Markets And Economy

Fall of the Rupee – Part II

  Continuing from the last post, let’s see how the price of rupee is determined vis a vis dollar. The market determines the price of a currency vis-à-vis another based on its demand and supply.  Some countries that permit exchange rate to be determined by the market do not impose any restriction on the amount of local currency to be exchanged for foreign currency. On the other hand, countries with a nonconvertible currency policy, fix the exchange rate by diktat. The Indian rupee is fully convertible on current account but there are restrictions on convertibility on capital account. This means that though foreign exchange for trade in goods and services is determined on the basis of market demand and supply, but the government has put in some restrictions on flow of different forms of capital in & out of the country. Some of the probable causes of the rupee’s depreciation against dollar are – Deficits in the trade of goods and services – India reported a trade deficit equivalent to $196 billion in October 2011 as compared with $104.4 billion in March 2011. The widening trade deficit poses downside risks to the weak Indian currency. Surpluses and deficits in trade…

Markets And Economy

Fall of the Rupee

. The Indian rupee continues with its free fall against dollar having fallen up to 18% in Dec 2011 from its year’s high in July 2011. Rupee has been Asia’s worst performing currency this year. The depreciation of rupee against dollar means that now it takes more rupees to buy a dollar; thus indicative of an increase in the demand of dollar. In absence of sufficient dollars to cater to the increased demand, there is supply-demand mismatch which causes the price of a dollar to rise against the Indian Rupee. The impact of a depreciating currency varies across businesses. Export oriented industries such as IT services which earn revenues in $ and incur costs majorly in rupee gain from the fall in rupee. In contrast, the import oriented industries such as Oil Management Companies which import crude are negatively impacted due to fall in rupee as they end up paying much higher for the imports. Furthermore the Indian companies that have raised debts in foreign currency will have increased burden to service interest payments. One way of reducing such losses is to hedge against currency movements. But since it is very difficult to forecast exchange rate, the risk due to…

Strategy

Material Girl and Mother Monster

Besides the obvious similarity in their profession and the huge popularity enjoyed by the two music artists, the other common point between Madonna and Lady GaGa is that they both have been chosen the subject of case study at B Schools.   I remember having an interesting start to the strategy class at London Business School with a slide on Madonna. Came to know that she started her career in 1982 and by 2008 she had amassed personal fortune of $300 million with a record sale of 220 million albums. Michael Jackson wondered what it was about her that made her so popular. Not a great dancer or a singer and yet she is always at your face. The answer lies in her positioning, efficiently leveraging and exploiting resources, employees, relationships (Prince, Warren Beatty, Sean Penn & Guy Ritchie) and other organizing skills such as building and using and even breaking alliances, creating controversy, manipulating press but above all ambition, discipline and self development. With an uncanny ability to spot trends, Madonna became known for her music and sex appeal in the period 1988 – 1995, turned to brazen sexuality and controversy in 1996 – 2002 and again reinvented herself…

Strategy

Bail me out – Kingfisher Airlines

Corporate India is abuzz with the news of KingFisher’s need for a bailout. Though the airlines company has  not yet defaulted, but with a debt exceeding Rs 7000 cr and losses mounting to thousands of crores, there is little doubt that the company is at the brink of default. Again, this is not the first time when the company has sought rescue. The airlines underwent a debt restructuring exercise in April 2011, when a consortium of 13 banks converted their debt into equity, paying a significant premium of 62% over the ruling market price of shares. In the event of a bankruptcy, the assets are liquidated and proceeds are paid to the creditors in the order of their seniority. The equity holders receive only the portion of the proceeds that is left over after paying off the creditors (which, for a company under distress can reduce to nothing). By agreeing to convert a part of their debt into equity, the banks helped the company to lower its interest payments and thus infused liquidity in the company. In the process, the banks increased their ownership stakes in the company while consenting to forego their interest income. After the conversion, the banks…

Strategy

Stuck in the middle – Kingfisher Airlines

Kingfisher is losing ground. Vijay Mallya is seeking investment, investors are not exactly willing to oblige.  Brand Kingfisher is a strong brand known for its excellent product & service offering. So what went wrong with the airlines? Captain Gopinath, the founder of Air Deccan believes that Mallya’s big mistake was to change Air Deccan to Kingfisher Red. Kingfisher Airlines catered to the top of the pyramid while Air Deccan was meant for the base of the pyramid and came with its huge customer base and massive network. After Kingfisher acquired Air Deccan, the rebranding of Air Deccan as Kingfisher Red left little difference between the two brands. They looked the same and offered similar services. This created inconsistency between the value proposition and the market segment to which the brands catered; Kingfisher Red remained neither low cost nor full services. With add on frills, it came out costlier than the other low cost airlines such as Indigo & SpiceJet. Markets punished the inconsistency. Passengers started to migrate from Kingfisher Airlines Economy to KF Red, which was cheaper and almost on par. And the low cost fliers ditched KF Red for the really low cost airlines. This led to cannibalization of…

Education

Endowments and spending in B schools

While the program fees for MBA and other executive education programs in B schools is widely known,  funding of the B schools remains a key area of interest for any B school’s management team. In B schools, funding comes in mainly through 3 sources: MBA Tutions, Development Activities and Executive program fees. Development activities generally include annual giving, capital giving and corporate giving.  During a discussion at roundtable conference in Mexico in 2010, it was found that in top tier US B schools, percentage of revenue distribution is in the range of 40% from MBA Tutions,  30% from Development Activities and 20% from Executive program fees. On the other hand, In European B schools distribution is in the range of 70% from MBA Tutions, 7% from Development Activities and 23% from Executive program fees. In Mexican B schools the distribution between MBA Tutions & Exec Education is 80% & 20%. Alumni givings vary as per the culture to give back & Corporate givings vary as per tax treatment. Tuck has an excellent Development office as the culture of giving back is part of the structure of their society.  In Europe, very few have been able to create an endowment larger…

Strategy
Markets And Economy

Role of Independent board directors in Indian companies

The probe into Satyam scam is finally over.  SEBI has barred Satyam Computer’s founder B Ramalinga Raju and four others from markets for 14 years and asked them to return Rs 1,849 crore worth of unlawful gains with interest. Following the takeover of scam-hit firm Satyam by Tech Mahindra in 2010, Mahindras were contemplating to sue the company’s erstwhile independent directors to recover Rs 11 million paid as commission to non-executive directors during the financial year 2008-09. Each of Satyam’s former independent directors were paid a commission of Rs 12 lakh over and above sitting fees for the financial year 2008-09. The Independent Directors of Satyam included renowned people like management guru Krishna G Palepu, Pentium chip innovator Vinod Dham, former Indian School of Business dean Prof Mendu Rammohan Rao, former cabinet secretary TR Prasad, former IIT Delhi director V S Raju and US-based academician Mangalam Srinivasan. It is ironical to note that in the presence of such eminent independent directors, the company’s founder Ramalinga Raju could manage to fudge the company’s accounts for several years.

Strategy

Risks and return considerations for companies investing in foreign markets

Since the past few months, the telecom service provider Uninor has been under scanner on eligibility criteria for allocation of 2G spectrum, by the former telecom minister of India. India’s Department of Telecom (DoT) has imposed a penalty of Rs 6.35 crore for not complying with the roll-out obligations, of which Uninor has been directed to pay Rs 3.8 crore by the telecom tribunal TDSAT, following the company’s petition challenging the penalty imposed by the DoT. The cancellation of licences or even the imposition of penalties could severely hurt cash flows of Uninor and of some other telcos which were issued similar notices. Uninor is a joint venture between reality firm Unitech and telecom firm Telenor of Norway, of which the Norwegian government is a major shareholder. Telenor’s acquisition of 67.25% stake in Unitech Wireless of India was funded with a Rights issue in October 2008. Telenor’s share price had dropped by 25% on the announcement day and by 45% over the month. The negative market reaction could have stemmed from the fact that India was an unknown market for Norwegian investors and they had doubts regarding the future returns from investments in India.Now, with India’s Supreme court monitoring the 2G scam investigations, their future…

Education

An Year off from Job – Mid Career B School Program

‘The pen is mightier than the sword’ said the English author Edward Lytton. Taking a cue from this famous adage, it would not be out of place to say that in today’s world ‘The net is mightier than the jet’. Having completed a reputed program for senior executives from the top Business School in UK, I feel that blog would be a great medium of expression for reaching out to people and sharing my thoughts with those who might be interested in reading this. Since the last one year many people have approached me to find out what the Sloan experience has been like, with the obvious question at the back of the mind ‘Is it worth investing a huge  sum of money for a one year management program at a mid career stage in life?’. Honestly it is difficult to have a cookie cutter answer to the question because a whole lot of it depends on what a person aims to achieve in that one year and how he or she is able to leverage on the learning while building on the past professional experience. I will attempt to pen down the aspects that a person may want to consider before…

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