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Dear Friends,
Greetings from Team InFINeeti
A lot has changed since the last me we interacted. A new government has been formed, the Union budget has been pre-
sented, the Sensex has touched a new high of 25000 and many more events. Before the elecons, a slogan from BJPs
naonal campaign had become famous, Ache Din Aane Wale Hai. The masses have voted for the party and aer three
decades, a single party has won a majority in the Parliament. There were high expectaons from the new government.
The rst test of the new government was to present a balanced budget which clearly lays down the roadmap for econom-
ic growth in India in both-short and long term. So, our theme for the magazine this me is based on the slogan of BJP:
Union Budget: Has budget met the expectaons of Ache Din ?
Technology, nowadays, is touching every sphere of business. Banking is no excepon. We have tried to analyse the role of
technology in shaping the banking industry. Also, we are hearing about GST for long enough. One of our arcles analyses
the future of GST in India. Many people believe that the one of the reasons for the fall of the last government can be
aributed to populist schemes by the centre and corrupon emanang from those schemes. We have tried to analyse
whether populism or raonal economic policies work in the longer term.
Financial sector is in dire need of reforms. Most of the laws are archaic and date back to the Stone Age. In this backdrop,
FSLRC commiee was formed which tabled its recommendaons. One of our arcles analyses the recommendaons
made by the commiee. In our constant tryst to innovate, we have tried to amalgamate two unrelated events into one.
One is the recently concluded FIFA World Cup and the other one is M&A. How football and M&A can be related? We have
an interesng arcle on it. The magazine also contains the analysis of dividend distribuon tax and FDI in Insurance, and a
discussion on whether they are good or not. This is the me of the year when B-school students have returned from their
summer internship. So, we have captured the experience of one of our colleague regarding how summer internships are
important to understand the nuances of business in a MBA students life. We then have tried to get an insight into the
Indian Agriculture sector and Rural Finances by conducng an interview with a dignitary from NABARD. We have also in-
cluded an arcle on implementaon of IFRS in India.
Besides the insighul arcles, the edion also features regular columns like FIN Trivia, FIN-lingos and News Chronicles.
We have also added a new regular column on equity research. We hope readers will nd it useful.
From the next me onwards, the readers will be greeted by our new team and we, the current team, have a sense of
pleasure, pride and at the same me are poignant as it was an excellent opportunity given to us to handle this esteemed
magazine. We hope that we have done a good job.
Till then we hope that you will enjoy reading this annual budget edion.
Do write to us regarding any suggesons, feedbacks or recommendaons.
Goodbye & Happy Reading !!!
FROM THE EDITORS DESK 3
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CONTENTS2 CONTENTS4
>>> P 26 >>> P 36 >>> P 56
Football MA:
A M&A
5
Budget plus 3.0:H
IIFT
9
Future of gst:A & - - GST
12
Top events of 2014:Rw 2014
24
Role of technologyin banking:
A - , &
26
COVER
STORY
N LYSISOFTHE
UNIONBUDGET
Does the budget meet the
expectations of Ache Din
8
Fslrc recommenda-tions:
Hw FSLRC -
-
45
EXPERT SPEAKS
FIN LINGOS16
EQUITY RESEACRH PRE-CURSOR36
49
Ifrs implementation
in india:
B IFRS
53
NEWS CHRONICLE
R
40
Dividend distribu-tion tax:
Hw
.
A -
?
32
Facultys corner:
FDI I
Populism: A neces-sary evil?
I-
Summer internshipexperience:
S Aw
RBI
61
56
60
63 FIN TRIVIA
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5
INTRODUCTION
Football has oen been used as a powerful image
represenng hope, as a vehicle that binds people and
encourages them to funcon as one, giving them a
sense of purpose and direcon. There is even an ad-
versement that shows kids playing football with a
rag ball in a poverty stricken locality in Africa, a strong
testament to the overwhelming senmental appeal
and sway that football holds over the masses. Club
football has cashed in on this popularity and has
transformed itself into elaborate money making ma-
chine that is on par with the leading corporate giants
of present day, in terms of revenue streams and mar-
keng campaigns.
SOURCES OF REVENUE
How do soccer clubs make money? It is a very simple
queson that many fans of the game oen wonder
and postulate but seldom fully understand. Most rst
answers to this queson would be match-day sales,
but there are those with a deeper understanding of
the industry that know that this is not quite the full
story. Deloies Football Money League reports the
revenue of top football clubs by broadly classifying
the revenue into 3 main segments: Match-day Reve-
nue (gate receipts), Broadcasng Revenue (domesc
and internaonal), and Commercial Revenue
(sponsorship and merchandise). As per a 2013 report,
Real Madrid earned revenue of $675 million during
the last year and has a team value of $3 billion as of
May 2014, of which $1.12 billion (32.6%) is to beearned through commercial sources, another $1.12
billion from Broadcasng, $710 million (20.6%)
through Match Day revenue and the remaining $484
million through brand value.
It is important to understand the growing similarity
between corporates of the nancial world and foot-
balling clubs. For the laer, assets are-players, broad-
cast rights, kit sponsorship deals and franchise deals,
and these are used by the club to make money, not
so markedly dierent from the way corporates make
money. Another curious similarity that can be struck
is the concept of mergers and acquisions (M&A).
FOOTBALL PLAYER TRADE VIS--VIS
CORPORATE M&A
BY-BRAJESH M & NITESH SINGH, IIFT
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6
The idea of M & A, though in circulaon for a long
me, has started gaining purchase over the past few
months, with several big cket deals being an-
nounced; Whatsapp-Facebook, Shire-Abbvie, Myntra-
Flipkart, to name a few.
FOOTBALL TRANSFERS AND CORPORATE M&A
The footballing world is no stranger to the idea of
M&A, though in an enrely dierent context. It is not
possible for football clubs to buy each other, so acqui-
sions are limited to people: the manager, the players
and the markeng and support sta. In fact, the
transfer market, which facilitates the acquision of
players, is the most talked about topic when transfer
windows open, and is fuelled by incessant speculaon
and hecc negoaons. Before we further develop
this analogy, lets take a step back and try and under-
stand why companies in the nancial world go in for
M&A. Though the reasons for such acvies would
vary from case to case, they can be broadly grouped
under a few categories, like capability enhancement,
expansion into other markets, reducon in compe-
on, nancial survival etc. A close examinaon of
transfer deals in football reveals striking similaries
with these points.
CAPABILITY EXPANSION
Capability expansion refers to a companys eorts in
shoring up its resources and improving resistance to
possible weaknesses. One of the major reasons be-
hind acquision is to appropriate some capability that
the target company has and that the acquirer wanted
or needed. Comcasts 2002acquision of AT&T
Broadband (so it could oer more comprehensive tel-
ecommunicaons services) and Walt Disneys 2006
acquision of Pixar(to extend its animaon capabili-
es and add new lms it could market to its estab-
lished audience) come under this bracket. Premier
League clubs have spent more than 4.4bn on players
since the transfer window was introduced 12 years
ago with this summer's spending set to cross 500m.
Post 2008, when Abu-Dhabi-based oil magnate Sheikh
Mansour bin Zayed Al-Nahyanbought Manchester
City FC, the clubs total cash outlay was 930.4m, of
which only 365.3m was generated from their own
operaons. Chelseas acquision of Diego Costa is a
clear indicaon of Mourinhos intenon to adding
some repower to his long depleted strike force, and
providing support to Fernando Torres who oen cuts
a lone gure up front. Luke Shaws move to Manches-
ter United to plug deciencies in le back can also be
viewed similarly. Other familiar names among big
spenders are Barcelona and Real Madrid, who are
constantly on the lookout for promising new talent, to
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maintain their reputaon of being football power-
houses. Roman Abramovich's billions have made Chel-
sea the Premier League's biggest spenders over the
past decade with 681m going on transfer fees.
EXPANSION
Another main movaon behind M&A is to expand
into a new geographic locaon. Examples include the
acquision of Lucent (U.S.) by Alcatel (France) in 2006,
Bhars deal with Zain to buy the Kuwai rm's mobileoperaons in 15 African countries in 2010 and South
African Breweries purchases of Miller (U.S.) in 2002
and Bavaria Brewery (Colombia) in 2005. Extrapolang
this argument to the world of football, a clubs mone-
tary fortunes are linked to the following that it enjoys
across the world.
The more popular a club is throughout the world, the
more point of sale opportunies it will have for fans to
purchase merchandise, thereby lling the coers of
the football club. It would be pernent to talk about
Manchester Uniteds eorts in building up a fan basein Asia, ranging from ocial websites in local lan-
guages (manutd.cn, manutd.jp) to e ups with local
mobile networks for access to free content. All of their
promoonal adversements feature Shinji Kagawa,
their Japanese midelder, in an aempt to connect
with their fans in Japan. Another instance of clubs try-
ing to build their image in new markets is the estab-
lishment of soccer training camps and youth leagues,
as entry points to an expansion in the future.
Many a mes, the raonale behind M&A is to expand
your market share by buying out compeon. Acquisi-
on of Thums up by Coca Cola in 1993 falls under this
category. Thums Up had an 85% market share when
sold, and it made sense for Coca Cola to swoop in and
bring Thums Up under its wings. There are endless
examples for this when it comes to football. A case inpoint is Borussia Dortmunds midelder Mario Gotzes
move to rivals Bayern Munich last summer, followed
by striker Robert Lewandowskis exit to the same club.
Juan Matas move to Manchester United constutes a
rather curious move by Chelsea to purportedly make
life dicult for its contenders Arsenal, Liverpool and
Manchester City.
7
Source:www.wowtechy.com
Source: www.thesportsbank.com
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LEVERAGED DEALS
Many M&A deals take shape of a leverage deal in
which the whole, or a part of a struggling business
enty is taken over by an acquirer, oen one aligned
with its eld of work, so as to open up the possibility
of collaboraon with the acquired business. Mi-
crosos acquision of Nokia, Sun Pharmaceucals
taking over of struggling Ranbaxy are examples for
the same.
A lot of football clubs resort to this measure so as to
avert the risk of nancial crisis. Cash strapped Ju-
ventus, for instance, is trying to make some money
out of the signicant interest that the other clubs
have in key midelder Arturo Vidal. Chelsea veteran
Frank Lampard being ooaded to rivals Manchester
City, is akin to companies geng rid of streams that
are no longer considered core to their business.
CONCLUSION
Having talked of M&A in companies and their similari-
es with transfers in Football, it is important to sound
a word of cauon; the path to a successful deal is lad-
en with numerous obstacles in all shapes and sizes.
Instances of failed deals and failed transfers are many
in number; America Online (AOL) and Time Warner in
2007, Sprint and Nextel Communicaons in 2005,
Motorola and Google (2012); the list is depressingly
long. A Forbes arcle states that the probability of
success of an M&A deal is about 50%, a coin toss. The
football world is also replete with instances of failed
transfers; Marouane Fellaini to Manchester United,
Fernando Torres to Chelsea, Andriy Shevchenko to
Chelsea, Mario Balotelli to Manchester City. It is
therefore imperave to understand to the last detail,
the implicaons of a possible merger, or a player ac-
quision, for a deal once signed cannot be undone soeasily.
Source:www.etoro.com/www.manutd24.com
Source: www.iamwire.com
8
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OVERVIEW
The third edion of the annual budget analysis ses-
sion, Budget Plus 3.0, was organized at Indian Ins-
tute of Foreign Trade, Kolkata. The esteemed discus-
sion panel included Dr. K. Rangarajan, Head, Kolkata
Center, Dr. Ranajoy Bhaacharyya, Professor of Eco-
nomics, IIFT, Dr.Saikat Sinha Roy, professor of eco-
nomics, Jadavpur University, Mr.Pankaj Agarwal and
Mr.Akash Mansinka from Ernst and Young. The discus-
sion was moderated by Dr. Bibek Ray Chaudhuri,Pro-
fessor, IIFT.
Dr. K Rangarajan welcomed everyone and said that
the Budget aects everyone from a housewife to a
business tycoon and how everyone has diverse views
on it. He added that IIFT has invited academicians,
faculty and industry experts to have a discussion on
the budget and what it holds for every one of us.
The Student Body gave an enlightening presentaon
on the highlights of the budget. It was a succinct over-
view, throwing light on the various schemes and ini-
aves taken by the Government. Dr. Bibek Ray
Chaudhuri threw light on the developmental per-
specves and spoke on how he looked forward tothe economy geng back on track with higher
growth, stable inaon and prudent policy system,
9
http://cc.iift.ac.in/docs/iift/profile.asp?id=7http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=29http://cc.iift.ac.in/docs/iift/profile.asp?id=78/11/2019 InFINeeti August2014 Annual Edition
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although the Consumer Price Index, being double-
digit, was sll a major issue of concern. The Budget
lays out the roadmap to achieve a growth rate of 7 -
8%. According to him, The Government is targeng
small savings".
Dr.Saikat Sinha Roy analyzing the budget
Dr.Saikat Sinha Roy spoke as to how, for the last two
years, the economy has not been performing well.
The trust of the investors in the Economy needs to
be restored. According to him, the budget is a docu-
ment of intent. The current government manifesto
included the need for an overhaul of infrastructure
by which the Government will get revenue. He said
that subsidies should be phased out for the Indian
economy to compete with the other economies.
Although the current government is perceived to beindustry friendly, yet retrospecve taxes have not
been taken o. According to him, one of the fea-
tures of the budget dierent from the earlier ones is
that most of the changes are for more than two
years and no meline has been specied. Moreover
tax benets have been given to the industries that
have their own power units. Dividend distribuon
tax, the tax paid by a company on its dividends paid,
needs to be grossed up".
Students listen as experts dissect every aspect of the budget
Mr. Pankaj Agarwal spoke on the indirect taxes which
comprises the customs, excise and service tax. He en-
lightened the gathering on how Service Tax, though
introduced only in 1994, garners the highest tax reve-
nues for the Government.
He also pointed out the iniaves taken to incenvize
the use of renewable energy resources. The decision
of the Government to levy taxes on the services pro-
duced by the educaonal instutes will add to the
revenues of the Government.
Dr. Ranajoy Bhaacharya took a dierent stance from
the other panelists and remarked that he was
disappointed by the budget. He said that the Gov-
ernment had missed a huge opportunity. Having been
elected with an overwhelming mandate, it
10
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was me to take some hard measures. According to
him, the budget was a pure eyewash. He quesoned
the transparency of the Government and its aempt to
surrepously reduce expenditure behind the
scenes, referring to the reducon in the expenditure
on Agriculture, Rural Development and Social sector.
He remarked that Agriculture is the main boleneck
in India and enlightened us on the fact that Agricul-
ture employs 55 percent of the populaon yet ac-
counts for only 14 percent of the GDP. This structural
aw needs to be addressed.
The audience, comprising of students from IIFT, were
very parcipave and had various quesons ranging
from the duraon of the long term capital gains to
increasing FDI in defense.
The panel concluded that though the budget was
welcoming, yet more was expected of it. They
called in for simpler tax administraon that would
lead to larger tax compliance.
All in all, the session was quite enriching and informa-
ve as students, both from the rst year as well as
from the second year got to understand the nuances
of the budget and also understood how to dissect the
niy-griy of the budget. So, from next me onwards
they would know what to look for in the budget and
would be in a beer posion to analyze it.
By Mohd Zeeshan -IIFT
11
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INTRODUCTION
The most awaited Goods and Services Tax (GST), a
major reform in the Indian taxaon system with re-
spect to indirect tax, has been announced in the Un-
ion Budget of 2014. Every industry is looking forward
to this transformaon with the posive hopes. There
are quesons in the minds of people from every sec-
tor of economy regarding the impact of the changes
that would be brought by GST. The manufacturers,
wholesalers, retailers and the consumers are waing
to know their stake associated with the reform.
BACKGROUND
The current tax system is inecient and complicated
due to the tussle between the central and the state
governments to generate maximum revenue forthem. Central government levies tax on the manufac-
ture of goods through CENVAT, on services through
Finance Act and on the sale of goods through Central
Sales Tax Act (CST). States again levy taxes on the
sales of good that is independent of the tax levied by
the Centre. This mul-layered tax system leads to the
cascading eect on the indirect taxaon system.
However, aer the introducon of VAT in 2005, the
cascading eect has been reduced to a certain ex-
tent. Moreover, the bulk of the tax revenue goes to
the central government. So in order to compensate
the state government it levy mulple indirect taxes
on the revenue generated from goods, for example
inter-state sales tax, octroi etc.
The proposed GST is aimed at replacing mulple indi-
rect taxes like central excise, VAT, service tax with the
common taxaon system. And this can have major
implicaons on the Indian economic growth. GST
would bring in higher revenue for the government by
broadening the tax base and minimizing exempons.
This would also redistribute the tax burden equitably
between the manufacturing and the service industry.
THE PROPOSAL OF DUAL GST
The current proposal of dual goods and service tax
will not disnguish between goods and services. And
the central and the state GST would be levied on the
taxable value of the transacon. Except few assump-
ons, all the goods and services would be covered
under this scheme.
Currently the indirect taxes on goods is around 20%
and services are taxed at around 10%. But once the
GST IS THERE ANY
FUTURE?
BY-SNEHA SHRIVASTAVA,
IIM-RAIPUR
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T
GST is implemented, the nal rate for GST is expected
to be around 14-16%. Further, the proposal has been
put for the dual tax structure which will impose single
tax rate for services and mulple tax rates for the
goods.
WHAT WILL EXACTLY HAPPEN?
The implementaon of the goods and services tax
would impose a single tax on the goods and services.
At the end the amount of tax the consumer has to
pay will remain almost same in the short run. But the
distribuon of taxes would be equal on both the
manufacturing and services sector. This will reduce
the extra burden that the manufacturing sector is car-
rying. Moreover, it will broaden the tax base by mini-
mizing exempons and scope of corrupon by mak-
ing the taxaon system more transparent. The cas-
cading eect of the taxes imposed by the centre and
the state would disappear.
IMPACT ON THE SUPPLY CHAIN AND LOGISTICS:
Currently due to the complex tax structure the inven-
tory and the distribuon decisions are taken so as to
avoid as much tax as possible. The manufacturers
maintain warehouses in dierent states to save on
central sales tax imposed on inter-state movement of
goods. This leads to the operaonal ineciency. Fur-
ther, the impact of the increase in the number of
warehouses is borne by the end consumer in terms of
cost or they have to sacrice on quality.
But the GST will bring a common and centralized mar-
ket for the sales of goods and services across the coun-
try. This will increase the operaonal eciency of the
supply chain and the benet will reach to the end con-
sumer as well.
IMPACT ON GDP:
Due to the transfer of major share of indirect tax col-
lected to the centre, state levies mulple indirect taxes
on the goods and services. To avoid this the taxpayers
play with the loopholes in the tax structure and try to
avoid paying the tax, leading to larger number of ex-empons. This leads to losses for the government.
But, the implementaon of GST would bring in trans-
parency and reduce complexity. It will broaden the tax
base and would redistribute the burden between the
manufacture and service sector. Further, under GST all
the goods and services would be covered and the num-
ber of exempons would be reduced. And this will gen-
erate more revenue for the government.
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T GST
The center and state will have their xed share and
there would not be scope of either unnecessary tax
imposion or tax avoidance. This will bring more in-
vestment, generate more employment and would
promote exports. All this together would add to the
GDP of our country.
IMPACT ON THE MANUFACTURING SECTOR:
As discussed above the manufacturing sector has
been pressed with the extra burden of tax as it pro-
vides the scope for mul-stage taxaon. This has
made this sector less aracve for investment.
But the GST would release the ailing manufacturing
sector from the heavy tax burden. This would make
this sector as a protable opon which would spur its
growth. As a result, cost of producon will decrease
and export will increase.
IMPACT ON THE PRICE OF GOODS:
In the long run, the price of goods would decrease as
the prot earned in the upper end of the supply chain
would be transferred to the consumers as well.
IMPACT ON THE SYSTEM:
The reform will increase the eciency of the system
by bringing in transparency. The dierent sectors
would be treated equally and the consumers would
have to pay the fair price for the goods and services.
The transparency will bring compliance to the govern-
ment norms and would reduce corrupon.
For example, in case of the goods manufactured, sup-
pose the consumer pays the GST of 6% while buying
the product. Here the tax amount paid by the consum-
er would be shared by the manufacturers, wholesalers
and retailers equitably based on their cost of manufac-
turing or services.
ANALYSIS-FOR THE FUTURE OF GST
With respect to the prior experience -Implementaon
of VAT in 2005-2008:
The implementaon of value added tax (VAT) in 2005
had increased the income tax revenue for the govern-
ment of India to 5.9% of GDP in 2008 when compared
to the 3.7% of GDP in 2004. Working on the
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similar lines of VAT, GST could also reduce the com-
plexies in the tax structure which gives the scope of
corrupon. It will bring transparency which will in-
crease the revenue generated from the income tax.
WITH REFERENCE TO OTHER COUNTRIES:
According to the report published by the Naonal
Council of Applied Economic Research, implementa-
on of GST would increase GDP by 0.9%-1.7%. Canada
experienced 1-2% increase in GDP aer the imple-
mentaon of GST. On the similar lines, when GST was
introduced in New Zealand in 1987, it increased the
revenue generated from tax by 45%.
Currently, there are 160 countries in the world who
have adopted GST.
WITH RESPECT TO THE BJPS ELECTION MANIFESTO:
BJP government is strongly in the favor of bringing
transparency in the tax system and the growth and
development of all the sectors of economy. The evi-
dence collected from the implementaon of VAT in
India in 2005 and the implementaon of GST or VAT in
other countries shows the brighter picture. It reveals
that the centralizaon of the taxaon system and the
single tax rate for both the goods and services would
reduce the complexity and would bring in more trans-
parency. It would reduce the scope of red tape and
tax avoidance or exempons, which is otherwise pos-
sible in the exisng taxaon system.
CONCLUSION
To summarize, the implementaon of GST would not
have direct impact on the consumers in the short run,
as they have to pay almost same tax for the consump-
on of goods and services. However, in the long run
the benets earned by the manufacturers, wholesalers
and the retailers would be passed on to the consumers
and they have to pay lesser on the purchase of goods.
Moreover, the burden on the manufacturing sector will
get reduced as there will be equitable distribuon of
tax between the manufacturing and services. This will
encourage investments in the manufacturing sector,
which is currently lagging behind in our country. The
boost in the manufacturing sector will create the col-
lateral benets like increase in employment, exports,
investments opportunies, FDI etc.
All these factors would together add to the revenue
generated from the indirect tax and would accelerate
the growth of the country.
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16
CHINESE WALL
It is the communicaon barrier
that should exist between
dierent departments of a -
nancial instuon to avoid any
possible conict of interest.
For example, if a rm oers both brokering and cor-
porate advisory services, the client should be able to
trust that the sensive informaon which it is shar-
ing with the advisory department would not be used
by the brokering department to make undue nan-
cial gains.
INVESTMENT GRADE
It is a rang system that indicates the risk of default
for a bond issued by a company or a sovereign.
There are bond rang agencies such as Standard &
Poors, Moodys and Fitch among others that assign
rangs to corporate, municipal or sovereign bonds.
These rangs correspond to the risk involved in buy-
ing these bonds.
CLUB DEAL
It is a private equity buyout in which the controlling
interest in a company rests with several dierent
private equity rms. This
group pools its assets togeth-
er and collecvely makes the
acquision. PE rms do this
in order to acquire expensive
companies which they would not have been able to
acquire going alone. Also, it is an eecve risk man-
agement strategy since the risk is now distributed.
CONDITIONS PRECEDENT
The set of condions that a borrower must meet
before he can request that credit facilies be madeavailable to him. These condions are a part of the
lending agreement that the borrower might have
with a bank or nancial instuon.
Fin Lingo
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FALLEN ANGEL
It is a security which was once in-
vestment-grade but has since been
downgraded to junk status. Not all
fallen angels are securies of com-
panies headed towards bankrupt-
cy. For example, a company with
strong fundamentals may temporarily lose investor
condence due to extraneous factors. This may result
in a downgrade of credit rang.
EXCHANGE TRADED FUND
An investment fund that holds stocks, bonds or com-
modies and is traded on an ex-
change like a regular stock. An ETF
tracks an index and tries to replicate
the return provided by it. For exam-
ple, when one buys into an ETF
tracking the Sensex, they are buying into a porolio
of stocks being traded there. The objecve here is not
to outdo the performance of the Sensex but to match
it.
CALL SWAPTION
Call Swapon is a category of op-
on which gives the owner a right
but not the obligaon to exercise
a swap. If exercised the buyer would have the right to
receive a pre-determined xed interest rate. Swap-
on is short for call swap opon. It is a hedging tool a
buyer might use if he believes the interest rates are
likely to go down.
PITCHBOOK
A book of graphs, charts and market data along with
recommendaons for the
market presented to prospec-
ve clients by bankers and
nancial instuons. The ob-
jecve is to land a mandate to
handle the clients funds.
MATERIAL ADVERSE CHANGE (MAC)
Material Adverse Change (MAC) is a condion that is
usually included in loan agreements,
providing protecon to lenders
against changes that may have a sig-
nicant eect on the business, nan-
cial condion and assets of the bor-
rower. Aer the occurrence of a
MAC event prior to closing of a deal, lenders usually
reserve the right to modify the interest rate or other
terms of the agreement. For already closed deals,
lenders may refuse any further drawing of cash and
demand immediate debt repayment.
Fin Lingo
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COVER STORY 19
INTRODUCTION
Elecon 2014 was a very high voltage aair where
many promises were made by our policians to bring
the economy back on track. The current government
carries the expectaons of a billion plus populaon to
salvage the economy from the deep economic mess it
is currently in. With this backdrop the Union budget
2014 was tabled on 10th July in Parliament by our Fi-
nance Minister Mr. Arun Jaitley. The Finance Minister
had limited me at his disposal to come up with any
big bang reforms. Nevertheless he was successful in
making some good decisions in the Union Budget. The
Finance minister announced a slew of measures for
correcng the economy in elds of manufacturing,
job creaon, educaon, banking and infrastructure.
So, although the budget measures may not be the big
cket reforms that people were expecng but these
same measures have the potenal to cause transient
but crical changes in the system. Some of the key
measures that the government took could have a very
posive eect on the economy.
MANUFACTURING BOOST
The Budget has specied a number of measures to
recfy the manufacturing sector and bring it back on-
to the growth track. The budget has announced steps
to raise private consumpon and make manufactur-
ing industry the future wheel that will drive the econ-
omy. Steps such as extending excise duty cuts on vari-
ous products like auto and consumer durables can
help in raising the private consumpon and spruce up
capacity ulisaon.
Source: Ministry of Stascs and Programme Imple-
mentaon
Infrastructure push in the form of beer road connec-
vity could push the demand of automobiles in our
country thus giving a boost to the industry that has
been in stagnaon for the last couple of years. The
biggest advantage of the growth of manufacturing
sector is that the eects are more prominently visible
in the rural areas than the urban areas.
BUDGET ANALYSIS : KYA ACHE
DIN AANE WALE HAI?
BY SURYANARAYAN PANDA
-IIFT
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So, manufacturing is the best tool to reduce the Urban
-rural income divide.
INFRASTRUCTURE PUSH
A greater thrust on the infrastructure was unmistake-
able in the Union budget. The overall spending for in-
frastructure is budgeted to increase by 24% to
210000 crores. The government has allocated 7060
crores to setup 100 smart cies. This will not only
boost the infrastructure sector but will also provide
low cost housing opons to the millions of poor peo-
ple who cannot aord proper housing.
Source: Ministry of Finance
The Budget has also focussed on ways to fund the In-
frastructure push by seng up of 3P India enty and
Infrastructure bonds. This could create a massive push
for beer infrastructure and the direct beneciaries
would be the Engineering, Procurement and Construc-
on (EPC) companies. The government has idened
that 40% of Indians do not have basic sanitaon facili-
es and the government has not provided its share of
facilies. The basic infrastructural issues like sewage
drain and access to roads could be addressed in the
Infrastructural push of the government thus improv-
ing the standard of life of average Indians.
INCREASE OF TAX EXEMPTION
The Finance Minister increased the basic tax exemp-
on rate from the current 2 Lac to 2.5 Lac for all
individuals. For women and senior cizens between
the age group of 60 to 80 years the basic exempon
rate is increased from 2.5 Lac to 3.0 Lac. The invest-
ment related deducon under secon 80C has also
been increased from 1.0 Lac to 1.5 Lac. These in-
creased tax exempon rates may cause a revenue loss
of 22000 crores to the government. However, the
increased tax exempons will ensure greater money
with the consumers, thus increasing the disposal in-
come with the general public. This will increase con-
sumpon and this will get reected as higher econom-ic acvies. The indirect beneciaries of the raising of
tax exempon could be FMCG, consumer durables,
two wheelers companies as well as the housing indus-
try in the form of increased consumpon.
EASE OF DOING BUSINESS
Investor senment is very important for the accrualof required investments to fund our economic growth.
Hence, the ease of doing business is a very important
factor that any country should keep in mind. Sadly,
India ranks at 134 out of 189 countries in the Interna-
onal Finance Corporaons Ease of Doing Business
index. The Finance Minister has taken a few steps in
this regard to give a llip to the overall operang envi-
ronment for an investor. These steps should incenv--
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COVER STORY 21
-ise value addion, generate income and create more
jobs for an average Indian thus improving the overall
environment for doing business. Moreover it couldalso make the Indian investment story aracve for
foreign companies and could aract highly needed
foreign funds.
Source: Ministry of Finance
INCREASE IN FDI IN DEFENCE
The Union budget presented a 12.43% hike in de-
fence budget to 229000 crores of rupees. The Finance
Minister, who also holds the porolio of the Defence
ministry talked about the important task of indige-
nous producon of defense equipments. To boost
home producon, the Finance minister hiked the FDI
in the defence sector to 49% from the earlier 26%.
The government has taken a sound decision by de-
linking FDI up to 49% for transfer of state of the art
technology. The primary focus of the government isto reduce the dependency of the security of the na-
on on supplies by other countries. Given the large
domesc market and advantage of operang out of
India this new policy could give an impetus to domes-
c manufacturing of defence equipments by domes-c companies. It could also aract those foreign com-
panies that were looking to invest in Indian defence
manufacturing as part of the earlier Defence Oset
Policy.
PUSH TO EMPLOYMENT CREATION
The budget has allocated 330 crores to set up 6
mega clusters around the country to boost the em-
ployment opportunies in the country. The budget
has also reduced the excise duty in labour intensive
sectors like footwear from 12% to 6% for footwear
priced between 500 to 1000 and few specic foods
packaging industries from 10% to 6%.
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The small and medium enterprises (SME) sector em-
ploys 8% of all the employees in our country. Giving a
boost to the SMEs of our country, the nance minis-
ter announced a 10000 crores fund to back early
stage companies. This is a huge respite for start-ups
in need of money and this will boost their ability to
survive.
Another employee intensive industry that receivedgood government aenon is Tourism. The budget
has proposed to create ve tourist circuits at a cost of
500 crores and proposed to launch the E-Visa facili-
ty. Such small incremental steps like E-Visa facility for
foreign tourists can create a vast change in the num-
ber of foreign tourists arrivals especially when the
number of foreign tourists arrival proporonate to
populaon of our country is one of the lowest in the
world and there is a huge upside to achieve on this
front.
In our country where the working populaon cons-
tutes 64% of the enre populaon, tourism and man-
ufacturing are two spheres that could create enough
jobs. Moreover, due to requirement of less invest-
ment in tourism sector, our country can aord to in-
vest and develop this sector. The skill requirements
for an employee working in a manufacturing rm arefar less than the skill requirements of an employee
working in the service sector. Hence, boosng the
manufacturing industry could be a pragmac way to
create low skilled or middle skilled jobs so that peo-
ple could move away from agriculture related low
paying jobs to beer paying manufacturing jobs.
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TAME INFLATION
The government has encouraged states to allow
seng up of private agriculture market in order to
keep a check on the state sponsored APMCs. This will
increase eciency in terms of mely delivery of pro-
duce as well as will reduce the food wastage. Key
measures like price stabilisaon fund and higher
budgetary allocaon for rural infrastructure and
warehousing were announced in the budget that will
improve the supply chain of agriculture products as
well as will ensure the mely arrival of essenal sea-sonal crops like onions etc.
ACHE DIN AANE WALE HAI
The measures undertaken by the government in the
Union budget shows the serious eorts put in by the
government. The measures may be small and incre-
mental but such small measures will go a long way in
transforming our economy locked in low growth and
high inaon. I believe that the government has put its
sincerest eorts in making the budget a pragmac
budget that touches the life of every Indian in a posi-
ve way and hence I believe that the elecon promises
of Ache Din Aane Wale Hai that was made by our poli-cians seem quite plausible.
COVER STORY 23
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MR. ARUN JAITLEY BECAME THE FINANCE MINISTER
Mr. Arun Jaitley took over the oce of the Finance
minister under the cur-
rent NDA rule in the 16th
Lok Sabha. Mr Jaitley,
who holds a Law degree
from the University of
Delhi, got the plum post
along with the Defence porolio.
AIRASIA ENTERS INDIA
Asia's biggest low-cost
carrier, the Kuala Lumpur-
based AirAsia, oated a
joint venture with Tata
Sons, the holding compa-
ny of India's largest con-
glomerate, and Telestra
Tradeplace, an investment vehicle of the Bhaa fami-
ly, to launch a new airline in India called as Air Asia
India. AirAsia will have 49% stake, Tatas 30% and
Bhaa will hold 21% in the company, which will be
headquartered in Chennai.
VISHAL SIKKA TO BE THE NEW CEO OF INFOSYS
Infosys appointed its rst out-
sider to head the company, hop-
ing new blood will help in its
struggle to stay compeve, as
it tries to evolve from a low-cost
outsourcing company into a
global technology brand. India's second-largest so-
ware exporter said Vishal Sikka, a veteran of Ger
man soware company SAP, will take over as manag-
ing director and chief execuve.
FLIPKART ACQUIRES
MYNTRA
Flipkart India Pvt Ltd, the
countrys largest e-
commerce rm, ac-
quired rival Myntra.com
in the largest-ever deal in the countrys e
-commerce
market. Though the two Bangalore-based companies
did not disclose the merger amount, analysts es-
mates suggest the cash-and-stock deal is likely to val-
ue online fashion retailer Myntra at more than $330
million.
$100B BRICS FUND TO
TURN CONCRETE IN RIO
The BRICS naons formally
announced the seng up
of a $100-billion fund,
which will help member
countries de over a cur-
rent account decit crisis, at their h summit in Bra-zil. China will be the largest donor to this fund and is
expected to contribute around $41 billion. India, Rus-
sia and Brazil will contribute $18 billion each with
South Africa bringing in the remaining $5 billion.
SUBRATA ROY IN TIHAR JAIL
Subrata Roy, the amboyant chairman of the nan-
cial services group Sahara India Pariwar and owner
TOP FINANCIAL EVENTS OF 2014
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of properes such as New
Yorks Plaza Hotel and a
stake in Indias only For-mula One racing team,
surrendered to police
aer the naons top court issued a warrant in a
probe into whether he failed to refund US$3.9 billion
to his depositors.
FLIPKART VALUED AT $7 BILLION
Indias biggest online retailer has
received as much as $1 billion in
fresh capital from its exisng inves-
tors including Tiger Global, Naspers and Singapore's
sovereign wealth fund GIC. Singapore's GIC became
the latest investor to put its faith in India's largest
online retailer. The fund raising, the largest-ever by
an Indian start-up and among the largest-ever by any
Internet start-up globally, values Flipkart at over $7
Billion.
TCS AT RS 5 TRILLION
TCS, Indias most valuable company based on market
cap, crossed Rs. 5 lakh crores in market value, a big
achievement considering the tough business environ-
ment it has been operang in. It has also found itself
a berth among the global top ve business soware
companies. The market value of TCS is more than
that of the next four Indian IT companies combined,
and exceeds that of the other
Tata Group rms put together as
well. Sustained growth momen-
tum over the past four years rel-
ave to peers is the key factor that has kept the
stock buzzing. In addion, a special dividend of 40
declared last week has aracted investors.
INDIA BLOCKS WTO DEAL ON TFA
India sculed the Trade Facilitaon Agreement (TFA)
which is part of the Bali
package at the WTO be-
cause it was not sased
with the progress on
nding a permanent solu-
on to the issue of allow-
ing it higher public stockholding of food grains. Last
ditch aempts to meet the 31 July deadline to
make the TFA a WTO rule failed as India did not sup-
port the move. At the heart of the problem is a rule
that caps subsidies to farmers in developing countries
at 10% of the total value of agricultural producon,
based on 1986-88 prices. Developing countries com-
plain that the base year is out-dated and that they
need to be provide food security
to the poor.
MICROMAX BEATS SAMSUNG
Home-grown domesc phone
vendor Micromax has unseated Samsung in India as
the top handset seller in the 2nd quarter of 2014. A
study conducted by technology market research rm
Counterpoint Research says that with a 16.6 percent
share of the mobile market, Micromax is followed by
Samsung with a 14.4 percent market share. However,
in the Smartphone segment, Micromax is sll placed
second with Samsung holding nearly 25 % market.
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INTRODUCTION
Shabby interiors, grilled counters, disinterested o-
cials, ceiling touching les, never ending queues to
spick-and-span oces, open counters and data hun-
gry computers, this has been challenging journey for
banking industry.
Ever since the incepon of banking system in India
from the early establishment of Bank of Hindustan in
1770 to its current state; banking system has con-
stantly been evolving. Naonalizaon of major pri-
vate banks in 1969 was one of the leading milestones
in the history of banking in India that made bank ac-
cessible to unbanked populaon of India. But the
most signicant change was the opening of Indian
economy towards the global economy that brought
the paradigm shi in the banking system in India. Lib-
eralizaon broke the shackles of the sector which ll
then operated in restricted mode. With the arrival of
foreign tech savvy banks, the public sector banks
were forced to restructure the banking operaons to
have a compeve edge.
ROLE OF TECHNOLOGY IN CHANGING
THE BANKING INDUSTRY
BY AVIRAL VERMA &
SANJEEV RANJAN
-IIFT
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EVOLUTION OF BANKING STRUCTURE
Technology has power to transform the fundamental
economics of any industry and banking is no dierent.
The banking industry has taken enormous strides with
the use of technology. Most of the banking transac-
ons can now be conducted over the internet. Along
with it, technology has reduced the barriers and
changed the economics of delivery.
KEY MILESTONES IN BANKING INDUSTRY
ATM: Addion of facilies such as fund transfer, bill
payment and account maintenance has reduced the
fooall at the bank branch which has brought down
the operaonal costs. Branches are now able to cater
more customer base from a single branch. As per
forecasts, ATMs per million populaons will increase
from 85 to 170.
P M- C D C: The biggest
game changer in the banking industry was the intro-ducon of plasc money. Debit and Credit card pay-
ments through payment gateway revoluonized the
banking sector and provided the individuals hassle
free transacons. Visa, which is a global payment
technology company, processes 47,000 transaconsper second reliably, conveniently and securely. Pres-
ence in 200 countries with $2.2 billion Visa cards and
2.1 million ATM (as of December 31, 2013) it accounts
for a total of 91.6 billion transacons worth $4.5 tril-
lion on 31 March 2014.
NEFT: Naonal Electronic Funds Transfer facilitates
electronically transfer of funds from any branch to
any individual or rm. NEFT has an upper ceiling of
50,000 per transacon.
RTGS:Real me gross selement system means con-
nuous selement of funds by an individual or by an
order within a span of 30 minutes. No upper ceiling in
transacon makes it the most favorable online trans-
fer mode of payment in case of larger transacon.
M : Over the years it was felt to have a
technology which goes beyond ATM. In context of In-
dia which boast of a mammoth subscriber base of 900
million mobile users this was even more necessary.
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Mobile banking inially provided SMS alert facility but
later added services such as account enquiries, bill
payment, and fund transfer and loan requests. This
helped in enhancing customer experience and con-
venience.
CORE BANKING SOLUTIONS
With the arrival of computer and internet, manual
ways found their way out. IT revoluon equipped the
banking sector with CORE (centralized online real-
me electronic) banking soluons. It helped in reduc-
on of operaonal cost as prinng and backup be-
came centralized. CORE banking reduced the man-
power requirement and increased eciency by reduc-
ing the transacon cycle me. It provided to custom-
er the much required freedom to transact anywhere.
It facilitated accurate and quick implementaon of
banking policies. All this helped in increasing business
opportunies which led to reducon in legal expenseand penales.
Cq T S: CTS introduced cheque
clearance using MICR. It helped in reducing the turna-
round me in clearing of cheques and curbing cheque
frauds.
ECSElectronic Clearing Service enabled repeve and
periodic transacon such as interest payment, salary
and pension payment towards electricity, phone and
water payments.
DATA ANALYTICS IN BANKING
Data analycs is the buzz word today.The highly com-
peve market requires banks to convert vast
amount of data into meaningful informaon which
could help them in generang sales and dierenated
customer experiences. Banks ulize data analycs to
improve customer retenon, cross selling, opmizing
price structure, gain customer insights and implement
real me event management.
Most private banks ulize their business analycs to
ne tune their campaign and markeng eorts. These
analycs provides insight and help to idenfy new
customers and reduces markeng spend per custom-
ers.
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FUTURE JOURNEY AHEAD
Bhas emerged strongly as an alternave to con-
venonal internet banking. Marketed as an open
source and decentralized technology, it is nding its
user base at an exponenal rate. The inclinaon to-
wards Bitcoin comes due to the fact that it poses no
restricon on the transacon amount and is free from
bank charges. This is why it has been witnessing in-
creasing acceptance around the globe. It is currently
values at 584 US Dollar/ per Bitcoin
The nancial bodies have me and again raised con-
cerns over the use of Bitcoin as a full-edged tool for
transacons. Currently the user base is quite small,
which limits its use as a normal currency. It is highly
volale and as a result its value experience high oscil-
laons. Also, the soware behind it is sll under beta
phase and a major poron is under development.
R: RBI launched Indias rst ever domesc card
scheme RuPay on March 2012 with an entry level ac-
ceptance at ATMs. Its long term aim is to evolve as
an alternave to MasterCard and Visa, but before
that it sll has to cover a lot of ground.
CONCLUSION
The pre and post liberalizaon era has witnessed
huge changes in the banking sector and the advent of
technology in this sector has spread new colors. Now
technology has become the integral part of the bank-
ing sector right from driving the basic banking ser-
vices to the introducon of several new products and
services. It is quite evident that what we see today
wont stay the same in coming years. Banking indus-
try will keep chasing the fast paced technology for its
beerment.
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INTRODUCTION
Decisions about the Dividend pay-out by far have
been a subject of great curiosity and interest for the
analysts, researchers and academicians for a long
me now. The objecve of the Dividend Pay-out is to
determine the extent to which the company is distrib-
ung the dividends to its shareholders out of the
earnings of the company.
Both the investors and the corporate houses were
expecng the abolion of the double taxaon on divi-
dend income ever since the Government of India had
iniated nancial reforms in 1991. In the budget of
1997, the Finance Minister announced the abolion
of tax on dividend income in the hands of the share-
holders. However, the budget also proposed a new
tax on the companies when they declared, distribut-
ed or paid dividend. This new corporate dividend tax
was also called as Dividend Distribuon Tax (DDT).
The main objecve of this was to discourage compa-
nies from increasing the dividend oulow signicantly
leading to lower capital formaon. Even though this
system exempted investors from paying any direct
tax, it required them to pay an indirect tax on the div-
idend at a prescribed rate.
This new system also ensured that the administraon
of tax on dividend would be more ecient and eec-
ve. The DDT aimed to improve economic growth
and exibility by eliminang the tax bias against equi-
ty-nanced investments thereby promong saving
and investment. It also aimed at reducing the tax bias
against capital gains in the earlier tax system encour-
aging investment and enhancing the long term
growth potenal of the economy.
DIVIDEND DISTRIBUTION TAX (DDT) & DOUBLE
TAXATION:
There is a common noon that the dividends are
oen taxed twice. There is a school of thought that
argues for tax exempon for dividend income. The
basis of their argument is that the taxaon of divi-
dend income amounts to double taxaon. The expla-
naon behind this concept is that the corporate
prots are subject to corporate tax. Since dividends
are paid out of the prot earned which is already
taxed, if the dividends are taxed again, it amounts to
double taxaon.
REFORMS IN DIVIDEND DISTRIBUTION
TAX : IS THE STEP BY GOVERNMENT
TAKEN IN THE RIGHT DIRECTION?
BY MOHNISH KHAINI
-IIM, SHILLONG
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This logic can be challenged on two grounds:
There is a legal disncon between the corporaon
as an enty and the individual shareholders who own
the company.
Tax rates currently in place were set with the
knowledge that there was taxaon at the corporate
and individual level. This means that if there is a mor-
al objecon to double taxaon, then, the remedial
acon would also require an increase in the corporate
tax rate.
IS IT UNFAIR TO RETAIL INVESTORS?
Its been over a decade that investors have been argu-
ing that taxing dividend is unfair and it leads to double
taxaon. The argument is well grounded in a sense
that dividend is a source of income for the sharehold-
ers and it is distributed aer the corporate tax is lev-
ied from the gross earning of the rm. Hence, imposi-on of tax on distribuon is injusce to them. Howev-
er, is it really an injusce to shareholders?
In my opinion, it does not lead to double taxaon.
Why? As per our legal system, a company and its own-
er both are separate enes. Various benets are ac-
crued to the owners because of this. For example,
when a company faces in a crisis, its owners are not
liable to pay any debt from their pockets. Considering
that, when the gross earnings of a rm are taxed it is
deemed as an income tax paid by the rm and not by
its owners. Moreover, when dividends are taxed,
earnings of owners are taxed. Hence, the argument of
double taxaon is denitely fallacious.
REFORMS IN DIVIDEND DISTRIBUTION TAX IN THE
UNION BUDGET 2014 15
The reforms brought in by the newly elected govern-
ment with respect to the direct tax will denitely be a
shot in the arm for corporate. However, the only
dampener would be the amendment made in the divi-
dend distribuon tax. The amendment made was with
respect to secon-115O of income tax.
This secon was introduced in income tax act in 1997
which made corporates liable to pay DDT while distrib-
ung prot to the shareholders. The recent amend-
ment in the act will increase the eecve dividend dis-
tribuon tax as the basis for calculaon of tax will be
gross distributable surplus rather than net distributa-
ble surplus.
T w -
:
Lets assume, in 2013, Infosys made Rs.200 Crore prot
and it distributed the enre prot to its shareholders.
In this case, the DDT that Infosys is subjected to pay
would have been as follows:
D : R.200 C/1.16995 =
R.170.95 C
(The eecve rate of 16.995% includes Educaon cess
and surcharge as well)
T P: R.170.95*16.995% = R.29.05 C
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In contrast, Post amendment, suppose the prot g-
ures are considered to be same for Infosys as per the
example above, the tax that Infosys has to pay in 2014
would be,
T : R.200 C*16.995% = R.33.99 C
D D A: R.200 R.33.99 = R.
166.01 C
Thus this example shows that a minor tweak in the cal-
culaon of DDT can result in high income that the gov-
ernment is going to earn from it.
IMPLICATIONS OF CHANGES IN THE DIVIDEND DISTRI-
BUTION TAX
1 -I :
There is an inverse relaon between dividend distribu-
on tax and companys dividend pay-out rao. When
dividend distribuon tax is higher, companies prefer to
retain most of their earnings for future spending. Re-
tained earnings can be used to invest in high growth
project which will help in following manner:
Need for external nancing will be less which will
reduce the cost of capital for the rms.
High growth projects will give an opportunity to rms
to earn more prots which will be reected in their
share price in the secondary markets.
2 -I :
Plethora of research has been done on what do small
shareholders prefer: capital gain or cash dividends?
Majority of them claim that shareholders are more
sased with capital appreciaon than cash dividends.
They do not raise any objecon if company retains all
the earning and invest it in high NPV project as it ul-
mately aects the share price of the company in sec-
ondary market.
Furthermore, if shareholders demand any dividends,
rms can distribute stock dividends in lieu of cash divi-
dends. Stock dividends provide many benets to both
shareholder and a rm.
It doesnt enforce tax liabilies on shareholders. Firms
dont have to share its earnings and can invest in new
projects to expand quickly. Stock dividends provide
more liquidity to the stock in the secondary market.
Hence, this proposed change will hardly be a cause of
concern for the shareholders.
3 -C :
Clientele hypothesis claims that certain type of inves-
tors prefer cash dividends since their marginal tax ondividend is less than their income from other sources.
It is more prevalent in India as compared to the devel-
oped economies.
For example: In
2013, the maximum
salary that Reliance
can give to Mukesh
Ambani, as agreed
by shareholders, is
Rs. 38 crore. But
Mukesh Ambani
withdrew only 15 crore as a salary. However, the
amount he received from cash dividend is massive Rs.
1,240.7 crore. The raonale behind this is that his sala-
ry is taxed at 30% while the earnings through dividends
are taxed only at 15%.
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The above table shows the dividend earnings of busi-
ness persons in the nancial year 2011.
This clearly shows the presence of clientele eect. Top
managers, who have a nal say in dividend policy of
the company, have personal advantage in cash divi-
dends which might lead them to incline towards cash
dividends. The proposed change will not limit the gap
completely, but will surely reduce the gap.
CONCLUSION:
Tax is one of the main sources of revenues for the Gov-
ernment. Decisions regarding taxes are always given
paramount importance during the budget since these
decisions set the stage for the economys growth dur-ing the course of the year. Well aware of these intrica-
cies of taxes, the new government, during its maiden
Union Budget has brought in small but eecve chang-
es in key policies which would assist in streamlining the
cash ows of its treasury. small tweak in the calcula-
on of the Dividend Distribuon Tax can generate huge
revenues to the government. At the rst instance, this
change gives an impression that it is going to play a
spoil sport for the corporates and investors but dwell-
ing deep into this maer, the changes also present an
opportunity for the corporates to look out for beer
growth oriented projects and thereby providing share-
holders beer returns on their investment by way of
capital appreciaon. Hence it can be said that in spite
of having negave aspects, the posive aspects of the
proposed change outweighs the shortcomings of the
same.
P C FY11 (R. C)
Azim H Premji Wipro 1345.1
Mukesh Ambani RIL 1240.7
Rahul Bajaj Bajaj 917.4
Anil Agarwal Vedanta 790.2
Keshub Mahindra M&M 312.2
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WHAT IS EQUITY RESEARCH?
The purpose of investment research is to help inves-
tors decide which asset class cash and cash equiva-
lents, xed interest securies, real estate, commodi-
es, currencies and derivaves amongst others-
would make a good investment. In Equity Research, a
sub-set of investment research, the universe of assets
is limited to stocks. There are two types of profes-
sionals in this eld, namely- Sell-side analyst who
work at brokerages and independent equity research
rms, and Buy-side analyst who work for money man-
agement rms and present stock pitches to porolio
managers.
Source: Moneycontrol
WHATS N IT FOR YOU?
InFINee from now on launches a new secon, called
EQUITY RESEARCH, to this magazine which will solely
be dedicated to publishing an equity research report
on one of the happening stocks of the quarter every
edion. We, acng as a sell-side analyst, through our
reports will give you our recommendaons on wheth-
er to BUY, HOLD or SELL the stock.
BUT HOW IS EQUITY RESEARCH DONE?
Before you start invesng, it is best that you know
how Equity Research reports are made. Hence, in this
edion, we put forward A Prelude to EQUITY RE-
SEARCH so as to get you an understanding of it be-
fore you actually dive into invesng.
HOW TO MAKE EQUITY RESEARCH REPORTS?
While doing an Equity Research for a parcular share
or stock, the work in itself requires one to split it into
research and then future projecons or esmaons.
For doing so, the basic framework involves one to un-
derstand the business model of the company, read its
nancial statements, use rao analysis techniques to
compare its nancial performance with those of its
closest comparable peers, value it using both intrinsic
(absolute) and relave valuaon approaches, and
EQUITY RESEARCH :
A PRECURSOR
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nally, prepare a complete equity research report
with a recommendaon to BUY, SELL or HOLD the
stock at its current price.
Equity Research starts with carrying out the Funda-
mental analysis of the company followed by the rao
analysis and then nally valuaon is done.
FUNDAMENTAL ANALYSIS:
Equity Research and analysis begins with an aempt
to understand the business and nancial characteris-
cs of the given company. This implies the analysis of
the industry and the company. To start with, doing
the Fundamental analysis of the company becomes
extremely crucial. When analysing an investment,
Fundamentals of a company are the actual numbers
that cause movements in its stock price. In this case,
the analyst is interested in analysing rm specic data
to have an understanding of the big picture, rather
than looking at the technical aspects of an invest-
ments market chart.
One of the two approaches goes into the doing of
Fundamental analysis namely Boom-Up approach or
Top-Down approach. Boom-Up approach focuses
primarily on the individual stocks rather than on the
external factors impacng the economy. The Top-
Down approach, on the other hand, is a step wise pro-
cess starng with the analysis of the external environ-
ment using PEST analysis, then examining the industry
of the company using models like Porters 5 forces or
Porters Diamond depending upon the underlying fac-
tors involved and eventually analysing the company
using the popular SWOT analysis. Aer doing the
above analysis, the analyst or the investor gets an un-
derstanding on the fundamentals of the company and
can qualitavely give a rang to the company. If fun-
damentals of the company are strong, even if the
market goes wrong, the company will come back to itsposion.
A simple framework for understanding the Business
Prole of the company:
FINANCIAL/RATIO ANALYSIS:
Once an overview of the business prole is done, the
nancial health of the company is to be looked into.
While analysing the nancial prole, one has to crical-
ly look into the aspects of Size, Protability, Growth
prole, Return on Investment and the Credit prole of
the company. Rao analysis helps in evaluang various
aspects of a companys nancial performance such as
its eciency, liquidity, protability and solvency. This
requires the analysis of the nancial statements,
namely the Balance Sheet, Prot & Loss Statement,
and Cash Flows Statement of the company. But the
numbers in the companys nancial statements carry
lile meaning in themselves as it doesnt tell us how
good the business is at converng resources to earn-
ings and this is where the raos come into help as they
provide meaningful relaonships between individual
line items in the nancial statements. Another im-
portant aspect of rao analysis is that the raos can be
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compared across dierent companies within the same
sector or sub-sector to get an overview of the perfor-
mance of the company against its competors or the
industry as a whole. In the coming edions of ourmagazine, we intend to restrict our use of rao analy-
sis to the nding of raos that will help us evaluate
ve aspects of the company namely its operang per-
formance, acvity levels, liquidity posion, leverage
and valuaon mulples.
Example of important raos used for Power Industry:
From the above table one can easily do a comparave
analysis of the companies against the important raos
and approximate an average rao for the industry.
From this, one can nd out how the company is per-
forming in tandem to the industry in general.
The list of important raos used:
Source: -www.moneycontrol.com (for the year 2011)
VALUATION:
Having done the two analyses, one moves to the last
and the most important aspect of Equity Research
which is Valuaon. The nal stage in the research of
the target company is nding out what is the compa-
nys total worth. As the name goes, valuaon is the
process of determining the current worth of the equi-
ty, asset or company. Valuaon is the esmaon of
an assets value based either on variables perceived to
be related to future investment returns (usually cash
ows) or on comparisons with similar assets. It is
needed in not just doing Equity Research but also in a
number of other things like Mergers and Acquisions,
investment analysis, capital budgeng and many
more. The valuaon models are used in making invest-
ment decisions as to which assets are undervalued
Operang
Perfor-
mance
EBITDA
Margin
Return on
Assets
Return on
Equity
Acvity
Levels
Asset
Turnover
Inventory
Turnover
Operang
working capi-
tal Turnover
Liquidity
Posion
Current
Rao
Quick Rao Cash Rao
Leverage Debt/
Equity
Net Debt/
Equity
Net Debt/
Capital
Stock Val-
uaon
Mulples
P/E P/S EV/EBITDA
38
Year 2011 NTPC Power
Grid
Reliance
Power
Face Value 10 10 10
Protability Raos
Operang Prot
Margin (%)
27.09 83.85 24.66
Net Prot
Margin (%)
15.57 28.81 55.59
Liquidity And Solvency Raos
Current Rao 2.48 1.05 1.94
Quick Rao 2.23 1.02 2.26
Debt Equity
Rao
0.76 2.05 0.44
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or overvalued. It is through Valuaon one can quan-
tavely rate the company.
Approaches to Valuaon as put forth by Aswath Dam-
odaran, professor at NYU Stern:
Intrinsic Valuaon: The value of an asset is esmated
based upon its cash ows, growth potenal and risk.
The most widely used valuaon model here are:
Discounted Cash Flow (DCF)
Dividend Discount Model (DDM)
In a DCF model, the forecasted future cash ows are
discounted to get to the present value. The other valu-
aon method in usage is Dividend Discount Model
(DDM). But this can be used only when the company
pays out dividends. Once the intrinsic value or the fair
value of equity is obtained, it is compared with the
Current Market Price of the share and based on this
the analyst comes to a conclusion whether the stock is
overvalued or undervalued.
Relave Valuaon: Esmates the value of an asset by
looking at the pricing of comparable assets relave
to a common variable like The above picture indicates
that the Intrinsic price of the equity is more than that
of the Current Market Price which tells us that the
stock is currently undervalued and has potenal,
hence should be a BUY.
The tools of equity valuaon is used to address a
range of praccal problems like judging whether the
securies are fairly valued or under/overvalued, infer-
ring market expectaons, evaluang corporate like
events mergers and acquisions, divestures, spin-
os, management buy-outs (MBOs), leveraged recapi-
talizaons etc.
Summary of the steps of Equity Research:
Understand the companys business prole and
do the company and industry analysis
Forecast companys performance
Select the appropriate Valuaon model
Make investment decision based on the funda-
mentals and valuaon.
While making an investment decision, both the Funda-
mentals and Valuaon of the company maers. Finally
on the basis of the rangs of these two parameters,investment is made. This above menoned framework
for doing Fundamental analysis, Rao Analysis and
nally Valuaon is an essenal starng point but is by
no means exhausve. There are many other factors
like the price movements (Technical Analysis) which
are taken into account before making an investment
in the equity.
Now that an overview is given, InFINee Team inaugu-
rates the secon on EQUITY RESEARCH. Please do look
forward to the next edion so as to start invesng
-
BY GAYATHRI BHUVANGIRI, IIFT
39
C M P: Rs. 250
I P: Rs. 262
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KEY RECOMMENDATIONS & THEIR IMPACTS
Let us discuss the key recommendaons of the Com-
mission and their impact on the Indian Financial r-
mament.
UNIFIED FINANCIAL AUTHORITY (UFA): - One of the
loudest amendments proposed by the Commission is
the formaon of a U F A re-
placing SEBI, IRDA, PFRDA and FMC (the Forward
Markets Commission). According to the FSLRC, the
incumbent nancial regime with mulple sectorial
regulators creates conicts of interest and leads to
overlaps and gaps in regulaon at the same me. For
example- while Ponzi schemes are not regulated by
any agency as of now, Securies market is regulated
by SEBI and RBI both. It makes economic sense and
creates synergy to merge regulatory bodies into one
and remove the problems of inter-regulatory turf-
wars. The FSLRC establishes a new seven agencymodel to regulate and control the nancial sector in
India.
It will regulate and control all acvies of the nan-
cial market other than what is to be regulated by the
RBI. The proposed agency will be carrying out all the
responsibilies of all the exisng regulators (other
than the RBI) like SEBI, FMC, IRDA, PFRDA etc. TheUFA will also be the rst consumer interest protec-
on regulator in the nancial sector with the excep-
on of banking and payment systems which will be
under the ambit of the RBI.
ROLE OF RBI: -The RBI gets to keep most of its pow-
ers and connues to guide the naons monetary pol-
icy and regulaon of its banking industry. It also per-
forms the funcon of regulaon and enforcement of
the payment systems and enforcement of the pro-
posed consumer protecon law. However, it loses its
power of managing public debt. Also, its monopoly
over monetary policy formulaon is in danger as the
commission proposes that the central government, in
42
P R T ( FSLRC)
RBI RBI ( though with reduced powers)
SEBI
FMC
IRDA
United Financial Agency (UFA)
S A T Financial Sector Appellate Tribunal (FSAT)
D I C
G C (DICGC)
Resoluon Corporaon (RC)
F S D
C (FSDC)
It remains as it is.
Nw Debt Management Agency (DMA)Nw Financial Redressal Agency (FRA)
T 2: P I F R S
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consultaon with the RBI Governor, set a monetary
policy target and hold the Central Bank accountable
in case of its failure to achieve these objecves. The
icing on the cake, at least for the Government, is the
fact that the Commission wants the Central bank to
deliver on the monetary policy front by adopng a
Monetary Policy Commiee having the Governor as
its Chairman and six other members.
Only one of these members will come from RBI. Of
course the Central Bank can advise the Government
on the appointment of two other members while the
remaining three members will be appointed by the
Government. Thus, the Commiee eecvely dilutes
the Central Banks autonomy on monetary policy
maers of the country. It rather places its faith in a
government which is prone to reducing rates in an
elecon year and is, otherwise too, gullible to being
populist at the expense of the economy.
Addionally, it places the RBI, and all regulators for
that maer, under judicial review, a step unprece-
dented in the history of India. Dr. Raghuram Rajan
has correctly warned that this provision will result
into constant quesoning of regulatory decisions thus
creang paralysis of analysis as regulators will go slow
on decision making. There is also the danger of
shrewd parcipants in the nancial system exploing
the loop-holes to their own advantage by going for
excessive ligaon.
FINANCIAL REDRESSAL AGENCY: -Consumer interest
protecon is one of the key concerns of the Com-
miee. To this eect, the FSLRC recommends the cre
aon of the Financial Redressal Agency (FRA) to
aend to consumer complaints in the nancial sector
(except the banking sector) across the naon. The
FRA will replace all sector-specic Ombudsmen pre-
sent now. All nancial service providers are required
to set up internal mechanisms for consumer griev-
ance-redressal and to educate the consumer of their
right to seek redressal. If the consumer is unsased
with the appropriate handling of their issues by the
rm, they can approach the FRA.
FINANCIAL SECTOR APPELLATE TRIBUNAL (FSAT): -
Financial Sector Appellate Tribunal (FSAT) is the all-
important pillar proposed by the Commiee, for ap-
peals against the acons of the RBI, the FRA and the
UFA. The exisng Securies Appellate Tribunal will be
merged into FSAT, to which the consumer can appealagainst all nancial sector regulators. FSAT will have
powers of jurisdiconal oversight on the acons of
the regulators. This places regulators in a ght spot,
for their decisions are not always based on the surety
of events but more on their likeliness to happen since
they cannot wait for a tragedy to strike before acng
on it and defanging it.
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S: -L
FINANCIAL STABILITY AND DEVELOPMENT COUNCIL
(FSDC): - The Financial Stability and Development
Council (FSDC) is the only exisng regulator, apart
from the RBI of course, that stays on. It will oversee
the various systemic risks and will suggest ways to
bring them down. The Commiee wants to establish
a nancial data cell whose primary job will be to look
for the systemic risk in the nancial sector and report
the same to its parent body, the FSDC. The FSDC, be-
ing a statutory body, will then measure and manage
the risks in the system. The FSDC will be empowered
to undertake all required intervenons for reducing
the systemic risks.
PUBLIC DEBT MANAGEMENT AUTHORITY: -The Pub-
lic Debt Management Authority to manage public
debt is an altogether new instuon to manage gov-
ernments debt in the proposed regime. A Resoluon
Corporaon has also been proposed to handle the
resoluon of nancial rms.
ANALYSIS & CONCLUSION
FSLRC has produced one the most far-reaching re-
ports based on its recommendaons and possible
outcomes. Its stress on having a clear framework for
monetary policy-making was what prompted the GoI
to form the Urijit Patel Commiee. The Commis-
sions rap to the service-providers and the regulators
for unfair and not-so-consumer friendly pracces may
begin a new era of consumer proteconism in the In-
dian nancial sector and may force the authories to
revisit their approach to the consumer and consider
mending their ways. In proposing to create a Dra
Financial Code for India, the commiee has tried to
bring in some fresh air to the laws governing the -
nancial sector of this country.
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In trying to amalgamate various regulators into one
body, it has tried creang the much-needed synergy in
regulaon. By proposing to make RBI and other regu-
lators responsible to the parliament, it has tried to
make them answerable to the people of this country.
In increasing the weight of the government in formu-
lang Indias monetary policy, it has tried to bridge
the gap between the countrys
monetary and scal policies and has made the govern-
ment further answerable to the people of India. In the
words of Dr. Raghuram Rajan, though he himself is
one of the biggest cric of the commiees recom-
mendaons, FSLRC report is one of the most im-
portant, well researched as well as well-publicized re-
ports in Indian Financial History. The reports inu-
ence will be felt for many years to come. Enough
said.
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INTRODUCTION
Internaonal Financial Reporng Standards (IFRS),
previously known as Internaonal Accounng Stand-
ards (IAS), is a set of standards, framework and expla-
naons adopted for preparaon and presentaon of
nancial statements.
In present scenario of globalizaon and liberalizaon,
the world has become a small place. Many corporates
in emerging economies are looking to enhance their
access to the global markets to full their need of cap-
ital funding. Thus, it is of paramount importance that
there exists a system or a set of guidelines which is
consistent all across the globe, and here in lies the
importance of IFRS. Many countries have already
moved towards convergence of their respecve ac-
counng principles with IFRS, while others are sll
passive with their approach.
IFRS IN INDIA
In India, Accounng standards are formulated by Ins-
tute of Chartered Accountants of India (ICAI), through
its Accounng Boards Standard. Thereaer these ac-
counng standards are considered by Naonal Advi-
sory Commiee on Accounng Standards (NACAS)
which then recommends it to the Central govern-
ment. At present, 28 Accounng Standards, with cer-
tain dierences, have been noed under the Compa-
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
BY-DHAWAL LACHHWANI
-IIFT
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the Companies Act, 1956.
ICAI, in 2007, commenced the pro