FINOMETRICS DEPARTMENT OF MANAGEMENT

STUDIES

VOL : 3 (8)

JANUARY 2013

Contents 1. Crowd Funding 1-3

2. Leveraged Buyout 4

3. Fight to Win 5-6

4. Present, Past and Future of Corporate Governance Reforms 7-8

5. Limited Risk in Equity investments 9

6. Article Review: Female Entrepreneurship in Transactional Economies 10-11

7. How to make College Degree Worthwhile 12-13

8. Technology in Financial Sector 14-16

9. Risk Management 17-19

10. Together Everyone Achieves more 20

Crowd Funding Multiple start-ups have used crowd funding to finance their projects in the recent past. This is the result of lack of

support from banks or the lack quick support services from them. This concept is in its embryonic stage in India and has

immense potential to grow considering the number of feasible start-ups India is seeing.

What is crowd funding?

The world saw the emergence of this concept in the 18th century when artists and writers found it difficult to

persuade publishers to accept their works. These writers and artists alternately asked a large group of wealthy individuals to

lend a helping hand for their production. As a result, several artists got some financial aid to build their products.

Crowd funding works exactly like the above-mentioned concept where companies sell small equity or products to

many investors to finance their projects, or just donate some amount for the start-ups. However, these companies are

private companies and hence invite a set of rules and regulations for proper use of funds and resources. On 5th April 2012,

President Barack Obama signed the JOBS (Jumpstart Our Business Startups) Act to lift the ban that was previously in effect

for raising public funds by private companies. This act has seen a positive reaction from the developer communities in the

US. However, the Securities exchange commission will complete the set of rules and regulations by January 2013.

Types of Crowd Funding

1. Pre buying the product from the people that make the product : Kickstarter-one of the world‟s biggest crowd funding

is an easy example in this category. They have many projects where the contributors pre-bought the products, which

in turn lead to funding of the project.

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Kickstarter has been a huge success in the United States of America and recently opened its doors in United Kingdom.

They work with a simple formula of making entrepreneurs meet investors. Investors who believe in your projects and think

their contribution will benefit this project. It‟s not a platform for investment because the project is wholly owned by the

entrepreneur and there is no equity or profit shared. Kickstarter is not a “Bank” where you can borrow money from and

repay at a later stage. Kickstarter has been a platform for several big projects like Etsy, TED fellows etc.

2. Donating for a cause: www.wishberry.in-India;s leading crowd funding platform fits into this category of crowd funding

where contributors donate money for a cause or social issue.

3. Crowd-investing: This crowd funding is a means to invest in the company where investors get equity or receive some

kind of profit in the future.

4. Recent Developments in India with regard to crowd funding: India has seen immense growth in the “Start-up” arena in

the recent past. There have been numerous projects funded by crowd funding such as, award winning film I AM (First

crowd funded film) and Sonam Kapoor‟s Breast Cancer Campaign. Both the projects were taken up by Wishberry.in-

India‟s 1st and leading crowd funding platform. Wishberry.in has mostly funded independent artists, NGOs and social

activists in the recent past. They believe in the “power of CROWD”. This may not have been uncommon in early India

but has only recently been documented. With Wishberry.in and the like coming into the picture the concept seems to

be growing and the trend has received positive reaction from all sectors of the country. However, this concept is not

free from hitches. The main issue is that crowd funding is not legal as per taxation system in India.

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For example, the film I AM which a wishberry in project was issued a notice for offering profits to the contributors. Had

he not promised any profits he probably wouldn‟t have faced such issues. This, also points out that the people who start

these projects are unaware of the provisions and legal consequences of crowd funding in India. The lack of such events

has resulted in no documentation of the legal requirements and other provisions .

Another issue here is protection of the idea. These websites do not promise any protection and the idea is up in the

open. Therefore there is a huge risk of being copied by others. The success of crowd funding will depend on how the inves-

tors are protected from bad investments. This said, the companies or organizations that act as platforms need to do their

due diligence proactively. In any case, this concept is here to stay.

AVANTHIKA SHARMA

1st MFM

3

Leveraged Buyout A leveraged buyout is an acquisition of a company or a segment of a company funded mostly with debt. A financial

buyer (e.g. private equity fund) invests a small amount of equity (relative to the total purchase price) and uses leverage

(debt or other non-equity sources of financing) to fund the remainder of the consideration paid to the seller. As the debt

usually has a lower cost of capital than the equity, the returns on the equity increase with increasing debt. The debt thus

effectively serves as a lever to increase returns which explain the origin of the term leverage buyout. Thus an leverage buyout

is characterized by high debt equity ratio. One positive aspect of leveraged buyouts is the fact that poorly managed firms

prior to their acquisition can undergo corporate reformation and earn substantial returns. Since this type of acquisition

involves a high debt-to-equity ratio, large corporations can easily acquire smaller companies with little capital. If the

acquired company‟s returns are greater than the cost of the debt financing, then all stockholders can benefit from the

financial returns and increase the value of the firm. Moreover it enables de-levering, operational improvement and multiple

expansion.

At times, corporate restructuring from leveraged buyouts can greatly impact employees in the form of lay off and

unemployment. However, if the company‟s returns are less than the cost of the debt financing, then corporate bankruptcy

can result. In addition, the high-interest rates imposed by leveraged buyouts may be a challenge for companies whose

cash-flow and sale of assets are insufficient. India has experienced a number of buyouts since Tata Tea‟s leverage buyout of

UK heavyweight brand Tetley for ₤271 million in 2000, the first of its kind in India. The various challenges faced in executing

leverage buyout in India are compliance with the legal framework in India and the scope of execution permissible in India,

restrictions on foreign investments in India, limited availability of professional management and under-

developed corporate debt market. Namratha

1st MFM

4

Fight to Win

People have become much busier in their professional and personal life. We are always in search of software‟s and

machines that will make our life much easier but at the least cost. Similar is the case with software and technology industries.

They are always in a cat fight with each other to win over the market and to be honored as the fast growing industry among

its competitor‟s with the highest market share and value. As Indian enterprises become more sophisticated consumers of

technology, software Oracle and SAP strive hard for market share. The competitions can no more be separated by country

borders. Overseas fight has begun and it not only limits to Oracle and SAP but has run over the veins of Indian companies

like WIPRO, INFOSYS, etc.

World has turned into a fashion market. Competition lies on the demand. Quality is hardly a matter of fact now. The

company with the modest model and attractive color will have the highest sale and might earn the highest profit regardless

of whatever expenses it has incurred. However in this cat fight, the countries are benefited the most irrespective of whoever

is the leading company is. The country‟s growth lies within the growth of any company within the country, which will finally

land up in increasing the country‟s GDP. Due to this cut throat competition among companies, there is a vivid fluctuation

taking place in the stock indices at a frequent rate.

As it goes, WIPRO has topped the “Greenpeace‟s Guide to Greener Electronics”, leaving behind the top 16 electronic

companies across the world like Apple, Samsung, Dell, Nokia, etc. based on their commitment and progress in three

environment criteria : Energy and Climate, Greener products and Sustainable operations, setting a new benchmark for

sustainability globally.

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Among the core competency of database, Oracle highlighted that it has over a 60% market share in India, at least

30% points ahead of the nearest competitor. On the other hand Hewlett-Packard Company is facing a high time. The sale

of personal computer has shrunk down by 14% and its revenue has drastically fallen down by 6.7%. Before WIPRO listing in

no. 1, it was Hewlett-Packard Company at the 1st position. Similarly competing high with H-P, Acer rose the most in ranking

where as Dell and Apple has dropped slightly in their ranking. After incurring such a huge loss, no company would like to go

in for any big software deal although it approves 10% rise in quarterly dividend. Therefore the company decided to go for a

reconstruction aiming at focusing on enterprise services in the mold of International Business Machines Corp.

On the other part of the globe, China took over US as the largest Personal Computer maker. This shows the growing

importance of china‟s consumers to the global economy. There is also a huge rush for tablets being launched by different

companies with few distinct features. Samsung is about to launch its 4 new galaxy smart phones followed by Motorola. It is

said that Samsung is about to invest Rs. 350 cr. in India by 2015. However Hewlett-Packard Company tried to beat Apple by

launching its own newly designed tablet, but proved to be a failure in its attempt. All companies finally aim at gaining

popularity and fame with the highest amount of profit and market share for which doing something distinct from others is a

needy.

Here comes the role of Wipro, which recently hived of its non-it business into a separate entity and is investing big on

the energy vertical where most companies prefer to technology-centric methods for exploration and production of natural

resources. It is also going to develop smart phone based car connectivity solutions. Therefore, all major companies which

are standing high, holding their names upright, should also see below their origin line and develop their projects and

strategies in such a manner as in not only to beat other companies but also to develop itself in all way distinct from others.

This will not only make the company name highlighted by itself but also will help it attain its objectives of growing market

share and improving the country‟s GDP.

Suchismita Chandra 1st MFM

6

Present, Past and Future of Corporate Governance Reforms

Corporate governance reforms were initiated by large industry groups, by making board and audit committees more

independent, powerful and focused monitors of management. The corporate after being listed successfully abroad

needed rigorous reforms to attract FIIs, portfolio investors, etc for the need of capital. Industries played a major role in

paving way for corporate governance reforms. It developed a task force to form a corporate governance code for Indian

Companies. It adopted the Anglo-American system‟s focus on relationships between the company‟s board and its

shareholders.

Clause 49: SEBI initiated the Birla Committee in 1999, its main focus was improving function and structure of company

boards and increasing disclosure to shareholders, Board representation and independence. Revaluation of clause 49, on

the recommendations of the Murthy Committee in 2002, was done in the wake of the Enron scandal, and focused on en-

hancing integrity and transparency and addressed the role of insiders. It recommended training in business models and

quarterly reports on business risk and risk management strategies. In 2004, the clause 49 was amended on recommenda-

tions by the Chandra Committee, which focused on types of non-audit services, the need for compulsory rotation of audit

partners etc.

The Satyam Scandal acted as a catalyst for the Indian government to rethink its corporate governance, disclosure, ac-

countability and enforcement ability in place. It involved two scandals, 1) transaction involving promoters, 2) colossal fraud

in Company‟s financial statements. The corporate governance responses to this scandal include corporate governance

and ethics committee to study the impact and introduction of voluntary reforms by the industry sector.

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SEBI made announcements regarding disclosures, accounting standards and asked for public opinion on governance

issues, amendment of listing agreement etc. The MCA issued voluntary guidelines for corporate governance and promoted

the „comply or explain‟ approach.

Clause 49 of standard listing agreement with India‟s stock exchanges is the key component of India‟s corporate

governance framework. Corporate governance reforms compliance would increase the market value of Indian Public

Companies. Its inability to reach PSU and small and medium sized industries is a major problem. Enforcement of corporate

governance reforms is nearly impossible due to India‟s politics, inter agency struggles between the MCA and SEBI, lack of

enforcement through courts due to delays, high costs, unavailability of a contingency fee system and another problem

cited is neglecting minority shareholders. Corporate governance reforms will be successful if these problems are resolved.

Taneesha Susan

1st MFM

8

Limited Risk in Equity Investments

Equity instruments are often defined as too much risk and not enough rewards. People saving for their pensions and

long-term commitments usually assume they should put a lot of their money in the stock market. Over the long run, equities

will always produce higher returns than safer assets such as government bonds and cash because they are riskier and

hence are volatile in nature and also because shareholders benefit from economic growth whereas bondholders do not.

Many people are still in the confusion as to whether to enter into the stock market or not. These prospective investors

are very much concerned about the fall in the stock price due to the existence of market forces. If more people want to

buy a stock than sell it, then the price moves up. On the other hand, if more people wants to sell a stock rather than buying

it, there would be a fall in price. Understanding the demand and supply forces to some extent helps in limiting risk in equity

investment. Experts are also of the opinion that the prospective investors should explore certain tools like trigger facility,

Dividend Transfer Plan to ensure that investors are protected from the downside risk while investing in equities.

Dividend Transfer Plan (DTP) where the investor does not receive quarterly dividends directly as cash instead their dividends

are directly reinvested in the underlying security. A person should first invest his money in a debt mutual fund or short term

bond fund and should opt for monthly dividend payout option. The advantage for these funds are that they have very little

interest rate risk and also that the fund manger does not risk the capital while investing. Once a person signs up for DTP, the

dividends declared by the scheme are invested into an equity fund. In case of this arrangement, only capital appreciation

is invested in equity and capital remains in a low risk income investment. On the other hand, if the investor is willing to take

some risk and also want to limit his losses, triggers can be taken into consideration. They do not protect

capital but only limit downside. If the investor is aware of the maximum loss he can take, it is better to opt Thangam

1st MFM

9

Article Review: Female Entrepreneurship in Transitional Economies

The article focuses on the impact of entrepreneurship on growth of the economy. The study has been done by taking

an example of Poland. Entrepreneurship promotes the economy development of countries and also facilitates changes in

transitional economies. Transition economies have to struggle with major structural changes, which results in growing

unemployment and social exclusion. As this problem concerns the female part of the society to a far greater extend, the

issue of female entrepreneurship in transitional economies is particularly important.

In a centrally planned economy, unemployed women face a lot of difficulty to set up their own enterprise. The pressure

of unemployment can influence the performance of women entrepreneur. There are various factors that influence female

entrepreneurship: process of transition and the degree and scope of such process. Liberalization and shrinking public sector

help in the growth of entrepreneurial activities. The study conducted also revealed that the participation of women is more

in the field of healthcare, education and administration. Women mostly have problem in managing their own firms because

of the role of women as housewife and mother and not as a manager.

Generally women are more engaged in home activities and as a result of which they less time for business or work.

Women prefer service sector as it consumes less time. Education is one of the main factors that drive entrepreneurial

activities, as it creates the knowledge and skills needed to manage firms.

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There are various other factors that influence female entrepreneurship:

financial motives

self-fulfillment

Independence

family tradition

fear of unemployment

risk

imitation

Women are quite well prepared to manage the firm, but they perform in a different way than men. They are more active in

looking for financial aid. The most significant difference between firms owned by women and men is the size: women-owned

firms are smaller. Women younger than men decided to start their business for reasons different from men, but in both cases

the motivation was rather positive. Growth as a goal was indicated by a smaller percentage of women, but the difference is

not significant either. As a consequence, a smaller percentage of women perceived growth opportunities.

LEARNINGS:

There are various factors that can influence the growth of an economy and entrepreneurship is one of the main factors.

Women entrepreneurs differ from the men entrepreneur in different ways, women works on marketing strategies on the

basis of their intuition while men takes practical scenario, literature and their experience into account. Women are more

comfortable in service sectors, as the time consumption is less and they can devote more time to their family and

personal life.

Shaibiya

1st MFM

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How to make College Degree Worthwhile

It is a common sentiment that if one attains a master‟s degree, they are more likely to have a higher starting salary

compared to their bachelor degree-holding counterparts. But, there has been an old school of thought, which holds true in

any industry today that experience in the industry will help one understand what is essential to progressing in our careers. As

a student pursuing a masters degree, this brings a question as to whether a higher starting salary is as important as losing

those 2 or so years of work experience. Weighing the pros and cons of your situation can help you make vital decisions on

when and how you will pursue your education as well as what your ultimate goals are going to be by getting this degree.

Various Educational experts have a common consensus as to what is important when considering a masters degree.

Potential for a higher salary

Students should research to see if a higher degree in their field of interest would pay off in the long run. A survey shows

that the average starting salary for a master‟s degree for elementary education is 30% higher than the average salary for

the same major at the undergrad level. A master‟s degree in computer science commands an average salary nearly 30%

more than their bachelor degree-holding counterparts. Additionally, the unemployment rate for master‟s degree-holders is

about 3.6%, while undergraduate degrees are at 4.9%, according to the Labor Department. There is going to be a lot of

time, sacrifice and hard work that will be a part of going back to school and you should carefully weigh these factors and

your desire to continue your education before considering the salary outcomes.

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Consider the Financial Cost

Two year MBA and master‟s degree programs can be expensive at times and even with a salary increase, students

should still consider the amount they will have to take out in loans. Calculate the projected difference in salary and deter-

mine how many years it will take to recoup that cost, and it may help you make a solid decision. Students need to be realis-

tic about student loans and interest rates and recognize that landing a well-paying job post-graduation is crucial to staying

afloat.

Taking on debt in this economy is not wise unless the payoff is significant enough to take the risk. This is the opinion of

various educational professionals all over the world. Regardless, the most important reason to do a masters degree should

be for the pursuit of knowledge. Regardless of the advantages like a better learning curve, it is your passion which should

drive you to be a better professional than what you are at this particular stage. Mix this into an environment with likeminded

peers and staff that are good mentors and guides, you are bound for success regardless of whether we are in a recession or

not. Creativity in all essence is recession proof - Something that many people tend to forget in the face of uncertainty.

.

Nirvigna

1st MFM

13

Technology in the Financial Sector

When Facebook came out with its IPO, certain seasoned experts had predicted that it was doomed to fail since the

price per share quoted was too high. Even so, the tech savvy market analysts listened to the calculations made by their so-

phisticated software with super servers dedicated to solving the mystery of making money without consciously being pre-

sent when a trade is being made.

A single electronic glitch had made Knight Capital Group (one of US‟ top asset management companies) lose $440

million. This points to a new kind of risk in this business: Technological Risk.

The financial services industry proves to be a difficult playground when it comes to automation. It is currently too early to

say, but computers can‟t take one factor into consideration while making calculations: Human Behavior. A great physicist;

namely Richard Feynman once stated, “Imagine how much harder physics would be if electrons had feelings”

Feynman was on to something there. How can we teach a machine to learn to read and understand human behavior

on such a large scale so that it can be used in a financial market? There are some who have come close. There are certain

highly trained experts who have very specific domain related knowledge in order to create algorithms to automatically

trade based on such calculations. Very few people like this exist in our world, and hence not everyone can benefit from this.

The interconnectedness of the financial markets and institutions has created an avenue for new financial accidents, as the

understanding has to go beyond just the outlook of a single organization in a market.

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On May 6th 2010, there was an incident where, within a grueling 20 minute interval, the stock price of Accenture - the

world‟s largest management consulting firm - had fallen to the price of 1 cent per share. This did not occur because of the

single organization‟s failures, but was the result of seemingly unrelated activities across different parts of the financial system.

When they happened to occur simultaneously, a financial storm broke out. Technology has progressed much quicker than

we have been able to adapt.

We as human beings made of organic matter are bound by a slow evolution that changes over a long period of time,

and hence our cognitive capabilities slowly improve along with this evolution. Hence, technology has been the greatest lev-

erage in making our race more efficient, and through time, we have created automated systems to manage our bank ac-

counts, transfer funds to the other side of the world or maybe even shop for products online without visiting a store. But, tech-

nology is limited to our capabilities as humans; our applications in technological products have been broad and unrefined.

Instead of learning how to use our technology more efficiently, we compensate by running our inefficient systems on large

server clouds and super computers.

Technology is as positive or as negative as we make it. The solution does not lie in forsaking technology. Actually, I

would say that we need to improve it even more. Improve it to a point that it is so flawless and foolproof that it will not need

our help and will eventually become an invisible force that governs our financial system without the need for us to interfere.

When we do improve our technologies, we will have to take various human behavior related activities into consideration.

15

We should be able to automatically detect when an organization becomes too big to fail, for financial innovations to

remove the need for us to control them, for politicians who issue government guarantees on projects whose repercussions

are not in their term in office and for regulators who look the other way because business is booming and nobody is com-

plaining. These are just some of the many examples of many “bugs” that we have to fix. Until that happens, we should be

able to deal with the consequences of our inefficient systems and leave the comprehension of human behavior to humans

rather than machines. This will maybe help us in making a computing system to develop what we call a “gut feeling”; an intu-

ition that makes us understand the environment around us. If history has taught us anything, ignorance is the cause of devas-

tation. I hope that we will not fall prey to it before it‟s too late.

Nirvigna

1st MFM

16

Risk Management

Risk management is an essential business process that all technology-driven companies must under go to protect their

business assets from threats.

Types of risks:

1. Intentional or accidental risks.

2. Natural or man-made risks.

3. Internal or external risks.

4. Strategic risks.

5. Compliance risks.

6. Financial risks.

7. Operational risks.

Ways to handle risks:

1. Mitigate risks: Reduce its impact or exposure.

2. Ignore risks: Do nothing at all.

3. Transfer risks: Have an outside authority to handle risks.

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Phases of risk management:

1. Risk Identification: In this phase, you should identify all the potential risks that affect your business.

2. Risk Assessment: In risk assessment phase, you take the recently identified risks in the last phase and you prioritize them

based on severity/damage impact. Example for risk matix includes HIGH, MEDIUM, LOW or CRITICAL, MINOR, MAJOR.

3. Risk Mitigation: Risk mitigation is a process in which you undertake to reduce the risk/threat from occurring. to mitigate

something means to make less severe or to reduce its impact. Example to mitigate the risk of virus in the computer we

install antivirus. software. Not all risks are worth your money and time to mitigate.

4. Risk Monitoring/Control: remember that all risk can never be completely eliminated. It can only be managed. A proce-

dure must be put in place to ensure that risk is properly managed. Newly evolved threats are always appearing which is

why it is critical to enact a Risk Management plan.

Principles of risk management:

The International Organization for Standardization (ISO) identifies the following principles of risk management:

Risk management should:

create value – resources expended to mitigate risk should be less than the consequence of inact should exceed the pain

be an integral part of organizational processes

be part of decision making

explicitly address uncertainty and assumptions

be systematic and structured

be based on the best available information

be tailorable

take human factors into account

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Risk Communication:

Risk communication is a complex cross-disciplinary academic field. Problems for risk communicators involve how to

reach the intended audience, to make the risk comprehensible and relatable to other risks, how to pay appropriate respect

to the audience's values related to the risk, how to predict the audience's response to the communication, etc. A main goal

of risk communication is to improve collective and individual decision making. Risk communication is somewhat related

to crisis communication.

Seven cardinal rules for the practice of risk communication:

Accept and involve the public/other consumers as legitimate partners (e.g. stakeholders).

Plan carefully and evaluate your efforts with a focus on your strengths, weaknesses, opportunities, and threats (SWOT).

Listen to the stakeholders specific concerns.

Be honest, frank, and open.

Coordinate and collaborate with other credible sources.

Meet the needs of the media.

Speak clearly and with compassion.

Vinutha

1st MFM

18

TOGETHER EVERYONE ACHIEVES MORE

Team is a group of various complementary skills, working together towards a common goal. Members operate with a

high degree of trust, accountability and interdependence. Members share authority and responsibility for self management.

Members create synergy with a strong sense of mutual commitment. Generates performance greater than the sum of its in-

dividual members. Teamwork is the fuel that allows common people attain uncommon results. Members help one and other;

help other team members, realize their true potential. Members create an environment that allows everyone to go beyond

their limitation.

Quality Collaboration:

Communication

Co-ordination

Balance of Contributions

Mutual Support

Effort

Cohesion

Coming together is BEGINNING, keeping together is PROCESS, WORKING TOGETHER IS SUCCESS. If everyone is moving for-

ward together, then success takes care of itself.

LET‟S DO IT! is more powerful than I do it or YOU do it! Simply stated is: LESS ME and MORE WE. Together every-

one achieves more. Vinutha

1st MFM

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EDITORIAL TEAM

CHIEF EDITOR

Dr JAIN MATHEW

HEAD OF DEPARTMENT,

MANAGEMENT STUDIES

ACADEMIC CO-ORDINATOR

PROF SURESHA B

FACULTY CO-ORDINATOR

Dr K SRINIVASAN

CREATIVE TEAM

PRANOY SAMUEL

STALIN

VIDYA P JAIN

YESHASWI.S

EDITORS

ADITI VARSHA DAVIDSON

KOMAL L.

NIHAR DUGAR

NANDHINI K .S

RASHMI N.

SHRIYA.M

WILLIAM GEORGE

ZUBIN SHERIFF

CHRIST UNIVERSITY

HOSUR ROAD, BANGALORE– 560029

KARNATAKA, INDIA

TEL: +91 80 4012 9100 FAX: +9180 4012 9000

finometrics@mfm.christuniversity.in

Website: www.christuniversity.in