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From the Directors Desk,

ndia finds herself in a rapidly changing economic scenario today. The general business landscape is more complex, more competitive and unpredictable than ever before. We have achieved such high levels of globalization that decisions made in the West influence the way business is done in the East, and policies implemented in the East affect the global business stratrequires managers to have a working knowledge of various issues, knowing how they affect each other and the various industries and services that depend on them. Indian Institute of Management, Udaipur has been able to put in place, along with the traditional and necessary disciplines, subjects and issues that are most relevant to the current times and that will help shape future trends. It is imperative that future managers get to know of the current trends in the industry and how the various macro-economic and micro-economic factors interact to affect the way business is done all over the world. There is a growing need to have the dissemination of this information from the restricted forums where it is available right now and empower the youth and students to participate in these discussions and increase their own knowledge and awareness. Arthaarth is the latest initiative by Finomina the Finance Club of IIMU, which aims at easing the transformation from being thought leaders, rich in ideas to becoming opinionated, knowledgeable action leaders capable of steering the organizations they work with and the society as a whole towards success. I hope it becomes a catalyst in this process of transformation. Wishing them the best in all their future endeavors.

egies of corporations in the West. This dynamic environment

Prof Janat Shah IIM Udaipur

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From the Editors Desk,

Editorial Team: Abhinandan Ghosh & Manish Jain Front Cover Design: Prateek Shukla Magazine Layout and Design: Ajith Pancily & Vivek Pandey Printing & Publishing: Aditya Arora, Aditya Raghunath, Ajith Pancily Distribution: Aditya Raghunath Content Fiscal Integration in the Eurozone: Shiv Marwah & Vinay Tejasvi LI(E)BOR & MIBOR: Aditya Raghunath & Aman Agarwal Rupees Roller Coaster Ride: Ajith Pancily, Khushboo Goyal, Kunal Kochar, Rahul Agarwal, Ratika Mittal FCCB Redemption Pressures: Varun Mediratta Face2Face with Dr. Kapshe : Aditya Arora, Aman Agarwal MoneyRatnam: Vivek Batra & Vivek Pandey Logophile: Rahul Agarwal & Ratika Mittal Back Cover Design: Ajith Pancily & Vivek Pandey FINOMINA

ncertainty, and how to effectively cope with it, is the chalreplete with examples of volatile markets, uncertain demands and befuddling trends in stocks and bourses. All these play devastatingly on the health and stability of trade, industry and business. In this maiden issue of Arthaarth, we try to look back at what major devel-

lenge of todays business. The financial climate world over is

opments the world has experienced due to these uncertainties and how these have exerted serious implications in the world of business and economy. It seems globalization is finally showing its true impact. The Eurozone crisis and financial troubles in the US amply demonstrate the phenomenon of global interdependence and inter-connectedness in todays complex world economy. Thus, what happened in one part of the world caused all-out economic repercussions, reverberating across other parts of the world as well. The expos of LIBOR rigging in the United Kingdom brought out the urgent need to put in place effective monitoring and regulatory mechanisms in the banking system. This is essential to safeguard the colossal amount of public funds that are subjected to clever manipulations by unscrupulous elements. Talking about regulations, the conversation capsule with Prof Sanjeevan Kapshe extensively covered various aspects of statutory and adhering to financial propriety. The volatility of the Rupee-Dollar exchange rate saps off the energy from the business houses and entrepreneurs involved in the EXIM business from India. The role of Government in orienting its fiscal policies, such as easing on FDI restrictions in multi brand retail, effectively managing fiscal deficit and removing a slew of ambiguities of GAAR and other restrictions, is expected to make desirable impact on the market economy. It will be quite interesting to see how the RBI also could play its role in this direction. The budding managers may benefit themselves by being well aware of the effervescence and incertitude involved in all these business elements. Let me invite you to an invigorating read ahead as I sign off with these few wordsmechanisms required to ensure their optimum functioning, protecting their integrity

Ceteris Paribus, stability is presumed,

As growth predictions go unbound.

But cruel are the financial worlds rules, Nothing is sure, neither a stable ground.

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Fiscal Integration in the Eurozone

tool to deal with the adverse macroeconomic conditions. This means that policies made for the EU are based on the average of these rates in its member countries and individual countries can only adjust their fiscal policy if they wish to tackle their inflament rates, the government had to increase fiscal

tion and unemployment rates. To adjust unemployspending which further aggravated the already dismal fiscal deficit condition. This led to rising public debts in these countries and they could not even dezone follows a common currency. he Eurozones troubles began in 2009 with the other countries in the EU exposing high debt levels debt crisis in Greece and have since spread to

value their currency to boost exports as the EuroTo eliminate such institutional problems and prevent more members of the Eurozone from defaulting on their debts and to avoid another wave of instability in the European banking sector the establishment of the ESFS (European Financial Stability Facility) is a of the crisis, the IMF has called for greater economic union to add stability to the monetary union. What will the fiscal Union do? The fiscal union will create a common budget plan being provided conditionally where the ECB or the for nations. It would allow for economic support IMF can closely monitor the actions of the debt ridden governments. Governments will have to obey and go by the rules put in place with regards to tax-

and fiscal deficits, economic recession that has led to

high unemployment rates, spending cuts on welfare schemes and trade imbalance among the member states. Recently, credit ratings of France, Italy and a few other Eurozone nations were downgraded by Standard & Poors. After a lot of deliberation over the appropriate course of action to be taken, the IMF has proposed the formation of fiscal and banking unions in the Eurozone to bolster the already existing monetary union.

step in the right direction and in its latest assessment integration and proposed the formation of a fiscal

Why do they need a fiscal union? At present, the European Central Bank (ECB) manages the monetary policy of the Eurozone. It makes all market with the principal aim of managing the inflation and unemployment levels in the Eurozone. Thus, the countries cannot use monetary policy as a
INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR

ation and expenditure and will need to make budget amendments in their constitutions to provide for this. A regular review to judge the bankability of these nations will be carried out so as to decide the future flow of funds to these nations and to vary the size of the European rescue fund commensurately.

the decisions regarding the money supply in the

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Finland, like for transferring taxes collected to other countries may be negative. It remains to be seen if all members of the Eurozone would even agree to the division of monetary resources among member

austerity measures fearing political upheavals. Also, nations would become a point of contention while nations try to outdo themselves in acquiring greater spending power. What does this mean? The Eurozone will have a centralized authority that will create a common budget plan for all the nanational budget and let the ECB control their spending. Implications in member nations tions. Member states will give up control over their

Impact of the Eurozone crisis on the US Firstly, The continuing crisis of the European Union economy. The first direct impact will be on exports. can directly have a negative impact on the US A slow growth for countries in the Eurozone will affect US exports to the Eurozone and the sales of US companies operating in European markets, which would in turn impact the countrys GDP growth. As of January 2012, the US and Eurozone GDP. The two economies have a bilateral relationship with each other, where each acts as a major source of foreign direct investment for the other goods and services. and represents a major market for the export of Secondly, The European banking system has a high level of exposure to countries like Greece, Italy and Spain and faces the major risk of default by these banks, the concern is that in the event of default these banks would not be able to absorb the losses US banks. and may in turn default on what they owe to the Finally, With the Euro declining against the dollar the US might look at other markets for investment, as investments in Europe will result in lower profits on conversion to dollars. countries. These banks are closely related to US economies together account for 40% of the worlds

When bailouts were initially announced in the form of assistance packages to Greece, Ireland and Portugal, they faced stiff opposition to using the rescue them. Adoption of austerity measures in many countries were met with public outcry and France where the incumbent president Nicolas Sarcized his austerity measures. Even the newly elect-

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

political backlash, as was evident in the case of kozy was beaten by Franois Hollande who critied Greek parliament has requested for slackening the strict austerity measures imposed by the EU and the IMF. In case of the establishment of a fiscal union, the reaction to spending cuts will be no different. Governments may have budgetary constraints imposed and a change in tax collection laws may also not be easily accepted. Public support for these measures, among fiscally strong countries like Germany and
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LI(E)BOR and MIBOR

rates with the motive of making substantial profits on their large portfolios linked to the LIBOR interest rate.

Estimates of how much money is tied to the LIBOR vary from $350 trillion to $800 trillion (From a scale perspective, $350 trillion would pay for all U.S government spending for about 96 years!) Moreover, a

one basis point change in LIBOR could potentially he LIBOR scandal involving Barclays and the nancial world. Some of the pertinent questions that are often asked are: Why did they do it and what has an event to occur in the Indian banking industry? LIBOR (London Inter-Bank Offer Rate) is an interest rate benchmark on which many financial instruments are pegged, ranging from commercial loans to rivatives. There are several speculated reasons for the rigging of LIBOR by Barclays and the16 member banks. Reasons for Rigging of the LIBOR Probably the foremost reason for the same could have been Barclays fear of nationalization. Barclays might have reported lower rates to the BBA (British Bankers Association) due to the fear of nationalization after the Lehman Brothers collapse which crept in. The reasoning behind this was that if the bank reported higher borrowing costs, the government may doubt its ability to raise capital and nationalize it for systemic reasons. been the impact of the scam? Is it possible for such Bank of England has created waves in the firesult in an additional cash flow of 2 million pounds to the member banks.

The member banks of BBA followed the polling method to arrive at the LIBOR rates wherein a set of banking partners provide the rates at which they trade or at one which they speculate. At the heart of it, this is an honor system, which some banks lever-

aged to artificially inflate or deflate their rates, de-

pending on what would benefit them the most. As it turned out, the numbers provided by the organizations were not based on trade data but guesstimates, which were stated in conjunction with others or on their own; and depending on the clout they had to maintain a certain rate. LIBOR and India Since this was tied to humungous amounts of money, it had major repercussions on consumers and financial markets worldwide. Many Indian companies that rely on external loans in dollars or euro an upper ceiling of 200 basis points above the LIBOR on trade credits and other loans up to three years. If the rate was manipulated on the higher end, companies would be paying huge amounts as interest payments. The motive and the action taken by Barclays to rig
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mortgages and money-market instruments like de-

pay interest rates based on LIBOR. RBI has imposed

The second reason, a more obvious one, is that of profit. The member banks had understated their
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the LIBOR compels us to reflect whether this is some-

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the sample with lowest standard deviation is reported to be the MIBOR. The verification of MIBOR through bootstrapping ensures that the noise in reporting rates by banks is nullified. Moreover, the value of n (sample size) drawn each time is dynamic, which makes sure that any attempt to rig the MIBOR via cartelization is taken care of. In spite of using all technical jugglery there are apprehensions in the market that the MIBOR could still be rigged. So the banks around the

thing exceptional or could it be replicated for MIBOR.

MIBOR refers to the Mumbai Interbank Offered Rate set by Reuters and NSE every morning and is the local rate over which Overnight Indexed Swaps are based. of MIBOR is miniscule when compared to that of LIdred trillions of dollars. The volume of trade happening in India on the basis BOR denominated trade which runs into several hunSo, should one even worry about a rigged MIBOR? The answer is a definite Yes because it is the central benchmark rate for majority deals struck for Interest Rate Swaps, FRAs and Floating Rate Debentures in India. However, the rates in MIBOR may not be rigged because of two main reasons. First, the motivation to rig the MIBOR is missing. Barclays did so because they the main contributing banks to MIBOR in India are themselves nationalized (ex. SBI, PNB, UBI among the 75% of the overall bank deposits).

country along with CCIL are considering a move based trading system. This looks like a credible solution as all the deals in government securities are ex-

towards determining the rates through the screen

ecuted through Negotiated Dealing System (NDS) and any deal executed outside the NDS is supposed based system used for trading money market instruments in other countries, it is an easier option to switch to system wherein the MIBOR would be deto be reported within 15 minutes. Unlike a voice

didnt want themselves to be nationalized whereas

pool of 31 banks and dealers commanding close to Second, and more importantly, there is a difference in the way LIBOR and MIBOR are calculated. To start with, both the rates are calculated by taking a poll of the rate at which the banks can or are expected to

termined by actual rates rather than the polled ones. NDS is an electronic trading platform operated by securities and other money market instruments. RBI which facilitates the exchange of government To conclude, the argument that the value of derivatives linked to MIBOR is miniscule and therefore rigging the MIBOR does not matter is flawed. This is because of the fact that these rates (LIBOR and MIBOR) are set and traded upon in the market on the basis of trust. If these benchmark rates are manipulated then it would make the whole financial industry vulnerable and prove to be a breeding ground for arbitrageurs.

raise capital overnight. The polled rates are then cleared of outliers by taking the 2nd and 3rd quartile of the rates into the consideration set and doing away mean of the rates in the mentioned quartiles and publishes it on daily basis. NSE goes a step ahead and involves drawing up of a sample of mean data verifies the polled rate through bootstrapping, which (pooled) and finding the efficiency of this mean value by computing the standard deviation. The mean of
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with outliers. British Banks Association reports the

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upee depreciation seems to be the current buzzword

Indian Rupees Roller-Coaster Ride

Minister to the friendly neighborhood paanwala talking about it. Its effects are everywhere. Although the Indian to a dollar, it makes sense to explore the reasons behind this volatility and try to project the future movements in the currency. To start with, the rupee depreciation can be attributed to a host of factors which can be broadly classified into internal and external factors. Internal factors are those factors which are intrinsically linked to the Indian economy- from government policies, the bulging fiscal deficit, current & trade deficits and the RBI policies to something as uncertain as the effect of monsoons. External factors are those factors which are not directly under Indian control such as the Euro crisis, the effect of oil prices and the inflow of FDI and FII in India. In the following sections, a variety of factors have been discussed which have played an important role in determining the rupee movements. Current Account and Trade Deficit Widening current account and trade deficits were the primary reason for the dramatic depreciation in the value of rupee. India is an oil-deficient country and subsequently, India ends up importing close to 80% of its crude oil consumption. Although this has been the story for many years now, the situation has worsened due to an unprecedented increase in global crude oil prices as well. If we talk in absolute terms, every 10 dollar increase in the price of an oil barrel increases the Indian current account deficit by roughly $6.5 billion dollars. Owing to the circumstances discussed above, the Indian current account deficit has reached 4.2% of GDP in 201112 with a trade deficit of 10% of GDP. Crude oil represents 30.1% of the total Indian imports in dollar value. However, an interesting point to note is that Gold & Silver represent 10.1% of the import basket. This fetish for Gold & Silver is unique to India and has created a serious problem for the RBI governor on the current account deficit front. Economists talk about the J curve coming into play when imports will eventually become expensive and thus their demand INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR will decrease. But, the problem in India is that huge subsidies are given on petroleum products which have resulted in inelastic demand for crude oil. Consequently, the domestic demand for petro products has not been influenced much by the depreciation of rupee. Hence, it will be difficult for the J curve to function as expected. If the conditions do not improve quickly then the WPI figures are headed north again which will bring the rupee under further pressure. Government Policies Policy paralysis has been widely cited as a reason for rupee depreciation. The government has failed to ease FDI restrictions in multi brand retail. The GAAR, which are aimed at reducing tax avoidance by introducing rules that will penalize investors wanting to route their money through tax havens have dissuaded foreign investors from investing in India. This has resulted in the drying up of dollar inflows into the country and reducing the demand for rupees. An area where the government can support the rupee is through the implementation of business friendly policies such as GST. Implementation of GST is expected to boost the business environment in India and will help increase the level of foreign investments which in turn will support the rupee. Till now, the government has just managed to take a few small steps like increasing the limit for foreign institutional investments in government securities and increasing import duty on Gold to support the plummeting rupee. On the other hand, RBI has taken steps such as tightening the norms for rupee forward contracts, raising interest rates on non-resident deposits and announcing relaxations in external commercial borrowings to support the rupee. Media has been criticizing the RBI for rupee has strengthened from its all-time low of over Rs.57

in the country with people ranging from the Prime

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not using its Forex reserves in the open market but past experiences indicate that a central bank cant offset the market trend using its reserves. It is bound to fall short as in the case of the Bank of England in 1992. Fiscal Deficit Indias huge fiscal deficit at 5.6% of the GDP has put a huge pressure on the government to reduce its spending on items such as petrol and fertilizer subsidies. But due to the populist measures taken by the government and the pressures of coalition politics, it has been unable to reduce this spending. In fact, the government has increased the outlay for public expenditure in some areas. Now, some might wonder how this is connected to rupee depreciation. The government has two ways to bridge the fiscal deficit: raise money using bonds or ask the RBI to print more rupees. The former method leads to an increase in interest rates making business difficult in the country. Also, it might lead to a downgrade by rating agencies, if the debt to GDP ratio is out of control. The latter method leads to an increase in money supply leading in an increase in inflation. It is evident that both the methods will result in conditions which make the country unattractive for foreign investors. Global Economy Although external, this factor plays a very important role in deciding the fate of a currency. The United States of America (11.9% of the exports) and Europe (19% of the exports) have always been a vital market for Indian exports. Therefore, any economic issue with these regions adversely affects the Indian economy. Low growth rates in these markets have diminished the demand for Indian exports, hence, worsening the current account deficit. Furthermore, the sovereign crisis in Europe and the possibility of Grexit (Greek Exit) from the European Union have weakened the Euro substantially and a capital flight started happening towards the US dollar. USD is being

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perceived as the ultimate safe haven by the investors. This has also resulted in investors pulling out from Indian investments in favor of dollar denominated securities. The rupee now in unchartered territory, has the market momentum firmly against it, and shall require strong policy support from the government. Future Outlook The situation looks quite gloomy after looking at all the factors that are playing a role in the fall of the Indian currency. However, everything is not that bad. India is still growing at a rate of 6.5% which is by no means a bad performance compared to the developed countries. Investors still believe in the Indian growth story and as a result India has managed to be the third largest recipient of FDI in the last year. The inflows have reduced this year but still they form a significant number in dollar terms. On the current account and trade deficit front, currency depreciation has opened a treasure trove for India by making the exports extremely competitive. Once the exports start growing and the import of non-essential goods is controlled, the current account deficit will take care of itself and the rupee will stabilize. However, the Indian government will find it difficult to control fiscal deficit given that 2012 will witness elections in Gujarat and Himachal Pradesh. Also, the coalition politics is likely to impose more pressure on the government to take populist decisions and, thus, subsidies will continue. Moreover, the government is now trying its best to remove as many policy barriers as it can to attract more foreign investors. The change in the finance ministry and the flak that the government has received from around the world gives a sense that the situation will improve in the coming months. On the global economy front, the European Central Bank has been firm in its support to the Eurozone nations and has maintained that the European Union will stay. Steps towards a fiscal union and collaborative political effort by the European leaders give a signal that the conditions will improve. In a nutshell, holding all factors under consideration, the rupee is not expected to touch 60 in the next six months. However, it is equally unlikely that it appreciates to 50. The movement will be less volatile than it had been in the last six months and the equilibrium range of 53 to 56 is estimated to prevail.

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FCCB Redemption Pressures

FCCB will be redeemed at the prevailing exchange rate. Therefore, if the currency in which the FCCB is issued appreciates significantly against the issuers home currency, the total outgo for the issuing company at the time of redemption will rise. This is exactly what has happened with many

cy other than the issuers home currency and the

defined as a bond which is issued in a curren-

foreign currency convertible bond (FCCB) is

investor has an option to convert the bond into eqmined period of time. Therefore, it is attractive to

uity at a predetermined price and after a predeterboth issuers as well as investors since the conversion option lowers the coupon rate for the issuer in addition to preventing immediate equity dilution. For the investors, it presents a unique opportunity to take benefit of an appreciation in the share price while the downside risk is limited since the coupon being out of the money.

of the Indian companies. Many Indian companies since they were able to raise debt at an average rate of

raised capital via the FCCB route during 2006-08 5% as against the domestic market cost of debt of close to 9%. According to Bloomberg, FCCBs worth will be up for redemption in 2013. Of these, FCCBs close to Rs. 31, 500 Cr. issued by Indian corporates worth Rs. 22, 000 24, 000 Cr. may not get converted since the current stock prices of the issuing companies are significantly below their conversion prices. Some of the big companies facing redemption pressures include Suzlon ($536 million), Jaiprakash Associates ($524 million), JSW Steel ($392 million), GTL

payment is guaranteed even if the option ends up

Infrastructure ($321 million) and Sintex Industries ($291 million) (source: Bloomberg). Adding to this, the rupee was at 40/$ at the time of issuance but since then, the currency has taken a serious knock and has

fallen to 56/$ (closing quote as of July 30th, 2012 = 55.6111/$; source: Bloomberg), a close to 40% drop. At the time of issuance, the cost of debt for the issue

was in the range of 5% - 6% but now, the cost of debt pact of close to 700 basis points on the back of ad-

has gone up to 12% - 15% which represents an imOne of the biggest risks that companies verse movement in the currency market. This point

which raise capital via the FCCB route face is cur-

rency risk. This is because of the fact that in case the conversion option expires worthless, i.e., the current market price of the share of the issuer company is lower than the predetermined conversion price; the
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can be further substantiated by looking at bonds isyield to maturity of 5.3% and 8.1% at the time of issuance respectively (source: Bloomberg); at the time of maturity in 2013, will be 12% and 15% due to the
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sued by Jaiprakash Associated and Tata Steel with

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rupees fall. This has had a huge impact on the profitcost has shot up. As a result, raising capital via the

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ability of these firms since the interest and repayment FCCB route which was considered to be a cheap

and replace foreign debt by domestic debt will go up their bottom-lines going forward.

substantially which will definitely have an effect on The steep increase in the redemption value of

source of funds has turned out to be costlier than the cost of raising debt in the domestic market. Since the rupee depreciation, the refinancing of FCCBs by raising domestic debt is very difficult for some of the interest rates are also ruling high in addition to the

the FCCBs due to a substantial depreciation in the rupee could have been negated if the FCCB issuing companies had entered into a derivatives contract at the time of issuance in order to hedge against the

currency risk. There are various options available with the company such as entering into a futures or forward contract, buying a call option or entering into a swap agreement which will ensure that the

company does not get hit on the currency front. The most suitable alternative out of the above mentioned options in this case would be to enter into a fixed rate

swap agreement with a multinational company

which has a large exposure to rupee debt. Entering nies can swap their interest payments as well as prinsmaller companies. And if these companies try to revise the conversion price downwards, it will cause a sharp equity dilution which will lead to further pressure on the share price of the company.

into a fixed rate swap agreement where the compacipal repayment will be beneficial for both the companies since it fixes the exchange rate and avoids any kind of volatility. have no option but to redeem their outstanding FCCBs at whatever is the spot exchange rate, the best way to do this would be to raise funds via the private placement route, also known as a QIP (Qualified Institutional Placement) which will ensure that the fund raising via the equity route is done at a fair valuation and thus, minimizing the equity dilution. Refinancing via the debt route does not make sense at this point of time because of high interest rates prevailing in the country and a slowing economy and thus, additional In the present scenario where the companies

Due to the above mentioned factors, some defaults on FCCB repayments have already started. PyrInfotech defaulted on their FCCB redemptions recently. Zenith Infotech had defaulted on FCCBs worth $33 million due in September 2011 and the stock fell close to 79% during the next three months as a result of the default (source: Bloomberg). According to Standard and Poors estimates, almost half of the 48 companies whose FCCBs are up for redemption in the current year might go for restructuring or might amid Saimira Theatre Ltd., Wockhardt and Zenith

debt will further increase the interest burden and ultimately impact profitability. Also, internal accruals should be used to be the maximum extent possible for repayment of the outstanding FCCBs.
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even default on the repayments. The interest costs for the companies that decide to restructure their debt
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A Cuppa with Dr. Sanjeevan Kapshe

fter completing B.E. (Electronics) in 1985, Prof. Sanjeevan Kapshe started his career as EDP Engineer with BHEL Bhopal. He joined Indian Railway Service of Signal Engineers (IRSSE), 1986 Examination Batch and worked on large construction projects on (old) Central Railway. After his doctoral work in derivatives from IIM Bangalore, he was Professor (Management Studies) at Railway Staff College, Vadodara for several years. He joined SEBI on deputation from Indian Railways as Officer-on-Special-Duty (OSD) to play the role of Chief General Manager and Head of Derivatives and New Products Department. On return to Indian Railways before dedicating himself to academics he was Chief Signal and Telecommunication Engineer (Projects) on West Central Railway, Jabalpur.

laws reflecting the changing needs of the society, the laws through framing of suitable rules and regula-

Recently, Team Finomina had a freewheeling interview with Prof. Sanjeevan Kapshe where he covered a wide range of issues relating to regulations in general and financial markets in India.

primary role of the executive is to implement these tions, and the role of judiciary in this context is to see that the laws are interpreted in the spirit they the normal situations; however there are situations were enacted. This system of working goes well in which require specialist knowledge of the subject

Q. What is the role of regulation bodies / regulators in India? A. Well, before we could get to the answer of this question, we need to understand the context in which we (in India) are working. What we can associate from our course work is that we have a govIndia. The Constitution of India talks about various ernance system established by the Constitution of things: citizens and their rights & duties; legislative, judiciary and executive arms and the distribution of power amongst them; the centre and state governments and their relationships, among many other things. While the primary role of the legislature is to enact
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matter where every executive or bureaucrat typically a generalist - may need advisors to play the role. This may not be either possible or efficient all the time; therefore we have regulators as inde-

pendent organizations, of course, working under same constitutional framework. As such, a regulatothe legislature. And, typically, this law gives legislaited sphere to the regulators. In the times to come, we may see more regulators depending on the degree of specialization required to carry out certain tasks something that we enFINOMINA

ry body is created under a specific law enacted by tive, executive, and judicial powers within a lim-

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countered in our course on organization theory. So, with this background knowledge, I come back to your question: In India, regulators play a critical role to sector specialists and carry out the mandate given to them. Today, there are many regulators in India. For example SEBI in securities markets, IRDA in insurance, RBI as central banker and banking or financial sector, TRAI for telecom sector, among others.

approaches to regulation, called as: principle-based regulation and rule-based regulation. Under the first approach regulators spell out, build consensus about certain core principles which are to be followed, observed, implemented, etc. by all the market participants on voluntary basis and industry associsense. If any major issue or point of departure from

ations, etc. play the role of self-supervision, in some the agreed upon principles comes up, then the regulator may provide suitable direction, guidance, supwe are saying is: a regulator is more like a facilitator in this situation. port, etc. to the market participants. Essentially, what

Q. So, SEBI plays the same role like SEC in the United States of America? A. Yes and No! It plays the same role of regulating securities market in India like SEC does in USA. But there is a key difference which places SEBI in unique position it has a mandate develop markets in India apart from its usual regulatory function. Q. How does SEBI respond to scams in Indian market? A. One thing we may recall from our course work on programming courses is no software is can remain bug free forever. Likewise, no market can re-

A contrasting scenario is in the rule-based working: regulators prescribe the rules for possible everything in great detail and failure to comply with these rules could lead to suitable penalties, punishments, etc. In this role a regulator is like a policeman, a referee one may say So, to contribute towards healthy governance the companies have to make efforts to move towards self-regulation. In India, the (stock) Exchanges play the role of front-line regulators. There are associations or voluntary organizations like AMFI (for mutual funds), in India, which provide support as SROs (Self-Regulatory Organizations) to a particular sega role of compliance officer, in some sense, who

main, in your words scam free forever. Someday, some situation may arise which was not foreseen when certain rules and regulations were framed. To respond to such emergent situations regulators are given powers. And SEBI has used these powers effectively. SEBI is an example of a learning organization in our management jargon, one may say.

ment. Further, at each firm or company level there is plays the role of regulators representative in the company. Finally, it is responsibility of each investor to be vigilant and keep the regulator informed about

Q. How can the companies contribute towards healthy governance and make the work easier for the regulators? A. Well, once again, before going to the specifics of your question, we need to understand the two basic
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anomalous situations in the markets. That is the best form of regulation coming straight from the investors .

INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR

M O NE Y R AT N AM
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oney Ratnam scratched his head for the umpthe 34 article he had read about Infosys Limited. He knew the time had come to summon all the investor
th

To Infy or not to Infy?

teenth time in the last minute, pondering over

spirits to answer the question echoing in his mind, To

Infy or to not to Infy.

In the annual results announced in the quarter ending Mar 12, Infosys had failed to meet their annual guidance, after almost two decades. Money Ratnam's eyeresults were announced. Infosys could not meet its

brows had barely settled to their mode height, Jun 12 quarterly guidance, lowered the y-o-y guidance from 14 % for the sector. It had also stopped the practice of

8-10 % to 5%, against the NASSCOM guidance of 11giving guidance, a practice it championed even when it was not mandated by the law. It was clear that the poster boy of the Indian IT industry was no longer the Ratnam. bellwether, something that did not please Money Unflustered by the predictions of the doomsayers, Money Ratnam started looking at the situation more objectively. Currency fluctuations led to a loss of Rs. to 31.78% in 2011-12. The company had shifted its focus from playing the role of an IT vendor to that of a strategic partner. The company, in alignment with this shift, had increased its focus on System Integration and Consulting. Being a relatively new entrant, the company itable avenues. In wake of recent VISA issues, the comleading to higher expenses. But should I be swayed by side as well? Money Ratnam thought.

has not been able to reap benefits from these more profpany had to increase the local hiring at onsite locations these concerns or is there something on the brighter In the quarter ending Jun 2012, Infosys had added 51

7280 crore. Persisting slowdown in US and European markets, which contribute 85.6 % of the total revenue, impacted the revenue. The Banking & Financial Serpanys revenues declined by 1 per cent. Money

vices which contribute about 34 per cent to the comRatnam rubbed his eye and in a moment of true in-

sight realized that these factors are common to all the IT companies. Deeply engrossed in thought, like Russell Crowe in A beautiful Mind, he declared, I must

new clients. One of these projects was a Rs. 700-crore project aimed at transforming the financial operations of India Post, clearly indicating a renewed focus on the of cash at hand (Rs.20591 crores) meant that the comities.

look through, find company specifics. In the wake of been able to command a high profit margin. Reluc-

domestic market segment. Zero debt and huge amount pany could invest heavily in major reorganization activInfosys 3.0, with the aim of making the organization

the challenging global environment, Infosys has not tance from the client side meant that discretionary spending by them had gone down, reducing the pricing by 3.7 percent in the latest quarter. The operating

leaner and focused on systems integration and consult-

profit margins have shrunk from 34.56% in 2009-10

INDIAN INSTITUTE OF MANAGEMENT - UDAIPUR

ing, looked at transforming Infosys from a technology

Continued in Page 15 FINOMINA

AR T H A AR T H I SS U E I
Across

THE LOGOPHILE
15

Page

1.India's New Chief Economic Advisor (8) 7.Company acquired by Infosys (9) NYSE(acronym) (4) (acronym) (4)

6.100 shares, basic trading unit for stock (8) (2 Words) 11.Average price for blue chip industrial companies on 12.One of the five PSUs beung disinvested by GOI 13.W. Buffet's first investment in India (8) 16."The world's local bank" (4)

15.Pricing model used for risky securities (acronym) (4) 17.Partnership between bank and insurance company (13) 18.Debt package that is highly unlikely to be repaid (5) 19.Traders who play for high stakes (4) Down

2.Current president of ECB (11) (2 Words) sis (6)

3.Required rate of return in a discounted cash flow analy4.A cozenage of 1920, noted in Charles Dickens' 1844 novel Martin Chuzzlewitt (5) 5.A acquires B, the quantifiable premium value of B (8) 9.Amortisation of oil field would be termed as (9) India (7)

8.Company asked to refund Rs.17400 crore to investors (6) 10.Canadian investment research firm creating waves in 12.Leading a suit againt major banks involved in the LIBOR scam (9) 14.Regional form of promissory note (5)

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

service provider to a strategic partner for clients. Reaffirming Money Ratnams belief in the efforts being taken towards Infosys 3.0 was Infosys's recent acquisition of a Money Ratnam could not ignore all these latest developments. The market price of Infosys share has been hovering in the range of around Rs. 2300 to Rs. 2550 over

leading global management consulting firm, Lodestone Holding AG, for 330 million Swiss francs. The step, acmeant adding more than 200 clients and 750 front end cording to Money Ratnam's understanding of the matters, consultants into Infosys's kitty and touching $1 billion in

the past month. Money Ratnam, without any further delay, opened his laptop and logged into his demat account. The figures on his computer screen, "Average average price of his investment in Infosys's stock for the had to do. With the time nearing for his analyses to come to fruition, he clicked on buy 100 shares.

Price Rs. 2437, against Infy struck his eye. This was the last 2 years. A slight shake of head and he knew what he

revenues from SAP Consulting, positioning it as one of

the global leaders in SAP Consulting. Money Ratnam was optimistic about the impact of this structural change and was also hoping for similar inorganic growth steps, in in systems integration and consulting.
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sync with the organic growth, to fasten the growth plan

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