead
FinLife
22
FINVIEW
29 Interview With Dr. Madalasa
Wealth Management: Make Venkataraman,Lead Researcher,

Your Own Portfolio
IIM Bangalore
CLASSROOM
31 Swap Market
The Month That Was
NIVESHAK
The Niveshak Times

Team NIVESHAK
IIM Shillong
RBIs new gold lending norms to make
hedging easier
negative 0.17 per cent from the provisional estimate

of zero, the data showed.
The Reserve Bank on Feb 18th lifted the ban on

imports of gold coins and medallions by banks and
trading houses. The RBI in a notification also said
banks are permitted to import gold on consignment
basis. Domestic sales will be, however, permitted
against upfront payment only. Speaking on the above
circular, S Subramaniam, CFO, Titan Co said the RBI
move was more on the credit side there was issue
on credit on gold imports for domestic consumption
but that has now been clarified. The gold metal loan
authorised by domestic banks will now be available
for domestic consumption. The most welcome
development of this easing in gold lending norms
is that hedging will become easier. Although it does
not change things too much for the company per
se because earlier also RBI had liberalised gold loan
credit for some four-five banks and they were already
getting credit, said Subramaniam. However, now the
ban has been lifted and all banks can provide credit.
The data comes after the index of industrial

production showed a growth of only 1.7 per cent
in December while retail inflation stood at 5.11 per
cent, well below the RBIs comfort level of 6 per cent.
Inflation turns negative at (-)0.39 pct in

January, food prices stay high
Headline inflation declined to a five-and-a-half year
low of (-)0.39 per cent in January on the back of a
sharp decline in prices of fuel and manufacturing
products. However, the food prices remained high,
the data released by the commerce and industry
ministry showed.
According to the Wholesale Price Index (WPI), which
gauges the headline inflation, while fuel prices
declined by 10.69 per cent in January compared to
a decline of 7.82 per cent in December, the rate of
price rise in manufactured products was 1.05 per
cent compared to 1.57 per cent in the previous
month.
However, the food inflation continued to remain high
at 8 per cent compared to 5.20 per cent in December
as pulses, vegetables and cereals became dearer.
The WPI stood at 0.11 per cent in December while
the November data was revised downwards to a
FEBRUARY 2015
Infosys Buys US-Based Panaya for $200 Million

Kerala and Goa have become the first states in the
IT major Infosys announced the acquisition of USbased Panaya for $200 million or Rs 1,250 crore.
This is Infosys second largest acquisition since
the September 2012 deal to acquire Zurich-based
Lodestone Holding.
New Jersey-based Panaya provides cloud-based
quality management services for enterprise
applications; its clients include companies such
as Coca-Cola, Mercedes-Benz and Unilever, among
others. The all-cash deal is expected to close before
March 31, 2015, Infosys said in a statement.
Panayas acquisition reflects Infosys execution
of its Renew and New strategy to enhance the
competitiveness and productivity of current
service lines by leveraging automation, innovation
and artificial intelligence, the company said in a
statement.
The acquisition comes at a time when Infosys, Indias
second-biggest IT outsourcing company, is betting
on new technology to boost growth. Under chief
executive Vishal Sikka, Infosys has been making big
bets on automation and other new technology like
artificial intelligence and cloud-based services as the
company tries to regain some lost ground from rivals
like Tata Consultancy Services.
RBI eases some restrictions on shadow bank
lending
The Reserve Bank of India (RBI) eased lending
regulations governing the countrys shadow banking
industry, removing investor limits and the need for
collateral guarantees on standard debt transactions.
The RBI said shadow banks would henceforth be
able to conduct non-convertible transactions valued
at 10 million rupees ($160,000) or more unsecured,
and such issuance would no longer be limited to 200
NIVESHAK
investors.Restrictions would remain on debt of less

than thatvalue that is not convertible into equity,
and on all convertible debt, the RBI said.
similar investigations or regulatory proceedings.
Indias shadow banks, known as non-banking

financial firms (NBFCs), are widespread and include
housing finance companies and consumer finance
firms that lend small sums to individuals.
Foreign direct investment (FDI) in India almost

doubled to $2.16 billion in December 2014, compared
to $1.10 billion in the same month of 2013.
The central bank also said NBFCs would not be

permitted to transfer the proceeds of non-convertible
debt issues to affiliates.
Shadow banks are lending heavily to sectors like
infrastructure without full banking licenses and
without being subject to the tougher rules imposed
on commercial banks - even as the countrys regular
banks struggle with a pile-up of bad loans after
years of reckless lending.
HSBC gets summons from Indian Tax Dept,
fears significant fines
Facing a multi-nation probe for alleged tax evasion,
money laundering and unlawful cross- border
banking solicitation, global giant HSBC said it has
been served summons by the Indian tax department.
The bank said it is being probed by tax authorities in
many other countries as well with regard to alleged
irregularities by its Swiss banking unit and there
could be significant amounts of fines, penalties and/
or forfeitures imposed on it.
Separately, the UK-based bank said it has also
received subpoenas and requests for information
from the US and other authorities with respect to
certain US-based clients of an HSBC company in
India.
FDI rose 27 per cent to USD 21.04 bn in AprilDecember 2014
During the April-December period of the current

financial year, FDI rose by 27 per cent to $21.04
billion against $16.56 billion in the same period last
fiscal, the data by Department of Industrial Policy
and Promotion (DIPP) showed.
Among the top 10 sectors, telecom received
the maximum FDI of $2.67 billion in the ninemonth period, followed by services ($2.29 billion),
automobile ($1.58 billion), pharmaceuticals ($1.21
billion) and computer software and hardware ($971
million).
During the period, India received maximum FDI from
Mauritius at $5.89 billion, followed by Singapore
($4.31 billion), the Netherlands ($2.57 billion), the
US ($1.48 billion) and Japan ($1.42 billion).
In 2013-14, FDI stood at $24.29 billion against
$22.42 billion in 2012-13. Healthy inflow of foreign
investments into the country help in balancing the
countrys balance of payments and stabilise the
value of rupee.
India is estimated to require around $1 trillion
over five years to overhaul its infrastructure sector,
including ports, airports and highways to boost
growth.
A leaked list of over one lakh account holders in

HSBCs Swiss banking unit, including 1,195 Indians,
recently became public, prompting authorities in
India and many other countries to launch their
investigations to ascertain whether these accounts
had illicit money stashed abroad.
Giving an update on the case in its annual report,
HSBC said it is cooperating with the relevant
authorities, while adding that it was possible
that other tax administration, regulatory or law
enforcement authorities will also initiate or enlarge
FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
The Month That Was
The Niveshak Times
35000
2,500
30000
2,000
25000
1,500
20000
1,000
15000
500
10000
5000
-500
-1,000
25/02/15
24/02/15
23/02/15
22/02/15
21/02/15
20/02/15
19/02/15
18/02/15
17/02/15
16/02/15
15/02/15
14/02/15
FII
13/02/15
12/02/15
DII
11/02/15
10/02/15
BSE
09/02/15
08/02/15
07/02/15
06/02/15
05/02/15
04/02/15
03/02/15
02/02/15
01/02/15
31/01/15
30/01/15
29/01/15
-5000
BSE
Market Snapshot
FII, DII Net turnover (in Rs.
Crores)
Article
ofSnapshot
the
Month
Market
Cover
Story
NIVESHAK
-1,500
Source: www.bseindia.com
www.nseindia.com
MARKET CAP (IN RS. CR)

BSE Mkt. Cap
10346378.17
CURRENCY RATES
INR/1USD
INR/1Euro
INR/100Jap.YEN
INR/1PoundSterling
INR/ 1 SGD
62.0468
70.4293
52.28
96.0298
45.69158
CURRENCY MOVEMENTS
1.50%
INR/1 USD Euro/1 USD GBP/1 USD JPY/1 USD SGD/1 USD
1.00%
0.50%
LENDING / DEPOSIT RATES

Base rate
Deposit rate
10.00%-10.25%
8.00% - 8.75%
RESERVE RATIOS
CRR
SLR
4.00%
21.50%
POLICY RATES
Bank Rate
Repo rate
Reverse Repo rate
8.75%
7.75%
6.75%
0.00%
-0.50%
-1.00%
-1.50%
-2.00%
-2.50%
-3.00%
FEBRUARY 2015
29-Jan-2015 to 25-Feb-2015
Data as on 25-Feb-2015
NIVESHAK
BSE
Index
Sensex
MIDCAP
Smallcap
AUTO
BANKEX
CD
CG
FMCG
Healthcare
IT
METAL
OIL&GAS
POWER
PSU
REALTY
TECK
Open
Close
% change
29559.18
10808.44
11369.11
20209.63
23439.08
10786.9
17077.58
8233.2
15581.27
11152.77
10298.15
10053.06
2201.68
8406.28
1718.83
6154.08
29007.99
10701.11
11254.82
19632.82
21475.41
10408.62
17399.48
8654.08
15541.16
11968.21
10382.12
9469.38
2232.04
7955.22
1757.75
6415.96
-1.86%
-0.99%
-1.01%
-2.85%
-8.38%
-3.51%
1.88%
5.11%
-0.26%
7.31%
0.82%
-5.81%
1.38%
-5.37%
2.26%
4.26%
% CHANGE
% Change
TECK, 4.26%
REALTY, 2.26%
PSU, -5.37%
POWER, 1.38%
OIL&GAS, -5.81%
METAL, 0.82%
IT, 7.31%
Healthcare, -0.26%
1
FMCG, 5.11%
CG, 1.88%
CD, -3.51%
BANKEX, -8.38%
AUTO, -2.85%
Smallcap, -1.01%
MIDCAP, -0.99%
Sensex, -1.86%
FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG
Article
Market
of Snapshot
the
Month
Cover
Story
Market Snapshot
Niveshak Investment Fund
Done on 30/6/14
Informa(on Technology
CONS NON DURABLE

(5.89%)
HCL Tech.
GODREJ CONSUMER
Wg:5.89%
Gain:28.82%
(13.18%)
Infosys
Wg: 5.02%
Gain : 32.00%
Wg: 3.83%
Gain : 39.11%
Britannia
Wg:4.69%
Gain :
104.17%

TCS
Wg: 4.33%
Gain : 7.80%
FMCG
(20.64%)
Colgate
HUL
Wg:5.91%
Gain :
25.05%
Wg:4.62%
Gain:25.86%

BANKING
(6.09%)
Wg:5.42%
Gain :
15.13%
Auto
(10.04%)
Pharmaceu(cals
(16.27%)
Dr Reddys
Labs
Wg:4.24%
Gain:12.62%

Lupin
Wg:7.20%
Gain : 47.40%

HDFC Bank
Wg: 6.09%
Gain : 12.62%

Chemicals
(6.71%)
Amara Raja
BaS
Wg:4.19%
Gain : 19.36%
Tata Motors
Wg:5.85%
Gain : 25.02%
ITC
Asian Paints
Wg:6.71%
Gain:25.93%
MISC.
(4.83%)
MANUFACTURING
Titan Company
Wg:4.83%
Gain:-12.93%
Page Industries
(5.23%)
Wg:5.23%
Gain:9.20%
Performance Evaluation
As on 26th February,2015
February Performance of Niveshak

Investment Fund
Performance of Niveshak
Investment Fund since
IncepCon
104
103
102
180
101
160
100
140
99
120
100
98
80
97
60
20

15
b-
Fe
2-
ec
-1
4
-D
ct
-1
-O
31
16
-S
ep
-1
-1
ug
-A
n-
14
-Ju
-1
18
ar
-1
14
-M
n-
Values Scaled
to 100
-Ja
NIF
30
Sensex
0
ay
15
03/
40
02/
15
02/
25/
15
02/
20/
15
02/
15/
15
02/
10/
15
02/
05/
31/
01/
15
96
-M
16
01
05
14

Risk Measures:
Opening Por+olio Value : 10,00,000
Standard DeviaCon : 16.40%(Sensex :
Current Por+olio Value : 15,32,140
13.50%)
Change in Por+olio Value : 53.214%
Sharpe RaCo : 2.93(Sensex : 2.97)
Change in
Sensex : 40.23%
Cash Remaining:269785

Comments on NIFs Performance & Way Ahead : This month the nancial market in India started with
the conCnued momentum that was gained in the January 2015 aTer the much needed rate cut by the
Reserve Bank of India on 15th January. The market in the second half of the month onwards has traded
on correcCon side on account of disappoinCng quarterly results and weak global markets. The BSE
Sensex during the month (Till 26th feb) recorded a negaCve change of 1.28 %, and the por+olio recorded
a posiCve change of 1.56% .
On internaConal front, the upbeat US Housing data increased the chances of Fed ge]ng exible on
increase of interest rates. The Brent crude touched the levels of $55, gaining as much as 30% since mid
January during the month, with OPEC choosing not to cut the output and compete with Shale and other
sources. Concerns over Greeks Bankruptcy also kept the markets under check and extension of tough
bailout deals could have further repercussions.
Towards the end of this month, the union budget would be presented by Honble Finance Minister ,
important areas like Direct taxes, Custom duCes and other leviables like GAAR and GST could see some
important changes and announcements .
The por+olio did not witness any re shue during this month, however we expect some sell os of
overvalued stocks and other reshues in the next month owing to budget, crude prices, legislaCve
reforms and other domesCc and internaConal developments.
10
Article
of the
Month
Cover
Story
NIVESHAK
Is flipkart over valued at $7

Billion
Borampalli Ravali Preethia
NIIE,Mumbai
Introduction
In 2007, when Flipkart was founded, online
retail sector in India was in its infancy. Internet
was not an available resource for an ordinary
man at that time. Even International players
like Amazon and eBay didnt enter the Indian
market. At the same time, Flipkart entered the
market and played a key role in the growth of
online retail market in India, as India has become
one of the largest online markets in the world.
Flipkart also adapted to the Indian conditions
by introducing cash on delivery, knowing there
is very less usage of credit cards and online
payments in India at that time.
Since 2007, online retail market in India had a
compounded growth rate of 56% every year and
Flipkart outperformed this rate every year. As
of 2014, In India, online retail is just 0.5% of
overall retail and 7.9% of overall organized retail
sector. This also indicates that online retail has
much growth potential in India. In recent years,
mobile commerce is playing an important role
in online retail industry in addition to social
networks. New sites are exploding every day,
and the mobile commerce plays a significant
FEBRUARY 2015
role in expanding the market, and it overcomes

the internet connectivity issues in towns and
villages. With all these amazing prospectus of
Flipkart and Indian online retailing,
Is the valuation figure attached to Flipkart is
justified?
Lets look at the fundamentals of Flipkart that
play a significant role in its valuation.
Revenue Growth
The e-tailing giant is presently in the growth
phase and is making no profits, a common
phenomenon observed in all the startups and
young growth companies. As we know that the
company with continued negative earnings and
cash flows doesnt have any value, young growth
companies like Flipkart are expected to make
revenues in the future. The expected revenue
growth at Flipkart will be the composite effect
of factors like expected growth rate in Indian
online retail business and expected market
share of Flipkart in the future. As, Flipkart
is keen in making its presence across the
countries, and it is anticipated that its revenue
is not only dependent on just Indian online retail
NIVESHAK
operating margin of 10% by 2025, and settle

as a mature business firm as that of Amazon
today. To provide the perspective- Online retail
giant Amazon had 5% margin till 2010, and now
it dropped to 1%.
Re-Investment
It goes without saying that every company in
order to grow have to reinvest in the business.
Growth is nothing but how much we reinvest
(Reinvestment rate) and how well it is invested
(Return on Reinvestment). As the revenues
of Flipkart are
expected to grow
massively
in
the near future,
there is a need
to reinvest in
the business in
proportion to the
expected revenue
growth. Till now,
Flipkart has done
reinvestment
both in terms of
technology
and
acquisitions.
Globally,
online
retail firms have
sales to capital
ratio of 2.26,
means
every
rupee reinvested
in the business generates 2.26 rupees as
incremental revenues. This number can be
adapted in the case of Flipkart too, due to its
efficient past growth.
Cost of Capital
Cost of Capital of Flipkart is presently at
16.86% considering the risk of the company,
present risk-free rate and the risk premium.
With the new government in power, the Indian
macroeconomic conditions are expected to
be in a better shape at least by the next ten
Article
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market but also the global market. At present

Flipkart has the market share of nearly 32% in
the Indian online retail market and is assumed
to grow to 40% within ten years. Therefore,
Flipkart will have 40% of Indian online market
share and also 20% of its revenues from outside
India (as Flipkarts founders aspire to take the
firm global). Analysts project that the Indian
online retail market will cross $100 bn by 2025.
According to the above estimates, revenues of
Flipkart is projected to be at $50 bn by 2025,
which are just 35% lower than that of Amazons
2013 revenues and 20%
below the Googles
revenues
in
2013
and 4.6 times greater
than Facebooks 2013
revenues.
Operating margin
Flipkart at present has
negative
operating
margin
of
nearly
4.62%. It has invested
huge capital (both its
revenues & Capital
raised
from
VCs)
in
supply
chain,
advertising
and
developing applications
and website to increase
its market reach. Online
retail is the sector in
which all the players offer products with similar
discounts for the same pool of customers. The
firm can differentiate itself from others in the
area of delivery m e c h a n I s m and reliability.
This eventually results in the lower o p e r a t
I n g m a r g I n s. Flipkart since its inception
has reinvested enormous amounts of capital
to enhance these areas that created them an
absolute competitive advantage. Flipkart with
its efficient supply chain management and
competitive advantage is expected to have an
11
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NIVESHAK
years. Thus, Flipkart s Cost of capital would be

reduced to 13.77% at its stable growth period
due to reduced risk premium and risk-free rate
by the time it evolves as a matured company
with low beta.
The Valuation
Taking all the above factors and estimations
into consideration, Flipkart is valued through
discounted cash flow valuation and the value
of the firm (or equity, as no debt) obtained
is $2.52bn, way below its $7bn Valuation. In
addition to this, Flipkart also has given stock
options to its employees, which further reduces
the value (ESOP were not deducted, due to
unavailability of data)
Flipkart is overvalued by nearly 1.78 times.
One of the main reasons for overvaluation is
investors high expectation of growth in Online
retail sector. In the same way, they are pricing
(relative valuation) Flipkart by comparing it with
Amazon and Alibaba, in terms of estimating the
future growth and market share.
Misjudging the Market Growth
Any sector cannot have high growth throughout
its life span. Similar to the firms, sectors to attain
stable growth after substantial high growth
period. Online retail sector being no exception,
is in its stable growth stage in US at present.
This is the reason investors are flooding funds
to Indian online retail sector in the recent years
rather than funding US online retail startups. But
one should note that Indian online retail market
too will reach its stable growth period. Investors
FEBRUARY 2015
and founders of e-Commerce Companies are

now banking high on Mobile Commerce. In spite
of the high mobile phone penetration, growth in
the m-commerce may not be in par because of
the conservative nature of the Indian customers
who prefer to buy goods offline.
Comparison with Alibaba
Many analysts compare Flipkart with Alibaba
in terms of both valuation and growth, as
they are market leaders in the eCommerce

business. Though both of them belong to
the markets that are growing at high CAGR,
there are many differences between them in
terms of market share and operating margin.
Unlike Flipkart, Alibaba has a its presence in
different e-commerce segments like Business to
consumer, consumer to consumer, the mobile
market and online payment segments in China.
In all these four parts, Alibaba is a market
NIVESHAK
13
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leader with a huge presence. In addition to this,

Alibaba has significant operating margin of 50%
at present and is expected to continue with the
same in future too.
The Amazon Story
Amazon was also valued in its initial days at very
high price, but later market prices it correctly,
thats for the dot com bubble for correcting the
valuation. After watching Amazon and Alibabas
success, investors are betting high on Indian
market and Flipkart. In both US and China,
those respective companies were able to gain
absolute monopoly till day in terms of market
share. In 1994, Amazon entered with the unique
business model, and it was the first of such
kind in the eCommerce business. It is also
important to note that it is one of those dotcom
companies survived the dotcom bubble burst.
Thus, Amazon has gained not only high market
share but also perfect monopoly in the online
retail business.
Flipkart, though it leads other firms in terms
of market share in India at present, it lacks
the monopoly that Amazon and Alibaba have.
Flipkart will face problem in gaining such a
huge market share in India in future, mainly
due to new entrants and strong existing players
like Snapdeal and Amazon who already have
considerable market share and are going
good in terms of both revenues and strategic
investments. In 2007, Flipkart was started with
the same idea and business model of Amazon
but made changes according to Indian market.
After few years, Snapdeal also worked with the
similar model and was successful in gaining the
market share. Therefore, it is the adaption to
the market that is gaining market share in India.

So, there is a lot of chance for firms with deep
pockets like Amazon to snatch away market share
from Flipkart. Maybe, it is the big expectations
on the growth potential that is making Flipkart
look big for investors.
Relative valuation perspective
Although intrinsic valuation determines the
value of the company by considering all the
fundamentals like growth rate, risk in the
company and estimated cash flows every year,
Most of the investment banks and Investors value
the company on the basis of relative valuation,
as it is easy and simple method to evaluate the
company by comparing with other companies in
the sector by using multiples of number of clicks
obtained or revenues generated. The company
on relative valuation gets overvalued if the sector
itself is overvalued. This comes right in the case
of Indian online retail sector. Being in young
growth sector, with less number of comparable
firms, Flipkarts Valuations were done solely on
the market expectations and belief.
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14
NIVESHAK
India The fastest growing economy

In the world: true or just an eye wash
Palash Jain & Bhawana Saraf
IIM Shillong
Introduction
The Gross Domestic Product (GDP) is like
the godfather of all the economic indicators.
Renowned economists, bankers, businessmen,
investors, policy-makers and the media, all seem
to be obsessed with this number, whose single
or double-digit value can spark much hysteria
and generate talking points for many of these
stakeholders. Recently there has been a hue
and cry about the change in the methodology
by which India calculates its GDP.
The Ministry of Statistics and Programme
Implementation recently announced a change
in the method of calculation of GDP which has
baffled almost everyone including businessmen,
economists, investors and international
communities.
FEBRUARY 2015
Taken at face value, India recently became the

fastest growing major economy in the world after
its statisticians changed the way they measure
Asias third-largest economy and showed that it
clocked faster growth than China in the December
quarter. It marks a dramatic turnaround for an
economy that just some time ago was assumed
to be struggling to gain momentum under
Prime Minister Narendra Modis reform-minded
government. Prior to Modis election last May,
the economy had undergone its weakest phase
of growth since the 1980s. But the question
still remains whether there actually has been a
turnaround or this is just a numbers play.
The Indian government recently changed its
method of measuring GDP, replacing factor costs
with internationally accepted market prices.
NIVESHAK
the real GDP is measured in accordance with

the prices and structure of the economy in a
base year. The GDP figures for a one-year period
become less relevant over time, thats why the
base year needs to be changed periodically. For
India the base year changed from 2004-2005
to 2011-2012. This was one of the reason why
Indias GDP growth rate for the year 2013-2014
was revised to 6.9%, much higher than earlier
estimate of 5.1%.
The usual norm in almost all major economies is
to revise the base year after every 5 years. After
all, the biggest use of GDP at an international
level is to have an accurate measure of
economic performance in the recent time. There
could be multiple reasons for such a large but
positive change. One of the reason could be
changes in the technology or trends which were
absent earlier. For example many things which
are important in consumption basket today
like Mobiles, Communication services, Digital
goods, E-Commerce did not have much impact
on the economy earlier. Today these services
are extremely important and therefore must be
accounted for in the GDP calculation.
So Why This Conundrum?
While the GDP growth figure shot up with the
new calculations, the absolute GDP figure was
essentially the same as it was before, making it
difficult for economists to understand where the
new-found growth came from. While the new
numbers reveal that last year the economy had
recovered strongly, some economists are still
sceptical. Most of the other indicators of that
year suggested growth was sputtering. Other
indicators such as index of industrial production
(IIP), trade and tax collection figures suggest
that the economy is still suffering from slack.
On one hand one part of the government has
been saying that tax collections are slow due to
a slowdown in the economy, another part of the
government is saying that GDP growth has been
strong. This means that either one part of the
economy is not taxed or there is an issue with
the data. This has confused the economists and
has made it difficult for them to make further
economic predictions.
The change in GDP calculation methodology has
not only confused the economists but also the
central bank. The Governor of RBI, Mr. Raghuram
Rajan also has no clarity on the new method.
We do need to spend more time understanding
Cover Story
The Statistics Ministry said that the countrys

economic output is projected to grow at 7.4% in
this fiscal year compared to 6.9% in the previous
year. Growth for the previous three months has
been revised sharply to 8.2% from an earlier
figure of 5.3%. As a result, India has officially
overtaken China as the worlds fastest growing
economy with a growth of 7.5% in the December
quarter. China grew by 7.3% in the most recent
quarter.
What Changes Did The Government Of
India Introduce?
Two new changes were introduced by the Indian
Government in its way to calculate the GDP of
the economy. These are:
1.While calculating GDP, price rise or inflation
in the economy for the period is an important
factor taken into consideration. This price rise
involves considering a base year to assess the
price change. The base year has been changed
from 2004-05 to 2011-12.
2.The second change is regarding the calculation
methods. Before the change in methodology,
India used to calculate its GDP based on factor
prices. However, after this announcement, the
GDP will be calculated at market prices. Factor
cost is defined as the price received by the
producers of a good or service, which is not the
same as the market price of a product, since
there are taxes involved which needs to be paid
to the government. Thus, Factor Cost=Market
Price taxes + subsidies.
Why Was This Change Needed?
The government said that its benchmark to
measure the economic growth will henceforth
be based on market prices, not on factor costs.
The older method tabulates economic activity
based on the cost of production, whereas the
new method is based on the amount paid by
the consumers. Most countries and international
bodies calculate GDP based on market prices.
Thus, in order to have better comparison with
other international economies, this change was
required. Also the new method incorporates
more comprehensive data on corporate activities
and spending by households and informal
businesses.
For the base year change, GPD cannot be forever
calculated on a single base year and the base
year need to be continuously revised. The new
method of calculating is rebasing under which
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NIVESHAK
Cover Story
16
the GDP numbers, Rajan had said on February

3 after releasing the bi-monthly monetary policy
of the central bank that retained the forecast of
5.5 per cent GDP (based on old method) growth
in 2014-15. We will be watching the February
9 release with great care and dwell deeply into
what we see there. At this point, it is premature
to take a strong view based on these GDP
numbers. he had said.
Industry chamber Assocham said the revision
was confusing as investment is yet to revive,
consumer demand is not returning with a
significant pace despite a sharp reduction in
crude oil prices. This is also contradicting to
the claims of Ministry of Statistics that there has
been high growth in the economy.
The latest data shows that while sectors like
agriculture, mining, hospitality and public
spending slowed in 2014-15 compared to the
previous year, key sectors such as manufacturing,
construction and financial sectors grew at a
faster pace than the previous year. Experts are
particularly surprised at the higher sectorial
numbers for the manufacturing and financial
sectors reported by the new series because this
is not reflected in data on factory output and
bank credit.
With nominal GDP projected at Rs.126.5 trillion
for 2014-15 from Rs.113.4 trillion a year ago, the
size of the economy is projected at $2.1 trillion
at the current level of dollar exchange rate at
Rs.61.7. At the turn of the millennium, Indian
GDP was about $481 billion and by 2007, it was
measured at $1.2 trillion. This means that it
had grown two-and-a-half times in seven years.
And effectively, in a span of 14 years the Indian
FEBRUARY 2015
economy has grown more than four times. This

seems unbelievable! The number also doesnt
mean much in terms of per capita income
and India will remain a lower middle-income
economy. Its economy will have to grow by
at least four times and its population remain
at the same level for it to become an upper
middle-income economy. Other key indicators of
GDP like inflation is not showing encouraging
signs. The latest data shows that inflation for
the month of January has fallen below zero to
-0.39%. This also questions whether the GDP has
actually grown at such a high pace.
Impact Of This Change
A step of this magnitude will create a ripple effect
in the Indian economy. The 2014-15 fiscal deficit
and current account deficit are likely to decline
to 4.3% of GDP (4.6% earlier) and 1.6% of GDP
(1.7% earlier) respectively. The Finance Minister
of India, Mr. Arun Jaitley, is widely expected to
increase capital spending and offer tax breaks
to the under-performing manufacturing sector.
But with GDP data showing the economy
suddenly cruising again, the fiscal stimulus
could fuel inflation. Also revised GDP data may
make it harder for him to assess the size of
the fiscal stimulus required to help re-establish
the economy to the even higher growth rates
needed to generate jobs for millions of young
Indians entering the work force.
Even Mr. Raghuram Rajan, who switched
the monetary policy in January with the first
interest rate cut in 20 months, faces a similar
predicament; whether to lower interest rates
again. This will push back the timeline for rate
cuts and any hope of an off-cycle rate cut in
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Cover Story
March, even if the budget is consistent with low

inflation-driven fiscal policy does not exist now.
There also can be political impact of such
decisions. The opposition, Congress, may claim
that there was high growth during their tenure
using this method which will belittle the current
governments claim of low growth during its
predecessors tenure. One of the key reasons
which led to election debacle for Congress was
lack of economic growth for a long period.
The new method is in line with the global

practices and also gives a clear picture of the
economic activity. Although the timing of such
a change can be questioned with the political
factors involved, it does integrate the reflections
on economic activity at the global spectrum. The
previous methodology of GDP Computation had
certain loopholes which have been fixed with
the modifications. For example, IMFs world
economic outlook projections are not based on
factor costs. This led to a state of confusion, with
IMFs projections turning out to be very different
from the Governments. With respect to the base
year change, it is the only way which ensures
that the products and services included in the
GDP calculation remain contemporary and reflect
the present state of the economy. For example,
the change in base year has included the
recycling industry which was not incorporated in
the earlier GDP computations. Similarly trading
activities by manufacturing firms are included in
that sectors share. Global investors use growth
prospect figures for investment allocations
between countries GDP is a key metric here.
So recalculation of Indias GDP growth at 6 per
cent as the average of the last three years from
4.6 per cent may help investors view India
in a more favourable light. Although there is
scepticism among the policymakers with regard
to the change in methodology, in our opinion
the alignment with the global practices would
certainly help in better comparison and greater
However, the new calculations show that the future prospects.
economy had already revived by the time the
new government had come GDP had grown
strongly during the UPA tenure.
Recommendations
18
NIVESHAK
FinGyaan
OUTSIDE MONEY | INSIDE

ECONOMY
Paras Parekh
IIM Shillong
The world as we know is changing, and is
changing fast. We have developed a better
means of travel and communication facilities
which has, in turn, enabled movement of
people across the land. To make a better life for
themselves, people do all sorts of things, one of
which is going to greener pastures. According to
the World Bank data there are over 230 million
international migrants, people born in a country
other than in which they live. To understand
the hugeness of this number, if all the migrants
were a country, its population would be greater
than that of Brazil and that would make it
the 5th largest nation in the world in terms
of population. These people, mostly from
developing or under-developed economies send
money back home for the well-being of their
FEBRUARY 2015
family members. The topic of this article is this

money, also known as- Remittances.
Remittances, according to the World Bank
definition, includes transfer of cash or kind
from migrants to their relatives back home.
The new edition of the Balance of Payments
Manual (BPM6, IMF 2008) states that personal
transfers include all current transfers whether
in cash or in kind between resident and
nonresident individuals independent of the
source of income of the sender and regardless
of whether the sender receives income from
labor, entrepreneurial or property income,
social benefits, any other types of transfers; or
disposal of assets and the relationship between
the households regardless of whether they are
related or unrelated individuals. These amounts
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of unrequited money maybe small in terms of

individual transactions but in total adds up to
billions of dollars and hence these have come to
represent one of the largest flow of international
funds. In many cases these remittance flows
have been more than the total FDI and FII inflows
to the country.
For the year 2013, the total global remittance
flow was $410 billion, which was almost three
times the total international aid of $135 Billion.
India was the largest recipient of these flows
with $71 billion followed closely by China at
$60 Billion and Philippines at $25 Billion. For
economies like Tajikistan, Bangladesh, Nepal
and many more, these flow of funds form a
substantial portion of their GDP. According to
2012 data, Tajikistan tops the list with 48%,
followed by the Kyrgyz Republic at 31% and
Nepal at 25%. Also, for many countries the
total remittance flow exceeds their own foreign
exchange reserves. Talking about India, the FDI
inflows in 2013 were $28 Billion and FII inflows
were $20 Billion. Comparing these numbers to
that of the remittance India receives, we can
understand the magnitude of the impact it
has on the Indian Economy and similarly on
other developing economies. World Bank data
estimates that by 2016 the total remittance from
the developed world to the developing world
countries would increase to $500 billion and

total global remittance (includes those to high
income countries) would touch a record of $707
Billion by 2016.
Remittances act as a major counter-balance
when capital flows weaken as happened in the
wake of the US Fed announcing its intention
to reign in its liquidity injection program (QE).
Also, when a nations currency weakens, inward
remittances rise and, as such, they act as an
automatic stabilizer, said Kaushik Basu, Senior
Vice President and Chief Economist at the World
Bank.
From the words of the former Chief Economic
Advisor to the Government of India, we can
understand that remittances play a major role in
the economic development and macroeconomic
stability of emerging economies. Remittances is
one of the most stable and least controversial
source of funds to an economy and hence policy
makers can play a huge part in maximizing the
output from this resource.
Talking about the benefits, one of the major
impact such flows have is on the development
of human capital of the recipient country. This
money acts as a life-line to the poor people.
It helps them to better support their families
in terms of nutrition, healthcare and education
and hence has a very direct impact at the grass-
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NIVESHAK
root level of the recipient economy. There have

been many studies conducted which shows
that in countries like Nepal and Bangladesh,
remittances have contributed immensely in
improving the overall human life by bringing
down the school dropout rate, infant mortality
rate and gender inequality. Other benefit is that
the migrating labor also brings back with him
good sanitation and life style practices which
can improve the standard of living not only of his
relatives but also of the community. According
to the Migration Policy Institute report, a 10%
increase in per capita remittance can reduce
the number of people below poverty line by
3.5%. Also an IMF (2007) report states that an
increase of 10% in the share of remittance in the
countrys GDP would lead to a fall in the number
of poverty affected people by 1.5%. Because
of the increased income, consumption as well
as investment increases. Families usually use
the extra funds to pay off debt, buy assets or
simply to improve their standard of living. Also,
the risk taking ability improves because of the
extra cushion of funds. This encourages people
to undertake risk-taking ventures which have a
better profit margin like being self-employed.
As there is a source of fund which can take care
of the daily needs of money, a person can think
of expansion and hence be in a better position
to provide for his family.
At the macro level, these huge inflow of funds
have an impact on major macroeconomic
variables like GDP, consumption and foreign
exchange rate. Multiple studies done in
FEBRUARY 2015
the past have found a positive relationship

between remittances and the GDP growth.
One study done by Adelman and Taylor (1990)
found that in Mexico, one dollar brought back
or sent back would increase the GNP from
anywhere between $2.69 and $3.17 depending
on the household income group. Similarly,
Ekanayake (2008) in his research on the effects
of remittances and FDI inflows concluded that
these inflows significantly improve the growth
in an economy. Also, a lot of research went
into understanding the effects of these inflows
on the consumption and investment behavior
especially in the developing countries. Adams
(2005) concluded on the basis of research done
on a set of families in Guatemala that people,
at the margin, spend more on human capital
development like education and comparatively
spend less on consumption. Remittances
also form a very important source of foreign
exchange for an economy and a stable flow of
remittance can ease pressure on meeting the
short run demand for forex. Also they have a
counter cyclical property, inflow increases when
the host economy faces a slowdown and hence
these flows act as a balance. If the economy is
in recession, migrants usually send more money
back to facilitate the consumption expenditure
and hence in a way boost the total expenditure.
This effect also increases when the domestic
currency depreciates and the migrants want
to take advantage of the exchange rate. But
by sending more forex back home, they help
in increasing the demand for the domestic
NIVESHAK
8%, which means for every $100 sent, the family

would receive only $92. This case is worse in low
volume channels. The average cost of sending
money to Africa is 12% while the average cost
of sending money within Africa is over 20%.
For other countries the cost could be as high
as 90%, which in turn promotes transaction
of money through unofficial channels. Along
with the cost associated with transfer, there
is cost associated with currency conversion,
taxes and other regulatory norms. If we were
to include all the above mentioned cost, and
the psychological and emotional cost associated
with the separation from a loved one, it is to
be seen whether the benefit is worth the cost
or not.
The Sun doesnt shine or set anywhere without
shining on some members of Indian Community
Motwani K Jagat (1994)
In 2013, India received the largest share of the
total global remittance which made up over 4%
of GDP. There are over 22 million Indian living in
over 110 countries across the world. According
to a research conducted at IIM Ahmedabad,
about 4.5% of households receive remittances
regularly, of which a maximum part goes to
the states of Kerala, Punjab and former Andhra
Pradesh. The Indian policy makers could leverage
this huge inflow so that the associated costs
can be minimized and the benefits derived be
maximized. India currently has a very attractive
interest rate policy where the interest earned
is tax free and is freely repatriable. Also Indian
government should more aggressively promote
financial instruments like foreign currency bonds
so that more and more of remittance money
can be routed into investment. The government
could also look into schemes like business
counselling and entrepreneurship development
programs for migrants. Such schemes would
focus on training the migrants on better ways to
invest the funds and in assisting them to plow
back these funds into productive ventures when
they return home, so that remittances could be
used in the most productive manner in a way
that it is beneficial to the individual as well as
the Indian Economy.
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currency and hence the currency appreciates.

These inflows also help to improve the credit
worthiness of the receiving country.
Along with all the benefits, there are also some
apprehensions that have been raised in the
various studies conducted to understand the
other side of the coin like potential repercussion
of such huge inflows and also the cost involved
in the remittance driven migration. Let us first
consider cost to the recipient countries. Though
a lot of studies have been conducted that show
positive correlation between the inflows and
the consumption, many studies show that the
effects are not very clear. This could be because
a substantial proportion of remittance inflow
goes into funding consumption needs, which is
less beneficial to the economy than expenditure
in saving and investment.
Also, migration of skilled and unskilled labors
can help in generating better numbers in terms
of unemployment level but that would only
be for a short term and this would kill any
incentive for changing the systems to improve
employability conditions in the domestic
economy. The migration of skilled labor would
additionally hurt the economy because of the
loss of expertise of the migrating labor. Also
inflow of foreign remittance money could lead
to high inflation resulting in increased prices of
goods and services. Also, such inflows of foreign
money lead to an appreciation in the domestic
currency which can be good for importers but is
bad for exporters. Any erratic fluctuations in the
short run could lead to massive losses for the
exporting companies.
There is also a cost associated with the inflow
of labor for the host country. Inflow of skilled
and semi-skilled labor who are ready to work at
a cheaper cost compared to domestic workers
result in an increased level of unemployment
in the country. Also, there are concerns that the
migrating workers consume much more of the
free public goods than they pay for it in the
form of taxes.
Another major type of problem that exists is
the cost of transfer of funds. Money transfer
companies have fees structures which makes it
difficult for the poor people to send the money
across at minimal cost. The global average is
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NIVESHAK
Wealth Management: Make Your Own

Portfolio
Prakhar Nagori
IIM Shillong
Portfolio could be termed as a mixture of various outlays of
investment done by you, or in short Asset Allocation
Why Manage Wealth?
Its your hard earned money, why not manage
it?
Why shouldnt your money earn more money
for you?
Well these questions would certainly seem
obvious to you, but these are the questions
that matter a lot as you grow old. This is a
materialistic world where money has gained a
lot of importance and for ones sustenance and
better livelihood, one desires for more and more
wealth.
For the purpose of generating huge wealth we
need to manage our money in an efficient way
and that is where Portfolio Management comes
into play. Portfolio could be termed as a mixture
of various outlays of investment done by you, or
in short Asset Allocation.
What Is An Ideal Portfolio?
This is a very common question asked by
everyone, but my frank answer to this question
would be there is no such Ideal Portfolio.
As every person is different in some way or
the other, his/her portfolio would also be of a
differing nature.
The portfolio would vary on various basis such
FEBRUARY 2015
as IncomeExpenditure of the person, risk

taking capacity of the person, assets/liabilities,
life stage of the person, state of the economy
and many more.
Usually there are three Portfolio styles, namely,
Aggressive, Moderate and Conservative. An
aggressive portfolio is aimed at high returns
taking high risks into account. This is the most
volatile portfolio which mostly depends upon the
news flows from the environment. A Moderate
portfolio lies between high risk-return portfolios
and low risk-return portfolios with moderate
returns over moderate risk. The movement of
such portfolios is usually consolidated for a
longer duration with some volatility in between.
Lastly, a Conservative portfolio is a less risky
affair where the major returns are equivalent
to risk free returns generated by government
securities. There is negligible volatility in such
type of investments unless something unusual
happens.
Portfolios could also be divided on the basis of
following three aspects i.e. growing your wealth,
managing your wealth and protecting your
wealth. Growing your wealth is a necessary step
for affecting the other two aspects, for which
it is required to follow a strict and disciplined
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investment approach on the basis of your risk

taking ability. First of all you need to figure out
your needs in accordance with time. This will
help you to invest in a better way to fulfil these
needs. Managing your wealth is as important
as growing your wealth, otherwise growth chart
can take a reverse movement at any time.
Thus, managing your wealth by evaluating your
portfolio on a periodical basis is very important,
along with studying about the sectors in which
you have invested in, by way of performance
updates, report analysis. Earning is not just for
the sake of today, but also for tomorrow, for
you and your family. This is where the third
aspect of Portfolio Management comes into
play i.e. protecting your wealth. Growing and
managing would give you enough of wealth but
it is like a wave, going up and down. Thus, to
gain maximum out of it we need to protect it by
the means of risk management, diversification,
hedging or insurance. Integrating all three
aspects of growing, managing and protecting
your wealth while creating a portfolio will ensure
that you successfully utilize the huge earnings
potential of your savings.
As discussed Portfolio Management is Asset
Allocation and when this allocation is done
in an optimum way would result into wealth
maximization.
A portfolio could be a blend of assets like: Equity Investment in Primary & Secondary
Markets
Mutual Funds- SIPs
Debt Instruments- Bonds & Debentures
Bullion- Gold, Silver, ETFs
Insurance Life Insurance, Term Insurance,
Health Insurance
Borrowings & Credit Card

Real Estate Property, REITS
Deposits- Fixed , Recurring & Flexible Recurring
Cash & Savings
Lets talk about a few of the asset classes
mentioned above:
Cash, Savings and Deposits- Cash and Savings
should be the amount the person requires for
his daily expenditure as well as certain amount
that is needed to be kept for emergency
purposes. Deposits are very less risk fixed return
investments where you get quoted returns. In
fixed deposits you maintain a certain amount for
a specific period and earn a specified amount.
In recurring deposit and flexible recurring
deposit you set a goal of the amount you want
to accumulate and thus deposit certain amount
on a periodic basis, where you would be getting
returns on a fixed rate along with your amount
deposited on the maturity of your recurring
deposit. The main difference between two types
of recurring deposits is that one demands a
regular payment of specified amount, whereas
in the other one you may deposit any amount
at any point of time, just the returns would then
vary accordingly.
Real Estate (Property /REITS) Owning your
own home is almost every mans dream, and
a very important investment decision with
huge capital outflow. Not only owning home
plots, even commercial spaces these days have
become an investment methodology which
every other person is going for because of the
tremendous increase in property rates which
can give good returns. Undoubtedly, property
is a good investment, but one should also see
the opportunity of returns on it. While investing
in a property, many things are to be kept in
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NIVESHAK
mind like legality of the property, potential

earning capacity and being a huge and long term
investment you are not blocking your funds just
on the basis of buyingselling it on a short term
basis for smaller gains. REITS i.e. Real Estate
Investment Trust is a good option for those who
cant invest huge amount. In REITS you invest in
a company which operates and monetizes from
the real estate it owns. This may be in the form
of residential/commercial property, hotels, malls
etc. Thus, investing into it would also make you
a partner in its profits.
Borrowings & Credit Card: Some people might
think that taking a loan and credit card should
be avoided and a person should suffice with
what he has in his hands, but I would like to
propose a different approach for the same. For
example, you have limited money right now but
you have two great investment opportunities
with minimum risks. Let say you are purchasing
a house as well as making another investment at
the same time, and you are well aware that you
could reap benefits out of the investment and
pay back your loan from your future earnings.
Then why should you suffice for one, when you
can get a loan at a lower rate than your rate of
return? Also, there are tax benefits on housing
loans which relatively reduces their cost. The
same case is with the use of credit card, if you
are spending in your limits then you are losing
on the interest portion as well as the opportunity
cost by paying through debit card rather than
swiping your credit card. But then there is one
big issue with these facilities - huge penalty and
credit default because of late payment. Thus, to
pay the requisite amount at the required time is
FEBRUARY 2015
a necessary element if you avail these facilities

else they would really cost you quite a lot.
Insurance Investment in insurance takes
care of your risk portion as well as act as a
long term investment plan. Also, new types of
Insurance covers are coming up like term plans,
which have an advantage of larger life cover
and low premium but it provides no returns.
These plans comes in health insurance category,
which is also an important part of the portfolio
as it takes care of the hospital bill in undue
circumstances. Awareness about the plans and
their benefits is necessary before you buy them.
These are not just for you, but for your family as
well. They might seem as a cost but investing in
them, for sure, is not a bad investment.
Bullion Gold/Silver/ETFs India is a country
where households are quite fond of buying
yellow and white metal as this is not only an
Investment for them but also a matter of pride.
But, I would like to bring to light a point that
investing a major chunk of your wealth for better
returns might not be a very good idea, as these
days the price change in these metals is quite
volatile in nature. Thus investment in bullion
has become a high risk return investment. One
should invest by keeping this thing in mind.
ETFs are exchange traded funds where a person
need not buy physical bullion but the exchange
buys it for him and keep it safe for a nominal
charge. It delivers him the same quantity in his
demat account which could be sold anytime he
wishes.
Debt Instruments- Bonds & Debentures
These are quite less volatile and less risky
instruments bearing a fixed rate of interest.
NIVESHAK
25
Article
of the
Month
FinLife
Cover
Story
These are offered by both government and

Corporates to get money from the market. In
case of exchange traded debentures/bonds the
returns might vary with change in interest rates
but if you hold them till maturity you will be
eligible for specified returns. These instruments
are given credit ratings as per the risk attached
with them, the better the rating the less risky
the asset would be.
Mutual Funds/ SIPs Mutual Fund investment
is where you invest in a fund which is managed
by fund managers who have prior knowledge
and experience in the industry. They are the
ones who make investment decisions for the
money which is deposited by numerous mutual
fund investors. The mutual funds are of various
types as required by the investors namely, debt
fund focussing on long term debt investments,
liquid funds focussing on short term gains by
investing in money market, equity funds which
invests in the equity markets and balanced funds
which mix match the above stated investment
methodologies. SIPs are systematic investment
plan which are applicable for both equity market
and mutual fund. Here, a person designates
certain amount of money to invest regularly on
a monthly basis in a stock or mutual fund for
the purpose of accumulating it at an average
price with outlay in small portions of money.
Stock Markets /Equity Markets: To some
people this would be a shining star but to
others, it is next to gambling. Investing in
stock markets is one big aspect of portfolio

management as many people link portfolio
management to equity management. Investing
in stock market needs a whole lot of back end
study including the fundamental and technical
research of the stock and sector you wish to
invest in. Not only this, you would also have to
look for the right time to invest in the stocks
as equity markets are quite volatile in nature.
A large foray of stocks are available in various
sectors and industry, what you can do is make
a diversified portfolio by selecting companies
from different sectors on the basis of your study
of the companies. Also there are high dividend
yield stocks which could possibly be a regular
income stock for you. Further, you can segregate
your investment on the basis of short term/
long term investments, amount of money to be
invested and risk appetite of the investor.
A blend of all the above assets as per your
preferences and risk taking capacity would help
you make a better and efficient portfolio which
in turn would help you manage and maximize
your wealth.
26
Article
of the
Month
Finsight
Cover
Story
NIVESHAK
The Basel Capital Accord: The

Journey and Way Ahead
Aishani Sharma
SIMSPune
The Subprime crisis has put various

global banking institutions under the
spotlight for all the wrong reasons. Can
a challenging and stringent regulatory
framework be a cure for the same?
The rapid pace of globalisation over the past few
decades has resulted in the emergence of a highly
integrated, interdependent and complex global
financial system. This emphasizes the need for
a universally standardized regulatory framework
which can assist in regulating and channelizing
the resources of the global financial (banking)
system in an efficient, effective and equitable
FEBRUARY 2015
manner. Accordingly, the Basel Capital Accord

was introduced by the Basel Committee on
Banking Supervision (BCBS), under the guidance
of the Bank for International Settlements (BIS) in
the year 1988. The main objective of these norms
is to facilitate the development and functioning
of a strong, prudent and resilient international
banking system.
The Basel I Capital Norms provided guidelines
on the holding of minimal capital requirements
for banks and primarily focused on credit risk,
which refers to the risk that a borrower can
default on any type of debt by failing to make the
required payments. Every asset in the banking
NIVESHAK
27
Finsight
Classroom
Cover
Story
system has different credit risk levels attached.

For instance, loans that are secured by a letter
of credit are riskier than a mortgage loan that is
secured with a collateral. Thus, various assets
need to be measured and weighted with their
respective credit risk levels and their summation
is known as the Risk Weighted Assets (RWA) of
a bank. The ratio between the total capital of
a bank and the RWA is known as the Capital
Adequacy Ratio (CAR), the ratio which protects
banks against excess leverage, insolvency &
keeps them out of difficulty. According to the
Basel I norms, this ratio needs to be maintained
at 8%. Moreover, the assets have been
categorised on the basis of different risk levels
or weights attached which are 0, 10, 20, 50 and
go up to 100%. However, a bank is also prone
to two other types of risks, namely operational
risks and market risks. Operational risks arise
from breakdowns in internal procedures, people
and systems and market risks arise due to
external factors like the economic situation,
socio-political conditions, natural disasters,
etc. These were not considered during the
formulation of Basel I regulations. Moreover, the
above mentioned categorization of risks were
found to be narrowly classified defined for the
complicated real business world.
These issues combined with a limited global
participation (mainly from G-20 countries)
hampered the effectiveness of Basel I
regulations, thereby encouraging the Bank for
International Settlements (BIS) to include more
countries and paving the way for its successor,
the Basel II Norms.
The second set of the Basel regulations (2006),
integrated all applicable provisions of Basel I
and introduced certain amendments. The Basel
II Norms were based on 3 pillars. The First Pillar:

Minimum Capital Requirements; The Second
Pillar: Supervisory Review Process; The Third
Pillar: Market Discipline. The first pillar, minimum
capital requirements requires banks to cover
credit, market and operational risk. Here, the
capital of a bank is divided into three tiers. Tier
1 Capital, which is the most liquid and crucial
component mainly comprises of permanent
shareholders equity and disclosed reserves.
The Tier 2 Capital is comparatively less liquid
in nature and includes undisclosed reserves,
revaluation reserves, general provisions, loanloss reserves, and hybrid capital (combination
of debt and equity instruments). The Tier 3
Capital includes loan instruments which are of
low priority.
Within the Capital Adequacy Ratio of 8%,
highest composition is of Tier 1, followed by
Tier 2 and Tier 3. The whole rationale behind
this classification was to improve the quality of
capital in banks. The second pillar, supervisory
review process mainly aims at ensuring proper
supervisory processes that ensure the effective
implementation of the various regulations
through their own internal risk assessment
processed. The third pillar, market discipline,
gives a set of disclosure requirements that
provide information on the capital, risk
exposures, risk assessment processes & overall
capital adequacy levels.
Unfortunately, the Basel II Norms were ineffective
in controlling the sub-prime crisis (2008). Due to
various technical loopholes and manipulations,
there were alarming discrepancies between the
reported and actual capital levels of banks. For
example, intangible assets like goodwill, which
have minimal liquidity were included in the
28
Article
of the
Month
Finsight
Cover
Story
NIVESHAK
calculation of capital. Thus, when the banking

system was hit by the crisis, the institutions did
not have adequate real capital to survive. The
lessons from this episode led to the formulation
of the Basel III Norms.
The Basel III capital accord was introduced in the
year 2010 and is expected to be implemented
completely by the year 2019. In order to make
these set of regulations more holistic and
stringent than its predecessors, the following
new ratios have been introduced:
Capital Conservation Buffer:- Within the CAR
levels of 8%, this new buffer of 2.5% needs to
be maintained by banks which would help them
to absorb losses, especially in periods of tight
liquidity levels.
Countercyclical buffer:- Along with the capital
conservation buffer, Basel III has introduced a
countercyclical capital buffer which ranges from
0 2.5%. This requirement is made for periods
of excessive credit growth and by triggering this
ratio, the excess liquidity in the system can be
optimized.
Liquidity Requirements:- For this requirement,
banks need to maintain two ratios namely the
Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) at 100% levels. The LCR
requires institutions to hold a sufficient buffer
of high quality assets that can be converted
into cash within 30 days. The NSFR requires
institutions to have more sources of stable
funding such as retail deposits, savings accounts
rather than risky instruments like certificate of
deposits.
Leverage Ratio:- This ratio requires the Tier I
capital to represent at least 3% of total assets, in
order to prevent excessive build-up of leverages
(amount of debt) on the banks.
On paper, the Basel Capital Accord appears to
FEBRUARY 2015
be well drafted and prudent. Yet, the world has

seen their paralysed effectiveness in handling
various financial crisis. The actual effectiveness
of the regulations can only be appreciated
with strict and timely implementation by
the respective Central Banks. This need to go
hand in hand with the objective of financial
inclusiveness and not contradicting the same.
For instance, Indian Public Sector Banks need to
raise INR1.5 to INR2.2 trillion, or US$26 to US$37
billion between FY 2015 & FY 2019 for the full
implementation of Basel III norms. According to
an analysis by Firstpost, at least five banks have
Tier-1 capital adequacy ratio less than 8 percent.
This challenge has been caused mainly due to
the high amount of NPAs. But, can crucial, yet
non-performing sectors like agriculture be
ignored by Government banks?
Every economy has certain sectors that can
possess high volatility and uncertainty (like the
real estate market) thereby making it crucial
for regulators to ensure that such sectors are
specified and prohibitions should be made to
optimize (if not minimize) exposure to the same.
Strict penalties, at national/international levels
need to be imposed in cases of manipulative
non-compliance. In a nutshell, if the various
global and national macro-economic factors
are considered, the regulations are improvised
continuously, enforced diligently and are
inclusive of higher number of countries, the
Basel Capital Accord can lead to the formation
of a healthy, wealthy, and progressive banking
system.
Interview With Dr. Madalasa

venkataraman
Lead Researcher,
Real Estate Research Initiative, IIM Bangalore
Real Estate blocks a huge amount of

money in ones portfolio. Is it good to
invest in Real Estate in current scenario
where the Indian Stock market is at its
peak?
To answer the question, RE in its current form
has a very different risk return profile from that
of stocks, and in the current context where stock
markets are zooming, investment in housing by investors -has definitely taken a hit.
The historical situation in India is that the equity
market was not really very well developed
and debt market is still lagging. Hence, the
investment options available to people were
real assets and Indians intrinsically seem
to have great fascination of owning a house.
There are some problems associated with the
real estate which is not there with the capital
market. In the capital market, investors have
the option to diversify their portfolio via index
funds. However, in the real estate market the
portfolio is accumulated in one single property
with a single developer. So at the age of 60
when people have the maximum amount of
financial capital, there is no way to diversify
their unsystematic risk in portfolio terms. Also
there are not many insurance products available
as well there is a lot of litigation in land.
However, there are still some factors why
people invest in RE, which are more to do
with behavioural finance reasons as well as
with levels of financial literacy. So while stock
markets are performing well, people purchase
real estate not just because of risk/return
profiles, but more from a solid demand from
the end-user consumers.
When the other portfolios are

performing as well as the real estate
portfolio, is it justified to take up so
much unsystematic risk?
The studies at the research initiative seems
to show that the real estate is not giving the
commensurate returns to the apartment
owners who has bought the house but to the
person who is aggregating the land to actually
develop. The individual who invests in real
estate do not trust capital market instruments
because the level of financial literacy is very
low. Hence, if one looks at the equity markets
which gives a return of 15% annualized over
the past five years, real estate is unable to give
that kind of consistent return. Also, there is a
very large behavioural aspect associated with
investment in real estate. People are rooted to
home ownership idea. They consider it a safe
investment, so when you ask an average man
on the street they will tell you that the property
prices will not come down. Unfortunately, in our
RE markets, time in the market substitutes for
fall in prices. For instance - there is a 43 month
inventory supply overhang in Delhi and 36-39
months in Mumbai which means that about 3
years of oversupply is prevalent in the market.
Looking at the perspective that prices have not
come down but have been prevailing at the
same level for 2-3 years implies that there has
been a deterioration in real value terms. The
real estate market is not at all competitive in the
sense that there is so much cartelisation that it
is not a buyers market, it is still sellers market
so as individuals we are price takers rather than
makers. So yes, it is not a good idea to take up
so much of unsystematic risk, especially if real
29
FinView
Cover
Story
FinGyaan
NIVESHAK
NIVESHAK
estate serves purely an investment motive.

Is it good to have real estate as a part of
your personal portfolio?
Maybe not to the extent of having 75% of our
portfolio in real estate by buying multiple
houses. One does not want to invest in capital
markets as still the question of financial literacy
is there. People look at their investments as a
medium of earning returns. They then try to
hold the returns in the safe assets, similar to
what prospect theory dictates. So one is earning
returns in something which is a risky asset and
take the generated return investing in a safe
asset. Hence, real estate falls into the category
of capital protection. Thus the prices of real
estate do not fall. Another problem with having
real estate as a part of portfolio is that it does
not provide exit option.
Having said this, RE is a good asset class to hold
from a diversification perspective - is there a way
to limit our exposure to the high unsystematic
risk, or to economically exit from this illiquid
investment? That is the burning question
Will Indian Retail Investors look
forward investing in REITS? How does
that benefit them without exposing them
to high risk?
FinGyaan
FinView
30
If a retail investor wants to invest in commercial

real estate which could actually produce income
and also be tax advantageous, it would not
be possible in the current context. One would
have to invest in a single property, typically
residential - and bear the unsystematic risk.
One cannot hold a part of commercial asset
or a bunch of commercial assets where the
unsystematic risk has been diversified. This is
possible only through a structure like a mutual
fund for real estate income producing properties.
This is where REITs come into play where retail
investors can invest in real estate ownership
with income producing characteristics.
REITS also assist developers because it provides
them a good exit option on long term projects
with long gestation periods where their cash is
tied down for long periods of time.
FEBRUARY 2015
What opportunities do you see for an

IIM Grad who would like to practice
Wealth Management as a profession?
Any suggestions for a person who would
like to pursue wealth management as a
career?
Wealth management is actually picking up
because this is one area which is getting
outsourced a lot from other countries. So if
you look at the ANZ bank, the entire wealth
management back-office and middle office was
outsourced to India, the front office is still in
Australia. Hence, the process intensive part
of wealth management is getting outsourced
to India from other countries. Thus there is a
huge career opportunity here which is in setting
up the systems, processes of how to actually
create and sell these wealth management
products. Also within India there is a huge
demand for wealth managers because there is
a huge growth of millionaires and billionaires
in the Asian market. If you look at India and
China, the number of people with huge wealth
are actually increasing so these people are
likely to require wealth manager services. The
average income of the upper class and upper
middle class in India is also increasing, they
also need wealth management services. When
you look at the competence of the people who
are now selling these products, financial literacy
as well financial regulation in India is fairly low
compared to a lot of developed countries. There
people who are at the managerial level and who
will be able to organize this industry along the
new roles would be needed, so that is where the
transformative capacity of wealth management
will come into play.
31
NIVESHAK
SWAP Market
FinFunda
of the
Month
Sir, I recently came across the term SWAP

but couldnt understand the term
Swap market is an over-the-counter market
and it involves the transfer of a series of
cash flows between the parties on periodic
settlement dates and for a specific time
period. In simple terms, swap market can be viewed
as the party going long on an underlying asset and
taking short position on another underlying asset.
SIr I got it but what are the uses of swaps?
I will take an example of the current swap
and explain you the concept. If a company
X is based out of Singapore and another
company Y is based in India and X wants
a loan in INR and Y wants a loan in Singapore dollar,
both these companies can enter into a swap contract
to exchange the payments as they can take the
advantage of getting loans at cheaper rates in their
home currencies.
Okay, what are the swaps that are most
widely used?
The different types of swaps include
interest rate swap which is also known as
plain vanilla interest rate swap, in which
for example if one party gets interest at a
fixed rate and the other gets it at a floating
rate and if they are not comfortable with the fixed
and floating rates, they enter into a swap in which
the party who is getting the loan at a fixed rate would
swap the payments with the counterparty who is
getting it at a floating rate; the next type of swap is
the currency swap which is already explained in the
above question; then we have equity swaps which
Paladugu Sai Sashanka

IIM Shillong
help the party to diversify its income without altering

the original assets. It may involve swapping of the
equity based cash flows to the fixed income cash
flow; the next one is the credit default swap is a
swap in which the seller of the swap will compensate
the buyer in case of a default of the loan.
But is it free from risks?
As the swap market is over-the-counter,
there is always a counter party risk and
in case of an interest swap, the party who
is initially getting a loan at a floating rate
and swapped it for the fixed rate payments
may end up paying more if the floating rate becomes
less than the fixed rate. The credit default swaps
played a major role in the 2008 financial crisis.
Okay, if you want to terminate the contract
before expiration, how do you do it?
There are four ways to terminate the
contract. Firstly, both the parties can enter
into a mutually agreement and terminate
the contract and the necessary payment
should be done by one party to the other. Secondly,
with the permission of the counter party, it is possible
to sell the swap to a different party and move out of
the contract. Thirdly, you can go for swaption which
is an option to enter into a swap which offsets the
existing swap contract. Lastly, you can directly enter
into an offsetting contract to nullify the existing
contract.
Thank you for the session sir. Now I got
more insight how the swap market works
and its merits and demerits.
Classroom
Cover
Story
CLASSROOM
32
WINNERS
Article of the Month
Prize - INR 1500/Borampalli Ravali Preethi
NIIE, Mumbai
February FinQ Winners

1 st Prize - INR 1000/Ravi Kumar Singh
IIM Shillong
2 ND Prize - INR 500/Palak Gupta

IIM Indore
33
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FROM EDITORS DESK

All images, design and artwork

04 The Month That Was

Article of the month

10 Is flipkart over valued at $7

14 India The fastest growing

economy in the world: true or

The Basel Capital Accord:

29 Interview With Dr. Madalasa

Wealth Management: Make Venkataraman,Lead Researcher,

The Month That Was

The Niveshak Times

negative 0.17 per cent from the provisional estimate

The Reserve Bank on Feb 18th lifted the ban on

The data comes after the index of industrial

Inflation turns negative at (-)0.39 pct in

Infosys Buys US-Based Panaya for $200 Million

investors.Restrictions would remain on debt of less

similar investigations or regulatory proceedings.

Indias shadow banks, known as non-banking

Foreign direct investment (FDI) in India almost

The central bank also said NBFCs would not be

FDI rose 27 per cent to USD 21.04 bn in AprilDecember 2014

During the April-December period of the current

A leaked list of over one lakh account holders in

FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Month That Was

The Niveshak Times

MARKET CAP (IN RS. CR)

LENDING / DEPOSIT RATES

Niveshak Investment Fund

CONS NON DURABLE

February Performance of Niveshak

Is flipkart over valued at $7

role in expanding the market, and it overcomes

operating margin of 10% by 2025, and settle

FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

market but also the global market. At present

years. Thus, Flipkart s Cost of capital would be

and founders of e-Commerce Companies are

they are market leaders in the eCommerce

leader with a huge presence. In addition to this,

the market that is gaining market share in India.

FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

India The fastest growing economy

Palash Jain & Bhawana Saraf

Taken at face value, India recently became the

the real GDP is measured in accordance with

FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Statistics Ministry said that the countrys

the GDP numbers, Rajan had said on February

economy has grown more than four times. This

March, even if the budget is consistent with low

The new method is in line with the global

OUTSIDE MONEY | INSIDE

family members. The topic of this article is this

of unrequited money maybe small in terms of

countries would increase to $500 billion and

FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

root level of the recipient economy. There have

the past have found a positive relationship

8%, which means for every $100 sent, the family