On the 30th of August, 2019, Finance Minister (FM), Nirmala Sitharam announced the merger of 10 major public sector banks (PSBs) to reduce the number of players in the banking scenario from a whopping 27 to 12. This news comes in wake of the disappointing news that India faced a 5% GDP growth in the preceding quarter. It is expected that the merger will increase the CASA (Current to Savings Account Ratio) and enhance lending capacity. These reforms were deemed necessary to foster the idea of India becoming a $5 trillion economy. Illustrated below shall be the expected scenario if the mergers are proven successful:

Merger between

Rank (based on size)

Number of Branches

Total Business Size

(Rs in lakh crore)

Punjab National Bank (A), Oriental Bank of Commerce and United Bank – Merger I



17.95 (1.5 times of current)

Canara Bank (A) and Syndicate Bank – Merger II



15.2 (1.5 times of current)

Union Bank of India (A), Andhra Bank and Corporation Bank – Merger III



14.59 (2 times of current)

Indian Bank (A) and Allahabad Bank – Merger IV



8.08 (2 times of current)

(A) Anchor Bank

It was also announced that Rs 55,250 crore of capital infusion will take place to ease credit growth and regulatory compliance. Now we’ll look at the capital infusion expected to take place to aid the mega mergers:


Recapitalization (Rs in crore)

Punjab National Bank


Union Bank


Bank of Baroda


Canara Bank


Indian Bank


Indian Overseas Bank


Central Bank


UCO Bank


United Bank of India


Punjab and Sind Bank


FM also announced multifarious administrative reforms to increase accountability and remove political intermediation. Bank management is made accountable as the board will now be responsible for evaluating the performance of General Manager and Managing Director. It is mandatory to train directors for their roles thus improving leadership in the PSBs. The role of the Non-Official Director is made synonymous to that of an independent director. In order to attract talent, banks have to pay competitive remuneration to Chief Risk Officers.

The banks were merged on three criteria – the CRR should be greater than 10.875%, the CET ratio should be above 7% (which is above the Basel norms) and the NPAs should be less than 6%. However, Syndicate and Canara bank have not been able to meet the criteria.

Post consolidation facts and figures:

  • Total Business Share
  • Ratios (all amounts in %)




United Bank of India


CASA Ratio















CRAR Ratio





Net NPA Ratio






Canara Bank

Syndicate Bank


CASA Ratio












CRAR Ratio




Net NPA Ratio





Union Bank

Andhra Bank

Corporation Bank


CASA Ratio















CRAR Ratio





Net NPA Ratio






Indian Bank

Allahabad Bank


CASA Ratio












CRAR Ratio




Net NPA Ratio





  • Economies of scale.
  • Efficiency in operation.
  • Better NPA management.
  • High lending capacity of the newly formed entities.
  • Strong national presence and global reach.
  • Risk can be spread over and thus will be minimized.
  • Lower operational cost leading to lower cost of borrowing.
  • Increased customer base, organic growth of market share and business quantum.
  • Banking practices reform announced to boost accountability and professionalism.
  • Appointment of CRO (Chief Risk Officer) to enhance management effectiveness.
  • Centralized functioning promoting a central database of customers.


  • The slowdown witnessed by the economy coupled with the dangerously low demand in the automobile sector will maintain the existing situation pessimism.
  • The already existing exposure of NBFCs in the individual constituent banks will be magnified as the merged entities shall have more than 10% loan exposure to NBFCs and thus, in effect, the liquidity pressure that comes along with it.
  • As history dictates, the merger of these eminent banks will cause near-term problems with respect to restructuring, recapitalization, operation, flexibility and costs.
  • Near-term growth shall be hindered and core profitability may suffer.
  • Compliance becomes a huge barrier.
  • Difficult to merge human resources and their respective work cultures post-merger – this will in turn lead to low morale and inefficient workforce


The mergers were announced with a very noble idea in mind; however, the timing is a bit unfortunate. During these times of economic slowdown, India needs its bankers devoting their time to boost the economy. With the merger happening, the banks will be more pre-occupied with the integration process rather than enhancing the economic growth. Merely combining banks will not help enhance credit capacity, it is also important to see whether synergies in reality will be created (or if it is merely on paper).

The share of assets of the top three or four banks account for only 30%-32%. Thus, the banks still remain fragmented for a major part – systemic risk or contagion effect shall not be a problem as of now. Although this is the case, out of the four mergers not one of them can be said to be financially strong. This is a phenomenon of blind leading the blind; it cannot be expected that two financially weak banks can merge into one financially strong entity. “A chain is only as strong as its weakest link.”

This announcement comes at a time when even the results of the previous mergers (e.g. Bank of Baroda) have not yielded any fruit and the PSBs have recently jumped back from a long stress scenario. It seems as if there is no common theme in the mergers (i.e. retail, corporate or SME), no particular skill-set that has been emphasized upon. Rather, it was just assumed that all the banks fall under the same template and a haphazard combination was made – in such a case, there is a slim chance of synergy creation. Also, with no major theme in hand the multifarious objectives will confuse the banks with respect to the pressing matters at hand.

According to technical experts, it might take around three to four years to integrate the existing IT systems of the banks. Although all of the use the CBS, heavy customization is required, mobile apps need to be in sync, backend functions have to be centralized effectively.

As for the case of resolution of NPAs, it might actually become easier and faster. Earlier, the bankers had to talk to their counterparts, the approach the senior management to come to a resolution. Now, with these institutions merging and with lesser levels to report to, a solution plan can be implemented at the earliest with considerably less effort. Apart from this, now that the banks will have a common database and a larger network, they can increase the services offered at a higher level at lower costs – this might show an increment in the fees earned and in turn, the profitability. It is expected that the Anchor banks will be benefitted more from the mergers as the swap ratio will be in their favour.

Chandreyee Sengupta
Team Member- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2019-21)

Connect with Chandreyee on LinkedIn

Valuation methods and issues that arise while conducting valuation

Valuation of a Business is conducted in order to arrive at an estimation of the Economic Value of an Owner’s Interest in a certain Business under the guidance of a certain set procedures. Valuation may be computed for a business in order to arrive at an accurate snapshot of the Financial Standing of the business which is presented to Current or Potential Investors. Valuation is generally conducted when a company is looking to merge with another company or acquire another company or sell off the entire or a fragment of its operations to another company. Some other reasons to conduct Valuation include establishing partner ownership, taxation, analysing the financial strength of the business i.e. determining solvency, planning for future growth and profitability of the business or even divorce proceedings. Further is a brief description of the approaches to Valuation Models and the issues that arise when conducting Valuation under those methods.

There are Three Different Approaches which are commonly used in Valuation:

  1. Income Approach
  2. Asset Based Approach
  3. Market Approach

Further is a brief description of the approaches to Valuation Models and the issues that arise when conducting Valuation under those methods.


  • Under the Income Approach, Valuation is based on the Economic Benefit expected from the investment and the level of risk associated with the investment.
  • There are several different Income Methods which include Capitalisation of cash flow or earnings, Discounted Future Cash Flows which is commonly known as DCF and the excess earnings method.
  • DCF is the Net Present Values of the Cash Flows projected by the company. The Value of an asset is intrinsically based on its ability to generate Cash Flows is the underlying principle of this approach.
  • This method relies more on the fundamental forthcoming expectations of the business rather than on the public market factors.



  • The value of a business depends largely on the profitability, financial health and earning power. Accounting Profits and Cash flows are two means to measure it.
  • Free cash flow is a better means to analyse profitability as compared to accounting profit because the Revenues and expenditures of the business are accounted for at the right time and the cash flows of a business cannot be manipulated as much as earnings.


  • At times while projecting the forecasts, the revenue is shown to be shooting up in numbers during the forecast period. This results when taking a hypothetical high growth rate.
  • What the valuer fails to notice is whether the growth of the company is aligned with the industry, what the market size of the company is or even whether the company has a strategy to achieve the desired growth goal.


  • What should be taken as the optimal length of the Financial Forecasts is one of the key choices that need to be made.
  • If a shorter forecast period is considered, it fails to give the effect of different parameters on the business in the upcoming years. For example in case of a company under FMCG sector, it would not be right to prepare financial forecasting for a period of just two to three years.
  • On the other hand is the length considered is too long, the valuation could result as misleading. This is because in the long run, risks associated with the business cannot be anticipated easily.
  • Thus, it is essential to consider an explicit time frame while conducting valuation that is neither too short nor too long. A time frame ranging from 5 to 7 years is generally considered when performing DCF Valuation.


  • Beta comes into consideration when deriving the Cost of Equity of a company.
  • When Valuation of a company is done under the circumstances of a merger or an acquisition, majority of the times, the Beta is taken to be that of the Acquiring Company. This is done under the assumption that the Target Company is a smaller company when compared to its bidder, thus the Target Company would have no influence on the resulting Capital Structure as well as the riskiness of the New Company.
  • Other times, the Beta considered is an estimation of the emerging company’s Beta with respect to a Market Index. But just using the historical beta is very risky when the company or its future risk prospects are not analysed.
  • At times, when levering and unlevering the Beta to arrive at the estimate, incorrect formulae are used. The levering should depend on the amount of debt prospect of the company in future.


  • Along with Beta, another problem that arises in deriving the Cost of Equity is the Risk free Rate.
  • Majority of the times the Risk free rate considered is just the 10 year Government Bond Yield.
  • What one fails to consider in this is the Country Risk. If this view is taken into consideration, the Cost of Equity of a company in United States would be same as that of a company in Bolovia, which is highly incorrect.
  • Thus, the Country Risk Premium needs to be deducted to arrive at an accurate Risk Free Rate.


  • It is a wrong notion to consider a higher discount rate when there are higher risk cash flows, on the basis that the discount rate on cash flows should reflect the riskiness.
  • Generally Book Values of Debt and Equity for arriving at the Weighted Average Cost of Capital (WACC). But this violates the Basic Principle of Valuation which is to arrive at a Fair Value
  • Thus, when valuing an on-going business, the market values of debt and equity should be taken into consideration to derive the WACC.


  • There is a Material Impact created on the value of a company when a long term growth rate is used.
  • This is considered when arriving at the Terminal Value. The Terminal Value is the Present Value of all the Cash Flows at a future point in time, when the cash flows are expected to be at a stable growth rate.
  • These Long Term growth rates generally lie in the range of 5% to 6%.
  • They depend on the growth rate of the economy and never exceed that figure. This is because, a higher growth rate than the GDP rate of the economy would imply that the company would grow larger than the economy. Applying such a high rate would result in overvaluation.


  • Under this approach, the value of a business is derived as a sum of its parts. This method takes into account all the assets and liabilities of the Business.
  • The Value of the Business is the difference between value of all relevant assets of the business and value of all the relevant liabilities.


  • This approach is used to derive the appraisal value of the business, intangible asset, security or business ownership interest by considering market prices of comparables which have been sold recently or are still available.
  • There are two main Valuation Methods under this approach-
    1. Comparable Companies Method – This method entails the use of valuation multiples of companies which are traded publically.
    2. Comparable Transactions Method – This method entails the use of valuation figures of observed transactions of companies in the same industry as that of the Target Company.
  • Certain common multiples considered for Relative Valuation are – P/E Ratio, PEG Ratio, EV/Sales, EV/EBITDA, EV/ Sales.



  • The industries in a market are often loosely defined. Making is difficult to select optimum peers to conduct Comparable Company Analysis.
  • Some of the major factors to be considered while selecting peers are product line, geography, seasonality, revenue, etc.
  • Another way to identify peers it to check the annual report of the companies, in case the company is a listed one, where the peers would be mentioned.
  • The same could apply for a Comparable Transaction Analysis. Where Multiples of an extra ordinary Transaction are considered for conducting Valuation.


  • There are a number of Multiples available to value the worth of a business. Each of these Multiples relate to a specific extent of the financial performance to the potential selling price of the business.
  • If a multiple is based on the Net Cash Flow, it should not be applied to the Net Profit.
  • For valuing new companies, which have small sale and negative profits, using multiples such as Price-to-Sales or Enterprise Value to EBITDA Multiples can be misleading. In such cases, Non-Financial Multiples can be helpful.
  • Certain common multiples considered for Relative Valuation are – P/E Ratio, PEG Ratio, EV/Sales, EV/EBITDA, EV/ Sales.


  • The Enterprise Value should not include excess cash. Also the Non-Operating Assets must be evaluated separately.
  • Operating leases must be considered in the Enterprise Value, the interests costs associated to such operating leases must also be added back to the EBITDA Value.
  • This is because though the Value of Lease and the Interest Cost of the lease, affect the ratio in the same direction, the effect is not of the same magnitude.


  • While conducting Relative Valuation, it is a common practice to consider the Average value of the PEER’s multiples instead of Median value.
  • The middle element of the data is the Median Value. Taking Median Value enables the extremely high or low values to be disregarded.


  • Valuation should not be derived by depending on just one methodology, especially just Relative Valuation. Relative Valuation is a considerably good method to validate the value derived from other Valuation Methods.
  • One issue of relying on Relative Valuation is that getting data of a privately owned business is difficult. Also the shares of a public company are more liquid than that of a private company.



  • Most of the times it is asserted that Valuation is a Scientific Fact rather than an Opinion.
  • A logical process is followed to reach a Valuation Figure or Opinion, thus there is the role of Science.
  • But what is forgotten is that the Value arrived at from any Valuation Method, is contingent to a set of assumptions and expectations. These expectations include future prospects of the company, industry or even the country. Another thing which is factored in is the Valuer’s appraisal of Company Risk.
  • Hence, valuation is more of an Art than a Science.


  • Business Goodwill is actually directly related to the earning power of the business.
  • If the Business earnings fall below the return on assets, then the business has a negative goodwill.


  • When conducting Business Valuation, risk assessment plays a very important role.
  • Each company has different financial and operational factors which contribute to its risk profile.
  • Thus, each company has different Discount and Capitalisation rates which need to be taken into consideration.


  • Redundant assets are those which are not required for the day to day operations of the business. The value of such assets should be added to the value of the business or company.


  • Many a times the project cost is considered to be the same as the purchase price. But that is not correct.
  • In order to arrive at the Purchase price s=certain adjustments need to be made to the project cost.
  • One such adjustment is that the buyer of the business also needs to inject certain working capital.
  • If there is any deferred equipment, its maintenance cost also needs to be adjusted.
  • There are certain investments which are needed to maintain the income stream such as hiring staff replacements, licences, regulatory compliances, etc. Such costs also need to be adjusted.

The method which has the capability to incorporate all the significant factors which have a material effect on the Fair Value is the Most Appropriate Method of Valuation.

Furthermore, one must keep in mind the above issues which can arise while deriving Valuation for a Business, Stock or Company in order to avoid any misleading valuation figures.

Vhabiz Lala
Volunteer – Equity Research & Valuation (M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

Connect with Vhahbiz on LinkedIn



Naresh Goyal founded Jet Airways in 1993 with a fleet of four leased Boeing 737 aircraft. At a time when private airlines had just started coming up in India, Jet Airways, a full-service airline, grew fast to become India’s largest international carrier.

However, with budget airlines such as SpiceJet and Indigo entering the fray, the aviation industry became highly competitive. Being budgeted airlines, SpiceJet and Indigo started to offer low airfare, forcing Jet to lower its fares too. But it continued to offer full services which lead to increasing operational costs and forcing it to keep borrowing from banks to stay afloat in the market. Macro-economic changes such as a rising fuel costs and weakening rupee also hurted it further.

It has consistently been one of the India’s top three airlines in past decade. Jet Airways was founded by ticketing agent turned entrepreneur Naresh Goyal, after India ended a state monopoly on aviation in the early 1990s. It’s now 24 per cent owned by Abu Dhabi’s Etihad Airways PJSC and controls 13.9 per cent of India’s market, one of the fastest-growing in the world.

As a slide of budget carriers started flooding the market in the mid-2000s, offering no-frills, yet on-time flights, Jet Airways began dropping fares even some to below cost. On top of that, provincial taxes of as much as 30 per cent on jet fuel added to its expenses, while price-conscious Indian travellers refused to pay a premium for on-board meals and entertainment. Unlike budget operators, full-service airlines such as Jet Airways offer most of such amenities for free.


In the first quarter of FY18, Jet posted its first quarterly loss of Rs 1,323 crore in 12 quarters. This was compared to a profit of Rs 53.50 crore in the same quarter a year ago. While it said that it has been working on operational efficiency but the loss only widened with each passing quarter. As we can see in the graph below:


In August, it asked its employees to take a haircut of up to 25% on their salary as a part of the cost-cutting measure. In September, it stopped offering free meals on economy class bookings. And in October, there were reports that the airline had laid off nearly 30 employees from departments such as engineering, security, sales and senior-level executives from the in-flight services department.


Reason 1: Acquisition of Air Sahara

On January 2006, Jet made its first attempt to acquire Air Sahara. This news was received with mixed emotions amongst the investors in the market and analysts even suggested that Jet had overvalued Sahara. Even after getting a go ahead from the Indian Civil Aviation Ministry, the deal fell apart due to disagreement on the price. Lawsuits were filed by both the companies seeking damages from each other.

Then in April 2007, this time Jet Airways managed to buy Air Sahara for INR 1,450 Crores.

Why Jet wanted to acquire Sahara?

  • Jet airways will get access to leased fleet of 27 aircrafts of Air Sahara with its Infrastructure and Logistics
  • It will give more coverage to the areas where Air Sahara is not yet present
  • Jet will get more airlines pilots and maintenance facilities
  • They will get to capture more market share that will be around 42%

Why this deal was not a success?

  • The merger guidelines didn’t talk about aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities post the acquisition
  • The Jet asked for 20-25% discount on its bid, stating that the merger was over-valued
  • Jet was expecting economies of scale to benefit for them but there was an upcoming merger of Air India and Indian Airlines which could have been a direct competition and a major threat to this merged entity.

Reason 2: Naresh Goyal’s inefficient management control

Experts say that there was a fault in Goyal’s management style. His decision to have a single management team, headed by himself, running all Jet’s operations was a critical mistake. Analysts say he should have had one team running the full-service carrier and other running the budget flyer. Jet lacked a concrete business model and played with it often, which confused investors and its passengers alike.

Several experts recently asked Naresh Goyal to exit as that could have been a way for Jet’s survival, since any investor coming on board wanted to take the control and hence due to immense pressure he had no other option but to step down.

Reason 3: Debt burden

Goyal has also been accused of making bad investments and failing to address the company’s deteriorating financial predicament while borrowing heavily. They spent more than they earned and also kept accruing debts. They have a total of Rs 8500 crores of debt in their books and they are trying to sell off their planes with hopes of fulfilling the debt but failed to do so.

Reason 4: Sale of stake to Etihad Airlines

In year 2013, Jet airways sold 24% of stake to Etihad airways for INR 2000 crores. This was also a year in which Jet faced a debt problem. And hence, it ends up taking competitive advantage of the new policy change allowing Foreign Direct Investment (FDI) in private sector. Even after having a 24% stake then, Etihad Airlines were not having major say in the functioning of the airlines. In March 2019 also when Naresh Goyal reached to Etihad, the maximum fund that they were agreeing to invest was INR 4200 Crores and with several conditions.

Reason 5: Purchase of mixed fleet

The other mistake was the purchase of mixed fleet of 10 wide-bodied Airbus A330 and Boeing 777 planes. Unlike his peers, Goyal decided to have only 308 seats, much lower than the global standard of 400, in order to give his customers a premium offering. He lost a fourth of the potential revenue in the process.

Reason 6: Fluctuating Crude Oil prices

All of India’s carriers are sensitive to fluctuations in global crude oil prices because they are major importers of oil. When the rupee is weak, which it has often been over the past year or so, fuel becomes more expensive, which is the largest expense for airline industry. Increasing oil costs and the Indian rupee hitting its lowest last year affected all Indian carriers. IndiGo and SpiceJet also reported massive losses but their books were resilient enough to survive the quarterly losses. However, Jet’s books were saddled with debts. “Jet Airways failed to manage its balance sheets and was caught out by these cyclical changes in the industry,” Mumbai-based economist Ashutosh Datar told AFP.


  • National Stock Exchange (NSE) announced that there will be no trading in Jet Shares w.e.f. 28 June 2019. Hence this lead to the fall in the share by 44%.
  • Jet owed SBI an amount worth of INR 8500 Crores. Jet Airways also owes over INR 10,000 Crores to its vendors as rental for aircraft which it had failed to pay up. At its peak, the airline was flying as many as 120 planes, most of which were on the lease. Jet Airways also owes around INR 3,000 Crores to around 23,000 employees who have not been paid since March 2019.
  • Future of, Jet depends on the new lenders, who are currently interested in buying it. But the problem is, lenders are not doing a great job and secondly they didn’t give them funds to keep pulling its operations. This is one of the reasons for shutting down business.
  • No one is interested in buying Jet’s grounded airplanes as there is no benefit for them in the books of huge debts. The books also consist of a huge expenditure in turnaround plans and salaries.
  • A lot of current slots of Jet has been taken off by other airlines.
  • Hinduja Group and Etihad Airways PJSC are nor proceeding to resurrect. Jet airways met with Ethihad Airways PJSC and Hinduja Group to look into the offer put forwards by them. But the lenders were not ready to accept the terms of the offer and decided to opt for insolvency proceedings instead. Hinduja’s offer would have meant that the lenders would take 95% haircut on their fund based exposure to Jet airways. “As far as bidding for Jet Airways is concerned, the Hinduja Group has taken a back seat now,” said a report. “The promoters of the group feel that it’s too risky for them to get involved (with Jet Airways) at the moment, due to ongoing government investigations and the recent insolvency pleas submitted by operational creditors at the National Company Law Tribunal (NCLT).”
  • In September, the income tax department raided Jet and drafted a report in February 2019. “The investigation report has found tax evasion of over INR 600 Crores. There were some transactions concerning a Dubai-based entity, which were of a suspicious nature,” an income tax official said.

    According to the investigation report, such payments were allegedly in excess of permissible business transactions under the Income Tax Act and is not considered as allowable expenses. “The survey was conducted at the time when Jet Airways was delaying the announcement of its June quarter result,” an income tax official told.”These are excessive payments made with the intent to divert funds abroad, so as to evade taxes.”


NCLT admits SBI insolvency plea against jet airways. It also asks (Insolvency Resolution Professionals) IRP to take hold of all its assets. IRP must try to close jet airways in 3 months. It asks IRP to first report it on July 5, 2019 and after every 15 days the report is been asked to be submitted. As this matter is of national importance, they gave them 90 days instead of 180 to resolve the issue related to Jet.

There is a hope as someone will come up with a resolution plan and aircraft will take off and employment will be secured again.

Other financial and operational creditors can also file their claims. National Aviator Guild will be filing claims on behalf of pilots before the IRP.


Jet Airways is on the verge of Bankruptcy. However, there are still some hopes for it. This case was taken by lender to NCLT and the application was accepted by NCLT then the company will proceed under IBC. Boards of directors have to step down and insolvency professionals will take over the Jet. This might revive the bids for the company as previously keen bidders wanted a change of management. This might give Jet their old good flight.

Apoorva Goenka
Team Leader- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

Connect with Apoorva on LinkedIn

Podcast 101- Valuation of Tech Companies

In Finvert’s first official podcast, Isha Khuteta – a member of Alternative Investments is joined by Mr. Ashish Rane – Senior Manager and team lead of Valuations and Advisory vertical at Aranca, a Global Research and Analytics Firm. Ashish has over 9 years of industry experience, wherein he has worked with the biggest names in the industry. Together, they discuss the valuation of technology companies and to what extent is it justified. During the discussion, Ashish gives us some insights into what factors need to be considered while valuing a technology firm and much more.

REITs – Real Estate Investment Trusts

The increasing incomes, urbanization and economic growth are majorly pushing the residential and commercial realty demand in India. The market size of the Indian Real Estate sector is expected to reach US$ 1 trillion by 2030 from US$ 120 billion in 2017 and by 2025 contribute 13% of the country’s GDP. Currently, the Real Estate sector contributes 6.3% to India’s GDP. This sector is growing at a rate of 10% p.a. From the past records, the returns from real estate investment have rarely been negative largely due to capital appreciation. It has also become a preferred class of assets for investments. But looking at the current property rates, buying a property is no piece of cake.

So how do people benefit from real estate without actually buying a property?

To overcome this hurdle, REIT’s were introduced.


Real Estate Investment Trusts or REITs are companies that own or finance income-producing real estate in a variety of property sectors.

A REIT is a security linked to real estate that can be traded on the stock exchanges. They are similar to mutual funds. Just like mutual funds, REITs also have sponsors, trustees, fund managers, etc. Both can be bought in units. However, like mutual funds have their underlying securities like stocks, bonds, gold, etc. REITs invest in income-producing real estate. REIT is basically investing in real estate without actually buying the property. The amount raised from the listing is invested in income-producing real estate like commercial office spaces, warehouses, malls, hotels, etc. The profits from these properties are then distributed amongst the investors. At least 90% of the taxable income should be distributed by a company to qualify as a REIT.


The US based REIT approach to real estate investment offering investors access to portfolios of income-producing real estate has been adopted by nearly 40 countries worldwide. Mutual funds and ETF’s offer the easiest and most efficient way for investors to add global listed real estate allocations to their portfolios.

Following is the comparison of the S&P US REIT Index with the S&P 500, indicating the trends over the years.

Launched on December 31 1992, the S&P United States REIT Index defines and measures the investable universe of publicly traded real estate investment trusts listed in the United States.

We can see that over the last 10 years, the returns from these indices have been similar. However, looking at the 1 year annualized returns the REITs index has largely outperformed the S&P 500 with returns of 16.24% compared to the benchmark returns of just 5.87%.


REITs have been introduced for more than a decade in India, but it was only in October 2013 that a draft guideline was issued by the Securities and Exchange Board of India (SEBI). However, discrepancies regarding the tax implications on the income earned and some other related aspects were restricting the instrument from becoming a reality. Though to overcome the issues there was some movement in the 2015 Budget, lack of clarity on a few things did exist.

The procedure for a REIT to get listed on the exchange is quite similar to getting a company listed. Necessary documents have to be submitted to SEBI, a red herring prospectus is issued, registrar and book running lead managers are appointed, and then the IPO is open for subscription.

Country’s first listed Real Estate Investment Trust – Embassy Office Parks REIT opened for investment between March 18 and 20, 2019. The company had planned to raise Rs. 4570 crore through the IPO. With a minimum application of 800 units and 400 units thereafter, the per unit price of the instrument was kept at 299-300, making it an investment of Rs. 2.4 lakhs. In the first month of its listing since April 1, it has managed to outperform the benchmark equity indices. This instrument delivered a return of 7.32% against the issue price of 300, whereas the NIFTY had gained a mere 1% in that period. One interesting fact about this IPO is that there were more than 10 book running lead managers, including top investment banks like Goldman Sachs, J.P Morgan, Morgan Stanley, Axis Capital and more.

To make REIT’s more attractive several amendments have been made in the past few years. As per the latest amendment by SEBI on 1st March 2019, the minimum investment limit has been reduced to ₹50,000 from ₹2 lakh. The minimum investment in the Embassy Office Parks REIT IPO is above ₹2 lakh as it was filed much before the amendment was made.


REITs in India are at a nascent stage. Seeing huge growth potential in the Indian economy, global investors are making huge investments to acquire large commercial office spaces to increase their REIT portfolios and thus this increases the scope for REIT’s as more and more commercial space would be needed to fulfill these demands. Also, the projected five-year returns on commercial assets are expected to be around 12-14%, hence good returns can be expected from REIT’s.

A recent report by JLL India had projected $35 Billion worth of office stock, that the commercial real estate market is likely to provide, around 294 million sq. ft of space that can be listed under REIT’s.

In the past few years, the government’s move to bring progressive alterations in India’s REIT policy has been a major cause for the increasing interest of investors in the commercial office space, making it more market-friendly. Progressive regulations, rising transparency levels and a healthy commercial real estate market in the country have made the segment a favorite amongst institutional and global investors, who have allocated nearly $17 billion in the form of direct investments.

Performance-wise, REITs offer stable cash flow and attractive risk-adjusted returns. Also, a real estate presence can be good for a portfolio, diversifying it with a different asset class that can act as a counterweight to equities or bonds.

Nimil Jain
Volunteer – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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Low Risk Anomaly: Does it work?

I remember my first introduction to finance. ‘Higher the risk, higher the rewards’ were the exact words uttered by the professor as the young minds were trying to contemplate the entirety of it. One brief explanation and all of us were satisfied with the answer. ‘If you want to move upward/earn high in life, you have to take risks’. Time and again we’ve heard versions of these words (if not the exact same thing) being thrown on us. These words then go on to shape students’ brains and most of the decisions that we take in our lives. Calculated risks are what they call it and that’s because taking unnecessary risks don’t make sense at all. Just like falling down a mountain is a way of descending but isn’t always a great choice. You may get to the destination faster but at a huge cost of life. Likewise, you can take a smooth road down the mountain which may take more time but it’ll get you there safe & sound.

Although not entirely false, sometimes it is better to not take risks. This behaviour is explained in behavioural finance by the concept of Low-risk anomaly. The concept takes the high risk/high return concept and dumps it in the garbage. Okay not so dramatically, but what it does say and in most cases, prove, is that even with low risk, one can achieve high returns or better, even generate alpha over high-risk stocks. This just undermines the whole CAPM theory. A number of studies in the field have shown that this strategy has worked in most of the developed economies and so this strategy has caught the eyes of investors everywhere.

Seeing its popularity grow in the US, NSE even launched a Nifty Low Volatility (LV) 50 index on November 19, 2012, comprising 50 of the least volatile stocks out of the top 300 companies listed on the NSE. Similarly, launched on July 08 2016 came the Nifty100 LV 30 consisting 30 of the top 100 least volatile stocks. Along with it NSE also launched the Nifty High Beta 50 index with just the opposite outlook but with the same expectations.  Since these indices have been launched recently, the 5 and the 10 year returns calculated below have been back-tested to get the annualised returns.


A look at the 10-year return of both these indices and comparing them with the benchmark NIFTY 50 will give some pretty disappointing results for high-risk takers. Forget high returns, the Nifty High beta 50 didn’t even give positive returns to its investors while the Nifty LV 50 beat the benchmark with comfortable margins. Both the Nifty100 LV 30 and Nifty LV 50 have had similar returns 

Five year returns tell us the same story with the high beta index still not giving any returns at all. A quick glance at the graph will tell us how similarly both the LV indices move over a long term horizon.

The three-year returns tell us a different story wherein our LV indices haven’t able to beat the index. Some good news for the high beta 50 index but still, returns are in single digits while nifty has given fantastic returns at 20.7%. Notice how similarly the benchmark index and the LV indices move.

For the last year comparison disappointment continues for the high beta index with the most negative returns at 16.5% while the LV indices manage similar returns at around 5.5%. Benchmark still beats every index with double the returns of its nearest competitors.

It is important to note that all the constituents of Nifty100 LV 30 are overlapping with Nifty LV 50 i.e. all 30 companies in the former are a part of the later index which probably explains the similarity of returns between the two indices. NSE hasn’t cared to explain the reason for introducing LV 30 index as there isn’t much of a difference between the two apart from the number of index constituents. The only real difference to note is that the former chooses from a list of top 100 while the latter chooses from a list of 300 stocks with the highest market cap on NSE.

BSE, too, wanted a piece of the pie and launched its own S&P BSE Low Volatility Index on December 03 2015. The index comprised 30 of the least volatile stocks in the S&P BSE LargeMidCap as measured by Standard deviation. There is no high volatility index to compare it with. Keep in mind returns of both these indices are Total Returns (TR) which basically means that dividends, if any, are reinvested in the index as & when distributed by the company.

Calculations for the BSE LV TR index have been back-tested as the index was launched in 2015 and so the returns are hypothetical. The low-risk strategy has worked in our favour providing comfortable margins over and above the benchmark BSE SENSEX.

Looking at the image below aligns with our previous findings of the LV indices at the NSE. Only 5Y and 10Y returns have beaten the benchmark (remember these returns are hypothetical since the index launched in Dec 2015). The LV index hasn’t actually beaten the benchmark since it launched as seen in the 3Y and the 1Y returns. 28 out of the 30 stocks in the index are the same as NSE LV 50 so there are no surprises here.

From the above findings, we observe that the LV strategy hasn’t really worked for short and medium-term returns but rather for the long term (5+ years). Most of the results are hypothetical since none of the LV indices were launched 10 years ago. Thus, it is only to be seen in the years to come whether the indices will hold up to the expectation resulted from success around the world or we’ll see another case of a gap between expectation and reality.

Disclaimer: This is not to be considered financial advice in any manner. Do your research before investing in any of the mentioned assets. Our work is limited to educating the readers regarding the same. I just wanted to check the degree to which the concept of low-risk anomaly works.

Ashish Tekwani
Forerunner- Finvert
(M.Sc. Finance, NMIMS – Mumbai 2018-20)

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National Spot Exchange Limited (NSEL), the first Electronic Commodity spot exchange of India, was incorporated in May 2005. NSEL was a subsidiary of 63 moons technologies limited, then known as Financial Technologies India Limited (FTIL) which was founded by Jignesh Shah.

The then Prime Minister’s vision to create a single market across the country for both manufactured and agricultural produce was the reason for NSEL to be conceived.

NSEL commenced its operations in October 2008. Its operations included providing an electronic platform to undertake spot trading of commodities. The then Managing Director of NSEL, Anjani Sinha announced that the NSEL had launched gold, mini gold, silver and cotton contracts, and more commodities were to launched in every following week.

The case came into light when NSEL made a payment default on the orders of the Forwards Market Commission (FMC) to stop launching any fresh contracts. This led the Exchange to abruptly shut down in July 2013.

According to the rules of FMC, the ‘SPOT’ contracts needed to be settled within 11 days. In other words, the entire transaction including delivery of the commodities as well as transfer of money should be settled in 11 days. Thereby, keeping the transaction as ‘Spot’ and not a ‘Forward Contract’.

What exactly happened?

NSEL supposed to make just T+2 contracts which were spot in nature. But NSEL did not abide by the guidelines. They designed multiple contracts such as T+25 or T+36 contracts. These contracts were forward contracts and NSEL was not authorised to make such contracts. But they did and no one stopped them.

NSEL made paired contracts and termed them as Arbitrage contracts. Investors assumed the arbitrage to be guaranteed as NSEL as an exchange stood guarantee. The brokers sold such arbitrage contracts to the customers where they could Buy the T+2 contracts and sell the T+25 contracts.

A long term contract usually has a higher price as compared to a short term contract. Thus the T+25 days contract was priced higher than the T+2 contracts. Thus the pattern of contract for the customers was that they purchased the T+2 contracts and sold the T+25 contracts. Now on the second day, they took the delivery of the commodities and stored them in the NSEL warehouse. Further on the 25th day they provided delivery of those commodities to whom they had sold the T+25 contracts. The price difference produced almost 15-18% net return to the investor after deducting storage charges, VAT, etc.

This went on for two years resulting in NSEL to generate high revenues. The number of customers to escalate to around 15000, who put in at least INR 2 lakhs, in order to earn higher returns.

Now the issue that arose was that these contracts were always executed in pairs. None of the investor was allowed to take just one side of the contract i.e. either purchase or sell. The brokers reported to have sold the pair contracts in the format of purchase on the near side while sell on the far side.

What stopped them?

Exemption was provided to spot exchanges like NSEL and NCDEX by the Forwards Market commission (FMC), for one day carry forward facility. Although, the day limit was not specified in the law, the rule stated that the contract should not surpass the 11 day trade settlement.

The Ministry of Corporate Affairs issued a show cause notice dated April 27, 2012, to NSEL for certain clarifications regarding the trades. Further on the orders on the Department of Consumer Affairs (DCA), NSEL suspended trading in all but its E-Series contracts as on 31st July 2013. NSEL would not launch any new contracts and the existing contracts were needed to be settled on the due date.

As seen earlier, there were investors who had purchased commodities on the T+2 contracts. These investors expected that after 25 days their sell contract would actuate and they would be paid back money from the sell contract.

According to Anjani Sinha, the MD, there were 40 live contracts out of the 86 contracts they launched in various commodities which had settlement period of over 11 days.

This resulted in the INR 5600 crore settlement crises in July 2013.

In August the FMC ordered Financial Technologies India Limited to appoint a reputed Forensic auditor firm to establish the creditability of the Books of accounts authenticate the commodity stock it had in the warehouses with the records. It was also in news that FTIL in a draft audit report suggested system and process improvements in some of NSEL’s departments.

Choksi and Choksi was the audit firm who was provided with the assignment of NSEL. In the audit report, they had provided a clean chit regarding the E-series contracts on NSEL. The FMC gave a No Objection Certificate for the E-Series settlement. Thus 40,000 genuine claimants of E-Series received benefit.

The audit report which came down heavily on NSEL stated that the NSEL had no mechanism to monitor the activities of the custodians in respect of quality, quantity or verification of underlying stock except for the two audit conducted in the past in December 2012 and March 2013. In many cases the collateral was just inadequate or just missing leading to the settlement crises.

In October 2013, Amit Mukherjee (Former Vice- President, Business development NSEL) was the first to be arrested by the Economic Offenses Wing (EOW) of Mumbai Police. Further arrests were of Jay Bahukhandi (Former Assistant Vice President, NSEL) and Anjani Sinha (Former Chief executive of NSEL).

Who were actually opposite the investors?

Opposite to the investors i.e. who were supposed to sell the contracts of T+2 and purchase the contracts of T+25 were revealed quite later. In reality they were just 24 who used the paired contracts pattern to raise money easily.

One of these 24 was Nilesh Patel, the Managing Director of NK Proteins Limited, supposedly the first borrower in the NSEL Scam. He was arrested by EOW in October but subsequently got out on bail.  Raised funds under the garb of the contract without depositing any collateral in the warehouses. The amount earned by NK Proteins due to the above contracts were utilised for expansion purposes and a castor oil joint venture with Adani group. It had deployed around 333 crore of the investor’s money it earned into the joint venture contract.

Some of the other defaulted borrowers who were also arrested include – Arun Sharma (Lotus Refineries), Surinder Gupta (PD Agro), Indrajit Namdhari (Namdhari Foods), Kailash Aggarwal (Ark Imports), Narayanam Nageswara Rao (NCS Sugar), B V H Prasad (Juggernaut Projects), Varun Gupta (Vimladevi Agrotech), Chandra Mohan Singhal (Vimladevi Agrotech), Ghantakameshwar Rao (Spin-cot Textiles)and Prashant Boorugu (Metcore Steel & Alloys).

What about the Brokers?

In November 2016, on the orders of the Ministry of Corporate Affairs, the Serious Fraud Investigation Office (SFIO) conducted investigations for the alleged irregularities in the NSEL Scam. SFIO is a multidisciplinary organisation which is involved in detecting white collar crimes. It recently submitted a report to the government stating that all the 148 member brokers of NSEL had earned ‘Unlawful Gains’ while their clients had to suffer ‘illegal Losses’.

SFIO wanted the Securities and exchange Board of India (SEBI) to put the commodity broker houses or their promoters or their directors through the ‘Fiat and Proper test’. SFIO also suggested the government to begin the ‘Winding Up Process’ of the 148 broker firms as they had been conducting business in a fraudulent manner.

The brokers had been accused for indulging in manipulation of client KYCs large scale modification of client codes on multiple deals as well as infusion of unaccounted money via their NBFCs. They made false representations of assured and risk free returns to clients.

Accused of the alleged role in the NSEL Scam of about INR 5600 crores, Criminal proceedings were initiated by SEBI against about 300 brokers.

Show cause notices were dispensed by SEBI to top 5 broker firms namely Anand Rathi commodities, India Infoline Commodities (IIFL), Geofin Comtrade, Motilal Oswal Commodities and Phiilip Commodities. The charges issued were mis-selling of NSEL contracts as they promised assured returns without ensuring delivery. Further they were also issued second show cause notices when SEBI was not satisfied with their explanations offered on the mis-selling allegation. SEBI said that these broker firms seemed to have a close association with the paired contracts and NSEL as they facilitated the paired transactions for their clients.

Nearly two years after it issued the show cause notices, Market regulator SEBI, Motilal Oswal and IIFL Commodities as ‘Not Fit and Proper’ and they shall cease to act as a commodity derivatives broker. In the orders uploaded by SEBI on its website, Motilal Oswal and IIFL had a close connotation with NSEL and allowed themselves to become a part of the network.

“Thus…the notice is not a fit and proper person to be granted registration to operate as a commodity derivatives broker,”

said the SEBI order.

SEBI also ordered that the clients of Motilal Oswal and IIFL Commodities need to withdraw or transfer the securities held by them with the broker within 45 days at no additional cost.

Motilal Oswal in a statement said that they too were the victim of the scam like thousands of other investors. They also claimed to have its own group investment of around INR 57.8 crores due from NSEL on the date of default. They would explore legal options as they were aggrieved by the order and also the order would not have any impact on the overall business of the company.

India Infoline Commodities Limited did not have any outstanding dues from NSEL, but would also explore legal options being aggrieved by the order.

In case of IIFL only 0.06% of its total business is in commodity trading and a 326 crore exposure to NSEL. While Motilal Oswal had a 263 crore exposure to NSEL.

Both the companies are likely to appeal the directions in the Securities Appellate Tribunal (SAT), according to the officials of the two firms.

The next to be declared as ‘Not Fit and Proper’ were Geofin Comtrade (Formerly known as Geojit Comtrade) and Anand Rathi Commodities (ARCL) by SEBI on 26th February 2019.

According to a report, Geofin Comtrade had an exposure of about INR 290 crores while ARCL had an exposure of INR 591 crores against NSEL.

Phillip Commodities India was the latest and fifth broker that SEBI declared as ‘Not Fit and Proper’.

The clients of Phillip Commodities, Geofin Comtrade and Anand rathi Commodities were given the same order to withdraw their funds or securities within 45 days. If they failed to do so the broker would transfer it within 30 days thereafter.

SEBI said that even though the broker firms were yet to be established in court, it is justified to keep a person in doubtful reputation out of the market rather than having the risk of market to get affected.

Fear looms around the other broker firms named by various investigating agencies as similar actions would be taken for their alleged involvement in   the NSEL Scam.

Vhabiz Lala
Volunteer – Equity Research & Valuation (M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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