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CLASH OF THETITANS

The RBI and the government are at loggerheads over separation of public debt management from monetary policy

RNI No. MAHENG/2009/28962 | Volume 7 Issue 4 | 16th - 30th Apr ’15Mumbai | Pages 48 | For Pr ivate Circulat ion

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It’s simplified...Beyond Market 16th - 30th Apr ’15 3

DB Corner – Page 5

Clash Of The TitansThe RBI and the government are at loggerheads over separation of Public Debt Management from Monetary Policy – Page 6On An Upbeat NoteRBI pegs GDP growth at close to 8% on the back of expectations of a normal monsoon, continuation of the cyclical upturn in a supportive policy environ-ment and no major structural change or supply shocks – Page 9Bonded By Civic SenseSEBI has come up with a list of guidelines to revive municipal bonds, aimed at raising resources for urban infrastructure projects – Page 12Breaking TraditionBancassurance, through ‘open architecture’, will free banks to sell products of more than one life insurer unlike in the past that will help expand insurance penetration in the country - Page 15Clean And GreenRecent policy announcements will give a thrust to the renewable energy sector, especially solar energy and wind power – Page 18North-South DivideWhile Delhi National Capital Region (NCR) is besieged with unsold inventory, Bengaluru is doing relatively well thanks to sales of reasonably priced apartments – Page 21Securing AirwavesThe government fetched significant returns from spectrum auction after days of fierce bidding, with Idea Cellular emerging as the highest bidder – Page 24Concrete StepsThe government has announced a series of tangible initiatives to boost the beleaguered construction sector – Page 27

Sarla Performance Fibers Ltd: A Damn Good YarnSarla Performance Fibers is spinning its success story by providing specialized and high value-added yarns in the US, along with upgradation of its existing facilities in India – Page 30

Important Statistics For The Fortnight Gone By – Page 33

Whetting Investor AppetiteMutual fund houses have in recent times launched a series of funds based on the ‘Make in India’ theme – Page 35

Prodding Start-upsBudget 2015 is indeed a godsend for start-ups as the government has proposed a series of measures to boost new entrepreneurs – Page 38

Dispelling UncertaintyDoji candlestick patterns appear on charts when market sentiment is indecisive and a trend is weakening – Page 40

Important Jargon For The Fortnight – Page 45

Volume 7 Issue: 04, 16th - 30th Apr ’15

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It’s simplified...Beyond Market 16th - 30th Apr ’154

Tushita NigamEditor

The Reserve Bank of India (RBI) is likely to see some major changes in its key roles. The separation of the public debt office from monetary management has been suggested and been a topic of debate for quite a while now. Among other things, a new monetary policy framework will help change the manner in which interest-rate decisions are taken and an independent public debt management agency will facilitate transparency in debt activities of the government.

However, the outcome of this ongoing clash between the central bank and the government is not yet known. The new framework, the agency to be set-up, and the views/counterviews have been elaborately discussed in the cover story of this issue. Read on for some clarity on this topic.

Among other articles, we have covered a synopsis of the recently-held monetary policy review, the various guidelines introduced by the Securities and Exchange Board of India to revive municipal bonds, the ‘open architecture’ model to be followed by bancassurance in India, the recent policy announcements to help propel sectors like renewable energy and construction, the state of the real estate market in the country and the outcome of the spectrum auction, among others.

The Beyond Basics section covers a very interesting article on new schemes being launched by mutual fund houses in India based on the ‘Make in India’ initiative introduced by the Narendra Modi-led government. In this article, we have tried to help our readers understand how lucrative such theme-based schemes can prove to be.

Out of the various positives announced in the Union Budget this year, those meant for start-ups were the most talked about. Several measures for start-ups were announced in Union Budget 2015-16, and have been covered in the Beyond Entrepreneurs sectioN.

A Note Of Discord

segment due to uncertainty in the upcoming quarterly earnings results and global events.

However, in the coming fortnight, the markets will be driven by the announcement of earnings resultS.


Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

n the previous fortnight, India’s apex bank, the Reserve Bank of India (RBI) in its monetary policy review meet

kept key rates unchanged. While the repo rate stands at 7.50%, the cash reserve ratio (CRR) remains unchanged at 4%.

CPI inflation for the month of March eased to 5.17%, the lowest in three months, supported by lower food prices in spite of crop damage due to unseasonal rain.

European Central Bank (ECB) President Mario Draghi said that quantitative easing was meant to continue until the end of September 2016 or until the ECB sees enough improvement in inflation.

He reiterated that the decision to keep

I the benchmark refinancing rate at its current all-time low of 0.05% and the central bank’s aggressive monetary policies were “effective.”

Quarterly earnings results of India Inc are expected to be rather weak.

In the coming fortnight, the Indian stock markets are likely to remain range-bound.

The Nifty has support at the 8,650 level. If it breaks this level, then the index is likely to touch the 8,450 level on the downside.

On the upper side, the Nifty is likely to be around the 8,760 level and the 8,840 level, thereafter.

Market participants are advised to avoid taking positions in the F&O

In the coming fortnight,the Indian stock markets

are likely to remainrange-bound.

Sensex: 28,442.10Nifty: 8,606

(As on 17th Apr ’15)

CLASHOF THETITANS

The RBI and the government are at loggerheads over separation of

public debt management from monetary policy



the public.

Analysis: World over, there are three principal targets used by central banks - money supply, inflation and the exchange rate. Each has its own pros and cons. Given the challenges and size of the Indian economy, it was decided to target inflation in India.

Inflation targeting was first adopted by New Zealand in 1990. Since then it has gained popularity around the world. Currently, there are around 25 central banks that have inflation targeting as their basic monetary policy framework. Central banks of all major economies target inflation.

The RBI oversees many key areas like issuing currency, supervision of the banking sector, financial inclusion, payment and settlement, liquidity management in the system, banker and debt manager for the government and manager of foreign exchange. It is difficult for the RBI to do justice to all roles.

With inflation targeting, the RBI has a mission and cannot offer excuses in case a target is missed. The move will also help better coordination between the government and the central bank.

Historically, there have been political pressures on the central bank, especially before and after elections, to cut rates. With inflation targets, the RBI can preserve its autonomy. Most importantly, targets will lead to greater scrutiny of MPC’s decisions.

Monetary Policy Committee

While the monetary policy agreement is silent on the setting-up of MPC, both the government and the RBI are negotiating how the committee will be set up. Both the FSLRC and the RBI committee report (Urjit Patel report) have recommended MPC to conduct monetary policy. More than

mportant changes are underway in key roles of the Reserve Bank of India (RBI). And the separation of the public debt

office from monetary management is being widely debated.

The debate has grown after Finance Minister Arun Jaitley, in his Budget speech, said the government has concluded a monetary policy framework agreement with the RBI. A separate PDMA also found a mention in the Budget speech.

There is a conflict of interest in the RBI managing both the roles. On one side, the RBI needs to ensure lower interest rates in the system for lower cost of borrowing for the government. The government borrows from the market to bridge its fiscal deficit. But lower interest rate pushes inflation up. Keeping interest rates low goes against inflation targeting.

To resolve the conflict of interest, the RBI and the government have already agreed on a new monetary policy framework. But both are not on the same page as far as a separate debt office and setting up of a monetary policy committee (within the new policy framework) are concerned.

THE GENESIS

The idea of separating the public debt office from monetary management has been debated for quite some time now. Many committees have vouched for it. However, it was the financial sector legislative reforms commission (FSLRC) that was more vocal about the subject.

The FSLRC set up by the government intends to overhaul the archaic financial sector regulation in India. It submitted a report in 2013 and many provisions within FSLRC need parliament’s approval. (Beyond Market covered FSLRC in April ’13.)

I FSLRC also talked about setting up of a monetary policy committee (MPC) to take policy decisions and set inflation target. Many committees in the past have suggested a vote-based monetary policy decision, as is practiced in developed economies.

THE NEW MONETARY POLICY FRAMEWORK

20th Feb ’15 was a watershed moment as the government and the RBI signed an agreement for a new monetary policy framework. The agreement mandates the RBI to work towards an inflation target. However, the framework is silent on the formation of the monetary policy committee (MPC).

For starters, it is the central bank’s role, among other things, to control interest rates in the system and find a balance between growth and inflation. The RBI achieves its set mission through monetary policies and various tools at its disposal.

Inflation Targeting

The agreement gives RBI an inflation target of 6% by January ’16 and 4% thereon with a band of plus or minus 2 percentage points. Inflation targeting arrangement provides the RBI with the flexibility to use any tool it deems fit to bring inflation under control. Inflation targeting means that when inflation goes above the comfort zone, the primary objective of the central bank will be to bring the inflation down. Below that particular level, the RBI can look at other objectives, but beyond the comfort zone, taming inflation will be RBI’s central policy objective. To ensure accountability, if the RBI is unable to meet the target, it will have to explain to the government why the target was missed and disclose it to


80 central banks in the world use MPCs for their monetary policies.

With MPC, policy decisions will depend on votes by committee members as against the current practice of a single individual (governor) taking the decision with inputs from his team members. Decision-making is very discretionary and accountability measures are absent.

Analysis: The bone of contention between the RBI and the government is the size and composition of the committee. FSLRC has recommended a total of seven members in MPC. The RBI committee report has recommended a five-member committee. Both the government and the RBI want a higher say in MPC. Most experts expect the composition of MPC to be an amalgamation of FSLRC and the Urjit Patel report.

As per FSLRC recommendations, MPC would look like this: MPC (7 members): 2 (RBI members)+ 2 (government appointee in consultation with RBI) + 3 (government appointees)

As per the Urjit Patel Committee report, MPC would look like this: MPC (5 members): 3 (RBI member) + 2 (government appointee in consultation with RBI) Public Debt Management Agency

As per this year’s Budget, a separate PDMA will be formed to manage government debt: both internal and external. Currently, external debt is being managed by the government, while internal debt is being managed by the RBI. With PDMA, both will come under one umbrella.

Since late 1980s, almost every nation from the Organization of Economic

Cooperation and Development (OECD) and major emerging markets have established such an agency. Internationally, a separate PDMA from monetary management is considered to be the best practice.

The creation of PDMA is a matter of intense debate in India. The main objective of debt management is to ensure that the government’s financing needs and its payment obligations are met at low cost over the medium to long run. While PDMA can minimize cost for government borrowing, the RBI is worried about risk to markets and system in the short term. Here are views and counterviews about the creation of a separate PDMA.

Lastly, unifying both internal and external debt management under one umbrella will lead to better information on government debt, thus yielding better decisions and subsequently improved debt management for the government.

Counterview: While a separate PDMA can lower the cost of borrowing for the government, there are prerequisites for that assumption. One, bond market needs to be very liquid to absorb all offerings from the government, otherwise it can blow up government’s interest costs. Therefore, bond market reforms are required for PDMA to succeed.

Two, the government needs to put its house in order as far as its fiscal deficit is concerned, else taking RBI away from debt management can be disruptive for the bond markets and offer risks to the system. There are fears about potential market volatility if debt management is shifted to the new agency.

Analysis: PDMA is caught-up in controversies between the RBI and the government. Both parties will have to work closely to minimize any collateral damage to the bond market. PDMA will need co-ordination between the RBI and the government.

The biggest positive of a separate PDMA is that once created, the RBI will reduce banks’ SLR requirements. This will free up funds to lend for private enterprise. It will also lead to the emergence of different classes of investors, especially retail investors who can directly participate in the G-Sec market without many hurdles. The new monetary policy framework will change the way interest-rate decisions are taken, while an independent PDMA will bring a lot of transparency to the government’s debt management operatioN.

100%

80%

60%

40%

20%

0%2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Internal Debt External Debt

11.89

88.11

11.37

88.63

11.98

88.02

9.65

90.35

9.44

90.56

9.12

90.88

8.16

91.84

7.41

92.59(% o

f Tot

al)

Composition of Public Debt*

Source: RBI *Central Government’s Public Debt

View: Key conflict of interests warrants a separate PDMA. One, higher rates to fix inflation leads to higher borrowing cost for the government. Two, the RBI can be considered as an insider as it acts as a merchant banker for the government and is an owner as well as an operator of government securities market.

Three, the RBI can mandate banks to invest more in government securities, since it regulates the banking sector. Thus, setting up the PDMA is important as it takes away few key conflict areas, and allows the RBI to solely focus on inflation.

Banks are captive buyers for government securities as they are mandated to maintain a statutory liquidity ratio (SLR). This has led to underdevelopment of the G-Sec market in India. Retail participation is non-existent. This has led to wrong pricing of government bonds.

n AnUpbeatNote

RBI pegs GDP growth at close to 8% on the back of expectations of a normal monsoon, continuation of the cyclical upturn in a supportive policy environment and no major structural change or supply shocks

he ‘will he, won’t he’ question has been answered, at least for now. The Reserve Bank of India

(RBI) Governor Raghuram Rajan maintained a status quo on its

T benchmark repo rate during the first bi-monthly monetary policy review for this fiscal (FY16) held on 7th April. The repo rate stands at 7.5%, and accordingly the reverse repo rate remains at 6.5%.

Repo rate is defined as the rate at which the central bank of a country (in India, it is the Reserve Bank of India) lends money to commercial banks in the event of any shortfall of funds. The reverse repo rate is the rate



expecting inflation to firm up by the year-end to 5.8%, Raghuram Rajan will be cautious with repo rate cuts. The chances of the repo rate hovering around 7% or just a little above it are, therefore, very high.

The Reserve Bank is encouraged by the fact that inflation is under control and there is no immediate upside threat. Inflation (barring food and fuel) has, in fact, been on a downward trend in the nine months till February this year, mainly driven by price cuts in petrol and diesel caused by a slump in international crude oil prices.

Housing inflation has eased while weak demand conditions have helped reduce upside pressures affecting prices of services such as education and health.

Another important point highlighted by the apex bank relates to the rate of growth of rural wages, which has come off substantially from double-digit levels that prevailed up to November ’13.

Further, adding to the downward pressure on inflation is the fact that there has been substantial easing of input price pressures.

Present indications are that inflation will not pose a great threat this year, barring unforeseen circumstances. The Reserve Bank, in fact, expects Consumer Price Index (CPI) inflation to fall to around 4% by August before climbing to around 5.8% by the end of this year.

However, inflation-control has always been a priority for the Reserve Bank and it has flagged a few concerns on the issue.

Unseasonal rainfall in end-February and March of this year has adversely affected crop production and this could potentially push food prices up.

bank is committed to an accommodative policy regime in the coming months - in layman’s language, it means that a cut in the repo rate can be expected in the coming months.

“Going forward, the accommodative stance of monetary policy will be maintained….the Reserve Bank will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.

“Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway,” the apex bank’s policy statement said.

It further said that “progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.

“Finally, the Reserve Bank will watch for signs of normalization of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.”

More reductions in the repo rate can, therefore, be expected this calendar year and there is a high likelihood of at least a further 0.25% cut in the next two-three months. The middle class and lower-income groups will have to wait until then before they can expect some relief in the form of lower equated monthly installments (EMIs).

A further rate cut will, however, depend on the direction inflation takes. With the Reserve Bank

at which the central bank borrows money from commercial banks within the country.

The Reserve Bank also kept unchanged the Cash Reserve Ratio (CRR) at 4% while the bank rate stands at 8.5%. The Statutory Liquidity Ratio (SLR) has also been kept unchanged at 21.5%.

Banking, corporate and financial communities were divided in their opinions as to what RBI Governor Rajan would do on 7th April. While a section expected that he would cut rates and indeed clamoured for the same, the other section expected him to maintain a status quo. The latter sentiment was mainly because of inflation, which had increased marginally in the last few weeks. Inflation still remains a cause of concern, especially food inflation, and therefore, Rajan was expected to be cautious during the April monetary policy review.

Inflation apart, the two rate cuts affected by the Reserve Bank (a total of 50 basis points or 0.5%) in the first three months of this year, have not yet translated into lower lending rates by banks and the credit off-take has been rather weak.

“With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review,” the Reserve Bank said in its policy statement.

The apex bank’s stance is, however, clear - it will reduce the repo rate going forward, most probably in June as many banking experts opine. Rajan himself made it clear that the monetary policy direction will not change, which means that the apex


A less-than-normal monsoon in the June-September period could compound the problem as a shortfall in crop production has the potential to play havoc with food prices.

“Larger than anticipated administered price revisions, a faster closing of the output gap, geo-political developments leading to hardening of global commodity prices and a spill-over from external developments through exchange rate and asset price channels” are the other upside risks to inflation, the apex bank said.

On the brighter side, it noted that “however, at this juncture, these upside risks appear to be offset by downsides originating from global deflationary/ disinflationary

tendencies, the still soft outlook on global commodity prices; and slack in the domestic economy.”

The Reserve Bank is buoyed by the macro-economic climate in the country and has pegged its GDP forecast for this fiscal at 7.8%, up by 30 basis points from 7.5% of 2014-15.

With liquidity conditions comfortable, banks should be able to transmit the recent policy rate reductions into their lending rates and this, in turn, will improve financing conditions for the productive sectors of the economy.

The policy announcements in the recently-announced Union Budget 2015-16, especially on the

infrastructure front, should help boost investment in this sector. The Narendra Modi-led government has focused on creating a conducive and business-friendly economic and investment climate, and this coupled with the conducive outlook on inflation, should help brighten the country’s economic prospects. In conclusion, the message from the April monetary policy statement of the Reserve Bank is that assuming a normal monsoon, continuation of the cyclical upturn in a supportive policy environment and no major structural change or supply shocks, India’s economy can be expected to chug along smoothly at close to 8%. Not bad for a country that had to endure a sub-5% growth for some years in the recent pasT.

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apital markets regulator, Securities and Exchange Board of India (SEBI) recently issued fresh

guidelines for the issuance and listing C

SEBI has come up with a list of guidelines to revive municipal bonds, aimed at raising resources for urban infrastructure projects

of municipal bonds in India.

New rules will help revive the lifeless municipal bond market in India and deepen India’s capital markets.

Municipal bonds or munibonds as they are famously called abroad are bonds issued by a municipal corporation. These bonds are generally used to raise resources for



information and improper ratings parameter by credit ratings agencies are other reasons for poor demand from pension and insurance funds. Further, lack of an active secondary market for municipal bonds has made this instrument illiquid.

On the supply side, the budgeting and accounting systems of ULBs still lack transparency. There is poor project evaluation. There are bureaucratic and political interferences. Further, there is no specific law, which governs the insolvency aspect of urban local bodies like corporates.

THE NEED

India is urbanizing like never before. The urban population is expected to rise to around 40% of the population by 2020 from around 31% currently. This projected growth will take urban population to approximately 65 crore by the year 2050 from around 35 crore at present.

Urbanizing is an irreversible phenomenon in India. The gradual increase in urban population will put a heavy strain on urban infrastructure.

This will lead to increase in demand for urban services including schools, roads, transportation, water supply, sanitation, health care, etc.

first tier, state governments and union territories comprise the second, while the urban and rural local self-governments (local bodies) make up the third tier.

Urban local bodies (ULB) are further divided into municipal corporations for larger urban areas, municipal councils for smaller urban areas, and nagar panchayat for rural-urban transition areas.

ULB can issue a municipal bond. At present there are 3,842 ULBs in India. Out of these, 139 are municipal corporations, 1,595 are municipalities and 2,108 are nagar panchayats. Rural local bodies are divided into district level, block level and village level.

From 1997 to 2010, several urban local bodies with strong balance sheets have been able to mobilize over ̀ 13 billion. However, since 2010 there has been no municipal bond issuance in India.

urban infrastructure projects as defined by law such as water supply, schools, sanitation, public health, transportation, etc.

Unlike shares that give no fixed returns, bonds give fixed returns to investors. The bond issuer (government, municipality or corporation) issues bonds with a promise to pay the holder of the bond on maturity a specified rate of interest during the lifetime of the bond.

Limited fiscal space available to the central government and higher infrastructure needs due to rapid urbanization warrant an alternative financing route like municipal bonds to finance infrastructure in India.

The government’s plan to create 100 smart cities across the country will need a vibrant municipal bond market to finance the plan. It also complements the cooperative federalism theme of the government.

Many developed and developing countries from around the world have relied extensively on the municipal bond market for their infrastructure funding needs. The United States and Canada have been the world’s largest market for municipal securities. In contrast, the decade-and-half-old municipal bond market in India is still in its nascent stage.

THE BEGINNING

It all started with the empowerment of urban local bodies (ULB) after the seventy-fourth amendment to the Indian constitution in 1992. The amendments empowered ULB to function as an institution and mobilize resources independently.

For starters, Indian federation for administration purposes is divided into a three-tier structure: Government of India comprises the

0

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1000

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2500

(` in million)

3000

3500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Municipal Bond Issuance In India

India’s Population THE ISSUE

Even though municipalities were allowed by the government to issue tax-free bonds in 2001 to incentivize investors, the size of the municipal bond market remains meagre. This is mainly due to issues both on the demand and the supply side. On the demand side, big investors like insurance and pension funds still have a conservative approach to investment in municipal bonds. There is always the worry of who will guarantee these bonds. Lack of

1.8

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01960 65 70 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 45 50

Urban

(Forecast)(p

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Rural

Traditionally, major sources of revenue for ULBs are property tax, profession tax, advertisement, user charges, fees or charges for usage of municipal assets and facilities; assigned revenues like share of entertainment tax, stamp duty, etc.


These revenue areas are not adequate to build infrastructure. ULBs also have relied on grants and subsidized funds provided by the Central and State governments for their needs. The government’s hands are tied due to limited fiscal space.

It is estimated that total investment requirements in urban infrastructure could exceed `7 lakh crore over the next 20 years.

NEW GUIDELINES

In this backdrop, SEBI issued new guidelines for the issuance and listing of municipal bonds. SEBI has balanced the needs of both the issuer and the investor of municipal bonds.

Investors

SEBI has mandated higher disclosure needs from the issuer. To ensure quality of the issuer, only the issuer that has not defaulted on its repayment obligations in the last one year will be allowed to tap the municipal bond market. The issuer should not have a negative net worth (total assets minus total liabilities) in any of the last 3 financial years. Further, the ULB will have to put in at least 20% of the project cost from internal accruals or from state grants. This will ensure their skin in the game. Besides, SEBI has mandated a

monitoring agency - which can be a bank or a financial institution - to keep a tab on the performance of these securities in the market.

Further, an investment grade rating is needed from a credit ratings agency. Better the rating, lower will be the cost for the issuer and lesser is the chance of the bond defaulting on its payments in the future.

For better servicing of urban local bodies, only revenue bonds i.e. municipal bonds that invest in a single project and have consistent operating revenue flowing (toll, octroi, etc), will be allowed for public issue. This will ensure regular interest payments and provide greater safeguard to investors.

Issuers

From an issuer’s perspective, the bonds would need to have a minimum tenure of three years. They can also issue general obligation bonds via private placements. A general obligation bond is a common type of municipal bond that is secured by a state or local government’s pledge to tax revenues to repay bond holders. This will ensure some sort of backing for ULBs with weak balance sheets. The proposed regulations also permit either the ULB itself or a subsidiary of the ULB to raise funds via the

municipal bond market. All these moves offer incentives for issuers to tap the municipal bond market.

IN A NUTSHELL

Ratings agency CARE estimates that large municipalities in India could raise `1,000 to `1,500 crore every year through municipal bond issues.

Should investors, therefore, invest in such bonds? The revised regulation will allow investors to make an informed decision before investing in municipal bonds. This will certainly attract institutional investors and pave the way for infrastructure building in the country.

A conservative retail investor mainly invests in fixed deposits, small savings schemes or gold. Bonds issued by municipalities having good financial track record can be a good alternative investment destination for such conservative investors, especially given the tax-free nature of some of these bonds.

Further, interest rates for municipal bonds are market-linked and investors can trade and exit on the exchanges and need not hold them till maturity. Municipal bonds are the best way to boost quality of life in cities with locals having a say in the process. Job prospects in that locality may also look uP.

Pareto-optimal / Pareto Efficiency:

An economic state where resources are allocated in the most efficient manner. Pareto efficiency is obtained when a distribution strategy exists where one party’s situation cannot be improved without making another party’s situation worse. Pareto efficiency does not imply equality or fairness.

Pareto optimality are conditions under which the state of economic efficiency occurs (where no one can be made better off by making someone worse off). The importance of pareto optimality results from its widespread use as a standard for comparing and judging outcomes. While pareto optimality provides only a weak standard because it does not provide a mechanism for discerning between the relative efficiency of competing pareto improvements, it offers standard judging criteria that many can comfortably accept in areas of economics, engineering and business.

he Indian life insurance industry has made significant progress since it was opened up to the private sector in the year 2000. Yet, penetration continues to be a big challenge for insurance

companies in the country. Only 2.3% of the Indian population is insured at present.

In order to enhance its reach and distribution, the life insurance industry has deployed a single corporate agency tie-up model in Bancassurance. Under this model, banks were allowed to tie-up with one insurer to distribute a life, non-life and an health insurance product.

Recently, the government passed the Insurance Act,

T

BreakingTradition

Bancassurance, through ‘open architecture’, will free banks to sell products of more than one life insurer unlike in the past that will help expand insurance penetration in the country



25% to new business sales of private life insurers.

Consumers too, have been large beneficiaries of bancassurance as they have higher trust in banks and feel more comfortable about getting need-based advice and better quality of service from banks as compared to insurance agents.

Besides, there is also the ease of making premium payments on insurance products as they can be linked to their bank accounts directly.

WILL MULTIPLE CORPORATE AGENCY MODEL WORK

While a single corporate agency tie-up has worked well in the Indian context, a multiple corporate agency arrangement may indeed open up a Pandora’s box as customers already find it difficult to comprehend the various aspects of life insurance.

The nitty-gritties of the structure of the insurance product seem intimidating to them and they prefer to rely on the intermediary, be it the insurance agent or the bank selling the products to them.

If multiple corporate agency tie-ups come into place, bank employees will be forced to explain the features of multiple product options from more than one insurer, which will be available for each life stage need of the customer, further adding to his or her confusion.

Banks, on their part, will have to spend more time and resources to train and retrain their sales cadre on various aspects of products and processes of different insurers.

Besides, a large amount of investments will also have to be made to align their technology infrastructure to that of multiple

have tie-ups with only two insurance companies to begin with.

This is being thought of as an opportunity for the customized development of insurance products and an unique opportunity for consumers to experience the variety of products that several insurers will bring to the table.

But the question that remains to be answered is that in a country like ours where insurance is still a product, that is barely understood by customers, will a multiple corporate agency tie-up really achieve the goal of increased penetration of insurance products or will it turn into a nightmarish experience for banks and customers when deployed?

WHY SINGLE CORPORATE AGENCY TIE-UP HAS WORKED SO FAR

The single corporate agency model has worked well so far. This is because insurance products are not as easily understood as banking products. Yet, banks as corporate agents have spent a significant amount of time and engaged resources to understand products of single insurance companies they have had tie-ups with. Subsequently, they explained these products to their customers depending upon their financial needs and life stages.

This has emerged as a win-win model for banks as well as insurance companies. Banks see insurance products as another means of grabbing eyeballs of their customers and earning an income through fees by making a little investment.

Insurance companies, on the other hand, get the advantage of reach that has deluded them thus far. Little wonder then that bank channels currently contribute approximately

whereby insurance companies will have greater access to foreign direct investment (49% instead of the earlier 26%). Now, a change in the existing structure of bancassurance is being considered by the regulator.

The Insurance Regulatory and Development Authority or IRDA is keen on an open architecture for insurance distribution on the basis of the recommendations made by a committee headed by former LIC Chairman NM Govardhan. CHANGES IN THE OFFING

The Govardhan Committee had recommended that IRDA pave the way for banks to have multiple tie-ups with insurance companies.

This means that in lieu of the single corporate agency tie-up that exists currently, there will be multiple corporate agency tie-ups that will give consumers access to a wider range of products, thus increasing the penetration of insurance products across the nation.

The benefits of open architecture, for those who are propogating it, are plenty. According to those who have recommended these changes, currently, banks are forced to push a non-performing product just because they have a tie-up with the said insurance company.

A multiple corporate agency tie-up will encourage banks to select from amongst a plethora of insurance products that have a better cost structure and are more suited to the needs of their clients.

In order to avoid confusion, there is likely to be a cap on the number of insurers a bank can have with individual insurance companies, to help create a level-playing field. For instance, a bank may be allowed to


insurance providers.

Another grave risk that banks will face is that of mis-selling as insurers are likely to create artificial sales limits on their products that may not be best suited to the needs of customers who will approach the bank at various life stages.

Banks too run the risk of being driven by profitability that each insurer brings to the table rather than concentrating on the needs of the customer. Both insurers as well as banks must, therefore, tread with caution as the controversy over Unit Linked Insurance Plans (ULIPs) has in the past, brought to the fore rampant mis-selling in which banks

sadly, had a significant role to play.

Therefore, there is also a grave risk of reputation being sullied, something that neither banks nor insurers can afford again.

WHY ROCK THE BOAT

While the concept of multiple corporate agencies is being considered on the premise of increasing penetration of life insurance industry, one must not forget the basic difference that banks and insurance companies have towards selling.

While banks have a reactive selling philosophy and sell demand-driven

products (pull strategy), insurance companies have an aggressive selling strategy that is need-driven (push strategy). These essential cultural differences between banks and insurance companies must be respected for any bancassurance venture to succeed.

IN A NUTSHELL

Perhaps the need of the hour is to not put spokes in the wheel, but ensure that the wheel of bancassurance, as it exists today, runs more smoothly and efficiently. This is likely to help achieve the core objective of penetration as well as ensure that customers’ need for insurance cover are adequately met by insurerS.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

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Currency Derivatives Trading with us keeps you a few

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CLEANAND

GREENRecent policy

announcements will give a thrust to the renewable energy

sector, especially solar energy and wind power



support for these projects. Besides, the removal of excise duty on solar photovoltaic panels, reduction in custom duty and Renewal Energy Certificate (REC) are some of the policy measures initiated by the government to create a right policy environment for investments.

Subsidies are also granted by the Ministry of New & Renewable Energy (MNRE) to investors who set up their solar photovoltaic power plants in the north eastern region at 70% and to the others at 30%.

Through these initiatives, the government is trying to create a right policy and investment climate, which will be crucial for growth. That apart, thinking innovatively and coming out with smart solutions and speeding up implementation of projects will be critical as well.

The government is working to build a team of 50 countries to share and exchange new technologies and research advancements so that innovation can allow this source of energy to reach maximum people.

Prime Minister Narendra Modi has suggested installation of solar panels over all water bodies, which can be used for farming and watering of fields. In rural areas, input cost of farmers can be reduced by using solar pumps along with micro irrigation.

The government is also looking to set up hybrid energy parks in the area where sun’s radiation is high, thus tapping those high potential areas with large plants.

For instance, like in the coal and gas sector, the government plans to construct Ultra Mega Solar Power Projects or high capacity plants in radiation-rich states of Rajasthan, Gujarat, Tamil Nadu, and Ladakh in Jammu & Kashmir.

apid urbanization and industrialization have pushed the demand for power in the country.

However, supply is woefully inadequate in comparison with the demand, leading to huge deficit and power cuts in India. The problems will compound if the economy grows at a faster pace, leading to more demand in the sector.

Today, the challenge is to not only produce more power but also generate green power or renewable energy so as to rely less on fossil fuels due to their limited availability and environmental concerns. That apart, reliance on imported coal and gas is going to be a big challenge for the country, both in terms of viability of plans and the financial health of the economy in the coming years.

Of about 94% of the power generated through conventional sources of energy like coal and gas in present times, only about 5.2% of power is generated through renewable resources. The renewable energy space has thus far lacked intent, investments and right policies.

However, all this is set to change. Recently, at a conference, Minister for Power Piyush Goyal said India will raise its energy mix from renewables to 15% in 10 to 12 years from 6% now.

According to ministry data, the current installed power generation capacity of the country is 2,49,488 mw. Of this, renewables account for merely 31,692 mw.

This also indicates that India has huge untapped potential. The total estimated medium-term potential (till year 2032) for power generation from renewable energy sources such as wind, small hydro, solar, waste to energy and biomass in the country is

R about 1,83,000 mw, which is 14 times higher than the current installed capacity from these sources of energy. India is a developing nation and this step is aimed at reducing the country’s dependency on fossil fuels.

The government is expecting public and private sector investments in the sector. A total of 293 companies, including NTPC, Suzlon, and Reliance Power are expected to set up energy generating plants with a target of 26,600 mw energy generation in the next 5 years.

State Bank of India (SBI) is slated to lend `75,000 crore for generating energy upto 15,000 mw over the next 5 years. Apart from investments in power generation, the government is also looking to speed up the implementation of the Green Energy Corridor Project, in the current fiscal year, to facilitate evaluation of renewable energy across the country.

SOLAR

The Modi government has set a goal of reaching 1,00,000 mw of solar energy by 2022. India has a huge potential given its geographical advantages and huge expanse of deserts. Desert and barren land alone have the potential to build solar-based capacity of about 45,000 mw. The government has already directed companies to build solar power plants in the country.

In his Union Budget speech, Finance Minister Arun Jaitley called it a ‘high priority’ area and allocated `1,000 crore for the solar power sector, aiming to support investment in the renewable energy sector.

Not just announcements, the government has been doing road shows in international markets to attract investments. That apart, the government has offered budgetary


WIND POWER

Currently, India has a wind energy capacity of about 21,000 mw. However, this is nothing compared to its potential in India.

As per industry estimates, the country can increase its wind power generation capacity to 50,000 mw-1,00,000 mw, which is over 3 to 5 times higher than the current installed capacity.

Investments are now pouring in from both government and private sector companies, which are seeking to diversify and tap this potential source of renewable energy. On ground, the industry has suffered

in recent years due to the lack of adequate investments and policy revisions by the government.

Over the last two years, the wind sector has been awarded a mere 600-1,000 mw of projects, which are now gathering pace.

No wonder in 2014, the wind market grew at 44% compared to last year.

Thankfully, policies are again in place. The government recently restored the accelerated depreciation benefit for companies investing in wind projects, thus attracting a lot more investments.

That apart, power generation-based benefits which expired in 2012, were

again extended.

This allows existing power producers to again consider the renewable energy space as a strategy to diversify and have a mixed fuel portfolio.

Additionally, the government has eased policies pertaining to approvals, land acquisition and foreign direct investment (FDI) in wind power thus attracting huge investments into the country.

Almost all large wind energy producers, some of who left India early, are now promising higher investments and capacities in India because of clarity and commitment of the government towards the renewable energy sectoR.

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inspire con�dence in them.

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NORTH-SOUTHDIVIDE

While Delhi National Capital Region (NCR) is besieged with unsold inventory, Bengaluru is doing relatively well

thanks to sales of reasonably priced apartments

udget 2015 was arguably the most awaited one in recent years by Indian corporates. After years of

policy paralysis and economic slowdown, India Inc was hoping that the newly formed government will usher in necessary changes to improve economic sentiments.

Needless to say, when Finance Minister Arun Jaitley presented Union Budget 2015-16 in the Lok Sabha, corporate czars were eagerly awaiting announcement of reforms in their respective sectors.

This also included the Indian real

B estate sector, which has been facing a slump since a long time now, partly because of government policies and party due to its own shortcomings.

After the NDA-led government came to power, there were announcements regarding affordable housing, relaxation of FDI norms and construction of 100 smart cities in the interim Budget.

The real estate sector was expecting more such announcements as it meant revival of the sector. But Budget 2015 was a letdown for most real estate players as neither big-ticket announcements were made, nor direct

measures to boost the growth of the sector were announced.

According to Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, “Real estate is an important sector which can help the country achieve high growth. But the government missed the opportunity to use it to boost growth.”

A few industry experts are optimistic. They say schemes such as ‘Housing for All’ will help the growth of the sector in the long term. Under the ‘Housing for All’ scheme, by 2022, the government will build 2 crore urban housing units and 4 crore rural



The condition of Mumbai real estate developers is not looking bright either. There has been a steady rise in debt level of Mumbai real estate companies due to slow property sales.

According to a report by Knight Frank, a real estate research and brokerage firm, Mumbai witnessed a 9% decline in property sales in 2014. This has resulted in inventory pile-up and would require a total of 50 months to clear existing stock at the prevalent absorption rate.

Under-constructed area worth `53,400 crore is lying unsold. Developers are neither able to sell these assets fast nor is their cash flow improving as industry experts believe that Mumbai real estate market is yet to recover.

New launches have also been subdued. In April-September period, new launches were down almost 51%. However, recently Mumbai Metropolitan Region (MMR) saw a number of new launches by developers such as Oberoi Realty, Lodha Group and Runwal Group.

Experts believe that for Mumbai and NCR markets, there is a huge lack of trust and confidence among buyers who fear investments would not reap near-term returns. Also, Mumbai developers have focused more on premium and luxury segments when demand was for affordable housing.

Pankaj Kapoor added, “On one side, there’s a housing shortage and on the other, you have rising inventory and that’s a very big paradox.”

While Mumbai and NCR have seen lacklustre growth, some markets such as Bengaluru and Chennai have been growing steadily. Bengaluru has become one of the fastest growing real estate markets in India, with growth seen in all segments such as

estate is only an indirect beneficiary.”

Experts believe that the beneficial impact on real estate because of REITs will take a few years to materialize. Moreover, increase in service tax will also affect the real estate market.

This is not good news for the troubled real estate market in Delhi National Capital Region (NCR). It has been suffering from project delays and severe liquidity crunch.

Among all the markets, Delhi NCR has been the worst affected. The house absorption rate is lowest in decades, with sales volume declining by 43% year-on-year in 2014. As a result, there has been a huge inventory pile-up.

According to a report by property research firm Liases Foras, NCR has a total of 303.48 million sq ft (about 3,03,000 apartments) of unsold real estate, which will require about 53 months to be completely sold off at the current pace.

One of the main reasons for this unsold inventory is uninhabitable localities. Builders have constructed apartments without providing necessary infrastructure like roads, sewage systems and water connections for the buyer.

Pankaj Kapoor, MD of Liases Foras says, “NCR is a very inefficient market where a lot of projects were launched in undeveloped areas.”

Even the organized retail space saw limited traction. Strong transaction happened only in the office space segment, which constituted 30% of the total transacted space. Major demand was driven by IT/ITeS, banking/financial services and telecommunication majors for their office space requirements.

housing units through allocation of `22,407 crore for housing development in the country.

According to Surabhi Arora, Associate Director, Research, Colliers International, “The intention to construct 6 crore housing units for rural and urban India by 2022 was a positive move. This will help to fill the huge demand-supply gap in housing sector and will make housing the next booming sector in India.”

Another important announcement was the introduction of the Benami Transaction Bill. Under this bill, cash transactions related to advances or payments of immovable property will be limited to `20,000. Once passed, this bill will help flush out black money from all sectors, especially real estate.

Also, the Finance Minister touched upon the much talked about Real Estate Investment Trusts (REITs). REIT is a security that sells like a stock on major exchanges and invests directly in real estate. It gives opportunity to individuals to invest in shares directly on an open exchange or in a mutual fund.

It will allow small savers to invest in real estate and enjoy the benefits of owning an interest in the securitized real estate market. The creation of REITs was approved in the last annual Budget and in this Budget, the Finance Minister announced allowing of pass-through status, which includes rental income also, wherein income generated would be taxed in the hands of the investor and the fund itself would not have to pay tax.

But, unfortunately, apart from these announcements, the real estate sector did not get much attention and as Anuj Puri, Chairman & Country Head, JLL India put it, “The Budget is low on big bang reforms and real


luxury, mid-income housing and affordable housing.

The IT industry in Bengaluru has been a major driving force behind this growth, which has contributed to its multicultural population. Of all the office space transacted in India, the city of Bengaluru accounted for almost 50% transactions.

Among concluded transactions, Tech Mahindra committed around 1,40,000

sq ft in Goldhill Supreme, Walmart took up around 1,30,000 sq ft in Salarpuria Aura, and RBS Business Services leased around 1,00,000 sq ft in RMZ Ecoworld.

Bengaluru and Chennai are two places where most number of residential projects were launched by realty majors. According to a report by CBRE, a large section of new project launches were concentrated at Gudunvanchery, Tambaram, Siruseri,

Anna Nagar, Ambattur and Chembarambakkam in Chennai, as well as at Whitefield, Koramangala and Sarjapur ORR in Bengaluru.

Bengaluru developers have been able to push sales because they have priced their apartments reasonably. In India, where affordability of homes remains a key driver of demand, maybe it is time NCR and Mumbai developers looked at offering homes that are affordablE.

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SECURINGAIRWAVES

The government fetched significant returns from spectrum auction after days of fierce bidding, with Idea Cellular emerging as the highest bidder



These two players intend to take on Reliance-Jio Infocomm, a company owned by Mukesh Ambani and be early birds when it comes to offering high speed data. All in all, the government has been able to sell 89.8% of the total spectrum that was put up on sale.

Here is a detailed picture of the strategy adopted by each key player in buying spectrum:

a) Bharti Airtel

Bharti added fresh spectrum apart from few renewals of spectrums. In six renewal circles, Bharti was holding 40MHz in 900MHz band but it bought 50MHz. It added 900MHz spectrum in four additional circles apart from renewal circles.

The company had bought additional spectrum in 900 MHz from Reliance Communications (RCom) since RCom in those circles had not renewed 900MHz spectrum holding.

The company also showed active participation in 2100MHz. It bought the spectrum in seven circles, adding 6 new circles to the bouquet and top-up spectrum in Tamil Nadu.

In 1800MHz, the company partly renewed spectrum which was set to expire. However, it added spectrum in other circles and bought a total of 15.4MHz in the 1800MHz band.

It is quite clear that the addition of fresh spectrum in 2100MHz and 900MHz shows that Bharti Airtel is focusing majorly on developing and enhancing its data services offerings to its customers.

The company will have to pay `29,100 crore in total, which includes `7,800 crore as upfront payment to the government.

ndia’s telecommunications industry is at an interesting juncture. From being just call service providers, these

companies have come a long way.

The telecom companies are evolving to such an extent that efforts are being directed at replacing computer desktops with mobiles.

Today, thanks to the wide acceptance and adoption of 2G and 3G services, data and voice services are revolutionizing the way mobile handsets are being used.

Not only mobile, even Direct-to-Home (DTH), Internet Protocol television (IPTV) and other services are changing the way we browse the Internet, watch television and more importantly, the way we connect with people.

After the recent conclusion of spectrum auction by the government, it is quite clear that the battle to provide the aforementioned services seems to be tightening up.

The spectrum auction this time around was keenly observed and analyzed as it comes at a stage where data penetration in India is sweeping and deep.

Here is a low-down on the strategies that the already incumbent (well-established) players adopted to buy spectrum. We also present to you the set of players that would gain from the spectrum auction.

THE BASICS

Spectrum auction, which concluded on 25th Mar ’15, was open for 19 days. The industry’s spectrum investment stands at `1,09,800 crore. In comparison with reserve prices, spectrum prices were 64% higher for 800MHz, 111% for 900MHz, 16%

I for 1800MHz and 5% for 2100MHz. Recently, the Department of Telecommunications (DoT) declared the provisional winning price of all spectrums put up for auction. Here are key highlights of the auction by geography:

a. 900MHz spectrum was sold at 118% premium to reserve price. According to DoT, `7,400 crore for each MHz was paid for 17 circles where it was being auctioned.

b. 800MHz spectrum has been sold in 18 out of 20 circles where spectrum was made available.

For these 18 circles, the provisional winning price is 65% higher than the reserve price of `4,540 crore per MHz. 800MHz spectrum remained unsold in Karnataka and Tamil Nadu.

c. In Delhi, Maharashtra, Madhya Pradesh and Mumbai, 800MHz spectrum was sold at higher rates than 900MHz spectrum.

Analysts say that well-established telecommunications companies, also called incumbent telcos or operators, such as Bharti Airtel, Vodafone and Idea, have made spectrum-grabbing difficult and expensive for new entrants or smaller telecom companies in the industry by setting high benchmark prices.

STRATEGIES

Analysts say that incumbent operators renewed their majority of spectrum holdings across circles.

It is observed that Bharti and Vodafone focused on adding fresh spectrum in 2100MHz to offer 3G services in six new circles.

This addition of spectrum in 2100MHz has a long-term vision.


b) Idea Cellular

Idea Cellular renewed 54 MHz spectrum out of its total holding of 59 MHz in 900 MHz band. Circles like Andhra Pradesh, Punjab and Karnataka where Idea has foregone some of the spectrum have been bought by Bharti.

Idea bought 2100MHz spectrum in one new circle, which is Kolkata.

Idea will now have 3G offering on 2100MHz in 12 circles, while it has already launched 3G services on 900MHz band in Delhi (this spectrum was bought in the auctions held in February ’14 ).

Idea Cellular will have to shell out a total of `30,300 crore, which includes `7,800 crore as upfront payment to the Indian government.

c) Vodafone

Vodafone has bought 35.6MHz (this does not include Tamil Nadu since spectrum in that circle was not put up for sale) in 900MHz in comparison with its holding of 38.8MHz.

Vodafone has foregone spectrum in Maharashtra and Gujarat, while Idea added the foregone spectrum of Vodafone in Maharashtra.

The telecom company had lost 900MHz spectrum bidding in Gujarat, which it compensated by buying in 1800MHz.

Like Bharti Airtel, Vodafone actively participated in the 2100 MHz band and bought spectrum in as many as six new circles.

At present, it has 2100MHz spectrum in 15 circles. Vodafone will have to shell out `26,000 crore in total and `6,900 crore as upfront payment to the government.

d) Reliance Communications

Reliance Communications renewed its 900MHz holding in only two out of seven circles.

The company lost 900MHz in Odisha and North East. However, it compensated for the loss by purchasing 5MHz in 800MHz band.

Given these purchases, analysts opine that the company may shut operations in three circles - West Bengal, Assam and Bihar. It is estimated that these circles contribute around 16% of its adjusted gross revenues.

It bought a total of 26.3MHz in 800Mhz band, 10MHz in 900MHz and 11.8MHz in 1800MHz. Its total payout stands at `4,300 crore, which includes an upfront payment of `1,100 crore to the government.

e) Reliance-Jio (R-Jio)

Given the presence of Mukesh Ambani-owned Reliance-Jio, most analysts are keenly watching out for the strategy being adopted by the company to buy spectrum.

R-Jio’s focus remained in buying 800MHz spectrum and adding 1800MHz. The company bought 48.8MHz spectrum in 800MHz band with 5MHz across the circles.

It also added spectrum in 1800MHz in four new circles and added spectrum in two existing circles. In total, it bought 28MHz spectrum in 1800MHz band. The company will pay a total sum of `10,100 crore, which has an upfront payment of `2,700 crore to the government.

f) Tata Teleservices

The company’s focus was in 800MHz band where it bought 11.3 MHz in five circles by shelling out `7,200

crore. In 1800MHz, it bought 2.6 MHz spectrum in Andhra Pradesh.

At present, the total payment due from Tata Teleservices stands at `7,800 crore. Of this, it has to pay `2,000 crore as upfront payment to the government.

g) Aircel

The company only bought 10MHz in 1800 MHz band with a total payout of `2,200 crore which includes an upfront payment of `740 crore.

Most analysts are of the opinion that regulatory issues concerning network of telecommunications companies would not be a concern in the coming years. They estimate that FY15 auction would be the last big renewal auction for telcos. It is believed that the next renewal auction is in 2021, which is mainly for CDMA telcos.

Given these factors, it is estimated that the top three telcos, namely, Bharti Airtel, Vodafone and Idea, would be in a better position to make the most of higher spectrum and offer high quality data services.

These companies have not renewed their 900MHz spectrum, which analysts say will help them reduce network disruptions.

Also, by securing 2100 MHz, the top three telcos will be able to gain market share in data services in the long term.

For new entrants, given the size of their balance sheets and presence, a large amount of funds will be used to service their interest expense.

Through price-war and deep pocket presence in smaller cities in the country, new entrants may also gain some market share in voice and data service offeringS.

ndia’s construction sector has been sluggish since the past few years as irrational bidding and fall in traffic estimates in

road projects due to economic slowdown has exhausted the bidding appetite of roads developers.

However, things are set to change with the government initiating steps to boost the beleaguered construction industry in the country.

THE RECENT PAST

In the past seven years ending FY14, analysts have estimated that the construction sector contributed close to 7.8% (at constant prices) to India’s GDP through two primary segments:

I

The government has announced a series of tangible initiatives to boost the beleaguered construction sector

buildings and infrastructure.

While buildings comprised residential, commercial, institutional and industrial; infrastructure encompassed rail, road, dams, irrigation, airports, power, telecommunication systems and urban infrastructure like water supply, sewerage, drainage as well as rural infrastructure in the country.

Between FY13-FY14, the construction sector’s growth declined at a compounded annual growth rate of 1.4% from 7.8% between FY07 and FY12 mainly on account of policy hurdles like environmental clearances and land acquisitions on fresh investments.

Despite this, business activity in the construction sector, has remained more or less stable.

With the new government at the centre, there is revival in growth in the construction sector.

According to the first quarter GDP growth numbers of the present fiscal, the construction sector grew by 4.8% on a year-on-year basis. This was much higher than the average growth of 1.4% in FY13 and FY14.

The BJP-led NDA government at the centre is implementing effective policies as well as granting faster clearances of stuck infrastructure projects in the country.

CONCRETESTEPS



terms have been changed to lump-sum from item rate contracts. Contractors will now be paid only after the completion of a specific stage or length of the road.6. The Ministry of Road Transport & Highways (MoRTH) has signed a memorandum of understanding (MoU) with the Ministry of Railways to remove all infrastructural hurdles related to the construction of Road Overbridge (RoBs)/ Road Underbridge (RuBs) on national highways.7. The Reserve Bank has allowed banks to issue long-term infrastructure bonds, which are exempt from CRR, SLR and priority sector lending requirements.

Moreover, the government proposes to amend the Land Acquisition Act, which will lead to faster execution of infrastructure projects.

RESULTANT IMPACT

These initiatives are paying off. There are signs of business activity gaining momentum in the past few months. The MoEF granted environment clearances to 232 projects between May ’14 and November ’14.

The government awarded contracts to construct 3,419 kms of roads in the April-October ’14 period, which is 40% of the total target of 8,500 kms in FY15 and much higher than 1,116 kms and 1,436 kms awarded in FY13 and FY14, respectively.

And the total road construction was 1,984 kms during April-October ’14 (31% of target of 6,300 kms in FY15), which is far higher than 637 kms constructed in FY14.

Besides, competitive pressures seem to be easing in the past few months. There is higher inflow of orders with better margins for players from the construction space.

has been changed to immediate exit of FDI, either post completion of the project, or after that

II) Policy Reforms

There have been significant changes in policies too to pace up growth of the construction sector. These changes are primarily for railways and road segments. Here are the changes in policies:

Railway

1. Up to 100% FDI allowed in key areas, such as freight corridor, high-speed trains, ports and mining connectivity projects through different modes.2. Up to 100% FDI permitted in most cases in rail projects, such as gauge conversion, construction of new lines, doubling of new lines and maintenance of Public Private Partnership (PPP) projects.

Roads

1. E-clearance for infrastructure and industrial projects in order to quickly clear stalled projects by the Ministry of Environment & Forests.2. The government plans to relax exit rules for road developers by allowing 100% exit after two years from project’s commissioning against a minimum 26% holding.3. NHAI is considering re-drafting of the Model Concession Agreement (MCA) to give itself more power for stuck bids, re-bidding and cancelled projects that fail to meet expected conditions.4. The cabinet has approved the formation of an independent entity called ‘National Highways Connectivity Company Ltd’, which will supervise the execution of road projects by NHAI, BRO and state PWDs.5. In order to speed up the execution of road projects awarded, payment

GOVERNMENT INITIATIVES

In Union Budget 2015-16, the government proposed the linking of 1,78,000 unconnected habitations by all-weather roads. This means completing construction of 2,00,000 kms of roads. This development is likely to help construction companies to acquire fresh orders.

Some of the prominent measures taken by the government are relaxation in construction FDI, 100% FDI in railways, e-clearance for infrastructure and industrial projects, and long-term bonds by banks.

Of these, two key policy initiatives are relaxation of FDI norms and policy changes. I) FDI In Construction

It is estimated that in the two-and-a-half years ending first quarter of FY15, FDI in the construction sector fell far below its 14-year average of US$ 1,705 million, down by 8.2% on a year-on-year (y-o-y) basis in FY14.

Here are a few norms relaxed in case of FDI in construction projects: 1. No minimum land area criteria for the development of serviced plots, as compared to the earlier norm of minimum 10 hectares.2. Minimum floor area reduced to 20,000 sq mt from 50,000 sq mt for construction-development projects.3. Minimum FDI cap lowered to US$ 5 million from US$ 10 million and will need to be brought within 6 months from the start of the project. Subsequent FDI can be brought within 10 years from the start of the project or before its completion.4. The earlier condition of at least 50% of project to be developed within five years has been removed.5. The minimum lock-in period of three years after project completion

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In the road segment, close to 76 tenders worth `47,900 crore are currently in the Request for Proposal (RFP) stage, while tenders worth `30,700 crore are in the Request for Qualification (RFQ) stage.

Out of the 76 tenders in the RFP stage, 65 tenders worth `31,400 crore are construction orders. It is believed that all these tenders will be awarded in the coming months.

Analysts expect railways to provide significant business to construction and infra players.

The construction sector in India is likely to see increased business activity with orders already having been awarded in the western and eastern dedicated freight corridors and a big pipeline of investments for modernizing railways, which include construction works related to tracks

and bridges, stations and terminals, and signalling.

This time only those companies with sound balance sheets are being considered for these initiatives. Sadbhav Engineering Ltd, IRB Infrastructure Developers Ltd, ITD Cementation India Ltd and Ashoka Buildcon Ltd are some of the companies that are likely to benefit from these initiativeS.

Sarla Performance Fibers is spinning its success story by providing specialized and high value-added yarns in the US, along with upgradation of its existing facilities in India

arla Performance Fibers Ltd (SPFL) is a 100% EOU (Export-oriented Unit) engaged in the manufacture and export of polyester and nylon textured, twisted and dyed yarns along with

covered yarns, high-tenacity yarns and sewing thread.

SPFL had started its operations as a manufacturer of commodity yarns. Over the years, it has successfully shifted its focus and established itself as a manufacturer of specialized and high value-added yarns.

SPFL grew its business by expanding and upgrading its existing facilities in India, as well as through the creation of new facilities overseas with the primary objective of establishing them in close proximity of its customers to provide quick and efficient services to them.

SPFL has an installed capacity of 11,900 tpa (turn per annum) to manufacture yarns at its Silvassa plant and a 3,200 tpa dyeing unit at its Vapi plant.

In Dec ’13, SPFL started its yarns facility in the US through its 100% subsidiary, Sarlaflex Inc. by setting up a 9,900 tpa POY (Partially Oriented Yarn) plant in Walterboro, South Carolina.

INVESTMENT RATIONALE

Diversified Product Portfolio

SPFL has a wide product portfolio, which includes:

S

A DamnGood Yarn



Source: Company Data

25%

10%

32%

34%

Segmental Break-up

Commodi es

Industrial yarn

Threads

Hosiery, socks,innerwear

Source: Industry Data

Difference In Asia And CAFTA Cost Structure

Asia CAFTA

Import duty (32%)

Agent & Other

Pro t (12%)

Logis cs

Cut & Sew/Trim

Fabric

$5.00

$6.00

$4.00

$3.00

$2.00

$1.00

$0.00

U.S

. $ p

er G

arm

ent

$5.76$5.44

US Facility: The Next Big Game Changer

`


contribution to the consolidated results. Deriving Full Benefits Of NAFTA And CAFTA Pacts

New Policies in the US favours local manufacturing (Rule of origin; Yarn Forward, etc). Local manufacturing in the US is expected to grow in the coming years as the US is the largest, most advanced and most competitive market.

Under the NAFTA (North American Free Trade Agreement) and CAFTA (Central America Free Trade Agreement), there is a growing preference for procurement of ready-made garments as well as yarn manufactured in the US itself.

Imports of the same results in imposition of duty as high as 32%. Being the first Indian textile company to set up a facility in the US, SPFL is strategically placed to reap the benefits of the same.

It is the first Indian plant to manufacture POY in the US. The plant imports polyester chip and produces partially oriented yarn (POY) and drawn texture yarn that is NAFTA- and CAFTA-compliant.

Currently, a single local supplier meets 50% of the demand, thereby offering huge market potential for this leading exporter of regular and high tenacity yarns. Fully Prepared For Phase II Expansion

Currently the capacity at its South Carolina plant stands at 9900 tpa. Once a sizeable level is reached with regard to utilization of capacity, the company is contemplating phase II as well.

Phase II expansion will take the total capacity to ~18,000 tpa by 2017 and will also add new product like flat yarn.

The total cost of the project including phase I and phase II is 25 million USD of which ~14 million USD has already been incurred.

For phase II expansion, the company has concluded QIP (qualified institutional placement) of equity shares for a sum of `467 million to fund capex and for general corporate purposes in October ’14. SPFL has placed this money in Fixed Deposit and will use it as and when the need arises.

Nylon 66- Another Feather In Its Cap

SPFL has started trial production of nylon 66 high tenacity

yarn at its Silvassa plant with production capacity of 450 tpa in the pilot stage.

Nylon 66 high tenacity and low shrinkage yarn is a niche and specialized offering and thus the margins are extremely high in the segment.

The product finds application in high-end segments like parachutes, car air bags, specialized sewing applications in automotive, shoe, leather, industrial filter and hose pipe manufacturing, among others.

At present, the focus of the company in the domestic market is on the air bag segment. The company is in the process of getting product approval from customers.

This being a niche product, generally takes longer for approval, But once approved, it can open a huge opportunity for the company.

Strong Financials

SPFL has registered revenue with a compound annual growth rate (CAGR) of 10.7%, EBITDA CAGR of 17% and a PAT CAGR of 12.6% over FY11-FY14. In Q3FY15, the US business reported EBITDA loss of `2.8 crore, which is expected to break-even once the company reaches 30% capacity utilization.

During the 9MFY15, revenue including US operations increased 26.3% year-on-year (y-o-y) and EBITDA increased 13% y-o-y. Excluding US business, EBITDA grew 29.6% y-o-y. RoE stood at healthy 19% to 20%.

RISK

failure to derive the desired output can put stress on the financial performance of the company.

working capital cycle of 4-5 months, which is comparatively on the higher side.

IN A NUTSHELL

We believe Sarla Performance Fibers Ltd is all set to enter the next league with:a) US facility to drive growth, b) big opportunity in nylon 66 segment,c) strong operating performance, e) healthy balance sheet with decent return ratios, and f) marquee clients with strong relationshipS.

ITECHNICAL OUTLOOK FOR THE FORTNIGHT

n the technical outlook for the month of March, Beyond Market had forecasted that the Nifty index was likely to test

the 9,150 level and correct at 8,620/8,300 levels in case of any weakness at higher levels.

As predicted, the index tested 9,120 level on the higher side towards the end of March. And the higher price dragged the index beyond the support level of 8,300 and tested 8,269. A further pull back took the index to the 8,844 level.

Interest rate announcement by India’s apex bank, RBI and the Fed in the US were the main reasons for it scaling an all-time high of 9,120 level and correction between 8,400-8,200 levels, thereafter.

Q4 earnings results of India Inc, which have already begun, could also impact the index in the months of April and May. However, if corporate earnings results turn out to be disap-pointing, then the Nifty index could correct further between 8,400 and 8,200 levels.

On the Nifty Options front for the current series, the highest OI (open interest) build up is seen at 8,500 Put followed by 8,300 Put, whereas on the Call side, it is observed at 8,800. We believe the markets will not sustain above its recent highs of 8,900 and a buy-on-dips strategy should be adopted by market participants if such a situation arises.

India VIX, which measures the imme-diate 30-day volatility in the market, has been in the range of 12 to 16. Going forward, we believe that the volatility index will remain in the current range itself.

Technically, on the weekly chart, the Nifty is trading in the upward rising channel, indicating that it has the potential to move upward. It is observed that the Nifty is well placed within the channel since the last five months, suggesting its strength and the fact that the uptrend is intact.

The daily Nifty chart suggests that the Nifty is trading above the 200 DMA i.e. above 8,200 levels since mid-FY13 and has never broken this

level on the closing basis, indicating a strong support at this DMA.

Interestingly, we always see a pullback from 200-DMA. Therefore, technically speaking, level 8,200 on the Nifty will act as an immediate, strong support level.

In the previous fortnight, the broader market has been outperforming the indices. Traders and investors are majorly building their long positions in mid-caps and small-caps instead of index-based stocks. We suggest investors to be stock-specific in this volatile market.

Overall, the market is in a bull structure trend. And dips, if any, offer a good opportunity to initiate long positions at lower levels. The current formation would add bullish momen-tum only if the Nifty manages to close above the 8,920 level.

The Bank Nifty faces immediate resistance around the 19,100 level on the upside and will continue to face selling pressure. There is an important support at 18,300-18,150 levelS.

Nifty Daily Chart


Contact At: 022 3926 9600e-mail: [email protected]

WhettingInvestorAppetite

Mutual fund houses have in recent times launched a series of funds

based on the ‘Make in India’ theme



Among all stakeholders, the government by far is the largest stakeholder in the Indian manufacturing sector and employs a great amount of control over the manufacturing sector through its policies and regulations.

Knowing the importance of the manufacturing sector to the country’s industrial development, the government of India has taken a number of steps to further encourage investment and improve the economy.

Recently, we saw passage of significant bills on Coal and Insurance, which might create a positive sentiment among businessmen in India who will look at investing in various capacities.

The government has unfurled vast potential advantages to Indian manufacturing and export sectors that will steadfastly create job opportunities, establish India as an export hub, enhance GDP growth and help narrow down the fiscal deficit.

With these benefits arising out of economic initiatives, coupled with positive momentum in the equity markets, both these funds are set to offer immense investment opportunity with added tax savings advantages to investors.

The funds will be invested in sectors like automobile, auto components, aviation, biotechnology, chemicals, roads and highways to name a few. Fund managers are confident that this theme will play out well in the next decade and investors will benefit from investments in these sectors.

DRAWBACK OF THE ‘MAKE IN INDIA’ CAMPAIGN

The target of increasing manufacturing’s contribution to 25% of the GDP is not going to be easy as

the infrastructure story, which led to the launch of dozens of schemes by various fund houses, Indian fund houses have always shown interest in new investment ideas.

WHY NOW?

It is true that millions of people are not even equipped to benefit from the opportunities in the flourishing services sector. It is only the labour- intensive manufacturing sector that has the potential to generate employment in adequate numbers to absorb the larger labour pool.

The Indian manufacturing sector currently contributes close to 15% of gross domestic product (GDP) of the country, which is almost half of China, whereas the service sector contributes almost 60% to the GDP.

This huge disparity in terms of contribution to GDP makes it imperative for India to focus on manufacturing and bring it close to 25% over the next decade.

India’s manufacturing sector has lagged far behind and now is the opportune time to focus on this sector. What India needs to focus on is to combine manufacturing operations with IT-based services to offer solutions, which increase the most serious sectors of the economy.

The manufacturing sector in India faces several challenges. There are still pending problems like power, ports, railroads and roads to shortage of human capital.

Manufacturing in India has long remained behind targeted goals. But the Indian government’s commitment to raise its investment in infrastructure from 7% to 9% represents a US$ 500 billion opportunity for growth within India’s manufacturing sector.

he Indian mutual fund industry is known to come out with innovative products on the basis of

themes that are in vogue at a given time. Now, since the ‘Make in India’ theme announced by Prime Minister Narendra Modi, is a rage, Indian fund houses have started launching a series of funds based on this theme.

Fund houses such as Sundaram Asset Management Company (AMC), ICICI Prudential AMC, Birla Sun Life AMC, JP Morgan AMC and L&T AMC have introduced funds that are based on the ‘Make in India’ campaign or are focused on recovery in the Indian economy.

Sundaram AMC started the trend with their two close-ended funds, namely, Sundaram Long-Term Tax Advantage Fund - Series I and Sundaram Top 100 - Series IV & V, which will invest in a diversified portfolio of 45-50 companies engaged in the business of exports and manufacturing.

L&T Mutual Fund has launched L&T Business Cycle Fund, which will invest in stocks of companies at different stages of business cycles.

On the other hand, ICICI Prudential Mutual Fund launched the ICICI Prudential India Recovery Fund, a close-ended equity fund that will invest primarily in stocks of companies likely to benefit from recovery in the Indian economy.

Even JP Morgan Mutual Fund launched JP Morgan India Economic Resurgence Fund, which is an open-ended equity scheme that will invest in “businesses that stand to benefit from growth acceleration and reform initiatives.”

Whether it was the technology boom in 2000, which forced many fund houses to come out with IT funds or

T


we think. Since the year 1970, it has been in the range of 15% to 16% and has not crossed 17% even after the country’s economy was liberalized in the early 1990s.

Given the fact that many global economies like Europe and Japan itself are going through prolonged sluggishness, the subdued demand for Indian goods might hamper prospects of the Indian growth story.

Unless both the US and the Eurozone revive, the demand for industrial goods will remain subdued.

Investors looking to benefit from the possible revival of the manufacturing sector should know that thematic funds can be cyclical in nature.

Even if you want to take a bet on manufacturing, a diversified fund is a much better option. Such a fund will invariably invest in stocks of manufacturing sectors, and they have been doing so in the past few months.

WHAT SHOULD INVESTORS DO?

Investors should first opt for balanced or diversified equity funds. However, this does not mean that investors should stay away from such thematic funds. If they are convinced that a

particular theme is likely to deliver positive returns, then they should invest for a longer duration.

In the past, such theme-based funds have delivered unstable returns and forced many investors to completely stay away from mutual funds.

To cite an example, many IT funds were launched during the technology boom of 2000. And in the last one year, they have on an average given returns of 30%, which is equal to the benchmark index, Sensex which also gave similar returns. Many diversified equity funds have given returns in excess of 60% to 80% in the last one year.

Such thematic funds go through a cycle and investors should have the courage and conviction to stay invested through a difficult period.

Similar thematic funds have failed to live up to investors’ expectations in the past. In the bull market of 2003- 07, many fund houses had launched infra funds with much fanfare.

But later on, from 2008 to 2012, many mutual funds struggled to give positive returns. It is only in the last one year that the equity markets have risen sharply and been able to give positive results.

IN A NUTSHELL

Many industry experts believe that India has the ability to push its manufacturing contribution of GDP to 25% by 2025. The Indian government has to act as the central figure of aligning private companies, public sectors, industries and all stakeholders in realizing this vision.

The government has to put policies in place, be it sector reforms, labour reforms or the elimination of business barriers. Many things are in process and reforms have already been announced by the government.

The government has taken various steps to further encourage investment and improve the business climate through the ‘Make in India’ initiative.

It is to be seen how the government makes this announcement a success. Investors who are already investing in mutual funds and need further investments to complement their current portfolio can certainly look at such thematic schemes with investment perspectives.

For first-time investors, it’s better to stick to the time-tested theory of investing in diversified equity mutual funds through SIPs or systematic investment planS.

Demurrage

Demurrage is the cost associated with owning or holding currency over a given period. It is sometimes referred to as the carrying cost of money. For commodity money such as gold, demurrage is the cost of storing and securing the gold. For paper currency, it takes the form of a periodic tax, such as a stamp tax, on currency holdings. Demurrage is sometimes cited as economically advantageous, usually in the context of complementary currency systems.

While demurrage is a natural feature of private commodity money, it has at various times been deliberately incorporated into currency systems as a disincentive against the hoarding of money, as well as to achieve other perceived benefits. In particular, for long-term investment financing, it affects the dynamics of net present value (NPV) calculations. Demurrage in a currency system reduces discount rates, and thus increases the present value of a long-term investment, and thus gives an incentive for such investments.

ntrepreneurs are integral to the growth, development and industrialization of a country, especially one that

is young and raring to go like India.

The India Start Up Report 2014 of NASSCOM (The National Association of Software and Services Companies) reveals that India is the fastest and the third largest ecosystem globally after the US and the UK.

Start-ups and entrepreneurs can indeed be nation builders who have a unique vision and a creative spirit.

It is, thus, imperative for policymakers to create a favourable environment for start-ups to grow, and the spirit of entrepreneurship to thrive in the nation.

Taking cognizance of the potential of entrepreneurs, Union Minister of Finance, Arun Jaitley, in his Budget noted that India should be a nation of ‘job creators’ and not ‘job seekers’.

E

Budget 2015 is indeed a godsend for start-ups as the government has proposed a series of

measures to boost new entrepreneurs

launch a National Skills Mission, which will consolidate skill initiatives that have been introduced across various ministries.

For start-ups in particular, the government is putting together a mechanism called Self-Employment and Talent Utilisation (SETU), which will support various aspects of the businesses of start-ups and other self- employment activities, particularly in technology-driven segments.

For this purpose, `1,000 crore has been initially provided in NITI Aayog. In order to enhance employability of the rural youth, a ‘Deendayal Upadhyay Gramin Kaushal Yojana’ has also been put in place that will be provided with `1,500 crores towards the progress of this scheme.

Besides, to encourage innovation, the Budget has also proposed the creation of the ‘Atal Innovation Mission’ that will be an innovation platform to

THE IMPETUS TO INNOVATION AND DEVELOPMENT OF SKILLS

A number of measures were thus proposed by the Finance Minister for furthering the progress of entrepreneurs in the nation. These measures are in line with the ‘Make in India’ and ‘Skill India’ vision of the NDA government.

The ‘Make in India’ vision focuses on skill development and creation of employment in 25 manufacturing sectors while ‘Skill India’ is specially designed to encourage entrepreneurship and job creation across all socio economic classes.

The ‘Skill India’ scheme has a vision of creating 500 million skilled Indian workers, especially the youth by the year 2020.

In keeping with this vision, Finance Minister Arun Jaitley has announced that the Indian government will soon

Prodding Start-ups



brought down from the current 30% to 25% in a phased manner over the next four years.

Further, in order to facilitate the inflow of technology at a lower cost, the fees and royalty for technical services has been reduced to 10% from the earlier 25%.

WHAT THE FUTURE HOLDS IN STORE

Needless to say, the start-up community is very excited about the Budget and thinks that several bold moves have been made to encourage the spirit of entrepreneurship in the country. Over the past few years, the start-up industry in India has witnessed stupendous growth.

With a young and inclusive entrepreneurial landscape, the number of start-ups in India is expected to go up to 11,500 from 3,100 now.

The budgetary announcements, therefore, provide major impetus to start-ups in the nation.

However, what needs to be seen over the next few years is how successfully the NDA government executes its schemes in order to boost the start-up environment in the natioN.

GST or Goods and Service Tax.

The currently applicable VAT structure exposes small business owners to multiple taxation norms in various states and leaves them at the mercy of the tax authorities.

The implementation of GST, which will be one uniform tax, will replace this multiple taxation structure, thus encouraging small business owners to expand beyond their own state limits.

ADDRESSING WORKING CAPITAL NEEDS

To address the finance needs of start-ups, that has been a traditional bottleneck for start-ups and small business owners, the government has proposed the setting up of a new financial entity called the Micro Units Development Refinance Agency (Mudra) bank.

Small and medium enterprises and budding entrepreneurs will be able to access loans from the Mudra Bank at lower rates of interest, thus making it easier for them to do business in the country without having to worry about working capital.

Lastly and perhaps most importantly, the Finance Minister has announced that corporate tax in India will be

support research scholars, academicians and entrepreneurs.

This platform, the government believes will foster a culture of research and innovation in the country, which is still far behind that of developed nations, despite the entrepreneurial prowess of India.

GROWING EASE OF DOING BUSINESS IN INDIA

One of the major grouses that start-ups usually have is the presence of many layers of administration and bureaucratic red tape that hinders them from going ahead with their plans at the start-up stage.

In order to remove these obstacles and facilitate an environment of ease for doing business in India, the government has launched an e-biz portal that will give 14 regulatory permissions at a single source.

The government proposes the setting up of an expert committee to reconsider the regulatory mechanism and replace, if necessary, the multiple permission structure.

One of the budgetary announcements that also comes as a major relief to the entrepreneur community is the promise of the implementation of

Anti-Fragility

It is a postulated antithesis to fragility where high-impact events or shocks can be beneficial. Anti-fragility is a concept developed by professor, former trader and former hedge fund manager, Nassim Nicholas Taleb. Taleb coined the term “anti-fragility” because he thought the existing words used to describe the opposite of “fragility” such as “robustness,” were inaccurate. Anti-fragility goes beyond robustness; it means that something does not merely withstand a shock, but actually improves because of it.

For example, he describes an anti-fragile trading strategy as one that does not merely withstand a turbulent market but becomes more appealing under such conditions. Another example he gives is weight lifting, which trains muscles not just to withstand heavy lifting but to develop increased strength as the body repairs the muscle fiber tears. Taleb discusses anti-fragility in his books, “The Black Swan,” “Fooled By Randomness” and his 2012 book “Antifragility.”

ost people who look at candlestick charts, focus only on green/red candles or

the filled and hollow candles.

Very little attention is paid to the crisscross lines that are interspersed within this array of green/red candles.

These thin lines are as important as full-bodied candles and sometimes even more important when it comes

M

Doji candlestick patterns appear on charts when market sentiment is indecisive and a trend is weakening

Dispelling Uncertainty

to predicting the future trend of the security/index in question. They are known as DOJI.

REGULAR CANDLESTICK

Although we have covered candlesticks in our previous issues, here is a brief refresher.

In a classical candlestick chart, every candle represents four basic things, Open, High, Low and Close of a

UpperShadow

BODY

BODY

LowerShadow

LowerShadow

UpperShadow

HIGH

HIGH

CLOSE

OPEN

OPEN

LOW

CLOSE

LOW

Candlesticks



Although dojis are considered as classical reversal patterns, in reality dojis are basically neutral candlesticks, which indicate indecision. After opening, the bulls and the bears exerted their forces but at the close of the trade, the prices closed near or at the open level, indicating that neither party were able to gain clear control.

This indicates that the strength of the momentum is weakening, which more often than not leads to a reversal. But doji can also indicate retracement or a mere pause in the trend. Dojis by themselves do not give much information, but when studied in context of the stage of the market in which they occur, i.e., oversold or overbought, or at crucial support or resistance levels, etc, can give valuable information.

TYPES OF DOJI

Since the open and close are virtually at the same level, and the body of the doji is usually a thin line or just too small, it is the length of the upper and the lower shadows (wicks) that give rise to different doji patterns.

session. The rectangular or cylindrical part of a candle is known as the body. It may be hollow (white) or filled (black or red).

If a stock closes higher than the opening price, a hollow body (Green) is drawn with the base of the body, representing the open price and the top of the body representing the closing price. If the stock closes lower than the opening price, a filled (Red) candle is plotted, with the top of the body representing the opening price and the bottom of the body representing the closing price.

The long or short thin lines above and below the body represent the high and the low, respectively and are called shadows or wicks, or tails. The high is marked by the top of the upper shadow and the low is marked by the bottom of the lower shadow.

DOJI

A doji is a candle that is formed when a security’s open and close are the same or nearly the same. The prices may move above or below the open price during the trading session, forming highs or lows. But by the end of the session, the price closes at or very near to the open price. Since the open and close are so near or at the same level, the body of the candle is very small or sometimes just a thin line. Doji has no colour.

may come soon. The close is very important. A close below the midpoint of the candle shows weakness; a close above the midpoint indicates strength.

high

closeopen

low

high

closeopen open

low

high

low

A long-legged doji is characterized by long upper and lower shadows. It looks like a cross. This type of doji represents a greater deal of indecision in the market, wherein the prices traded well above and below the open but by the end of the trade closed virtually at the level of the open. It suggests that demand and supply are nearing equilibrium and shift in trend

highcloseopen

low

A dragonfly doji forms when the open, high, and close are the same and the low creates a long lower shadow. In other words, after opening, the sellers pushed the price significantly down during the session. But by the end of the trade buying pressure emerged and pushed the prices back up to the Opening level and closed there. Since the prices never moved above the opening price throughout the session, there is no upper shadow and the resultant candle looks like a “T”, i.e., no upper shadow and long lower shadow.

Dragonfly dojis are fairly reliable bullish patterns. This pattern helps traders visualize the level at which demand sets in and where the support is formed (indicated by the low point of the lower shadow). A dragonfly doji that forms after a significant down move, usually signals that the downtrend may be stopping and a reversal may be forming. However, dragonfly doji should always be used in conjunction with other indicators such as an upward break of the downward trendline.

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A gravestone doji is exactly the opposite of a dragonfly doji. In that open, low and close are the same and the high creates a long upper shadow and there is no lower shadow. In other words, after opening, buyers pushed the prices significantly higher during the session.

But by the end of the trade, they could not hold on to the gains and the bears became stronger and pulled the prices back down to the opening level and closed there. Since the prices never moved below the opening price, there is no lower shadow and the resultant candlestick looks like an inverted “T” with no lower shadow and a long upper shadow.

This is a fairly reliable bearish pattern, which helps traders understand where the stock is facing resistance and where the supply level is. This is indicated by the high point of the upper shadow. A gravestone doji that occurs after a significant uptrend is a signal that the uptrend may be over and a trend reversal is round the corner.

However, it should always be used in conjunction with other indicators such as a downward break of the upward trendline.

Sometimes multiple dojis are formed in a short period of time. This is nothing but an extension of the indecision phase of the markets. It is usually found before a significant news event such as elections, budgets, etc are announced.

Traders know that the event is big and can have a significant bearing on the markets, but are not sure whether the news flow will be positive or negative, and, hence, are reluctant to take prices higher or lower. Usually after such multiple dojis, investors can expect a strong breakout in any one direction.

The timing or the stage at which a doji appears is very important. If the stock is in the early stage of an uptrend/downtrend, it is unlikely that a doji formed would indicate a top or bottom and may not indicate a reversal. It may just indicate a pause/rest period after which the trend may continue. However, a doji that appears after a prolonged upmove or down move has a strong chance of being a reversal signal.

Don’t trade at the first sight of a Doji. Always wait for the next candle to appear before taking any action. If a doji appears after a sustained upmove, and the very next candle is a large gap-down red candle, one can go short confidently, i.e., a new candle close below the doji low would be a signal to go short. Place your stop loss a few points above the doji high, and set your target to twice the range of the doji candles itself.

If the doji appears after a sustained down move, and the very next candle is large gap-up green candle, one can go long confidently. Place your stop loss a few points below the doji low

level and set your targets to twice the doji range. Alternatively, if the next candle after the doji forms in the same direction that the market/security had before the doji, it means that there will be no reversal and the doji formed should be ignored.

Thus, we see that doji is not a reversal signal by itself. To form a reversal signal, it needs confirmation in the form of the next or a next few candles that is against the direction that the market had prior to the formation of the doji.

Also, dojis should always be used in conjunction with other indicators. For example, a doji that appears at crucial support or resistance levels assumes greater importance. And dojis that form when RSI or stochastics are showing oversold or overbought levels are considered more reliable.

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A four price doji is simply a horizontal line with no upper or lower shadows. it indicates that all four, open, high, low, and close of the session were at the same level.

The four price doji is usually found in securities that are highly illiquid, where there is either no trading or very little trading during a session. For this reason, four price dojis are quite rare.

This is a bullish reversal pattern. A bullish doji star pattern is a double candlestick pattern, which consists of a long downward candle (red candlestick) followed by a doji candlestick that opens gap-down and opens and closes below the close of the previous red candlestick. The long red candle indicates that the stock is in a downtrend. The next day


opens with a gap-down, but trades within a small range and closes at or near its open. This is a sign that sellers are losing grip and buyers are regaining control. Smaller the doji candle, stronger is the signal. For confirmation of reversal look at a Bullish Morning Doji Star, or Bullish Abandoned Baby pattern, that will be discussed below.

bullish doji pattern, the appearance of a long third up (green) candlestick confirms that the reversal pattern is indeed true.

uptrend may have reversed.

This is a bearish reversal pattern, that is exactly the opposite of the bullish doji star, i.e., a green candle followed by a gap-up doji. It signals the end of an uptrend.

This is a bearish reversal pattern. It is exactly the opposite of Bullish Morning Doji Star, i.e, a green candle followed by a gap-up doji, followed by a red candle. It signals that the uptrend may have reversed.

This is a bullish reversal 3-candle pattern. It is the same as the Bullish Morning Doji star, with the only difference being that the shadows (wicks) of the doji must also gap below the shadows of the red and green candles. This tool is used to confirm that the reversal is true.

It is the opposite of Bullish Abandoned Baby. A green candle followed by a gap-up doji (above the shadows of the previous and next candle), followed by a red candle. This pattern indicates that the

It is a bullish 2-candle reversal pattern. The first candlestick is a long down candle (red candle), which is followed by a doji that is fully contained (engulfed) within the body of the first candle. The first candlestick is a long down candle, which indicates bearishness.

The next day, the prices open at or above the close of the previous day and end the day at the same level, giving rise to a doji that is totally contained within the previous candle. The bears feel that the downtrend is ending and rush to cover their shorts, which leads to a rise in prices.

This is a bullish reversal pattern. It is a 3-candlestick pattern. It is the same as the Bullish Doji Star, the only addition being the formation of a third upward candle (green candlestick) that forms after the doji. This upward candle should open gap-up (above the high of the previous candle and close. Since the red candle followed by the gap-down doji already has signalled that the bears are weakening in the

Bearish Harami Cross is the opposite of Bullish Harami Cross, where a


long green candle is followed by a doji that is totally engulfed by the body of the green candle. It signals that the uptrend may be reversing.

It is an extremely rare sequence of 3 consecutive dojis. Hereafter a formation of the first doji, the second doji opens gap-down, and the third

doji opens gap-up. In other words, the second doji must be below the first and third doji candles. After a sustained downtrend, the first doji is a warning, the second doji indicates the bears are losing strength, and the third doji is almost an indicator that the downtrend is over.

This is the opposite of Bullish Tri-Star Doji. After the first doji, the second doji opens gap-up, and the third doji opens gap-down.

An indicator that the bulls are losing strength.

Dojis don’t always mean reversal; they merely mean indecision.

But one thing is for sure, whatever the stage, a doji candlestick means that the prior trend is losing strength and there is lack of momentum and hence one has to be vigilan

Prime Minister Narendra Modi recently inaugurated the multi-purpose Micro Units Development and Refinance Agency (MUDRA) Bank. Finance Minister Arun Jaitley, in his Budget Speech for FY 2015-2016, had proposed the creation of a MUDRA Bank to address the problem of timely and adequate finances to the non-corporate small business sector. MUDRA Bank is an attempt by the government to facilitate credit to the unorganized sector.

What Is MUDRA Bank?

MUDRA Bank is not a traditional bank. It will not directly lend to borrowers. But it will offer refinance facilities. Refinance means it will offer funds to lending institutions that lend in certain areas like microfinance, SME or agriculture. Refinancing would be done at a lower interest rate. Initial refinance corpus will be of `20,000 crore.

MUDRA bank will also have a credit guarantee corpus of `3,000 crore. This will give an insurance cover to lenders in case a borrower defaults and has no collateral to fall back on. The bank will indirectly lend in the range of `50,000 to `10 lakhs.

Why The Need For MUDRA Bank?

With the current set-up, the unorganized sector is left out. For instance, a microfinance institution (MFI) does not give loans beyond `50,000 to a single borrower. Commercial banks mostly focus on large corporates.

While banks are required to channel 40% of their loans to the so-called priority sector, consisting of agriculture and other small loans, they typically give money to MFIs to meet such targets. Clearly, SME borrowers that need money above `50,000 are left out. These are the self employed and micro units. MUDRA scheme is aimed at ‘funding the unfunded’.

IMPORTANT JARGONFOR THE FORTNIGHT

Why Is The Unorganized Sector So Important? Micro enterprises are not getting due attention. As much as 50% of India‘s gross domestic product comes from the non-corporate sector. While 1 crore 25 lakh people find employment in large industries, small enterprises employ 12 crore people in the country.

There are 5.7 crore small business units and only 4% of them are able to access institutional finance. Further, even if small businesses have access to funds, they are offered at very high interest rates. Given the importance of small units to the economy, a MUDRA Bank was set up by the government. In fact, a SME-focused bank was a long-standing demand of the industry. MUDRA Bank is expected to offer refinance at a much cheaper rate, which, in turn, will lower rates for small borrowers.

What Would Be The Benefits To The Economy? MUDRA Bank can be a game changer for the economy. Experts expect GDP growth to get a boost by one percentage point. Apart from economic gains, there are many social gains. Small entrepreneurs of India are used to exploitation at the hands of money lenders. MUDRA will instill new confidence in them and help the task of nation-building.

Does India Have Refinance Agencies? Yes. One is the National Housing Bank (NHB), a refinance agency and a regulator in the home loan market, set up in July 1988. The National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI) are also in the business of refinancing.

Internationally, Bangladesh, a pioneer in the MFI sector has a similar entity for financing micro-credit, called the Palli Karma-Sahayak Foundation (PKSF).

MUDRA Bank



were not favouring banks. The pricing at which debt was converted into equity was the higher of the average of the last 26 weeks or the last two weeks. This historic price may not reflect the actual value of the company that is in stress. This led banks to convert at a price that was often higher than the market price, making the turnaround impossible or very costly. This limited the options for lenders to recover their dues.

Who Demanded The Changes?

The RBI and the banks had approached the SEBI and told that conversion of loans into equity as part of restructuring of a company in acute distress should be exempted from few regulatory requirements to make such a company viable and protect the interests of the lending institutions.

What Are The Relaxed Norms?

Instead of the existing market pricing formula, the SEBI has opted for a fair price mechanism for conversion of loans into equity. Conversion can happen at fair value deduced with a pricing formula, but cannot happen below the face value of the shares. Equity shares resulting from conversion will be subject to a lock-in of one year. No open offer will be mandated when banks breach the open offer threshold level.

What Would Be The Benefits?

For banks, converting into equity will mean lower provisioning for bad loans. This will make their books look nicer. Banks can also get management control of defaulting companies and help turnaround the company with the help of professionals.

For defaulting companies, conversion of debt-to-equity will improve their cash flows by lowering interest costs. This move will curb the chance of insolvency of the particular company.

What Is The Stock Market Perspective?

From stock market’s perspective, conversion of debt into equity is just a change in the capital structure of a debt-ridden company. There is no actual cash infusion into the company, which would have potentially helped the company to revive.

Now, the question is whether banks will play an active role in turning around the company by infusing more capital or buy more stake in the company with the purpose of turning it around after conversioN.

SEBI RELAXES DEBT-TO-EQUITY CON-VERSION NORMS FOR BANKS

What Are The Responsibilities Of MUDRA Bank?

MUDRA Bank will be a statutory body responsible for regulating and refinancing all MFIs that are in the business of lending to micro and small businesses. It will lay down policy guidelines for micro and small enterprise financing business, register MFI entities and regulate them. It will also rate MFIs (like ratings agency), formulate a code of conduct for the industry to ensure client protection principles and methods of recovery, promote right technology solutions for last mile lending to micro enterprises in the country.

How Will The MFI Sector Change Post MUDRA?

MUDRA Bank will be a game changer for the MFI sector. Refinance from MUDRA Bank could constitute a significant proportion of the overall debt of MFIs. Since MUDRA Bank is likely to have access to low-cost funds, MFI is likely to pass on the same, leading to lower funding costs for MFIs and their clients. A single regulator for all entities engaged in microfinance could lead to the adoption of a uniform code of conduct for all players in the industry. At present there are differences in regulations by different regulators. Further, the credit guarantee corpus of `3,000 crore will encourage lenders to take higher exposures

SEBI recently relaxed norms for Indian banks that want to convert debts of defaulting publicly-traded borrowers into equity. This move was long overdue. It will make it easier for both lenders and stressed companies to deal with banks’ stressed assets.

What Is Debt-To-Equity Conversion?

Debt-to-equity conversion will enable banks to get equity stake in the borrower company in exchange for full or partial cancellation of its debt claims against the company.

Why The Conversion?

As of September ’14, stressed assets (which include bad loans and restructured assets) stood at 10.7% of the total loans in the system. This has been plaguing banks’ balance sheets as well as the system. With conversion, banks can recover their dues.

So, What Is The Issue?

Current norms of debt-to-equity conversion of bad loans

www.nirmalbang.comDISCLAIMERIn the preparation of the content of this magazine, Nirmal Bang Securities Private Limited has used information that is publicly available, including information developed in-house. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgement of Nirmal Bang Securities Private Limited at the date of this publication/ communication and are subject to change at any point without notice. This is not a solicitation or any offer to buy or sell. This publication/ communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. For data reference to any third party in this material no such party will assume any liability for the same. Further, all opinion included in this magazine are as of date and are subject to change without any notice. All recipients of this magazine should seek appropriate professional advice and carefully read the offer document and before dealing and/ or transacting in any of the products referred to in this material make their own investigation. Nirmal Bang Securities Private Limited, its directors, officers, employees and other personnel shall not be liable for any loss (financial or otherwise), damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary and consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. This magazine is prepared for private circulation only. Nirmal Bang Securities Private Limited, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Securities Private Limited or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.

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