Insolvency and Bankruptcy Code, 2016


Introduction:

IBC was passed by the Parliament of India on May 11, 2016 and received assent of President on May 28, 2016. Thus, the provisions of various laws related to resolution of bankruptcy in India Inc. like SARFAESI Act (2002), RDDBFI Act (1993), The Presidency Towns Insolvency Act (1909), The Provincial Insolvency Act (1920), Chapter 19 & 20 of The Companies Act (2013) etc. were replaced by Insolvency and Bankruptcy Code (2016). This was the birth of Insolvency and Bankruptcy Board, an independent body dedicated entirely on administration and resolution of Insolvency and Bankruptcy cases-responsible for the ongoing NPA crisis in the country.

IBC was need of the hour to cope up with the rising NPA’s in the country as they led to liquidity crunch thus hampering growth of the country. The gross NPA of Indian banks increased from Rs 53,917 crores in Sept 2008 to Rs 341,641 crores in Sept 2015 which became a matter of concern for the Indian financial system.

IBC- Two Years down the line:

A few cases resolved by IBC gave unbelievable results. The takeover of Bhushan Steel by Tata Steel gave unexpected results in all elements of insolvency. Bhushan Steel is a plant with capacity of 5 million tonnes of steel per annum but due to the financial distress was producing only 3 million tonnes per annum. Now under the management of Tata Steel, it is expected to produce output to its maximum capacity. Also the recovery rate for creditors was an impressive 63%. Another flabbergasting resolution was in the case of Sharon Bio Medicine, where even the unsecured creditors recovered about 98% of their dues.

On the other hand, a lot of cases gave unpleasant surprises which include Jaypee Infratech, Binani Cement, Essar Steel etc. The biggest trouble for IBC revolves around 12 cases identified by RBI in the process. These consists of some largest companies in the country accounting for about 25% of the total defaults (by value) filed with NCLT under IBC. So the resolution process of these cases is viewed to be as the test for success or failure of IBC.

Until now, 5 out of these 12 cases have been resolved with average period of resolution at 333 days The resolution was as follows:

  • Lanco Infrastructure Ltd. was headed for liquidation
  • Amtek Auto Ltd. was acquired by Liberty House
  • Monnet Ispat Ltd. was acquired by JSW Steel Ltd.
  • Bhushan Steel Ltd. was acquired by Tata Steel. Ltd.
  • Electrosteel Steels Ltd. was acquired by Vedanta Ltd.

In the remaining 7 cases, more than 415 days have passed but no resolution is achieved and neither there seems a way working for them. This period has far exceeded the timeline of maximum 270 days prescribed by IBC. Also, according to IBC, if the resolution process is not completed within a span of 270 days, the company should be subjected to liquidation. But neither of these 7 companies have been directed to the process of liquidation.

As mentioned above, the IBC seems to be a master piece on paper but its implementation in real life scenarios does not appear to be much satisfying.

In a span of two years after introduction of IBC in 2016, over 1,322 cases have been admitted under CIRP against the corporate debtors according to the data by Insolvency Bankruptcy Board of India (IBBI). Among these, 91 cases were closed upon ‘appeal and review’, 260 companies have been ordered for liquidation and only 66 cases have been resolved under IBC until now. About 905 cases are still ongoing with much of them still to be resolved even after the maximum stipulated period of 270 days.

In 66 resolution cases, the realization by creditors is around Rs. 80,000 crores against the amount settled in cases disposed at pre-admission stage around Rs. 2.02 lakh crores. This by itself undermines the significance of the resources and time spent in the resolution process under IBC.

The major issue in implementation of IBC appears to be non-adherence of strict deadline of maximum 270 days to resolve the CIRP’s. According to the experts, this is the biggest hindrance in the implementation of IBC.

In Numbers

Status of Corporate Insolvency Resolution Process

Status No. of firms
Admitted 1322
Closed on appeal/review 91
Closed by resolution 66
Closed on liquidation 260
Ongoing 905
>270 days 268
>180 days <= 270 days 180
>90 days <= 180 days 159
<= 90 days 298

    (Source: IBBI)

From the above table we can see that among ongoing 905 cases, 268 are still ongoing above the time limit of 270 days and 180 are running on the extended period of 90 days.

The major reason for liquidation of 259 companies as against the resolution of only 52 companies is that the resolution value for most of the companies is less than their liquidation value. This means that the selling of the assets of these companies would fetch more value than finding a new buyer for them.

According to IBBI, about 288 companies have filed for voluntary liquidation under IBC. Most of them have stated non-operations and commercial unviability to be the reasons for filing CIRP’s. Even the liquidation process of these companies seems to take longer time than expected as over 100 companies which filed for voluntary liquidation required a span of time between 90 to 270 days before the final report was submitted to IBBI.

Short-fall of NCLT:

The major reason for the inefficiency of NCLT in resolving the CIRP’s within stipulated timeline is the lack of manpower to handle the weight of its workload. With over 10,000 of registered cases ranging from simple to complicated cases, NCLT handles bankruptcy, insolvency and also other company law cases.

While the sanctioned strength of NCLT is of 62 members, NCLT has only 28 members all across the country to hear all these cases resulting in failure to cope up with the burden of insolvency cases that forms 40% of its workload. And as the government is not able to fill the vacant seats, the plan to setup special benches for insolvency cases has taken a back seat. Two such special benches have been setup at Cuttack and Kochi, but the plan to setup more such eight benches is far away from the sight.

Flaws and Evolution of IBC with time:

With IBC being relatively a young legislation, a lot of loopholes were found and exploited by the promoters of the defaulter entities. While drafting IBC, the concerned team has taken care to leave as little ambiguity as possible in the wordings. But the real test of a legislation takes place once it is introduced and starts getting applied on the real-life scenarios.

One such loophole that was exploited by the promoters was by bidding for their insolvent companies through other entities or parties related to them. This flaw directly used to pierce the heart of IBC by giving the control of the debtor company again in the hands of the same promoter responsible for bankruptcy. This flaw was corrected by the government by passing an ordinance on 17th November 2018 making it difficult for promoters or related parties to bid without repaying their existing defaults. The ordinance also prohibits individuals or entities other than those related to promoters and possess a stake in entities responsible for NPA’s in bidding unless the payments they have defaulted upon are cleared.

This move came after a question rose on the eligibility of the two bidders for Essar Steel viz. Archelor Mittal and Numetal. The bid by Arcelor Mittal came under the scrutiny because the company had a stake in Uttam Galva Steel which is an NPA (though the stake was sold by Arcelor Mittal before submitting the bid). Also, Archelor Mittal had a stake in Kazakstan’s KazStroy Services, which in turn was the promoter of an NPA, KSS Petron. On the other hand, the bid by Numetal came under cloud as it is related to Rewant Ruia, a member of the promoter’s family.

This was only one among flaws in the IBC which was corrected by government but yet a lot of loopholes are to be revamped to prohibit their exploitation by the promoters and related parties. These include rebidding of second highest bidder resulting in extension of resolution timeline, treatment of real estate defaults in the same manner as other entities, IP’s giving information to the rejected bidder etc.

Conclusion:

From the data and facts discussed above, we can conclude that IBC seems to be a masterpiece in theory but in practical sense it is still in the nascent stage. A lot of improvement in defining the wordings and removing the ambiguity in IBC is to be done to prohibit exploitation of the loopholes by the benefiting parties. The major challenge that IBC faces is the non-adherence of the strict deadlines for resolution of CIRP. Also in most of the cases it is seen that the liquidation process provides more value to the creditors than the resolution process resulting in wastage of time and resources involved in the resolution process.

But as IBC evolves along with time, it can become a sword with sharp edges that’ll cut-off the parasite of NPA’s stick to the Indian Financial System.

(Written by Dhiraj Jadhav, First-Year MMS)

India’s potential solution to rising need and cost of fossil fuels


Recently in September 2018, we saw oil prices reaching a four-year high at $ 81.20/barrel. This resulted in fall of the Indian rupee and thus widening of India’s trade deficit to $50 billion from $ 32.5 billion a year ago. Clearly, it shows how badly the price of crude oil can impact the Indian economy.

To our relief, the prices of crude oil are reduced now but OPEC’s target is to stretch them to $70.So in order to curb the problem of rising consumption and prices of crude oil, the government has fixed an official target to cut the oil imports by 10% in the next 4 years.

One of the potential solutions that the government can look into is the blending of ethanol with petrol. This is not something new to the world which is being done successfully by Brazil.

Brazil is the world’s largest producer and exporter of sugar.  But due to lower prices and a global surplus, it faced with its over-stocking of the sugar. Also owing to the rising prices of crude oil, Brazil started running its wheels on ethanol blended petrol and also on pure ethanol. In fact, the vehicles running on blended petrol now constitute 80% of the country’s light vehicle float. To achieve this, Brazilian sugar mills used 64% of the sugarcane crop grown in 2018 to produce ethanol. Thus, through a single solution, Brazil solved the problem of high sugar surplus as well as depleting foreign reserves due to rising prices of crude oil.

In the year 2018, India will produce about 35 million tonnes of sugar as against 32.5 million tonnes of sugar produced in 2017. As average yearly consumption of sugar lies at 26 million tonnes, about 9 million tonnes of the surplus will remain over-stocked in the hands of the Indian government.

As India produces low-quality white sugar, the demand for Indian sugar in the international market is low.  Thus the scope of exporting entire surplus is not great and an alternative needs to be developed.

With such a huge pile of surplus sugar and pressure of dynamic oil prices, India can follow the path of Brazil and can tackle the issue wisely.

(Written by Dhiraj Jadhav, First-Year MMS)

Elections and Economic Policy


The Code of Conduct under the Election Commission of India states that government cannot announce new projects, programs, concessions or financial grants to influence the voters a month before the actual election date. But even this six month period leading up to the elections actually might define the way forward for our country in the coming years. And as always the policy shakeup or amendments that might be introduced will affect the economy in a big way.

The fallacy of incumbent governments

But why is it that in emerging economies with democratic regimes, incumbent governments lose their focus? Somehow always the priorities shift from striving towards a long term goal to a short term fix that enhances their chances of re-election. Venezuela miserably failed to continue social reforms in times of economic crisis. Money that was supposed to target inflation and shortages was instead spent on social justice, social welfare, education and military recruiting.

Granted that such policies are signs of a developing economy, but really at what cost? If one wants to look at India, don’t look back more than 2014. The UPA government like any third world incumbent government depended on tax cuts and subsidies. But they were unsuccessful in tackling the NDA which ran on growth and good governance. They failed then, and now, almost five years later history is repeating itself, albeit with the roles somewhat reversed.  

The recent sparring between the government and the RBI governor was a result of different viewpoints. RBI with its long term outlook and a strategic plan to keep inflation in check had every right to exercise its authority. But with elections just around the corner the government cannot afford to be cavalier about its chances of re-election. Hounding the RBI for not resolving the liquidity crisis much faster was at best not thought rationally. Being the central bank, it was RBI’s responsibility to look for long term goals and government criticism was something like punishing a regulator for showing too much regulatory zeal.

The difference of opinion and strategic plans could not be more evident and the divergence speaks for itself. All of this is done to sway undecided voters which seems like a harsh price to pay for the economy.

Fiscal Expenditure

The most important weapon in the government’s arsenal is however fiscal spending. Proven and tested, fiscal spending is a safe option to go for. Not only is the fiscal spending greater but the amount of tax cuts and subsidies provided also increase. Now taking into consideration the recent volatility in the markets, the NDA government has also to some extent given in to populism to counter anti incumbency and lift market sentiment. Looking back, we can find that in seven out of the last eleven times, the fiscal spending increased significantly in election years. It has been quite well known in academic circles and policy makers have also paid attention to these theories of increased government expenditure that will boost employment and market sentiment.

Only in the years FY-84, FY-99 and FY-09 did the incumbent government was re-elected to power. The last incumbent government to be successful was the UPA I regime which had already embarked on an expansionary fiscal policy due to the 2008 global economic meltdown. This regime had waived off farm loans, expanded social security through schemes under National Rural Employment Guarantee Act (NREGA) and implemented revised salaries of central public servants through recommendations from the Sixth Pay Commission.

Overall one can see that incumbent governments have fallen prey to implementing populist policies that might endanger a more stabilized and gradual approach to solving certain situations. The current regime however has proven itself to be par with the best of regimes in terms of implementing a number of reforms like GST, FAME and Demonetization. However the success or failure from the perspective of a political analyst will only depend on the chances of re-election which necessarily does not mean strategic long term goals, but short term appeasements in alignment with the populist platform.  

Market concerns

A major factor to consider at the time of elections is market sentiment and investor confidence. Dalal street, already well known for its knee jerk reactions to election outcomes, showed it again last Monday why confidence among investors is key. Even the news from exit polls that the incumbent government at the centre might be in for a shock defeat was enough to make equity indices plummet by two percent.

Investors care less about which government is in power, but what they fear above everything else is uncertainty. For investors it is much easy to adjust to the idea of there being a unified chain of command and smooth transition from one ruling regime to another. But this situation rarely happens, as often the new regime resorts to its new agenda and it will differ from the populist policies of the previous years.

In conclusion, it is clear that elections do impact the macroeconomic scenario in the country. These factors however don’t affect the economy directly, but does more so by influencing policy decisions that are undertaken. The general elections in India will be held in April 2019, how the markets and economy reacts to the results, remains to be seen.

Corporate governance issues in Yes Bank: Explained


On 17th September 2018, India’s banking regulator Reserve Bank of India (RBI) denied three-year term extension to Yes Bank Managing director and Chief Executive Officer Mr. Rana Kapoor due to persistent governance and compliance failure reflected in Yes Bank, highly irregular credit management practices and serious deficiencies in governance and a poor compliance culture. Earlier in June 2018, Yes Bank requested a three-year extension for Rana Kapoor till 31st August 2021, but the RBI declined the request and asked Yes Bank to make a succession plan. As per the RBI’s directive, Rana Kapoor’s tenure as the Managing Director and Chief Executive officer of Yes Bank would have ended on 31st January 2019. We will see what has led to this situation for Yes Bank and the reasons which triggered the Indian banking regulator (i.e. RBI) to take strict actions against them.

Regulatory and governance issues in Yes Bank

Yes Bank came under the central bank’s scanner over regulatory and governance issues under Mr. Rana Kapoor’s watch in 2015, when the RBI decided to conduct an asset quality review (AQR) to clean up the rising toxic loan problem in the country’s financial sector. As a result, several banks were forced to report loan divergences, i.e., the difference between the RBI’s assessment of bad loans and the one reported by the bank, in their quarterly results. At a time when most banks were struggling with rising bad loans, Yes Bank had managed to keep a check on its non-performing assets (NPAs). However, following the AQR review in 2015, RBI found out some serious issues related to loan divergence and NPAs at Yes Bank. The main observations noted by RBI in 2015 AQR review were

  1. Yes Bank consistently showed NPAs below 2%. The gross NPAs reported by the bank in FY16 were at Rs 748.98 Crores. It turned out that the NPAs identified by RBI were at Rs 4925.68 Crores.A whopping 557% higher NPA was observed during the AQR review with respect to actual reported. The Gross NPA % disclosed by Yes Bank as on March 2016 stood at 0.76%. This Gross NPA actually should have been at 5.01% as per RBI observations.
  2. RBI also observed very astounding deviation of 1166% for Net NPAs. The Net NPA % disclosed by Yes Bank was at 0.29% for Mar 2016, which according to RBI should have been 3.67%.

Basically, loan divergence is mere account jugglery and these things are not taken lightly by the regulator (i.e. RBI) when exposed. Sometimes banks extend loans to genuinely restructure a loan. At other times, it is done only to delay recognizing a problem.

RBI’s response over the regulatory and governance issues in Yes Bank

The Reserve Bank of India (RBI) and Yes Bank Ltd exchanged at least eight letters related to persistent governance and compliance failures and violations of statutory and regulatory rules at Yes Bank before RBI decided to reject a request to extend Mr. Rana Kapoor’s tenure as the managing director and chief executive officer for three years in September 2018. In at least four letters sent to Yes Bank, RBI had questioned Yes Bank on

  1. Poor compliance culture and serious violations of statutory and regulatory guidelines between 2014-15 and 2017-18
  2. Persistent governance and compliance failure

In an April 2018 letter, RBI brought to Yes Bank notice

  1. A series of serious lapses in the functioning and governance of the Yes Bank.
  2. Highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture”.
  3. Proposed to re-examine the proposal for bonus/remuneration to Kapoor and consider clawback of the bonus paid to him for the years 2014-15 and 2015-16.

So finally, in the September 2018 letter, RBI declined Yes Bank’s request to grant Kapoor an extension of three years. The RBI had extended Mr. Kapoor’s term only till 31st January 2019 before which the bank has to identify a new successor to Mr.Rana Kapoor as a new head of Yes Bank.

Consequences on Yes Bank’s Rating and share price

1. Moody Rating

On 27th November 2018, Moody Investors Service downgraded Yes Bank’s ratings, citing corporate governance concerns and impact of leadership change on the bank’s growth plan.

  1. The global rating agency lowered Yes Bank’s foreign and local currency bank deposit ratings to Ba1 from Baa3.
  2. It also downgraded Yes Bank’s Baseline Credit Assessment (BCA) to Ba2 from Ba1.
  3. Moody’s also downgraded the foreign currency senior unsecured medium-term note (MTN) programme rating and senior unsecured debt rating.

2. ICARA and CARE Ratings

Troubles continued to mount for Yes Bank Ltd, with rating agencies ICRA Ltd and CARE Ratings Ltd downgraded the private-sector lender’s debt instruments.

3. Effect on Yes Banks’s share price

Yes Bank share prices plummeted following the news of rating downgraded by Moody, ICRA and CARE. Yes Bank’s share price registered their two-year low of ₹147.00 apiece on the BSE on 29th November 2018.

Bumpy road ahead for Yes Bank

As per the RBI direction, Yes Bank is now in the process of finding a successor to Mr. Kapoor and has appointed a search committee headed by former LIC and IRDAI chairman T.S. Vijayan. However, one of the members of the search committee, O.P. Bhatt, resigned citing conflict of interest. Earlier Rentala Chandrashekhar, who was appointed as the independent director in April 2018, had resigned from the board of Yes Bank in November 2018 as he was concerned and dismayed at the manner in which recent developments, especially on corporate governance, were dealt with by the Yes Bank. Also, Ashok Chawla, who was non-executive chairman of Yes Bank, resigned, saying he would not be able to devote adequate time to the Bank in the run-up to appointing a new CEO. At that time, it was speculated that his exit was triggered by his name being mentioned in the charge sheet filed by Central Bureau of Investigation (CBI) in the Aircel-Maxis case. Vasant Gujarathi, another independent director, had also resigned from Yes Bank board. Most importantly Moody’s rating action considered the resignation of members of the bank’s board.

Currently, RBI is inspecting Yes Bank’s exposure to Infrastructure Leasing and Housing Finance Ltd, Dewan Housing Finance Corp. Ltd (DHFL), Indiabulls Group and Sudhir Valia-promoted entities. The inspection is to ascertain whether there is any link between the bank and non-banking finance companies (NBFCs) in the backdrop of the IL&FS crisis.

So it will be a challenging task for Yes Bank to find the successor before 1st Feb 2019.

RAFALE or RoughALE DEAL?


Kitna deti hai? (What’s the mileage?) – This is the ultimate question for any Indian in the market for a transport vehicle. So, why should it be any different when the Indian government goes shopping for fighter jets?

What are Rafale Jets?

Rafale is a twin-engine medium multi-role combat aircraft, manufactured by French company Dassault Aviation. Dassault claims Rafale has ‘Omnirole’ capability to perform several actions at the same time, such as firing air-to-air missiles at a very low altitude, air-to-ground, and interceptions during the same sortie. The aircraft is fitted with an on-board oxygen generation system (OBOGS) which suppresses the need for liquid oxygen refilling or ground support for oxygen production.

What is the Rafale deal?

  • It all started in 2001, the Indian Air Force sought additional fighter jets claiming that they had a lot of heavy and big jets but did not have any medium size fighter jets.
  • In 2007, A.K. Antony, the then Defence Minister of India (UPA Government) approved the process of buying a fleet of 126 medium multi-role combat aircraft (MMRCA). They started scouting for this aircraft across the globe.
  • In 2011, Indian Air Force declared that two aircrafts were shortlisted – Rafale Ltd and Eurofighter Typhoon.
  • In 2012, Rafale was finalized and was declared as the L-1 bidder and contract negotiations began with its manufacturer Dassault Aviation which is a French company. They finalized 126 aircrafts out of which 18 were to be bought in flying condition and 108 were to be assembled in India by Hindustan Aeronautics Ltd (HAL). The total deal was said to be worth Rs.54,000 crore which is approximately Rs.435 crore per aircraft.
  • In 2014, even after 2 years of finalizing the deal contract negotiations remained incomplete due to a lack of agreement on various terms of RFP compliance and cost related issues. Transfer of Technology remained the primary issue of concern between the two sides.

Hence, there was no deal under the UPA Government. Then, the UPA government was overthrown and the Modi government (NDA) came to power.

  • On 10th April 2015, Shri Narendra Modi during his visit to France made a declaration that he would be purchasing 36 rafale jets from Dassault Aviation in a government-to-government agreement. After the announcement, questions were raised by the Opposition on how the PM finalised the deal without approval of the Cabinet Committee on Security.
  • On 23rd September 2016, India and France signed a deal for 36 rafale jets.
  • On 18th November 2016, Mr. Subhash Bhambe the then Junior Defence Minister stated in the parliament that the deal has been finalized and the approximate cost per aircraft at Rs.670 crore.
  • In February 2017, the contract deal was signed between India and a joint venture (JV) between Reliance defence and Dassault named Dassault Reliance Aerospace Ltd. (DRAL).  The agreement for 36 Rafale fighter jets was at a value of euro 7.87 billion, or about Rs 59,000 crore which is Rs.1640 crore per aircraft. The agreement also included a 50 per cent offset obligation, the largest-ever offset contract in the history of India. The main point of the offset agreement was 74 per cent of it had to be imported from India, which meant direct business worth around Rs 22,000 crore. The delivery of the fighter aircraft is expected to begin in 2019, with an annual inflation capped at 3.5 percent.

Allegations:

In November 2017, Congress alleged a ‘huge scam’ in Rafale fighter jets deal. They have been accusing massive irregularities in the deal, alleging that the government was procuring each aircraft at a cost of over Rs1,640 crore as against Rs 470 crore finalised by the UPA government. The party has also demanded answers from the government on why state-run aerospace major HAL was not involved in the deal. The party claimed that Qatar had purchased 12 Rafale fighter jets in November 2017 for USD 108.33 million per aircraft (Rs.694.80 crore). The Congress has also alleged the government was benefitting the Reliance Defence Ltd (RDL) through the deal as the company has set up a joint venture with Dassault Aviation to execute the offset obligation for the Rs.59,000 crore deal. Reliance Defence had no expertise in the fighter jets business and had never built an aircraft till date. The party also alleged Reliance Defence was formed just 12 days before the announcement of the Rafale deal by the prime minister on April 10, 2015. To make things worse on 21st September 2018, former French President Francois Hollande revealed that the choice to select Reliance Defence as the offset partner was made by the Indian government and France had no option but to go ahead with it.

Counter-Allegations:

Finance Minister Arun Jaitely claimed NDA government negotiated hard to keep the price of Rafale jets down by at least 20% per aircraft in its 2016 deal as compared with UPA government’s deal of 2007. He also accused the Congress of having seriously compromised national security by delaying the Rafale deal by over a decade and said the Congress and its President Rahul Gandhi were unaware of the Rafale deal facts. A document prepared by the ministry of defence and the Indian Air Force this year shows that the per unit price of Modi regime’s Rafales, after taking into account the cost of weapons, maintenance, simulators, repair support and technical assistance is Rs.1,646 crore while the ones negotiated for by the UPA would have come to Rs.1,705 crore. The aircrafts bought by NDA also has missiles such as the METEOR and the SCALP which were not included in the aircrafts bought by the UPA. Also, on 22nd September, Dassault Aviation the French defence manufacturing giant has refuted claims by former French President Francois Hollande and said that it was Dassault who selected Anil Dhirubhai Ambani’s Reliance Defence and not the Indian government.

How important is this deal to both India and France?

France: Rafale jets are currently being used mostly by France and also by Egypt and Qatar. Dassault is hoping that export of Rafale jets will help the company meet its revenue targets. India was the first country that agreed to buy Rafale, after it was used in Libyan airstrikes. If India inducts these jets in its military fold, other nations could express its willingness to buy Rafales. This will give a huge boost to the country’s economy.

India: India chose Dassault over its traditional partner Russia’s MiG. It also ignored U.S.’ Lockheed, at a time when India and U.S. were aiming for closer ties. Procurement of combat aircraft is long overdue for the Indian Air Force. Further delay can only make things worse. This deal is India’s biggest-ever procurement. In the effectiveness of the Rafale deal lies the future of other defence procurement.

(This artile has been written by Archit Zaveri, first-year student at SIMSREE)

Rupee Depreciation


On 18th August 2018, the Indian currency, Rupee witnessed the historic intra-day low of 70.40 before closing at a life time low of 70.15 per dollar. Aggravating the situation, on 27th August it hit a record closing low of 70.16.

Before we deep dive into “why the Indian Rupee is depreciating, what are its impacts & measures to control it”; knowing “Rupee depreciation & who fixes the value of Rupee” is vital.

Rupee Depreciation:

When Rupee becomes less valuable compared to U.S. Dollar, it is called as Rupee depreciation. It simply means that, more Rupee is required per dollar. In other words, buying dollar becomes costlier.
Example: One dollar costed for Rs. 49.45 in 2012 and as on 27th August 2018 it costs more. i.e. Rs. 70.16.

Who fixes the value of Rupee?

Most of the people think that either Indian government or RBI fixes the value of Indian Rupee. But in reality currency market decides its value. The Supply & Demand of Indian Rupee in the global currency market decides its value. If the demand of Indian Rupee is less relative to its supply, it will depreciate & if the demand is high relative to its supply, it will appreciate.

For example: Say, India is going through inflation phase (High prices of goods & services). To lower the prices, suppose RBI increase the interest rates (It is the amount charged to borrower by lender). As interest rates are high, people will be less keen to take loan to buy goods & services. Rather, they will be depositing more money into banks to get more interest returns. This will attract foreign investors to deposit their money into Indian banks. That means the demand for Rupee will increase & hence Rupee will appreciate. This type of system is called as Floating Rate System.

India has adopted “Managed Floating Rate System” to minimise the extreme fluctuations in the exchange rate of Rupee. That means if there is a sudden inflow or outflow of money, RBI will use its policies to maintain the steady exchange rate.

Reasons for Rupee depreciation:

In the recent past, number of events has reduced the demand of Indian Rupee in the currency market which led to the Rupee depreciation. Some of these events are:

Fall in currencies of emerging market peers:
The crisis such as Eurozone crisis, Turkish crisis has depreciated their respective currencies Euro & Lira. This has created an atmosphere of doubt and sowed the seeds of negativity in the minds of the investors. As a result, investors find it safer to invest in Dollar rather than any other currency or assets. Due to which demand of Dollar has increased tremendously leading to further increase of its price. As Dollar became more valuable its value in Rupee has gone up leading to depreciation of Rupee.

US-China Trade War:
Imposing 25% duties on about $34 Billion in Chinese machinery, electronics & high tech equipment including computer hard drives, LEDs on July 6, 2018, started the US- China trade war. This in turn resulted Indian Rupee to depreciate due to outflow of money from India which has been discussed in detail further. Due to higher import duties, Chinese manufacturers have increased the cost of selling products which has led to inflation in U.S leading to inflation striking a six-year high to fight inflation, U.S. Federal Reserve has increased the interest rates twice in this year due to higher interest rates investors are willing to deposit more money into banks, in order to earn more income. So, foreign investors has been pulling out money from Indian market & putting it into U.S. market which has reduced the demand of Indian rupee leading to its depreciation.

Impacts on Indian Economy:

Imports have become costlier:
As the value of Rupee has increased to 70.16, more rupee has to be paid to buy the same imports which could have been bought cheaper earlier.
Example: As on 28th August 2018, Oil (WTI) Price Per 1 Gallon is 1.21 USD. If this rate was same 1 year earlier when USD/INR was 63.80, we would have costed 77.198 Rs (1.21*63.80) Per Gallon. But as on 28th August 2018, it cost 84.89 Rs(1.21*70.16) Per Gallon. That means for the same amount of Oil India needs to pay more Rupees when currency depreciates.

Exports have become cheaper:
Due to plunge in Rupee price, exporters get more money per dollar.

The rise in Current Account Deficit (CAD):
A deficit on the current account means that the value of imports is greater than the value of exports. India’s CAD in 2017-18 was $48.7 billion. That means we are spending more on imports than we get from exports. This in turn reducing forex reserve we have which is leading India to ask for more dollars from foreign markets which in turns increasing dollars demand and hence depreciating Rupee value further.

The rise in fiscal deficit:
Fiscal deficit occurs when government’s expenses become more than its incomes. On March 2017, India’s external debt was placed at US$ 471.9 billion. Due to Rupee depreciation, the government will have to pay a higher amount (in rupees), to repay its debt (in dollars). This has increased the expenses & hence fiscal deficit.

The rise in Inflation:
Rising import prices along with rising crude oil prices will increase the retail fuel prices. This will have cascade impact (as fuel is required to transport goods & services) on every industry in turn increasing prices of goods & services. It will lead to inflation. According to RBI, for every 5% fall in Rupee, retail inflation will increase by 20 basis points.

Other Impacts:
Foreign education has become costlier. Foreign touring has become costlier.

Do we really need to be worried about this?

Moody’s, a credit ratings agency said that , “India is among the 5 countries which are least vulnerable to currency pressures amid strengthening of the US dollar, because of low dependence on external capital inflows”. Some of the reasons could be as follows:

In recent years, India has build-up its forex reserves which act as a buffer to mitigate external vulnerability risk. As on June 2018 India has around $410.07 billion of forex reserve. India has low dependency on foreign borrowings to fund its debt. India has managed to get funding through Equity inflows through FDI. Also Indian domestic finance market has created large savings which has lowered the dependency on external market & hence has mitigated the risk.

At present, Indian government & RBI should not worry about the Rupee depreciation but should worry about the volatility in the currency exchange rate. Stabilization of Rupee is more important. High volatility situation like Rupee being 69 one day and 71 the other day; creates Rupee more risky & fosters the negativity in the minds of the counter parties which do business with India. It becomes difficult for them to do long term business considering high volatility in the currency & also becomes difficult to track the Profits & Losses.

Way Forward:

RBI intervention in the Forex market is the short term solution. As we have discussed, when demand of any currency increases; that currency gets costlier. Using the same principal, RBI can sell dollars from its Forex Reserves and can buy more Rupees. As demand of Rupee increases it gets strengthened.
In long run, reducing dependency on imports & improving exports is the solution.

(This article has been written by Yogesh Kurle, a first year management student at SIMSREE)

Security Analysis and Portfolio Management


Hats off to course coordinators- Shrija, Harshal & Ninad for so efficiently co ordinating 16 presentations of excellent quality on the subject of Security Analysis and Portfolio Management taught by our HOD Finance Dr. Sangeeta Pandit Mam . They worked with diligence & maturity to ensure good attendance, class participation and learning. Many thanks to Finance Forum students for constantly tutoring students through their magazines, events, messages and bringing clarity to financial concepts and applications. Attached are the ppts, only snippets are attached, for sake of brevity detailed calculations and examples done in the ppts are not included. Summary of 16_student presentations