FINFAILS FINVIEW MOVIE REVIEW

Harshad Mehta Mr. Nitin Mathur – The Rogue

security scam CEO, Tavaga Trader
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DECEMBER 2018 EDITION || VOLUME XII || ISSUE XI

NIVESHAK
Finance and Investment Club

THE BIG EXIT

RBI Governor resigns citing
personal reasons

The New Era Business

Machine learning & Ease of doing business & its
Investment banking impact on the economy
 Dear Niveshaks, investors. Is there any chance
2018 has been indeed very of harmony between the
interesting. There are a host of government and the regulator?
events that one can look back Or India will have to deal with
too. From the sizzling high such exits. The article of the
profile Bollywood weddings, month, written by S Arun
assembly elections and Vignesh of IFMR, helps us
political controversies, understand the concept of
landmark victory with section ease of doing business and its
377 and much more. The impact on the economy. Going
financial world had its share of ahead with developments in
stories, people’s interest was FinTech, this month’s edition
invested in a variety of interviews Mr.
subjects, ranging from Nitin Mathur, the
Bitcoin prices, budget CEO of Tavaga.
2018, mergers and Tavaga is a Robo
acquisitions, etc. investment platform
Niveshak wraps up for which essentially
you the happenings in uses algorithms
the last month of the to manage its
year. This month’s clients’ investments
cover story describes un nouveau départ automatically. Mr.
the most unexpected Mathur runs us
event, the exit of the RBI through the latest
governor, Mr. Urjit Patel. The developments in the Indian
rift between the government economy and how fintech can
and the RBI has a long history, affect the growth of the sector.
perhaps a problem with no The movie review section talks
solution. Be it the about Nicholas William "Nick"
Chidambaram-Subbarao era or Leeson, former English
the Jaitely-Rajan era; things derivative broker responsible
haven’t been smooth between for bringing down Barings
the top two bodies. No matter Bank, the UK’s oldest
what happened in the past, a merchant bank into bankruptcy.
sudden resignation of a The Rogue Trader is a film that
professional of his calibre beautifully describes this
instils fears in the minds of the tragedy. Every stock market
perhaps has its own ‘Nick
Leeson’, for India, it was
Harshad Mehta. The latest Nirav THE
TEAM
Modi scam has a high
resemblance to what happened
to the Indian stock market and
the Indian banks in the year
1991. The finfails section
describes one of the biggest Aayushi
stock market scam of India till Abhishek Soni
date, the Harshad Mehta Arpit Murarka
securities scam. A fraud so Bhushan Bavishkar
diligently crafted that it
Mahesh M
completely upturned the markets.
Priyanshu Gupta
Harshad Mehta was by far the
most cunning broker that India
Samprit Shah
ever had, his complicated yet Sheshav Dosi
simply executed method of Sriya Gupta
embezzling money from the two Aman Jain
parallel markets forced the Harsh Jain
market regulator, SEBI to reform Rajat Magotra
the entire process. It is an Rohit Garg
exciting read for those who wish Shreyansh Parakh
to understand the loopholes in Suchitra Mandal
the stock market and the Trisha Waghela
changes that this scam brought Vinti Singla
in the workings of the same. Yukti Rajpal
As we come to the end of this All images, design and artwork are copyright of
year, we hope to have kept you IIM Shillong Finance Club
abreast with the latest
developments and events in the
financial world. Now it’s time for
the new beginnings. Wish you all
©
Finance Club
a very Happy New Year! Indian Institute of Management, Shillong

Stay Invested, Disclaimer: The views presented are the

Team Niveshak opinion/work of the individual author and the
Finance Club of IIM Shillong bears no
responsibility whatsoever.
 Contents
NIVESHAK: DECEMBER 2018
06 08 10
The Niveshak Article of the

. .
Month

.
That Was
Investment
Fund
Month: Machine
learning & IB

14 18 22
Cover Story: FinFail:

.
FinGyaan: Ease of

. .
The Big Exit Harshad Mehta
Security Scam
doing business

26 29 31
. . .
FinView: Mr.
Nitin Mathur
Classroom: Movie Review:
Index Calculation The Rogue Trader
NIVESHAK | DECEMBER 2018 TMTW

THE MONTH State assembly elections 2018

conclude: Congress emerges back

THAT WAS With Madhya Pradesh's nail-biting fight

ending earlier this morning, results of
all the five states' polling are finally out.
Shaktikanta Das appointed In Madhya Pradesh, Rajasthan,
Governor of RBI Chhattisgarh, Congress emerged as
the single largest party, while BJP had
to take the trailing seat. However, in
Rajasthan, INC fell one seat short of a
clear majority, and two seats in
Madhya Pradesh. In Telangana, TRS
won with a bang. The Mizo National
Front (MNF) overthrew the reigning
Congress party out of power in
Mizoram.
Image credits: Business Standard

Shaktikanta Das was named as 25th

Governor of the central bank on 11th
December. Within 24 hours of Urjit
Patel's resignation, the government
appointed Shaktikanta Das as the new
governor of the Reserve Bank of India.
Das resigned from the 15th Finance
Commission, to take over his new
post. Urjit Patel resigned on 10th
December citing personal reasons,
following months of strained relations
between the central government and
RBI. He was the economic affairs
secretary from 2015 to 2017, a
staunch supporter of demonetization.
Das is the first non-economist RBI
Governor since 1990. S Venkitaraman
was the last non-economist appointed
to the post. Unlike his predecessors
Urjit Patel and Raghuram Rajan, who
were economists, Das pursued post-
graduation in History from Delhi
University and financial management
program from IIM Bangalore.

[6]
 NIVESHAK | DECEMBER 2018 TMTW

Qatar to withdraw from OPEC in President’s rule. President Ram Nath

January 2019 Kovind has signed the proclamation, in
Qatar’s Energy Minister Saad Sherida the follow-up of PM Modi making the
al-Kaabi on December 3, 2018 decision earlier that week.
announced that the country will
withdraw from the Organization of the
Petroleum Exporting Countries
(OPEC) in January 2019. This decision
to quit OPEC was confirmed by Qatar
Petroleum, the state oil company.
Qatar’s pure strength is the production
of Gas. Qatar is the world's biggest
supplier of Liquefied Natural Gas
(LNG), producing almost 30 percent of
Image credits: India Tribune
the world total. Qatar also shares the
world's largest known natural gas field Vijay Mallya on a tweeting spree;
the ‘North Field’ with Iran. says ready to repay 100% amount
Tweeting regarding the allegations
against him, Vijay Mallya said that he
wishes to put an end to the allegations
"that he stole money" from the lenders.
He further appealed the banks to
"Please take the money". The 62-year
old had tweeted on 5th December that
he has "offered to repay 100% of the
principal amount to them (the banks)".
Mallya also claimed that since 2016,
Image credits: Business Standard his offer on the table is being refused,
President's rule in Jammu and pasting a defaulter's image on him.
Kashmir
With the six months of governor's rule
ending in the state, Jammu & Kashmir
was under President's rule starting
from midnight 19th December 2018. In
June, BJP had withdrawn its support to
the Mufti-led PDP government,
following which the state had come
under Governor Satya Pal Malik's rule.
On Monday, Malik had recommended
Image credits: twitter.com
the central government to impose

[7]
 NIF PERFORMACE EVALUATION
As on December 31, 2018

November Month's As on 31th July 2017

Performance of Niveshak
Performance of NIF Investment Fund since
265
255 Inception
103 245
102 235
101 225
100 215
99 205
98
97 195
96 185
95 175
94 165
93 155
92 145
135
09-Dec-18
03-Dec-18
05-Dec-18
07-Dec-18

11-Dec-18
13-Dec-18
15-Dec-18
17-Dec-18
19-Dec-18
21-Dec-18
23-Dec-18
25-Dec-18
27-Dec-18
29-Dec-18
31-Dec-18
125
115
105
95
Scaled Sensex Scaled Portfolio
Sensex Scaled values Portfolio Scaled Values
Value Scaled to 100

Total Investment Value: 10, 00,000 Risk Measures:

Current Portfolio Value: 20,42,990 Standard Deviation NIF: 35.49
Change in Portfolio Value: 104.29% Standard Deviation Sensex: 19.20
Change in Sensex: 76.00% Sharpe Ratio: 2.83 (Sensex: 3.75)
Cash Remaining: 37,788

Comments on the Equity market and NIF’s Performance:

The Indian equity markets outperformed the global markets in December 2018,
aided by lower oil prices, the government’s recapitalization measure and Reserve
Bank of India’s liquidity-boosting efforts. Though there is some nervousness amid
weak global factors.
Fundraising through the initial public offering (IPO) route plunged as compared to
2017, largely on the back of weak market conditions. It has been a challenging year
for markets, with benchmarks rising 3-5 percent this year. Around 24 companies
took the IPO route to raise funds, amounting to Rs 30,959 crore. This is a fall from
36 companies that raised money last year. Of the total amount of Rs 63,744 crore,
the fresh capital amount was Rs 29,224 crore (46 percent); the remaining Rs.
34,520 crore being offers for sale.
Markets will now look for further cues from the third quarter earnings season
starting in January. The budget will also be closely followed and the markets may
act cautiously if the government takes populist measures to woo voters ahead of
2019 general elections which may lead to a fiscal deficit.
The mid-cap valuation premiums over large caps have come down in 2018 making
the former attractive yet again. Private banks, construction materials, specialty
chemicals, and consumer food sectors are expected to outperform led by healthy
demand and earnings growth.
NIF PERFORMACE EVALUATION
INDIVIDUAL STOCK WEIGHT
AND MONTHLY
PERFORMANCE
Monthly Performance
Portfolio Weight

TOP GAINERS FOR THE MONTH

• Westlife Development (11.42%)
• Nelco (10.36%)
• Mannapuram Finance (9.43%)
TOP LOSERS FOR THE MONTH
• Bharat Forge (-9.95%)
• Asian Granito (-9.46%)
• Paramount Comm (-7.85%)
NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH
Evolution of Machine Learning

Machine
Learning:
Investment
Banking
- Deepak Rawtani
KJ SIMR The journey of ML started in 1952
when it was still stuff of science
Introduction to Machine Learning fiction but gathered pace after the
1980s. Initially started with
developing a computer learning
program based on the game of
checkers, the journey’s critical
moment was in 2016 when an
algorithm developed by Google
managed to win 5 games out of five
in a Chinese board game! A big
achievement is the world of
technology. There are 2 reasons for
this transition. First, the tools used
Most of you might be familiar with the earlier were more straightforward in
company name Ola! In marketing approach and secondly, from 1995-
words, it is now regarded as the top- 2005, the focus was on the search,
of-the-mind recall. What attracts in natural language, and information
the picture is the brand positioning retrieval. This combined with Human
“Reach on time or get your money Capital development and investment
back” along with the estimated ride in basic infrastructure helped in the
time. Ever wondered how your ride’s evolution of ML.
estimated time and arrival time is
measured? Well take your time and
think something related to Industrial
Revolution 4.0. The answer to my
very own is MACHINE LEARNING.
In layman terms, Machine Learning
or ML is a category of an algorithm
that allows software applications to
act, learn and improve without being
monitored.
[10]
NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH

In layman terms, Investment Banking A) Trade processing

or IB is a special branch of banking Its core application revolves around
operation that helps organizations or identifying systematic investment
individuals to raise capital or provide strategies and automatically
financial consultancy to them. executing trades over several global
An investment Bank helps its client financial markets. Apart from this,
perform the following main things:- identifying patterns in the trade that
can lead to failure. In layman terms,
A) Buy or sell assets or companies – Machine Learning optimizes trade
Mergers and Acquisitions execution from different channels.
B) Raise capital from Equity Capital These channels can be external
Markets (ECM) dealer algorithms, internal execution
C) Providing financial services such algorithms or the firm’s trading desk.
as trading securities, derivatives Thus, not only efficient but also cost
trading, and FICC (Fixed Income optimization.
Instruments, Currencies, and
Commodities) B) Predictive Analytics
D) Raise Capital from Debt Capital The core competency of Predictive
Markets (DCM) Analytics to help and guide traders
E) Restructuring to improve the make a better and faster decision by
efficiency of business deciding what price to quote when
buying and selling bonds for their
Apart from the above core clients based on real-time and
competencies of IB, it covers 2 types historical data. A recent tool called
of groups i.e. Product and Coverage Katana was launched by ING is
In simple terms, Product means based on predictive Analytics.
working in a group that specifically
does a transaction in one the following C) Automated Market Data Collection
platforms (M&A, DCM, and ECM) ML can be helpful to detect certain
while on the other hand coverage changes in the market without any
means you focus on a particular human intervention. Obtaining
industry ranging from consumer retail market information from different
to heavy industry and Telecom to sources by automating the process
Textiles. and then using algorithms to filter
out the most relevant information for
Machine Learning in Investment clients is the brain behind this
Banking: Current Applications Automated Market collection
Despite IB being slow to catch up with procedure.
ML, a lot of current applications have
been outsourced to ML. All the current Machine Learning in Investment
application of ML in IB has been Banking: Challenges
clubbed into 3 groups- Machine learning provides organizations

[11]
NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH

decide which area is to be

automated. Anyways, the easiest
process to automate is the one that
can be carried out manually with no
output while on the other hand,
complicated process requires in-
depth introspection before going for
automation.

C) Commencing without good data

with the knowledge to make data- The first and foremost problem
driven decisions that are leaner and faced by ML is the quality of good
faster than traditional approaches. data. Noisy, incomplete and, dirty
Below are some common classes of data are the biggest obstacles of an
ML problems ideal machine learning. IB is a
division where data from the range
A) Lack of Skilled Resources of services from underwriting,
The backbone of any economy is its trading, financial advisory, raising
skilled labour. ML is a new technology capital, issuance of shares and
and there is a shortage of skilled bonds, research, to the advisory on
labour to develop and manage mergers and acquisitions colludes.
analytical content for ML. The problem However, all the data one get is not
gets aggravated when Data Scientists suitable for ML. The solution to this
an organization hires lacks how problem is in-depth analysis and
financial markets work. Understanding separation of healthy and useful
the economics of data is key for data for ML processes.
successful correlation of ML and IB.
D) Inadequate Infrastructure
B) Classifying the areas that need ML requires vast amount of a data
Automation processing capabilities. This
For organizations and enterprises, it is coupled with the complexity
increasingly becoming difficult to associated with Investment Banking
separate facts from fiction of ML today. and lack of financial market
Before one decides which AI platform knowledge of Data Scientists takes
to use, one needs to evaluate the a toll on already built infrastructure.
areas of investment. Banking one is The potential is up-gradation of
looking to solve. Areas like current infrastructure and financial market
financial positions, research, issuance training of Data Scientist.
history, market conditions, & historical
data are up for grab for Automation. Conclusion
However, not all areas need With the IB industry becoming data
automation. It is for the organization to heavy and number crunching, Machine

[12]
NIVESHAK | DECEMBER 2018 ARTICLE OF THE MONTH

Learning can come handy in coming inadequate infrastructure, and

years. The core concept of Automation classification of data are minor
is the brain behind the early success hiccups but they too will become a
of ML in IB. However, a few thing of past if the ML moves with an
roadblocks like lack of skilled manpower, upward trajectory in coming years.

[13]
COVER STORY
THE BIG EXIT
NIVESHAK | DECEMBER 2018 COVER STORY

“Personal Reasons” is what the now While Mr Patel has resigned and is
former RBI governor Urjit Patel cited only the third governor to do so in
while resigning on 10 December independent India, but in his tenure he
2018, about nine months before his has seen everything from
expected tenure completion. It is not a demonetization, NPAs, banking scams
secret that his tenure was not a as well as Non-Banking ones and of
smooth sailing boat but a rocky path course the election year bought with it
with regular clashes with the its own share of tantrums. It won’t be
incumbent government. And it is also fair to say that he had his share of ups
a no-brainer that while the ex- & downs because as it seems, the
governor cited personal reasons, the downs far outweighed the ups.
bumpy ride and the recurring intrusion
is exactly what led him to resign. The Exit was the cherry on the top that
the Banking sector awaited to end the
A speech by Viral Acharya, Deputy year after witnessing a series of major
Governor that he gave a couple of exits & unprecedented controversies.
months ago hinted at just that, Chanda Kochhar and ICICI Bank,
“Governments that do not respect Shikha Sharma and Axis Bank, Rana
central bank’s independence will Kapoor and Yes Bank just to name a
sooner or later incur the wrath of few. Before Mr Patel, Benegal Rama
financial markets, ignite economic Rau was also one of the Governors to
fire, and come to rue the day they resign mid-term six decades ago due
undermined an important to reasons similar to Mr Patel.
regulatory institution.”

Source: https://isupdate.com/govt-vs-rbi-jaitley-man-mocks-banks-dy-governor/

[15]
 NIVESHAK | DECEMBER 2018 COVER STORY

it was just a series of unfortunate

events.

The downfall of the Infrastructure

Leasing and Financial services was
another nail in the coffin. Other issues
included easing rules of lending under
the PCA framework with the
government wanting to decrease the
pressure on SMEs but the RBI being
cautious about the unrequired need for
cleanups it would later create.
Additionally, NPAs and their
classification and creation of a
separate payments regulator were
other points of contention.

As the pressure of the upcoming

elections mounted on the incumbent
government because of the resultant
liquidity crunch the nation faced, the
central bank simultaneously faced
mounting pressures to ease it out.
However, these ordinary pressures
and pushes seldom bore fruit when it
came to the RBI who rarely had the
tendency to cater to the whims and
Source: www.insightsonindia.com/2018/11/12/insights-
into-editorial-independence-and-accountability-on-rbi/ fancies of the government with its own
long term agenda of maintaining the
But the exit was not a result of recent inflation and a stable monetary policy
conflicts; it was Building and brewing coming to the fore. And that is exactly
since the PNB scam came into light when the government decided to take
and maybe even before that. But the out the Big Gun in the form of Section
PNB Scam was the first significant 7. A section which in the history of the
event when the Independence and RBI has never been invoked was
autonomy of the Central Bank came called out by the government which
under fire. It was then that under empowered it to Direct the RBI on
whose purview does the matters of “Public Interest”.
accountability of the national banks
fell came under dispute with both the Which poses very imperative
central bank and the government questions such as, Was the situation
pointing fingers at each other. After that so urgent? Or was it just a show of

[16]
NIVESHAK | DECEMBER 2018 COVER STORY

power? And why exactly does this look There is no dispute over whether or
like a repeat of what so many Indian not the government has the best
institutions currently are fighting for interest of the public in mind, but the
which is autonomy and freedom from application and the intent were lost
its very own government? along the way when its own vested
interest became more important. As
India had faced numerous instances the speech by the deputy governor
of financial instabilities before as well indicated that the government looks
but never was an extreme step like for the short term whereas the RBI
invoking section 7 was deemed maintains its position with a vision of
necessary, which brings another the long term.
pertinent question to the fore and that
is who decides what is “Public The appointment of Shantikanta Das,
Interest” in matters of economic who previously held position of the
stability because that is exactly what Union Economic affairs secretary and
the purpose of RBI is. was also actively involved during the
demonetization phase may not seem
The Preamble of the RBI reads, “To like the most obvious choice with his
regulate the issue of Bank notes history of no economics however he
and keeping of reserves with a view might just be the right choice
to securing monetary stability in especially with the government’s
India and generally to operate the history of hiring allies as aides in the
currency and credit system of the top most Public institutions.
country to its advantage; to have a
modern monetary policy framework The only thing that is left to be seen is
to meet the challenge of an whether this will be a temporary Blow
increasingly complex economy, to or will it leave one of the most
maintain price stability while prestigious and premium institutions of
keeping in mind the objective of growth.” the country handicapped.

[17]
 FINFAILS
Harshad Mehta Scam
NIVESHAK | DECEMBER 2018 FINFAILS

Mumbai, Mehta joined The New India

Harshad Mehta Assurance company as

salesperson. It is here that he got
a

interested in the stock markets. He

1992 Security soon quit his job and joined a
brokerage firm in 1981. This was the

Scam beginning of the journey to the biggest

stock market scam in the country.

The 1992 securities scam in India is India’s two parallel markets

one of the scams which had a During the ’90s, India had two different
profound effect on the retail investors but parallel markets in operation. One
of the country. It was a cunning game was related to security transactions,
played by the well known Gujarati which was the interbank government
broker Mr Harshad Mehta, who security market. Here the volume of
colluded with the bank officials and transactions was large. However, this
other market players to inflate the market had fewer brokers, just over a
stock market and raise the prices of dozen who had the license to work in
select stocks by more than 4000%. this market.
The scam was exposed by Sucheta
Dalal, who later narrated the entire On the other hand, the corporate
episode in her best selling book securities or the stock market had a
“Scam”. large number of brokers, close to 50 at
that time. The required return on funds
was much higher when compared to
the government securities market. The
existence of these two parallel
markets created the opportunity for
arbitrage, which was exploited by
Harshad Mehta to earn massive
returns on his bets.

Colluding with banks

The banks at that time were desperate
Image credits - Quint
to make money since they were losing
Who was Harshad Mehta? business to other competing products
Harshad Mehta was born in 1954 to a like money markets and portfolio
lower-middle-class Gujarati family in management services. The banks
Mumbai. He moved to Raipur, where wished to tap the high cash reserves
he finished his schooling before of the Indian corporate sector,
moving back to Mumbai. After particularly the oil and gas public
graduating from Lajpat Rai college in sector units.

[19]
NIVESHAK | DECEMBER 2018 FINFAILS

The Modus Operandi was transferred in the brokers’

Mehta’s scheme was simple in account, the broker then found
essence. He devised a plan to divert another bank who had excess security
huge sums of money form the security and made the exchange. Often it was
market and invest in select scripts in difficult to transfer the securities from
the stock market. The huge returns one bank to another; hence instead of
earned from the stock market was exchanging actual securities, the
used to settle the security market banks issued BRs (bank receipt) as
transactions, and the remaining profit proof of having received the securities.
was pocketed by him and his team of When the holding period of the
crony investors. To better understand security was over, the banks would
the mechanism, one needs to sell back the security to the broker at a
understand the concept of BR, or bank discount. The difference between the
receipts, which was the main purchase and sale amount was the
instrument used to embezzle the profit of the bank, and the broker
funds. A bank receipt is a proof or received a commission for facilitating
acknowledgement of the deposit such a transaction.
received by a bank from an investor.
Harshad colluded with certain banks
Those days, banks were required to and started issuing fake BRs. These
invest a certain portion of the deposits BRs were given to the banks instead
in government securities. These of actual securities. The banks could
investments were subject to regular not validate the authenticity of such
fortnightly checks by the regulator. BRs since they did not know who the
Failing to maintain the desired level of counterparty was. Also, Mehta had
investment attracted penalties. Thus if established a strong reputation among
a bank had a low level of security the banking community, so one
investment, it would purchase the questioned his moves. He used the
government bonds from another bank money received from exchanging
which had a shortage of funds but an these BRs to rig the markets. He
excess amount of securities. The bond invested heavily in certain stocks,
and fund exchange was done for a especially cement stocks like L&T and
short period. The role of a broker here ACC. The prices of these stocks
was to bring such banks together, and
only the banks would undertake the
transactions.

Harshad Mehta stepped in this system

and developed a new market where
the banks essentially dealt only with
the broker, unaware of who the other
bank was. In this system, the money
Image credits - Quint
[20]
NIVESHAK | DECEMBER 2018 FINFAILS

skyrocketed and so did the Sensex. prison. He complained of chest pain

Harshad had a Midas touch; his every one night and was admitted to Thane
move was tracked by the retail Civil Hospital. He died following a
investors. As the market rose, retail brief heart ailment, at the age of 47.
investors began pumping in more
money into the market. There were many litigations still
pending against him. A total of 28
Exposed cases were registered against him,
The discrepancies in Harshad’s out of which only one has been
operation was discovered when SBI closed. This was a complicated
reconciled its balance sheet with the scheme, played out in a very simple
PDO (Public Debt Office) managed by way by a mastermind broker of all
RBI. On further scrutiny, SBI realised times.
that it had the bulk of BRs in the books
but no real security was ever received,
and it had been shelling out thousands
of rupees to purchase the securities.
All these transactions were facilitated
by Harshad Mehta. Gradually, more
such discrepancies were identified.
The two small banks with whom
Harshad Mehta had colluded were
Bank of Karad (BOK) and the
Metropolitan Co-operative bank,
fraudulent operations of these banks
came into light by an investigation led
by Sucheta Dalal.

The Aftermath
As the scam broke out, the stock
market crashed. People lost their
savings due to the sudden collapse.
The situation worsened when few
investors who were heavily leveraged
committed suicide as a result of the
fallout.

Harshad Mehta was arrested by the

CBI on 9th November 1992 for
misappropriating more than 2.8 million
shares of about 90 companies He was
under criminal custody in the Thane

[21]
NIVESHAK | DECEMBER 2018 FINGYAN

Ease of Doing Business (EDB)

A succinct exposition Ranking and India:
of Ease of Doing India has moved by 23 places to 77th
Rank from 100th position in EDB
Business & its impact rankings from the previous year.
on the Economy Under the leadership of Prime
By: S Arun Vignesh Minister Narendra Modi, India has
IFMR, GSB made a leap of 65 (142nd to 77th)
places from 2014 to 2018.
Introduction: Factors that turned around the picture
for India are:
•Digitalization and consolidation of
multiple procedures for starting a
business
•One Tax regime I.e., Implementation
of Goods and Services Tax (GST)
•Elegant construction permits and
quality controls
•Fast and cheap availability of
Source: Forbes.com electricity
•Improved cross border trade policies
South African born billionaire- and
entrepreneur Elon Musk once quoted •Effortless credit availability
“It always seemed like when there
was cool technology or things Though the figures mentioned in
happening, it was kind of in the United table 1 look satisfying, research
States. So, my goal as a kid was to proves that EDB and economic
get to America basically”. This growth do not always go hand in
illustrates that Ease of Doing hand.
Business is one of the key parameters
Table 1. Factors affecting the EDB Ratings
that entrepreneurs look for in a
Economy India
country, one that provides a hassle Global Rank 77
free environment and social protection Starting a Business 137
for doing business. New businesses Dealing with Construction Permits 52
bring in more revenue and Getting Electricity 24
investments, in turn providing more Registering Property 66
Getting Credit 22
job opportunities and economic
Protecting Minority Investors 7
growth. Paying Taxes 121
Trading across Borders 80
In reality, does it really affect Enforcing Contracts 163
economic growth? Let’s find out. Resolving Insolvency 108
Source: doingbusiness.org

[22]
NIVESHAK | DECEMBER 2018 FINGYAN

Growth Models and approaches: 1 and USA stands at 8th position out
Which one is right? of 190 countries. Intuitively, we can
According to the research paper “The establish that, there is a positive
Ease of Doing Business Rank: An correlation between EDB ranking
Assessment of its Macroeconomic and per capita income. Also from the
Relevance (June 2016)” by Professor second chart, we establish that per
Vivek Moorthy and Research Analyst capita income has negative
Arul Jason, of IIM Bangalore, two correlation with GDP growth rate.
growth models/approaches have been
discussed. One of which is the 1. Ease of Doing Business
conventional Solow’s model of growth Ranking and Per Capita
(Solowian’s Model). It focuses on Income. (Chart 1)
savings and thereby investment and 120

Thousands
capital stock as a major factor for long

Per Capita (2007 - 2017 in

100
term growth. It takes into account the 80
following factors.
Dollars)
60
•Labour 40
•Capital Stock 20
•Technology 0
0 50 100 150 200
EDB 2019 Ranking
Whereas, EDB focuses on Sotovian
approach (called after Peruvian 14.9
Average GDP Growth rate

Economist Hernando de Soto), that is

9.9
not mathematical but relies on
(2007 - 2017)

underlying policies and property rights 4.9 New

as a factor for growth. -0.1
0 50 100 150
Thinking on similar lines, analysis has Thousands
been done for the latest data fetched Chart 2 Per Capita Income (2007 - 2017 in Dollars)
from World Bank database for 162
countries. The above two charts 2. Ease of doing business
establish the relationship between Ranking and GDP growth rate:
EDB 2019 ranking vs. Per Capita (Chart 3)
Income (from 2007 to 2017) and per 12
Average GDP Growth

capita income vs. average GDP 10

rate (2007 - 2017)

growth rate (from 2007 to 2017). As 8

6
claimed in the original article,
4
developed countries such as USA and 2
New Zealand have higher per capita 0
income compared to developing -2 0 50 100 150 200
nations like India. It is also to be noted -4
EDB 2019 Ranking
that New Zealand has an EDB rank of

[23]
NIVESHAK | DECEMBER 2018 FINGYAN

The EDB ranking vs. average GDP of poor countries tend to reach the
growth rate chart illustrates that, levels of richer countries over time. As
countries with higher per capita mentioned in the research work, from
income have lower GDP growth rate. a period of 1880 – 1985, all the 52
Developing nations like India and states of America showed a negative
China having higher growth rate tend correlation to per capita income and
to have lower EDB ranking. growth rate. Thus, it proves the
negative impact of high per capita
Stringent labour laws with upper limit income and labour force. Therefore,
in working hours and higher wages Solovian approach (EDB Ranking)
along with incentives for overtime, in cannot be attributed to economic
developed countries restrict growth in the long run.
productivity and hence lead to
reduced output. This leads to When it comes to growth in the EDB
reduction in the size of labour force ranking of India, the rise in position
thereby reducing growth which is can only be attributed to the political
very well in contrast with the first scenario of the country with newer
observation that showed higher per reforms and regulations. The number
capita income attributing to higher of days for construction, electricity
EDB ranking. and credit availability has
considerably reduced from the
Outcome of the Analysis: previous year which is pretty much in
Over the years, developed countries sync with the policies of the
have had stable political situations, incumbent government. Trading
better development opportunities, across borders has also seen a jump
rules and regulations that paved a from 146th to 80th position from the
way for businesses to flourish, which previous year.
is in sync with the Sotovian model.
However, higher per capita income FDIs and EDB Ranking:
and lower population led to stagnant Considering foreign direct
or stable growth due to market investments (FDIs), EDB ranking is
saturation and reduced labour force used as an important measure to
as noticed in developed countries. attract investors. But this necessarily
People here, have higher purchasing doesn’t mean that higher ranking
capacity and hence it is harder to fetches higher investment. According
produce new products that would to Ruchir Sharma, a writer and Chief
drive the consumer to increase Global Strategist at Morgan Stanley,
consumption which contradicts the analysts are hired by countries to
previous statement. To further enable them to move up the EDB
support the Solowian model and rankings. He further adds that,
conditional convergence hypothesis, Russian President Vladimir Putin had
studies showed that per capita income set a goal of raising Russia’s EDB rank

[24]
NIVESHAK | DECEMBER 2018 FINGYAN

rank to top 20 in 6 years. Russia Hence, foreign investors are

succeeded in reaching the 51st requested by experts not to make
position in 2015, ahead of developing investment decisions solely based on
nations such as China, Brazil and EDB rankings.
India. He then catechizes the ranking
methodology for its simplicity in Conclusion
moving the rank up easily. Russia To conclude, Ease of doing business
currently stands at 31st position in the rankings do act as an indicator that
2019 rankings. clears the air of doubt about the
institutional establishment, rules and
Finally, a counter argument by World regulations that prevail in a country in
Bank Economist Mary Hallward- setting up a business venture and
Driemeier and Harvard University acting as a guardian for small and
Economist Lant Pritchett say that the medium scale industries. But the real
EDB rankings are de jure and not de question about the relationship
facto. I.e., it is the difference between between EBD rankings and its
things that happen according to law economic implication depends on a
(de jure) and the ground reality (de multitude of factors.
facto) in a country. It includes actions
that go around the law, to get things From the evidences and analysis
done. World Bank relies on data made we can say that, the growth in
obtained from lawyers and economy doesn’t depend entirely on
accountants with respect to written the EBD rankings, so are the Foreign
down rules and regulations. But in Direct Investments. More importance
practice, this is not always the case. should be given to ground realities
Moreover, the data is collected from and other factors such as political
major cities - Delhi and Mumbai. This stability and the conventional growth
clearly doesn’t paint the complete model that play a crucial role in
picture about actual happenings and assessing the growth of an emerging
practices in other states and cities. economy for a country like India.

[25]
NIVESHAK | DECEMBER 2018 FINVIEW

Mr. NITIN order will get affected by a shift from a

MATHUR US-dominated institutional framework
to one dominated by multiple actors
Nitin Mathur is an Indian including China. This long-term
entrepreneur from Mumbai & CEO confrontation is far from over and will
of Tavaga Advisory Services, a likely be played out over the next
robo-advisory platform. He dabbled decade and beyond. Over the short
in various financial products for term as well, US is concerned about
ICICI Bank. He has regularly the trade deficit, intellectual property
featured on television and print theft issues and China's increased
media for his analysis of the Indian predatory interference in the political
Consumer Sector. affairs of other countries via debt trap
diplomacy. Have these issues been
Q1. What implications do you see resolved at G20 summit? Hardly so,
of the USA - China truce on the rather only an agreement has been
Indian economy? reached to discuss some of these
There are two aspects to this issues over the next 90 days. Further,
question. One is the US-China this agreement was later followed by
relations, and the second - the certain adverse actions by Trump
impact of changes in US-China administration. Therefore, we expect
relations on the Indian economy. The increased volatility in the markets
question inherently assumes that the surrounding these negotiations over
US and China were at a the short as well as long term.
confrontation at the outset and that a
truce has happened during the The second part of your question is
bilateral negotiations on the sidelines related to the effect of these
of the Dec 2018 G20 summit. Both of developments on the Indian economy.
these statements are exaggerations. India being a net exporter to the US
and a net importer from China, India is
The reality is that China is US's likely to be only marginally affected to
largest trading partner as of now and the extent of second or third order
there is no outright confrontation effects - one being the impact on
between them aside of the nominal overall global risk appetite and second
tariff impositions. The long-term coming directly from the imposition (or
"confrontation" essentially stems lack thereof) of trade tariffs. While
from the difference between the two both these effects are marginal, a US-
systems - the democracy and China truce would be marginally
markets-based system of the United beneficial to India in the short term as
States and the centralized it will boost global risk appetite. On the
authoritarian state capitalism model other hand, in the long term, the
adopted by China. And how the world situation will be driven more by geo-

[26]
NIVESHAK | DECEMBER 2018 FINVIEW

political interests rather than purely in its planning process. While we feel
economic interests, in which case, that PSU banks have a certain role to
India would still be in the middle path play in the development of the rural
with an independent foreign policy. economy, the government should
Therefore, it will be only marginally incentivize the private sector within
affected in the long term as well. the banking system as opposed to
the PSU sector going forward.
Q2. Given the high volatility that Providing incentives for financial
the markets have experienced as inclusion via private sector initiatives
of late, which sectors do you feel would be the right path forward.
can be a safe bet for the
investors? Similarly, technologically advanced
Recent market volatility has players like Robo Advisors and P2P
highlighted some of the concerns in lenders can provide alternatives to
the NBFC sector led by ILFS related the banking system to convert
issues and continued lack of savings into investments. Other
resolution around major banking methods to reduce the dependence
sector related issues (surrounding on the banking system would be to
NPAs). During times of market stress initiate reforms to develop the
like the present one, usually the municipal, state and corporate bond
consumer sector (like ITC, HUL) markets further. These are again
remains by and large insulated. alternatives to the banking system to
Similarly, the IT sector is likely to perform the function of conversion of
affect by different considerations that savings to investments.
are unrelated to the present market
stress? Thus providing diversification Q4. What role would Robo-
benefits. We, however, recommend Advisors play in the future for a
Investors take exposure to these common investor?
volatile markets through Exchange Advancements in the Robo advisory
Traded Funds (ETFs) only. space are happening at a rapid pace.
Presently, Robo-advisors like Tavaga
Q3. We have seen many have started disrupting the
commercial banks struggle due to investment advisory landscape -
lack of governance and democratizing the investment advice
transparency in the recent past. (like cross-asset allocation) earlier
What measures in your view only available to sophisticated and
should be adopted by the large investors. In the future, we
government or RBI to fix the expect this trend to continue with
situation? common investor getting increased
We believe that the government and access to value-added services like
the RBI should include the private sector smart beta via Robo-advisors.

[27]
NIVESHAK | DECEMBER 2018 FINVIEW

Q5. Along with the benefits of the While Fintech will bring increased
use of technology comes the fear democratization of existing
that it may ultimately lead to job investment solutions, it will also
losses. Your views on how enable portfolio managers and
FinTech may affect job existing advisors with a larger and
opportunities in the financial better set of tools that they could
sector? potentially make available to their
Every major change in technology is clients to generate alpha. Thus, job
likely to generate large benefits for opportunities for qualified and
society overall and we believe the knowledgeable financial
same is true with fintech. While pure professionals are likely to only
distribution approaches to increase as investors needs move
investment products are likely to from pure distribution to more
become redundant, the opportunities advisory focused and more alpha-
for value-added services will focused.
continue to increase going forward.

[28]
NIVESHAK | DECEMBER 2018 CLASSROOM

market for a particular script are

INDEX multiplied by the current price of the
script to arrive at the current market
CALCULATION capitalization of the stock. The same
is then done for all scripts included in
the valuation of the index and the
There are three prevalent methods of total market capitalization is
Index Calculation: calculated. This is then compared to
• Market Capitalisation Weighted the market capitalization at base
Index year prices to arrive at the index
• Price Weighted Index value of the stock exchange. This
• Equally Weighted Index method makes sure that each stock
can influence the index only by the
Out of these, the Market proportion of its market value.
Capitalisation Weighted method is
the most popular, which is used in Formula
the calculation of a number of
important indices like SENSEX, Total current market
NIFTY, S&P 500, NASDAQ, Hang capitalization
Seng, etc. Also called the Market Index = --------------------------- × Base
Value Weighted Index, it calculates Total base market Index
the index such that each individual capitalization
stock affects the index in proportion
to the market value of the stock. Example
The following example will provide a
The number of equity shares in the better understanding of this method:

EQUITY CURRENT CURENT MARKET BASE BASE MARKET

SHARES
SHARES PRICE VALUE PRICE VALUE

A 20,000 250 50,00,000 150 30,00,000

B 50,000 630 3,15,00,000 250 1,25,00,000

C 70,000 800 5,60,00,000 200 1,40,00,000

D 10,000 180 18,00,000 110 11,00,000

TOTAL 9,43,00,000 3,06,00,000

[29]
NIVESHAK | DECEMBER 2018 CLASSROOM

Here, we assume: • Issue of bonus shares by a

• The exchange considers these 4 company considered in index
stocks for computation of index calculation
• The base index is equal to 100 • Conversion of debentures, bonds
• There is no change in the number etc. into shares
of shares and no dividends have
been issued Criteria
The index department of the BSE
The current and base market index considers certain criteria for
capitalization is calculated by selection of stocks for its various
multiplying the number of shares with indices. These include:
the current and base market prices • The stock should be among the
respectively. Now the current index top 100 companies classified by
can be calculated using the formula: market capitalisation
• The stock should have a market
9,43,00,000 capitalisation of at least 0.5% of
Current Index = ------------------ × 100 the total capitalisation of the
3,06,00,000 index
• The stock should have been
= 308.17 traded on every trading day in the
past one year
Stock Selection • The stock should be among the
Every stock exchange sets up an top 150 companies classified by
index panel or committee whose job is average number of trades per
to identify and select the stocks which day in the last one year
will be considered for the calculation • The stock should give a fair
of the index of the exchange. The representation of its sector and
panel holds frequent meetings to industry and must be a leader in
consider any alterations in the index their group
calculations. Some scenarios in which • The stock should have been
the panel would need to revise the listed on the exchange for at least
index could be: one year
• Issue or buy-back of shares by a • The stock should have a good
company considered in index track record in the opinion of the
calculation committee

[30]
NIVESHAK | DECEMBER 2018 MOVIE REVIEW

ROGUE TRADER

The film tries to remind us that there is In the interim, back in the City, the
something about England that is anti- respected toffs at Barings – headed by
cinematic. Nick Leeson demonstrated John Standing – have been hesitant to
a Midas-in-Reverse touch wherein he pull the attachment on their whizz-
single handed destroyed his child's subsidizing in light of the fact
employers, Barings Bank by running that he is by all accounts making them
up debts of over 800 billion pounds on so much dosh. The film,
the Singapore stock exchange. James disappointingly, skims over this
Dearden chose to portray the story astounding blend of idiocy &
around a plodding biopic rather than eagerness, as if Dearden were
the various genres this film could have hesitant to paint any of his characters
been in such as the top hole farce of as something besides adorable
tragedy or anything along the lines. duffers. Less skimmed over but rather
more not referenced at all are the
A wan Ewan McGregor plays Leeson normal financial specialists who
as the original Man Behaving Badly – probably lost their funds in the fiasco.
a Watford barrow boy who likes
drinking & dropping his pants out in The escalation of a relatively small
open. His significant other Lisa, played debt into an implacable black hole is
by Anna Friel, is considerably more carefully charted, and the nuts and
cursorily portrayed; everything she bolts of Leeson's scam are
does is work out at the exercise assiduously laid out. But we're left
center, mooch around in their none the wiser, because Rogue
Singapore level, have an unnatural Trader doesn't seem to be actually
birth cycle & – when her better half at about anything; it's just the
long last possesses up to having lost 8 indifferently edited highlights of its
bn yen – shout, "Gracious, Nick!" just protagonist's giddy career. A criminal
as he'd spilt breakfast grain down his tie. waste of a brilliant story.

[31]
Fin.
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