In fin-nitie vol 2 issue 3

INDIAN INSTITUTE OF QUANTITATIVE FINANCE
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 Certificate Program in
(PGPFE) – 1 Year (Part Time) program Applied Mathematical Finance for Engineers
jointly conducted with
A course tailor-made for candidates with strong
numerical backgrounds who want to enter into the
Financial Engineering is a multidisciplinary field involving entry-level “Quant” teams of financial institutions like
the application of theories from financial economics, Investment Banks, Hedge Funds, Broking Firms,
mathematics, statistics, physics and econometrics using Derivatives Analytics Firms, etc. This is a very rigorous
complex tools and techniques of numerical analysis, the course on Stochastic Calculus, RNG, Advanced Monte
methods and tools of engineering, and the practice of Carlo Simulation Techniques, Complex Derivatives
computer programming to solve the problems of Valuations Models with extremely strong emphasis on
Investment Finance. This course provides a hands-on programmatic implementations skills
comprehensive training in these disciplines as they are development. The program covers all the technical and
applied in the context of high-end finance. The program is quantitative aspects of derivatives modeling techniques
designed to impart the mathematical knowledge as well as used in the top Wall Street financial institutions.
practical implementation skills of structuring, valuations
and risk analysis of various complex financial derivatives, Admission Process: Admission Test, Academic
quantitative trading techniques, quantitative portfolio background and professional experience.
management and investment strategies and risk
management technologies. Eligibility Requirements:
• B.E./B.Tech/M.E./M.Tech
Admission Process: The admission is through an • M.A./M.Sc or equivalent in Statistics / Mathematics /
admission test – Quantitative Aptitude Test (QAT) Physics / Econometrics / Actuarial Science.
• Good exposure of Multi-variate Calculus, Linear Algebra,
Eligibility Requirements: Probability and Statistics.
• B.E./ B.Tech./ M.E./ M.Tech • Good knowledge of any programming language
• MBA / MMS / PGDBM or equivalent • Good knowledge of MS Excel
• M.A./M.Sc. or equivalent in Economics / Statistics / Applicants in their final year bachelor's/master's degree
Mathematics / Physics / Econometrics or CFA / FRM course (as applicable) are also eligible to apply.
• Good knowledge of any programming language

For more information log on to: www.iiqf.org or email to: info@iiqf.org
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 is-
sue will entertain you and keep you engrossed about the recent happen-
ings in the world of finance.

We look forward to your comments and wish to bring out more interest-
ing issues in the future.

Dr. M Venkateswarlu
Asst. Professor of Finance
NITIE, Mumbai
From the Editor
Patron
Eurozone has taken the world stock markets to its grips. Any news, posi-
Dr. Amitabh De tive or negative is provoking sharp reactions from markets world over.
Should Euro be salvaged? What is the fall out of Greece being allowed to
Convenor
exit out of Eurozone. In this edition of In-Fin-NITIE, our authors pre-
sent their view.
Prof. M. Venkateswarlu
Infrastructure - the backbone of any country’s growth - faces hurdles in
Editorial Board financing in India. Governance, regulations and administration are ma-
jor challenges. This edition delves into alternatives for infra financing
Ameeth Devadas and overcoming these challenges. Also is a look into how much Basel
Anil Kumar Singh norms can check or contribute to financial crisis.
Karthik Mahadevan Taking endeavors to the next level, we present a new initiative- Sector
Keerthi P Reports. We flag off this initiative with insights into Power and Telecom
Nimit Varshney sectors.
Saurabh Bansal We would like to extend our thanks to everyone who has dedicated their
Siddharth Jairath time and effort in putting this issue together. The team at In-Fin-NITIE
values your comments and suggestions. Bouquets and brickbats - all wel-
Special Thanks come at street.nitie@gmail.com.

Sathish Selvam Editors
In-Fin-NITIE

© $treet-Finance Club, NITIE Mumbai

Contents

05
BASEL NORMS
Evolution of Basel Norms and
their contribution to Subprime
Crisis.

09
POWER SECTOR
Compreshensive analysis of
the Power Industry in India

INFRASTRUCTURE

14 Issues affecting Infrastruc-
ture development in India -
Infrastrucuture Financing

EURO DEBT CRISIS

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

20
TELECOM INDUSTRY
Compreshensive analysis of
the Telecom Industry in India

SUSTAINABILITY

25
THROUGH INNOVATION
Achieving Economic Sustain-
ability through Innovation

Features
29 FINTOONZ

30 FIN-QUIZZITIVE

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 con-
sidered 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 Sarkozy over the EFSF with Slovakia rejecting the plan to bol-
is still in tatters even after 3 years of its outbreak. From the ster the same got the European leaders again at loggerheads
New York investment bank Bear Stearns collapse in June with no concrete resolution emerging from the discussions
2007, Northern Rock liquidity support (Sep’ 07), Bank of Post the onset of the crisis there were widespread calls
America purchases of Countrywide Financial (Jan’ 08), Na- for better regulation and supervision of the international
tionalization of Fannie Mae and Freddie Mac by the fed- finance system. Economists often debated that the lack of
eral government (July 08), Lehman Brothers Bankruptcy having a stringent regulatory regime, resulted in reckless
(Sep’08), Takeover of Merrill Lynch by Bank of America, Res- behaviour by the international banks and was the main
cue of AIG through $85 billion, to Washington Mutual being cause of the crisis. However contrary to the popular be-
sized by FDIC (the largest U.S bank failure), the events lead- lief it was the implementation of Basel Norms that led
ing to the crisis crumbled the financial world beyond repair. the developed world into the pit of a chronic debt crisis.

The large-scale asset purchases (LSAP) in QE1, reinvest- Origin of Basel I – A combination of regulatory and ne-
ing the returns of QE1 in the purchase of Treasury securi- gotiating regulations
ties and the operation twist adopted by U.S did little in
boosting the confidence similar to the pre-crisis level. The As Benjamin Cohen puts it, banks provide ‘the oil that
crisis led not only the US financial markets feeling the lubricates the wheels of commerce’. To ensure that
heat but even exposed the strongest countries of Euro- they can continue to perform this essential function – to
zone like Italy and Spain suffer the downgrade. The crisis ensure that the wheels of commerce keep spinning –
exacerbated the situation to such an extent that even the banks must have the resources to withstand downturns
three year €110 bn package by the Troika could not uplift in the economy. This is where capital regulation comes in.
the Greece economy. The continuous spat between German
Chancellor Angela Merkel and French President Nicholas United States witnessed the failure of about 747 out of the
© $treet-Finance Club, NITIE Mumbai In-Fin-NITIE Vol 2 5

3,234 savings and loan associations between 1980s -nt of Basel I and the incorporation of only credit risk,
Evolution of Basel Norms

and 1990s. In the wake of this savings and loan cri- led the Basel Committee make amendments to the exist-
sis (S&L), the vulnerability of the international banks to ing norms and reduce the incentive for banks to engage
bankruptcy sent tremors to the stability of the finan- in regulatory capital arbitrage through Basel II. The new
cial system. As a result of this growing scepticism and accord rested on three ‘pillars’. In addition to specifying
lack of confidence the Basel Committee realised the im- minimum capital requirements (pillar 1), the new accord
mediate need for a multinational accord to strength- provided guidelines on regulatory intervention to national
en the stability of the international banking system. supervisors (pillar 2) and created new information disclo-
sure standards for banks (pillar 3). Though Basel II was per-
The 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 rat-
that the crisis is no longer limited to a single currency. ings’ based (A-IRB) approach and sophisticated mod-
els 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 bank’s 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 vehi-
international 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 as-
same 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 mid-
default 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 IIF’s 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 col-
ments – 20%, Mortgages – 50%, Other Exposures, retail lectively voiced by America’s community Bankers (ACB),
and wholesale(SMEs) – 100% Second Association of Regional Banks, a group represent-
Though 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 People’s bank of China. These banks
risk-based capital and gave rise to regulatory capital arbi- highlighted the fact that the fundamental premise of en-
trage (RCB). The drawback that a loan to a safe industrial suring adequate capital cushion and maintaining equal-
country 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 in-
cord. The incentive to engage in regulatory capital arbi- frastructure and the technology to adopt the internal rat-
trage 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
The overall simplistic approach followed in risk assessme- historical data to predict the future trend of asset per-

In-Fin-NITIE Vol 2 6 © $treet-Finance Club, NITIE Mumbai

-formance. The assets behave differently in the ex- post Basel II norms.

pansion and in the crisis phase revealing no correla-
tion 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) as-
signed 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 statisti- economy expands and asset prices rise, the country
cal concepts which fail when the economy behaves in op- and 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 re-
by 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 mortgage-
backed securities. The collateral is bought by a “special
purpose vehicle” (SPV), which acts as the shadow bank. Source: PWC report on Basel III
The investors put their money in the SPV and keep the se- Basel III will result in less available capital to cover higher
curities, which substitute for FDIC insurance in a tradition- RWA requirements and more stringent minimum cover-
al bank. (If the SPV fails to pay up, the investors can fore- age levels.
close on the securities.) This money is used by the banks The main considerations for Basel III apart from the en-
for other lending, investing or speculating. But that puts hanced quantitative measures are the following:
the banks in the perilous position of funding long-term
loans with short-term borrowings. When the investors get 1) Revision of regulatory capital structure
spooked for some reason and all pull their money out at • Harmonisation of regulatory capital deductions
once, the banks can no longer make loans and credit freez- • Publication of detailed disclosures
es. In September 2008, investors were spooked when the
mortgage-backed securities backing their repo “deposits” 2) Capital Conservation Buffer (CCB)
proved not to be “triple A” as represented. • Create buffers in good times
Much of the shadow banking system was actually a conse- • Impose good bank governance - increasing regulator’s
quence of Regulatory Capital Arbitrage which encouraged power
securitization and off balance sheet entities, which peaked


3) Countercyclical Buffer The retail, corporate, and investment banking segments

• Prevent excessive credit growth will be affected in different ways. Retail banks will be af-
Macro Prudential Buffer – add- on to CCB to protect fected least, though institutions with very low capital
from excess credit levels ratios may find themselves under significant pressure.
Country Dependent – exposure to private sector Corporate banks will be affected primarily in specialized
lending and trade finance. Investment banks will find sev-
4) New Leverage Ratio eral core businesses profoundly affected, particularly trad-
• Volume-based ratio, not risk adjusted ing and securitization businesses. Despite the long transi-
• Credit 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
5) 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 inter-
cross-border institutions (SIFIs) national banking stability. However it’s 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
6) 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 short-
term funding profiles to more stable long term fund-
ing profiles.

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


POWER SECTOR
Shashank
NITIE, Mumbai

“ Power is something without which modern lifestyle can’t 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 didn’t last long as harsh realities
came into picture. All targets of power generation went for a toss and India’s 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 India’s growth story

Overview of power sector in India
Power sector in India doesn’t only deal with lighting home
and running factories, it also encompasses the socio-po-
“
litical fabric of the country. Therefore, understanding it
becomes even more challenging. Historically, India’s pow-
er consumption story has been a sordid tale, with low per
capita consumption & penetration.
In order to tide over the deficit, ministry has formulated a Power consumption: Per capita per year in kWHr
comprehensive blueprint for Power Sector development Source: World Bank 2007
– “Mission 2012: Power for All”. It intends to provide
cost effective, reliable and quality power for all to sustain With each shortfall in capacity addition power deficit
a minimum 8% GDP growth rate. However, the dream keeps on mounting, significant enough to impediment
seems to be a distant one with capacity additions failing economic growth. Today, power sector is the single larg-
to catch up with the targets in each five year plan. est bottleneck in India’s growth story.


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

share of the pie.

Capacity addition: Poor track record
Source: Central Electricity Agency

Although reforms have come and private players partici-
pating actively, State and Centre still remain the largest Generation mix by source (174 GW)
contributor to power generation in India. Source: Central Electricity Agency

Major reforms

Activities related to generation, distribution and trans-
mission have been primarily done by the state electric-
ity boards. Due to mounting subsidies doled out to the
SEBs(State Electricity Boards), government decided to dis-
tance itself from tariff determination by bringing competi-
tion 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
Demand supply mismatch: Up to 10% during peak hours players. Some of the recommendations have been imple-
Source: Central Electricity Agency mented while some are yet to be fully enforced.

Value chain analysis

Value addition in power sector comes from 4 major seg-
ments i.e. input sourcing, power generation, Transmission
and Distribution. A firm can also show its presence in cer-
tain allied sector like infrastructure financing, power trad-
ing and power equipment manufacturing.

• Raw material sourcing: Securing sources of coal and
gas reserves de-risks the business from price fluctua-
Although the private sector is in a nascent stage, it has tions.
been more successful in adding capacity when compared • Power generation: Setting up capacity for generation.
to its Government controlled counterparts. • Transmission:Offloading power from point of genera-
tion to national grid for subsequent transfer.
• Distribution: Setting distribution network, maintain-
ing it and collecting revenue at each consumer end.
• Financing: Providing long term funds for capital ex-
penditure in mining, generation, transmission etc.
• Equipment manufacturing: Reducing time and de-
pendence on equipment suppliers by entering into JV
with them. Also creates business by selling to others.
• Power trading: Allows trading of power as a commod-
ity to reign over the demand supply mismatch. It tries
Capacity addition: Higher achievement by Private sector to bring the excess captive capacity and upcoming ex-
Source: Central Electricity Agency
cess merchant power in the grid.

A firm in the business of power can create value through • JSW Energy:Emerged out of the steel business of JSW,
presence in one or all the segments, depending upon the it has power projects dotted across the country. Has
macro environment factors prevailing, e.g. presence in presence in equipment manufacturing business too.

Power Sector
mining has become very important due to fuel shortage.
• 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 gen-
eration.

• NHPC Ltd: Government firm with strong presence in
hydropower generation. Later, embarked with addi-
tional 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 pres-
ence in coal mining, thereby making it less prone to
coal spot market prices.

• PGCIL: State owned entity with exposure to transmis-
sion business only; it transmits 51% of total power
generated in India on its network. Recently it has di-
versified 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
Story of firms in power sector generation among all the private sector firms. The
Company has around 35,000 MW of power capacity
Historically power generation has been the sole responsi- under construction, including 3 UMPPs (Ultra-Mega
bility of SEBs. However with reforms coming in the sector Power Projects). Although many of its projects are
and the huge demand-supply mismatch has promised pri- under scrutiny due to fuel shortage, it is primarily tar-
vate players humungous growth. One of the biggest rea- -geting on long term power purchase agreements rat-
sons was merchant power- under which companies can -her than merchant power.
sell power to any buyer at usually high rates than the long
term Power Purchase Agreement (PPA). Huge expansion • TATA Power: One of the oldest private sector players,
plans were charted out by them fueling up their share it has highest operational capacity along with pres-
prices. However, the hope faced bitter reality with a mul- ence from mining up to distribution. By successfully
titude of problems coming into picture (discussed in de- completing Mundra UMPP, it has shown its excel-
tails in next section). Despite all the hurdles the industry is lence in project management skills. Company has a
trying its best and still believes that there is money to be diverse mix of generating facility with gas fired, hydro
made in this business. and coal fired plants under its portfolio.

Analysis of major companies in power sector reveals: • Torrent Power:Very young firm with prime focus on
• Adani Power: Relatively new firm in the power busi- distribution business.
ness with big expansion plans. It has complete back-
ward integration starting from mines in Indonesia, Challenges faced by power sector
ships to transport coal and the captive Mundra port
to offload coal. Acute coal shortage: Power generation in India remains
skewed towards coal, and is expected to remain the same
• CESC Ltd.: Owned by the RPG group, it is one the old- for years to come. Allocation of coal blocks have been
est private sector firms in power sector with strong marred by factors like land acquisition, environment and
presence in distribution business in West Bengal. It forest clearances. Scarcity has widened from 4mt in 2004-
is one of the few firms with presence in all segments 05 to 40mt in 2010-11. Projects of 10,000 MW expected
from mining of coal to power distribution. to come by 2017 have been marred by looming fuel short-
age.
• GMR Power and GVK Power: Primarily infrastructure Recently, companies are turning towards imported coal
firms with foray into power business too. from Indonesia and Australia. Also, high ash content in In-


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 com-
Power Sector

panies 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 defi-
cits. 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 weak-
ening credit quality.

However, experiences of privatization of distribution
sector have even not yielded encouraging results. Socio-
political pressure preventing rise in power tariff coupled
with power theft, make the distribution business unvia-
ble. Recent experiences of TATA Power and Reliance have
not been encouraging. However, greater political will can
make the distribution sector attractive for private play-
ers 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 influ-
ence; it needs reforms to put power sector back on track.
Even transmission sector has a sordid story to tell. Trans-
mission 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 ex- Funding concerns:In the target capacity addition in 11th
ported coal to be linked to the global spot prices, thereby five year plan of 78GW requiring an estimated Rs. 10.6
exposing companies to price vagaries. Adding to it, most Trillion, power ministry expects a shortfall of 4.2 Trillion.
of the long term PPA doesn’t allow passing on the increase This reflects the serious problem of financing new power
in fuel prices to consumers, putting a question mark on projects. Prime reasons of it can be attributed to; rising
the viability of these projects. interest rates, sector specific risk, slowing down of equity
Coal prices have started sky rocketing post the 2009 slow- markets and banks closing down on sector exposure lim-
down at an exponential level. its.
In order to solve the riddle, power ministry has urged
banks to increase their group exposure as well as indi-
vidual 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 Commer-
cial Borrowings from overseas banks can be another so-
lution to reign over the crisis. Generally quality projects
don’t face a funding crisis, but they may face high cost of
funds.

Equipment and manpower crunch:There is an acute
Weak distribution sector:Distributing free power to farm- shortage of trained technical professionals to build and
ers, not having the will to revise tariff and high depend- run the power plants. Many imported equipment suppli-
ence on subsidies doled out to the State electricity boards ers provide employees to run their plants for initial years,
(SEBs), have made them inept. Around 30% of power be- till their Indian counterparts are trained enough to han-
ing lost in transmission and distribution make the busi- dle them. An estimated 25,000 trained men would be re-
ness infeasible. Power theft, high T&D losses, billing inef- quired for every 50GW being added.
ficiency and buying costly merchant power to meet peak There is global shortage of power equipments, with the
demand deficits have led to mounting losses for SEBs. Due tried and tested producers like BHEL, American and Ger-
to political pressure power distributed to SEBs is written man suppliers having a long waitlist. However, cheap and

easily available Chinese
equipment doesn’t

Power Sector
have a long track record
to be credible enough.
Roughly 75% of latest
orders have gone to the
Chinese.

Conclusion

Post electricity reforms
everything was going
smooth for the power
sector, when suddenly
the SEBs backed out
from buying the costly
merchant power, there-
by putting question
mark on the very exist-
ence of new firms. Expl-
-oding losses of SEBs impacted the off take rates of long Depleting natural resources and increasing demands are
term PPA too. When the miseries of power sector were putting pressure on our natural resources leading to price
not enough, coal shortage further aggravated them. With fluctuations. In such times of uncertainty, consumers have
domestic coal demand exceeding the supply, firms started to start learning to live with reliable but costly power and
looking for solutions abroad through acquisition of coal forget the days dominated by SEBs with unreliable but
assets. For some time imported coal resolved the issue, subsidized power.
but soon the coal exporting nations like Indonesia and
Australia started tweaking the coal prices to spot prices. For power sector firms, companies with excellent back-
Thus, coal spot prices along with the transportation cost ward integration through long term purchase contract or
made coal import unviable. Our power generators seem captive coal blocks would flourish in the long term. Also,
to have stuck in between the ailing SEBs and costly coal. 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 References :
2003 itself. Reforms have arrived at each segment of value
chain, except the distribution sector. Expediting reforms 1) www.powermin.nic.in
in distribution sector through removing the socio-political 2) www.cea.nic.in
influence on tariff revision and power theft is a way to get 3) data.worldbank.org
through. Coal shortages can be curbed by expediting the 4) en.wikipedia.org/wiki/Torrent_Power
coal block allocation through early land settlement and 5) www.jsw.in/investor_zone/pdf/Energy/Analyst/Q1%20
environment clearances. Optimizing the domestic and FY12.pdf
imported fuel mix can help in reducing our dependence 6)www.jsw.in/investor_zone/pdf/Energy/Ana
on costly imported coal. Above all these measures, Indian lyst/28_04_11_Analyst_Presentation_Final.pdf
consumers should learn to bear the brunt of costly fuel. 7) http://en.wikipedia.org/wiki/Adani_Power
8) Industry outlook, The Hindu

Fin Quotes
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
Warren Buffett

“An investment in knowledge pays the best interest”.
Benjamin Franklin


INFRASTRUCTURE FINANCING IN INDIA
Ankur Bhardwaj, Email : pg10ankur_b@mandevian.com
Sounak Debnath, Email : pg10sounak_d@mandevian.com
MDI, Gurgaon

Finance is one of the most basic requirements for carry-
SUMMARY
ing out infrastructure projects, which are capital intensive
This article deals with one of the important issues af-
and are in risky domains. The low levels of public invest-
fecting the pace of infrastructure development in India
ment have made India’s physical infrastructure incompat-
– Infrastructure financing. India needs funds from di-
ible with large increases in growth. Any further growth
verse sources for this sector but governance, regulatory
will be moderate without adequate investment in social,
and administrative issues pose major challenges while
urban and physical infrastructure.
arranging these funds. These challenges have been dis-
In 11th 5 Yr plan, 30% of total infra investment is expected
cussed in detail. The theme of this article is to find out
to be from private sector & 48.1% of total infra invest-
various alternatives so that there is easy availability of
ment is expected to be from Debt sources . This empha-
funds for infra finance. These alternatives range from
sises the need for availability of cheap and easy finance
developing domestic debt markets, easing regulations,
options for private sector.
innovative ways like loan buyouts etc.
Infrastructure – It is the backbone of economic activity
in any country, but unfortunately, India in this sector suf-
fers from Osteoporosis. Time and again various policy
measures have been taken to boost infrastructure, but
no major progress has taken place barring telecom infra-
structure front.To fuel India’s 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) 2009-
10, India ranks very low at 76 in infrastructure domain.
Also, India spends only about 6-7% of its GDP on infra-
Source: 11th 5 year plan document, planning commission
structure.


Challenges in Infra Financing

Infrastructure Financing

There a lot of hindrances in achieving easy financing for
infra projects in India

• Savings not channelized – Although India’s 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 in-
surance. • Developing domestic bond market, Credit De-
fault Swaps & derivatives : India receives substan-
• Regulated Earnings – Earnings from projects like tial amount of FII investment in debt instruments.
power and toll (annuity) may be regulated leading to But most of this investment is concentrated in gov-
limited lucrative options for private sector and diffi- ernment securities and corporate bonds.Just like
culty for lenders. Also any increase in input cost over a well developed equity market, India needs ef-
the operational life is very difficult to pass on to cus- ficient bond market so that long term debt instru-
tomers due to political pressures. ments are available for infrastructure. Currently
FIIs can trade Infra bonds only among themselves.
• Asset-Liability Mismatch – Most of the banks face Also if credit derivatives are allowed, then FIIs will
this issue due to long term nature of infra loans and be encouraged to invest more in these infrastruc-
short term nature of deposits. ture bonds due to the presence of credit insurance
and better management of credit risk. RBI is in the
• Limited Budgetary Resources – With widening fiscal process of introducing CDS on corporate bonds and
deficit and passing of FRBM act, government has lim- unlisted rated infrastructure bonds by Oct 24 2011
ited resources left to meet the gap in infra financing. . However much progress is sought is this domain
Rest of funds have to be met by equity / debt financ- like minimizing multiplicity of regulators, removing
ing from private parties and PSUs. TDS on corporate bonds, stamp duty uniformity, etc.

• Underdeveloped Debt Markets - Indian debt market • Priority sector status to Infra :Hitherto, infrastruc-
is largely comprised of Government securities, short ture financing doesn’t come under the ambit of pri-
term and long term bank papers and corporate bonds. ority sector like agriculture, small scale industries,
The government securities are the largest market and education etc. For every Rs 100 lent to non priority
it has expanded to a great amount since 1991. How- sectors, banks have to lend Rs 140 to priority sectors
ever, the policymakers face many challenges in terms . Giving priority status will help banks to lend more to
of development of debt markets like this sector.
-Effective market mechanism
-Robust trading platform • Take out financing and loan buyouts :One major
-Simple listing norms of corporate bonds problem faced by banks while disbursing loans to
-Development of market for debt securitization infrastructure projects is the asset liability mismatch
inherent with these projects. Therefore many such
• Risk Concentration – In India, many lenders have projects are denied financing by banks. One way out
reached their exposure limits for sector lending and from this predicament will be the taking over of loans
lending to single borrower (15% of capital funds) . by institutions like IDFC after the medium term. This
This mandates need for better risk diversification will allow banks to finance these projects for a me-
and distribution dium

• 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 in-
vest in public sector of government securities.

Alternatives

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


term by sharing some of the risks with institutions like • Utilising foreign exchange reserves :India’s foreign

IDFC. This reduced risk exposure will allow banks to exchange reserves stand at USD 311.5 bn (Sep 2011)
increase their financing of infrastructure projects. .These reserves are primarily meant to provide a buff-
er against adverse external developments. But they
• Rationalizing the cap on institutional investors :Ra- do not add value to any real sector as they are in-
tionalizing the cap on investment in infra bonds by vested in foreign currency assets such as government
institutional investors like pension funds, PF funds bonds. So, the returns on these reserves are quite
and life insurance companies will lead to more invest- small. The Deepak Parekh committee on infra financ-
ment in this sector. Currently insurance companies ing is also in favour of allocating a small fraction of
face a cap of 10% of their investible funds for infra total reserves for infra purpose. This method of fund-
sector . ing is already being used in some Asian countries like
Singapore. After accounting for liquidity purposes,
• Tax free infrastructure bonds by banks :Currently external shocks, high rate of domestic monetary ex-
only NBFCs can float tax free infrastructure bonds. If pansion & real risks of disruptive reversals of capital
banks are also allowed to float these bonds, they can flows; some of funds can be used for infra.
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 inves-
tors 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 borro-
wing cost.
»»Tax treatment on unlisted equity shares :Unlisted
equity shares attract larger capital gains tax than
listed ones. Currently capital gains on unlisted equity • Future cash flows as tangible security :The loans
shares are taxed at 20% instead of 10% for listed eq- given to infrastructure project consortiums by banks
uity shares. Most private players in the infrastructure are not secured & fall under the unsecured loans
sector are not able to raise capital through public is- asset class for banks. Currently RBI mandates that
sues. Therefore for these players unlisted equity will provisioning of such unsecured loans is kept at 15%
be their dominant source of equity capital. Therefore (additional 10% for sub standard unsecured loans) .
they are adversely affected because of the tax treat- Therefore total amount of loans to infrastructure pro-
ment meted out to unlisted equity shares. Hence spe- jects are constrained because of the sub standard un-
cial consideration should be given to private players in secured nature of these loans. The primary source of
the infrastructure sector to encourage investments. repayment of these loans is the future cash flows ac-
crued from the project once they are completed and
• Foreign borrowings :With respect to foreign borrow- ready for public use. These cash flows can act as a se-
ings, several options are there like increasing the cap curity under certain conditions and debt covenants.
rate for longer tenure loans, relaxing refinancing cri- For instance in case of road/highway development
teria for existing ECBs/FCCBs; allow Indian banks for projects, RBI passed an order that a) annuities under
credit enhance ECBs (which is currently allowed only build-operate-transfer (BOT) model and b) toll collec-
for foreign banks), etc. tion 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 pat-
tern and Indian experience
3)Deepak Parekh Report on Infra Financing
4)DNB Research – BFSI Sector – Regulatory & Policy envi-
ronment

EUROPEAN DEBT CRISIS AND
WAY BEYOND

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 them-
selves, 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 SUMMARY
in 377 B.C. was of Greece and ever since it has failed to Today PIIGS juggernaut has transformed into Euro
repay its debts on numerous occasions in the past 2,388 zone’s Frankenstein monster. As the euro was de-
years. Even supposed bastions of financial reliability such signed to be the Roach Motel of currencies , there is no
as Germany, Britain, France and the United States have in
legal provision for departure. The cost of departure of
the past also fallen into some kind of sovereign default
either Germany or France are forbiddingly high esti-
rather, almost every nation on Earth (exception of a few
Asian and Nordic countries) has at one time or another mated at about as high as 40-50% of their GDP by UBS .
failed to honor their obligations. But over the years the While the costs of efforts to save the euro are justi-
frequency of defaults has increased and along with it the fied by the claim that the alternative would be too
scale of collateral damage has assumed broader and sys- dreadful to contemplate, there lie important les-
temic proportions (Great Depression of the 1930s; and sons to be learnt from Argentina, also a potential
the Asian financial crisis of the late 1990s). Today PIIGS fiscal union on lines of United Europe. It is envis-
juggernaut has transformed into Euro zone’s Frankenstein aged that it would require transforming EFSF into
monster. The aegis of the Stability Growth Pact and Maas- full-fleged treasury therby giving European Un-
tricht Treaty provided its adopters access to common cur- ion’s monetary Union a political leg to stand on.
rency, unified capital markets, free trade, cheap credit-
allowing it to accumulate high levels of debt and engage to GDP ratio of Greece at 144% , Italy at 120% ), with mas-
in tax evasion which led to shrinkage of government in- sive indirect exposure by way of derivatives that no one
come along with near absence of a lender of last resort. bothered to tally/regulate. But as against Global Financial
The inherent weakness in the structure of Euro Crisis 2008 the total toxic assets the Fed wound up ,hav-
was it being adopted by a group of widely diver- ing to buy $1.5 trillion (tn) –about 11.5% of US 2008 GDP
gent economy living by their own fiscal policies but , the total sovereign debt of PIIGS is about €3.1 tn which
all dependent on monetary and interest rate policies. is 20% of Euro zone’s GDP (this is just the PIIGS sans ex-
Already parallels have been drawn to 2008 Global Finan- posure of France ,Belgium and UK which if needed, would
cial Crisis and the present one which is deemed to be double the amount owed!). It’s alleged that current situ-
lot bigger. We are structurally at the same place having ation may wind up being four times 2008 price tag which
unpayable debt held up by a fragile financial sector (Debt happens to be just nominal value of toxic debt at the core.


Thus the message from Greece in words of Floyd stands notes as against there being no drachma notes floating
stark and clear “I’m small. I’ve suffered. You can afford to around Athens), its reborn drachma would plummet—
rescue me. If you don’t, I can create chaos for all of you.” which might be good for its exporters but which would
Euro Debt Crisis

trigger what Barry Eichengreen, calls “the mother of all
As the euro was designed to be the Roach Motel of cur- financial crises”. The devaluation of the drachma against
rencies. Once you enter, you can never leave since there the euro would turn any debts that remained in euros into
is no legal provision for departure. a crippling burden( a fallout of Original Sin). At the same
time depositors, who are already edging towards the exit,
While the costs of efforts to save the euro are justified by would break into a headlong rush/ bandwagon effect
the claim that the alternative would be too dreadful to ,triggering in its wake a dominoes effect culminating into
contemplate. Yet, economic history is replete with exam- run on banks not just in Greece but the entire coupled
ples of fixed exchange rates that came unfixed (In 2002, international financial system. (As if investors start taking
Argentina gave up Currency Board which led to its even- their money out, the banks will react by deleveraging and
tual cut off from international credit, massive devaluation reducing their exposures as quickly as they can by selling
of Peso(by a factor of 2/3), a brief recession, plunging of sovereign bonds. They will also be less eager to lend to
imports , limits on bank withdrawals—the corralito—and the private sector. Such acts can lead to tensions in the
big losses for depositors and banks as their assets and lia- U.S., a potential recession in Europe and possibly a global
bilities were redenominated, each at a different exchange recession. )
rate, but it proved to be a turning-point, as devaluation
did work its way back to economy rebound wherein the The costs of both these eventualities as estimated by UBS
economy grew at 9%, illustrating the costs entailed are are forbiddingly high at around 20-25% of GDP in the first
not always greater than costs of servicing even the dis- year and then roughly half that amount in each subse-
uniting of currency unions, though rarer, happens from quent year if Germany departs and at 40-50% of GDP in
time to time.(As rouble area dissolved post the Soviet Un- the first year with subsequent annual costs at around 15%
ion while the monetary union of the Czech Republic and for Greece stepping out.
Slovakia lasted only a matter of weeks)
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 ECB’s 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
The three major ways to fall apart are: a wholesale disso- as in the absence of political will; Europe is condemned
lution into the original currencies; a fissioning into north- to a seemingly unending series of crises. Measures that
ern hard-currency and southern soft-currency blocks; or would have worked if they had adopted earlier turn out
the exit of a trickle of countries, or just one. to be inadequate by the time they become politically pos-
These translate to as suggested by Hans-Olaf Henkel that sible.
Germany could leave, either on its own or with a select
group of small economies—Austria, Finland and the Yet the outlines of the missing ingredient in the perfect
Netherlands or the third and more likely, Greece might European union, namely a common treasury, are begin-
secede or be forced out each having economically devas- ning to emerge in the form of the European Financial Sta-
tating consequences. bility Facility (EFSF)—agreed on by twenty-seven member
states of the EU in May 2010—and its successor, after
If Germany were to leave, its Neue Deutschmark would 2013, the European Stability Mechanism (ESM). It is sup-
soar and while transition itself would not pose a challenge posed to provide a safety net for the euro zone as a whole,
the ensuing recapitalisation would lead to lower value of but in practice it has been tailored to finance the rescue
its foreign assets. packages for three small countries: Greece, Portugal, and
On the other hand if Greece were to leave(drawing les- Ireland and is not large enough to support bigger coun-
sons from Argentina Crises but with the important differ- tries like Spain or Italy. Nor was it meant to deal with the
ence of Argentina having a currency that still existed:peso problems of the banking system, although its scope has


subsequently been extended to include banks as well as That is a mistake. The euro exists and the assets and li-
sovereign states. Its biggest shortcoming is that it is purely abilities of the financial system are so intermingled on the
a fund-raising mechanism while the authority to spend basis of a common currency that a breakdown of the euro

Euro Debt Crisis
the money is left with the governments of the member would cause a meltdown beyond the capacity of the au-
countries. thorities to contain.
If at all Union survives the possible way forward as pro-
To prevent a financial meltdown, four sets of measures pounded by pro-political integration to enforce discipline
would have to be taken. First, bank deposits have to be is creation of a United States of Europe /fiscal union that
protected. If a euro deposited in a Greek bank would be would supervise the issuance of common Eurobonds.
lost to the depositor, a euro deposited in an Italian bank With the ins (good governments) emerging as more pow-
would then be worth less than one in a German or Dutch erful (with power to veto countries’ fiscal excesses and
bank and there would be a run on the banks of other giving the European Court of Justice the right to impose
deficit countries. Second, some banks in the defaulting good behaviour) than outs (bad governments) building in
countries have to be kept functioning in order to keep the its wake a huge new federal super state offering the ten
economy from breaking down. Third, the European bank- countries, including Sweden, Poland and Britain, that kept
ing system would have to be recapitalized and put under their own currencies a choice: to join the euro or be ex-
European, as distinct from national, supervision. Fourth, cluded from a new “core Europe”.
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.
References :
All this would cost money. Under existing arrangements
no more money is to be found and no new arrangements 1. How Greece could escape Euro: Floyd Norris
are allowed by the German Constitutional Court decision 2. Does the Euro have a future? George Soros
without the authorization of the Bundestag. There is no 3. Financial Turmoil Evokes Comparison to 2008: NEL-
alternative but to give birth to the missing ingredient: a SON D. SCHWARTZ
European treasury with the power to tax and therefore to 4. Eurozone Debt Trap: Krugman (The New York Times)
borrow. This would require a new treaty, transforming the 5. Saving Euro: The Economist
EFSF into a full-fledged treasury. 6. The Eurozone Lost in the Transition:UBS
That would presuppose a radical change of heart, par- 7. Eurozone: Where Next?: UBS
ticularly in Germany. The German public still thinks that 8. Greece’s sovereign debt crunch
it has a choice about whether to support the euro or to 9. A very European crisis: Economist
abandon it.

ANSWERS TO FIN- QUIZZITIVE, AUGUST 2011

1.Levy stable distribution or simply Levy distribution

2.Plain Vanilla
Devang Vishe
3.Tax evasion IIM Kozhikode

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


INDIAN TELECOM
SECTOR
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. Tel-
edensity, a measure of telephone penetration, has reached 71%. Aver-
age 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 expect-
ed 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 de-
mands.


Trend in wireless subscriber additions Active subscriber form ~71% of total industry sub-

Indian Telecom Sector
scribers

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
Source: TRAI all the operators followed by Bharti (89.5%). Circle wise
J&K (83.3%) had the highest proportion of VLR subscrib-
Trend in wireless teledensity ers followed by Assam (77.4%) while Mumbai (57.2%) had
the lowest proportion of peak VLR.

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
Source: TRAI 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,
Bharti largest operator with ~20% subscriber share
NLD, ILD and other services.
Bharti Airtel dominates the wireless market with 19.9%
share in April 2011. However, it may be noted that over
Trend in revenue market share across operators
the past 11 quarters it has lost its share from a peak of
24.7%, as newer operators have entered the field. Voda-
fone 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 Air-
cel have increased their share over last 11 quarters from
9.2% and 4.1% to 11.1% and 6.8% respectively.

Subscriber market share-April 2011

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 dou-
Source: TRAI ble the revenue of RCom. This indicates Vodafone has


In fin-nitie vol 2 issue 3

Recommandé

Recommandé

Contenu connexe

En vedette

En vedette (17)

Similaire à In fin-nitie vol 2 issue 3

Similaire à In fin-nitie vol 2 issue 3 (20)

Dernier

Dernier (20)

In fin-nitie vol 2 issue 3