The IBS

ECOBIZZ
Magazine

June 2010

Inside this issue:

Greek Debt Crisis 3

Role of Private 6
Equity

Bhopal Gas 8
Tragedy

BP Oil Spill 10

Fundamental 12
Valuation
IFRS Convergence 14

Playing with 16
Derivatives
 From The Editors Desk

Hello Everyone!

Hope all of us had a great stint getting introduced to the corpo-

rate world. I believe everyone has got back to enjoying life in
campus after the SIP.

It gives me immense pleasure in presenting the first issue in the

third semester as the senior batch of IBS, Hyderabad. This issue
has gainful insights on Greek Debt Crisis, Private Equity, Funda-
mental Valuation, BP Oil Spills, Bhopal Gas Tragedy, and so on.

As we all know the juniors, class of 2010 - 2012 has joined. It

feels great to welcome them to the campus. I with the complete
EcoBizz team wish them all the best and a great learning experi-
ence in our young and dynamic business school.

Regards,
Kriti Pant
Editor, The Focus

2
 The Greek Sovereign Debt Crisis & The Eurozone

During the decade preceding the global financial

crisis, Greece‟s government borrowed heavily from
abroad to fund substantial government budget and
current account deficits. Between 2001 and 2008,
Greece‟s reported Budget deficits averaged at 5%
per year and Current account deficits averaged at
9% per year, compared to a Eurozone average of
2% and 1% respectively. Many attribute the budget
and current account deficits to the high spending of
successive Greek governments.

The Global Financial crisis which plagued the major Greece funded these twin deficits by borrowing in

economies of the world in 2008, which continued in international capital markets, leaving it with a

2009 and it just seemed to find the horizon when chronically high external debt (115% of GDP in

there was another wave coming this time in the 2009). Both Greece‟s budget deficit and external

form of a Sovereign Debt crisis from one the partner debt level are well above those permitted by the

in the European Union (EU). rules governing the EU‟s Economic and Monetary
Union (EMU). In October 2009, the new socialist

The Greeks are the one responsible for the current government, led by Prime Minister George Papan-

Euromess. Greece got Euro status in 2001 and cur- dreou, revised the estimate of the government

rently is one of the 16 member countries which budget deficit for 2009, from 6.7% of GDP to 12.7%

have Euro as their currency. To get Euro status or of GDP.

adopting Euro as the currency requires the EU

countries to meet some macro economic conver- Due to Greece‟s reliance on external financing for

gence criteria called the “Maastricht criteria” in order funding budget and current account deficits left its

to adopt Euro as their currency. The rules call for economy highly vulnerable to shifts in investor con-

budget deficits not to exceed 3% of GDP and debt fidence. Before the crisis, Greek 10-year bond

not to exceed 60% of GDP. These are some strin- yields were 10 to 40 basis points above German 10-

gent conditions the EU country needs to adhere to year bonds. With the crisis, this spread increased to

get the status. Greece is a relatively small country, 400 basis points in January 2010, which was at the

GDP of around $400Bn as compared to the other time a record high. High bond spreads indicate de-

EU members. clining investor confidence in the Greek economy.

3
 Despite that the government was able to success-
fully sell €8 billion ($10.6 billion) in bonds at the end
of January 2010, €5 billion ($6.7 billion) at the end
of March 2010, and €1.56 billion ($2.07 billion) in
mid-April 2010, albeit at high interest rates.
To finance the further maturing debt of the country
mainly external, the Eurozone member states have
pledged to provide financial assistance to Greece in
concert with the IMF.
In April 2010, the details of the proposed financial
assistance package for this year were released: a
three-year loan worth €30 billion ($40 billion) at 5%
interest rates, which is well above the normal rate in
EU and another $15 billion from the IMF.
Investor jitteriness spiked again in April 2010, when
Eurostat released its estimate of Greece‟s Budget
deficit. At 13.6% of GDP, Eurostat‟s estimate was
almost a full percentage higher than the previous
estimate released by the Greek government in Oc-
tober 2009. In late April 2010, the spread between
Greek and German 10- year bonds reached a re-
cord high of 650 basis points, and one of the major
credit rating agencies, Moody‟s, downgraded
Greece‟s bond rating.
The crisis has contributed to a weakening of the
euro‟s foreign exchange value, and a fear that
deepening crisis could spread across European
bond markets and draw in countries such as Spain,
Portugal, Italy, and Ireland. The cost of providing
financial assistance to Greece is relatively low.
Greece‟s total outstanding debt approximately €300
billion ($399 billion).
4
Greece‟s current economic problems have been
caused by a mix of domestic and international fac-
tors. Domestic factors: Firstly, High government
spending and weak Government Revenues, a large
and inefficient public administration in Greece,
costly pension and healthcare systems, tax evasion,
and a general “absence of the will to maintain fiscal
discipline” as major factors behind Greece‟s deficit.
Weak revenue collection coupled with tax evasion
has contributed to Greece‟s budget deficits. Sec-
ondly, Structural Policies and Declining International
Competitiveness, was another reason why Greek
industry is suffering from declining international
competitiveness. Relatively high wages and low
productivity is the primary factor.
International factors: Firstly, Increased Access to
Capital at Low Interest Rates Greece‟s adoption of
the euro as its national currency in 2001 is seen by
some as a contributing factor in Greece‟s buildup of
debt. The perceptions of stability conferred by euro
membership allowed Greece, to borrow at a more
favorable interest rate than would likely have been
the case outside the EU, making it easier to finance
the state budget and service existing debt. If the
market had discouraged excess borrowing by mak-
ing debt financing more expensive, Greece would
have been forced to come to terms earlier with the
need for austerity measures and reform. Secondly,
Issues with EU Rules Enforcement, the lack of en-
forcement of the Stability and Growth Pact is also
seen as a contributing factor to Greece‟s high level
of debt. In 1997, EU members adopted the Stability
and Growth Pact, an agreement to enhance the
surveillance and enforcement of the public finance
rules set out in the 1992 Maastricht Treaty‟s
“convergence criteria” for EMU.
 In an effort to restore investor confidence in the
Greek economy, the Papandreou government has
pursued a series of wide-ranging fiscal austerity
measures. However, that the mix of tax increases
and sharp spending cuts could lead to higher unem-
ployment and deepen an ongoing recession in the
country. The Greek government cutting large gov-
ernment budget deficits (contractionary fiscal poli-
cies) and stimulating the economy during cyclical
economic downturn (expansionary fiscal policies)
are at odds with each other.
In addition to austerity and financial assistance from
Eurozone member states and the IMF, Greece
could finance its budget deficit and increase the
competitiveness of its exports by exiting the Euro-
zone and adopting and devaluing a new national
currency.
However, most consider this an unlikely policy
course as both Greek and European leaders appear
committed to ensuring that Greece remain a Euro-
zone member and exiting the Eurozone could make
future borrowing costs much higher for Greece.
Its geographic location, particularly as a potential
hub for regional trade and investment in energy and
transportation networks; the renewable energy sec-
tor; and already strong global shipping and tourism
sectors would help Greece in increasing exports
and the much needed competitiveness.
5
Another aspect of the Greek crisis lies with the big
Investment Banks, Greek government‟s debt had
been underwritten by prominent financial institutions
including Goldman Sachs, and used complex finan-
cial instruments to conceal the true level of
Greece‟s debt so that Greece could get the Euro
Status by simply using an accounting loophole in
the system. For example, the government of Papan-
dreou‟s predecessor is alleged to have exchanged
future revenues from Greece‟s highways, airports,
and lotteries for up-front cash payments from inves-
tors. Likewise, it is reported that the Greek govern-
ment borrowed billions by trading currencies at fa-
vorable exchange rates. Because these transac-
tions were technically considered currency swaps,
not loans, they did not need to be reported by the
Greek government under EU accounting rules. The
Federal Reserve is currently investigating the role
that Goldman Sachs and other U.S. financial institu-
tions played in the buildup of Greece‟s debt.
If Greece defaults, there is a risk of contagion to
other Southern European countries, including Portu-
gal, Ireland, Italy, and Spain (which, along with
Greece, have been nicknamed the „PIIGS‟. Con-
cerns about a spillover of Greece‟s crisis to its
neighbors are rooted in memories of the Asian fi-
nancial crisis in 1997-1998, where it is believed that
investor Herding behavior contributed to the spread
of the crisis throughout the region.
By: Nikunj Doshi
 Role of Private Equity Sector in India

Private Equity (PE) has emerged as a potential The factors contributing to the growth potential of

source of corporate financing in addition to the tradi- the sector are the possibility of higher returns in

tional sources of fund mobilization such as public comparison to alternative investments, capital re-

equity issues, bank loans, private placements, euro quirements in growing sectors like education, infra-

issues and external commercial borrowings. Techni- structure, power and the regulatory reforms in the

cally PE is the capital that is not listed on the stock primary market which widens the exit scope for the

exchange. It consists of funds and institutional in- PE firms. According to a recent report by Goldman

vestors who commit large amounts of money with a Sachs, India requires USD 1,700bn over the next

long term perspective. The investments made are decade for maintaining its existing growth rate. One

directed either into private companies or for buyouts third of the estimated Rs. 1,700 bn is expected to

of public companies which results in delisting of be funded by the PE sector. However, the PE play-

public equity. The funds generated through PE can ers cannot invest more than 33.33% of its investible

be used to expand the working capital of a firm, to funds in equity of listed company.

carry on an acquisition activity, to provide new tech-

nologies or to strengthen the balance sheet of a The regulation of PE in India is at an evolving stage.

company. The various categories of PE include Currently, there is no regulatory body established to

Venture Capital, Leverage Buyouts, Growth Capital frame standards and policies for PE in India, how-

Distressed Investments and Mezzanine Capital. ever, indigenous and foreign venture capitalist are
regulated by SEBI(Securities Exchange Board of

PE in India is relatively a recent phenomenon. PE India) Regulation, 1996 and Foreign Venture Capi-

funds are customizing their India strategy keeping in tal Funds Regulations, 2000. PE fund investments

mind the local realities, the relatively small size of from other countries are required to adhere to the

companies seeking capital, promoters‟ reluctance to restriction on foreign capital inflows.

cede control, and local takeover regulations, among

others. The performance of PE in past few years In first Quarter of 2010:

was disappointing due to the impact of global reces- PE Sectoral Break Up - Utilities, Consumer Dis-

sion. The deals decreased by 38% in 2009 over cretionary & Financials were the most targeted
2008 levels and 45% over 2007. India accounted for sectors for investment with deals worth $484

6% of total global PE deals volume in 2009 while million, $440 million and $403 million respec-
only 2% in terms of deal value. However, it is esti- tively in Q1 2010. Together, they accounted for

mated that the sector would achieve an annual more than 68% of total private equity deal value

growth of 15-20% by 2011. during the quarter.

6
 PE Investments - Q1, 2010

Consumer
Discretionary
Consumer Staples
$484 $440
Energy

$95 Financials
$112
Health Care
$134 Industrials
$403 $26
$131
$35 $82 Information
Technology
Materials

Telecommunications
Services
Utilities

Major PE Deals - The major private equity deals
were investments in Star Health & Allied Insur-
ance, Coastal Projects Pvt. Ltd., Tikona Digital
Networks Pvt. Ltd., Coffee Day Resorts & Ho-
tels Ltd. and Asian Genco Pte Ltd.
and Indian PE firms,. One of the factors that can be
identified is recent inception of PE sector in India.
The top global players have a long standing history
and robust experience which differentiates it from
Indian Players.

In India the major PE players are ICICI Venture -
India„s largest private equity fund, Chrys Capital,
Kotak Private Equity Group, IDFC Private Equity
and 2i Capital. Leading global players include
Texas Pacific Group (TPG), Goldman Sachs Capital
Partners, The Carlyle Group and the Kohlberg
Kravis Roberts. There is massive difference in the
amount of fund raised between the global PE firms
PE is a transformational and value added invest-
ment strategy. Also, for sustaining the projected
growth rate of 8-8.5% India requires $1.3 trillion
over the next three years. PE firms can play a piv-
otal role in providing funds for the pending project.
Although, there is a growing acceptance among
various business owners, however, large business
entities are yet to embrace this potential source of
capital.

By: Bharti Bajaj

7
 Bhopal Gas Tragedy-
A Reflection of sickened Indian System

Soccer seems to be the flavour of the season and Union Carbide Corporation will never ever be extra-

„Soccer Mania‟ seems to have grappled all the dited.

countries across the globe with the ongoing FIFA

world cup in South Africa. However, India seems to BJP which is the opposition party has demanded an

be indifferent to this African carnival, not because explanation from the Congress on who had let War-

India isn‟t a qualifying team at the world cup but ren Anderson escape from India. According to them

because there‟s another game which has kept Indi- Bhopal gas tragedy was the result of indifference

ans busy at the home grounds. The game is well- and nexus of the then ruling party i.e. Congress for

known and as you will browse through the morning which Arjun Singh (then CM of MP) and Rajiv Gan-

newspapers and surf the news channels you will dhi (then PM of India) both are being considered

realize that it seems to be the talk of the town. The responsible. Obviously a man who was responsible

game is „Blame game‟ and it has already been mak- for killing thousands of innocents could not be al-

ing great waves throughout the nation with the lowed to get away by Arjun Singh on his own. Also,

prominent parties and politicians playing it superbly there was no law and order problem in the city at

under the wake of 1984, Bhopal Gas massacre. that time which Arjun Singh is citing as the reason

Indian politics about which it was once said that it for all this. But then hardly any point in discussing

was facing danger of criminalization, is presently the wrongs committed by successive governments

witnessing unassailed politicization of criminals. If in the past. Be, it the congress or BJP, they have all

we call anything alarming this sure is! conspired to let the Americans get away as a favour
or for money. In 1985 we allowed Anderson to get

More than a quarter of century has passed since away and after 26 years of trial the seven surviving

the world‟s greatest industrial disaster swiped out accused of Union carbide India Limited have been

thousands of families after tonnes of poisonous given just two years of punishment and they have

methyl-isocyanate (MIC) gas leaked from the Union been left on bail after submission of bonds and a

Carbide pesticide plant on the night of December 3, security payment of Rupees twenty five thousand

1984 killing about 4000 people instantly, thousands only. To further frustrate us, Chief Justice Magis-

severely injured and handicapped with the death toll trate has given the verdict and told that the „justice

rising sharply to 10000 within 72 hours. However has been delivered‟. The judgment was not only a

the worst part to all this is that the main accused i.e. mockery of justice as it came so late but it also let

Mr. Warren Anderson who was the then CEO of the main accused go scot-free.

8
 Also, what has fuelled the wrath of the people is
that the company deliberately sacrificed the safety
of its workers in Bhopal. CBI officials who handled
the investigations at the site have enough evi-
dences to prove that that the management knew
that the Carbide plant was unsafe. In 1981, a gas
leak had killed one worker. In 1982 again, 25 work-
ers were hospitalized after another gas leak. Two
years later, Union Carbide sent its US experts for a
safety audit of the Bhopal plant. The team discov-
ered 30 hazard spots but still the management ne-
glected it which ultimately led to dangerous
amounts of water entering a tank containing methyl
isocyanate gas forcing toxic fumes to vent, choking
and strangling thousands of people. However the
death of innocent lives do not really matter to US as
the President Barack Obama has stated that this
case is now an internal matter of India which means
that neither can Anderson be tried for his crimes nor
will Dow Chemicals which has bought Union Car-
bide will pay a dime more for compensation. All this
and more only proves that perhaps we as Indians
are minor push-overs whose lives really don‟t mat-
ter. Hypocrisy and dirty politics can be seen at its
pinnacle with Obama safeguarding an American
with the manipulated laws and at the same time
asking for compensation above the liability cap
(including the financial loss) for the loss of eleven
lives in Louisiana from BP chief Tony Hayward for
the oil spill. Can anybody answer as to why Mr.
Obama has different standards for people of differ-
ent countries? Is twelve thousand rupees that have
been given in case of Bhopal gas tragedy to the
victim‟s next of kin enough for the life of an Indian?
Do they sound fair? They do not but surely they are.
He has done what was expected out of him in ca-
pacity of being the First person of a nation for safe
9
guarding the interests of his citizens and its pride.
Also, why should he agree to compensate a country
where its judicial system requires 25 years to take a
catastrophic case into consideration. We wish if In-
dian Government too had the same attitude and
support towards its citizens. MP Chief Minister
Shivraj Singh Chauhan blames the legal system for
the entire outcome. He feels that though the court
gave what was possible, the quantum of punish-
ment to the accused in such a huge disaster was
not enough.
Thus, the parties are busy playing blame games
with each day formulating new and further attacks
to dismantle people‟s confidence in the other party
and gain people‟s trust for themselves at the cost of
people‟s innocence. Another example of this is the
nuclear liability bill which the Congress government
is planning to bring in the parliament, which says
that in the event of an accident the entire responsi-
bility for an accident will be that of the Indian com-
panies, not of American companies. Also, the liabil-
ity has been capped at Rs 300 crores and the over-
all liability at Rs 2200 crores implying that the Indian
company would pay a maximum compensation of
Rs 300 crores and the rest would be paid by the
Indian govt. or in other words it will go from our tax
money, with the Americans again getting away scot
free. However, instead of going into the critical
analysis of the tragedy we should focus on what
can we look forward to, as a part of our future ef-
forts.
Though, nothing much can be done to undo the
harms caused, however, some steps can definitely
be taken to set off the issues as our sympathetic
concern for the people who have suffered due to
 the tragedy. One of the bleak hopes in such sce-
nario is to cash the golden opportunity when
Obama comes to India in November and influence
him to extract some large amount for our people.
Also, rather than playing ridiculous blame games,
the govt. of India along with the nation as whole
should join hands to accelerate the ongoing reha-
bilitation processes in Bhopal. Bills like the „nuclear
liability bill‟ should include laws like sharing of
the liability by both Indian and the parent company
in case of an accident so that families of all the vic-
tims can receive succor. Last but not the least,
there is an urgent need for revision in the Indian
judicial system norms so that no tragedy ever be-
comes a „Judicial tragedy‟.
By: Anuradha Upadhyay

The BP Oil Spill - A Closer View

Human efforts since time immemorial have been

guided towards understanding natural phenome-
non, using them, molding them and changing them
for human gains. However, most of these efforts
have often resulted into a war with nature which has
long lasting impacts with bearings on generations to
come.

One such resultant activity is oil spill-a release of BP is one of the largest energy companies in world.

a liquid petroleum hydrocarbon into the environment It deals in fuel, energy products and petrochemical

which has been result of careless or planned hu- products. BP was in the news headline worldwide

man activities. It often refers to marine oil spills, on April 20, 2010 for the oil spill from its nine year

where oil is released into the ocean or coastal wa- old mobile offshore drilling unit Deepwater Horizon

ters. There had oil spill crisis most famous of them in Mississippi Canyon.

are Exxon Valdez oil spill of March, 1989 and the

Gulf of Mexico oil spill in April, 2010.

10
 The spill started on April 20, 2010 when an oil well
blew out. According to statement of president
Barack Obama, the reason for it was negligence
and lack of responsibility on the part of BP and its
associated companies- Transocean and Halliburton.
The explosion in the oil well caused explosion of
Deepwater Horizon. According to BP‟s internal in-
vestigation, the reason of the explosion was the
leakage of Methane gas from the well that ignited
after expanding out of the well. One more reason
that is tabled is the cost cutting by BP on mainte-
nance activities causing explosion as an end result.
The size of spill is not yet fully determined different
estimates have come. Initial BP estimates were
1,000 barrels of oil per day (42,000 gallons) gushing
forth from the broken pipeline. By June 14, a gov-
ernment panel announced that the rig was jetting as
much as 2.5 million gallons of oil per day into the
Gulf. This makes the spill near to be worst spill ever
seen.
Effects of explosion are multi dynamic. They can be
traced from politics, economics, social, business to
environment. The very first effect seen was political
in nature which questioned President Obama‟s de-
cision to open new regions for offshore drilling.
The next in line are environmental issues. The oil
spill threatened the most productive and fragile ma-
rine ecosystems in the US. About 25% of nation‟s
wetlands lie in the Mississippi River Delta, a habitat
for nesting seabirds and resting migratory birds.
The Gulf is home to dozens of threatened and en-
dangered species, and commercially important fish,
crab, and shrimp that act as basis to Gulf Coast
economy.
11
The economic and social impacts were seen soon
and their overall costs are yet to be estimated. The
prices of the seafood rose by 10% to 30%. The sea-
son is best tourist season. However the hotels, res-
taurants, clubs, resorts and airlines saw cancella-
tion of booking. Hotels and resorts are losing money
- between $100,000 and $200,000. Gulf Coast saw
a 50% decrease in sales and hotel occupancy as
low as 15-19%.
Fishermen and boat owners are looking now for
alternate sources of income. The social life is seen
as misbalanced with families more stressed to fund
daily living sustainable and cutting regular expendi-
ture.
Overall U.S. oil production next year will drop by an
estimated 2%. Further high oil crude oil prices, rise
in oil imports is expected for US economy.
The impact of crisis is seen on BP‟s finances. The
company has been imposed with fines, lawsuits
apart from the relief measures it took. As of 18 June
2010, the gulf oil spill has cost BP an estimated 1.6
billion USD. This figure can be itemized as follows:
25 million USD in grant money given to the
states of Alabama, Florida, and Mississippi,
60 million USD allocated towards the construc-
tion of barrier islands off the coast of Louisiana
1.4 billion USD accrued as of 18 June 2010 in
cleanup efforts (tabulated at a rate of 33 million
USD per day since the incident).
 This does not include lawsuits or the over 6700
compensation claims filed costs, although 1000
claims have been settled. Energy analysts
at Barclay Capital project losses worth 22.6 billion
USD will be incurred by BP, including cleanup
costs, worker compensation, legal fees, and lost
th
revenue. On 6 June, 2010 BP announced cut in
capital expenditure bill and suspend dividend pay-
ments until September 2011 to pay for the 20 billion
USD claims fund imposed upon the company by the
United States.
Although government is attempting to overcome the
impact and boost economy of area time will decide
success of such measure. While BP is seeing
nearly 34-40% stock price decline and going though
post crisis management and image makeover as a
responsible company, it will take time for it to win
FUNDAMENTAL VALUATION:
A move towards reality
Investors in stock markets often hear a phrase
called- Fundamental Valuation. What exactly is
Fundamental Valuation? In brief one can say that
it‟s the real worth of the company or the intrinsic
value of the company. There are different ways of
determining it. The most common is the Discounted
Cash Flow (DCF) method.
12
back customers trust and clean brand image. To
overcome such situations in future a strong initiative
on the part of government and corporate is needed.
Since such oil spills effect are not limited to one na-
tion‟s boundaries so an international level directive
is need of hour. Today we need global guidelines
stating what precautions and security standards are
to be followed for oil rigs. Further, an international
body is needed to regulate oil refining in sea and
oceans at global level. We also need more respon-
sible corporate behavior guided towards efficient
management, maintenance and surveillance of off-
shore rigs. An efficient crisis management team
with corporate and government joint efforts is
needed to timely redress any crisis. Although, future
remains uncertain such efforts can hedge risks of
playing with nature and human life.
By: Garima Shukla
While the purpose of DCF valuation is to determine
the intrinsic value of the company (in other words
the justified price for the company), the most com-
mon method brokerages use for giving recommen-
dations is relative valuation, pricing an asset relative
to its competitors . But does Fundamental valuation
really matters while going for an individual invest-
ment decision?

The answer to this question depends upon the mar-
ket maturity and investor‟s motive.
In 1990s, Indian stock market consisted of investors
investing in stocks only with the aim of speculation
and an opportunity of getting higher returns not for
their interest in the company and its growth. Stock
Market was considered a place to gamble in antici-
pation of higher returns. In Indian stock market,
speculative motive of investors had made the mar-
ket unpredictable which also meant that no valua-
tion worked. In past, most of the stock brokerages
in India were not even looking at company‟s funda-
mentals to value the firm, they were merely going
by the trends in the stock market for their recom-
mendations (in fancy words by “technical analysis”).
Due to the speculative culture which prevailed in the
stock market many retail investors suffered huge
losses and many investment firms went bankrupt.
13
With growth and the maturity of Indian Stock mar-
ket, the fundamental valuation of companies is gain-
ing prominence. More or less fundamental valuation
plays a major role when it comes to any acquisition,
takeover or merger decisions or when it comes to
long term investment decision. However, for giving
calls in intra day transactions or for short term in-
vestment decision, usually relative tools are found
to be more effective. In relative valuation, you are
assuming that the whole market is rightly priced. In
case the stock is not moving in the direction of mar-
ket, it considered to be mispriced. The work of an
equity researcher is to find out the scrip which is
performing differently from the market average,
thereby giving recommendations to “buy” or “sell” a
share.
Now as markets have started moving towards the
maturity phase, the significance of fundamental
valuation is gradually rising. The importance of Fun-
damentals can also be observed in the speeches of
the world‟s richest investor “Warren Buffett”. His
investment choice always depends upon his knowl-
edge of the sector, functioning of the company and
its fundamentals. Realizing this, even back home in
India, a number of portfolio managers have started
following the practice of assessing a company‟s
fundamentals prior to making any long term invest-
ment decisions.
Thus, promoting a culture of making sensible in-
vestment decisions based on DCF of fundamental
valuation.
By: Lakshya Mehta
 IFRS Convergence –
A Road Map for Opportunities

From the April 1, 2011, India will join 120 countries touted as the next big thing for the Indian Economy

across the globe that allow or require preparation of and for Indians definitely, after technology and out-

financial statements in accordance with the Interna- sourcing.

tional Financial Reporting Standards (IFRSs). In

India, the convergence process is expected to be While the benefits of global convergence cannot be

over by 1st April, 2014. However, different dead- doubted, this requires considerable groundwork to

lines have been set for different sectors: be done to make the country ready for a new setup.
In this direction, all players involved in the formula-

insurance companies from 1st April, 2012, tion, implementation and enforcement of the con-

Banks and NBFCs from 1st April, 2013 and verged accounting standards have to play a pivotal
role.
all remaining listed entities from 1st April, 2014

The companies start preparing their financial state-

ments in accordance with the Accounting Standards
(AS) converged with IFRS as per the road map and
guidelines issued by the Ministry of Corporate Af-
fairs, Government of India in consultation with the
Institute of Chartered Accountants of India (ICAI).

By 2015, more than 150 countries including USA

will move to the IFRS. Thus, IFRS will emerge as
one single language of financial reporting ensuring
ICAI as the formulator of AS has already reached
comparability of financial statements prepared all
advanced stage of formulation of AS corresponding
over the world. This will facilitate cross-border
to all IFRS guidelines and has been regularly updat-
movement of capital at lower cost. Also, it will en-
ing the same. These Standards are also in the proc-
hance the mobility of professionals and professional
ess of consideration by the National Advisory Com-
services internationally. India, as an emerging econ-
mittee on Accounting Standards (NACAS) for rec-
omy has great appetite for foreign investment in
ommendation to the Central Government. The Gov-
various sectors of economy and convergence with
ernment in-turn would notify the same under the
the IFRS will definitely go a long way in moving
Companies Act 1956. To ensure that the Account-
capital in favor of India. In addition to this, with the
ing Standards corresponding to the IFRS do not
world proven skill set, the financial reporting is

14
 conflict with various requirements of the Companies
Act 1956, the relevant provisions thereof are being
amended and for which the Government of India
has setup a specialized committee. It is expected
that the amendments in the Act will be in place
much before the end of this year.
Certain areas have been addressed from the indus-
try perspective for ensuring the consistency be-
tween various regulations and AS converged with
the IFRS. However, the regulators such as Reserve
Bank of India (RBI), Insurance Regulatory and De-
velopment Agency (IRDA) and Securities Exchange
Board of India (SEBI) have also identified areas in
their regulations which are not consistent with the
AS converged with IFRS and thereafter are required
to be ammended.
Another area which needs to be addressed from the
industry perspective is to ensure that the AS are as
tax neutral as possible so that there are no adverse
tax implications for the individuals as well as the
corporate. To make a country ready for IFRS con-
verged accounting standards, the extent of prepar-
edness of the professionals in carrying out the tasks
related to audit of financial statements with the stan-
dards is pivotal. A massive training program by ICAI
has already been started for its members in industry
as well as in practice. Also, a number of seminars
15
and conferences on IFRS are frequently conducted
to discuss various aspects related to implementa-
tion of IFRS.
Ministry of Corporate Affairs in association with the
ICAI has recently undertaken a task to conduct
workshops at 58 centers across India. While the
Institute, Government and the Regulators are per-
forming their allotted tasks, it is also imperative for
the entities to prepare themselves to change their
accounting and other systems to be fully ready to
implement the accounting standards converged with
the IFRS.
The country, professionals as well as the compa-
nies should take this as an opportunity of another
leap to capture the entire accounting and financial
reporting arena across the globe. It‟s time to gear
up.
By: Sudhanshu Pandey
 Playing with Derivatives

A range of sophisticated toys available in the finan- Enterprise use derivative instruments to hedge

cial markets are „The Derivatives‟. Derivatives are against market risks such as interest rates risk, cur-

innovative financial instruments which are primarily rency risks and so on. Say for example if an enter-

used for two purposes one for „Risk Management‟ prise is to obtain goods from another entity located

and the other for „Speculation‟. Use of derivatives abroad and the payment for goods is to be made in

as the latter might create a havoc, however, its use a foreign currency at a later date. We know that

as the former can really help in effective functioning Currency is subject to fluctuations. Therefore, the

of an enterprise. Although, using Derivatives for enterprise making payment can book a “Buy” posi-

speculative purposes can also result in huge profit, tion of a derivative contract (forward, future, option)

however, the possibility of losing the game is way and safeguard against the possibility of loss due to

higher than the possibility of winning. unfavourable exchange rate fluctuations. Lets say a
speculator expects that the shares of a company

Let‟s understand what exactly are Derivatives? called AB Communications will rise in future. There-
fore, a contract of buying 1000 shares of AB Com-

Derivative is a contract between two or more parties munication at a future date is booked at current

whose value is determined by the rise or fall in the price. Currently, the share price is at Rs. 1,000 per

value of underlying assets. The underlying asset share and it is expected that it will rise to Rs. 1,300

could be a stock, a bond, a commodity or a cur- per share. Now on the due date, in case the share

rency. The most common types of derivatives are prices move as expected by the derivative investor,

Forwards, Futures, Options and Swaps. he gains Rs. 300,000. However, contrary to the ex-
pectation the price of the same share falls to Rs.

One can say that a Derivative challenges the uni- 700 per share the same investor looses Rs.

versal truth „future is uncertain‟, it gives the investor 300,000. Therefore, the probability of gain comes

an opportunity of living the current in future. with an equal probability of a loss.

Initially, derivatives were introduced with the aim of While with Swap the enterprise can exchange

Enterprise Risk Management. Risk Management is equivalent value of its foreign currency obligation

safeguarding the possibility of future losses. In case with that of another enterprise having its obligation

any possibility of loss is anticipated then it can be in the enterprise‟s domestic currency.

averted with Derivative instruments. An investment

in Derivative is primarily to ensure that the benefit Interestingly, we have derivative instruments for

derived from the regular trade contracts should Energy, Weather and Insurance. These instruments

never reduce below the ascertained levels. are used for management of risks associated with

16
 prices of energy products (crude oil, electricity and
natural gas), safeguarding industries where per-
formance is affected by unpredictability of weather
and the risk of excessive insurance claims due to
natural calamities.
Currently, the Derivative investments are increas-
ingly used for speculation. Using Derivatives for
speculation is the other extreme of the same chord.
While speculating, the complete game is based on
the expectations and market sentiments. What you
believe is how you invest and if the belief comes
true there is profit else a loss. The prime intention of
speculative investments is to leverage the profits.
One example of speculative practice is the invest-
ment in Collateralized Debt Obligations (CDO), the
assets underlying these financial instruments were
the loans approved by the commercial banks. Huge
volumes of CDOs were traded in the stock market
and profits were reaped by many. However, the
complexity of these instruments and the little under-
standing of the same to the speculators engulfed
the complete American economy into economic de-
pression and eventually the rest of the world.
An investment into derivative markets requires a
deep rooted understanding of the financial instru-
ments and an excellent foresight about the future
market development. Exiting the market at the ap-
propriate phase is an essential for profiting in real
terms.
17
Of late more and more sophisticated derivative in-
struments like Swaptions, Leaps, Baskets and so
on are introduced in the financial market. They are
usually a blend of two or more than two vanilla de-
rivatives. More than Risk management these de-
rivatives are increasingly used by the enterprises to
make speculative gains and enhance their invest-
ment earnings.
The latest innovation in the derivative market is the
Media Derivatives. Recently in US, Commodity Fu-
tures Trading Commission (CFTC) has approved
the trading futures contract for movies in the com-
modity market. Imagine you bidding for the box of-
fice success or failure of a forthcoming movie.
All in all, derivatives when sensibly used with the
purpose of Risk Management prove to be an excel-
lent tool for safeguarding against losses. However,
when the same instruments are used with a specu-
lative intent then the results could be other than
gains. Despite such possibilities enterprises have
been increasingly indulging in investment into such
contracts. Hope they are keeping in their minds - to
win while paying the game is to play smart and play
intelligent!
By: Kriti Pant
 TEAM ECOBIZZ
BATCH OF 2011

From Left to Right:

Sudhanshu Pandey

Anuradha Upadhyay
EDITORIAL
Garima Shukla

Kriti Pant

Lakshay Mehta

From Left to Right:

Sonal Agarwal
Vivek Narang

EVENT Aanchal Agarwal

Shivalika Singh
Shubhra Chaudhry
Bharti Bajaj
Nikunj Doshi
Prasanna Sawarkar

From Left to Right:

Ashmita De
Sweta Singhania
CREATIVE Rishi Vagrecha

18
 From Left to Right:
Anjum Daniels

Sumair Riyaz

Aditya Manishi

Kunal Bhatia
marketing
Mansi Unadkat

Y.V. Sai Shanmukha

Mohil Mishra

Amit Vohra

From Left to Right:

Manish Patel
IT
Ankit Jain

19