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i Editor’s Note FINANCE AND We are pleased to publish the INVESTMENT CLUB fourth issue of ‘Arbitrage’ – Finance and Investment Club’s monthly IIM ROHTAK magazine. Arbitrage aims to cover a diverse range of topics under the wide domain of Finance and Economics. TEAM MEMBERS Our goal is to ensure that we provide 1. ANUPREET significant value to the readers CHOUDHARY through informative articles and 2. BHASKAR PODDAR articles on current affairs. We would 3. HEMANT JAIN like to thank all the authors for 4. KEYUR BUDDHDEV contributing their articles for 5. MAYANK JAIN Arbitrage. In the Article of the Month – ‘The Ransomware scare & its 6. RUSHI VYAS implications on company finances and 7. SHARIKH KADER the Bitcoin’, the authors Ryan Rego & 8. TANMAY MONDAL Shruti Dhumal from S.I.E.S College of Management Studies have done a good analysis on Ransomware and its Disclaimer: The views and opinions expressed in this effects. magazine are those of the We hope for the continuous authors and do not support of our authors and readers to necessarily reflect the make this magazine a success. opinion of the stakeholders of IIM Rohtak. -Finance and Investment Club, IIM Rohtak © ALL RIGHTS RESERVED June 2017 FI CLUB IIM ROHTAK

ii CONTENTS 1. The start-up valuations bubble burst 01 2. Re-imagining bank business model 04 3. OPEC – A brief history 08 4. “Human” Arbitrage 11 5. The Ransomware scare & its implications on company 12 finances and the Bitcoin (Article of the Month) 6. Stock Options – Past to Future 16 7. Why Arbitrage Opportunities Exists 17 8. Goods and Services Tax 19 9. Avenue for Export Led Growth for India 24

1 The Start-up Valuations Bubble Burst By- Payal Sharma, TAPMI Manipal Ever heard of companies internet, unregulated currency returns. This belief is soaring called Google, Facebook, market, IoT, etc. For most of investments & valuation Microsoft, LinkedIn, Twitter? them the only remarkable along with it. Uber- a ride Well who hasn’t? They have accomplishment until now is sharing app has been valued changed the world for good, in ‘raising funds from prominent at $69 billion which is way terms of how we interact, investors despite of racking up more than General motors travel, work, etc. But one thing huge losses’. (GM), largest automaker of which they have also done is to Data says, in the first U.S. Xiaomi raised funds at show the world that with a quarter of FY’17, investors staggering $45 billion great product and tech you can have injected $14.5 billion valuation, which is 30% more raise billions of dollars. It gave into U.S. Start-ups alone, up than its actual net worth. hope to a lot of undergrad by 37% from the previous There are many more such students to work on tech quarter. Floods of investment decacorns in Silicon Valley products and raise millions and are pumping up the industry such as Tesla, Netflix, billions. And that worked. valuations to next level. Snapchat. Story is familiar in That worked big time. Every There are more than 150 India too with arguably other technology start-up is private tech startups with decacorns like Paytm & coming up with a vision to valuation exceeding $1 Flipkart. ‘make the world a better place’ Billion in Silicon Valley As much as founders with their promising solutions alone. But, investors believe of these start-ups deny to get like paperless economy, safe that those who will survive valuated as per conventional self-driven cars, decentralized will secure 30-50% of P/E based valuation, they

2 cannot be out of touch with more & more. Fear of losing So, is this a bubble? reality for long. GM has sold out customers to competitors Very much yes. By its basic 10M vehicles earning is pushing these start-ups to definition, bubble is $166.4B in FY’16. It has shell out cash to survive in something where asset prices shown profits of $9.4B. market leading them to forget rise so sharply that they Despite such tangible results, about profitable growths. exceed the valuation justified it has been valuated less than Then, what is that by financial fundamentals. Tesla – which is deeply in which is evaluating these Unheard name like Slack, a debt with $0.8B losses in loss-making start-ups up to team messaging software FY’16. Uber with $2.8 billion 100x of sales? Isn’t it just company, has worth of 90x of loss in 2016 has net worth Fear of Missing out its sales, let alone the known more than that of US (FOMO)? Missing out on giants like Airbnb, Waymo. automaker leaders like GM & something with large user This substantiates the fact Ford. Surprisingly, none of base, ownership of huge data, that, yes, it’s a ‘Tech these start-ups are working to future of technology? valuation bubble’. change this situation. No Investors funded the But is it bursting? I doubt that customer companies based on am inclined to say yes but this satisfaction is the most aspirations & hopes. Growth looks complicated. Even important growth factor for in number of users and now, Start-ups are raising any business. But these start- eyeballs was a measure of million-dollar every couple of ups are pouring their cash in performance than the profit months but at lower valuation all possible ways to get the levels. In all this, ask for a than previous rounds (down customers on board by sustainable business model rounds). In its Series G-II providing them services at the with well monitored cash funding round, Vanguard least possible price. flows was missing. Investors marked down Ola cabs by Consumers do enjoy 4 km aren’t concerned about the 40% bringing its valuation to ride for Rs.29, they do lack of prospects or the $3billion from $5billion demand new content on unrealistic growth charts. All when it raised $500 million in Netflix every day. Rivalry they are concerned about is November 2015. Canvera, an among the companies is not to miss out on the next Indian photography making consumers ask for Facebook or Uber. company, could get a fresh

3 funding of 150 million and not bursting, the valuation still getting a valuation bubble is deflating. lowered down to 750 million Not to forget, Money is there from a whopping 2.5 billion in market. The investors are in 2014. Valuation is still willing to invest. But now questioned even more on, one with promising profit aggressively when company levels will receive funding. tries to go public. IPO Investors will now invest in enforces companies to business models than paying disclose their financials, for sky-high office rents, secrecy of which has got them stupid marketing strategy and gigantic valuation until this illogical never ending time. Cloudera- the first discounts. unicorn & Hortonworks took a valuation haircut when went public. Dropbox is estimated to experience 50% drop in valuation on Wall Street from where it stood as private company. With the investors getting their senses back and analyzing the product before investing, many overvalued startups are even shutting down. In 2016, PepperTap, India’s 3rd largest grocery delivery service at that time shut down because of low funds, poor technology and insensible discounts. So, if

4 Re-Imagining Bank Business Models By - Suraj Bobade, IIM trading, underwriting, merger & follow this type of model are Kozhikode acquisition, financial usually from the less matured restructuring and guarantor economies like Poland, Mexico A good business model should services were present. And & Hungary. In originator model, answer Peter Drucker’s age-old conglomerate model was a banks indulge in originate and questions – Who is the combination of these two distribution activities on the customer? What does the models in different weights. All bank assets (loans) and have a customer value? How do we these models were successful at high capital ratio. However, make money in this business? that time because of the less since these transactions of How can we deliver that value to complexity, favorable distribution of asset are shown the customer at an appropriate institutional environment and off balance sheet, they do not cost? simple customer expectations reflect a true picture of the risk In this article, we would try to prevalent at that time. associated with the bank. Banks answer all these questions and However, as time progressed which follow this type of model look how the bank business new innovations were brought in are usually from UK, USA & model has changed over time to increase the performance of Ireland. In trader model, banks and what are the drivers for this the banks which in turn mostly indulge in trading of change. increased the risk associated securitized assets like Mortgage Backed Securities (MBS) and Banks are very complex with banking operations. Asset Backed Securities (ABS). institutions which are very Presently, the bank business Further, the performance of important for assessing the model can be divided into four these types of banks show a high maturity of the economy of a categories viz. traditional correlation to the capital market country. Traditionally, there model, originator model, trader of the country which renders it were three dominant types of model & neutral model. In as the most risk type. Banks banking models viz. traditional traditional model, banks which follow this type of model model, investment model & perform traditional activities are usually from Germany, conglomerate model. In and have lowest capital ratio and Netherland & Switzerland. In traditional model, banking poor operational efficiencies. neutral model, banks have a activities like lending However, indulging in non- balanced investment and credit (wholesale & retail), deposits complex and less uncertain strategy which gives them good (current and savings account) activity makes them the least operational efficiency. If a bank and payments (cheques, ATMs, risk type and hence, they are intends to focus on profitability prepaid cards) were present. In able to tackle market turn downs while defining its risk appetite investment model, activities like more effectively. Banks which and managing its risk tolerance

5 then this is the best model to follow. Banks which follow this type of model are usually from Italy, Spain, Japan & Canada. The financial model for all these four types of models are as follows: Sr. No. Model Interest Income Non-Interest Income 1 Traditioners > Mean Value < Mean Value 2 Originators = Mean Value = Mean Value 3 Traders > Mean Value > Mean Value 4 Neutrals < Mean Value > Mean Value However, in the last one decade which proposes to change the the traditional bank model there has been a lot of change in way in which banks classify and unviable to manage the the way banks do business. The measure financial liabilities, regulatory risk. Hence, banks main drivers of this change are introduce a two-stage model for need to mitigate risk by bringing globalization, technological impairments, and reform hedge robust regulatory management change, global regulations, accounting. Over the years, the practices and collaborate it into rising customer expectations, banks were preparing of the the core of the new bank competition from challenger implementation of IFRS 9 in business model. banks & FinTechs, emergence terms of technical and of new types of risks and cost methodological perspective. b) Technology: saving using standardization & However, they may have missed Technology can be considered simplification. out on the strategic as the major driver for the repercussions of the new change in business model of the In this article, we would standards which will require a concentrate on the two main fundamental business model bank where it has introduced a drivers of bank business models change. new set of competitors called viz. regulators and technology. FinTechs. Another example is that of the a) Regulators: FATCA (Foreign Account Tax Governments are exerting Compliance Act) which UniCredit regulatory pressure on banks enforces US persons (including UniCredit has planned to where they are being required to living outside US) to file yearly invest EUR 1.2 Billion over 3 assist in crackdowns on illegal reports on their non-US years (2016-17-18) in digital and unethical financial financial accounts to the transformation initiatives like transactions like money Financial Crimes Enforcement digitalization of the bank-end laundering, sanctions busting, Network (FinCEN). This would process, digitalization of fraud and financing of terrorism. cost an estimated document management In recent regulations, for implementation cost of USD system, developing of a new example, IFRS 9 has been a 200 Billion (for 2.5 years) and a digital Core Banking System, major regulatory compliance for compliance cost of USD 8 and launching a new digital international reporting standards Billion per year for the banks. which will come in effect from Thus, these tightening business like buddybank. January 2018. IFRS is the regulatory environment and international financial reporting accounting standards will make standard published by IASB

6 According to the EFMA survey advanced analytics, open APIs, Hence, these drivers are going to of October 2016, priorities for AI and mobility & wearables. influence the banking industry the banks to invest in digital in a major way and ultimately transformation are: creation of a However, there are certain decide the future of bank customer centric organization, major barriers to fully harness business models. By providing an omni-channel this technological wave such as internalizing these drivers, we experience & leveraging mobile legacy systems, lack of skill & can come up with three banking and social network as an expertise and lack of unified scenarios stated below which the advantage. Further, the vision for digital integration banking industry is likely to technologies which are expected across the enterprise. follow: to be the key disruptors are Three Scenarios of Banking Industry Bank Domination Bank Re-Invented Bank Ecosystem a) Bank Domination: In this one-stop-shop service providers b) Bundle of Services Model: In scenario, the regulators would have while the new entrants gain this business model, the bank would increased the entry barriers for the significant market share in some be providing a specific banking new digital entrants while market segments. solution to the customer often using customers would have maintained economies of scale. Hence, such their loyalty to the traditional bank Thus, these three banking scenarios banks will act as a solution provider establishments. However, banks will give rise to the emergence of for regulatory insights, investment would be required to upgrade their five future bank business models technologies as per the changing mentioned below, which will be customer expectations by either based on economies of scale, trust, One Service developing the expertise internally innovation and consolidation of or by growing inorganically. services. Bundle of a) One Service Model: This Services b) Bank Re-Invented: In this scenario, the traditional bank business model will be focusing on establishments fail to adapt to the the economies of scale for services The Five Future Bank Business Models All Services changing needs and legacy system like white labelling, transaction which enable the new entrants to consolidation and custody & acquire the trust of the customers depository services. Hence, Trust Services using attractive product and service standardized and low cost service offerings. will be provided to the customers Innovation along with banking platform c) Bank Ecosystem: In this services to the unlicensed new Services scenario, the traditional bank entrants. establishments lose their status of advice, KYC, tax, payments, etc rather than for a single service.

7 c) All Services Model: In this and efficient product across several banking. Hence, banks would be business model, the bank would be industry sectors such as retail, able to maintain a seamless control providing a comprehensive low cost private, corporate and investment over the entire front and back-end process along with diversified business mix which would reduce the bank’s volatility and thereby increase its stability. d) Trust Services Model: In this business model, the bank would be focusing on economies of scope to gain high market share of the client’s wealth. Thus, by having a deeper understanding of the client’s needs beyond the financial matters, the bank would be able to develop on the client’s trust and go beyond the traditional transaction advisory services. e) Innovation Services Model: In this business model, the bank would be focusing on the development of new innovative products while charging a premium price for it. Thus, the banks would be required to deliver quality and high utility products using a fast time-to-market strategy which will enable them to take the first mover advantage. Thus, banks carry the risk to be left behind in the race of technological advancement due to underinvestment and negligence over a long period of time which can make them incapable to make a transition from the old legacy system. Hence, when all these drivers ate internalized, a new business model can be created which would be able to provide a better customer experience at a lower cost while maximizing shareholders wealth.

8 OPEC- a brief history By – Aishwarya Yadav, NMIMS barrels per day in 2016, before it down on production by 1.2 mb/d. returns to growth of 0.3 million %. This decision was taken by OPEC stands for The barrels per day in 2017, and that OPEC’s 14 member nations in Organisation of the Petroleum world oil demand is estimated to order to bolster the dropping Exported Countries. It was grow at 1.2 mb/d in both 2016 prices due to global glut. This founded in 1960 by Iraq, Iran, and 2017. would be done in order to ensure Saudi Arabia, Kuwait and that the all time inventory levels Venezuela in Baghdad. It was It was the first time that during come down and the oil market later joined by Qatar, the conference the inventory rejuvantes. It was done to get Indonesia(no longer a levels were highly stressed upon back to the normal profit levels member),Libya, UAE, Algeria, for both OECD and non OECD which existed earlier. Increase in Nigeria, Ecuador, Angola and countries and it was established price levels will ensure finally Gabon respectively. that they were well above the investment level goes up and Initially it had its headquarters in five year average and it was hence future supply can be Geneva, Switzerland which later important that these are brought regulated.The agreement will be moved to Vienna, Austria in back to the normal effective from jan, 2017. In order 1965. levels(because prices were to oversee the implementation of falling leading to declining The main objective of OPEC is profits for the oil producing the agreement, a high order ensure that there is co-ordination countries). It was also observed monitoring committee was set up and integration of policies that there has been a drop in the which constituted of oil ministers among member nations. It also investment levels in these and assisted by OPEC makes sure for an efficient and countries in the last two years. secretariat. OPEC members economic supply to all the Moreover, the industry saw huge agreed to this and promised for a consuming nations and also fair layoffs in the last few years stable and balanced market , both return on capital for investors. for the producers and the mainly due to fall in profits. It consumers. OPEC helds its meetings twice was emphasized upon during the a year. The latest meeting was meeting as to how important it is This is the first time since the held in Vienna, Austria on 30th for the oil industry to have global financial crises that the November, 2016. The decision regular investments in order to organization has decided to cut (as will be seen later in this make sure there is regular supply down its production. The overall article) of this meeting literally of oil in the future at competitive limit has been set but not for shook the world. It was observed prices. individual countries giving during the conference that global Thus,in alignment with “Algiers leeway to Saudi Arabia and other economic growth forecasts were Accord” in the previous meeting, producers with spare capacity. quite reasonable for 2016 and it was decided upon to Producers have been facing with 2017, at 2.9% and 3.1% implement a new production the price collapse for last two respectively. It was further target of 32.5 million barrels per years in response to OPEC’s noticed that non-OPEC supply day (mb/d).This meant cutting decision of not cutting down might contract by 0.8 million production after facing the global

9 glut. Last two years have been much as 25 percent, the most situation, the most pertinent really stressful for the OPEC since 2008. thing for New Delhi to do at this countries which faced declining juncture is to plan for the future revenues from $753 billion in Implication for India: with a lesser dependence on 2014 to $341 billion this year. Oil-consuming countries like fossil fuels, especially crude oil. Saudi Arabia’s willingness to do India (which imports a deal, in particular, approximately 81 per cent of its However, that was the demonstrates the economic pain energy needs) have seen a immediate reaction when the lower oil prices has caused to the windfall due to this almost decision to cut production came producers. The world’s largest threefold reduction in crude oil out. Now it is being realized by exporter is facing a record prices. the experts that the global crude budget deficit this year, is oil price of $50-55 a barrel is burning through foreign An uncertainty for India is the comfortable for India and they exchange reserves and this week newly elected US President Mr. believe that it is highly unlikely announced it will have to halt Donald Trump. This has already that it will go beyond that. This bonus payments to civil servants. seen capital outflows from is because if it goes beyond $55, developing countries like India shale oil will become viable for The reason why OPEC decided to the US. Further increase in US producers. This ensures that not to cut down production in price levels will negatively affect price won’t go beyond this level 2014 was to put pressure on high fiscal deficit of India. Since 4/5 and India doesn’t have to worry priced countries like The USA of the oil needs are met by about it if it remains in that and Canada. Obviously it didn’t imports, it was felt by the experts range. Higher price will ensure bear fruits as expected because that the benefit which the that even US producers also companies in these countries country received as falling crude produce more which will ensure have been innovating and cutting oil prices will not continue and that supply doesn’t fall very production costs ever since. The hence will affect the fiscal short of demand keeping prices recent decision is a reversal of deficit. Therefore, countries like in check. A worry for India the previous one of not cutting India must invest in cleaner would be when there is reduction down production. technology development, of about 600,000 bp/d non- reducing their overt dependence opec countries(which is highly Immediate impact : The decision on oil ,else they risk being unlikely because after Trump to cut down production by adversely affected each time the being elected the president, oil almost 1% led to an immediate production is likely to increase). increase in oil prices by almost price of crude oil starts to rise. 5%. Oil prices gained as much as Rising oil prices could also Therefore we can conclude that 10% in New York market. mean an increase in downstream the impact of this decision will prices of finished products be felt a little only if all member Across the U.S. shale patch, the nations stick by it. It is difficult OPEC cut triggered a huge which will in turn fuel inflation to do so especially when the equity rally. Whiting Petroleum for the other products leading to prices are low. If there is any Corp. rose as much as 32 percent overall increase in the inflation such doubt, prices in the market -- its biggest one-day jump in 13 of the economy. This would will again be affected. Moreover, years -- while Continental negatively play for the Indian the decision to cut oil production Resources Inc., the company government which is trying to might increase price to some founded by Donald Trump’s keep inflation in check for the extent but will not reach the adviser Harold Hamm, gained as Indian Government. Given India's macro-economic levels of 2014. Hence, it should

10 not be a factor of worry for Indian government. The impact will also depend on the fact that the decision to cut production is implemented. Seeing the past trend, it might happen that countries might not be willing to cut their own production and reduce their profits. Hence, we can say that although it might affect the fiscal deficit a bit but it is not the need of worry at this hour. The possibility is low and even if it is implemented the effects would not be the grave as was estimated earlier.

11 “Human” Arbitrage By – Radhika Chawla IMI New pile of tokens does not need the efficient employee marketplace to Delhi luck of having good cards to win remove this Arbitrage enjoyed by the game. Organizations. I know some of you Many concepts exist for financial thought of Labor Unions just know. markets, to enable Business to I am not going to write about It came to my mind as well. The behave efficiently. And it is an conventional things, it will not reason why I think it will not work added incentive for thought leaders bring the change needed for the out is because of a very cliché to make business more efficient society. reason, which might have ‘n’ especially when you have concepts CHALLENGES number of theories named in its such as “Going Concern” going honor. for all Industrial Firms. 1. Abundant Supply – I took a ride in Ola less then a But as has already been pointed out With the literacy rate of India month back with my luggage, all by leading management consultants going up the situation could not be the second year students can guess that all businesses needs to change rosier for the organizations. With the purpose of the trip. Needless to their Business Models because the highly capable Indians at their say I was tired and exhausted. I environment in which they operate Beck and Call, they end up having didn’t have energy to participate in has changed drastically from being a bigger share of the pie. And as a conversation but nevertheless the operationally efficient to being always Indians fall prey to their newfound silence was something I human efficient. The most tactical strategies at psychological was not used to yet. So I don’t important resource today without a level of Brand, Status, Future know what occurred to me and I doubt is Human, and any Growth Prospects, etc. etc.. We asked the driver how the whole organization that is courageous need a powerful trigger to change strike issue worked out. Did you enough to remodel the way the dynamics of the employment guys benefit and get what you Humans are awarded or evaluated industry. wanted? To my surprise the driver will be here to stay. To all the 2. Entrepreneur Ecosystem quickly reverted by saying that naysayers who claim that Humans “What benefit? Sure the Labor are not resources, well all I have to Startups present themselves as the union must have benefitted.” say is that if Mother Earth can be a perfect vehicle to make this change Before you question the credibility resource so can we, period. a reality. If they have the intent of the above situation, just keep in they will get the exponential mind that it is a probable situation What I am hinting at is the growth, ultimate dream of all even if it might not have happened. arbitrage existing in human startups. employee space. Every IT That is the level of arbitrage that employee would second me in With technological advancements exists in Human employment saying that if they are themselves taking place, ideally one would space. It is time to realize that responsible in, however marginal imagine that the change agent future belongs to Human Union amount of, bringing about change responsible is the best thing to go and not Labor Union. My ardent in their future by building the LONG on, but then by looking at wish that someone courageous and Automation capabilities of the the employment figures of the last talented takes up this problem and organization, their own worth decade not just in India but across makes working a joyous and should also go up simultaneously. the globe suggests a contrarian call desired thing for all and instead of It is like a Game of Poker where at play. Why are they SHORT on it being a necessity the other bigger player having big employee/workforce. We need an

12 ARTICLE OF THE MONTH The Ransomware scare & its implications on company finances and the Bitcoin By- Ryan Rego & Shruti Dhumal, S.I.E.S College of Management Studies In the month of May, 2017, Friday attackers encrypt your data and decryption key. Hence, there will the 12th seemed unluckier than demand a ransom to restore the be almost loss of $700 and still you Friday the 13th, where in computer data. Below we can see the will end up back to square one. devices running on the older graphical representation of how versions of Microsoft operating the average ransom has increased 2. Loss of data and productivity systems across the globe were first over the years. There is loss of data due to the struck by the deadly ransomware ransomware attack and there is that went by the name WannaCry, huge impact on the business as a holding the user’s data hostage whole. Losing data such as client’s unless they paid up the ransom in information, company records and Bitcoin. It targeted enterprises as intellectual property can highly well as individuals alike asking impact financial situation of the them to shell out 300$ within three company, brand and reputation. days and if that was not met the Due to the unavailability of the ransom amount was doubled. If the important data the company might revised ransom was not paid in 7 1.Cost of Ransom cross the deadlines of huge days the data would be deleted. projects and in turn have huge If you see for the year 2016, $679 financial and sales losses. Even Effects on the company finances: is not a smaller cost. Is it worthy after paying ransom and getting the Ransomware attacks are increasing for your IT services to be so decryption key to all the files there day by day. It has major effects on negligent to cost you so much? It is are chances of the files getting the business continuity, always advised that one should not corrupted again. productivity, reputation and much pay the ransom. But is this the case more. Getting rid of this problem is in reality? Many businesses end up 3. Downtime costs not only time consuming but also paying the ransom and hence you When the data gets encrypted and costly. Small and medium scale can see that the ransom has almost no longer can it be used then all businesses are affected the most. doubled from 2015 to 2016. Even work comes to a standstill. SMBs needs to strengthen their IT after giving the demanded ransom Downtime costs are approximately defences to avoid such huge losses. there is no guarantee that the $700 billion per year. Huge! To If proper care is not taken the hackers will give you the deal with the infection the

13 company might be forced to shut ransom. Payment is demanded in WannaCry ransomware attack. down the systems which can lead the form of Bitcoin; a According to data collected from to financial losses, reduced cryptocurrency. coindesk, Bitcoin fell more than customer satisfaction and Why do criminals prefer Bitcoin as $200 from an all-time high of eventually reputational damage. $1,848.75 reached on the 11th of a mode of payment? Because of the May, 2017, to a low of $1,644.64 Effect on the insurance anonymity behind it. the next day. companies: Card payments and net banking According to Brian Kelly, CEO of In 2016, ransomware caused the can be traced. However the BKCM (a global investment damage of approximately 1.5 transactions that one makes using management firm), this recent billion dollars, according to market this cryptocurrency are completely attack was a big hit to market researcher Cybersecurity anonymous. It cannot be used to sentiments and that it had created Ventures. In 2017’s attack, Cyber identify a person. Whenever negative publicity for Bitcoin. risk modelling firm estimates the people trade in bitcoin, they use a Later though, the cryptocurrency loss of $4 billion or hundreds of ‘private key’ associated with their steadied over the weekend and on millions. Cyber criminals are wallets to generate lines of code Monday traded more than 5 demanding $300 in Bitcoin to (an address in this case) which is percent lower on the day near unlock the data. then publicly associated with their $1,676.42. Over the next seven transactions but with no personal Almost 200,000 computers are identifying information. In this days, the prices underwent an affected by ransomware. manner, every transaction is upward trend overall. According to Bloomberg News, recorded and securely signed in an the market for insurance for such open ledger which can be accessed kind of attacks is supposed to triple by anyone .However, the to $10 billion by 2020. movements of the bitcoin can still Many companies in India are be traced. taking help of the insurance Effects of WannaCry companies for recovering the ransomware on the Bitcoin: damages caused by ransomware. Any expense up to $100000 would Will the WannaCry incident cause Figure 1: Price chart of Bitcoin from be insured by the insurance the Bitcoin’s downfall? The reality 12th May, 2017 to 15th May, 2017 companies. “There are people who is that the bitcoin is too huge for The law of Demand in economics are choosing to pay the ransom and such an incident to cause it serious dictates that an increase in the claim the cost of taking backup, damage. Recent calculations peg demand of a certain thing would which, in one case has gone up to the market capitalization at lead to an increase in the price of ₹ 1.2 crore”, said an executive of approximately 45 billion dollars that certain thing (other things the insurance broking company. (sources: One of being equal). So technically, if the Approximately, companies are the things to consider is that the ransomware creators, demand buying the insurance of $10-$100 bitcoin has survived worse ransom in Bitcoin, there will be an million. incidents such as stories of increased demand in that criminals using bitcoin for illicit Connecting the dots with purposes and for buying cryptocurrency and there will be an Bitcoin: increase in the price of Bitcoin contraband off the dark web. Now (other things being equal). The Moving on to the next important let us find out what happened to the other factors which have led to the element of the ransomware; the Bitcoin price immediately after the

14 rise in its prices are that many countries are now making Bitcoin legal and an increasing number of investors are finding cryptocurrency as a safe store of value. Outlook for the Bitcoin: Date Price Date Price Date Price 22-05-16 438.57 25-09-16 599.9 29-01-17 1,032.24 29-05-16 521.42 02-10-16 611.08 05-02-17 1,011.27 05-06-16 574.41 09-10-16 615.81 12-02-17 1,061.07 12-06-16 667.54 16-10-16 640.93 19-02-17 1,152.20 19-06-16 759.06 23-10-16 645.7 26-02-17 1,269.41 26-06-16 630.46 30-10-16 694.82 05-03-17 1,182.50 03-07-16 659.39 06-11-16 713.72 12-03-17 966.86 10-07-16 650.25 13-11-16 704.17 19-03-17 963.01 17-07-16 673.78 20-11-16 729.41 26-03-17 1,089.49 24-07-16 661.29 27-11-16 730.19 02-04-17 1,183.63 31-07-16 635 04-12-16 767 09-04-17 1,178.80 07-08-16 595.04 11-12-16 767.18 16-04-17 1,239.63 14-08-16 570.32 18-12-16 788.03 23-04-17 1,349.97 21-08-16 580.33 25-12-16 968.62 30-04-17 1,578.47 28-08-16 573.57 01-01-17 901.99 07-05-17 1,782.13 04-09-16 606.54 08-01-17 821.97 14-05-17 1,972.84 11-09-16 606.38 15-01-17 923.64 21-05-17 2101.39 18-09-16 608.39 22-01-17 920.02 Figure 1: Graph showing Bitcoin prices' variations

15 On May 20th, 2017, Bitcoin reached a 2. Sakshita Khosla, 2017, May new milestone, it crossed the $2000 16 , WannaCry ransomware: th mark, its price has increased more How much global financial than 100% this year and seems to be loss is the cyber-attack in a healthy trajectory. Crossing this expected to cause, mark would leave a positive message in the minds of potential investors. ss/wannacry-ransomware- Thus, it is possible that this bull run how-much-global-financial- could continue but with a lot of volatility. loss-is-the-cyber-attack- expected-to-cause-2137670/ 3. Jackie Wattles, 2017, May th 14 , Who got hurt by the Outlook for companies post WannaCry: ransomware attack, Companies must take measures to 5/13/technology/ransomware protect themselves from malicious -attack-who-got-hurt/ ransomware. They should ensure 4. Jonathan Berr, 2017, May backups are taken on a routine basis. 16 , “WannaCry” th It is also advisable for them to update ransomware attack losses their computer software on a regular could reach $4 billion, basis. Instructions should be given to their employees to be cautious of emails and links sent to them from ws/wannacry-ransomware- unfamiliar sources. attacks-wannacry-virus- losses/ There has been an increasing trend 5. Shilpi Sinha, 2017, May 16 , th wherein companies across countries Insurance companies may have started preparing contingencies. face the brunt of botched tech They have been keeping reserves of after WannaCry, Bitcoin just in case more sophisticated http://economictimes.indiati ransomware were to attack their data. Paying ransom does not seem like a nance/insure/insurance- good idea but in the case where companies-may-face-the- desperate times call for desperate brunt-of-botched-tech-after- measures, when it comes to a wannacry/articleshow/58689 company’s crucial data, keeping a 365.cms Bitcoin reserve seems pragmatic in Gautham, 2017, May 18 , WannaCry th the eyes of several companies. influences companies to stock bitcoin for ransomware emergencies, References: /wannacry-companies-stock-bitcoin/ 1. Historic data is taken from ncies/btc-usd-historical-data

16 Stock options: Past to future By – Abhishek, NMIMS belongingness amongst the utility of employees with the wealth of employees and can get employees shareholders. In particular, we Not so long ago some of us were highly inspired and focused for their examine the exercises of options for a working for an organization prior to jobs. It helps aligning the interest of large sample of grants through their pursuing our MBA. And one the managers with those of the expirations, and compare the important tactic employed by the owners. But are they really an decisions to exercise options to organizations to retain their talented incentive. They may lead an employee contemporary decisions not to employees and to motivate their to continue working for an exercise vested in-the-money options. senior management is to offer them organization which is devoid of It is found that, ceteris paribus, the stock options. An organization grants growth and learning for him. likelihood of exercises during the to an employee the option to buy a years before the expiration year certain number of shares in the Uncertainty and Unpredictability decreases with unpredictability, company at a fixed price after a suggesting that employees place a certain number of years often called Earlier the impact of risk on the timing higher value on their options when option period. Before the employee of stock options exercise had unpredictability is high. Also granting can exercise the option he is usually motivated several prior researchers options to employees increases their required to complete the vesting who failed to reach a conclusion about appetite for risk and provide further period which typically means that he whether the relation is positive or justification for using executive stock has to continue to work for the negative. Later contributors options as an interest alignment organization for a minimum number introduced the second measure of mechanism between shareholders and of years before part or all of the uncertainty, alongside the more executives. options can be exercised. traditional measure of unpredictability. The estimates of Uncharted Beginnings…. both these two quantities exhibit a modest correlation, and turn out to be Stock options as performance important. Thus each variable has a incentives have been on a roller statistically significant effect on the coaster ride for decades. They were timing of option exercises, with the quintessential enticements used by unpredictability causing people to tech startups during the dot-com boom hold their options longer in order to in the late 1990s, but their star later preserve remaining option value, and dimmed amid allegations of abuse by uncertainty increasing the tendency unethical companies. So it’s hard for for executives to exercise early in employers to know whether they are response to risk aversion. still a good, well, option. Riskiness Incentive or not..? Like any individual, employees ESOPs are the best and most endeavor is to maximize their own frequently used tools to retain top utility. The purpose of employees’ notch employees in a company. It compensation plans is to align the instills a sense of ownership and

17 Why Arbitrage Opportunities Exist? By - Soumyadip Chakrabarty, ISB equilibrium by trading dissimilarly is limited, the market does not correct priced securities. the pricing anomaly instantaneously. With the extensive usage of machine learning and algorithmic trades, This brings to an obvious question- Therefore we see that the assumptions spotting an arbitrage opportunity has why arbitrage opportunities even of efficient market hypothesis is fairly never been simpler. Arbitrageurs are exist? Theoretically, any arbitrage restrained, and in real world scenario essential for the markets to run should be instantly corrected. The the assumptions of free information efficiently. True to the canonical reason it’s not, is because the markets and frictionless market does not notion of LOP, which is by the way are not frictionless as is assumed. substantially hold. driven by the founding laws of There are transactions costs involved. Moreover, among the investors/ economic theory: “demand meets Additionally availability of funds arbitrageurs there exist an arbitrage supply at market clearing price”, limit reaction time. These factors asymmetry. Human behavior is arbitrageurs are the ones who allow coupled with technological lag peculiar and the concept of bounded the system to correct itself by prevents any arbitrage opportunity to rationality looms large in various profiting from pricing anomalies. correct instantaneously. behavioral pattern exhibited by The idea is simple: think about riding A primary limitation to arbitrage humans. There is a peculiar affinity a see-saw, at any point in time if you correction is explained by Miller’s among investors to buy securities want to remain calm (horizontal) you hypothesis. Miller in 1977, theorized rather than sell to exploit arbitrage need to balance forces at both the that a major reason why overvalued opportunities. That is to say, investors ends. Dissimilar forces on either side stocks are in fact not shorted is due to view shorting differently from disbalances the equilibrium and you “divergence in opinion”. According to purchasing and are thus more find the ends going down or up as the his hypothesis overvaluation is comfortable in buying an underpriced case may be. To re-balance you need maintained as only optimistic traders security rather than shorting an to exert force and get back to operate in the market, and continue to overpriced one. Such behavior partly equilibrium. Drawing the analogy buy the security. This condition is explains why any arbitrage forward, arbitrageurs akin to the maintained until such “divergence in opportunity might not be immediately “force” bring market back to opinion” among traders is narrowed worked upon. down. Thus, as arbitrage opportunity

18 Lastly, volatility of stocks also do effect the extent to which arbitrageurs would consider trading the stock. Generally arbitrageurs prefer to stay away from extremely volatile arbitrage positions. The reason is quite obvious: there is a lurking fear of not being able to cover such positions without losing on the traded value. Although extremely risky arbitrage positions almost always offer attractive returns, in reality that “return” can be realized only if the position can be easily liquidated. Extremely volatile positions are almost always less liquid. Therefore positions in these securities exposes the arbitrageur to high risk of loss and at worst a possible fire sale of securities. The notion that availability ensures purchase is not necessarily true. Such insight helps us in understanding the behavior of arbitrageurs in the security market. Trying to explain arbitrage from the traditional EMH standpoint often makes us ponder as to why such opportunity is not instantaneously corrected. Modern finance helps us with the answer. There’s more to it than what meets the eye!

19 Goods and Services Tax By – Keyur Buddhadev, IIM Rohtak Introduction The introduction of Goods and Services Tax (GST) is a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax, it would mitigate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated to be around 25%-30%. Introduction of GST would also make Indian products competitive in the domestic and international markets. Cascading Effect Example Cascading Effect of Taxes where a tax is paid on tax and the value of the item keeps increasing every time this happens. Action Cost 10% Tax Total Buys Raw Material @ 100 100 10 110 Manufactures @ 40 150 15 165 Adds value @ 30 195 19.5 214.5 Total 170 44.5 214.5 Under GST Action Cost 10% Tax Actual Liability Total Buys Raw Material 100 10 10 110 Manufactures @ 40 140 14 4 154

20 Adds Value @ 30 170 17 3 187 Total 170 17 187 History of GST in India

21 Salient Features of GST  GST would be applicable on “supply” of goods or services as against the present concept of tax on the manufacture of goods or on sale of goods or on provision of services.  GST would be based on the principle of destination based consumption taxation as against the present principle of origin based taxation.  It would be a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States [including Union territories with legislature] would be called State GST(SGST). Union territories without legislature would levy Union territory GST (UTGST).  An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of goods or services. This would be collected by the Centre so that the credit chain is not disrupted.  Import of goods would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties.  Import of services would be treated as inter-State supplies and would be subject to IGST.  CGST, SGST /UTGST & IGST would be levied at rates to be mutually agreed upon by the Centre and the States under the aegis of the GSTC.  GST would replace the following taxes currently levied and collected by the Centre: o Central Excise Duty o Duties of Excise (Medicinal and Toilet Preparations) o Additional Duties of Excise (Goods of Special Importance) o Additional Duties of Excise (Textiles and Textile Products) o Additional Duties of Customs (commonly known as CVD) o Special Additional Duty of Customs(SAD) o Service Tax o Cesses and surcharges in so far as they relate to supply of goods or services.  State taxes that would be subsumed within the GST are: o State VAT o Central Sales Tax o Purchase Tax o Luxury Tax o Entry Tax (All forms) o Entertainment Tax (except those levied by the local bodies) o Taxes on advertisements o Taxes on lotteries, betting and gambling o State cesses and surcharges insofar as they relate to supply of goods or services. o GST would apply to all goods and services except Alcohol for human consumption. o Tobacco and tobacco products would be subject to GST  Under GST all the items are divided under 5 tax slabs No tax (0%) Goods No tax will be imposed on items like Jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi. Sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, Bones and horn cores, bone grist, bone meal, etc.; hoof meal, horn meal, Cereal grains hulled, Palmyra jaggery, Salt - all types, Kajal, Children's' picture, drawing or colouring books, Human hair

22 Services Hotels and lodges with tariff below Rs 1,000, Grandfathering service has been exempted under GST. Rough precious and semi-precious stones will attract GST rate of 0.25 per cent. 5% Goods Items such as fish fillet, Apparel below Rs 1000, packaged food items, footwear below Rs 500, cream, skimmed milk powder, branded paneer, frozen vegetables, coffee, tea, spices, pizza bread, rusk, sabudana, kerosene, coal, medicines, stent, lifeboats, Cashew nut, Cashew nut in shell, Raisin, Ice and snow, Bio gas, Insulin, Agar batti, Kites, Postage or revenue stamps, stamp-post marks, first-day covers. Services Transport services (Railways, air transport), small restraurants will be under the 5% category because their main input is petroleum, which is outside GST ambit. 12% Goods Apparel above Rs 1000, frozen meat products , butter, cheese, ghee, dry fruits in packaged form, animal fat, sausage, fruit juices, Bhutia, namkeen, Ayurvedic medicines, tooth powder, agar batti, colouring books, picture books, umbrella, sewing machine, cellphones, Ketchup & Sauces, All diagnostic kits and reagents, Exercise books and note books, Spoons, forks, ladles, skimmers, cake servers, fish knives, tongs, Spectacles, corrective, Playing cards, chess board, carom board and other board games, like ludo, Services State-run lotteries, Non-AC hotels, business class air ticket, fertilisers, Work Contracts will fall under 12 per cent GST tax slab 18% Goods Most items are under this tax slab which include footwear costing more than Rs 500, Trademarks, goodwill, software, Bidi Patta, Biscuits (All categories), flavoured refined sugar, pasta, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, tissues, envelopes, tampons, note books, steel products, printed circuits, camera, speakers and monitors, Kajal pencil sticks, Headgear and parts thereof, Aluminium foil, Weighing Machinery [other than electric or electronic weighing machinery], Printers [other than multifunction printers], Electrical Transformer, CCTV, Optical Fiber, Bamboo furniture, Swimming pools and padding pools, Curry paste; mayonnaise and salad dressings; mixed condiments and mixed seasonings Services AC hotels that serve liquor, telecom services, IT services, branded garments and financial services will attract 18 per cent tax under GST, Room tariffs between Rs 2,500 and Rs 7,500, Restaurants inside five-star hotels. 28% Goods Bidis, chewing gum, molasses, chocolate not containing cocoa, waffles and wafers coated with chocolate, pan masala, aerated water, paint, deodorants, shaving creams, after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heater, dishwasher, weighing machine, washing machine, ATM, vending machines, vacuum cleaner, shavers, hair clippers, automobiles, motorcycles, aircraft for personal use, will attract 28 % tax - the highest under GST system.

23 Services Private-run lotteries authorised by the states, hotels with room tariffs above Rs 7,500, 5-star hotels, race club betting, cinema will attract tax 28 per cent tax slab under GST Summary The idea behind having one consolidated indirect tax to subsume multiple currently existing indirect taxes is to benefit the Indian economy in a number of ways:  It will help the country’s businesses gain a level playing field  It will put us on par with foreign nations who have a more structured tax system  It will also translate into gains for the end consumer who not have to pay cascading taxes any more  There will now be a single tax on goods and services In addition to the above,  The Goods and Services Tax Law aims at streamlining the indirect taxation regime. As mentioned above, GST will subsume all indirect taxes levied on goods and service, including State and Central level taxes. The GST mechanism is an advancement on the VAT system, the idea being that a unified GST Law will create a seamless nationwide market.  It is also expected that Goods and Services Tax will improve the collection of taxes as well as boost the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.

24 Avenue for Export led Growth for India By- Bhaskar Poddar, IIM Rohtak truck as a physical capital can be competition and special privileges so more productive in Iowa, USA that they can generate profits over it If we analyze the growing economies compared to a city in Egypt and the to build organizational capital, while in the last century it is pretty evident only reason for it is Iowa has a well- maintaining some incentives for firms that the nations which are rich and connected roads (Infrastructure) to be efficient. To facilitate this the prosperous now have not grown which Egypt does not have. It government erects barriers to entry, particularly fast but have grown establishes that the developing offering tax breaks so that private steadily for a very long time. Early countries lack organizational firms can generate larger profits to developers for Instance USA and structure to employ the physical fund their investment, encourage Australia have grown steadily for a capital, which hinders the close ties between firms and banks century which growth rate of 1% to productivity of the capital. So how a and provide raw materials at a 2% and on the contrary the late country does develops the subsidized price. A key challenge for developers like Japan, China and organizational structure? the government has been to retain Taiwan have grown at much faster the disciplinary incentives provided rate for a shorter period of time i.e. The government has to play an active by the market while still allowing for the last few decades. And these role in the development of firms the chance to make profits and countries have set aspirational organizational structure of the build organizational capabilities. At standards for developing countries nation. It has to facilitate and create times this need to create strong like India and Brazil. If we see a the institutional environment for organizational structure may lead the commonality in the late developers competition and innovation- to government to favor the producer and the aspirations of the now establish secure IP rights, strengthen and the financier at the cost of the developing countries, globalization of patent laws, reduce barriers to entry, citizens. This is exactly what was economies has enabled them to build infrastructure and let the going on in the Indian economy boost growth backed by heavy private sector take charge. As before we opened the market to exports. suggested by scholars, the foreign players in the dawn of the institutional change does not precede The factor which produces a 90’s, when to whole world was in but rather accompanies the process staggering difference between the crisis. A lethargic system existed of growth, which is pretty much the rich countries and the not so rich is called License Raj, with all of red tape- case of our nation. The primary role the physical capital. What physical ism and nothing of efficiency. As the of the government is to ensure that capital does is - it makes everybody organizations grew at the cost of the the structure that facilitates private more productive. But then again the citizens, the consumption for the activity including public security and physical capital is much more economy drastically fell, and these enforcement of contracts functions efficient in the developed countries same firms were deprived of the efficiently. In the initial stage the compared to a developing one. For domestic market. government has to provide firms instance consider a freight carrier some protection from foreign

25 One shot arrow to tackle both these were happy to exploit domestic The process of strengthening problems of falling domestic demand market without much of competition organizations required massive but and inefficient firms is export. It not that led to inefficient public sector careful government interventions. only forces firms to produce cost units which ran losses for decades Incessant firms need protection. But competitive product which improves and all of it at the cost of tax payer’s the real danger is the state of efficiency but also gives the firm money. stagnation which was the state of global demand which helps the firm India in 60’s and 70’s, where the On the contrary the countries which in terms of economies of scale. governments provided permanent are extensively dependent on the Developing countries governments protection and the firms exploiting exports faced another dilemma. As may try to provide incentives to firm this were more than happy with their manufacturing sector boomed to increase the exports. Opening the stable meagre growth. The solution backed by exports, the rising wages in market for the firm doesn’t mean was to use the global market’s the manufacturing sector pulled up that the firms don’t need support disciplinary power and attractiveness wages for the non-tradable goods like now, in fact they need the support to shape the private sector. restaurants meals, transportation, now more than ever. Some Government should have enforced accommodation, in turn decreasing authoritarian governments have tried now-strengthened firm to compete in the demand for them. So the trouble maintaining an undervalued the international market. In the of the export oriented miracle exchange rates to make the exports economies of late developers, which economies was that a superefficient cheaper, holding down wages by had export led growth are troubled manufacturing sector was at times suppressing or co-opting unions. by the government policies, domestic more than compensated by the Others have tried to subsidize the raw vested interests and household declining service sector. As the falling materials, power inputs or directly habits formed during these years of consumption in the economy also providing cash rebates on exports. growth which till-date conspired the increase the risk exposure and This sort of managed capitalism has economies to be dependent on dependence on the external demand. proved successful in the economies export dependent on growth. India This can be seen for the case of Japan, immediate objective of getting out of has edge here with more than 16% of being a superefficient manufacturing poverty but doesn’t provide long the world’s population and nation, it is supposed to contribute to term stability. The problem with impeccable demographic dividends pull the world out of recessions but managed capitalism is it’s hard to which can easily create consumption instead time and again it has implement for populist democracies to give the domestic shield against all depended on outside stimulus to pull and once the firm is strong enough, it the external stimulus. The need of the it out of recession. It was not until the has to be pushed to export by hour is to grow at an unprecedented dawn of this century, after a number improving efficiency. India didn’t rate, may be based on export in the a Japanese attempts failed to pull have to deal with this problem short run, but with a mind-set to itself out of its decade long slump, despite being a populist democracy boost consumption in the long run that the economy recovered backed because of the large consumer base it and not falling into the vicious circle by the stimulus of dot-com bubble. has. And since they didn’t have to other south Asian economies have keep up with global innovations, they fallen into.

26 CALL FOR ARTICLES Finance and Investment Club of IIM Rohtak invites articles from all Business Schools across India. The article should be original and should be related to finance and economics. All the reference should be cited and sources of images should be mentioned clearly. The winner of the article of the month will get Rs.300/- with an e- certificate. All the other selected articles will be published in our magazine ARBITRAGE Instructions: 1. Please send your articles before 25th July, 2017 to [email protected] 2. Do mention your NAME, INSTITUTE and BATCH with your article 3. Font: - Times New Roman, Size: - 12 in word .doc/.docx 4. Length of the article should be greater than 500 words 5. Please DO NOT send PDF files and kindly stick to the format 6. Number of authors 2 at max 7. Maximum Word Limit: 1500 words Minimum Word Limit: 500 words 8. Naming Convention: Name1_Name2_CollegeName.doc 9. Any Image without the source or label will not be accepted IMPORTANT: The article should be original and should not have been/should not be published elsewhere. You will be disqualified if you violate the same.

27 Finance and Investment Club Indian Institute of Management Rohtak Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak.

28 All Rights Reserved Finance and Investment Club Indian Institute of Management Rohtak MDU Campus, Rohtak, Haryana For any queries/feedback/comments mail to [email protected] Website:

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