Forex Association Of India

IAFT Awards International Association of Forex Trader QuotTraders Unionquot ist die erste offizielle Internationale Vereinigung von Forex Traders Unser Hauptziel ist es, die vorteilhaftesten und komfortabelsten Bedingungen für Ihre Arbeit auf dem Devisenmarkt zu schaffen. Wir bezahlen Sie Mit anderen Worten, werden wir einen Teil der Ausbreitung von jeder Transaktion zu vergelten, egal ob es rentabel war oder nicht Jetzt anmelden und sich der Gemeinschaft der Händler, die mehr als andere verdienen Die erste offizielle Internationale Vereinigung der Forex Trader Die größte Berufsgemeinschaft. Über 120 000 Händler Unabhängige Händler Forum Die Verteidigung der Interessen der Händler und umfassenden Schutz ihrer Rechte Handelszentren Ratings Verlässliche Partner Die beste Auswahl an Analytics Rebate von 60 aus einem Teil des Spread auf jede Transaktion Fixed Auszahlung Zeitrahmen Wesentliche Versicherungsfonds Kostenlose juristische Unterstützung Nr Minimale Einschränkungen für Abhebungen Professionelle technische Unterstützung Professionelles Partnerprogramm Gesamtauszahlungen von 3 000 000 GewinnrechnerDie Forex Association of India, die der Association of Cambiste Internationale, Paris angegliedert ist, ist eine nationale Organisation, deren Mitglieder Treasury Manager, Devisenhändler und Devisenmakler sind Aktiv am Devisenhandels - und Devisenrisiko-Management beteiligt. Die Mitglieder des Verbandes sind aus Devisenhandelsgeschäften aller Nationalbanken, ausländischen Banken, Private Sector Banks und einigen Corporate Dealings Rooms gezogen. Devisenhändler in Indien vertreten autorisierte Händler, d. h. Geschäftsbanken. Sie sind Frontline-Nutzer des Devisenmarkts und ihre primäre Funktion ist es, Preisanbieter für andere Benutzer zu sein, d. h. Importeure und Exporteure sowie Investoren mit nach innen und außen liegenden Kapitalströmen. Forex Association of India ist eine selbstfinanzierende Körperschaft. Der Verband versichert, dass die Märkte transparent sind und Devisentransaktionen so professionell wie möglich durchgeführt werden. Es ist ein informelles Forum für den Austausch von Nachrichten und Ansichten über die neuesten Entwicklungen, sowohl finanzielle und technologische, unter Fachleuten. Einige der Aktivitäten des Vereins sind: Organisation von Seminaren zu verschiedenen Themen wie technische Analyse, Derivative Produkte ndash Optionen, Futures, Zinsswaps, etc. Organisieren von Sitzungen in regelmäßigen Abständen zu diskutieren, Probleme und Fragen der Forex-Community. In diesem Zusammenhang hat die Vereinigung ein Market Watch Committee gebildet, das Probleme diskutiert und Meinungen und Vorschläge für die Regulierungsbehörden vorlegt. Organisation von Trainingsprogrammen für die Mitglieder, um sie für die ACI-Diplom-Prüfung vorzubereiten. Hierzu wurde das Bildungsgremium gebildet. Organisation von National Forex Montage alle vier Jahre für ihre Mitglieder. Der Verein hat erfolgreich gehostet International Junior Forex im Jahr 1985. 15. Asien-Pazifik-Forex-Versammlung im Jahr 1993. 2. South Asian Forex Dealers Montage im Jahr 1998. 21. Asien-Pazifik-Kongress, 2000 Diese Website soll der Schwerpunkt für die Interaktion mit in den indischen Forex werden Gemeinschaft und als Ausgangspunkt für jedermann auf der Suche nach Informationen über die indischen Forex-Märkte. Es ist uns eine Freude, Sie einzuladen, diese Website zu Ihrem Nutzen zu nutzen und uns zu kontaktieren, falls Sie weitere Informationen zu einem assoziierten Thema benötigen. Vorsitzender Forex Association of India. Eingetragener Firmensitz: 55-C, Mittal Court, C-Wing, Nariman Point, Mumbai 400 021. Tel.:91 22 34598765. Email: feedbackfai. org Forex Association of India. 55-C, Mittal Court, C-Wing, Nariman Point, Mumbai 400001. Tel. 91 22 34598765. Website DevelopmentGORU (Regierung der Demokratischen Republik Utopia), beschlossen, Papiergeld abzuschaffen und stattdessen nur drucken BYTE MONEY. Technologen kam mit einem einzigartigen nicht-gefälschten Algorithmus und konfiguriert Byte Geld in verschiedenen Konfessionen der utopischen Rupie (UR) bis zu 1 Million UR. Die Reserve Bank of Utopia (RBU), verantwortlich für den Druck des Byte Money, übertragen riesige Mengen von solchen gedruckten Byte Geld an verschiedene Banken durch Computer, im Austausch von Papier-Währung von den Banken übergeben. Diese neue Währung wurde benannt UTOPIAN BYTE RUPEE (UBR) Alle Bürger von Utopia wurden gebeten, ihre Byte Rupie-Karten (BRC) von den Banken zu sammeln. Diese kunststoffelektronischen Karten wurden mit UBR beladen, was dem von ihnen übergebenen Papiergeld entspricht. Jeder BRC kann bis zu UBR 1 Million halten. Personen, die bereits Bankkonten hielten, erhielten auch diese Karten, die mit dem Rest des Kontos belastet waren. Diese BRCs waren Trägerkarten, die wie Geld, gestohlen oder verloren gehen konnten. Somit wurde auf Antrag des BRC-Halters eine eindeutige Zahl eingebettet. Alternativ könnte er sein eigenes Passwort für die Zahlung mehr als UBR500 auf einmal. GORU führte auch ein kleines Gadget namens BYTE MONEY STORER (BMS), die Größe einer Zigarettenschachtel (20s). Dies war eine subventionierte Gadget für UR.50 und verkauft nur durch Banken. Jedem Gadget wurde eine eindeutige Nummer gegeben. Jeder kirana und Einzelperson war im Besitz von BMS. Das System arbeitete wie folgt: Herr A geht zu einem kirana, um ein Shampoo oder Teebeutel oder Brötchen für UR 2.00 zu kaufen. Er fügt seine BRC in die kiranas BMS und schlägt die Menge. Der Betrag wird von seinem BRC abgezogen und auf die BMS der Kirana übertragen. Am Ende des Tages, fügt der Kirana Besitzer seinen eigenen BRC in seine BMS und bekommt die Balance in der BMS gutgeschrieben. Jetzt hat das BMS keine Balance. Wenn der Kirana-Besitzer seinen Lieferanten bezahlen möchte, kann er dies tun, indem er seine BRC in das BMS des Lieferanten hineinsteckt oder der Lieferant sein BRC in das BMS der Kirana einsetzen kann und sich gutgeschrieben bekommt. Sogar tägliche Busfahrkarten, Auto / Taxis, Kinokarten etc. wurden durch BRCs bearbeitet. In der Tat zahlen Maut auf Autobahnen, Kauf von Gemüse, genießen eine Tasse Kaffee könnte durch BRCs werden. Mit anderen Worten, die BRC war die Geldbörse, die das Geld, von dem man bezahlt anothers BRC durch BMS. Die breite Nutzung der BRC und BMS führte dazu, dass: In Zeitabständen, in denen der BRC - Inhaber Geld auf sein Bankkonto einzahlen wollte, nahm er seinen BRC an die Bank oder an den Geldautomaten und steckte ihn in das BMS ein Bank und sein Konto in der Bank gutgeschrieben und von seinem BRC abgezogen. Die Banken haben früher genutzt, um den Geldabzug von Geldautomaten auf nicht weniger als 100 UR zu beschränken, was auf die damit verbundenen Transaktionskosten zurückzuführen ist. Jetzt hörte dieses auf, ein Problem zu sein, da niemand Geld von den Geldautomaten zeichnete und sogar UR 1.00 konnte durch das BRC zu jedem möglichem BMS gezahlt werden und diese Verhandlung war nicht durch den ATM. Dies war gleichbedeutend mit der Zahlung von Papiergeld aus der Börse. Einfach ausgedrückt, wurde Geld von BRC zu einem anderen BRC durch BMS von Einzelpersonen gehalten übertragen. Innerhalb eines Jahres stieg das gesamte Papiergeld aus dem System und in die Gewölbe von RBU zum Aufschluss und Recycling für andere Zwecke. Da es nicht mehr Druck von Papiergeld gab, wurden Millionen Tonnen Holz gespart, was zu einem Stillstand der Zerstörung von Wäldern und Bäumen führte. Die verschiedenen gefährlichen Chemikalien, die bei der Herstellung des Papiergeldes verwendet wurden, wurden eliminiert. Die neue BYTE MONEY (UBR-Utopian Byte Rupie) wurde von der RBU nach der normalen Geldpolitik von GORU gedruckt. Jeder bezahlt alle anderen in Byte Geld und die Regierung sammelte auch seine Steuern in Form von Byte Geld. Mit anderen Worten: Papiergeld existiert nicht mehr. Genau wie der Kampf zwischen einer Federal Reserve Bank und den Fälschern von Papiergeld ging der Kampf auch mit Byte Money weiter. GORU ist darauf ausgerichtet, dies zu bekämpfen. Das Problem des Byte Money Storer (BMS) gestohlen, immer zerstört, ertrunken usw. wurden auch angesprochen. Da sowohl BMC als auch BMS von den Banken verkauft wurden, geben die Banken eine eindeutige Nummer und ebenso wie die Deaktivierung eines Mobiltelefons verloren oder gestohlen wurde, wurde die gleiche Deaktivierung getätigt und neue BMS ausgegeben. Die BMS - Inhaber wurden ermutigt, auf dem Bankkonto erhebliche Guthaben im BMS zu tätigen und nur einen minimalen Saldo in der BMS zu behalten, so dass bei verlorener oder beschädigter Geldmenge minimal (wie das Risiko, der Geldbeutel). Die Einrichtungen waren in allen Geldautomaten und Bankfilialen verfügbar, um Bytegeld von den Bankguthaben entweder in BMS oder BRC zu ziehen und umgekehrt. Dies beseitigte die Forderung von BRC oder BMS, schwere Balance zu tragen. Ein wichtiger Nebeneffekt war die Dämonisierung des Papiergeldes, die zur Beseitigung von Schwarzgeld, Bestechungsgeldern und Korruption führte. Es ist wahr, dass für ein paar Monate, das Papiergeld verwendet, um im Umlauf, was bedeutet, dass einige Leute immer noch das Papiergeld als Gegenleistung für Zahlungen. Es starb schließlich, aus dem einfachen Grund, dass RBU war nicht drucken mehr Papiergeld, um verschmutzte oder beschädigte Notizen zu ersetzen. Nach einiger Zeit weigerten sich die Menschen, alte Papiergeld zu akzeptieren. In diesem Prozess der Beseitigung von Papiergeld und Wiederherstellung der Wälder verdiente die Republik Utopien erhebliche Einnahmen aus Carbon Credits. Sie waren sich jedoch bewusst, dass sie den ersten Vorteil hatten und es war eine Frage der Zeit, bevor auch andere Länder dem Anzug folgten. Es war eine Win-Win-Situation für alle. Es war fast eine Schraube aus dem Blauen. Tata Sons kündigte am 24. Oktober an, dass sie Herrn Cyrus Mistry als Vorsitzenden des Unternehmens entlassen und Herrn Ratan Tata zur Übernahme aufgefordert habe. Berichte schlugen vor, dass die Entscheidung der Tata Sons Board an diesem Tag alle überrascht und die ganze Veranstaltung wurde unter größter Geheimhaltung bis zum Datum der Ankündigung gehalten. Später zeigte ein Zeitungsbericht1, dass ein Abgesandter von Ratan Tata einen Tag vor der Tata-Sons-Vorstandssitzung mit Herrn Cyrus zusammengetroffen war, um zu erläutern, was auf der Tagesordnung der nächsten Treffen war. Daher kann eine Frage entstehen, ob einige Insider die Neuigkeiten wissen konnten Tata Sons ist die Holdinggesellschaft von Tata conglomerate. Tata Trust besitzt 66 von Tata Sons, und Ratan Tata ist der Vorsitzende des Tata Trust. Übrigens, Cyrus Mistry und seine Familie Kontrolle 18 von Tata Sons. Daher wäre der Tata Trust normalerweise besorgt über das Wohlergehen der Tata Sons und damit alle operativen Gesellschaften, die direkt oder indirekt unter der Kontrolle von Tata Sons stehen. Es ist ganz natürlich, dass ein Underperforming Chairman gefragt werden kann, ob die Holding seine Leistung fehlt. Es ist kein Geheimnis, dass mehrere operative Gesellschaften der Tata Group kämpften. Tata Steel wird durch das Scheitern der europäischen Wette belastet. Tata Teleservices befindet sich inmitten einer unübersichtlichen Trennung mit NTT DoCoMo. Tata Global Beverages beschäftigt sich mit gestressten Vermögenswerten in Osteuropa. Tata Consultancy Services (TCS), die Gruppen Cash Cow, steht vor einem eigenen Problem. Daher sollten die Menschen kein Motiv in die Entscheidung von Tata Sons setzen, Cyrus zu vertreiben. Allerdings, Freunde von Cyrus sagen, dass er nur vier Jahre, um das Unternehmen laufen und man sollte nicht beurteilen, seine Leistung in so kurzer Zeit. Die Experten haben begonnen, Ratschläge zur Umstrukturierung des komplexen Unternehmensmonolithen zu geben. Anregungen sind Tata Trust und Tata Sons haben denselben Vorsitzenden, Tata Trust würde sich nur auf Philanthropien konzentrieren und würde nicht die Regierungsgewalt und den Vorstand von Tata Sons und anderen operativen Gesellschaften, etc. beeinflussen. Die Cyrus-Ouster-Episode hat mehrere Governance-Fragen aufgeworfen. Trennung von Eigentum und Management in Organisationen schaffen Informationen Asymmetrie Problem zwischen Aktionären und Führungskräfte, die Eigentümer zu Agenturkosten. Im familiengeführten Geschäft, Agentur Problem hat eine andere Dimension - die Spannung zwischen Eigentümerinnen (Veranstalter / Familie) und außerhalb der Eigentümer. Empirische Erkenntnisse zeigen, dass Aktienmärkte in der Regel Unternehmen belohnen, die einer transparenten Unternehmensführung folgen. Studien haben gezeigt, dass Unternehmen mit besserer Unternehmensführung Geld zu geringeren Kosten aufbringen können. Unternehmen, die ihre Governance-Struktur verbessern, profitieren von einer Senkung ihrer Eigenkapitalkosten. Selbst die Kreditgeber bevorzugen und verlangen manchmal eine gewisse Governance-Struktur. Daher ist es wirtschaftlich sinnvoll, den bewährten Vorstandspraktiken zu folgen. Es gibt jedoch Ausnahmen - mehrere Forscher zeigen, dass bestimmte Familienunternehmen Unternehmen mehr Wohlstand für die Aktionäre schaffen, ohne viel Aufmerksamkeit auf Board-Governance. Der Gründer von Apple Inc. dachte, dass Corporate-Governance-Praktiken Innovation und Kreativität behindern. Die Gründung einer Corporate-Governance-Struktur in einem Familienbetrieb ist eine echte Herausforderung. Familienbetriebe tragen wesentlich zur wirtschaftlichen Entwicklung eines Landes bei. Viele große globale Konzerne sind Familienbesitz. Diese Unternehmen haben die Bedeutung der Struktur und Prozesse, die jedes Unternehmen zu wachsen helfen realisiert. Governance-Struktur in der Familie-Geschäft ist nicht einfach - es erfordert die Familie zu öffnen, machen das Opfer und Abtretung einige administrative Kontrolle für Außenstehende. Dieser Übergang erfordert die Schaffung einer Form von Familienrat, um die Übertragung von Macht zu gewährleisten, ohne die Kontrollrechte unbedingt zu verwässern. One-way-Unternehmen erreichen dieses doppelte Ziel der Umsetzung von Corporate-Governance-Struktur in operativen Einheiten ohne Aufgeben viel von Cash-Flow-Rechte durch die Schaffung einer eng gehaltenen Holding-Unternehmensstruktur. Es könnten zwei Arten von Rechten im Zusammenhang mit der Kontrolle von Bargeld - und Kontrollrechten entstehen. Große Investoren können in der Lage sein, private Vorteile von der Kontrolle abzuleiten. Somit können die Kontrollrechte die Cashflow-Rechte (d. h. die Dividende) überschreiten. Bennedsen und Nielsen (2010) 2 finden Beweise für das Vorhandensein erheblicher Kosten der Agentur, die mit der Trennung von Kontroll - und Cashflow-Rechten verbunden sind. Das Controlling der Aktionäre hat Anreize und Möglichkeiten, private Leistungen auf Kosten des festen Wertes zu erhalten. Darüber hinaus werden die Agenturkosten in Unternehmen, in denen der Cashflow nicht für Investitionen oder für Auszahlungen an die Aktionäre ausgegeben wird, höher angesetzt, sondern den Barreserven zugewiesen, die vermutlich an der Kontrolle der Aktionäre liegen. Es gibt Anschuldigungen gegen Cyrus, dass er versucht, die Kronjuwelen des Unternehmens zu verkaufen und führte einen geheimen Plan für die Verkleinerung oder Entsorgung von mehreren Projekten / Vermögenswerte, Ratan Tata begonnen hatte. Menschen näher an Ratan Tata beschuldigte Cyrus für die jüngste schlechte Leistung der Tata Group Unternehmen an der Börse. Das Cyrus-Lager dagegen beschuldigte Ratan Tata für unzulässige Eingriffe und behauptete, dass Cyrus einige harte, aber notwendige Umstrukturierungen vornehme, um das Unternehmen auf lange Sicht zu retten. Die Debatte würde für einige Zeit andauern und nur Zukunft würde zeigen, wer Recht hatte. Das Ziel dieses Artikels ist es nicht, die Corporate-Governance-Winkel zu dieser Debatte zu untersuchen oder finden Sie die wirklichen Gründe für die Ouster von Cyrus. Wir versuchen zu erkunden, ob manche Leute die Nachrichten über Cyruss ouster am 24. Oktober vor diesem Tag kannten. Wir wenden uns an die Handelsaktivitäten in den Tata-Gruppenaktien um den Ankündigungstermin. Ankündigung Auswirkungen auf das Volumen Wir haben das Handelsvolumen von 27 (24 für NSE) Tata-Konzernaktien sowohl in BSE als auch in NSE am Tag nach der Bekanntgabe der Ablösung von Cyrus Mistry (Tabelle I) betrachtet. Es wurde in BSE gesehen, dass Tata Teleservices und vier (drei in NSE) andere Unternehmen zeigten erhebliche Handelstätigkeit als ihr tägliches Volumen sprang mehr als 100 am nächsten Tag. Interessanterweise verzeichnete TCS am 25. Oktober 2016 einen Rückgang des Handelsvolumens um fast 50 (32 in NSE). Die anderen beiden großen Tata-Gesellschaften - Tata Steel und Tata Motors - verzeichneten einen moderaten Anstieg des Handelsvolumens. Prozentuale Veränderung der Tata Group Aktie am Tag der Beseitigung von Cyrus Mistry Volchg () ist die prozentuale Veränderung des Volumens an der Bombay Stock Exchange im Vergleich zum siebentägigen gleitenden Durchschnitt Quelle: ACE Equity Unsere Ergebnisse sind nicht erschöpfend, da sie Marktreaktionen abdecken Ein vierzehn Tage um das Datum der Bekanntgabe des Ausreißers von Herrn Cyrus Mistry. Es bietet jedoch einen gewissen Spielraum für weitere Analysen. Unsere Ergebnisse zeigen zumindest, dass es einige Tage vor dem 24. Oktober in einigen Aktien der Tata-Konzerngesellschaften zu Lärm kam. Sowohl das Handelsvolumen als auch die kumulierten Renditen erfaßten die Anomalie. 1 Wirtschaftszeit, 25. Oktober 2016 2 Bennedsen, M. Nielsen, K. 2010. Incentive - und Verankerungseffekte in europäischem Eigentum. Journal of Banking and Finance 34, 2212-2229 Geldpolitische Ankündigungen neigen zu gewinnen, um große Medienaufmerksamkeit zu gewinnen. Die Economic Times vom 5. April 2016 beobachtete 8220Die Reserve Bank of India (RBI) auf den erwarteten Linien reduzierte die Repo-Raten um 25 Basispunkte und behauptete eine positive Haltung. Der Aktienmarkt reagierte scharf, nachdem die Benchmark-Indizes kurz nach der Bekanntmachung der Politik821 nahezu 1 Prozent in Eile verloren hatten. Es gibt mehrere Gründe für solche wahrgenommene Hype über die Auswirkungen der Geldpolitik an der Börse. Erstens sind die geldpolitischen Ankündigungen viel häufiger als ihre steuerlichen Pendants. Zweitens tendiert die Geldpolitik in makroökonomischen Standardmodellen dazu, durch Investitionsentscheidungen über Zinsänderungen oder durch Beeinflussung der Nettoexporte durch Wechselkursänderungen zu wirken. Sofern es sich nicht um eine abnorme Zeit einer Rezession handelt, sind die privaten Akteure (einschließlich der Finanzmarktteilnehmer) bei währungspolitischen Maßnahmen weitaus komfortabler. Eine der Quellen dieses Hype über die Geldpolitik ist vielleicht seine wahrgenommene Wirkung auf den Aktienmarkt. Wie es passiert Die populäre Wahrnehmung ist in Investopedia erfasst, kommentiert, 8220Die Auswirkungen der Geldpolitik auf Investitionen ist. Direkte sowie indirekte 8230 Die direkte Auswirkung ist durch das Niveau und die Richtung der Zinssätze, während der indirekte Effekt durch Erwartungen über, wo Inflation headings8221 ist. Wie weit sind solche Assoziationen symptomatisch in der Natur? Sind die visuellen Effekte der Bewegungen der Geldpolitik und die Bewegungen der Aktienkursindizes nicht in der Lage, die Wahrheit zu entschlüsseln (Abb. 1 und 2), leiden diese Ansprüche unter dem logischen Irrtum des posthoc ergo propters Hoc Hält diese Assoziation strenge Tests an? All diese Fragen haben große praktische Bedeutung. Ich, zusammen mit zwei Mitforschern, habe diese Fragen nach Indien in einer kürzlich veröffentlichten Arbeit mit den täglichen Daten im Zeitraum 2004-2014 geprüft und fand die Antwort im Allgemeinen negativ (mit einigen Qualifikationen). 1 Angesichts dieses interessanten Ergebnis auf Mangel an Beziehungen zwischen Geldpolitik und Aktienmarkt, für die Leser von Artha, die vorliegende Zuschreibung fasst unsere Erkenntnisse und versucht, Sinn dieser offensichtlichen Nicht-Beziehung zwischen Geldpolitik und Aktienmarkt in Indien. Es kann nützlich sein, mit einer kurzen Abschweifung auf Methodologie zu beginnen. Methodisch wurde die Frage der Assoziation zwischen Geldpolitik und Aktienmarkt traditionell entweder über einen Event-Study-Ansatz oder in einem VAR-Rahmen (Vector Autoregression) untersucht, der einige geldpolitische Indikatoren, Aktienkurse und verwandte Variablen umfasst. Während der Fallstudienansatz die Bewegungen einer Effektvariablen (in diesem Fall der Aktienkurse) in einem vorherigen Vergleich betrachtet, hat sich in letzter Zeit ein neuer innovativer Ansatz ergeben. Dieses Verfahren, bekannt als Identifikation durch Heterosedastizität (IH) (82), wenn die strukturellen Schocks eine bekannte Korrelation haben (meist 0), läßt sich das Identifikationsproblem lösen, indem man einfach auf die Heteroskedastizität der strukturellen Stöße anspricht8221. In Wirklichkeit betrachtet sie die Varianz der Aktienkurse Tage mit der Varianz für nichtpolitische Tage. Bei diesem Ansatz wird der Gesamtzeitraum in zwei Teilproben unterteilt: (a) Politiktage (P) und nichtpolitische Tage (NP). Politiktage sind diejenigen, bei denen Entscheidungen vom RBI angekündigt werden, während nicht-politischer Tag sich auf den Vortag (über ein zweitägiges Fenster) bezieht. Die technischen Einzelheiten der Methodik sind in Anhang 1 aufgeführt. Geldpolitische Ankündigungen Die geldpolitischen Ankündigungen im Zeitraum 2004-2014 können unterteilt werden in: a) geplant und (b) außerplanmäßig und (c) innerhalb der Marktstunden und ( B) nach Marktstunden. Tabelle 1: Geldpolitische Ankündigungen (April 2004 März 2014) Interessanterweise unterscheidet die Literatur zwischen antizipierten und unvorhergesehenen geldpolitischen Maßnahmen. So verwenden Sie einen Proxy für unerwartete Bestandteile von Policy-Ankündigungen Da im Gegensatz zu den USA kein Repo-Futures-Markt für Indien existiert, verwenden wir den 91-tägigen Schatzwechsel als Proxy für Überraschungseffekte geldpolitischer Maßnahmen. Denn die antizipierten Änderungen der geldpolitischen Maßnahmen sind bereits in den Schatzanweisungen des Schatzamtes durch den Markt und jegliche Veränderung der Rendite nach den politischen Ankündigungen berücksichtigt, die die unerwartete Komponente der politischen Entscheidungen widerspiegeln. Sowohl bei der planmäßigen als auch bei der nicht planmäßigen Bekanntmachung von Strategien haben wir versucht, sowohl eine Ereignisstudie (ES) als auch IH-Ansätze zur Schätzung der Auswirkungen der Geldpolitik auf die Börsenindizes (von drei Indizes, Sensex, Nifty und Bankex) zu implementieren ). Wir haben festgestellt, dass die Geldpolitik negative Auswirkungen auf die Aktienindizes hat, sind aber statistisch unbedeutend (Tabelle 2). Dieser Befund steht im Einklang mit den beobachteten Entwicklungen für Deutschland, Ungarn und Polen. Tabelle 2: Auswirkungen der Geldpolitik auf die Aktienkurse: IV gegenüber ES und GMM Ergebnisse über Identifikationstest (GMM) Hinweis:: Hausman Test für die Gültigkeit der zugrunde liegenden Annahmen der Fallstudie (ES) Schätzer getestet gegen instrumentelle Variable (IV) - Ansatz . Die Standard-p-Werte sind in dieser Spalte angegeben. . P-Wert von Hansens J chi Quadratwert ist in dieser Spalte angegeben. Tabelle 3 enthält die Ergebnisse der Auswirkungen von außerplanmäßigen Bekanntmachungen auf den Aktienmärkten von IH und ES. Die Ergebnisse zeigen, dass die Geldpolitik eine negative, wenn auch statistisch unbedeutende Wirkung hat, für ES und IH nach IV-Methode. Die Hausmann-Teststatistik lehnt die Nullhypothese bei 10 zugunsten von IH nach IV-Methode ab. In der IH-Methode mit GMM, finden wir schwach signifikante (bei 10) Auswirkungen der unvorhergesehenen Geldpolitik auf die Sensex und Bankex. Erwartungsgemäß ist der Einfluss auf Bankex höher als der Sensex. Dies steht im Einklang mit der Dominanz des Bankensystems im monetären Transmissionsmechanismus. Tabelle 3: Auswirkungen der unangemeldeten Geldpolitik auf die Aktienkurse: IV gegenüber ES und GMM Ergebnisse Anmerkung:: Hausman Test für die Gültigkeit der zugrunde liegenden Annahmen der Fallstudie (ES) Schätzer getestet gegen Instrumental Variable (IV) - Ansatz. Die Standard-p-Werte sind in dieser Spalte angegeben. . P-Wert von Hansens J chi Quadratwert ist in dieser Spalte angegeben. Die oben dargestellten Ergebnisse haben sich als recht robust erwiesen und standen den Test eines längeren (d. H. Drei Tage) Datenfensters 4 und eines alternativen Maßstabs für unvorhergesehene geldpolitische Maßnahmen der MIBOR FIMMDA-NSE Mumbai Interbank Oer Rate (MIBOR) Laufzeit von 3 Monaten wie in T-Bills. Wie können wir die Ergebnisse der relativen Bedeutungslosigkeit der Geldpolitik interpretieren, um die Aktienkurse zu beeinflussen? Man kann mehrere Vermutungen anstellen. Erstens sind die kleinen und mittleren Unternehmen (KMU), die das Bollwerk des Industriesektors bilden, weiterhin ausschließlich auf Bankfinanzierungen angewiesen, da sie nur begrenzten Zugang zum Aktienmarkt haben. Zweitens war die Unsicherheit über die indischen makroökonomischen Fundamentaldaten während des Untersuchungszeitraums ungeachtet der Auswirkungen der globalen Finanzkrise eher gering. Denn mit einem durchschnittlichen Wachstum von über 7 und einer Inflation von rund 6 zeigte die indische Wirtschaft eine bemerkenswerte Widerstandsfähigkeit inmitten der globalen Kernschmelze. Drittens ist der indische Aktienmarkt trotz einer schrittweisen und kalibrierten Umstellung auf Kapitalkonvertierung ganz offen und globalisiert. In diesem Sinne kann die inländische Geldpolitik nur einen begrenzten Einfluss auf die Investitionsentscheidungen von Indien in Indien haben.5 Viertens gibt es für Banken Investitionen in den Aktienmarkt, die Banken einschränken8217 Engagements an Börsenaktivitäten.6 Schließlich ist die Rolle des Aktienmarktes an Kapital Die Bildung im Land, sowohl direkt als auch indirekt, nach wie vor weniger signifikant. Anhang 1: Methodik der Identifizierung durch Heteroscadascity Nach Rigobon und Sack (2004) kann das Verhältnis zwischen Geldpolitik (wie durch einen kurzfristigen Zinssatz erfasst) und Aktienkurs durch zwei gleichzeitige Gleichungen beschrieben werden: Ist die geldpolitische Reaktionsfunktion, bei der die Veränderungen der Geldpolitik oder des kurzfristigen Zinssatzes (it) auf den Aktienindex und eine Menge von Variablen z reagieren, wobei z beobachtbar oder weggelassene Variablen sein kann. Gleichung 2 ist dagegen die Asset-Preisgleichung und modelliert die Veränderungen der Börsenindizes in Abhängigkeit von Änderungen des kurzfristigen Zinssatzes und der Variablen z. Geldpolitische Schocks sind und Börsenschock ist t. Die reduzierten Formgleichungen von Gleichung (1) und (2) sind gegeben durch: Die Differenz der Kovarianzmatrix zwischen dem Politiktag (P) und den nichtpolitischen Tagen (NP) kann dann folgendermaßen dargestellt werden: Aus der obigen Gleichung (5 ), Können wir den gewünschten Parameter sowohl nach dem Instrumentalvariablen (IV) als auch nach dem GMM-Verfahren (general-method of of moments) abschätzen. Zuerst gruppieren wir die Änderungen in den beiden Variablen in den beiden Teilabschnitten, d. h. (P) und nichtpolitischen Tagen (NP) in einen Vektor mit der Dimension 2Tx1, wobei T die Anzahl der Richtlinientage in der Teilstichprobe ist. Da die Beobachtungsanzahl für die Politiktage und die nichtpolitischen Tage gleich ist, wird durch Kombinieren derselben die Gesamtbeobachtung zu 2T. Die neuen Vektoren i und s sind gegeben durch Die beiden Instrumente zur Schätzung des IV-Ansatzes (Rigobon und Sack 2004): Hierbei ist die instrumentelle Variable w i mit der abhängigen Variablen korreliert, ist aber weder mit noch korreliert. Es ist mit i korreliert, da die größere Varianz in der Teilprobe P die positive Korrelation zwischen (i P) und (i P) von w i impliziert, die die negative Korrelation zwischen (i NP) und (i NP) von w i mehr als überwiegt. Es ist weder mit z t noch t korreliert, da die positive und negative Korrelation sich gegenseitig aufheben (Foley-Fisher et al 2013). Angesichts der beiden Instrumente, die die Auswirkungen der Geldpolitik auf die Börse messen, kann durch eine der folgenden Gleichungen geschätzt werden: 1 Edwin Prabu, Indranil Bhattacharyya und Partha Ray (2016): 8220Ist der Aktienmarkt für geldpolitische Ankündigungen undurchsichtig: Beweise aus aufstrebenden Indien8221, International Review of Economics amp Finance, Band 46, November 2016, Seiten 166-179. 2 Rigobon R (2003): 8220Identifikation durch Heterosedasticität8221. Überblick über Wirtschaft und Statistik. 85 (4), 777792. 3 Rigobon R und Sack, B (2004): 8220Die Auswirkungen der Geldpolitik auf die Vermögenspreise8221, Journal of Monetary Economics. 51: 1553-1575. In unserer Stichprobe gab es jedoch drei Fälle, in denen die Leitzinsen zweimal innerhalb einer Spanne von zwei bis drei Tagen geändert wurden. Daher waren wir nicht in der Lage zu definieren, Politik Datum und Nicht-Politik Datum ohne die Überlappung von Daten. Daher haben wir die überlappenden Daten aus unserer Stichprobe ausgeschlossen. 5 Wir haben auch den möglichen Einfluss der unkonventionellen Geldpolitik in den USA auf den indischen Aktienmarkt untersucht und konnten keinen systematischen Einfluss erlangen. Um die Auswirkungen von spezifischen Ereignissen auf Aktienrenditen (2 Tage Fenster) abzuschätzen, verwendeten wir eine Event Study Methodologie mit Dummy-Variable für jeden der 24 US-Fed Ankündigungen Termine, während die Kontrolle für Überraschungen in der makroökonomischen Daten veröffentlicht mit Citigroup wirtschaftlichen Überraschung Index Für die USA und den Nomura-Überraschungsindex für Indien. 6 Das direkte Engagement in Aktien ist auf 20 des Nettovermögens einer Bank beschränkt. Die globale Finanzkrise brachte die Notwendigkeit von Transparenz und geringerem Risiko bei allen Finanztransaktionen stark zur Geltung. Dieser Aspekt ist für die Transaktionen im OTC-Derivatmarkt, der als eine der möglichen Ursachen der globalen Finanzkrise identifiziert wurde, umso wichtiger geworden. Auf dem Pittsburger Gipfel im September 2009 stimmten die G-20-Führer darin überein, dass alle standardisierten OTC-Derivatkontrakte bis Ende 2012 an Börsen oder elektronischen Handelsplattformen gehandelt werden sollten, die gegebenenfalls bis Mitte 2012 durch zentrale Gegenparteien (CCP) geklärt und darüber hinaus vereinbart wurden OTC-Kontrakte sollten den Transaktionsregistern (TRs) gemeldet werden und im Jahr 2011 darauf hingewiesen, dass nicht zentral gehandelte Kontrakte einem höheren Margenbedarf unterliegen sollten. Der Financial Stability Board (FSB) hat im Oktober 2012 seinen Bericht über länderspezifische Zusagen in sechs Reformbereichen veröffentlicht: 1) Standardisierung von OTC-Derivatkontrakten 2) zentrales Clearing von OTC-Derivatkontrakten 3) Börsen - oder elektronischer Plattformhandel 4) Transparenz und Handel 5) Berichterstattung an Handelspapiere und 6) Anwendung zentraler Clearing-Anforderungen. Globale Regulierungsbehörden haben eine Politik eingeleitet, um die Abwicklung aller OTC-Derivate über eine CCP zu fördern oder sogar voranzutreiben, indem entweder ein zentrales Clearing oder angemessene Risikominimierungstechniken für die OTC-Geschäfte vorgeschrieben werden, die nicht zentral geklärt werden. Die globale Finanzkrise OTC-Derivate Das Scheitern der Lehmann Brothers Group im Jahr 2008 war der Hauptantrieb für die Reform der globalen OTC-Derivatmärkte. Darüber hinaus führte die Rettung von AIGs Verlustpositionen das Fehlen von Regulierung in diesem Markt, die die Krise verschärft hatte. Die Marktteilnehmerverluste aufgrund ihrer Engagements gegenüber OTC-Derivaten waren weitgehend unquantifiziert, da diese Transaktionen nicht geregelt waren. Während der Krise sorgten die mangelnde Transparenz im OTC-Derivatmarkt und die nachprüfbaren Daten über die Kontrahentenrisiken für Ansteckungsängste. Während CCPs wie LCH. Clearnet die Lehmann-Positionen im Zins-Swaps-Markt unter Ausnutzung eines kleinen Teils der Margen reibungslos verwalten konnten, gab es Schwierigkeiten bei der Abwicklung von Kontrakten in Bereichen, in denen CCPs nicht beteiligt waren. Die Krise spielte sich akut auf dem Markt für Credit Default Swaps (CDS), bei denen jedes ein eigenes Adressenausfallrisiko im Vergleich zu anderen derivativen Märkten mit CCPs oder Börsen verwaltete. Entstehung von Basel-III-Normen Die Basel-III-Rechtsetzung ist die zweite grundlegende Revision der Basel-I-Regeln, die 1988 vom Basler Ausschuss verkündet wurde. Basler Normen sind eine Reihe von Standards und Praktiken, die vom Basler Ausschuss von Basel etabliert wurden Banking Supervision (BCBS) mit dem Ziel, sicherzustellen, dass die Banken angemessenes Kapital aufhalten, um wirtschaftliche Belastungen zu widerstehen und das Risikomanagement und die Offenlegung im Bankensektor zu verbessern. Die Basel III-Normen entwickelten sich aus der Antwort der BCBS auf die globale Finanzkrise und zielten darauf ab, das Bankensystem durch die Beseitigung der bestehenden Schwäche in den Basel-II-Normen zu stärken. Die Normen verschreiben höhere Risikogewichte für risikoreiche Vermögenswerte, höhere regulatorische Eigenkapitalanforderungen, die Erhöhung der Kapitalqualität, die Stärkung der Liquiditätsbedürfnisse sowie die Verstockung der Schwachstellen im Finanzsystem durch die Förderung des CCP-Clearing von OTC-Derivaten und die Verringerung der Abhängigkeit von externen Ratingagenturen . Existing Regulatory Frameworks Currently four regulatory reforms are expected to be relevant to counterparties in OTC derivative transactions: Basel III, Dodd Frank Act, the European Markets Infrastructure Regulation (EMIR) and the Market in Financial Instruments Directives/Regulation (MiFID)/ (MiFiR). Basel III addresses the capital and liquidity requirement of banks and pushes banks towards centralized clearing of their OTC derivative transactions. In the United States, the Dodd Frank Act works towards reducing systemic risk and increasing market transparency by mandating centralized clearing of OTC derivative transactions, margining requirements for such transactions, and improving pre and post trade reporting. In Europe, the European Market Infrastructure Regulation (EMIR) and the Market in Financial Instruments Directives (MiFID) are the two regulatory initiatives sought to be implemented towards reducing systemic risks in the OTC derivatives market. The EMIR focuses on reducing banks counterparty risks and mandates increase in margin requirements of bilateral OTC derivative transactions, centralized clearing and trade repository reporting for such transactions. The MiFID which is closely related to the EMIR seeks to address the trading and transparency issues in these transactions. EMIR (European Market Infrastructure Regulation) In pursuant to the Agreement between the European Parliament and Council in February 2012 on a regulation for more stability, transparency and efficiency in derivatives, EMIR (European Market Infrastructure Regulation), the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories was adopted and came into force on August 16, 2012. This Regulation helped the European Union to deliver on its G20 commitments on OTC derivatives agreed in September 2009. EMIR affects all entities established in the EU (banks, insurance companies, pension funds, investment firms, corporates, funds, SPVs etc.) that enter into derivatives, whether they do so for trading purposes, to hedge themselves against interest rate or foreign exchange risk or to gain exposure to certain assets as part of their investment strategy. The clearing obligation applies to European Union firms which are counterparties to an OTC derivative contract including interest rate, foreign exchange, equity, credit and commodity derivatives unless one of the counterparties is a non-financial counterparty. EMIR has identified the two different groups of counterparties to whom the clearing obligation applies: Financial counterparties (FC) like banks, insurers, asset managers, etc. Entities other than FC are classified as Non-financial counterparties (NFC) which includes any EU firm whose positions in OTC derivative contracts (unless for hedging purposes) exceeds the EMIR clearing thresholds. Any non-regulated EU entity will also be an NFC under EMIR. The existing clearing threshold in gross notional value for the various classes of derivatives are EUR 1 billion for equity and credit derivatives and EUR 3 billion for interest rate, foreign exchange and commodity derivative contracts. The key features of EMIR are as follows: Clearing . eligible OTC derivatives must be cleared through a central counterparty (CCP) if transacted between financial counterparties. Certain non-financial counterparties will also have to clear eligible OTC derivative contracts Reporting . counterparties (including CCPs and non-financial counterparties) must report derivatives trades (and any modification or termination) to trade repositories within one working day. This applies to both cleared and non-cleared trades Risk mitigation for non-cleared transactions . financial counterparties and certain non-financial counterparties must have processes which ensure timely confirmation of transactions (where possible, by electronic means) and monitor risk, the latter to include the exchange of collateral or the holding of appropriate capital and CCPs and trade repositories . the authorisation, supervision and regulation of CCPs and trade repositories are provided for. Markets in Financial Instruments Directive (MiFiD), which was implemented in equity markets since 2007 brought about significant changes in this market. The introduction of Multilateral Trading Facility (MTF) led to increased competition among trading venues, increased transparency, lowered transaction costs and bid ask spreads and led to faster trading times in equity markets. MIFID II/MIFIR (Markets in Financial Instruments Regulation) is the review of the MIFID to extend its benefits to a wider class of assets other than equity markets in view of the 2009 G-20 commitments in relation to OTC derivatives. The key initiatives of this framework are introducing a market structure framework to close loopholes and ensure that trading takes place on regulated platforms. Toward this end it introduces a new multilateral trading venue, the Organised Trading Facility (OTF), for non-equity instruments to trade on organised multilateral trading platforms. It has laid down rules to enhance consolidation and disclosure of trading data and establishment of reporting and publication arrangements. It has provided for strengthened supervisory powers, effective and harmonized administrative sanctions and stronger investor protection. In order to encourage competition in trading and clearing of financial instruments, MiFiD II establishes a harmonised EU regime for non-discriminatory access to trading venues and CCPs. It also introduces trading controls for algorithmic trading in order to reduce systemic risks. It also provides for a regime to grant access to EU markets for firms from third countries. The MIFID II/MIFIR after endorsement by the national governments and the European Parliament officially came into effect on July 2014 and is proposed to apply to Member States by January 3, 2017. Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act addresses the gap in U. S. financial regulation of OTC swaps by providing a comprehensive framework for the regulation of the OTC swaps markets. This Act divides regulatory authority over swap agreements between the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). It provides that the CFTC will regulate swaps, and the Commission will regulate security-based swaps, and the CFTC and the Commission will jointly regulate mixed swaps. The key requirements under this include: No Federal assistance may be provided to any swaps entity (i. e. swap dealers and non-bank major swap participants) The CFTC will have jurisdiction over swaps and certain swap market participants, and the SEC will have jurisdiction over security-based swaps and certain security-based swap market participants. Banking regulators will retain jurisdiction over certain aspects of banks derivatives activities (e. g. capital and margin requirements, prudential requirements). The Act creates 2 new categories of significant market participants swap dealers and major swap participants. A swap dealer is a person who makes the market in swaps, enters into swaps as an ordinary course of business on his own account and is known in the market as a dealer or market maker in swaps. This term excludes persons entering into swaps for their own account individually or in a fiduciary capacity or depository institutions entering into swaps with their customers in connection with originating loans with those customers. CFTC and SEC also need to prescribe de minimis exception to being designated as a swap dealer. A major swap participant is any person who is not a swap dealer, but maintains a substantial position in swaps for any major swap category, whose outstanding swaps create substantial counterparty exposure or is a highly leveraged entity in relation to the capital it holds and is not subject to the Federal banking agencys capital requirements and maintains a substantial position in outstanding swaps in any major swap category. A swap must be cleared if the applicable regulator determines that it is required to be cleared and a clearing organization accepts the swap for clearing. Mandatory clearing requirement will not apply to existing swaps if they are reported to a swap data repository or, if in case of absence of one, to the applicable regulator in a timely manner. Further mandatory clearing is exempt if one of the counterparties to the swap is not a financial entity, using swaps hedge or mitigate commercial risk and notifies the applicable regulator how it generally meets its financial obligations associated with entering into non-cleared swaps. The extent to which the swap must be cleared, it must be executed on an exchange or swap execution facility, unless no exchange or swap execution makes the swap available for trading. Persons who are not eligible contract participants (ECP) must always transact via a swap only through an exchange. Swap dealers and MSPs must be registered and will be subject to a defined regulatory regime. The relevant regulators will set the minimum capital and initial and variation margin requirements for swap dealers and MSPs. The Volcker Rule is included as a part of the Dodd-Frank Act and effective from April 2014 onwards. It prohibits banking entities from engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account. Exemption is provided for US Treasury Securities and municipal securities. It has also limited bank ownership in in hedge funds and private equity funds at 3. The Basel III norms were released in December 2010 and were scheduled to be introduced from 2013 to 2015 but the changes introduced in 2013 further extended the implementation to 2018 and again further to 2019. With regard to the OTC derivatives, the interim norms released by the BCBS in July 2012, aim to incentivize centralized settlement of all OTC derivative transactions through CCPs especially qualifying CCPs (QCCP) who are compliant with the CPSS-IOSCO Principles by assigning risk weights of 2 for all derivative transactions cleared through a CCP. These norms also work towards ensuring that the risk arising from banks exposure to CCPs is adequately capitalized. The Basel Committee sought to improve on the interim norms in terms of reducing undue complexity, ensure consistency, incorporating policy recommendations of other supervisory bodies and the Financial Stability Board. Towards this end it released its final policy framework in April 2014 largely retaining features of the interim framework, while adding provisions like a new approach to determine capital requirements for bank exposure to QCCPs, cap on capital charges on their exposure to QCCPs etc. In addition to this, the Basel III rules following up on the counterparty credit losses incurred by banks during the crisis has introduced a credit valuation adjustment (CVA) in the calculation of counterparty credit risk capital, wherein banks have to calculate an additional CVA capital charge to protect against a deterioration in the credit quality of their counterparty in respect to their OTC derivative transactions. This CVA capital charge is not applicable for the banks transactions through a CCP. OTC Derivative Transactions - Settled Through CCPs The Basel Committees framework for capitalizing exposures to CCPs relies on the Principles for Financial Market Infrastructures (PFMIs) released by CPSS-IOSCO to enhance the robustness of CCPs and other essential infrastructure that support global financial markets. The new Rules have elaborated on the two types of exposure that banks need to capitalize when dealing with CCPs - their trade exposure and default fund exposure. Trade exposure implies the current and potential future exposure of a client or clearing member to a CCP from OTC derivatives, securities financing transactions, including initial margin. Default funds or guaranty fund contributions are the funded or unfunded contributions by clearing members to the CCPs mutualized loss sharing arrangements. The Basel Committee released it interim framework for determining capital requirements for bank exposures to central counterparties in July 2012. These norms relied on the current exposure method to calculate the capital requirement of CCP. It also specified an alternate simplified method for clearing members to calculate the risk weight for their default fund exposures to the CCP. However, the interim norms were criticized for a number of reasons. It was stated that the Method I for calculating the default fund exposures relied on a simple capital methodology, the current exposure method (CEM), to define the hypothetical capital required by the CCP. This was designed for simple and fairly directional portfolios of bank and was thought to be too conservative for the diverse portfolios of CCPs. Further the CEM does not fully recognize the benefits of netting and excess collateral and does not differentiate between margined and unmargined transactions. Taking into consideration the feedback received from respondents and in order to avoid undue complexity and ensure consistency, where possible, with relevant initiatives advanced by other supervisory bodies, the Basel Committee released its revised standards for capital treatment of bank exposures to central counterparties in April 2014. These standards are proposed to come into effect from January 1, 2017 onwards. In comparison to the interim standards, the final standard incorporates a new approach for calculating the capital requirements for a banks exposure to QCCPs, caps explicitly the capital charges for a banks exposures to a QCCP, use of standardized approach for counterparty credit risk to measure the hypothetical capital requirement of a CCP and includes specification of treatment of multilevel client structures. The broad framework of the Basel III norms for capital requirements for OTC derivatives is elaborated in the following table Bank is client of clearing member and the clearing member is the intermediary in the transaction between the bank and the QCCP, then its exposure to the clearing member will receive treatment similar to 8220a clearing member8217s exposure to a QCCP. Similarly the clients exposure to a CCP, guaranteed by a clearing member will receive a similar treatment. The collateral of the bank with the CCP must be held such that there is no loss to the client due to either default or insolvency of the clearing member, or his other clients and also the joint default or insolvency of the clearing member and any of its other clients In case of the default or insolvency of the clearing member, then the positions and collateral with the CCP will be transferred at market value, unless the client requests a close out at the market value. In case of the default or insolvency of the clearing member, then the positions and collateral with the CCP will be transferred at market value, unless the client requests a close out at the market value. When the client is not protected from losses in case default or insolvency of the clearing member and one of its clients jointly, but all the conditions above are met, then a risk weight of 4 is applied to the client8217s exposure to the clearing member In case the client bank does not meet the above requirements, then it would need to capitalize its exposure to the clearing member as a bilateral trade Margin requirements for Non-Centrally Cleared Derivatives RBI in its First Bi-Monthly Monetary Policy Statement for 2016-17 had announced the release of a consultative paper outlining the Reserve Banks approach to implementation of margin requirements for non-centrally cleared derivatives. The paper was released in May 2016 and most of the proposals here are in line with above mentioned BCBS-IOSCO standards. The key features are: The initial and variation margin will generally apply to all non-centrally cleared derivatives, with atleast one party under the regulatory preview of RBI. Physically settled foreign exchange forwards and swaps and transactions involving exchange of principal of cross currency swaps, will not attract initial margin requirements. Margin requirements to be applied in a phased manner, to all financial entities (like banks, insurance companies, mutual funds, etc.) and certain large non-financial entities (having aggregate notional non-centrally cleared derivatives outstanding at or above Rs. 1000 billion on a consolidated group basis). No margin requirements for derivative transactions with sovereign, central bank, multilateral development bank and Bank for International Settlements. Types of margins o Variation margin to protect against change in mark-to-market value of the derivatives and initial margin to protect against potential future exposure. The computation and exchange of variation margin should be done bilaterally on a daily basis. o Threshold for exchange of initial margin is Rs. 350 crore and would be applicable on a consolidated group level. Margin transfers between parties would be subject to a minimum transfer amount of Rs. 3.5 crore. The initial margin would be required to be exchanged bilaterally by the counterparties on a gross basis. o While initial margin is to be implemented in a phased manner, entities required to fulfill margin requirements need to have notional amount of non-centrally cleared derivative transactions outstanding of atleast Rs. 55,000 crore for initial margin requirements to be made applicable. o Initial margin requirements to be calculated through 2 approaches: Standardised method (multiplying RBI specified factors with notional amount of the derivative transactions) and quantitative risk models after due validation by RBI. The Standard method requires computation of initial margin based on following: Asset class (derivatives) Initial margin requirement ( of notional exposure) Initial margin requirement calculated through models should be atleast 80 of the amount computed using the above schedule. o Amount of variation margin is dependent on mark-to-market value of the derivative transaction and needs to be exchanged daily on a transaction-by-transaction basis. The eligible collateral for exchange of the margins are Cash, Securities issued by Central Government and State Governments and Corporate bonds of rating BBB and above. Appropriate haircuts, either model based or those specified by RBI, have to be applied to the collateral collected under initial margin. Initial margin collected should not be comingled with other assets of the collecting party and it should be used only for the specific purpose of meeting the losses arising from default of margin giver. There is no need to separate margin collected as variation margin from other assets of the collecting party and it could also be re-hypothecated, re-pledged or re-used without any limitation. Intra-group derivative transactions are exempted from scope of margin requirements, while in case of cross border transactions, RBI would co-operate with other regulators for application of appropriate treatment. Transactions booked in foreign locations would follow margin requirements of foreign jurisdiction in case it is consistent with global standards else follow the requirement specified above. The new requirements would involve operational enhancements and additional amounts of collateral entailing liquidity planning. Hence the new requirements will be implemented in phased manner. o Variation Margin: From September 1, 2016 entities whose notional amount exceeds Rs. 200 trillion have to exchange variation margin when transacting with an entity with similar scope for contracts entered into after September 1, 2016. From March 1, 2017 onwards, all entities within the scope have to exchange variation margin for contracts entered after that date. o Initial Margin: The requirement to exchange two-way initial margin with a threshold of up to INR 350 crore will be phased in as follows for all entities on the basis of their aggregate month-end average notional amount of non-centrally clear derivatives for the March, April and May of the year under consideration From September 1, 2016 to August 31,2017 notional amount exceeding INR 200 trillion From September 1, 2017 to August 31, 2018 notional amount exceeding INR 150 trillion From September 1, 2018 to August 31, 2019 notional amount exceeding INR 100 trillion From September 1,2019 to August 31, 2020 notional amount exceeding INR 50 trillion On a permanent basis (i. e. from September 1, 2020) notional amount exceeding INR 550 billion Impact Assessment of OTC Derivative Regulatory Reforms The assessment of the macroeconomic implications of the OTC regulatory reforms was undertaken by the Macroeconomic Assessment Group on Derivatives (MAGD) under the aegis of the BIS. Comparing and assessing the long term consequences of the reforms programme the Group finds the main beneficial effect is the reduction of forgone output due to lower frequency of financial crisis and the main costs to be expected reduction in economic activity due to higher price of risk transfer and other financial services. The main costs associated with the shift to the new regulatory regime are: Costs of complying with new capital and collateral requirements and increases in the operational expenses inherent in central clearing. The increase in capital requirements from the combination of CVA charge for uncollateralized OTC derivative exposures and trade and default fund exposures to CCPS. Additional margin for OTC derivatives for non-centrally cleared trades or reallocation of exposures to CCPs. The fees paid to CCPs for clearing and collateral management. The demand for high quality collateral for central clearing and for margin requirements of non-centrally cleared derivatives could put pressure on pricing of high quality collateral and increase the costs of such transactions. The extraterritorial application of regulatory frameworks for example the prescriptive rules under EMIR and the Dodd-Frank Act may prevent European/US banks from participating in third country CCPs currently not recognized by them. This could lead such CCPs being treated as non-qualifying leading to higher regulatory capital requirements for trade and default fund exposure, acting as a disincentive for OTC derivatives trading. The benefits are: These regulatory reforms collateralize the vast majority of exposures in the OTC derivatives market. This leads to lower CVAs against these exposures and correspondingly increase the scale of severity of events required to precipitate a crisis. Reduction of counterparty risk results in reducing the too-big-to-fail problem related to systemically important banks. It could lead to better price differentiation and competition as greater standardization of products and lower counterparty risk will facilitate comparison of pre-trade prices. Central clearing and use of collateral will lead to increasing unimportance of individual counterparty information. An IMF study (Making Over-the-Counter Derivatives Safer: The Role of Central Counterparties), has estimated that collateral requirements related to initial margin and default fund contributions to amount up to 150 billion, assuming that existing bilateral OTCD contracts (credit default swaps, interest rate derivatives, other derivatives) are moved to CCPs. It states that the inability of banks to re-use through re-hypothecation and the possible fragmented CCP space could pose issues with a few sovereigns debt management strategies. End-users of OTC derivatives could buy less perfect hedges by using cleared or standardised derivatives against bespoke and expensive non-cleared derivatives, exposing themselves to more risk on their balance sheets. The market could move towards Futurization i. e. shift from bilateral OTC markets to centrally cleared exchange-traded futures-style contracts. In addition to this the Basel III regulatory requirements, especially that of the leverage ratio has acted as an incentive for banks to reduce their derivative books and there has been an increase in compression activity in the interest rate derivative activity. This has resulted in a decrease in the notional principal outstanding is this market. As per the Global OTC derivative statistics released by the BIS, the IRD notional outstanding has decreased from USD 584.8 trillion at end 2013 to USD 384 trillion by end 2015. As per the final guidelines issued by the Basel Committee in April 2014, the standards for the capital treatment of bank exposures to central counterparties will come into effect on January 1, 2017. However, member countries of the Basel Committee on Banking Supervision (BCBS) seem to be making slow but steady progress in the process of adoption of these norms. As per the Financial Stability Boards Tenth Progress Report on Implementation of OTC Derivatives Market Reforms released in August 2016, many countries have put in force the legislative framework or other authority in place to implement the G20s OTC derivatives reform commitments. The implementation framework is the most complete in case of trade reporting and higher capital requirements for non-centrally cleared derivatives (NCCDs). Central clearing frameworks and to a lesser degree margining requirements for NCCDs have been or are being implemented, while trading platform systems were largely underdeveloped in most frameworks. A substantial share of new OTC derivatives are estimated to be covered by reporting requirements in many jurisdictions, with the coverage most comprehensive for interest rate and forex derivatives. According to the Report, all but four FSB jurisdictions had requirements in force to cover 80-100 of the interest rate derivative transactions. As at end June 2016, TR or TR like entities were authorized and were operating for atleast some asset classes in 21 of the 24 FSB jurisdictions. There has been progress in the move to promote central clearing, with 14 jurisdictions evolving a legislative framework with respect to over 90 of OTC derivative transactions to determine the products to enforce central clearing. Higher capital requirements for non-centrally cleared derivatives (NCCD) are in place in 20 of the 24 FSB member jurisdictions, which are now currently applicable to over 90 of OTC derivatives transactions. While the BCBS-IOSCO standards for margin requirements as scheduled to be phased in starting from September 2016, only 3 jurisdictions have scheduled to enforce the requirements with several jurisdictions announcing delays in implementation. As at end-June 2016, 19 jurisdictions have at least one CCP that was authorised to clear at least some OTC interest rate derivatives. In the case of implementing the G20 commitment to promote electronic platform trading, the Report finds that while almost all jurisdictions have established a legislative basis towards this end, less than half of FSB members have evolved comprehensive assessment standards or criteria. The sheer breadth and depth of new regulations in the OTC derivative market, ranging from Basel III OTC regulations, Dodd-Frank, EMIR etc. create significant challenges for banks, brokers and other major participants in the global derivatives market. The imposition of mandatory margins for both cleared and non-cleared transactions and demand for high quality collateral by CCP could pose collateral management challenges. The bifurcation of the market model between CCP settled and bilateral transactions could increase operational complexity. Finally CCPs could face challenges in holding and servicing the increased amount of collateral in their custody. Despite these challenges, the coordinated effort by global regulators and standard setting bodies in the OTC derivative market following the global financial crises bloodbath is an important milestone in the history of the global derivative market. Implementation of these regulatory measures is expected to be a stepping stone to achieve the goal of maintaining the integrity and stability of the global financial markets, and preventing the recurrence of financial crises in the future. Basel Committee on Banking Supervision: The standardised approach for measuring counterparty credit risk exposures, March 2014 The New Standardized Approach for Measuring Counterparty Credit Risk: Sara Jonsson and Beatrice Ronnlund, May 24, 2014 Basel Committee on Banking Supervision - Board of the International Organization of Securities Commissions: Margin requirements for non-centrally cleared derivatives, March 2015, September 2013 Macroeconomic Assessment Group on Derivatives: Macroeconomic impact assessment of OTC derivatives regulatory reforms, August 2013 Bank for International Settlements: Regulatory reform of over-the-counter derivatives: an assessment of incentives to clear centrally - A report by the OTC Derivatives Assessment Team, established by the OTC Derivatives Coordination Group, October 2014 JP Morgan: Regulatory Reform and Collateral Management - The Impact on Major Participants in the OTC Derivative Markets, 2011 Basel Committee on Banking Supervision 8211 Consultative Document: Review of the Credit Valuation Adjustment Risk Framework, July 2015 Capital Requirements Directive IV Framework Credit Valuation Adjustment (CVA): Allen amp Overy Client Briefing Paper 10, January 2010 Financial Stability Review: OTC Derivatives: New Rules, New Actors, New Risks, April 2013 Deloitte - EMEA Centre for Regulatory Strategy: OTC Derivatives The new cost of trading, 2014 Reserve Bank of India: Discussion Paper on Margin Requirements for non-Centrally Cleared Derivatives, May 2016 Sea of Change-ISDA Dodd Frank Act v. EMIR Business Conduct Rules-Clifford Chance, October 2012 Morrison amp Foerster: The Dodd-Frank Act: a cheat sheet, 2010 Bank for International Settlements: OTC derivatives statistics at end-December 2015- Monetary and Economic Development, May 2016 ISDA Research Note: The Impact of Compression on the Interest Rate Derivatives Market, July 2015 Shyamala Gopinath: Over-the-counter derivative markets in India issues and perspectives, Article by Ms Shyamala Gopinath, Deputy Governor of the Reserve Bank of India, published in Financial Stability Review, Bank of France, July 2010 Reserve Bank of India: Implementation Group on OTC Derivatives Market Reforms, February 2014 PWC: MiFID II Driving change in the European securities markets, 2011 Basel Committee on Banking Supervision: Capital requirements for bank exposures to central counterparties, July 2012 CVA the wrong way: Dan Rosen and David Saunders, February 2012 Baker amp Mckenzie: The Basel III Reforms to Counterparty Credit Risk: What these Mean for your Derivative Trades, October 2012 Reserve Bank of India: Capital Requirements for Banks Exposures to Central Counterparties, July 2, 2013 RBI Notifications Basel Committee on Banking Supervision: Capital requirements for bank exposures to central counterparties, April 2014 Shearman and Sterling: Basel III Framework: The Credit Valuation Adjustment (CVA) Charge for OTC Derivative Trades, November 2013 European Banking Authority: EBA Report on CVA, February 25, 2015 Financial Stability Board: OTC Derivatives Market Reforms, Ninth and Tenth Progress Report on Implementation, July 24, 2015, November 4, 2015 OECD: Regulatory Reform of OTC Derivatives and Its Implications for Sovereign Debt Management Practices-Report by the OECD Ad Hoc Expert Group on OTC Derivatives 8211 Regulations and Implications for Sovereign Debt Management Practices, OECD Working Papers on Sovereign Borrowing and Public Debt Management No.1 India Emerging: New Financial Architecture Finance amp Accounting, Indian Institute of Management Bangalore, Bangalore, Karnataka, India Corresponding Author: E-mail: sankarshanbiimb. ernet. in Phone: 91 80 26993078 Short Title: India Emerging: New Financial Architecture Keywords: New financial architecture Integrated financial architecture De-regulation Global Financial Crisis 2007-2008 Banking Mutual funds Non-banking finance companies Risk management The global financial crisis of 2007 2008 highlighted the need to re-evaluate several well established tenets in the world of finance. Questions have been raised the world over about the existing paradigm, leading to an acceptance that new financial architecture needed to be evolved and that new models need to emerge, keeping in mind the multiplicity of socio-economic realities that exist round the globe. In this context, the imperative for a new financial architecture in India is quite evident, and the ensuing panel discussion throws up some India-specific issues that need to be explored by the various stakeholders involved in this attempt. Perspective note to round table The global financial crisis of 2007 2008 has questioned many of the beliefs held very strongly in the world of finance, in particular about the way the whole system was developed and sustained. The collapse of most of the large financial institutions in the capitalist capital of the world, the United States of America, and the subsequent requirement of huge governmental support in bailing out these institutions to preserve the stability of the social structure has led to regulators (both national and international), policy makers, researchers as well as practitioners questioning the very model on which they had built their reputation, leading to an understanding of the requirement for a new financial architecture to be followed, going forward. We are now at the point where the need for the new financial architecture has been more or less universally accepted, but the exact form of the same is yet to be understood and accepted. In fact, it is highly probable that there will be not just one model but multiple models depending on the underlying social fabric and requirements, and hopefully all of the models will coexist. The financial architecture that has been in use was conceived in the wake of the Great Depression of 1929 and was designed to address the issues arising out the economic conditions at that point. Over the last 70 odd years, the economic conditions around the globe have significantly changed. The Second World War and the development assistance plans that were put in place post the war by the developed nations meant that there was an abundance of capital to rebuild the world. This also meant that a lot of the regulators frameworks put in place in the immediate aftermath of the Great Depression were slowly but steadily dismantled so much so that by the 1990s the entire financial markets globally (particularly the developed world) were subject to very little regulation. On the other hand, financial markets in countries like India and China were still significantly controlled by the regulators, and in some cases by the governments themselves. In the good years, through till about 2006 2007, this meant that the perceived benefit of deregulation that most of the developed markets saw did not really percolate to these markets and hence these markets had a persistent demand for larger levels of deregulation. This has been coupled with the need for relatively high growth rates that these countries would require to sustain their economies a growth rate of 8 8211 9 going forward for a number of years. One of the obvious fallouts of these kinds of needs would be the fact that the standard financial architecture that existed would not be able to sustain this level of growth in fact no one segment of the financial sector will be able to sustain the growth required hence the possible need for an integrated new financial order or architecture integrating the banking sector, the mutual funds, and the nonbanking finance sector. Another sector that probably would need to be formally included in this new order would be the organisations that collate and provide all the relevant financial information as, going forward, information will be the key driver and more so in the financial sector. While the new financial architecture needs to be developed, each segment of the finance industry will be impacted. The banking segment will probably the most impacted as it is the largest contributor to the financial sector. The need for financial inclusion in the country, the push for the same from the government, as well as the additional responsibilities and requirements thrust on them on account of the various regulatory mechanisms, for example the Basel guidelines, will definitely make banking a whole new ball game when compared to the banking sector that we now know of. Implementation of and adherence to such requirements would also require significant amount of trained human capital and thus trained human capital would also form a pillar in the new financial architecture that is in the process of being developed. The other major sector that probably has never got the attention due to it is the micro small and medium enterprises (MSME). It seems clear that these MSMEs are going to be the major drivers of growth in the future and hence the entire financial structure would have to give importance and prominence to the capital and fund requirements for such enterprises this is particularly relevant given that the current share of the noncorporates in the Indian GDP is about 52 and is expected to grow in the coming years. The financial support needs to come from the formal banking sector as well as the nonformal sector represented by the nonbanking financial companies (NBFCs). Interestingly NBFCs can also play a significant part in the financial inclusion of all citizens. In a sense, it is now clear that going forward, NBFCs will play an even larger role that it plays currently and such organisations will have to be given a place at the high table of finance on equal terms. The other pillar of the new financial architecture will be the mutual fund industry. Globally it is already a very important player contributing around 36 of the global GDP. This number is only expected to increase with increased life expectancy and therefore an increase in the superannuated population leading to larger savings during the working life. On the contrary mutual funds contribute only about 7 to the Indian GDP but as life expectancy increases, the retired population also increases, and thus the need for increased savings will become very important, and the mutual funds will be one of the prime vehicles of this investment going forward. The main driver that will lead to a successful increase in the increased investments in mutual funds will be improved and effective regulation of the capital markets, thereby increasing the confidence of the common investor in capital markets products and, as a consequence, the mutual funds. The final pillar of this new financial architecture has to be information information on all counts but in particular channelised towards risk management and risk mitigation. The same is being highlighted by all regulators Basel guidelines by the Bank of International Settlements (BIS) is a classic case in point. The importance is also growing as better and more efficient analytics tools are available today for users and regulators alike to carry out detailed predictive analysis and hence try and pre-empt adverse market moves. Even if the success of pre-emptive market moves may be questioned, the ability of these data based strategies will give all the stakeholders of the financial system a better chance to have more efficient and robust risk management systems not that they will be successful all the time but the success rate will definitely improve significantly from the current times and thus improve the efficiency of the entire financial sector. In this context, the imperative for a new financial architecture in India is evident. The following panel discussion, brings forth some of the issues that would need to be identified, particularly in the Indian case, as the regulators and the policy makers in conjunction with market participants, go about building a new architecture. India Emerging: New Financial Architecture Panel Discussion 1 Chair: R Vaidyanathan Professor, Finance amp Control, Indian Institute of Management Bangalore T Keshav Kumar, Chief General Manager, Commercial Banking, State Bank of Mysore Imtaiyazur Rahman, Chief Financial Officer, UTI Mutual Fund Sriram Ramnarayan, Country Head, Financial Markets, Thomson Reuters S. Sundararajan, Group Director, Shriram Group. A new financial architecture is emerging in India. We are talking about 8-9 growth in the future. What are the challenges faced by the financial architects What types of changes are required To discuss these issues, we have experts from distinct areas 8212 banking, mutual funds, non-bank finance, and risk management. We will have a short presentation from each of them pertaining to their domain, and then open up the discussion to the audience. We have with us Keshav Kumar, Chief General Manager, State Bank of Mysore, from the area of Commercial Banking. He has been with State Bank of India (SBI) Project Finance, Mumbai, and was DGM Credit, at State Bank of Travancore, Kozhikode. We have with us G. S. Sundararajan, Group Director of Shriram Group, the largest non-banking finance group in the country. He is the MD of Shriram Capital, the holding company of the group. The company is in the insurance business and financial services, both in India and abroad. As a group director, he is in-charge of subsidiaries, providing oversight in critical areas, primarily in strategic growth opportunities for the country. We have with us Imtaiyazur Rahman, Chief Financial Officer, UTI. He also supports the global operation of the company and the private equity division of UTI. He has 27 years of experience in management and business leadership. He has been with UTI since 1988. He has served on the board of Invest India Micro Pension, collective investment as well as pension. The final panellist is Sriram Ramnarayan, Financial Risk Division, Country Head, Thomson Reuters. He has been working in the finance sector for 18 years. Currently, he is the Mumbai Location Head at Thomson Reuters. I invite Mr Keshav Kumar to speak first. Keshav Kumar . Banks and the new financial architecture The financial sector in India consists of commercial banks 8212 private and public sector, foreign banks, all India financial institutions, and the non-banking finance companies (NBFCs). I will focus on banking and the changes required, the issues to be resolved in the formulation of the new financial architecture. Banking has undergone a huge amount of change with the regulator playing his role in guiding the banks on the concepts of BASEL-1, 2 and 3, particularly on the need to maintain higher capital. Capital is an important element in strengthening the foundation of the bank and in building a healthy banking system. We need to ensure that we have enough capital to meet eventualities. This is an area that is going to be of greater prominence in the banking system. We cannot give loans just because there is an appetite for loans we need to link loans to the capital that is available. Given that public sector banks are managed by the government with more than 51 shareholding, the ability to raise money is one of the main challenges. The government in its own way is trying to bring down the holding levels but this will take time. One of the structural changes that has to be made is for the government to move out, and retain only a controlling interest, leaving the professionals to run the show. The next issue is streamlining the procedures and upgrading technology in banking. A lot of things have changed in Indian banking. When we got into the banking system in 1984, we had manual systems. As one among those who have gone through the process, I definitely know that we have come a long way. People with no experience in handling computers, who are retiring soon, have been managing systems successfully. The major issue that banks face today, which will impact their efficiency going forward, is that of human resources. Banks, at one point of time were able to attract the best of talent. It was the prime area where employment was being generated. Joining the bank as a probationary officer was not considered any less than joining the Indian Administrative Service. The salary structure was also similar at that point of time. But today, after the IT boom, the best of talent has not come to banks. This is the sector that is going to be very important for the economy. There has to be a distinct look at what needs to be done to attract the best of talent to banking, especially to the public sector. This is the most important part of the whole financial architecture that we are talking about. The challenge will come to a head in the next couple of years when the seniors in the bank retire all those who joined in the late 70s and early 80s and there will be a distinct gap in the middle and senior management levels. The seniors will be replaced by officers who have not had that experience. We have to take this challenge seriously and address it if we want banks to be the backbone of the industry and the economy. Coming to funding, we are talking about universal banking today, which has its own benefits and disbenefits. We started commercial banking from the short-term lending perspective of the industry and the all-India financial institutions took over the long-term funding of the industry. This created its own problems. Financial institutions did not possess the resources for asset liability management (ALM) they do not have the assets to match their liabilities. Banks moved into term lending and intra-lending. This has caused a major issue as the ALMs do not match. Our liabilities are of short duration whereas the assets needed to carry projects such as airport projects or port projects which are of10-15 year duration or longer, are different. Today, non-performing assets in the banking industry are causing issues. The prime reason for this is that we have not looked at economic length of the project or what the project requires but at a random number of 10-15 features based on ALMs. We must have the ability to draw from long-term resources. In all other economies, these activities are funded by groups such as pension funds, Public Provident Fund (PPF), and so on through which more long-term funding is available but in our country there are several investment and regulation issues. Insurance companies only invest in AA or AAA rated companies. So when projects come up, they are unable to attract long-term funds and that is why they come to banks. When they come to banks, based on their ALMs, we give them loans for 10-15 years which impacts our profits. This is because such decisions are based on assumptions. A road project is assessed on what the traffic is going to be. These assumptions need not necessarily turn out to be true. You need a mechanism where we can viably assess such projects and change our goal posts. For that, you need ALMs on tenor-wise basis. Going forward we need to have banks for varied interests and varied causes. A start has been made by the Reserve Bank of India (RBI) with payment banks. A lot of disintermediation is happening and this is a great challenge. There was a time when banks were involved in various activities, now they find that they have to do clear credit activity. You need to see if income comes from non-interest income. In the past banks used to float funds. Today that option is not available in the banking sector. Going forward, we are going to have a layered structure where we will have specific activities given to different banks. Next, we come to capital constraints and governmental compliance and regulatory compliance that banks have to meet. This is not a level playing field. Public sector banks have crucial social obligations. Public sector banks need to meet their social obligations, and at the same time focus on profitability as they are also accountable for their performance. The banks have to divert 40 of their lending to the priority sector. These are all social objectives. Unless there is a level playing field, you will not be able to judge which banks are doing better. Information technology (IT) is already a challenge and given the stage that banks have reached, we are confident that the best of IT would come into this sector and we would be able to match the expectation of the customer. When it comes to IT, the objective of the bank will be to take its cues from the public depending upon their requirements. Banking is in the cusp of change. It is a change which should happen and will happen. Going forward, we will witness various sets of banking improvements. The banking structure needs to be stronger so that it actually becomes the basis on which the economy works. Thank you Mr. Kumar for initiating the discussion. Mr Kumar has identified the issue of capital adequately. He has also identified the huge gap that many banks face in terms of their age profile. Quite a number of people are going to retire because in the 1980s in the public sector banks, there was a slackening in the intake. This is a demographic problem in a number of banks. They have a junior level and then there is a huge gap. It is a huge challenge in public sector banks. Banks could leverage IT and overcome the circumstances. The relation between the government and banks is an age-old issue in India. The government pressure on banks to meet the public obligations and priority sector is phenomenal. All the banks face this. We will now have perspectives from the non-banking sector which occupies a very large space in the Indian context. I request Mr Sundararajan to highlight some of the issues in that space. S. Sundararajan: Challenges faced by non-banking finance companies ( NBFCs) in India I am going to focus largely on the Micro, Small, and Medium Enterprises (MSMEs) space, the role that non-banking finance companies (NBFCs) play and how they are or are not facilitated within the regulatory framework also, what needs to be done in the new financial architecture to ensure that the NBFCs are supported to give credit to MSMEs in a big way, which alone will ensure that we have a sustained GDP growth of 8 or above. Medium enterprises have a reasonable amount of credit which comes in from the banking sector. Micro and small enterprises are largely unorganised, but they do not like to be called so they call themselves self-organised. Many of them are not registered. They receive credit from local cooperatives which are often private co-operatives. Some NBFCs have taken the risk over the years to lend to micro and small enterprises, and see that they grow, which has had a multiplier effect in terms of positively developing the community around them. In terms of financing, every bank says it lends to MSMEs. One would think that MSMEs are the most overbanked sector, but they are actually the most under-served. The MSMEs rarely get the credit they need for their growth from banks. So MSMEs are largely served by the NBFCs. Financial inclusion is a term that has been heard for the last few years, but much more today than before. It is something that some NBFCs have been doing very significantly and they have been niche players in transport finance, equipment finance, small business finance and so on. The primary challenge faced by the regulators with regard to NBFCs is that that today, of the 12,000 or so NBFCs which are registered with the RBI, only about 20-25 of them account for about 70 of the lending in the marketplace. Many of the other players are either inactive or do small business in their local area. The regulator has a lot more focus when it comes to regulating banks (public deposits are a big concern for regulators and they have to protect the depositors), and NBFCs have been regulated with a very light touch for the first 15-20 years. However, over the last 7-8 years, the regulator has looked at NBFCs with more focussed attention. The thought process now seems that as in the global environment, NBFCs and banks should have a level playing field. Therefore, NBFCs should be regulated just as banks. Some regulations have come about over the last few years, especially in the last one and half years which I believe are going to have an adverse impact on how NBFCs lend to micro and small enterprises. Perhaps this is why in the last budget announcement, there was a separate committee set up to examine the financial architecture of the MSME sector under K V Kamath2 . The issue here is that if NFBCs are regulated the way banks are, be it in terms of capital adequacy norms or provisioning norms or anything that affects the advances made by NBFCs, then NBFCs will also target the same customers as banks. Today if there is any financial inclusion happening (when I say financial inclusion I am not focussing on savings bank accounts or insurance, I am focussing primarily on the amount of credit available from the organised institutions to the sector which is deprived of credit) it is through the NBFCs. There is a lot of mutual exclusivity between the target markets serviced by banks and by NBFCs. Further, there is a significantly higher level of risk which is being taken by the NBFCs because they have light touch regulations and they are allowed to take this risk. On the other hand, banks depend a lot on public deposits for their funding, so the RBI regulates banks more closely. Today, banking is a low risk-low reward business. While there may be no bank which has more than 12 return on equity (ROE), banks have a premium in terms of their valuations, they have a lot of investor interest and the overhang of RBI control and regulations is seen as a safe bet in the financial services space. In the case of NBFCs, because of the light regulations and some errant players who have misbehaved in the market place, the RBI has decided to regulate all the NBFCs in the format of the lowest common denominator. They have decided to regulate the entire NBFC sector in the light of the few failures and with a view to preventing further failures, which has made life much more difficult for these 20-25 NBFCs who are the only ones catering to micro and small enterprises. According to the committees advising the finance ministry, unless we have a separate architecture created for small business financing, financial inclusion will continue to remain a dream and even the few finance companies which are doing good business will cease to exist. Even if banks start understanding these customer segments, and try to serve them in an effective way, it will take another 15-20 years for them to be effective. Till then, we need NBFCs to flourish continuously and grow. There is a lot of appreciation for the role played by NBFCs from the finance ministry. We are confident that there will be significant changes and some amount of facilitation will happen which will enable NBFCs to continue the process of growing and giving more credit to the micro industries. To give you a brief background on the character of MSMEs, though they are clubbed in one department and under one acronym, there is a lot of difference in terms of their characteristics. Medium enterprises typically have beyond INR 20-25 crores of turnover. They typically need multiple bank products and they have grown in different sectors of the Indian economy. Their risk is perceived to be relatively lower than the micro and small industries. They are registered companies, some of them are even limited companies. Therefore there is a lot of transparency and their financial documents are available because of which banks have a certain comfort level with them. None of this exists with most of the micro and small enterprises. At the same time, most micro and small enterprises at the lower end do not need any product other than term loans they have enough collateral available which they are willing to give against loans. Today, when they take loans from NBFCs or local money lenders, their interest rates are much higher. The interest rates are more because there are very few players in this segment and the supply is much lower than the demand. Also there is a perceived high risk on the part of RBI and other players who are in this space. Therefore, there is a higher return which is seen and made available to NBFCs. The objective of the new architecture for small business finance is to ensure that more and more players come into the open. If more entrepreneurs come into the MSME space the ultimate pricing for these customers will come down, and there will be more inclination to borrow from NBFCs, and therefore there is huge growth opportunity and potential which will be realised as we go along. It is extremely critical and imperative for NBFCs to grow and we hope the new architecture will facilitate this. In the last few years we have seen a lot of regulations coming in, but this has not stopped the NBFC sector from growing. NBFCs have been fighting for survival all along and they know the art of surviving in the most adverse conditions. The new financial architecture is critical to enable NBFCs to play an even more significant role in financial inclusion in the country. Thank you Mr Sundararajan for an excellent exposition on the issues faced by NBFCs. Though little recognised, NBFCs play a very large role in our economy. This segment includes money lenders and the bigger companies. Of the 58 million small enterprises in the country, most of them are non-corporate. But in a district survey, I found that most of management research is only concerned with corporates. In terms of value addition, the non-corporates constitute around 50 of the GDP, while corporates constitute only 12-13, but we are all enthusiastic about corporates. NBFCs perform a phenomenally good role in terms of reaching the last man. The usual complaint is that they charge a very high rate of interest but funds are otherwise not available to the average person. It is not so much a rate of interest issue but a question of availability and with the least amount of paper work. Much of these transactions are based on relationship and trust. There is a general opinion that gold is most unproductive. We do not realise that gold is the single largest collateral in the country today for small businesses. I have a flower vendor near my house. There are times when she wears bangles and times when she doesnt. When she doesnt have bangles, the business is down. She would have mortgaged the bangles for working capital. When the business is doing well, the bangles come back. So, gold is not an idle asset. It is one of the largest collateralised items in this country, and that is why gold will occupy an important place. We hope the new financial architecture will factor that in. We now have Mr Rahman from UTI. He will talk about mutual fund investments and their issues. Imtaiyazur Rahman: Mutual funds 8212 issues and developments We will take a few minutes to look at the global perspective of mutual funds and then deal with the Indian mutual fund. So far as global asset managers are concerned, it is a very rich sector. Global asset managers manage the total assets (TA) they manage the traditional mutual funds and also manage the alternative assets, globally. According to a study, global assets under management (AUM) was 67 trillion (TD) last year. In 2020, it will reach 100 TD. What are the segments that are going to contribute to it The traditional mutual fund in 2012 was around 65 TD. In 2020 it will go up by 40 TD. The mandated assets in 2012 was 31 TD and that will go up to 47 TD in 2020. Alternatively, private equity was 7 TD in 2020, it will be 13 TD. There are four broad factors which will drive AUM. In most of the Western countries, there is an ageing population. So they will save more towards retirement benefits. There will be serious shift in the culture of investment in the emerging countries. The culture of saving will move towards investment. High net worth individuals (HNI) will accumulate more wealth by way of ESOPs, creating more organisations, and new entrepreneurs. Financial literacy is going up in a big way and all these factors will lead to 100 TD assets. These assets will help the industry and economy to grow, and to meet growing capital requirements. It is important for us to see the Indian mutual fund industry in three different perspectives. In 1963-64, the Government of India (GoI) started the Unit Trust of India (UTI), which dominated the scene until 1987. In 1987, GoI decided to open up this sector and it was available to public sector undertakings. Many public sector banks like Canara Bank and SBI started their own mutual funds. Before 1987, UTI had Rs 4700 crores of AUM. When the sector opened up in 1987, the AUM rose to Rs 47,000 crore. In 1993, when this sector opened completely to the entire public sector, AUM has grown from 47,000 crore to over Rs. 10 lakh crores. But, here we have to introspect. What is the contribution of MF The allocation of household savings to MF is 3. Mutual fund in India contributes only 7 of the GDP while global MF contributes 36 of the GDP. Where does the money go Bank deposits account for 56 and this trend continues. The allocation to MF is far less. We need to introspect on this growth. Compare 2009 and 2014. In 2009, the investment of corporate holdings in MF was 51, HNI had 22, and retail had 21. This has shifted. In 2014 corporates hold 50 in MF, HNI has gone up from 22 to 27 and retail continues to be at 21. There are three important matrices we need to look at. First of all, the investor-mix. There is a lot of concentration as far as the corporate sector is concerned. Other statistics show that there is a large concentration as far as cities are concerned. The top five cities of the country contribute 74 of the ADR and Bangalore is one of them. Next top 10 cities contribute 14, 88 contribution comes from top 15 cities. Only 12 of the money comes from beyond the top 15 cities. So, we are seeing high concentration in cities as well as the corporate sector. Coming to the third matrix, income funds constitute 56 of the ADR, liquid funds 13, and equity funds 21 of ADR. This is the latest trend. By 2020-25, MF will have 10 share in household savings. If this is the goal, what are the things we need to do Basically, there are four drivers in this industry one is Product and the other is Customer. There are two types of customers: distributor as a customer and the industry as a customer. The other drivers are Operations and Regulations. If we need to achieve our investment goal, there needs to be a serious shift in the minds of the people from savings to investment. As asset managers of MF, we need to play the right role, i. e. we need to come out with the right product. If we look at todays market, it is really crowded. All of us come out with the same product. Equity funds large cap there are 40 large caps in the market. And there is no great differentiation. So we need to launch a product that is relevant, we need to price it well and position it well. Coming to the investor mix, there is high concentration geographically as well as in terms of the participants. We need to diversify quickly. In the last 7-8 years, there has been a huge amount of investment by the MF industry, including the regulators, in investor education. But it is very fragmented. So we as an industry need to work very hard and ensure that new investors are inducted. The number of folios for investors is only 4 crores. It has not grown. We can see some growth in equity fund only in this financial year. But again if you look at the flow, it is worrisome Rs 95,000 crore has come in the last 8 months and Rs 55,000 has gone. This is a trend. The MF industry needs to change its landscape and from mid-MF player, it should become the asset manager. While managing assets, the MF industry players also need to manage the pension fund, insurance and the money in alternative spheres. Only then can we achieve the goal of 10 MF share in household savings. The next important piece is distribution. The MF industry is heavily dependent upon distribution. We have five different channel partners. Banks have the largest dominance in the top tier cities independent financial advisors (IFAs) are found across the country we have national distributors and regional distributors. Apart from the three parties investors, distributors, and asset managers, there is also the regulator. And in the distribution space their interests are not aligned. The regulator is saying you cant pay so much of commission. The worry for the small MF player is that the large players have deep pockets and will pay more commission and will take away the entire space. The large player says X has large number of equity elements, we have smaller number of equity elements, so we must buy. Periodically, there used to be a huge problem in this space. UTI had over 150,000 IFA distributors. Then, there came a regulation that they had to be American National Standards Institute ( ANSI )-certified. The number got reduced substantively. Now, there are 60,000 IFAs, and out of them only 5,000 are active. This is worrisome. What we need to do is make sure a new generation of IFAs comes in and they are paid well. The last important piece in the MF industry is the regulator involvement. This industry is highly regulated. We are required to produce several documents. But there is some welcome development from the regulator side as well. The regulator came out with the provision that the paid up net worth of asset management needs to be Rs 50 crore. The regulator wanted to send out a message that only serious players will be encouraged here. They increased the capital adequacy requirements from Rs 10 crore to Rs 20 crores. They wanted the asset managers to put their skin into the system and therefore we at UTI are required to invest in all open-ended schemes equivalent to 1 of AUM or Rs 50 Lakhs, whichever is less. This is really welcome. But many of the incentives are non-tax. If this industry has to grow, we need to get a lot of tax benefits from the Government of India. There has to be necessary provision in the law that MF should be given this benefit. In conclusion, I would say MF needs to be permitted to become the asset manager for insurance and pension funds. Mutual fund needs to have a large distribution base and the number of regulations needs to be reduced. In this entire space, digital strategy is crucial, and is going to be a big game changer. The better the digital strategy, the lower the cost, and the better the efficiency. With more digitisation and IT initiative, we will be able to serve the customer better. Thank you Mr. Rahman for highlighting the achievements as well as the travails of the MF industry 10 of the financial savings going into the MF industry will be a very positive development. As of now, the bank is the most preferred destination for household savings not only in India but all over Asia because the capital market is not much trusted by the household saver. We also hope that the regulatory framework would be much more favourable. Perhaps the developmental role of the regulator should be stressed. The perception of the regulatory authority or regulation should change. I would now like Mr Sriram to consolidate the whole issue based upon his experience, including the risk management perspective. Sriram Ramnarayan: The risk management perspective Going by the presentations of the earlier speakers, everyone is talking in terms of growth in the banking sector. None of us is complaining about regulations, as such. All the presentations spoke about how inevitable growth is and how can we ease the bottlenecks and enable mechanisms to grow faster. To give an example from the treasury space, ten years ago I was in risk management. At that time, you used to be very happy in the banking and financial sector, if you had a treasury recapture and position keeping system in your books, mainly in forex which runs into billions and billions of dollars on a day-to-day basis. If you could electronically capture the deal, pass it onto mid office and to the back office electronically, untouched by human hand, you were stated to have implemented a risk management framework for your organisation. People would put it in their balance sheets, if you can recall, that they were proud to implement so and so risk management systems in the organisation. This was what risk management constituted 10 years ago. Today, risk management has taken a completely different hue for the simple reason that most of the trading is done at such a fast pace, and it is governed by things completely beyond your control. If you are aware of the things that are behind that change and the change in trading mechanism, you must be lucky. Therefore, one of the prudent ways to look at the framework for risk management in order to facilitate all the businesses that you want to grow, is to try and put all the processes for known risks together. Unknown risks, you cannot combat. If someone says they have a comprehensive risk management framework or a complete risk operational system, that is a doubtful claim. For example, if you look at the way equities are trading in most parts or the algo trading or machine trading mechanism that is happening now, 80-90 of the global trading is done by machine. Those machines have a vast amount of historical data built into them comprising simulation, analysis of last 15 years, data of a particular country, climate, political influence, and so on. People used to take a look at the news and past credit and make their decision. Today, the machine does that in a micro second or even a nano second. What do these machines do They simply take all the historical data, look at all news on BBC or Reuters or Bloomberg that comes in electronic format, read that news, and relate that news to similar events that took place 5 or 10 years ago. They look at questions such as: How has the market responded What is the market sentiment, the reaction with respect to such a response What will be the reaction once such news is out in the market Which way will the market move The machines provide a positive or a negative sentiment and then ask Do you want to trade This is a question pertaining to trade in millions of dollars 8212 yes or no The order is executed in less than a micro second. Before we as human beings can see that news on the machine, the order is already executed between the two extremes. You need to have good risk management processes in place in order to address those individual applications and markets. It is again a myth when people say they need to have a comprehensive risk management solution that takes care of everything and all the activities of a bank or a financial institution. Such a solution does not exist. If you look at the treasury risk management system, it is so different from the core banking system where the emphasis is on credit. Each bank knows exactly what credit model is best for it. An external credit rating agency can only do so much. The real estimate of the credit risk is done by the person who takes the decision. I have been saying this at various forums the last man who takes the risks when he gives a loan knows what the probability is of the loan being returned. Similarly, in infrastructure funding or the trading environment where the trader hits the buy button on the screen and says buy 5 million, he knows in his heart what exactly the impact of his actions could be on the organisation, and collectively five such people know what is the impact of such action is on the state of the economy, which will contribute to systemic change. The herd mentality of five people going in the same direction or going wrong contributes to a systemic risk. Having said that, what is the new risk management principle What are people now looking at I spoke to a compliance officer of one of the big MNC banks recently who said that one of his big worries was how he did risk management. The organisation had all systems in place. The department heads in the organisation had to tick mark on a form that they had complied with all processes. But the compliance officer could not be sure because he was depending on someone elses tick mark. Therefore, people are now looking at various processes by which you can capture all the risk, the birth place of those risks and bring them all under one operational framework so that they could be in a position to see the risk. How much you act on that risk, how much you cover is entirely up to you. For example, if you go to the World-Check database3 the UN gives a list of about 1000 people you should not trade with. If you go to a software company/service provider, they will give you 1,50,000 names you should not deal with. However, these are not blocked deals, they are cautions provided by the service provider. The risk culture is changing due to the very complex business environment. The man on the floor the man at the end of the cycle where you disburse money in trade that is where the risk culture has to come from and has to go all the way up to the board. This is the reason why in the New Companies Act, the responsibility is placed on the CFO and at the same time, you have the CRO and the internal auditor who is responsible and answerable to the board. Having said that, who is most apprehensive about all these regulations The board of directors. Now, the board of directors is telling us please equip us to be aware of what is going on, as independent directors in the company. Is there awareness among them Are the independent directors capable and do they have the time and wherewithal to read the reams of paper they receive and come back with recommendations and decisions points Physically it is not possible. So, now the board is focussing on how to train the independent directors to have a bigger perspective, of being able to see what others cannot. That is what risk management is about. Compliance is another big question in peoples minds. Indian companies are investing all over the world. They are subject to so many compliance laws that the investment and returns expected by investors overseas and in India can be wiped out by one penalty fine. So, the dire need for people is to see, in one place, the compliance laws that they are supposed to adhere to. Even in India, different states have different labour laws, laws with respect to doing business, local taxes, octroi, and so on. The entire framework of risk, governance and compliance now has to take a unified shape and form which is addressed by systems, and by people, most importantly, by people with expertise. You cannot lose people who understand the business. You need people who understand and implement the processes and you need the risk culture to be propagated across the organisation. I would like to leave the audience with one thought. We have several regulators 8212 insurance regulators, financial regulators, forward market commissions, SEBI, RBI, and IRDA. Is there a need to have a wrapper of a regulator Do you need a unified system in the country as a whole to ensure that the financial systemic exposure is better controlled Do you need linking between regulators Do you need a unified regulator who has overall view on at least certain basic principal parameters which then can then boil down to industry-level specifics The question cannot be answered in a day but it is a thought process for all of us. Thank you for bringing out this important issue of role of directors. The recent 2013 Companies Act is, in a sense, a draconian act several independent directors are quitting directorships and companies are desperately in search of good directors. What the system has done in its enthusiasm is practically make the independent director more responsible for the affairs of the company than the executive director. They have made conditions very stringent in a few years, many companies, particularly listed ones, will find it very difficult to get people. We always have pendulum swings from one extreme to the other. That seems to be the Indian perspective. At one time the entire system was an outcry system, then it became 100 software system. No via media. There should be a re-look at it if you want capable people on the board who have to provide some amount of advice. The second important point concerns the time duration for decision making. The time perspective should be commonly understood across the board. We will now open up the discussion to the audience. Q. My question is to Mr Sriram. You mentioned that 80 of the global trading that occurs is electronic in nature. As part of the research at IIMB, we found that the space in India is limited to between 30 and 40. How aggressive is that space going to be in the coming years Sriram Ramnarayan . In India, it is a different scenario in terms of the percentages. But we see that in India, it is growing up slowly, thanks to our regulators and in some manner, the machines. The most important requirement, other than getting the programme, the system or the risks and controls right, is availability of technological infrastructure to such a degree that you are able to rule out any glitches in order to execute your trade once you are sure about your machine tradable capability. I think electronic trading is coming and is unavoidable but whether it is coming in a big way, and the speed of the change, is something that one needs to see it is difficult to predict. Imtaiyazur Rahman: To supplement what Sriram said, SEBI has now allowed direct market access. So, now most of the participants are going directly to the market instead of going through the broker. I think this is the beginning but going from 50 to 80 will not take much time going from 40 to 50 may take some time. Once it crosses 50, reaching 80 will not take much time. Q. I want ask you a question on the human resource policy of public sector undertaking (PSU) banks. I recently conducted a 3-day programme on financial derivatives in the Staff Training College of a major PSU bank. Half the participants were in the age group of 58-60 years and they admitted that there was little incentive for them to learn complicated subjects at that stage. At another such programme, there was a very bright young participant who was very good in treasury risk management and absorbed everything we conveyed. But a year later he was transferred to a rural branch of the bank and he had to sell agricultural loans to farmers when he has absolutely no talent for it. Why do banks have these kinds of policies Keshav Kumar . Coming to the age factor, as I said in my presentation, post 1987-88, the recruitment of officers was totally stopped in PSU banks. There were no new people brought in through the bank recruitments for 10 years. Post 2005-06, more recruitments are taking place and you will see younger faces sitting in the banks. This is an ongoing process. I also mentioned in my presentation that structured and varied banking is coming in where different sets of banks are assigned different sets of practices. At present banks are doing all kinds of activities at the same time. We are told by government that we have to give priority loans, and so on. There is a major regulatory issue there. The regulations affect all aspects such as recruitment, credit and risk taking. There is a certain mindset that is part of the Indian ethos, especially in earlier times, and I am confident that it is changing and will change for the better. Q. It is true that when some untoward incidents happen, the regulator starts tightening the belt. However, in the larger perspective of the protection of interests of the general public, how would you take care of such things if these types of regulations were not there An example from the recent past of companies that have garnered huge amounts of money is the Sarada Group in West Bengal, and the Sahara Group. If you dont bring in regulations, how will you ensure control S. Sundararajan . Where you have people squandering public money, there should be action taken. However, unless it is systemic, you cannot have regulatory changes. If it is sporadic, you have to address it the way sporadic issues are addressed. For example, Sarada was just a corporate collecting deposits. They were not authorised to collect deposits. The moment they got caught, they were labelled as a chit fund company. They were not a chit fund company. If you are a chit fund company, you have to be registered with the chit fund registry. Sporadic changes cannot have a regulatory undertone. When you apply the rule of the lowest common denominator, it will not facilitate people who are doing well to continue to grow well and contribute to the economy. That is something which needs a mindset change with the RBI and other regulators. Q. This is regarding the volume of automatic trading in India. The SEBI regulations in the last few years are mainly about having an empanelled auditor and other aspects. What is the next thing In Europe and in the US they are coming up with more regulations. Are the brokers providing the right platform for the customers Do you see that coming in future in India Imtaiyazur Rahman: This is a real concern for me as a mutual fund asset manager. Lassen Sie mich Ihnen ein Beispiel. A few years ago UTI was trying to have a strategic alliance with another company. I met a couple of their broker dealers. Whenever they have to meet a client, they have all the records with them. They record each and every discussion including discussions of their clients expectations, their age groups, their net worth, what they want to do and how much they want to invest. There was a very open dialogue between investor and the broker-dealer. That is not there in our case. The lack of financial literacy is one of the primary reasons for this. Mr Sundararajan mentioned the chit fund. I come from the state of Bihar, from a village. Whenever I go to the village and speak about mutual fund, the only question I am asked is about the returns. Chit fund offers them 16 returns. Mutual fund cannot offer any assured returns therefore financial literacy is very important. When IFAs, who would be selling the products of the top few asset management companies (AMC), interact with the people in the village, the only question the investor asks is where he has to put his signature. There needs to be serious shift about financial literacy. People need to take control of their own money. Unless that comes, it will be very difficult. No matter what regulations you put in place, we will not be in a position to avoid this. So, here, it is not really a bread and butter income for the IFA. They do it as a side income. My sense is unless we all grow, all four of us bankers, insurance companies, NBFCs, IFAs, and educate the people enmasse, we will not be able to see real light of day. Sriram Ramnarayan: The other side of the picture is the institutional trading. How much will you practice How will the regulation work It is a question of give and take. I do not think even locally in India, institutional players are eager and keen to increase themselves 10-fold because they are aware of the risks to themselves in the architecture that goes into the delivery of such a mechanism. So, as Mr. Rahman said, there will be growth, but the pace of growth will be dictated more by the market conditions and risk mitigation mechanisms rather than the regulators themselves. Vaidyanathan . Thank you all very much. We have had interesting perspectives from different dimensions of the financial market. I would like, individually, to thank Sriram, Rahman, Sundararajan and Kumar. 1 The panel discussion was part of the 4 th India Finance Conference 2014, December 17 19, 2014. This part of the article carries edited excerpts of the presentations made at the panel discussion. The views expressed by the panellists are personal and academic in nature and not necessarily the views of their organisations. The presentations of the panellists were made in an academic context in an academic institution. The data and statistics are as quoted by the panellists in their presentations. 2 This committee has submitted its report in February 2015. msme. gov. in/WriteReadData/DocumentFile/201502MSMECommitteereportFeb2015.pdf 3 a database of Politically Exposed Persons (PEPs) and heightened risk individuals and organisations which is used around the world to help to identify and manage financial, regulatory and reputational risk. Leverage in the balance sheet increases financial risks resulting in lower credit rating and higher cost of funds. A healthy mix of debt and equity is key to debt sustainability. Too much debt increases the marginal cost of borrowing due to expected distress cost and also cost of equity via higher levered beta. Therefore, corporate finance theories suggest that there is limit to borrowing. Traditionally corporate India borrowed from banks for both short term and long term requirements. Any corporate loan default adversely affects the balance sheet of a bank. Debt default is not always deliberate. Leverage has side benefits too: one . tax shield on borrowing and second . debt, it is said, disciplines management. The benefit of tax shield is immediate for those firms, which make operating profits. An all-equity company will not have any pressure of contractual obligations for timely interest payment and loan repayment. Replacing equity with debt (e. g. share repurchase) puts more pressure on the management to perform as the firm swaps promise (dividend) with obligation (interest). Highly indebted firms face difficulty in negotiating favourable terms with suppliers and even customers put pressure to squeeze extra credit period. The Reserve Bank of India (RBI), while sympathetic to corporate defaults due to uncontrollable extraneous factors, has come very hard on wilful defaulters by threatening to name and shame such borrowers. RBI has, over the past two years, brought several schemes to help stressed borrowers to restructure their debt and at the same time allowed lending banks to change promoters of wilful defaulters. Three companies in India together owed more than Rs. 3 lakh crores (US46 billion) to banks at the end of March 2015. If one takes the top ten indebted companies in India, the figure goes up to Rs. 7.3 lakh crore (more than US100 billion) for the same period. This alarming proportion of debt puts tremendous strain on the balance sheet of banks. The main issue, therefore, is to explore how leverage affects a firm, a bank and ultimately a nation. Myers(1977)1 demonstrated that the outstanding level of debt in a corporate balance sheet can alter the investment decisions of firms. Firms with higher debt will underinvest by not accepting many positive NPV (net present value) projects in pursuit of higher return, as those projects would not leave anything for the shareholders after paying for debt. Typically, bank debts are collateralised on the assets of firms and hence during recession when the market value of assets fall, such firms face structural bankruptcy in the balance sheet. Such apparent bankruptcy threats make firms more conservative with investment. In other words, during economic boom, rising firm income and asset prices boost borrowing and opposite happens during economic bust. This is known as procyclical feature of leverage. Debt overhang in a bank arises when the scale of debt relative to the value of assets distorts lending decisions. At a macro level, leverage is defined by the debt-to-GDP ratio. A nation with higher leverage would face restricted investments, which in turn may adversely affect potential output growth. Therefore, too much debt is bad for everybody and the recent recession in 2008 confirmed this hypothesis. Globally one can observe increasing trend in deleveraging balance sheet, particularly post-recession. Effect of Deleveraging Broadly, firms can reduce debt on the balance sheet in two ways - (a) raising equity and (b) disposing assets. A famous example would be that of BP. After the Gulf oil spill, BP sold billions of dollars in assets and used that cash to pay hefty fines and shore up cash reserves. Deleveraging with equity infusion may be the best course of action for companies that have become over-levered and are flirting with financial distress. Merrill Lynch (now known as Bank of America Merrill Lynch) regularly conducts fund manager and CFO surveys. In one of such surveys conducted in 2002 (much before the global financial crisis), majority (54) of respondents said that they prefer repayment of debt as the best use of free cash and the consensus reached 62 in 2003. The same trend is observed post-crisis. In a recent survey on Asia in 2015, CFOs (51) mentioned that deleveraging is the main motive for change in capital structure. If debt is cut with fresh equity, the capital structure adjustment may reduce cost of capital. But it does not help in future growth of the company. More damaging is the case when assets are disposed to pay down debt (Table 1). This strategy reduces the overall balance sheet size and hence shrinks output. If majority of firms follow this practice, it would seriously affect economic growth of a country. Thus, deleveraging is good to reduce financial risk. But if higher leverage makes a firm risk averse, the firm would tend to use free cash to reduce debt rather than invest in positive NPV projects. Countries with higher debt-to-GDP ratio may also suffer from the same underinvestment problem. Burden of financial debt typically leads to cut in capital expenditure and even disposal of assets to bring down debt. This strategy may help a firm in the short-run. However, if this practice is sustained for long it would lead to massive underinvestment hurting economic growth. Tendency to hoard cash would generate suboptimal returns leaving shareholders poorer. Data released for British firms in 2012 showed that, since mid - 2008, firms have cut more debt than they have raised equity. Table 1: Impact of deleveraging The hypothetical firm (Table 1) was highly levered in Stage 1 and had to significantly dispose of assets to reduce debt (Stage 2). This deleveraging was necessary to improve the financial health of the balance sheet and thereby corporate rating. But in the next stage (Stage 3), the firm gets conservative and starts hoarding cash. Revenue earning assets of the company shrunk by more than 50 leading to underinvestment problem. The excess cash is generally invested in government bonds, bank deposits or mutual funds, which earn suboptimal return. As firms stop investing, banks that get such corporate deposits also do not find borrowers. Banks again put this money mostly in government bonds. If the country already has higher debt-to-GDP ratio, it also does not invest. Thus the consequence of leverage cycle is lower future economic growth. It is not good to have high leverage on the balance sheet. It is equally bad to hoard cash and underinvest. This trend can be seen in Indian corporate sector. A report1 shows that companies and banks in India are sitting on cash piles (Table 2). The four banks hold about Rs. 400,000 crores (USD 61 billion) in cash. Thus, corporate deleveraging exercise is ultimately fuelling cash hoarding. Table 2: Cash Holdings Cash amp Bank ( of Total Liabilities) Hoarding cash has become a popular practice for corporate sector. Top ten US companies held more than 675 billion in cash by the end of 20152. Cash-rich companies in India have decided to use the cash for share buyback rather than investing in new projects. This trend is seen globally too. The Merrill Lynch survey showed that approximately two-thirds or more of all U. S. companies say they intend to hold constant the percentage of free cash flow they allocate to share repurchases (77 percent), dividends (76 percent), research and development (67 percent), and acquisitions (66 percent). The problem is that the cash so distributed by firms do not reveal itself in investment and employment. It rather shows up in savings. Firms with huge cash balance have negative debt and such a situation is not tax efficient. Situation in India Like other countries, India too had launched generous financial stimulus to help corporate sector fight recession. RBI reduced interest rates significantly to offset the increase in private sector risk premium and to underpin aggregate demand. In spite of these efforts credit remained tight-banks were hesitant to lend immediately after recession leading to weak aggregate demand. Table 3 shows leverage situation of three select cement companies in three different economic regime. 5-year Sales CAGR AMBUJA CEMENTS LTD. AMBUJA CEMENTS LTD. AMBUJA CEMENTS LTD. ULTRATECH CEMENT LTD. ULTRATECH CEMENT LTD. ULTRATECH CEMENT LTD. Note: Liquidity Cash amp cash equivalents ( Assets), Leverage Long-term debt ( Assets) and Asset Build up Capex ( operating cash) Generally, companies have reduced leverage post global crisis. Such deleveraging exercise has somewhat adversely affected the top line growth of the companies. Companies were also careful in adding physical capacity. The cement industry had severely curtailed its spending immediately after 2008 economic crisis reduced its debt and built up liquidity in 2010. In next five years, this sector has again witnessed investments in physical capacity. However, interestingly deleveraging continued. This is mainly due to cyclicality of the industry with general economic growth. So favourable operating cash helped these firms to maintain growth with lower leverage. Indian firms seem to negate the global story that deleveraging also reduces capital expenditure. At least the top three cement companies seem to spend substantial part of operating cash for growth and debt reduction. 2 A recent Financial Times report states that US companies cash pile hit 1.7 trillion. 3 Computations done by Mr. Bobbur Abhilash Chowdary, a fourth year FP (PhD) student at IIM Calcutta. Data source: Prowess Tautologically, FinTech has two parts, finance and technology. Globally, FinTech is gaining momentum and causing significant disruption to the traditional value chain. In fact, as per the 2015 Global FinTech Report of the PwC, funding of FinTech start-ups more than doubled in 2015 reaching 12.2bn, up from 5.6bn in 2014. Interestingly, apart from affordable technological innovations, globally new regulations in the post-crisis world have played a key role in development and emergence of the FinTech firms. Illustratively, stricter capital requirements leading to reduced credit availability, tighter scrutiny of risky lending, and changes in the consumer market all could have provided an avenue for FinTech firms. In fact, globally the FinTech sector has been seen as a rise of the new shadow banks (Goldman Sachs, 2015).1 Perhaps in line with these global trends, payment system and the Indian banking sector have also been in the media headlines in recent times. Unlike the disturbing trends in non-performing loans by Indian banks, the news on spread of FinTech has been creating the right waves. There are media reports that technology has been disrupting the financial sector in its various segments 8211 from bank transfers, to payments, to loans. Thus, it has various diverse elements from replacing men by machines in the banking sector to financial inclusion. How much are of such expectations in nature of hype and how much of it are in tune with reality Trends in FinTech Investment Interestingly, two recent reports 8211 one by KPMG and the other jointly by BCG amp Google have created huge interest in FinTech. The KPMG Report2 noted that FinTech investment in India increased significantly from USD 247 million in 2014 to more than USD 1.5 billion in 2015. Admittedly, various diverse initiatives of the Government and the RBI have played a key role in enkindling the interest in FinTech these initiatives and sops include: the January 2016 Start-Up India initiative of the Government establishing a fund of USD 1.5 billion Jan Dhan Yojana (adding over 240 million unbanked individuals into the banking sector as of September 2016) and various tax and surcharge relief.3 In fact FinTech firms 8211 the likes of Paytm to Billdesk 8211 have all been attracting huge investments (Table 1). Table 1. Some Illustrations of large FinTech funding in India Source: KPMG (2016). Shape of things to come The BCG-Google report is very optimistic about the usage of FinTech in India and noted, over the last five years, digital transactions have shown steady growth of 50 per cent Y-o-Y, followed by ATM transactions growing at 15 per cent.4 A few specific forecasts from the study on the Indian digital payments industry is worth mentioning: Indias digital payments industry will grow to 500 billion by 2020 It will account for 15 per cent of the countrys GDP More than 50 per cent of Indias internet users will use digital payments by 2020 the top 100 million users will drive 70 per cent of the gross merchandise value (GMV) for these payments and Indias non-cash contribution (such as, cheques, demand drafts, net-banking, credit/debit cards, mobile wallets and unified payments interface) in the consumer payments segment will double to 40 per cent by the year 2020. How much of this trend is hype Divergent views exist. While industry bodies are normally very euphoric about the shape of the things to come in the FinTech sector, a look at the broad payment system indicators from the recently released RBI Annual Report of 2015-16 is instructive (Table 2). Table 2: Payment System Indicators Annual Turnover I. Systemically Important Financial Market infrastructures (SIFMIs) 3. Government Securities Clearing 4. Forex Clearing II. Retail Payments (A BC) 6. MICR Clearing 7. Non-MICR Clearing 11. Immediate Payment Service 12. National Automated Clearing 13. Credit Cards 15. Prepaid Payment Instruments 1. Figures in brackets are percentage to total.. 2. Real time gross settlement (RTGS) system includes customer and inter-bank transactions only. 3. Settlement of collateralised borrowing and lending obligation (CBLO), government securities clearing and forex transactions are through the Clearing Corporation of India Ltd. (CCIL). 4. Consequent to total cheque volume migrating to the cheque truncation system (CTS), there is no magnetic ink character recognition (MICR) cheque processing centre (CPC) location in the country as of now. 5. The figures for cards are for transactions at point of sale (POS) terminals only. 6. The National Automated Clearing House (NACH) system was started by the National Payments Corporation of India (NPCI) on December 29, 2012, to facilitate inter-bank, high volume, electronic transactions which are repetitive and periodic in nature 7. ECS: Electronic clearing service NEFT: National electronic funds transfer 8. Figures in the columns might not add up to the total due to rounding off. Source: Annual Report, RBI, 2015-16. A look at Table 2 confirms one basic trend 8211 while in volume terms, the lion8217s share of the transaction are dominated by retail payments (around 98 per cent), in volume terms these small transactions account for only around 10 per cent of total transactions. In other words, payments system indicators are dominated by what is called 8220Systemically Important Financial Market infrastructures8221 (SIFMIs) or the bulky transactions. In fact, more than half of such SIFMIs are accounted for by transactions in the RTGS segment. It needs to be noted that these bulky transactions are already in electronic forms. So, the FinTech firms are perhaps looking for exploiting the retail sector, which is quite small in value term as of now. Admittedly, there are two ways of reading such existing numbers 8211 the smallness of the retail segment could be indicative of the huge potential of the FinTech sector or this could connote the hype about the sector. Only the future can tell whether the glass is half-empty or three-fourth full. Many of the emerging market economies are now at the forefront of alternative payments system. Assets of M-Pesa, first launched in Kenya in 2007 by Safaricom, at US24 billion is now equivalent to half of Kenyan GDP. In China, nearly one-in-ten of all payments are now made using Alipay an online multipurpose banking service provider combining payment, lending, deposit and other functions. With the establishment of payments banks in India and the exuberance in the FinTech sector, in the days to come, it remains to be seen whether India follows this path of Kenya or China and the hegemony of banks are put to test. 1 Golaman Sachs (2015): The Future of Finance: The Rise of the New Shadow Banks . 2 KPMG (2016): Fintech in India: A global growth story (Joint publication by KPMG in India and NASSCOM 10,000 Startups), available at assets. kpmg/content/dam/kpmg/pdf/2016/06/FinTech-new. pdf 3 The major ones are: tax rebates for merchants accepting more than 50 per cent of their transactions digitally 80 per cent rebates on the patent costs for start-ups. income tax exemption for start-ups for first three years exemption on capital gains tax for investments in unlisted companies for longer than 24 months (from 36 months needed earlier). The more widespread practise is to focus on real GDP or inflation adjusted GDP growth. The benefits of this is well documented and widely understood. Economic activity, when not adjusted for inflation, leads to measures such as Nominal GDP (or GDP at current prices). In any economy with high inflation or gradually accelerating inflation, focussing on nominal GDP growth does not reflect the damage to the economy. However, in economics there are no absolutes. There are economic scenarios where the focus on Nominal GDP is as important as Real GDP. This scenario is specifically one where the Inflation is slowing down sharply or dis-inflation has set in to such an extent that the year-on-year inflation measure is negative. In such a situation which nearly happened in India a few quarters back, the Real GDP growth ( and also applicable for Real GVA growth) was higher than the nominal GDP(and GVA) growth. In fact real GDP showed an improvement while nominal GDP showed a deceleration. The stated recovery in real economy was not being experienced in other measures such as corporate earnings, wage growth, credit growth and reduction in NPA of banks. Abuse of GDP in Economic and Financial Analysis . In pre-2010 period it was not difficult to come across claims in Indian banking sector that if (real) GDP growth is 8, the Banking sector assets would grow by 2.5 to 3 times. This almost became a common wisdom or a rule of thumb. However, such wisdom is not holding good currently since, the real GDP is growing at around 7.5 while the banking sector asset (credit) growth is just 9 to 10. Anyone with a basic understanding of dimensionality would take it as no surprise. Banking sector credit growth is nominal in a sense it is not adjusted for inflation. Any attempt to find a correlation between a nominal value (banking sector credit growth in this case which is not adjusted for inflation) and a real value (GDP in this case which is adjusted for inflation) is unsound mathematics and bad economics. Banking credit growth in India typically has a 1.1X to 1.5X multiplier with respect to nominal GDP growth. Given that the recent nominal GDP growth has been 8 or below, a 9-10 banking sector credit growth is in line with historical observation. However, the malady of comparing a real GDP growth to nominal measures is quite widespread and extends to things such as regressing corporate earnings growth (again a nominal measure) against real GDP growth. The lack of usage of nominal GDP even when it is required is very intriguing. Is it because most analysts (and their economist units) have forecast of real GDP growth but no publicly or consensus view on nominal GDP growth This is surprising. Specifically, the surprise arises from the observation that for estimating real GDP, the nominal GDP needs to be estimated beforehand. At least the government agencies which calculate GDP tends to follow this approach. Real GDP Estimate Unlikely without Nominal estimate: The steps of estimating GDP are as follows. Firstly . the nominal GDP in INR terms of various sectors are estimated. Nominal GDP estimation uses the existing and current price of various products and services as of the period of calculation. The prices for significant number of the components of the GDP are directly observable and to an extent is experienced by the people. Subsequently . for each of these sectors a suitable deflator is used to adjust for the impact of inflation affecting that sector. This gives the real absolute GDP component for that sector. Then the real (inflation adjusted) GDP components are added to get the real GDP of the overall economy. If the estimate of real GDP growth are done systematically and rigorously, then the forecaster would first come up with the nominal GDP growth estimates. However nominal GDP estimates are rarely, if ever, published. For some reason only the real GDP growth rate is shared by most economic forecasters. However if the forecaster assumes that the inflation rate remains constant over previous year then one may model the real GDP directly from previous years real GDP. The implicit assumption being made in this approach is that the GDP deflator remains unchanged from year to year. However, in years when inflation is rapidly falling or rising this quick fix approach of calculating real GDP will provide estimates which are wide off the mark. Assumption of Money Neutrality and superiority of real measures: A relook at the practise of focussing entirely on real measures is clearly required for other reasons as well. It comes from the theoretical premise that money is neutral. Joseph Schumpeter, in History of Economic Analysis explained the concept of neutrality of money succinctly. To quote Real Analysis proceeds from the principle that all essential phenomena of economic life are capable of being described in terms of goods and servicesMoney enters the picture only in the modest role of a technical device that has been adopted in order to facilitate transactions so long as it functions normally . it does not affect the economic process which behaves in the same way as it would in a barter economy: This essentially what the concept of neutral money implies. It is important to note Schumpeters definition which assumes that the money is functioning normally. But money may not be as neutral as classical economists claim. American economist Hyman Minsky argued, in a capitalist economy resource allocation and price determination are integrated with the financing of outputs, positions in capital assets, and the validating of liabilities. This means that nominal values (money prices) matter: money is not neutral . Classical economists propounded the theory that money is a representation of value. As per classical economists, money was considered to be a contrivance which facilitated economic transactions / exchanges in the real economy but itself did not impact the elements of real economy such as land, labour and the process of production. In effect it highlights the neutrality of money of the real economic process. Here it may be mentioned that that the way Minsky defined capitalist draws on the way Karl Marx defined capital-ism. As per Marx, in the capitalist system money/financing is required before the production. Money does not appear mysteriously after production just to make the exchange of the product more convenient. This need for capital before production is one of the features of a system which may be tagged as capital-ist. One may agree that this is the case in India as well. Monetarists and the Focus on Real GDP: The world is currently leaning on policies which may be defined as Monetarist. The Monetarists, among other thing, have a faith that lowering interest rate or increasing the supply of money(or its alter ego-credit) would increase economic activity. Recall near zero interest rate ( and of course negative interest rates) are adopted in some countries with the expectation of reviving their economic activity. To be fair, monetarists view money to be neutral only in the long term. So one may expect some of the monetarists to be interested in the nominal GDP. However this brings us to an interesting question. Most economic analysts tracking Indian economy tend to subscribe to the monetarist view. The author conjectures this since a lot of them create eloquent and verbally pleasing arguments of how interest rate reduction may improve Indian economic growth. However where they deviate from true-blue monetarists is that while analysing/predicting economic activity either of next quarter or next year (technically short-term) they use only real GDP growth. Hardly if ever one would find forecasters predicting the nominal GDP growth rate, forget expected value of nominal GDP in INR terms. The principal objective of equity restructuring is to provide adequate returns to shareholders and improve investors confidence. Equity restructuring is also used as a strategic tool to minimise cost of capital, write-off losses and perhaps increase liquidity of stocks. Writing off losses or writing down assets against equity is a well-practiced strategy. What has assumed more significance recently is the use of free cash by a profit-making firm. Free cash is the cash left with a firm after meeting profitable investments requirements. It is the responsibility of the managers to ensure that such free cash is not unproductively used. A natural choice could be distribution of such free cash to the shareholders by way of dividend or share buyback. For example, the free cash flow per share of Apple has grown from USD 2.6 in 2010 to USD 12.6 in 2015. This is after significant share repurchase - the number of shares outstanding has dropped by 13 over the past five years for Apple. Apple has cash and marketable securities worth USD 233 billion out of total assets of around USD 300 billion in March 2016. Obviously there will be clamour for further distribution of free cash to the shareholders. In India, TCS reported a free cash flow per share of INR 95.7 in March 2016 up from INR 26.4 in 2010. This is after paying INR 26000 crore as dividend in the past two years. TCS got its shares listed in 2004 and has never repurchased its shares. TCS shareholders may soon demand even higher dividend payments. However, managers must ensure that they do not face underinvestment problem due to lack of cash in future. Therefore, an objective assessment of future capital expenditure is to be made before distributing free cash to the shareholders. Prudent use of free cash is also a controversial issue for public sector enterprises in India. For example, Coal India had generated an operating cash flow of INR 197 billion in 2014-15 and spent only INR 49 billion in capital expenditure during the same period. Recently (May 2016) the Department of Investment and Public Asset Management (DIPAM), Ministry of Finance. Government of India has issued a guideline to all central public sector enterprises (CPSEs) on how to restructure equity and distribute free cash flows to shareholders. The guideline attempts to bring together all equity restructuring options under a consolidated document. The guideline also categorically highlights its binding nature and requires specific approval of DIPAM for any exemption. A CPSE is an entity where Government of India and/or Government-controlled one or more body corporate have controlling interest. Table 1: Capital Restructuring Proposal for Central Public Sector Enterprises Compulsory split if market price or book value of a share exceeds 50 times of its face value. Source: Guidelines of Department of Investment and Public Asset Management (DIPAM), Govt. of India The guideline of the Ministry of Finance did not require CPSEs to declare their dividend policy in the annual report. It simply mentioned the quantum of minimum dividend to be paid each year. The capital market regulator (SEBI) is contemplating mandatory disclosure of a companys dividend policy in an initial public offering (IPO) prospectus. Regulators believe that shareholders demand transparency on dividend and have every right to know the expected use of cash, if the same is not distributed as dividend. SEBI has recently made it mandatory for top 500 listed companies to declare a dividend distribution policy to their shareholders. SEBI has also mentioned that if a company decides not to pay out dividend in a particular year, it must explain the reason and how the retained earnings will be used. A stated dividend policy will remove speculation and help analysts estimate fair value of shares. The Financial Reporting Council of UK has brought out a report1 suggesting how companies can make dividend disclosures more relevant for investors. The top ten2 CPSEs have distributed Rs. 2.5 trillion as dividend over the past ten years (up to 31 March 2015) and spent only Rs. 1.3 trillion for organic growth (net capital expenditure). The dividend paid is more than 5 of net worth of the CPSEs. Though the gross capital expenditure of the top ten CPSEs was Rs. 3.4 trillion, much of it was funded by depreciation. Dividend paid by these CPSEs over the past ten years is almost equal to the GDP of Odisha as on March 2015. Therefore, even in the absence of such strong guidelines, the profitable CPSEs were paying handsome dividend to the shareholders, the principal beneficiary being Government of India. The top ten NIFTY companies (excluding CPSEs) paid Rs. 1.8 trillion as dividend during the same period - almost 30 lower than the CPSEs. ONGC paid dividend of about Rs. 764 billion during the past ten years and spent Rs. 181 billion on capital projects. Coal India paid about Rs. 590 billion dividend in last ten years. The capital expenditure (net) incurred by the company during this period was abysmally low at only Rs. 2 billion. The third highest dividend paying CPSE was NTPC which distributed Rs. 418 billion as dividend and spent more than double of the amount (Rs. 863 billion) for capacity building. Government of India, as principal shareholder of the CPSEs, has directed all profitable CPSEs to follow the minimum dividend guideline. Is it right for the major shareholder to compel companies to pay any pre-announced dividend Any prudent dividend policy would lay down circumstances when dividend will or will not be paid. The quantum should only be decided after evaluating the following factors: (a) future expansion need (b) profit earned and (c) free cash flow. However, in view of huge cash pile up and lack of clear expansion plans, the CPSEs would definitely face the heat of the shareholders for distribution of free cash. The situation equally applies to companies in the private sector. Table 2: Utilisation of Cash Flows of top 10 CPSEs ( figs in Rs. Crore, unless otherwise stated) Source: Ace Equity. Net CapexCapex - Depreciation. OCF After-tax operating cash flows. Own() Government ownership The guideline directs that a CPSE should issue bonus shares if the retained earnings are more than 10 times paid up capital. The guideline further states that whenever the multiple (retained earnings/ paid up capital) exceeds 5, the concerned CPSE should evaluate the possibility of offering bonus shares. It is generally understood that bonus shares reward shareholders. Typically, whenever retained earnings of a company become disproportionately higher and the concerned firm is unable to reward its shareholder by way of cash dividend, bonus shares prove useful. However, it is also to be noted that issue bonus shares act as poison pill and create permanent pressure on the treasury of a firm for future dividends. In that sense, bonus debenture could be a better choice. Seven out of top ten CPSEs are required to issue bonus shares if one follows the diktat of the DIPAM guidelines. Most of these are from energy sector. It may be noted that five of these CPSEs had already issued bonus shares in the last ten years. If Government of India has plans to disinvest further its stake in these CPSEs, it is always prudent to have lower equity base. The blanket guideline on issue of bonus shares would bloat the paid up capital of many entities thereby making them unattractive to potential investors. Table 3: Potential Bonus Issuance ( figs in Rs. Crore, excepting the multiple) Source: Ace Equity. RE Retained earnings, Capital Paid up capital, Multiple RE/Capital Theory of corporate finance tells us that one of the motivations of share buyback is to distribute free cash to the shareholders so that the latter can use the funds profitably. There are examples of shareholders pressure for buyback whenever any company holds too much of cash. But the real question is how much cash is too much The DIPAM guidelines provide that any CPSE with a cash balance of more than Rs. 1000 crore should seriously consider share buyback to distribute free cash. If one considers current investments as part of cash and cash equivalents, all the ten top CPSEs (Table 4) should buyback shares. The main motivation behind the guideline seems to be reducing the budget deficit of the central government rather than enhancing shareholder wealth. The guideline may also contradict its own recommendations. For example, ONGC is required to issue bonus shares, pay hefty dividend and also buyback shares - all in the same year Whereas the financial statements of ONGC show that the company has already severely depleted its cash reserve from a high of 18 of total assets to only 1.2 in March 2015. It is always prudent to consider relative rather than absolute liquidity while taking a share buyback decision. One might of course argue that ONGC has spent only 7 of operating cash of past ten years in capital projects and hence clearly the company does not have any immediate need of hoarding cash. It has already paid 28 of its operating cash as dividend over the past ten years. Hence, there is no valid reason of forcing the company to go for a share buyback with such a low relative liquidity position. The guideline should have specified a relative liquidity criterion (e. g. cash as a percentage of total assets) to trigger share buyback. Table 4: Share Buyback Candidates (figs in Rs. Crore, unless otherwise stated) Source: Ace Equity There are two theories behind corporate motivation for stock split - first, split enhances liquidity of stocks and diversifies the shareholders and second, it sends a signal of superior performance of the firm. Empirical evidence, however, supports the hypothesis of the liquidity theory. The DIPAM guidelines mention that whenever market price or book value of share of a CPSE exceeds 50 times its face value, the CPSE will split its shares appropriately. Figures for the financial year 2014-15 (not reported here) suggest that three out of top ten CPSEs (ONGC, NMDC and BHEL) is required to split their shares on book value basis. However, if one looks at the market value-to-face-value multiple, there are four companies (BPCL, NMDC, HPCL and BHEL) having such multiple more than 50 and hence are required to split stocks. If one CPSE has a face value of Rs. 10 per share, the guidelines suggest that the CPSE with a book or market value of share more than Rs. 500 should consider stock split. Isnt that too predictable Equity restructuring is a continuous process and is used by the management as a technique to enhance the net worth of a company. Equity restructuring strategies increase the price-to-book multiple of firms. Share buyback is not that popular in India as the shares so bought back are to be cancelled. Cash dividend, on the other hand, is a more popular form of distribution of cash to shareholders. But dividend is stickier than share buyback. Hence, if a firm has to distribute a large amount of cash to shareholders, it is always prudent to opt for the buyback route. Any restructuring action generally conveys positive signal to the market. But if the actions are pre-defined and follow some cardinal principles, there would be no surprises and market would factor in such actions in the prices much before the actual events. Splitting stock when the market price exceeds INR 500 (with a face value INR 10) is too low a level for such action. For example, 43 out of 50 NIFTY companies have share prices more than 50 times of their respective face values. If these companies start splitting stocks (some of them have already done that), the market will witness a surge in supply which may not always increase the return of the stocks. 2 By market capitalization as on 30 June 2016 The Financial Stability Report of June 2016, recently released by the Reserve Bank of India (RBI) is an interesting reading. Notwithstanding the standard Central Bank Speak, often couched in terms of what is known as constructive ambiguity, the report reveals some serious concerns on Indian banking 8211 the most important being the state of non-performing assets (NPAs) of the Indian public sector banks. The report confirms the already known fact that not all is well in the health of Indian banks. In fact, the gross NPAs rose sharply to 7.6 per cent (of gross advances) in March 2016 8211 this is 250 basis points increase over the last six months 8211 from 5.1 per cent in September 2015. But this is only part of the story 8211 if one adds the quantum of restructured assets to NPAs, then the overall 8220stressed advances8221 rose to 11.5 per cent in March 2016. Stripped of jargon, in simple terms, it reveals that more than 10 per cent of the loans extended by banks in India are bad debt. But was this expected In fact, if one looks at the intertemporal behaviour of NPAs of banks in India since 2002-03, numbers show remarkable improvements till about 2009. Since then the NPA situation started deteriorating, so much so that by March 2016, it appears that all the progress achieved during the last one decade or so, has evaporated and Indian banks in 2016 are back to the situation prevailing in 2002 (Chart 1) Chart 1: Trends in Gross Non-Performing Assets of the Banking Sector in India ( of Gross Advances) Source: Handbook of Statistics on Indian Economy, RBI, various Issues. But this deteriaration is not uniform across all banks. There is great difference in the extent of formation of NPA across ownership-specific bank-groups. Effetively, the derioration in NPA front is primarily driven by the public sector banks in recent times, the NPAs of private banks are less than one-third than those of public banks (Chart 2). Since the issue is primarily related to the public sector banks, one can go a step further and add that it is beyond the financial sector in India and that it becomes effectively a fiscal risk, imposing a burden on the already stressed State Exchequer. Chart 2: Asset quality of Scheduled Commercial Banks Source: Financial Stability Report, June 2016, RBI To release or Not to Release (the names of big defaulters) Who are responsible behind such deterioration Have the banks become more inefficient in recent times Or, are bank borrowers, of late, going through bad times Is it effectively a cyclical phenomenon Such questions are raised. In popular discourse the situation is often seen as a product of Indian variety crony capitalism whereby a coalition of bankers-bureaucrats-politicians-corporates could have generated this unwanted outcome. In fact, there is a larger debate about the desirability (or its lack) of revealing the firm-specific or indutry house-specific data on bad debt. Like any major issue in public policy, in this case too, arguments exist on both sides. Illustratively, in a country where farmers routinely commit suicide on account of debt burden, one can legitimately question the lack of enthusiasm of the authorities to publish such data at the same time one can also be sceptical about the lack of investigative journalism in this regard. On the other hand, it can be argued that when a particular business venture of a business house goes through a bad patch, leading to its inability to pay back bank loans because of some legitimate and secular reasons, publishing such price sensitive information could be a recipe for an overall corporate disaster. After all, historically, the notion of limited liability came up with the motive of ring-fencing one8217s personal property from the assets of a company. Leaving aside such an issue, in absence of any firm data of industry-group-wise contribution to NPAs, one can only look at some collaborative evidence. What we now know is that small firms or priority sector advances are not responsible behind the NPA mess and thus, unlike many of our economic malaises, the NPA situation is not an outcome of macroeconomic populism. In fact, bulk of the NPAs have emanated from the industrial sector, in which share of construction, basic metals, infrastructure, and textiles are rather large (Chart 3). In fact, in terms of size class, much of NPAs that sprang during 2015 are concerntrated in the size of Rs 200 million to Rs. 500 million (Chart 4). Apart from the possibility of crony capitalism and laxity on the part of the bankers, several factors seem to be responsbile behind such a phenomenon.1 First, in the aftermath of the global financial crisis, the regulatory foreberance adpted by the Indian authorities could have been too aggressive.2 Second, in some of the sectors like steel and basic matels the story is part of the global recession and consequent nose-diving of metal demand. Third, in its over-zealous pursuit of infrastircuture projects under the PPP model, both the government / banks as well as corporates could have kept the old-fashioned calculations of project viability under the carpet. Finally, in general many of the Indian corporates have taken the easy route of debt financing this is refleted in a 2015 Credit Suisse Report on India that noted a seven-fold increase of indebtedness of ten heavily indebted Indian corporates over the last eight years. However, not all is lost. Some efforts to ease the situation are already under way. The RBI has issued guidelines on a Scheme for Sustainable Structuring of Stressed Assets (S4A) on June 13, 2016. The S4A scheme 8220envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around8221.3 The Scheme has been criticized on the ground that promoters are not brining any assets. In fact, in a recent interview, the RBI Deputy Governor S S Mundra went on to say: 82208230 These are not the best solutions these are the second-best solutions. We don8217t have the best solution in place at this point. Hopefully, it will be put in place. once it comes (Bankruptcy Law), things will be dealt with under that structure. It leaves room for a potential upside and when that comes, the one who has sacrificed more should also gain more.82214 As part of its Indradhanush Proposal of April 2015, Government of India has earlier proposed revamping the public sector banks by infusing capital worth of Rs.70,000 crores out of budgetary allocations for four years 8211 for Rs 25,000 crore in 2015 -16 Rs. 25,000 crore in 2016-17 and Rs 10,000 crore in each of 2017-18 and 2018-19.5 During 2015-16, 21 public sectors banks got fund support of Rs 25,000 crore of this, SBI got the highest amount of Rs 5,393 crore followed by Bank of India at Rs 2,455 crore. More recently, the Finance Minister reiterated the government8217s intention to stick to the declared schedule of capital infusion to public sector banks. But capital infusion and restructuring is part of the immediate solution. End of the day, if Indian public sector banks want to bring back soundness in their balance sheet, professionalism of the management and freedom from interferences from the government / politicians need to be ensured. Besides, the country needs to have systemic procedure for corporate bankruptcy. Otherwise, this pattern of formation of NPAs and rescuing the public secror banks with tax payers8217 money becomes a scheme of cross-subsidization of the rich and mighty by the poor and is best avoidable. 1 Mohan, Rakesh and Partha Ray (2016): Indias Financial Sector Reforms 2010-2016: Outcomes And Issues, presentation at the 17th Annual conference on Indian economic policy, organized by the Stanford Center for International Development (SCID), Stanford University, available at scid. stanford. edu 2 Several such measures were introduced. Illustratively, provisioning requirements for most standard assets reduced to a uniform level of 0.40 per cent and risk weights on banks exposures to certain sectors revised downward. 3 RBI Press Release on 8220RBI introduces a Scheme for Sustainable Structuring of Stressed Assets8221, June 13, 2016 available at rbi. org. in/Scripts/BSPressReleaseDisplay. aspxprid37210 Post navigation