finxpress july 13 2014

July 13, 2014

Volume 3

Moving on with the legacy

Club FinNiche would like to take the opportunity to welcome all the

juniors to the clubs and committees in IMT Ghaziabad. It is exciting to

see the flare with which the juniors are taking the new leadership

roles and carrying forward the IMT legacy. With the academic year

going at full speed, seniors have their presentations lined for the

weekend whereas the juniors are studying hard to excel well in their

quizzes and mid term.

This week we bring to you opinion about the much talked Union

Budget 2014-15 and have a critical view of the same. The magazine

highlights the need for SLR and CRR Exemption in the Infra sector,

whether such regulatory norms are required or not? To enhance the

financial knowledge, we bring to you LBO (Leveraged Buyout) as the

term of the week.

We hope you enjoy reading the articles in this edition of FinXpress.

Looking forward to your acknowledgements and suggestions for

improvements.

Happy Reading!!

Regards

Team FinNiche

From The Editorial FinXpress Volume 3

July 13, 2014

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

July 2014 Page 1

CONTENTS In Focus: CRR and SLR

Exemption: A much

needed fillip in the in-

fra sector

Opinion: Union Budget 2014-15

Term of The Week: Lev-eraged Buyout

Market This Week

News

Fun Corner

In Focus

The newly elected NDA government has

often emphasized that reviving

infrastructure is one of its priorities. The

budget presented by Mr. Jaitley on the

10th of July was a step in the right

direction. In a move described by HDFC

Chairman, Deepak Parekh, as

revolutionary, the finance minister has

proposed that banks be allowed to raise

funds to finance infrastructure loans

without having to maintain cash reserve

ratio (CRR) and statutory liquidity ratio

(SLR) requirements for such funds.

CRR requirement pertains to the

proportion of deposits (currently set at

4%) that banks have to keep with RBI

and on which they get no interest

whereas the SLR requirement pertains to

the proportion of deposits (currently set

at 22.5%) that banks must invest in

government securities.

This proposal, when implemented, will

also have the added effect of freeing such

funds, raised through long term bonds,

from priority sector lending requirements

as infrastructure is a component of the

priority sector. The main benefit that will

accrue from this proposal is better

management o f asset— l iabi l i ty

mismatches in banks which had become

a major problem for some public sector

banks. This is because the cost of funds

for banks issuing long term bonds for

infra lending will be reduced as a result

of CRR and SLR exemption, which will

compensate the banks for any premium

that they would have to pay for such

bonds due to their long tenor.

However, the euphoria among banks over

this proposal may not last long. RBI is

already planning to come up with strict

standards to regulate the implementation

of the proposal. It is planning to allow

this leeway to banks only as long as the

loan remains healthy. If such a loan

becomes an NPA, the bank will have to

set aside the SLR and CRR requirements

for the entire exposure. The central bank

is also planning to set strict project

appraisal standards for banks wanting to

avail of this facility, so that such fund

raising is only allowed for viable projects.

These steps are being taken by the RBI

because many within the central bank

believe that banks are already

overexposed to the infra sector and any

more exposure might lead to an increase

in credit risk. Infrastructure is among the

five sectors (the others being textiles, iron

and steel, aviation and mining) that the

RBI has identified as stressed. Also, the

RBI is apprehensive about losing a

certain amount of control on monetary

policy as it controls the money supply in

the economy by adjusting the CRR. After

the implementation of this exemption, the

RBI won’t have the authority to tinker

with such funds.

Whichever side of the debate one chooses

to take, what cannot be denied is the fact

that a strong infra sector is urgently

required for sustained growth and at

least the government has set the ball

rolling in the right direction.

FinNiche

CRR & SLR Exemption : A Much Needed Fillip For

The Infra Sector

July 2014

—- By Arunav Chakraverty

Opinion

The much awaited Modi’s Union budget

2014 is out to address the impending fiscal

consolidation and the infrastructure

bottleneck challenges faced by the Indian

economy. Let us have glance over its major

highlights and their possible impact.

The fiscal deficit target for FY15 is pegged

at 4.1%, which the Government looks to

achieve by bolstering its revenues by

increasing its tax ambit (in particular

indirect taxes) and with an increase in

disinvestment proceeds. The measures like

introduction of long term capital gains tax

on debt mutual funds and further increase

of customs and excise duties on imported

electronics and tobacco products are all

intended in achieving the same.

Capital expenditure is budgeted at 18.8%

with a significant increase towards power,

ports and shipping, which are critical for

fuelling a sustained growth in the

economy. However not just awarding these

projects but also the implementation of

these projects by addressing the ground

issues like environmental clearances and

land acquisitions will be crucial.

The proposed 10 year tax holiday for the

power sector will benefit almost 18-20GW

(~10% of total generation capacity of India)

projects which are currently in various

phases of construction. However, the

current budgeted allocation for the

renewable and excise duty cut on its

imports is only expected to have a minimal

impact.

Banks are also allowed to raise long term

funds for the infrastructure lending which

will address their issue of asset-liability

mismatch. Providing autonomy to the

PSB’s and reducing the attractiveness

towards debt mutual funds (as mentioned

above) will enable banks to attract more

funds from customers. However the

proposed capital infusion of INR 112 billion

in the PSB’s, which is less than previous 4

year average, is not an encouraging sign

particularly when they are grappling with

increased NPL ratios.

The proposal of setting up an INR 100

billion venture capital fund, lowering of

investment allowance (to INR 250 million)

and designing a new legal framework for

exit are all expected to boost the flagging

small and medium enterprises segment.

The construction sector has also witnessed

an increased allocation in this year’s

budget which is expected to boost the

country’s employment levels, as this sector

is one of the largest employers in India.

However, all these steps of increasing the

consumer expenditure and boosting

manufacturing sector could yet be undone

by poor monsoon and consequential poorer

agriculture output. Along with this, its

possible spill over effects on the industry

and service sector would only worsen the

woes of already stagnating economy. This

is really a big challenge for the new

Government for achieving its promised

“Ache Din aane wale hain” motive.

FinNiche

Union Budget 2014

—- By V V Raviteja

July 2014

FINANCIAL KNOWLEDGE

LBO stands for Leveraged Buyout which

means acquiring another company with the

help of leverage. The term is widely used in

Mergers and Acquisitions when one

company uses some form of leverage like

issuing debt, bonds and other instruments

and uses the proceeds to obtain or acquire

a company or any real asset. Generally, the

assets purchased are used as collateral in

order to obtain the leverage to the debt

holders.

The entities which use this form of takeover

strategy are not restricted to corporations.

In fact, funds like private equities and

hedge funds also use this form of strategy

to enhance their returns. Financial

sponsors are firms supply equity to fund

houses who then will combine it with

leverage to carry out the transaction

thereby enhancing the return. Leverage in

the form of debt is a cheap source of

financing and therefore increases the

return that can be attributed to the

shareholders. However, using too much

leverage increases the debt-to-equity ratio

which adds to the risk profile of the firm. So

there is a trade-off between the riskiness of

a deal and the cost of funding.

LBO’s are a win-win situation for both the

financial sponsor and the banks as the

sponsors get the means to carry out the

deal and the banks are able to earn a better

margin on their services than a normal

corporate lending. The debt issued can also

be divided into several tranches and sold off

according to the requirements of an

investor. The senior most tranche gets a

lower margin whereas lower tranches are

compensated for the risk in the form of

higher margins.

The first LBO can be dated back to 1955

when McLean Industries purchased Pan-

Atlantic Steamship Company. McLean

during this transaction borrowed US$ 42

million and issued preferred stock worth

US$ 7 million. These days you will see

several transactions involving LBO. The

latest deal which came into picture

involving LBO was the Dell’s buyout.

Motivations behind LBO:

Lower cost of funding

Enhanced returns from the buyout

Some of the risk transferred to the

debt holders

Risks involved in a LBO:

Risk profile of the acquiring company

increases due to increase of leverage

If too much leverage is used

sometimes cost of funding increases

when the optimal capital structure is

breached

Legal risk sometimes increases if the

debt holders are not treated properly

and fairly

A specific form of leveraged buyout is

Management Buyout or MBO where the

management of the company acquires the

company from the shareholders using

leverage provided by the owners itself.

MBOs are generally supported by owners

when they want to retire or liquidate their

equity position. MBO’s also create a conflict

of interest when the management is looking

for a lower price for the purchase and are

employed by the owners who would prefer a

higher price.

FinNiche

Leveraged Buyout (LBO)

July 2014

FINANCIAL KNOWLEDGE FinNiche

Market This Week

Equity benchmarks plunged over 3.5% during previous week amid heavy profit booking

post the Railway Budget and the Union Budget. Both benchmarks touched new all-time

highs (26190/7808) on Tuesday’s session before succumbing to selling pressure. A

strong wave of selling pressure swept the index off its feet leading to its biggest percent-

age fall in 15 months. The broader markets bore deeper cuts as the BSE midcap

and small cap indices remained under the profit booking spell and ended down 7.00%

and 7.80% respectively. The 30 share S&P BSE Sensex closed down by 937 points or

3.61% at 25024, while the NSE Nifty settled at 7459, down by 292 points or 3.77%. In-

ternationally major European markets ended the week losing 3-4%. The Asian markets

traded mixed but maintained a negative bias taking cues from the weak US and Europe

markets.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

July 2014

Thirty Days 25347.68

Fifty Days 24733.81

Hundred Fifty Days 22486.98

Two Hundred Days 21986.50


Bank Rate 9%

Repo Rate 8%

Reverse Repo Rate 7%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 22.5%

INR / 1 USD 59.92

INR / 1 Euro 81.68

INR / 100 Jap. YEN 59.25

INR / 1 Pound Sterling 102.74

Commodity Unit Rs / Unit % Change

Gold 10 grams 28315 2.65%

Silver 1 Kg 46068 2.25%

Crude Oil 1 bbl 6070 -2.52%

Base Rate 10.00%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8.0%-9.05%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 7574.96

Fifty Days 7386.00

Hundred Days 6705.74

Two Hundred Days 6549.41

Key Policy Rates and Reserve Ratios

Exchange Rates

July 2014


NEWS

July 2014 Page 7

India’s Forex reserves up by $614

million

India's foreign exchange reserves rose by

$614.6 million to $316.39 billion for the

week ended July 4, Reserve Bank of India

(RBI) data showed. The reserves had

increased by $856.6 million to $315.77

billion for the week ended June 27, led by

a sharp jump in overseas currency assets.

According to the RBI's weekly statistical

supplement, foreign currency assets, the

biggest component of the forex reserves,

jumped by $760.6 million to $286.57

billion. The foreign currency assets had

grown by $850.9 million to $288.81

billion for the week ended June 27.

Wall St edges up; indexes post losses

for week

U.S. stocks managed to score modest

gains on Friday, but the S&P 500 posted

its biggest weekly drop since April as

investors showed only mild enthusiasm

after getting their first glimpses of

earnings. Shares of Wells Fargo & Co.,

which fell 0.6 percent to $51.49, were in

the spotlight as the biggest U.S. mortgage

lender was the first major U.S. bank to

report earnings. Wells Fargo's results will

be followed next week by earnings from

Citigroup, Goldman Sachs, JPMorgan

Chase and Bank of America.

Internet names ranked among the day's

biggest gainers, with shares of

Amazon.com Inc up 5.6 percent at

$346.20, and eBay Inc up 2.3 percent at

$51.50. The Dow Jones industrial average

rose 28.74 points or 0.17 percent, to end

at 16,943.81. The S&P 500 gained 2.89

points or 0.15 percent, to 1,967.57. The

Nasdaq Composite added 19.29 points or

0.44 percent, to 4,415.49. For the week,

the Dow ended down 0.7 percent, the S&P

500 slid 0.9 percent and the Nasdaq

tumbled 1.6 percent. A sharp drop in oil

prices slammed energy shares, with U.S.

crude futures settling down more than $2

a barrel. Shares of Exxon Mobil were

down 0.8 percent at $101.74 and were

the biggest drag on the S&P 500.

German business lauds India’s budget,

ready to invest in country

German companies are ready to invest in

India at the first signs of growth recovery,

while Finance Minister Arun Jaitley's

maiden budget shows the NDA

government is taking the right direction,

German business leaders said here

Friday. Germany is India's biggest trading

partner in Europe and ranks among the

top 10 countries by origin of foreign direct

investment (FDI) into India.

What has impressed the German industry

heads is that the government intends to

facilitate private business and foreign

investment. The union budget for 2014-

15 has raised the FDI cap in defence and

insurance upto 49 percent, with majority

control of ventures being retained in

Indian hands.

Apple holds iWatch release till

November

Apple iWatch is not likely to enter the

market until November. Earlier, it was

rumored that the much-awaited gadget

would probably see an early launch but a

report said that the launch date has been

deferred owing to both hardware and

software related complications. According

to the Mashable, KGI analyst Ming-Chi

Kuo has confirmed the delay and said

that the estimated time of iWatch mass

production has been extended from late

September to the middle or end of

November.

FINANCIAL KNOWLEDGE

Aerospace jamboree on tenterhooks

over F-35 fighter, Airbus jet revamp

Suspense over the appearance of

America’s newest combat jet, a diplomatic

chill between the West and Russia and

the re-launch of an Airbus jet with a

surprise tweak in its name could make

the Farnborough Airshow one of the least

predictable for years.

While the world’s largest aerospace event

is traditionally a cauldron for new

technology and dazzling flying displays,

technical problems forced the F-35 Joint

Strike Fighter to withdraw from a warm-

up event and Farnborough's aircraft list is

already crossed through with several high

profile no-shows. The July 14-20

gathering will go ahead without the brand

new Bombardier (BBDb.TO) C-Series or

popular Russian fighter displays. Qatar

Airways has withdrawn its Airbus A380

superjumbo, saying the still undelivered

plane is not yet ready.

China demands wall around wealth

management sector to cut risk

Chinese banks must create a firewall

around increasingly popular wealth

management services, the country's

banking regulator urged, in order to avoid

any contagion from higher risk products

spreading to normal bank loans. Banks

must establish a separate department to

carry out wealth management business

by the end of September, the China

Banking Regulatory Commission (CBRC)

said on its website on Friday.

Thirsting for higher returns, China's

wealth management sector has exploded

in recent years, hitting around 12.8

trillion yuan ($2.06 trillion) by the end of

May. But the opaque nature of the sector

has fed concerns about its health. New

rules require banks to set up separate

departments for risk management,

accounting and statistical analysis for

wealth management services, and give

details for each wealth management

product individually.

Stock indices flat as Portugal fears

ease; oil down sharply

Major global equities markets steadied

and the yen stabilized against the U.S.

dollar on Friday as worries about

Portugal's biggest bank ebbed, while oil

prices dropped on easing concern about

supply losses in the Middle East. MSCI's

All-World Index, however, was still down

1.6 percent for the week, while the

Standard & Poor's 500 index was on track

for its worst week since April.

Early U.S. earnings reports sparked some

caution for U.S. stock investors, with Well

Fargo's shares down 1.2 percent after the

bank for the first time since 2009 did not

increase its earnings-per-share from the

preceding quarter.

US sets duties on South Korean steel

pipe in about-face

The U.S. Commerce Department on

Friday set duties on South Korean steel

pipe used in the oil and natural gas

industry, reversing itself in one of the

most contentious trade disputes in years

after hefty lobbying from U.S. producers

and lawmakers. The turnaround cheered

domestic steel companies battling a surge

in imports from foreign rivals looking to

cash in on surging demand for the

specialist pipes due to a boom in U.S.

shale drilling.

Duties will lift pipe prices and tighten

supplies, helping companies like United

States Steel Corp.

FinNiche

NEWS

July 2014

FinNiche

Fun Corner

FinQuiz 1. A —— loan is a short term loan availed until a longer term financing is obtained? 2. A certificate of debt is called ———-? 3. The measure of continuous rise in the worth of an asset is called ———-? 4. The value of an asset based on its original cost of purchase excluding the deprecia-

tion and other devaluing costs is called ———? 5. ———- is funds available for borrowing?

CARTOONS

FUN CORNER

Page 9

Rush in your entries to : [email protected] The right entries will get their name featured in the next issue of FinXpress. So hit the quiz fast & get yourself visible among 1000 odd in the campus.

Feel free to write to us at : [email protected]

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Publisher: Mukul Gupta

July 2014

Last Week’s Answers

1. Linkers 2. Baldev Singh 3. The Taj palace and tower 4. Spicejet 5. Tata Indica

Last Week’s Quiz Winners

Kushal Kapoor Ravi K

Sarthak Awasthi Mili Handa

finxpress july 13 2014

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