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Centre of Excellence in Quantitative Finance and Financial Engineering

MathWhiz to Quant Whiz

Calling all math wizards Career in Quant Finance beckons you Are you up for the challenge?
IIQF is the pioneer of high-end finance education in India. It is an education initiative of top industry practitioners who have pioneered the most sophisticated financial technologies in India like Portfolio Risk Management Models and Systems and Algorithmic Trading Systems using High Performance Parallel Computing. "One of the major problems we face when recruiting Financial Engineering Graduates/Postgraduates, even from some of the top Global Universities, is that a lot of them have not been taught the implementation skills, that is why they are not able to clear the interviews for Quant Jobs. The most important thing that we look for in these candidates is whether they have good implementation skills. Congratulations to IIQF and Thompson Reuters for getting it right and putting the emphasis on practical implementation skills which makes all the difference when people go for these types of jobs." Dr. Binay Kumar Ray, Ph.D., AVP Counterparty Credit Risk Quant, DBS Bank, Singapore. There exists a huge gap between the skills that are required by the industry and what the Indian academic system produces. The objective of IIQF is to impart training to students in those skill-sets that are in demand in the industry and make them industry ready, or as we call them The Street-Ready.

Post Graduate Program in Financial Engineering

(PGPFE) 1 Year (Part Time) program jointly conducted with
Financial Engineering is a multidisciplinary field involving the application of theories from financial economics, mathematics, statistics, physics and econometrics using complex tools and techniques of numerical analysis, the methods and tools of engineering, and the practice of computer programming to solve the problems of Investment Finance. This course provides a comprehensive training in these disciplines as they are applied in the context of high-end finance. The program is designed to impart the mathematical knowledge as well as practical implementation skills of structuring, valuations and risk analysis of various complex financial derivatives, quantitative trading techniques, quantitative portfolio management and investment strategies and risk management technologies.

Certificate Program in Applied Mathematical Finance for Engineers

A course tailor-made for candidates with strong numerical backgrounds who want to enter into the entry-level Quant teams of financial institutions like Investment Banks, Hedge Funds, Broking Firms, Derivatives Analytics Firms, etc. This is a very rigorous course on Stochastic Calculus, RNG, Advanced Monte Carlo Simulation Techniques, Complex Derivatives Valuations Models with extremely strong emphasis on hands-on programmatic implementations skills development. The program covers all the technical and quantitative aspects of derivatives modeling techniques used in the top Wall Street financial institutions.

Admission Process: Admission Test, Academic background and professional experience. Eligibility Requirements:
B.E./B.Tech/M.E./M.Tech M.A./M.Sc or equivalent in Statistics / Mathematics / Physics / Econometrics / Actuarial Science. Good exposure of Multi-variate Calculus, Linear Algebra, Probability and Statistics. Good knowledge of any programming language Good knowledge of MS Excel Applicants in their final year bachelor's/master's degree course (as applicable) are also eligible to apply.

Admission Process: The admission is through an admission test Quantitative Aptitude Test (QAT) Eligibility Requirements: B.E./ B.Tech./ M.E./ M.Tech
MBA / MMS / PGDBM or equivalent M.A./M.Sc. or equivalent in Economics / Statistics / Mathematics / Physics / Econometrics or CFA / FRM Good knowledge of any programming language

For more information log on to: or email to: Contact Person: Nitish Mukherjee (+91-9769860151/ +91-22-28797660)

Message from the Convenor

Heartiest congratulations to all of you. With the release of the 5th edition of the magazine we are getting bigger and better and it gives me immense pleasure and satisfaction to be the convenor of $treet. In-Fin-NITIE has given me an opportunity to work with students and advance forth with the common goal of learning and practicing finance. As always, In-Fin-NITIE brings you something new this time around too. After a series of issues with identified themes and articles related to those themes, the current issue gave students a chance to just write about finance. Themes and matching articles aside, this issue has a plethora of written words by students about whatever caught their eye in the field of finance. I applaud the effort of team $treet for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that this issue will entertain you and keep you engrossed about the recent happenings in the world of finance. We look forward to your comments and wish to bring out more interesting issues in the future. Dr. M Venkateswarlu Asst. Professor of Finance NITIE, Mumbai

From the Editor

Patron Dr. Amitabh De Convenor Prof. M. Venkateswarlu Editorial Board Ameeth Devadas Anil Kumar Singh Karthik Mahadevan Keerthi P Nimit Varshney Saurabh Bansal Siddharth Jairath
Special Thanks Sathish Selvam

Eurozone has taken the world stock markets to its grips. Any news, positive or negative is provoking sharp reactions from markets world over. Should Euro be salvaged? What is the fall out of Greece being allowed to exit out of Eurozone. In this edition of In-Fin-NITIE, our authors present their view. Infrastructure - the backbone of any countrys growth - faces hurdles in financing in India. Governance, regulations and administration are major challenges. This edition delves into alternatives for infra financing and overcoming these challenges. Also is a look into how much Basel norms can check or contribute to financial crisis. Taking endeavors to the next level, we present a new initiative- Sector Reports. We flag off this initiative with insights into Power and Telecom sectors. We would like to extend our thanks to everyone who has dedicated their time and effort in putting this issue together. The team at In-Fin-NITIE values your comments and suggestions. Bouquets and brickbats - all welcome at Editors In-Fin-NITIE

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05 09 14 17 20 25 29 30

Evolution of Basel Norms and their contribution to Subprime Crisis.


Compreshensive analysis of the Power Industry in India


Issues affecting Infrastructure development in India Infrastrucuture Financing


Euro Zone lost in crisis and the financial turmoil resulting from it.

Compreshensive analysis of the Telecom Industry in India


Achieving Economic Sustainability through Innovation


Evolution of Basel Norms and their contribution to the Subprime Crisis

Stuti Dalmia NMIMS-Mumbai

The article highlights the emergence of the Basel Accord in 1988 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed.
The Financial Crisis of 2008 shook the financial world and is still in tatters even after 3 years of its outbreak. From the New York investment bank Bear Stearns collapse in June 2007, Northern Rock liquidity support (Sep 07), Bank of America purchases of Countrywide Financial (Jan 08), Nationalization of Fannie Mae and Freddie Mac by the federal government (July 08), Lehman Brothers Bankruptcy (Sep08), Takeover of Merrill Lynch by Bank of America, Rescue of AIG through $85 billion, to Washington Mutual being sized by FDIC (the largest U.S bank failure), the events leading to the crisis crumbled the financial world beyond repair. The large-scale asset purchases (LSAP) in QE1, reinvesting the returns of QE1 in the purchase of Treasury securities and the operation twist adopted by U.S did little in boosting the confidence similar to the pre-crisis level. The crisis led not only the US financial markets feeling the heat but even exposed the strongest countries of Eurozone like Italy and Spain suffer the downgrade. The crisis exacerbated the situation to such an extent that even the three year 110 bn package by the Troika could not uplift the Greece economy. The continuous spat between German Chancellor Angela Merkel and French President Nicholas Sarkozy over the EFSF with Slovakia rejecting the plan to bolster the same got the European leaders again at loggerheads with no concrete resolution emerging from the discussions Post the onset of the crisis there were widespread calls for better regulation and supervision of the international finance system. Economists often debated that the lack of having a stringent regulatory regime, resulted in reckless behaviour by the international banks and was the main cause of the crisis. However contrary to the popular belief it was the implementation of Basel Norms that led the developed world into the pit of a chronic debt crisis. Origin of Basel I A combination of regulatory and negotiating regulations As Benjamin Cohen puts it, banks provide the oil that lubricates the wheels of commerce. To ensure that they can continue to perform this essential function to ensure that the wheels of commerce keep spinning banks must have the resources to withstand downturns in the economy. This is where capital regulation comes in. United States witnessed the failure of about 747 out of the
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-nt of Basel I and the incorporation of only credit risk, led the Basel Committee make amendments to the existing norms and reduce the incentive for banks to engage in regulatory capital arbitrage through Basel II. The new accord rested on three pillars. In addition to specifying minimum capital requirements (pillar 1), the new accord provided guidelines on regulatory intervention to national supervisors (pillar 2) and created new information disclosure standards for banks (pillar 3). Though Basel II was perThe Basel Committee on Banking Supervision was cre- ceived to ensure stability and soundness in the system with ated by the Group of Ten Countries (G-10) at the end market risk also considered, it did exactly the opposite. of 1974, after the failure of Herstatt Bank and the New York-based Franklin National Bank in 1974 revealing The misconception that the advanced internal ratthat the crisis is no longer limited to a single currency. ings based (A-IRB) approach and sophisticated models to estimate value-at-risk (VaR) would reduce The Basel Capital Accord (Basel I) was adopted in 1988, the incentive for regulatory capital arbitrage through and had two main objectives: a banks own risk assessment was never achieved. Hence the advanced internal ratings approach and the Strengthen the soundness and the stability of the freedom to deploy VaR models acted as the main vehiinternational banking system minimum capital ad- cles to the failure of Basel II. equacy ratio by assessing the credit risk of the banks. Create a level playing field among international banks Advanced Internal Ratings (A-IRB) & VaR- The decision to Banks from different countries competing for the allow international banks to use internal ratings for risk assame loans would have to set aside roughly the same sessment was influenced by the Institute of International amount of capital on the loans. Finance (IIF), a powerful consultative group of major US and European banks based in Washington. The fact that Fallout of Basel I and emergence of Basel II Basel I had arbitrary risk weights assigned to it and that the banks would be better off in risk sensitivity when using Basel I set the platform for maintaining the adequate internal rating approach got the consensus of almost all capital cushion required by the banks in the event of a the developed nations but the Bank of England. By middefault or grim situations. However the adequate capi- 2000, every member of the Basel Committee had come tal (Tier I & Tier II) to be maintained was solely based around to the IIFs view, on the credit risk (on-balance sheet, trading off-balance By the time the small and the developed nations became sheet, non trading balance sheet) assessment which was aware of the proceedings, the internal rating approach divided into 4 categories of Government Exposures with had already been implemented which left them with little OECD countries - 0%, OECD banks and non OECD govern- choice than to go ahead with it. The concerns were colments 20%, Mortgages 50%, Other Exposures, retail lectively voiced by Americas community Bankers (ACB), and wholesale(SMEs) 100% Second Association of Regional Banks, a group representThough the main aim of formulating the Basel Norms was ing the Japanese regional banking industry, and Midwest to ensure the optimal capital cushion to be maintained Bank, an American regional bank catering to consumers required in the event of a crisis, the very introduction of in Missouri, Iowa, Nebraska, and South Dakota, Reserve Basel Accord, increased the gap between economical and Bank of India and the Peoples bank of China. These banks risk-based capital and gave rise to regulatory capital arbi- highlighted the fact that the fundamental premise of entrage (RCB). The drawback that a loan to a safe industrial suring adequate capital cushion and maintaining equalcountry and that to a volatile developing country attracted ity among international banks was being defeated. Since the same weight highlighted the inefficiencies of the Ac- only the large (Too big to fail) banks had the requisite incord. The incentive to engage in regulatory capital arbi- frastructure and the technology to adopt the internal rattrage by lowering capital levels without actually reducing ing approach, it would prove to be a disadvantage for the the risk was the paramount fallout of the Basel Norms. banks in the emerging world. There was clear resentment Bad Debts, excessive leverage were primarily caused by that the pillar 1 would instead of maintaining stability the housing policy and the capital regulations. The shift would render the banks in the emerging banks vulnerable adopted by the banks from traditional mortgage lend- to takeovers because of lesser profit margins. ing to securitization (RCB) along built up huge reserves of debt and encouraged banks towards more risk taking However as witnessed post the crisis the exact opposite measures. of what was predicted happened. The emerging markets emerged almost unscathed despite using the standardized Revision of Basel I norms and the emergence of Basel II approach primarily due to the following reasons: The internal ratings approach modulated the use of historical data to predict the future trend of asset perThe overall simplistic approach followed in risk assessmeIn-Fin-NITIE Vol 2 6

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3,234 savings and loan associations between 1980s and 1990s. In the wake of this savings and loan crisis (S&L), the vulnerability of the international banks to bankruptcy sent tremors to the stability of the financial system. As a result of this growing scepticism and lack of confidence the Basel Committee realised the immediate need for a multinational accord to strengthen the stability of the international banking system.

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-formance. The assets behave differently in the ex- post Basel II norms. pansion and in the crisis phase revealing no correlation and hence rendering the mechanism of keeping Snapshot of the fallout of the Basel II norms less capital cushion for certain assets ineffective. The crisis highlighted a series of shortcomings in the Basel The banks found an easier way to widen the gap II accords: between the economic risk and the regulatory risk through the internal ratings and as a result the capi- The capital requirement ratio of 4% was inadequate tal cushion decreased rapidly thus at the discretion to withstand the huge losses of the individual banks engaging in higher degree of Responsibility for the assessment of counterparty risk capital arbitrage. The capital cushion was reduced to (essential to the risk-weighting of banks assets and the extent of 2% when the stipulated was 8%. therefore in assessing the capital requirement) assigned to the ratings agencies, which proved to be The VaR model (determining the probability of the fall in vulnerable to potential conflicts of interest. the value of portfolio) also met with criticism because of The capital requirement is pro-cyclical: if the global relying more on historical data and hence using statistieconomy expands and asset prices rise, the country cal concepts which fail when the economy behaves in opand counterparty risks associated with a borrower posite directions. Economists suggested backtesting to tend to decrease and thus the capital requirement is evaluate the actual risks encountered and that predicted lower; however, in the event of a recession, the reby the VaR models. verse is also true, thus raising the capital requirement for banks and further restraining lending. Basel II incentivises the process of securitisation, As a result, this process enabled many banks to reduce their capital requirement, take on growing risks and increase their leverage. Basel III and its subsequent impact (September, 2010)

Source: PWC report on Basel III

Shadow Banking System This term refers to the system of credit intermediation that involves entities and activities outside the regular banking system. Ellen Brown explains the concept of Shadow Banking: The shadow banking system operates largely through the repo market. Repos are sales and repurchases of highly liquid collateral, typically Treasury debt or mortgagebacked securities. The collateral is bought by a special purpose vehicle (SPV), which acts as the shadow bank. The investors put their money in the SPV and keep the securities, which substitute for FDIC insurance in a traditional bank. (If the SPV fails to pay up, the investors can foreclose on the securities.) This money is used by the banks for other lending, investing or speculating. But that puts the banks in the perilous position of funding long-term loans with short-term borrowings. When the investors get spooked for some reason and all pull their money out at once, the banks can no longer make loans and credit freezes. In September 2008, investors were spooked when the mortgage-backed securities backing their repo deposits proved not to be triple A as represented. Much of the shadow banking system was actually a consequence of Regulatory Capital Arbitrage which encouraged securitization and off balance sheet entities, which peaked

Source: PWC report on Basel III

Basel III will result in less available capital to cover higher RWA requirements and more stringent minimum coverage levels. The main considerations for Basel III apart from the enhanced quantitative measures are the following: 1) Revision of regulatory capital structure Harmonisation of regulatory capital deductions Publication of detailed disclosures 2) Capital Conservation Buffer (CCB) Create buffers in good times Impose good bank governance - increasing regulators power
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Evolution of Basel Norms

Evolution of Basel Norms

3) Countercyclical Buffer Prevent excessive credit growth Macro Prudential Buffer add- on to CCB to protect from excess credit levels Country Dependent exposure to private sector 4) 5) 6)

The retail, corporate, and investment banking segments will be affected in different ways. Retail banks will be affected least, though institutions with very low capital ratios may find themselves under significant pressure. Corporate banks will be affected primarily in specialized lending and trade finance. Investment banks will find sevNew Leverage Ratio eral core businesses profoundly affected, particularly tradVolume-based ratio, not risk adjusted ing and securitization businesses. Despite the long transiCredit Conversion factor of 10% applies to uncondi- tion period that Basel III provides, compliance with new tionally cancellable commitments processes and reporting must be largely complete before Cap on the build up of leverage the end of 2012 Safeguard against model risk and measurement errors Outlook for the next 10 years Systemic Add-on The Basel III norms have been introduced at a time when Reduce risks related to failure of systemically relevant, there is a dire need of a stringent regulation in the intercross-border institutions (SIFIs) national banking stability. However its too early to predict Decrease the probability of failure of systemic risks the positive benefits. There are other risks that we need Decrease the impact of failure of systemic banks to be cautious of: The implementation timeline for these regulations is Liquidity Coverage Ratio relatively long, in order to avoid any negative impact Adequate level of high-quality, unencumbered assets on credit conditions and the still recovering economy. to weather a severe stress scenario Stock of highly liquid assets subject to quantitative and qualitative eligibility criteria

7) Net Stable Funding Ratios Incentive for structural reforms to shift from shortterm funding profiles to more stable long term funding profiles.

Basel III will have significant impact on the European banking sector. By 2019 the industry will need about 1.1 trillion of additional Tier 1 capital, 1.3 trillion of short-term liquidity, and about 2.3 trillion of long-term funding, absent any mitigating actions. The impact on the smaller US banking sector will be simi- lar, though the drivers of impact vary. The Tier 1 capital shortfall is estimated at $870 billion (600 billion), the gap in short-term liquidity at $800 billion (570 billion), and the gap in long-term funding at $3.2 trillion (2.2 trillion). The capital need is equivalent to almost 60 percent of all European and US Tier 1 capital outstanding, and the liquidity gap equivalent to roughly 50 percent of all outstanding short-term liquidity. Basel III would reduce return on equity (ROE) for the average bank by about 4 percentage points in Europe and about 3 percentage points in the United States.
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Since most of the regulations are supposed to be implemented in between 2013 and 2019, though banks would be having sufficient time to take care of the infrastructure issues, the implementation would force certain small banks out of credit access. Basel Committee and IIF are of different opinion regarding the change in GDP corresponding to a percentage point in capital requirements The solution of the shadow banking system (such as insurance firms, hedge and pension funds, and investment banks) is still in shambles as they fall outside the purview of the regulations of even the new norms Regulatory Arbitrage, still remains a concrete risk for the international banking, as US and UK government focus on a sooner implementation. Securitisation wrecked the stability of the financial system, with assets being shifted to the off balance sheet. Since the credit conversion factor (the riskweighting) of these items has risen from the current 20% to 100%. This means that banks will have to increase their capital for asset-backed loans by a factor of five. Since trade finance instruments represent more than 30% of world trade, the fivefold increase in the costs would either be passed on to the consumers or banks would resort to less expensive trade finance instruments or other forms of unsecured financing such as forfeiting.

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Shashank NITIE, Mumbai

Power is something without which modern lifestyle cant be imagined. With rising standards of living, power requirements have grown manifold. However, our state electricity boards are not able to meet the rising demands. This prompted the government to bring in private players to bring competition and bridge the power deficit. Huge demand supply mismatch in power allured many players to jump into the sector. But the promises of revenue growth didnt last long as harsh realities came into picture. All targets of power generation went for a toss and Indias growth was threatened. Thorough analysis of the problem reveals the solution, which lies within us rather than the outside world. Strong socio-political will is something which can solve the power riddle, which is acting as one of the biggest bottleneck in Indias growth story

Overview of power sector in India

Power sector in India doesnt only deal with lighting home and running factories, it also encompasses the socio-political fabric of the country. Therefore, understanding it becomes even more challenging. Historically, Indias power consumption story has been a sordid tale, with low per capita consumption & penetration. In order to tide over the deficit, ministry has formulated a comprehensive blueprint for Power Sector development Mission 2012: Power for All. It intends to provide cost effective, reliable and quality power for all to sustain a minimum 8% GDP growth rate. However, the dream seems to be a distant one with capacity additions failing to catch up with the targets in each five year plan.

Power consumption: Per capita per year in kWHr Source: World Bank 2007

With each shortfall in capacity addition power deficit keeps on mounting, significant enough to impediment economic growth. Today, power sector is the single largest bottleneck in Indias growth story.
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Power Sector

The primary source of fuel for power generation in India is still coal followed by hydro. However with Indo-US nuclear deal in place, nuclear power will soon claim a bigger share of the pie.

Capacity addition: Poor track record Source: Central Electricity Agency

Although reforms have come and private players participating actively, State and Centre still remain the largest contributor to power generation in India.

Generation mix by source (174 GW) Source: Central Electricity Agency

Major reforms
Activities related to generation, distribution and transmission have been primarily done by the state electricity boards. Due to mounting subsidies doled out to the SEBs(State Electricity Boards), government decided to distance itself from tariff determination by bringing competition in the sector. Electricity Act 2003 was one of the biggest reforms in power sector in India. It tries to de-license the generation, distribution, transmission and trading business to private players. Some of the recommendations have been implemented while some are yet to be fully enforced.

Demand supply mismatch: Up to 10% during peak hours Source: Central Electricity Agency

Value chain analysis

Value addition in power sector comes from 4 major segments i.e. input sourcing, power generation, Transmission and Distribution. A firm can also show its presence in certain allied sector like infrastructure financing, power trading and power equipment manufacturing.

Although the private sector is in a nascent stage, it has been more successful in adding capacity when compared to its Government controlled counterparts.
Capacity addition: Higher achievement by Private sector Source: Central Electricity Agency

Raw material sourcing: Securing sources of coal and gas reserves de-risks the business from price fluctuations. Power generation: Setting up capacity for generation. Transmission:Offloading power from point of generation to national grid for subsequent transfer. Distribution: Setting distribution network, maintaining it and collecting revenue at each consumer end. Financing: Providing long term funds for capital expenditure in mining, generation, transmission etc. Equipment manufacturing: Reducing time and dependence on equipment suppliers by entering into JV with them. Also creates business by selling to others. Power trading: Allows trading of power as a commodity to reign over the demand supply mismatch. It tries to bring the excess captive capacity and upcoming excess merchant power in the grid.

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Neyveli Lignite: Government owned lignite mining firm with own power plants located on pit of the mine. Uses one of the lowest qualities of coal for generation. NHPC Ltd: Government firm with strong presence in hydropower generation. Later, embarked with additional portfolio of geothermal, tidal and wind. NTPC Ltd: It has the largest power generation facility with a target to double its capacity by 2017. Known for its project management skills, it has strong presence in coal mining, thereby making it less prone to coal spot market prices. PGCIL: State owned entity with exposure to transmission business only; it transmits 51% of total power generated in India on its network. Recently it has diversified into telecom business too. PTC India: Formed on a PPP model, it is the leading provider of power trading solution in India. Reliance Power: It has the largest portfolio in power generation among all the private sector firms. The Company has around 35,000 MW of power capacity under construction, including 3 UMPPs (Ultra-Mega Power Projects). Although many of its projects are under scrutiny due to fuel shortage, it is primarily tar-geting on long term power purchase agreements rat-her than merchant power. TATA Power: One of the oldest private sector players, it has highest operational capacity along with presence from mining up to distribution. By successfully completing Mundra UMPP, it has shown its excellence in project management skills. Company has a diverse mix of generating facility with gas fired, hydro and coal fired plants under its portfolio. Torrent Power:Very young firm with prime focus on distribution business.

Story of firms in power sector

Historically power generation has been the sole responsibility of SEBs. However with reforms coming in the sector and the huge demand-supply mismatch has promised private players humungous growth. One of the biggest reasons was merchant power- under which companies can sell power to any buyer at usually high rates than the long term Power Purchase Agreement (PPA). Huge expansion plans were charted out by them fueling up their share prices. However, the hope faced bitter reality with a multitude of problems coming into picture (discussed in details in next section). Despite all the hurdles the industry is trying its best and still believes that there is money to be made in this business. Analysis of major companies in power sector reveals: Adani Power: Relatively new firm in the power business with big expansion plans. It has complete backward integration starting from mines in Indonesia, ships to transport coal and the captive Mundra port to offload coal. CESC Ltd.: Owned by the RPG group, it is one the oldest private sector firms in power sector with strong presence in distribution business in West Bengal. It is one of the few firms with presence in all segments from mining of coal to power distribution. GMR Power and GVK Power: Primarily infrastructure firms with foray into power business too.

Challenges faced by power sector

Acute coal shortage: Power generation in India remains skewed towards coal, and is expected to remain the same for years to come. Allocation of coal blocks have been marred by factors like land acquisition, environment and forest clearances. Scarcity has widened from 4mt in 200405 to 40mt in 2010-11. Projects of 10,000 MW expected to come by 2017 have been marred by looming fuel shortage. Recently, companies are turning towards imported coal from Indonesia and Australia. Also, high ash content in InIn-Fin-NITIE Vol 2 11

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Power Sector

A firm in the business of power can create value through presence in one or all the segments, depending upon the macro environment factors prevailing, e.g. presence in mining has become very important due to fuel shortage.

JSW Energy:Emerged out of the steel business of JSW, it has power projects dotted across the country. Has presence in equipment manufacturing business too.

off as T& D losses, significantly impacting their books. Combined losses of the entire SEBs mount up to 1% of GDP. Weak distribution sector affect the generating companies significantly, low tariff by SEBs forces generating companies to reduce power at significantly lower rates. This affects their profit margins and prevents them from adding new generating capacities, leading to power deficits. It also distorts the merchant power business which is the prime reason for many firms entering into power sector. Poor health of SEBs also leads to longer receivable period for generating companies, because of their weakening credit quality. However, experiences of privatization of distribution sector have even not yielded encouraging results. Sociopolitical pressure preventing rise in power tariff coupled with power theft, make the distribution business unviable. Recent experiences of TATA Power and Reliance have not been encouraging. However, greater political will can make the distribution sector attractive for private players too.Torrent power distribution business in Gujarat is an excellent example of it. Reforms in T&D segment have been very slow primarily due to socio-economic influence; it needs reforms to put power sector back on track. Even transmission sector has a sordid story to tell. Transmission utility major PGCILis awaiting investments of Rs. 1.4 Trillion to expand its capacity. -dian coal enhances further dependence on imported coal. But, foreign governments have asked prices of exported coal to be linked to the global spot prices, thereby exposing companies to price vagaries. Adding to it, most of the long term PPA doesnt allow passing on the increase in fuel prices to consumers, putting a question mark on the viability of these projects. Coal prices have started sky rocketing post the 2009 slowdown at an exponential level. Funding concerns:In the target capacity addition in 11th five year plan of 78GW requiring an estimated Rs. 10.6 Trillion, power ministry expects a shortfall of 4.2 Trillion. This reflects the serious problem of financing new power projects. Prime reasons of it can be attributed to; rising interest rates, sector specific risk, slowing down of equity markets and banks closing down on sector exposure limits. In order to solve the riddle, power ministry has urged banks to increase their group exposure as well as individual exposure. However, such acts can create serious asset liability mismatch for commercial banks. Therefore, long term infrastructure bonds by infrastructure finance companies (like IIFC) and NBFCs (like PFC and REC) that can give loans to commercial banks can solve the crisis to a great extent. Also, companies using imported power equipment can utilize export financing. External Commercial Borrowings from overseas banks can be another solution to reign over the crisis. Generally quality projects dont face a funding crisis, but they may face high cost of funds. Equipment and manpower crunch:There is an acute shortage of trained technical professionals to build and run the power plants. Many imported equipment suppliers provide employees to run their plants for initial years, till their Indian counterparts are trained enough to handle them. An estimated 25,000 trained men would be required for every 50GW being added. There is global shortage of power equipments, with the tried and tested producers like BHEL, American and German suppliers having a long waitlist. However, cheap and

Power Sector
Weak distribution sector:Distributing free power to farmers, not having the will to revise tariff and high dependence on subsidies doled out to the State electricity boards (SEBs), have made them inept. Around 30% of power being lost in transmission and distribution make the business infeasible. Power theft, high T&D losses, billing inefficiency and buying costly merchant power to meet peak demand deficits have led to mounting losses for SEBs. Due to political pressure power distributed to SEBs is written
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Post electricity reforms everything was going smooth for the power sector, when suddenly the SEBs backed out from buying the costly merchant power, thereby putting question mark on the very existence of new firms. Expl-oding losses of SEBs impacted the off take rates of long term PPA too. When the miseries of power sector were not enough, coal shortage further aggravated them. With domestic coal demand exceeding the supply, firms started looking for solutions abroad through acquisition of coal assets. For some time imported coal resolved the issue, but soon the coal exporting nations like Indonesia and Australia started tweaking the coal prices to spot prices. Thus, coal spot prices along with the transportation cost made coal import unviable. Our power generators seem to have stuck in between the ailing SEBs and costly coal.

Depleting natural resources and increasing demands are putting pressure on our natural resources leading to price fluctuations. In such times of uncertainty, consumers have to start learning to live with reliable but costly power and forget the days dominated by SEBs with unreliable but subsidized power. For power sector firms, companies with excellent backward integration through long term purchase contract or captive coal blocks would flourish in the long term. Also, firms with own distribution licenses or long term PPA would be better bets at least for times till reforms happen at the SEBs end.

Possible answer to the question lies in the electricity act 2003 itself. Reforms have arrived at each segment of value chain, except the distribution sector. Expediting reforms in distribution sector through removing the socio-political influence on tariff revision and power theft is a way to get through. Coal shortages can be curbed by expediting the coal block allocation through early land settlement and environment clearances. Optimizing the domestic and imported fuel mix can help in reducing our dependence on costly imported coal. Above all these measures, Indian consumers should learn to bear the brunt of costly fuel.

References :
1) 2) 3) 4) 5) FY12.pdf 6) lyst/28_04_11_Analyst_Presentation_Final.pdf 7) 8) Industry outlook, The Hindu


Warren Buffett

Only buy something that youd be perfectly happy to hold if the market shut down for 10 years. An investment in knowledge pays the best interest.
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Power Sector

easily available Chinese equipment doesnt have a long track record to be credible enough. Roughly 75% of latest orders have gone to the Chinese.


Ankur Bhardwaj, Email : Sounak Debnath, Email : MDI, Gurgaon

This article deals with one of the important issues affecting the pace of infrastructure development in India Infrastructure financing. India needs funds from diverse sources for this sector but governance, regulatory and administrative issues pose major challenges while arranging these funds. These challenges have been discussed in detail. The theme of this article is to find out various alternatives so that there is easy availability of funds for infra finance. These alternatives range from developing domestic debt markets, easing regulations, innovative ways like loan buyouts etc. Infrastructure It is the backbone of economic activity in any country, but unfortunately, India in this sector suffers from Osteoporosis. Time and again various policy measures have been taken to boost infrastructure, but no major progress has taken place barring telecom infrastructure front.To fuel Indias ambitious growth rate and meet distant targets, a major restructuring is required on governance, legal, administrative and financial front. According to Global Competitiveness Report (GCR) 200910, India ranks very low at 76 in infrastructure domain. Also, India spends only about 6-7% of its GDP on infrastructure.

Finance is one of the most basic requirements for carrying out infrastructure projects, which are capital intensive and are in risky domains. The low levels of public investment have made Indias physical infrastructure incompatible with large increases in growth. Any further growth will be moderate without adequate investment in social, urban and physical infrastructure. In 11th 5 Yr plan, 30% of total infra investment is expected to be from private sector & 48.1% of total infra investment is expected to be from Debt sources . This emphasises the need for availability of cheap and easy finance options for private sector.

Source: 11th 5 year plan document, planning commission

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There a lot of hindrances in achieving easy financing for infra projects in India Savings not channelized Although Indias saving rate may be as high as 37%, but almost one-third of savings are in physical assets . Also financial savings are not properly channelized towards infra due to lack of long term savings in form of pension and insurance. Regulated Earnings Earnings from projects like power and toll (annuity) may be regulated leading to limited lucrative options for private sector and difficulty for lenders. Also any increase in input cost over the operational life is very difficult to pass on to customers due to political pressures. Asset-Liability Mismatch Most of the banks face this issue due to long term nature of infra loans and short term nature of deposits. Limited Budgetary Resources With widening fiscal deficit and passing of FRBM act, government has limited resources left to meet the gap in infra financing. Rest of funds have to be met by equity / debt financing from private parties and PSUs. Underdeveloped Debt Markets - Indian debt market is largely comprised of Government securities, short term and long term bank papers and corporate bonds. The government securities are the largest market and it has expanded to a great amount since 1991. However, the policymakers face many challenges in terms of development of debt markets like -Effective market mechanism -Robust trading platform -Simple listing norms of corporate bonds -Development of market for debt securitization Risk Concentration In India, many lenders have reached their exposure limits for sector lending and lending to single borrower (15% of capital funds) . This mandates need for better risk diversification and distribution Regulatory Constraints There are lot of exposure norms on pension funds, insurance funds and PF funds while investing in infrastructure sector in form of debt or equity. Their traditional preference is to invest in public sector of government securities.

Developing domestic bond market, Credit Default Swaps & derivatives : India receives substantial amount of FII investment in debt instruments. But most of this investment is concentrated in government securities and corporate bonds.Just like a well developed equity market, India needs efficient bond market so that long term debt instruments are available for infrastructure. Currently FIIs can trade Infra bonds only among themselves. Also if credit derivatives are allowed, then FIIs will be encouraged to invest more in these infrastructure bonds due to the presence of credit insurance and better management of credit risk. RBI is in the process of introducing CDS on corporate bonds and unlisted rated infrastructure bonds by Oct 24 2011 . However much progress is sought is this domain like minimizing multiplicity of regulators, removing TDS on corporate bonds, stamp duty uniformity, etc. Priority sector status to Infra :Hitherto, infrastructure financing doesnt come under the ambit of priority sector like agriculture, small scale industries, education etc. For every Rs 100 lent to non priority sectors, banks have to lend Rs 140 to priority sectors . Giving priority status will help banks to lend more to this sector. Take out financing and loan buyouts :One major problem faced by banks while disbursing loans to infrastructure projects is the asset liability mismatch inherent with these projects. Therefore many such projects are denied financing by banks. One way out from this predicament will be the taking over of loans by institutions like IDFC after the medium term. This will allow banks to finance these projects for a medium

To overcome these challenges and find a way for easy availability of funds for infra finance, we can explore following alternatives:

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Infrastructure Financing

Infrastructure Financing

Challenges in Infra Financing

Infrastructure Financing

Rationalizing the cap on institutional investors :Rationalizing the cap on investment in infra bonds by institutional investors like pension funds, PF funds and life insurance companies will lead to more investment in this sector. Currently insurance companies face a cap of 10% of their investible funds for infra sector . Tax free infrastructure bonds by banks :Currently only NBFCs can float tax free infrastructure bonds. If banks are also allowed to float these bonds, they can raise long-term resources for infrastructure projects, thus reducing the asset liability mismatch. Fiscal Recommendations :The following fiscal policy medications can allow more funding of infrastructure projects. Reducing withholding tax :Currently foreign investors pay withholding tax as high as 20% depending on the kind of tax treaty . It increases borrowing cost as the current market practice is to gross up the withholding tax. So this recommendation would reduce the borrowing cost. Tax treatment on unlisted equity shares :Unlisted equity shares attract larger capital gains tax than listed ones. Currently capital gains on unlisted equity shares are taxed at 20% instead of 10% for listed equity shares. Most private players in the infrastructure sector are not able to raise capital through public issues. Therefore for these players unlisted equity will be their dominant source of equity capital. Therefore they are adversely affected because of the tax treatment meted out to unlisted equity shares. Hence special consideration should be given to private players in the infrastructure sector to encourage investments. Foreign borrowings :With respect to foreign borrowings, several options are there like increasing the cap rate for longer tenure loans, relaxing refinancing criteria for existing ECBs/FCCBs; allow Indian banks for credit enhance ECBs (which is currently allowed only for foreign banks), etc.

Future cash flows as tangible security :The loans given to infrastructure project consortiums by banks are not secured & fall under the unsecured loans asset class for banks. Currently RBI mandates that provisioning of such unsecured loans is kept at 15% (additional 10% for sub standard unsecured loans) . Therefore total amount of loans to infrastructure projects are constrained because of the sub standard unsecured nature of these loans. The primary source of repayment of these loans is the future cash flows accrued from the project once they are completed and ready for public use. These cash flows can act as a security under certain conditions and debt covenants. For instance in case of road/highway development projects, RBI passed an order that a) annuities under build-operate-transfer (BOT) model and b) toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, be treated as tangible securities.

References :
1)The Global Competitiveness Report, 2009-10, World Economic Forum. 2)RBI Staff Studies Infrastructure financing global pattern and Indian experience 3)Deepak Parekh Report on Infra Financing 4)DNB Research BFSI Sector Regulatory & Policy environment
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Infrastructure Financing

term by sharing some of the risks with institutions like IDFC. This reduced risk exposure will allow banks to increase their financing of infrastructure projects.

Utilising foreign exchange reserves :Indias foreign exchange reserves stand at USD 311.5 bn (Sep 2011) .These reserves are primarily meant to provide a buffer against adverse external developments. But they do not add value to any real sector as they are invested in foreign currency assets such as government bonds. So, the returns on these reserves are quite small. The Deepak Parekh committee on infra financing is also in favour of allocating a small fraction of total reserves for infra purpose. This method of funding is already being used in some Asian countries like Singapore. After accounting for liquidity purposes, external shocks, high rate of domestic monetary expansion & real risks of disruptive reversals of capital flows; some of funds can be used for infra.


Sukriti Jain IIM Kozhikode

Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant, Carmen Reinhart and Kenneth Rogoff.
The first ever recorded incidence of sovereign default in 377 B.C. was of Greece and ever since it has failed to repay its debts on numerous occasions in the past 2,388 years. Even supposed bastions of financial reliability such as Germany, Britain, France and the United States have in the past also fallen into some kind of sovereign default rather, almost every nation on Earth (exception of a few Asian and Nordic countries) has at one time or another failed to honor their obligations. But over the years the frequency of defaults has increased and along with it the scale of collateral damage has assumed broader and systemic proportions (Great Depression of the 1930s; and the Asian financial crisis of the late 1990s). Today PIIGS juggernaut has transformed into Euro zones Frankenstein monster. The aegis of the Stability Growth Pact and Maastricht Treaty provided its adopters access to common currency, unified capital markets, free trade, cheap creditallowing it to accumulate high levels of debt and engage in tax evasion which led to shrinkage of government income along with near absence of a lender of last resort. The inherent weakness in the structure of Euro was it being adopted by a group of widely divergent economy living by their own fiscal policies but all dependent on monetary and interest rate policies. Already parallels have been drawn to 2008 Global Financial Crisis and the present one which is deemed to be lot bigger. We are structurally at the same place having unpayable debt held up by a fragile financial sector (Debt

Today PIIGS juggernaut has transformed into Euro zones Frankenstein monster. As the euro was designed to be the Roach Motel of currencies , there is no legal provision for departure. The cost of departure of either Germany or France are forbiddingly high estimated at about as high as 40-50% of their GDP by UBS . While the costs of efforts to save the euro are justified by the claim that the alternative would be too dreadful to contemplate, there lie important lessons to be learnt from Argentina, also a potential fiscal union on lines of United Europe. It is envisaged that it would require transforming EFSF into full-fleged treasury therby giving European Unions monetary Union a political leg to stand on.
to GDP ratio of Greece at 144% , Italy at 120% ), with massive indirect exposure by way of derivatives that no one bothered to tally/regulate. But as against Global Financial Crisis 2008 the total toxic assets the Fed wound up ,having to buy $1.5 trillion (tn) about 11.5% of US 2008 GDP , the total sovereign debt of PIIGS is about 3.1 tn which is 20% of Euro zones GDP (this is just the PIIGS sans exposure of France ,Belgium and UK which if needed, would double the amount owed!). Its alleged that current situation may wind up being four times 2008 price tag which happens to be just nominal value of toxic debt at the core.
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Euro Debt Crisis

Thus the message from Greece in words of Floyd stands stark and clear Im small. Ive suffered. You can afford to rescue me. If you dont, I can create chaos for all of you. As the euro was designed to be the Roach Motel of currencies. Once you enter, you can never leave since there is no legal provision for departure. While the costs of efforts to save the euro are justified by the claim that the alternative would be too dreadful to contemplate. Yet, economic history is replete with examples of fixed exchange rates that came unfixed (In 2002, Argentina gave up Currency Board which led to its eventual cut off from international credit, massive devaluation of Peso(by a factor of 2/3), a brief recession, plunging of imports , limits on bank withdrawalsthe corralitoand big losses for depositors and banks as their assets and liabilities were redenominated, each at a different exchange rate, but it proved to be a turning-point, as devaluation did work its way back to economy rebound wherein the economy grew at 9%, illustrating the costs entailed are not always greater than costs of servicing even the disuniting of currency unions, though rarer, happens from time to time.(As rouble area dissolved post the Soviet Union while the monetary union of the Czech Republic and Slovakia lasted only a matter of weeks)

notes as against there being no drachma notes floating around Athens), its reborn drachma would plummet which might be good for its exporters but which would trigger what Barry Eichengreen, calls the mother of all financial crises. The devaluation of the drachma against the euro would turn any debts that remained in euros into a crippling burden( a fallout of Original Sin). At the same time depositors, who are already edging towards the exit, would break into a headlong rush/ bandwagon effect ,triggering in its wake a dominoes effect culminating into run on banks not just in Greece but the entire coupled international financial system. (As if investors start taking their money out, the banks will react by deleveraging and reducing their exposures as quickly as they can by selling sovereign bonds. They will also be less eager to lend to the private sector. Such acts can lead to tensions in the U.S., a potential recession in Europe and possibly a global recession. ) The costs of both these eventualities as estimated by UBS are forbiddingly high at around 20-25% of GDP in the first year and then roughly half that amount in each subsequent year if Germany departs and at 40-50% of GDP in the first year with subsequent annual costs at around 15% for Greece stepping out. In contrast, a successful rescue would seem a bargain.(As adding together the money already spent on rescues, to what is needed to recapitalise European banks and any potential losses to the ECB the total will still only be in the hundreds of billions of euros.) If the ECBs intervention is bold and credible it might not even have to buy that much debt, because investors would step in. But this at its onset also evokes the classic moral hazard problem that safe in the knowledge that the ECB stands behind their bonds, they may shy away from reform and rectitude. While in an ordinary financial crisis with the passage of time the panic subsides and confidence returns. But in this case, time has been working against the authorities as in the absence of political will; Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had adopted earlier turn out to be inadequate by the time they become politically possible. Yet the outlines of the missing ingredient in the perfect European union, namely a common treasury, are beginning to emerge in the form of the European Financial Stability Facility (EFSF)agreed on by twenty-seven member states of the EU in May 2010and its successor, after 2013, the European Stability Mechanism (ESM). It is supposed to provide a safety net for the euro zone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland and is not large enough to support bigger countries like Spain or Italy. Nor was it meant to deal with the problems of the banking system, although its scope has

The three major ways to fall apart are: a wholesale dissolution into the original currencies; a fissioning into northern hard-currency and southern soft-currency blocks; or the exit of a trickle of countries, or just one. These translate to as suggested by Hans-Olaf Henkel that Germany could leave, either on its own or with a select group of small economiesAustria, Finland and the Netherlands or the third and more likely, Greece might secede or be forced out each having economically devastating consequences. If Germany were to leave, its Neue Deutschmark would soar and while transition itself would not pose a challenge the ensuing recapitalisation would lead to lower value of its foreign assets. On the other hand if Greece were to leave(drawing lessons from Argentina Crises but with the important difference of Argentina having a currency that still existed:peso
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To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults. All this would cost money. Under existing arrangements no more money is to be found and no new arrangements are allowed by the German Constitutional Court decision without the authorization of the Bundestag. There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow. This would require a new treaty, transforming the EFSF into a full-fledged treasury. That would presuppose a radical change of heart, particularly in Germany. The German public still thinks that it has a choice about whether to support the euro or to abandon it.

References :
1. How Greece could escape Euro: Floyd Norris 2. Does the Euro have a future? George Soros 3. Financial Turmoil Evokes Comparison to 2008: NELSON D. SCHWARTZ 4. Eurozone Debt Trap: Krugman (The New York Times) 5. Saving Euro: The Economist 6. The Eurozone Lost in the Transition:UBS 7. Eurozone: Where Next?: UBS 8. Greeces sovereign debt crunch 9. A very European crisis: Economist

ANSWERS TO FIN- QUIZZITIVE, AUGUST 2011 1.Levy stable distribution or simply Levy distribution 2.Plain Vanilla 3.Tax evasion 4.Dalal Street 5.Glass Steagall Act 6.J&K bank 7.Hyman Minsky and Minsky moment 8.Mariner Eccles. The Eccles building is the headquarters of the Federal Reserve, Washington 9.Prefix investing. Back during the bubble years, companies were seeing their stock prices shoot up if they simply added an e- prefix to their name and/or a .com to the end. 10.Paul Krugman
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Devang Vishe
IIM Kozhikode

Euro Debt Crisis

subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism while the authority to spend the money is left with the governments of the member countries.

That is a mistake. The euro exists and the assets and liabilities of the financial system are so intermingled on the basis of a common currency that a breakdown of the euro would cause a meltdown beyond the capacity of the authorities to contain. If at all Union survives the possible way forward as propounded by pro-political integration to enforce discipline is creation of a United States of Europe /fiscal union that would supervise the issuance of common Eurobonds. With the ins (good governments) emerging as more powerful (with power to veto countries fiscal excesses and giving the European Court of Justice the right to impose good behaviour) than outs (bad governments) building in its wake a huge new federal super state offering the ten countries, including Sweden, Poland and Britain, that kept their own currencies a choice: to join the euro or be excluded from a new core Europe.


Yash Paresh Doshi MMS Finance KJ Somaiya Institute of Management

The Telecom sector in India has been witnessing highest growth rates in the world for the past few quarters. This is particularly impressive considering that during the period the entire world was affected by the global economic meltdown and recessionary trends. This high growth rate was achieved with the operators ability to offer innovative and low tariff plans. This has led to rapid expansion of the subscriber base. It has paved the way for extensive provision of modern communication services in rural areas which are still not tapped to its potential and can provide strong boost to revenues. With the auctions of the 3G and BWA spectrum, this growth is set to become even more pronounced. The overall telephone subscriber base at the end of April 2011 stood at 861mn largely contributed by wireless subscriber base of 827mn. Teledensity, a measure of telephone penetration, has reached 71%. Average revenue per user (ARPU) of GSM subscribers for the quarter ended (QE) December 2010 was Rs105 from 144 in QE December 2009. The 27% decline in ARPU is due to increase in number of operators which caused tariff wars.

Wireless growth has been a stellar success story

Wireless subscribers stood at 827mn in April 2011; it grew 34% in the past one year and CAGR at 37.5% over past 5 years. India has the second largest subscriber base in the world. The wireless subscribers consist of GSM (Global System for Mobile communication) and CDMA (Code Division Multiple Access) depending on technology used. For the QE December 2010 out of 752mn, 14.7% subscribers were CDMA. Wire-line subscriber figure is ~35mn in March 2011 down from ~37mn or 5.3% YoY. According to a 2010 TRAI report the total no. of subscribers are expected to touch 1bn by 2014. But going by the average monthly additions in last 12 months, the figure of 1bn will be reached by March 2012, much sooner than expected.

Wireless teledensity hovers around ~70%

Wireless teledensity reached 69.2% in April 2011 from 52.3% in April 2010. Rural teledensity reached 33.4% in April 2011 from 24.3% YoY. Comparing this with urban teledensity which is 152.4% in April 2011 and owing to lower teledensity in rural areas than urban, there is scope for subscriber base growth in the rural areas, which every operator is aware of and trying to adjust their future plans to meet the rural demands.

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What is Visitor Location Register (VLR)? It is a temporary database of the subscribers who have roamed into the particular area, which it serves. The VLR data calculated here is on the basis of active subscribers in VLR on the date of Peak VLR of the particular month for which the data is being collected. It shows the active no. of users at a given time. The recent trend of owning more than one SIM because of cheaper tariffs makes VLR data more relevant than before. VLR data thus gives a better idea of present subscriber base. Idea (92.9%) has highest proportion of peak VLR among all the operators followed by Bharti (89.5%). Circle wise J&K (83.3%) had the highest proportion of VLR subscribers followed by Assam (77.4%) while Mumbai (57.2%) had the lowest proportion of peak VLR.

Source: TRAI

Trend in wireless teledensity

Source: TRAI

Bharti commands ~30% revenue market share

Considering the dual SIM phenomenon in the recent past, revenues rather than no. of subscribers represent the real market leadership. The revenues of an operator divided by the total industry revenues would give revenue market share. Access service revenue is considered for calculating the market share. The gross revenue is sum of access service, NLD, ILD and other services.

Source: TRAI

Bharti largest operator with ~20% subscriber share

Bharti Airtel dominates the wireless market with 19.9% share in April 2011. However, it may be noted that over the past 11 quarters it has lost its share from a peak of 24.7%, as newer operators have entered the field. Vodafone and Rcom have 16.6% and 16.8% share respectively. Their market share have fallen from a peak of 17.9% and 18.6% to low of 16.5% and 16.7% respectively, over last 11 quarters, a change of ~150-200bps. Also, Idea and Aircel have increased their share over last 11 quarters from 9.2% and 4.1% to 11.1% and 6.8% respectively.

Trend in revenue market share across operators

Subscriber market share-April 2011

Source: TRAI

Source: TRAI

Bharti is the market leader both in terms of revenue and subscriber market share. RCom and Vodafone though have similar no. of subscribers; Vodafone has almost double the revenue of RCom. This indicates Vodafone has

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Indian Telecom Sector

Trend in wireless subscriber additions

Active subscriber form ~71% of total industry subscribers

Indian Telecom Sector

higher revenue generating (or ARPU) customers. Also Rcom has CDMA subscribers which have lower ARPU than GSM, thereby acting as a drag on its overall revenues. BSNL has seen erosion in its revenue market share in over the past 11 quarters. Idea and Aircel have increased their respective market share by 560bps and 220bps over past 11 quarters. Tata along with Japanese operator DoCoMo was first to offer per second plans. This changed the industry tariff plans thereafter. Soon after its launch in August 2009, its revenue market share increased from 6.3% in September 2009 to 7.7% in March 2010, a 140bps increase.

based voice and non-voice services across the country. Given the scarcity of spectrum and bring India in line with international best practice TRAI recommended that the new licences will not have spectrum bundled with them and applicant will only have to pay entry fee which will be finalised by DoT. Classification of circles

Policy Environment
In terms of National Telecom Policy (NTP)-1994, the first phase of liberalization in mobile telephone service started with issue of 8 licenses for Cellular Mobile Telephony Services in the 4 metro cities of Delhi, Mumbai, Calcutta and Chennai to 8 private companies in November 1994. Subsequently, 34 licenses for 18 Territorial Telecom Circles were also issued to 14 private companies during 1995 to 1998. During this period a maximum of two licenses were granted for CMTS in each service area and these licensees were called 1st & 2nd cellular licensees. These licensees were to pay fixed amount of license fees annually based on the agreed amount during the bidding process. Subsequently, they were permitted to migrate to New Telecom Policy (NTP) 1999 regime wherein they are required to pay license fee based on revenue share, which is effective from 1st August, 1999. Consequent upon announcement of guidelines for Unified Access (Basic & Cellular) Services licenses on 11.11.2003, some of the CMTS operators have been permitted to migrate from CMTS License to Unified Access Service License (UASL). No new CMTS and Basic service licenses are being awarded after issuing the guidelines for Unified access Service Licence (UASL). Unified Access Service License (UASL) regime permits an access service provider (licensee) to offer both fixed and/ or mobile service under the same licence, using any technology. Total licensees as on 31st March 2008
Source: TRAI

Licence fees

Source: DoT

Spectrum charges

Source: DoT

In May 2010 and after the successful auction of the 3G spectrum, TRAI released a report recommending that the price of the 2G spectrum should be equal to that of 3G. TRAI also proposed to hike the spectrum fees by sixfold. It also recommended that the price for the initial 6.2 MHz of spectrum be upped to Rs110bn for pan-India operations, compared to Rs17bn earlier. The proposal states that every MHz of additional spectrum beyond the contracted limit of 6.2 MHz should cost Rs46bn.

Revenue and Cost composition Revenue

The gross revenue of the telecom service sector for the year 2009-10 was Rs1.6tn. The gross revenue for the three quarters ending December 2010 was Rs1.3tn compared to Rs1.2tn at the same time last year which is a 7.2% increase YoY.

Source: DoT

Domestic geography divided in to 22 circles

DoT has divided the entire country in to 22 telecom circles which are classified as Metros, Categories A, B and C. There have been talks about uniform licence fees where regulator TRAI recommending a 6% of AGR whereas DoT wants it to be higher at 8.5% of AGR. Previously the licence and the spectrum were offered together. But there may be some service providers who wish to provide services without using spectrum. For e.g. Internet service providers (ISP) can obtain only licence to provide all IP
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Key metrics Revenue per minute (RPM)

Revenue per minute is computed by dividing the total revenue by total no. of minutes. It is a key metric which describes the revenue of an operator. It also helps in determining ARPU. RPM has been decreasing over past 5 quarters. Idea has seen the largest fall in RPM of 12.9%, which is currently at 40.6p. Bharti also has seen a decline of 8.3%.

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RPM has been decreasing over past 5 quarters. Idea has seen the largest fall in RPM of 12.9%, which is currently at 40.6p. Bharti also has seen a decline of 8.3%. Average Revenue per User (ARPU)
Source: Idea, Bharti, Rcom

Access and Interconnect charges In a multi-operator, multi-service scenario, Interconnection Usage Charges (IUC) regime is an essential requirement to allow subscribers of one service provider to communicate with the subscribers of other service providers. The term interconnection refers to the commercial and technical arrangement under which service providers connect their equipment, networks and services to enable their customers to have access to the customers, services and networks of other service providers. IUC are wholesale charges payable by one telecom operator to the other for use of the latters network for originating, terminating or transiting/carrying a call. These charges are usually based on cost and indicate a fair compensation for use of one service providers network resources by another service provider. In India, Calling Party Pays (CPP) regime is followed, where the calling service provider pays to the other service provider on whose network the call terminates. At present IUC charges are at 20p/min for domestic voice calls and 40p/min for international voice calls. With new operators coming into the market who do not own endto-end networks and asymmetry in calling patterns this cost has gained significance. Hence incumbent operators who own end-to-end networks and have pan-India presence will have more on-net calls i.e. calls to the same service provider, and thus lesser IUC charges. Network operating expenditure Telecom being a capital intensive business, operators have to setup large scale infrastructure like cell sites, lease lines, towers etc. This also requires maintenance and operating costs like power, fuel, security, repairs etc. Setting up a single tower requires around Rs4.5mn and for pan India coverage one would require at least 50,000 towers. Hence companies often do joint ventures for better capacity utilisation, efficiency and cost sharing. Indus Towers is one such example of a JV between Bharti, Vodafone and Idea. Indus has more than >100,000 towers across India who rents out towers on a non-discriminatory basis. Selling, General and Administrative expenses This expense also forms around 13-18% of sales which is a significant number. Recent sector developments 3G and BWA auctions 3G refers to the third generation of wireless technology, which follows the two earlier generations. The International Telecommunications Union (ITU) defines 3G of mobile telephony standards IMT-2000 to facilitate growth, increase bandwidth, and support more diverse applications. For example, GSM could deliver not only voice, but also circuit-switched data at speeds up to 14.4Kbps. But to support mobile multimedia applications, 3G had to deliver data with better spectral efficiency, at far greater

Average Revenue per User (ARPU) It is computed by dividing total revenue for the relevant period by average customers; and dividing the result by the number of months in the relevant period. Minutes of Usage (MOU) Total MOU is the sum of all incoming and outgoing minutes used on the wireless access network by all customers in aggregate. This is divided by average number of customers in relevant period. Operating cost structure Licence fees and spectrum charges Service providers need to pay the government for the using the spectrum. In India revenue sharing model is practised, where the companies using the spectrum pay licence fees and spectrum charges depending on the revenue generated from it. It is charged as % of revenue depending on the presence in different circles as mentioned in policy environment earlier. Average fees are in the range of 10-12% for majority of telcos. Trend in Average licence and spectrum fees as % of AGR

Source: TRAI

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Indian Telecom Sector

Indian Telecom Sector

speeds. Hence with growing need for internet communication and shortage of spectrum availability, 3G auctions finally took place between April and May 2010. Broadband wireless access (BWA) enables high-speed data communication over wireless link. BWA offers significant advantages over fixed-line broad band systems based on cable networks or DSL in terms of better coverage, high scalability, lower maintenance and upgrade costs, and phased investment to match growth. 3G e-auction was held for 71 blocks across 22 circles. There were 4 blocks in 5 circles and 3 blocks in 17 circles for the bidding process. One block was reserved for BSNL/ MTNL in each circle and was decided that they would pay the amount which is to be paid by the winning bidder in that circle correspondingly. Metros, Delhi and Mumbai generated the highest bids of INR 33169mn and 32471mn per block respectively. The total amount generated in the auction was ~677bn. Bharti, Reliance and Aircel, each won in 13 circles. Vodafone, though being the second highest payer in the auction, won only in 9 circles. The BWA auction was held for 44 blocks across 22 circles with 2 blocks per circle. Taking a cue from 3G auctions and good prospective from the metros, Delhi and Mumbai generated the highest bids of INR 22410mn and 22929mn per block respectively. The total amount generated in the auction was ~385bn. Infotel Broadband Services Pvt. Ltd. Won in all the 22 circles. Other players who won in some circles were Aircel, Bharti, Tikona etc. Mobile Number Portability (MNP) MNP enables the end users to retain their telephone number and changing their service provider thus not compromising on quality, reliability and operational convenience. After much delay, MNP was implemented from 20th January, 2011. It was previously implemented in the Haryana circle in November 2010. It is expected to be a game changer as more and more subscribers had started keeping multiple SIMs, indicating that they wanted to change their existing customers but did not like to change their numbers. Though big players were not much fussed about MNP being detrimental to them over a long run and saw it as an opportunity to increase their market share. It is still early days to know about the impact of MNP. Reports indicate that by the end of April 2011 ~8.5mn subscribers have submitted their requests to different service providers for porting their mobile number. A Cellular Operators Association of India (COAI) report on MNP suggest that GSM players are preferred over CDMA due to better network quality, wide selection of value added service and handsets. The COAI said less than 5mn subscribers, or less than 1% of the countrys total customers, had opted to switch carriers. Of these, a net 192,761 customers switched to Vodafone Essar, while Idea Cellular was next, with net gains of 150,789 customers. Bharti AirtIn-Fin-NITIE Vol 2 24

-el gained a net 148,215 customers in MNP; Reliance Communications was a net loser of 306,417 customers. Entry Barriers: High The barriers are high due to various reasons1.Govt. Regulations 2.Highly capital intensive 3.Long gestation period 4.Large incumbents like Bharti, Vodafone, Idea. Threat of substitutes: Low Since telecommunication being a service it does not have a perfect alternative/substitute Buyer power: Low The buyer or customers are individual who dont have sufficient volume to be able to exert any pressure on companies. Few offsets would be enterprise specific plans where some margin can be passed on to the customers. Supplier power: High Since telecom is a technology dependent industry it is largely dependent on telecom equipments which are mostly sourced from either China or other developing nations. Also technical support provided by software firms is critical. Specialised firms are required to do these activities, thus high supplier power. Existing rivalry: Very high The bloodbath of tariffs seen in Indian telecom industry has changed the paradigm set by the incumbents. Global majors like Telenor (Norway), Sistema (Russia), who have deep pockets to sustain losses in earlier years, have tried to penetrate the Indian market. So in a way it is commendable for Indian cos. which have put hold against them but at the cost of declining profits. Recent price rise by Bharti and consequent rises by Vodafone, Idea etc. give a sign of normalcy ahead and taking the war may on non-prise basis. Conclusion Wireless sector in India has been a stellar success story. Key drivers for this include robust growth in subscriber base, lowest tariffs in the world and availability of mobile handsets even in the sub Rs2,000 range. In terms of teledensity, urban areas have more than 100% coverage, whereas in rural areas it is still less at around 33%. This shows that there is still scope of penetration in rural areas which would help in further increasing the subscriber base and teledensity. Also, availability of dual SIM mobiles had earlier created arbitrage opportunity between tariff plans of two operators, which in turn has led to convergence of voice tariffs across the industry. Data revolution is going to be the next big thing in telecom sector after the Voice revolution. In developed economies, VAS contributes about ~25% of service revenues. However, for India, this figure is barely 15%. So with the launch of 3G services and rising availability of 3G enabled smart phones, we expect data to be an influential driver of operator revenues and, more importantly, operating margins.

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Gurkirat Singh NITIE, Mumbai Email :

The current economic instability is the result of under regulated markets built on an ideology of free market capitalism and unlimited economic growth. Since the onset of industrialization and conceptualization of economic theories various externalities are not considered as a part of economy. They were assumed to be relatively small and solvable. The consequences that declare an economic model unsustainable always follow with a lag and unpredictably. Gradually the planning and decision making on various economic fronts has always considered an incomplete picture. But considering various economic failures in the new context, we have to remember that the goal of the economy is to sustainably improve human well-being and quality of life. Ultimately we have to follow innovative approaches while designing new models of economy that consider various outcomes in entirety. The we but us indisputable truth is that for economic growth have to juggle among various scarce resources, final aim is to reach for new models which help to conceptualize sustainable economic scenarios.

Economic development Economic Indicator - Macroeconomic Performance Factor - Gross Domestic Product per capita Scope for innovation - Developing models that can balance the impact of social and environment cost of production and consumption

Impediments to the Reform of National Economic Indicators

Innovative and holistic approach to internalize environment cost in National Accounts is required. It will apply environmentally adjusted economic indicators to the decision making processes. Doing so would mean a major reduction in the level of GNP, which few governments would want as it will present a poor

According to Brundtland Report sustainable economic development means meeting the needs of the present without undermining the ability of future generations to meet their needs. For such a sustainable economic model to exist various financial practices, human cost factors, and existing economic models need to be considered collectively. The economic practices that are useful today may become sustainable by supplementing them with new innovations.


An Indicator based improved approach to monitor progress towards sustainable economy is required . United Nations CSD (Commission on Sustainable Development) indicators of sustainable development can be used to understand scope of innovations.

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In-Fin-NITIE Vol 2 25

grade report. Also, the lack of international coordination hampers the development of a universally comparable framework for internalization, which prompts many governments to take a wait and see attitude. So to internalised environmental cost into existing system of economic indicators innovative rollouts require systematic implementation at supranational government level. This will provide an appropriate valuation of natural resources and will make economic considerations more comprehensive. Even when the existing SNA (System of National Accounts) remains in place, efforts to internalize environment costs in economic indicators can at least provide information on the real costs of economic growth which is not available now.

Economic Sustainability

Environmental health Economic Indicator - Research & development Factor: Efficiency levels of energy consumption Scope for Innovation: Expanding knowledge base and developing new and improved products. Environment provides various resources required for economic development. Unsustainable economic growth results out of improper planning and forecasting due to ignorance of certain factors that are not directly related to production. Hence scope for innovation lies while designing the simulation models which can bring together various departments to act in unison to gauge the impact of any economic change. This can uncover a huge scope to reduce load on resources and to promote long term sustainability. Industrial society must invent better production processes that are energy and material efficient. This approach must avoid wasteful consumption and consumerism. The supply chain of goods must include parallel running reverse salvation chain to collect the discarded material. This can be done by innovating and organizing the model for scrap industry.

Japans experience at reforming SNA

Net National welfare was calculated as an adjusted GNP. Actual pollution abatement costs were identified and deducted from GNP, so were the potential costs of meeting environmental standards for specific pollution problems. The value of non-market activities was added to GNP. This approach helped in determining the level of sustainability of the economy. Governance Economic Indicator - Effectiveness and Technological Provisions Factor: Higher Teledensity, Internet connectivity, and Resilient Cyber Security Scope for Innovation: Innovative technological implementations provide critical support for sustained economic development. Innovating network security models ensures controlling any vulnerability and maintains sustainability of ecommerce. Absence of secure systems leads to undetected risks for economy, and improper decision making. In todays globalized market, defences at the physical borders are not enough to achieve sustainability. The flow of transactions and critical information needs high level of defence settings at e-boundaries. This calls for continuous innovation in technology so as to guard off any threat on cyber frontiers (Refer Figure-1). Figure-1: Growth in the number of financial institutions whose clients were targeted using malicious programs to steal data.

Can innovation solve economic issues at micro level ?

New product innovations can reduce the burden on economy by decreasing the demand for energy. This is explained in the below cases: Case 1: Innovating efficient lighting systems Table-1

Case 2: Innovating Architecture designs for self sustained cities. Centralized development model has led to rise of mega cities at the expense of rural areas. This resulted in high levels of unemployment and poor quality of life in rural India and large scale migration of the population to big cities. This migration is a result of lack of sustainable agriculture in rural area. Hence we need to look for decentralized model of development. A sustainable city can feed itself with minimal reliance on the surrounding countryside, and power itself with renewable sources of energy. It involves a city designed with consideration of environmental impact, inhabited by people dedicated to minimization of required inputs of

Source: Kaspersky Lab In-Fin-NITIE Vol 2 26

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Examples from around the globe United States: Coyote Springs Nevada largest planned city in the United States. Denmark: The industrial park in Kalundborg is often cited as a model for industrial ecology. India: Manimekala is Hightech Eco City project in Karaikal. It will be first of its kind in South India. Case 3: Alliance to Save Energy - India Watergy-Program [Watergy = Water +Energy] This innovative approach led to the creation of an Alliance to Save Energy, in partnership with the U.S. Agency for International Development. The alliance is designing sustainable Watergy solutions for municipalities to take advantage of opportunities that reduce energy use, water waste and costs, while at the same time improving water services. The approach is to enter into partnerships with state-level urban development agencies, in parallel with interventions on the municipal level. Table-2

Education and Human Resource Development Education for Sustainable Economic Development (ESD) is the practice of teaching for sustainability. UNs Agenda-21 was the first international document that identified education as an essential tool for achieving sustainable development. On similar guideline a country can invent its education system as per the changing social and economic needs. Few methods that have undergone strategic innovations are: Liberalise and deregulate the education system to encourage promotion of new schools, colleges, vocational and other institutions of higher education. Central and state government should change their roles within the education system, reinventing themselves as facilitating and supervisory organisations. Devising a common schooling system and updating teacher training curriculums. Using computers and technology - Indias Rs. 3 K tablet, is such an innovative concept.

Innovation in education
For capacity building (i.e. creating awareness) in the young generation, MOEF has started a National Green Corps (NGC) program. This program provides opportunities to children to understand the environmental issues through school eco-clubs. During the tenth plan, 50,000 schools are expected to participate in NGC related activities. Moreover, 3000 eco-clubs have been set-up in schools in MOEF assistance. Global Trade partnership :Demand and supply patterns Huge scope of innovation in Supply Chains is feasible to optimize the transportation of goods and to collect & salvage the scrap. Efficient trade partnerships do contribute to economy and make it sustainable by reducing inflation and fluctuation in prices by ensuring timely supply of commodities. Example: ITCs e-Choupal agri-business model for rural communities ITCs Agri-Business Division, has conceived e-Choupal as an innovative and efficient supply chain aimed at delivering value to its customers around the world on a sustainable basis. It leverages an innovative IT model to virtually cluster all the value chain participants. It unshackles the potential of Indian farmer who has been trapped in a vicious cycle of low risk taking ability - low investment - low productivity - weak market orientation. Such a market-led business model can enhance the competitiveness of Indian agriculture and trigger a virtuous cycle of higher Tourism Economic Indicator Tourism Factor- Number of domestic and international tourists Scope for Innovation - Relevant contributor in an economy. Tourism model can be innovated to increase the revenue out of this sector by developing the requisite infrastructure and organising the sectors model. Example: French Agency for Tourism Engineering (AFIT) The French tourist industry has followed an innovative approach by redesigning the model and developing the infrastructure to support this sector. The AFIT undertakes several dozen new initiatives a year. These initiatives are organised according to several main lines of approach: Understanding of customer bases and activities. Public management of tourism. Development of tourism projects. Marketing of tourism supply. Lopsided progress in industrialisation has created significant challenges for managing pressures on resources. An example of unsustainable factor of economic developmeIn-Fin-NITIE Vol 2 27

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Economic Sustainability

energy, water and food, and waste output of heat, air pollution - CO2, methane, and water pollution.

incomes and enlarged capacity for farmer risk management, larger investments and higher quality and productivity. This sustainable trade model has led to a growth in rural incomes and will also unleash the latent demand for industrial goods. This will propel the economy into a higher growth trajectory.

Economic Sustainability

-nt is the green revolution, which made a beginning in 1966 and by 1985 it had reached saturation level and has been seeking a new direction. Water depletion in the tube well irrigated lands and water logging in the canal irrigated ones have emerged as serious problems. Later this was followed by providing free electricity to farm sector. It was expected that it would increase the development of the agriculture sector, but this unsustainable model disrupted the entire economy at the state level and the consequences have spilled over to other sectors. General perspective Economic Indicator - Sustainable Public Finance Factor - Inflation rate Scope for Innovation - Creating provisions for cushioning high and unanticipated inflation. This includes innovating warehousing and cold storage infrastructure Economic Indicator - Employment Factor - Debt to GNI ratio, Labour productivity and unit labour costs Scope for Innovation - High debt ratio is an indication of unsustainable public finance and a rise in labour cost decreases international competitiveness. Innovation can be done in the manufacturing processes to reduce the production cost and hence achieving sustenance. Recognizing these challenges the government of India has articulated the National Environmental Policy (2006)

which calls for a fundamental shift in the priority given to the environment and the regulatory approach to environmental management. Sustainable agricultural models have led to the innovation of practices under the organic farming. Various innovations in this sector are: Breakthroughs in Irrigation Technology (Sprinklers, Drip, Microdrip methods) Breakthroughs in Food Processing and Handling industry. CONCLUSION The long term solution to the unsustainable economic growth is therefore to move beyond the growth at all costs model to a model that recognizes the real costs and benefits of growth. Hence innovation on various fronts to develop sustainable economic models is the way ahead. This ensures to the degree possible that present and future generations can attain a high degree of economic security and achieve democracy while maintaining the integrity of the ecological systems upon which all life and production depends.

1)A Sustainable World - Edited by Thaddeus C. Trzyna 2)Toward a new sustainable economy-Robert Costanza Sustainable Development-by Dr. B.S Bhatia, Dhiraj Sharma 3)The French Initiative for innovation in tourism-by Mr. Andr-Jean Guerin 4) 5)



1. Who was the first banker on record? It was Pythius, a merchant banker from Asia Minor in 5th cen tury B.C. 2. The term check or cheque is derived from the game of chess. Putting the king in check means his choices are limited, just like a modern day cheque that limits opportunities for forgery and alteration. 3. The $ symbol comes from the Spanish dollar sign. In 1782, the US considered choosing the Spanish peso as the countrys currency. The abbreviation for the Spanish peso (PS) later transformed into a $. 4. The first credit card came out in 1951, produced by American Express. 5. A stack of one million US$1 bills is 361 feet high and weighs exactly 1 ton. 6. The worlds largest coins were used in Alaska in 1950. At 3 feet in diameter, these 2 feet wide coins weighed 90 lbs each! Each coin was valued at $2,500. 7. The worlds highest denomination note is Hungary 100 Million B-Pengo (American 100 Quintillion Pengo)*, issued in 1946. Thats 100,000,000,000,000,000,000 Pengo. It was worth about U.S. $0.20 in 1946.

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Fin Quizzitive
1. Connect the pictures 6. Connect the picture (or) The term X became very popular after the scandal Y. Name X & Y.

2. In Indian economic scenario which significant reform was introduced by the Indian Government on April 1, 1957? 3. Which financial services giant is referred as the Thundering Herd? 4. What is an unusual service offered by Bank of Baroda at Tirupati? 5. Connect the pictures

7. What do you call when a firms actual bank balance is greater than the balance shown in the firms book? 8. What is known as the working balance in foreign currency maintained by a bank in Country X with its correspondent bank in Country Y to facilitate delivery or receipt of currencies? 9. Name the index which used to detect the Bullish or Bearish trend in stock market? 10. Buying a company to sell its assets is otherwise called _____

Mail in your answers to : with the subject Fin-Quizzitive before November 20, 2011. Winner to get a cash prize of Rs. 1000/ $treet-Finance Club, NITIE Mumbai
In-Fin-NITIE Vol 2 29



Monica Dhiman ,IMI.


Team Street
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Leaning Outcome: Create MS Excel based financial models. Use the advanced tools of Excel. Record and use Excel Macros for implementing advanced functionalities in Excel. Carry out financial analysis, forecasting, etc. Valuation of company Bond Valuation Valuation of Mergers and Acquisitions Course Prerequisites: Basic knowledge of MS Excel Good knowledge in Finance

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