Message from the Convenor

Heartiest congratulations to all of you. With the release of the 8th edition of the magazine we are getting bigger and better and it gives me immense pleasure and satisfaction to be the convenor of $treet. In-Fin-NITIE has given me an opportunity to work with students and advance forth with the common goal of learning and practicing finance. As always, In-Fin-NITIE brings you something new this time around too. After a series of issues with identified themes and articles related to those themes, the current issue gave students a chance to just write about finance. Themes and matching articles aside, this issue has a plethora of written words by students about whatever caught their eye in the field of finance. I applaud the effort of team $treet for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that this issue will entertain you and keep you engrossed about the recent happenings in the world of finance. We look forward to your comments and wish to bring out more interesting issues in the future. Dr. M Venkateswarlu Asst. Professor of Finance NITIE, Mumbai

Editors Note

Patron Dr. Amitabh De Convenor Prof. M. Venkateswarlu Editorial Board Ameeth Devadas Anil Kumar Singh Karthick Mahadevan Keerthi P Nimit Varshney Saurabh Bansal Siddharth Jairath Design Team Gunaseelan M Nilotpal Mukherjee

We are in an ever changing, ever evolving world of Finance. Without doubt, a major part of the world of finance is all about Money. In this milieu, there is an entirely new sensational concept to raise the all-powerful money- Crowd Funding. The concept has significantly emerged in the past decade where in hundreds of thousands of various currencies of money has been raised! In this edition of In-Fin-NITIE, our authors have presented a comprehensive study on Crowd Funding. This edition also comes with a wonderful analysis of the enigmatic behavioural aspects in financial decision making, offering an exceptional insight into Behavioural Economics. A financial magazine is never complete without analysis of industries. This edition also packages thorough analyses on Hotel and Multiplex industries. We had a very tough time choosing the best among hundreds of articles which kept pouring in to us. Each article in this edition- written by some of the best minds in Indian B-Schools- is exceptionally written maintaining a significant level of detail and quality in it. We would like to express our sincere gratitude to everyone who has helped us in putting this issue together. The In-Fin-NITIE Team values your comments and suggestions. Bouquets and brickbats are welcome at street.nitie@gmail.com. Editors In-Fin-NITIE
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www.street.nitie.org

Contents

October, 2012

Behavioural Paradoxes in Financial Decision Making:

An Insight Into Behahioural Economics

17

Features
5 Facebook: An Overvalued Necessity 8 Analysis: Hotel Industry 13 Crowd Funding: The Beckoning of Private Capital Markets 21 Analysis: The Multiplex Industry 25 Taking India Forward: Role of MSMEs in Achieving Double Digit Growth 29 Fin-Quizzitive
You can love it, you can hate it, but you cant ignore it. This time tested axiom symbolizes what Facebook is all about.

Facebook

An Overvalued Necessity
By Vaatsal Tandon SP Jain pgp12.vaatsal@spjimr.org

You can love it, you can hate it, but you cant ignore it. This time tested axiom symbolizes what Facebook is all about. We as a part of the so called FB era are hooked on to social networking in such a manner that with its nearly 1 billion users Facebook would be the 3rd largest country. With the nearly $16bn IPO (Initial Public Offering) launched recently, Facebook became the first internet company to have such a high valuation of $100bn. But was the company correctly valued? Did the hype surrounding the IPO actually reduce investor confidence? Or was the California based company successful in ushering in a new era of generating revenue through social networking?
IPO Hype On 17th May 2012, Facebook sold 421.2 million (12% of the total) shares at a price of $38 to raise nearly $16 billion, giving the company a market capital of $104.2 billion. This offer price valued Facebook at 107 times its trailing 12 months earnings. The underwriters including Morgan Stanley, Goldman Sachs and JP Morgan ensured that share price remained stable on the first day of trading. However, the stock price soon slumped and reached an all time low of $25.52 on 6 June 2012. Such a horrendous stock market debut for Facebook suggests investors are not ready to jump in and create another tech bubble despite big expectations for social media.
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Valuation of Facebook Facebooks stock price as on 20th May 2012 had a trailing PE ratio of 88.3. It implied that the stock was trading at 88.3 times its earnings per share whereas an average S&P 500 company trades at only 14 times EPS. The stock price was much too far from its earnings. Facebooks forward PE ratio of 63.72 also represents an overvaluation of the company. Using an optimistic PE ratio of 20 (slightly above the S&P 500 average) gives a stock price of only $8.60 Consider the pre-IPO analysis of the company in 3 different scenarios > a base case > a high growth > extreme growth scenario. Using a discount factor of 5%, a profit margin of 29% and $3.5 of revenues per user per year yields a value of $ 15.3 billion in the base case scenario, $20.2 billion in the high growth scenario and $ 32.9 billion in the extreme growth scenario. Facebook has declared that it expects a slowdown in its exceptional revenue growth which was 154% from 2009 to 2010 and 88% from 2010 to 2011. Now if we assume that the revenues grow at 45% pa during fiscal 2012 (estimate based on the Q1 growth rate) and at 35% pa in the next fiscal (based on the decline in the industrial growth), we see that the company still has an extremely high valuation compared to the market. The average EV / Revenue multiple amongst its software peers is around 3.5x and the average EV/ EBITDA multiple is around 9-10x. This gives Facebook an enterprise value of around $15-20 billion. Thus, as per the industry P/E multiple, the value of a Facebook share should be around $10. It currently trades in the range of $25 - $40, thereby making it grossly overvalued. With 154% growth in 2010, 88% in 2011, and an expected growth of 45% and 35% in 2012 and next fiscal respectively,the company has an extremely high valuation compared to the market

Future of Facebook and its growth prospects

Facebooks IPO may be overpriced, but that does not mean that the company is not highly valuable. Facebooks revenue was $4 billion and earnings were $972 million for the 12 months up until March 2012. It makes more money from advertising than any other
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website and accounts for 28% of display ads seen online. Also the 60% penetration rate of internet users in the US and 45% penetration rate of the worlds 2 billion internet users, together suggest that Facebooks user base still has significant room for growth. However, these prospects may not last in the coming future. Key concerns towards the same include: Overdependence on advertising as a source of the companys revenue which accounted for 95% and 85% of the companys revenue in 2010 and 2011 respectively The companys ability to adapt to the mobile platform and generate revenue through the same Lack of success in enabling developers to build applications (apps) and websites that integrate with the Facebook Platform Inability of new products and changes to existing products could fail to attract or retain users or generate revenue In 2011 and the Q1 2012, up to 19% and 15% of the revenue, respectively, was derived from Payments processing fees from Zynga, direct advertising from Zynga, and revenue from third parties for ads shown on pages generated by Zynga apps. Hence, in order to sustain the growth levels, Facebook would have to reduce its over-dependence on Zynga Also, social networking franchises like Groupon, Zynga, LinkedIn face growth in competition The user growth has been a primary driver of growth in revenue. The number of subscribers is expected to grow exponentially till 2013. However, the user growth and revenue growth rates would decline as the size of the active user base increases and as the company achieves higher market penetration rates, leading to a decline in growth rates.

It has to find a way to translate subscriber numbers into revenues. It must grow its revenues much faster than its major competitors. These hurdles can be overcome with constant innovation and by learning from the mistakes of its predecessors. It needs to come up with ways to generate revenue through mobile and diversify its focus from advertising to some other avenues. No matter how overvalued the company may seem, it has hooked one entire generation to a product that does not provide any service as such. It represents a shift in how people interact with one another and exchange information on the web. It deserves a premium to the internet coverage universe. Facebook is here to stay and unless some new platform or technology catches the eye of the world it will continue to flourish and keep people connected.

Facebook is here to stay :

Facebook broadly has just 2 major challenges: References

ETH Risk Center Working Paper Series: ETH-RC-11-007 dated November 2011 S-1 filing of Facebook on SEC dated 01 Feb 2012 S-1/A filing of Facebook on SEC dated 15 May 2012 Business Insider News article dated 18th May 2012: http://www.businessinsider.com/apparently-online-ad-sales-manager-is-the-2nd-best-job-to-have-without-acollege-degreeheres-todays-ad-brief-2012-5

The stock market is filled with individuals who know the price of everything, but the value of nothing. - Phillip Fisher
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analysis

HOTEL INDUSTRY
Introduction Global Trends:

By Nakul Sharma

The word 'hotel' origininates from the French word 'Htel' meaning hostel. Hotels are an important component of the tourism product. They contribute to the overall tourism experience through the standards of facilities and services offered by them. Tourism is an important sector of the Indian economy and contributes significantly in the country's GDP as well as Foreign Exchange Earnings (FEE). Most governments recognise the role that the Travel and Tourism sector can play in employment generation, foreign exchange earnings and trade in general, thereby contributing to GDP growth. During the period 2004 to 2009, the CAGRs of foreign tourist arrivals and foreign exchange earnings from tourism in rupee terms were 8.1 per cent, and 14.5 per cent respectively . With its backward and forward linkages with other sectors of the economy, like transport, construction, handicrafts, manufacturing, horticulture, agriculture, etc., tourism has the potential to be an economy driver. India's share in international tourist arrivals is a paltry 0.58 per cent in 2009. International Tourist Arrivals across the globe has grown to 980 million in 2011, 4.4% above 2010, down from a 6.6% growth in 2010, and is forecasted to grow at a moderate pace in 2012. The growth of International Tourist arrivals is expected to continue in 2012, but at a slower pace of 3-4%. ITAs grew by 5.7% in the first two months of 2012. It is anticipated to hit almost one billion by the end of 2012, with emerging economies regaining the lead with stronger growth in Asia and the Pacific .

Tourism

Foreign Tourist Arrivals in India saw an 8.8% growth in 2011 vs. 11.8% growth in 2010 and the domestic visits has grown 11% over 669 million travellers in FY10 to 740 million travellers in FY11[1]. It has demonstrated a growth of over 89% over last 6 years from approximately 392 million travellers in FY05.
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Hotel Segment Premium & Luxury Mid-Market Budget Heritage

Target Customer

High-End 5 Star Deluxe, Business and Foreign 5-Star Leisure Traveller 3 and 4 Star 1 and 2 Star Palaces and Forts converted to hotels Middle Level business Traveller Highly price conscious domestic and leisure travellers Elite Class

Market Structure

The organized market accounts for 30% of the total revenue[5]. The Indian hotels & motels industry had total revenues of $15.7 billion in 2010. The following figure gives the details regarding the revenue of the Indian Hotel & Motel Industry in the year 20062010. The industry has grown at a CAGR of 12.4%. In comparison, the Chinese industry increased with a CAGR of 10 to reach respective values of $59.4 billion
[2]

The break of the industry shows that 5 Star Deluxe and 5 Star together have 45% of the total room capacity and 55% of the total revenue of the organised Hotel Industry [5]. This highlights the dominance of domestic travel in the country [1]. The following graph shows the forecasted Foreign Exchange earned by the tourism industry which is estimated to grow at a CAGR of 7.2% from 2012-2015. This is much higher than the estimated world-wide growth of the foreign tourist arrival at 3-4%.

Industry Concentration Ratios:

Four-firm concentration ratio for the industry is 54% and the Herfindahl-Hirschman Index (HHI) for the top 5 Indian hotel industry is equal to 855. This shows that even the organised sector is highly competitive. 1. The combined revenue of Indian hotel companies listed on stock exchange is about Rs. 78.8 Billion. 2. The market share of Indian companies listed in India is led by Indian Hotels Company promoted by Tatas, accounting for 21.2% of the market share.

Market Share

Classification of Hotels:

The Ministry of Tourism classifies hotels under the star system in seven categories, from One to Five Star, FiveStar Deluxe and Heritage Hotels (introduced in 1994)[1].

Source: IndiaStat

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3. ITC and EIH are 2nd and 3rd with 13.7% and 12.3 % market share respectively. 4. Indian Hotels has been able to increase its market share on the back of diversification as it has brands in all the three major hotel segments - Premium & Luxury, Mid-Market and Budget hotels.
Company Indian Hotels ITC Welcomgroup EIH Operating segments Luxury, mid-segment and budget Luxury, budget and heritage hotels Business hotels, leisure hotels and cruises Luxury, business hotels, economy and cruises Luxury, mid-segment and business hotels Brands Taj, Gateway, Vivanta and Ginger ITC HotelLuxury Collection, WelcomHotel Sheraton, Fortune and WelcomHeritage Oberoi and Trident Radisson Hotels and Resorts, Park Plaza, Country Inns & Suites, Park Inn InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Hotel

Hotels in Pipeline 2012/13

Hotel Gateway, Kolkata Gateway, Raipur Gateway, Gondia Gateway, Hubli Gateway OMR, Ginger Hotels Vivanta by Taj, Dwarka Vivanta by Taj, Coorg Vivanta by Taj, Gurgaon Company Management Contract Management Contract BHL Management Contract Management Contract Root Carporation IHCL Kaveri Resorts Management Contract Rooms 200 119 34 92 193 720 250 62 200

badly hit, overall revenue per room fell by 14 %, in 2008-09 & by 12% in 2009-10. 3. Foreign tourist arrivals in India, which were at 5.28 million in 2008, fell to 5.11 million in 2009 due to the global crisis.

Source: MicroSec Research

Carlson

Foreign Exchange Earnings

InterContinental

Major Expansions

1. Carlson Group is bringing Regent to Gurgaon by 2013 by tie-up with Pioneer 1. Urban Land and Infrastructure which will invest INR 2.45 Billion. 2. The Leela group plans to open 6 more properties by 2013. 3. ITC Ltd expects to add 8-10 hotels in India in the next 3-5 years.
Hotel projects in pipeline 2011-12 (Expected
Hotels Vivanta by Taj, Yeswantpur Vivanta by Taj, Srinagar Vivanta by Taj, Bekal, Kerela Vivanta by Taj, Begumpet Vivanta by Taj, Coimbatore Ginger Hotel, 4 Cities Subtotal Indicative Timeline Launched Launched Soft Opening Launched Launched 2011/12 Company IHCL Management Contact Management Contact Taj GVK OHL Roots Corporation Rooms 327 88 72 181 180 356 1204
Source: ICICIdirect.com Research, Company

The tourism industry is one of the major Foreign exchange earners for India. The forecasted foreign exchange earnings of India are expected to grow at a CAGR of 7.2%. This rate of growth is much higher than the world-wide expected growth of foreign tourist arrival (3-4%). This will add to the much required foreign reserve of the country.

Future Opportunities

Effect of Recession on Occupancy rate and ARR:

1. The onset of the global economic slowdown had a greater impact on the profitability of the sector, determined by the occupancy rate. The occupancy rate came down from 69% in 2007-08 to 60% in 2008-09 and was 68% in 2010-11[5]. 2. Average room rates (ARRs) saw a marginal decline of about 2%. As the occupancy rates were

1. Demand Supply Imbalance: There are currently around 117,000 rooms available in India (2010) and according to the Ministry of Tourism India has a shortfall of 150,000 rooms. The impact of this demand and supply gap is felt by way of increased room tariff [6]. 2. Despite short term challenges, the long term outlook for the Indian hospitality industry is positive. A country as diverse as India with a strong historic and cultural heritage will always be sought after by international travellers. 3. Government Initiative: Government has announced a five-year tax for two, three, and four star category hotels located in all United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage sites (except Mumbai and Delhi) for hotels starting operations from 1 April 2008 to 31 March 2013[6]. 4. Expected Growth: The Hotel & Motel Industry is expected to grow by CAGR of 13.6% for the

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Growth Drivers

important feature to attract customers. Buyers are generally price sensitive except for the premium market and the switching cost is low. The customers of the hotel business are numerous and mostly small in size, the threat of losing a customer is not very significant. Hence the power of an individual buyer is very low but with the expected decrease in the gap between supply and demand buyers power is expected to grow. Suppliers Power: The Suppliers in the hotel industry are defined as property owners, developers and real estate companies, interior design and furnishing companies, architects, management and training service providers. All these companies are relatively smaller in size compared to the globalized hotel industry and hence dont have the financial muscle to negotiate favourable terms.Hotel operators are reliant upon sophisticated technology and systems, including technology utilized for property management, procurement and reservation systems. This strengthens the suppliers power. Overall the Suppliers power is Moderate. New Entrant: The Hotel industry is certainly very capital intensive and for large-scale entrance, the starting investment in the land, building and staff is very expensive. The existing hotel players, who acquired properties years ago, have definite advantage over new players. Tourism is not a necessity consumer good, the demand tends to be cyclical and travellers are increasingly expecting bargain rates while refusing to tolerate lapses in quality and service. But at the low end of the market it is very easy to enter by owning a small and independent hotel. Hence, overall threat for new entrants is moderate. Substitute: The industry is under threat from other types of accommodation such as camping facilities, informal accommodation and recreational vehicles which offer added benefits. The switching cost is negligible. The overall threat of the substitute is assessed as moderate. Internal Rivalry: The leading players in India are EIH, Indian hotels,
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five-year period 2010 - 2015, which is expected to drive the industry to a value of $29.7 million by the end of 2015[2]. 5. Cruise Tourism: India with a vast and beautiful coastline, virgin forests, and undisturbed idyllic islands can be a fabulous tourist destination for cruise tourists. 6. Government Initiative: Government has Online Booking: Websites like MakemyTrip, Yatra are helping budget hotels to connect with the customer this has led to an increase in the bookings by domestic and international tourist. 7. There is an increased flow of people, especially those from the west, to India for medical services. This has also brought into limelight Medical Tourism. Current market for Medical Tourism in India is $533 million, expected to grow to $3.29 billion by 2018[5]. 8. Domestic Tourism: Sliding rupee has made overseas travel costlier by 20-30% for Indian. This would attract people to spend vacations in India. 9. Innovative Operating Model: Hotels are adopting innovative business strategies by bringing external brands of Restaurants, Spas, and lounges to generate substantial revenues.

Porter Five Force Analysis

Buyers Power: The organised hotel industry is a very mature and competitive industry; brand recognition is an

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Leela hotels and ITC ltd and together they command 55% of the total revenue of the organised hotel industry. However, a very large number of unorganised and independent players are present in the industry. To grow and sustain the business the hotel owners need to offer value added services reducing their margins. Moreover the exit barriers in the industry are fairly high because most of the major tangible assets are highly specific to their industry, and thus harder to divest. Hence the overall internal rivalry of the industry is estimated to be high. Financial Analysis Most of the Indian hotels were not able to make profit in financial year 2011-12 because of the fall in the number of foreign tourist arrivals (FTA) as well as the drop in the growth of the domestic business tourist. The hotel sector is characterized by high value addition that does not necessarily lead to high return ratios. High fixed costs (employee, fuel, power and light, linen costs, etc) coupled with the downturn in the sector was the main reason for lower returns. But with the increase in the amount of foreign tourist visiting India in year 2012 the industry is expected to increase its margins. It has to incur heavy costs for periodic renovation and a long gestation period. Further, the huge borrowings for expansion and the long gestation period will keep return ratios suppressed in the immediate future because of high interest and depreciation expenses. According to the data available all the prominent hotel industry companies have a very low PAT margin of around 3-8%. Rise in Business Travel: Improved economic

growth also helps the hospitality sector. Growing business opportunities, cheaper airfares and better connectivity will keep the demand for rooms high.
Company Name Sales Indian Hotels Co. Ltd. E I H Ltd. Hotel Leela Venture Ltd. Asian Hotels (North) Ltd. Oriental Hotels Ltd. Sayaji Hotels Ltd. Royal Orchid Hotels Ltd. PAT Total assets 91,076 42,120 63,426 24,565 7,140 2,982 5,399 PAT AssetMargin Turnover NA NA 7.2% 11.3% 10.1% 2.5% 7.5% 31.4% 29.7% 8.3% 12.4% 38.7% 68.7% 28.2% 28,625 -1,048 12,521 5,262 3,056 2,761 2,048 1,521 -128 378 345 279 52 115

Source: Prowess Database All numbers in Rupees Million and FY11

Recommendation

1. The government of India can accord Hotel Industry with infrastructure status which could provide them with full benefits of concession as available to infrastructure facilities like airport, seaports, and power projects. 2. Rising land cost can be countered with a rise in the Floor-Space-Index (FSI) which can help newly set-up hotels to maximize space utilization. Most big cities across the globe offer higher FSI then Indian cities 3. Improving the quality of infrastructure would drive the growth of the Indian tourism industry. 4. Manpower Training: To achieve the target rate of growth for tourism in India, it is imperative to ensure we have trained manpower.

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By PRITOM NMIMS

one way to look and move beyond IPOs, private equity, venture capital etc. The JOBS Act, signed into law by Presi-dent Obama on April 5, 2012, authorizes the use of online funding portals to offer and sell crowdfunding investments of up to $1 Million per year. It is a welcome tool considering the sorry state of affairs in the bank-ing system, declining mutual funds, lacklustre IPOs etc. It aims at combining the drops of money that lies parked with average individuals to form a big ocean of funds through the networking power of the internet. According to Gartner the Crowd Funding industry worldwide is exOn Apr 12, 2012, President Barack pected to grow from a $1.2 billion Obama signed what is called the industry in 2009 to around $7 bilJOBS act. The JOBs act basically lion in 2013. An entrepreneur in the US designed a watch strap that one could use to clip an iPod Nano into it and walk around with it on the wrist. Looking for investors, he approached Apple and they said nobody would buy it. Undeterred, he started a Crowd Funding project asking for $15,000 in 30 days to build a prototype. At the end of that month Apple was left astonished after he had raised almost $1 million from over 13,000 people. He is now selling his strap in every Apple store around the world. This is the power of crowd funding.
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WHAT IS CROWDFUNDING? Basically crowd-funding is an alternate form of financing a business or idea or a project. It involves raising money from investors via an online funding portal. The investor may contribute an amount as low as 100$. In other words, it is a way to distribute the risk among a huge no. of investors, thereby minimising the risk exposure of an individual. There are many benefits that crowd-funding provides. One notable benefit of crowd-funding is that the stakeholders themselves can become potential ambassadors of the product or service. Secondly, since the contribution per individual is quite low, the business promoters have a less taxing task of convincing the investors.
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Thirdly, the internet platform gives a boost to creating awareness, thereby lessening the need to invest huge sums in promotions and advertising. Crowd funding is not an entirely new concept, but something successfully executed and operating internationally, primarily in the USA. The idea of crowdfunding began in the late 1990s and the term crowdfunding was coined by a Michael Sullivan of fundavlog. Crowding funding is done through dedicated web

sites which are some times referred to as platforms. They provide a venue for all aspects of a campaign, such as creation of the public interface, campaign and project tracking, a pay-ment mechanism and disbursement of funds. Crowdfunding thus is a collective effort of indi-viduals who network and pool their resources,to support efforts initiated by others

IndieGoGo, established in 2008, allows anyone to set up a campaign for free. A fee is charged on money raised. Writers, musicians, film makers and visual artists often use the platform to fund projects but anyone can post any type of campaign. A recent campaign soliciting money to send a bullied school bus monitor on vacation amassed enough money to fund her retir-

ement. The crowd-funding platform charges a fixed % of the raised amount of money as their fee. Most of the platforms dont charge any fee in case the promoters are not able to raise the required sum. Crowd-funding can be of four major types: equitybased crowd funding, donation based crowd funding, debt-based crowd funding and reward-based crowd funding.

TWO MODELS FOR CROWDFUNDING SITES Crowd-funding sites or platforms use one of the two models given below. > All or nothing (AoN): after the fund-raising period is over, the funds are transferred to the entreprneurs only if some specific goal is met. If the goal(s) are nIn-Fin-NITIE Vol 4 14

ot met, , all the funds are transferred back to the contributors immediately. The goal can be a certain sum of money or a timelimit or a combination of both. This is the most common model. > Keep it All (KiA): regardless of the goal achievement, all the funds are transferred to the entrepre-neur

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after charging a commission. It is up to the entrepreneurs to decide whether they want to go ahead with the plan or not. As per a survey done by masssolutions, a research firm specializing in crowdfunding solutions, there were 452 crowdfunding platforms active worldwide as of Apr 2012 which raised around $1.5 tril-lion in 2011, funding around 1 million campaigns. About 1067 of the campaigns were in the donation based category. North America was the largest market for fundraising at $837mn. Most platforms are in North America, which has 208 (191 in the USA); Europe has 139 (44 in the UK). Donation-based platforms raised the most funds at $676M. It was followed by debtbased platform at %552mn. Reward-based platforms were able to raise only $1.6mn in 2009.
TWO MAJOR CROWDFUNDING PLATFORMS
Kickstarter and Indiegogo are the two biggest and most popular crowd-funding platforms.

be fully funded before the fund-raising time expires or no money changes hands. If a project is successfully funded, Kickstarter charges 5% fee to the funds raised and there are no charges, if the fundraisinfails. Its biggest success has been the raising of nearly $1 million from its users for the designer of an iPod Nano wristwatch strap. Some other notable platforms are: > 40Billion is a platform for funding business startups. Any entrepreneur with a United States address can create a campaign. > Funding4Learning is dedicated to education related projects. Most campaigns are to fund continuing education. Other projects seeking funding include student debt payment and education-related travel. > FirstGiving is a platform that allows individuals to create their own person-to-person fundraising pages for the benefit of any United States based non-profit organization. > Spot.us is a platform for what it calls community funded reporting. Journalists pitch story ideas and the community collaboratively evaluates the ideas and pays to have the successful ones written. The site partners with news organizations for distribution.

Kickstarter has till now successfully funded 25832 projects, out of which 7 projects raises more than $1mn, 17894 projects raised $1000 to $9999 and 3106 raised less than $1000. Every Kickstarter project must

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Indiegogo uses the following pricing strategy :

TWO PROMINENT NAMES Two of the prominent names in the sphere of crowdfunding are Mumbai Angels and EPCM or Exhilway Private Capital Market.
Mumbai Angels was started in Nov, 2006 and it provides as a platform to start-ups and new companies by bringing them close to entrepreneurs, professionals, investors and other people interested in investing their money in such places. The members of the Mumbai Angels typically consider investments of US$ 200,000 to US$ 500,000 and remaining as an investor in the company for a three to five year period prior to an exit pur-suant to an initial public offering, trade sale or merger or acquisition.

agreed price. Currently four companies are listed on the exchange and the average market capitalization of the company is Rs.1098 crore. CandyDate Jobs, StyleAdda.com, Stacy Medlin and DC Builders are currently listed on the exchange. StyleAdda.com and CandyDate Jobs constitutes nearly 80% of the exchanges market capitalization. But like anything else, crowd funding is also not free from disadvantages. Some of them are: The revenue stream is not sustainable No choice in selecting investors Regulatory framework still in nascent stage Business idea gets exposed to the world Lack of accountability in the internet ROAD TO OPTIMISM Inspite of all these advantages, it can be hoped that crowd funding has a long way to go before it loses its lustre in this funds starved and entrepreneur booming world. REFERENCES: 1) www.marketingcharts.com 2) Crowdfunding Raised $1.5bn in 2011, Set To Double In 2012, published 11/5/12, Forbes 3) http://mashable.com/follow/topics/crowdfunding/ 4) Indiegogo website 5) www.investopedia.com 6) Wikipedia

was founded by Larry Carlton in April 2012 and is headquartered in Chennai. It is the online marketplace which links private companies and partnership firms, their shareholders and membership unit holders into a single network. It connects more than 50,000 Indian institutional and angel investors with the emerging businesses.
Exhilway Pre-IPO Exchange

Exhilway PCM does not charge any money to the em erging businesses rather they charge equity stake in the company of the same value after evaluating the total value of the business. They charge between 3-4% of the equity stake and they keep 10% of the stake as the lifetime fee. Later on they either sell the stake to priva te equity investors or sell it back to the company at an

the power to shape economic opportunity belongs in each of our hands. - premal shah
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behavioural Finance

BEHAVIORAL PARADOXES IN FINANCIAL DECISION MAKING

By Vignesh Lakhshminarayanan NITIE Mumbai

An Insight Into Behavioral Economics

The 2008 financial crisis was a body blow to the financial world. The once hyper-rational, self-regulating Wall Street was brought down to its knees. The probability that such an event could occur was unfathomable. Bankers who reveled during the boom claiming their work was the work of God were shocked and the whole financial world was in turmoil. Dan Ariely in his pioneering work The End of Rational Economics rightly said that finally Behavioral Economics had come of age. The inherent flaw in the Neo-Classical Economic theories was finally exposed. All theories are built on the fundamental premise that man is a rational being, however it is a fatal flaw to assume that a rational man exists. Man is Irrational and based on this premise, Behavioral Economics came into existence. Behavioral Economics is a powerful indicator of how human behavior alters decision making. It gives us a framework on why certain decisions made under certain conditions are irrational. This article will focus on certain theories under the umbrella of Behavioral economics and the utility of

the same in predicting human behavior in financial deci-sion making.The major aspect of Behavioral economics are Heuristics and Biases.Heuristics often means making judgments through intuition. Heuristics help us make sound decisions. They help optimize on search time before arriving at decisions. However, they dont work well always and at many times distort the real picture. A classic example of this is the way the housing price asset bubble was built. In the boom time there was a misperception of the risk. The bankers never sought to know whether a person could afford to pay for the homes and gave away easy loans. At some point when these practices became un-sustainable, the bubble burst. At the core of the behavioral economics is the fact that humans incur a cognitive cost which in turn results in a bounded rationality which satisfies the human rather than optimize decision making. All the theories are built on Heuristics and Biases which often lead to sub-optimal decision making. The subsequent paragraphs focus on theories built on this foundation.
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Anchoring to our subconscious reasoning Anchoring is one of the biases by which human beings make irrelevant decisions by sticking to one kind of information. In other words all our decisions are made with the supposed information as our anchor. In uncertain conditions, we base our decision on these anchors. However what we fail to understand is that we often miss the mark. We often make wrong choices between experiences to which we may be exposed because we are systematically wrong about our affective memories. Salesmen use this phenomenon to influence buyers to arrive at what seems to be the reasonable price. By implanting the notion of what is reasonable, even an expensive item can look like a bargain. There is always a trade-off between what we can afford and what we can pay. The ability to pay is ones anchor point and often salesmen are adroit in exploiting this phenomenon. Even before they prompt us, we set our limits. Anchoring also shows overconfidence while making decisions. We always estimate a range in which our assumed value must lie and we are supremely confident that we would be 100% right. However when these limits are very close to each other, the estimation goes woefully wrong. We have a historical bias towards events that have hap-pened. For example the Great Depression took place in 1929 and till 2008 there were not many events of the catastrophic magnitude. Investors usually assess risk with a historical bias and neglect the salience of low probability risk events. This is what happened in the Recession of 2008 where such low probability risks were ignored. Under the masquerade of reforms institutional control was diluted and over the years systemic risk accumulated which proved too unwieldy to handle. Utility function vs Value Function The biases in handling risk are beautifully explained by the Prospect Theory- by Daniel Kahneman who won the Nobel Prize for the Loss Aversion Theory. Generally man doesnt bother about the magnitude of utility he derives from making a decision. Though classical economics focuses on maximization of utility, utility in Behavioral Economics focuses on the intensity of pain or pleasure experienced by man. These peaks of pain and pleasure determine the Decision Utility. The prospect theory replaces the conventional Utility Function with a Value Function with respect to a reference point. We are familiar with the concept of diminishing marginal utility and on similar lines Value Function emphasizes on Diminishing Value or Diminishing Sensitivity. Generally, a concave curve for gains and a convex curve for losses is a clear indication of risk aversion. Lets take the classic case of a Gambler. If a gambler loses money in the beginnIn-Fin-NITIE Vol 4 18

Value Function
ing, the initial pain is very high and is very evident from the steep curve in the beginning. Once he loses money in the first bet, losses loom large and he immediately goes for another bet. This behavior can be gauged from the fact that the pain experienced is much less in the less steep part of the curve. Or in other words, he becomes insensitive to pain as his derived value decreases as he moves along the curve. Similarly, we tend to preserve our gains. Here our mind considers the probability equation. For example if we are assured a gain of Rs 900 and have a chance to win Rs. 6000 in a roll of a die, our mind will calculate the probability of winning as 1/6 and the calculated return will be Rs.1000. But the risk involved is that we can end up with nothing. Hence, we usually end up choosing the assured sum of Rs.900, which exemplifies risk aversion. Another example of the same is observed when Real-Estate markets often dry up for long periods of time and markets are down. This is due to widespread bias in favoring Status Quo in decision making. Framing Effect and the Age old dilemma The next phenomenon in discussion is The Framing Effect. We can relate this to shifting of the Frame of Reference or The Context while making the Decision. Framing usually refers to the shifting of the utility curve when an external factor is brought into the equation. In the same scenario of the gambler, if the gambler had more wealth than the expected loss or gain, then he would go for the gamble since the returns are attractive with respect to the risk involved. In a contrasting situation if he had less wealth, he would have backed out, which again points to loss aversion. Hence Scale distorts decision making. Framing tells us how the framing of the choice affects the choice which is selected. Kahneman and his colleagues explained the framing effect with the Asian Age problem. 600 lives are threatened.

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Action (a) saves 200 lives. Action (b) saves all 600 lives with probability 1/3 and saves nobody with probability 2/3. Which action would you choose? (a) or (b)? Under this condition, we tend to stick with option (a) which saves 200 lives because we are afraid of the other choice where theres 67% chance where all 600 could be dead. Reverse the probabilities in action (b) and the results are in complete contrast because with 67% of saving 600 people in picture, it seems worth taking the risk. Hence framing exposes the inconsistency of decisions and the fundamental limitations of a human mind. One Mans Ceiling Is Another Mans Floor The next bias which is dealt in behavioral economics is The Endowment Effect. This states that a customers willingness to obtain compensation for a good is greater than the willingness to buy it. People value a thing more, once it becomes theirs. Hence ownership increases Utility. The perceived value of the thing which is owned is greater even for people who dont own that thing and they are willing to pay more money than is actually worth. This is in strong contrast with the neo classical economics which says consumers are willing to pay only what the good is worth. Again the rational element in human decision making is betrayed. The phenomenon of Sunk Costs induces man to take irrational decisions. Sunk costs are costs which have been incurred and cannot be recovered. However we have a misgiving that not doing justice to the cost incurred is equivalent to wasting of resources. This is a phenomenon which is seen in investors who own the responsibility of making money handling decisions and even if their costs sink they are overly optimistic that they can recover the costs in the future while failing to realize they are losing the opportunity cost of looking for better alternatives which will give them more returns. Mental Accounting: 2 Sides Of The Same Coin Another important phenomenon which profoundly influences financial decision making is Mental Accounting, which describes how people violate rationality by failing to maintain a comprehensive view of outcomes. Mental accounting refers to allocation of money under different pools based on the required need. For instance one separates money for say different things like savings, childrens education etc. Investors derive some benefits from this behavior. They divide the returns into income earned and capital appreciation. Many feel they can spend the income but

not capital appreciated since its the principal. Sometimes however the same attitude also erodes their wealth. Say investors go for high yielding bonds. Though the dividend yields are attractive but their capital returns are negative thereby eroding the real value of the asset base. The same phenomenon comes into picture when people tend to spend bonuses rather than their salaries. Lets take a classic example. Case1: X has booked a ticket to a cinema for Rs.100 and lost the ticket. Will X buy the ticket? Case 2: X lost Rs. 100 from his wallet. Will X buy? Interestingly in case 2 X will buy because the money is from his general account whereas in Case 1 X will not buy the ticket because he has already compartmentalized some money for the movie. Hence mental accounting proves that Money is not tangible, which again goes against, thereby in contravention with the conventional theory, where money is considered to be a measurable asset.

Gamblers Fallacy And Hot Hand Bias

The other two phenomena to be discussed are Gamblers fallacy and Hot Hand Bias. Strategists are prone to commit the Gamblers Fallacy, where people try to compare the presence of variables in a small sample and their distribution in a general population. In the gamblers fallacy, an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future. Based on the occurrence of a higher occurrence event, the person believes that the next event to occur would be the event with the lower incidence, even though the probabilities of occurrences of both the events remain the same as before.
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For example, consider a number of series of coin flips that have all landed with the heads side up. Under the gamblers fallacy, a person might predict that the next coin flip is more likely to land with the tails side up. This line of thinking represents an inaccurate understanding of probability because the likelihood of a fair coin turning up heads is always 50%. Each coin flip is an independent event, which means that any and all previous flips have no bearing on future flips. If we extend the similar analogy to an investing decision, when the value of a stock appreciates, we tend to liquidate our positions assuming that its value has to fall sometime. On the flip side, we tend to hold on to stocks whose value is depreciating but again we assume that this has to stop at some point of time instead of making the rational call to sell the stock and hedge the losses. Hot hand bias on the other hand is the extrapolation of the current performance into the future. This is a common phenomenon observed in mutual fund investors. When the value of a mutual fund appreciates, instead of collecting from it, investors buy more units of the fund in the hope that the fund would further appreciate in the future. Then there is the Bandwagon Effect which is reflected in the way stock markets behave. For instance on hearing the bad news, immediately all investors start liquidating their positions and others follow suit.

Behavioral Economics: A Lot More To It

There are many other phenomena which can be traced to heuristics and biases. And these have a profound influence on the decision making of man. Investors, money managers, stock traders etc. have to make the right decisions. Making the right decisions is the difference between a successful outcome and a failed outcome. Some might think that Behavioral Economics or Behavioral Finance are just a passing fad and dont really impact the overall economic factors. But what is evident is that repeated erroneous decision making has brought this field into prominence. Behavioral Economics has become the focal point to understand what happens in the real world and why there is a huge gap between the result expected and the result achieved. Understanding human behavior or psychology in financial decision making is important for making better and more responsible financial decisions and avoiding these pitfalls. References 1)The End of Rational Economics- Dan Ariely. http://hbr.org/2009/07/the-end-of-rational-economics 2)http://www.nobelprize.org/nobel_prizes/economics/laureates/2002/kahnemann- lecture.pdf 3)http://www.hss.caltech.edu/~camerer/Ec101/ ProspectTheory.pdf 4)www.investopedia.com

ANSWERS TO FIN- QUIZZITIVE, MARCH 2012 1.Cup and Holder Pattern 2.David Sokol and Lubrizol 3.Royal Sundaram 4.Sarbanes and Oxley 5. Infosys 6.CD Deshmukh 7.Insider Trading 8.Asset Stripping 9.Watered Stock 10.Derailed Planned Merger of NYSE Euronext and Deutsche Bourse

Vivek Kumar

National Institute of Industrial Engineering

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analysis

By Nitish Chawla IIM - Indore

The Multiplex Industry

After two tough years 2009 and 2010, the Indian film industry is expected to be on a revival mode. The FICCI KPMG report estimates the CAGR for 2011-15 to be 9.6% whereas the PwC India Entertainment and Media Outlook Report, 2011 puts it at 9.3%. million in France and 117 screens per million in the US.

Multiplex growth and decline of the single screen theatres

The multiplex industry is growing tremendously with all the major players adding new properties across the country.
No. of Screens
Player PVR Fame Cinemax Inox RMW
1

India's place in the world

According to PwCs research, India has the highest number of admissions as compared to most of the countries. However, the average ticket price (ATP) is less than a dollar. This reduces the overall size of the market.
Average Ticket Price (ATP) vs Admissions
Country US Canada UK China India Average Ticket Price (US$) 7.89 8.19 8.96 4.34 0.69 Admissions (million) 1345 120 166 345 2000

Screens (FY2010) 123 95 94 119 250

Screens (FY2011) 142 97 114 144 260

Screens (Dec 2011) 158 102 123 151 265

Also, the Indian consumer is highly underserved with only 12 screens per million as compared to 77 per

Many have started pricing early morning shows at half the price. They have also tied up with credit card companies to provide attractive discounts and offers. The release of many 3D films also increased the average ticket price.
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Growth in Average Ticket Price (ATP)

Player PVR Fame Cinemax Inox RMW Average Ticket Price (2009) 146 138 125 134 90 Average Ticket Price (2010) 179 152 134 150 99 Growth 22.6% 10.15% 7.2% 11.94% 10%

ceiling on ticket prices at Rs 120 fixed by the government.

Key Growth Drivers

Urbanisation and Growing Middle Class: Rising urbanization is expected to drive multiplex growth through a population that increasingly spends on discretionary items such as entertainment and through the availability of quality spaces such as malls which are suitable for multiplexes.

Multiplexes are also trying to increase their occupancy rate using offers and schemes.

Under Screened market: Compared to global Single-screen theatres in India had a tumultuous benchmarks such as USA, UK, France, India is year in 2010. More than 1000 single-screen theatres an under screened market. downed their shutters on account of compounding Screens per million for various cities is as given: losses. Lack of good content in the industry just expedited the process. In Maharashtra alone, the City Screens (per million population) number of single-screen theatres has reduced to Mumbai 23 around 650 from around 1080. Delhi 13 There are few key reasons for this: 1. Competition from multiplexes 2. High entertainment tax 3. High conversion costs from single screen to multiplex 4. High cost of operations
Bangalore Hyderabad Indore Chennai 21 6 13 5

The governments of many states have announced entertainment tax benefits to multiplex operators. This has encouraged the growth of multiplexes and also led to the conversion of single screen cinemas to multiplexes.
Entertainment Tax Waiver in different States
State Punjab Rajasthan MP UP Year 1 100 100 100 100 Year 2 100 100 100 100 Year 3 100 100 100 100 Year 4 100 100 75 75 Year 5 100 100 50 50 Min Seats 1000 1000 1000 NA Min Screens 3 3 3 NA

Better viewing experience: Multiplexes offer a better viewing experience, audio and comfortable seating. Moreover, they offer better and hygienic food and beverages, making it a popular medium for cinema consumption.

Key Challenges
Competing entertainment formats such as cricket: Competition from sporting events, particularly cricket and IPL had created an 8 week black window for multiplexes. However, the audience response for the IPL 2011 was lukewarm and many movies like Dum Maro Dum, Game, F.A.L.T.U, etc were released in 2011. Even in 2012, movies like Housefull2, Bittoo Boss, Tezz, Jannat 2 and Vicky Donor are slated to be released during the IPL. Escalating Rental Costs: With a boom in the real estate market, rental costs have increased for most of the multiplexes. This is causing pressure on margins and impacting profitability. Revenue Share: The theatrical window for movies has reduced and the first 2 weeks account for the majority of box office collections. With the revised revenue sharing policy, multiplexes are now sharing greater revenues with the producers.

South India is an attractive market for the multiplex industry. Currently being dominated by single screen cinemas, many multiplexes are set to open in the cities of Tamil Nadu, Kerala and Karnataka. Kerala, in its 2011 budget granted entertainment tax exemption to multiplexes for the first 5 years. According to the investor presentation by Reliance MediaWorks (Feb'11), Chennai and Hyderabad have very low screen densities of 5 and 6 screens per million respectively. Also, the market in south India is huge due to the additional regional movies in the area. One drawback with Tamil Nadu is the upper
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Despite having added a considerable number of The main players in the Cinema and Multiplex in- new screens in FY 2012, the revenue per screen for dustry are the 5 listed firms: PVR, Inox Leisure, Fame December 2011 is almost equal to that of FY2011 India, Reliance MediaWorks (RMW) and Cinemax and is expected to surpass the figures of FY2011. India. The profit margins for all the players except Fame All the major players have significantly improved their performance over the past financial year. have also shown a rise.

Peers

Comparison FY2012 (9 month) vs. FY2011 (in Rs cr.)

PVR Cinemas
Dec 11 No of Screens Revenue Expenses Profit Before Tax (PBT) Profit After Tax (PAT) Profit Margin (%) Debt-Equity Ratio Earnings Per Share (EPS) Revenue Per Screen 16.15 2.27 158 358.4 323.37 56.8 43.0 11.98 FY2011 142 351.99 297.1 22.9 16.3 4.54 0.56 5.85 2.23 0.57 1.46 102 148.9 130.0 1.2 1.20 0.79

Fame
Dec 11 FY2011 97 161.2 136.7 1.4 2.0 1.23 1.72 0.57 1.66

Cinemax
Dec 11 123 182.18 157.7 0.15 3.2 1.73 1.15 1.48 FY2011 114 182.3 156.9 (3.1) (1.5) (0.84) 0.63 0.00 1.60 3.31 2.16 Dec 11 151 326.5 275.6 27.4 20.4 6.25

Inox
FY2011 144 340.2 296.9 9.2 7.0 2.05 0.64 1.12 2.36 265 399.6 482.7

RMW
Dec 11 FY2011 260 596.5 582.6 (256.2) (256.2) (42.95) 6.18 -64.42 1.51 0.00 2.29

(297.1) (297.1) (74.37)

All the players were affected in FY2011 due to the lack of good quality movies as well as the cricket world cup games happened in the year. Fame Cinemas have incurred a loss of 4.48 crore in foreign exchange in 2nd quarter of FY12. Cinemax had some delays in the launch of their screens in FY2011 which also affected their profitability. Inox Cinemas had an increase of ~Rs.10 crore in their interest on fixed loans from FY2010 to FY2011, which resulted in a decline in their PAT for FY2011. Due to the massive expansion by all the companies, the interest expense on debt takes away a huge share from the operating profit and decreases the PAT.

Distribution of Revenue
Box Office Collection (%) FY 11 PVR Inox Fame RMW Cinemax 65.2 78.2 62.6 68.5 68.4 FY 10 66.0 77.2 67.1 64.9 67.9 Canteen Sale (%) FY 11 18.3 16.7 22.1 21.8 21.3 FY 10 19.1 17.1 21.9 17.1 20.8 Advertisement Sale (%) FY 11 14.0 4.2 12.0 6.5 7.8 FY 10 12.6 5.1 7.1 12.7 7.2 Others (%) FY 11 2.6 0.8 3.4 3.2 2.5 FY 10 2.4 0.6 3.9 5.3 4.2

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fully operational, the ROCE is rising again and was around 6% for FY2011. The decline in the profits for the multiplex industry started in 2009 due to the strike between the producers and multiplex owners due to which no new movie was released for 63 days. This trend continued in 2010 due to lack of good films and the cricket world cup in 2011. However, the OPM and PAT have significantly increased for FY12. This is majorly due to the release of movies like Ready, Bodyguard, Don 2 and Ra.One, all of which crossed the Rs. 100 crore mark. The multiplex industry is highly dependent on the quality of movies being released. With a number Due to massive expansion by all the 4 players, each of multi-starrer releases lined up for 2012, the adding 25-30 screens, the ROCE had taken a dip in profits for the multiplex industry are expected to the year 2009 and 2010. Now that the properties are continue in their upwards trend.
A comparative valuation of all the players is as under:
Company
FY2011 PVR Fame Cinemax Inox RMW 5.9 0.6 0.0 1.1 0.0

EPS
FY2010 0.0 0.0 2.0 4.2 0.0 FY2011 9.3 3.9 3.3 4.7 0.0

ROCE (%)
FY2010 3.8 0.3 4.0 5.7 0.0 19.7 68.93 Dec 12 12.5

P/E
FY2011 18.18 98.16 0.0 39.78 0.00 FY2010 0.00 0.00 32.67 14.92 0.00

Market Cap (Rs. Cr)

FY2011 288.6 195.5 117.7 275.8 695.7 Apr12 375.8 325.7 94.5 308.9 369.7

Market Value Per Screen (rs. Cr)

FY2011 1.83 2.02 1.10 1.88 2.68 Apr12 2.38 3.19 0.77 2.05 1.40

Conclusion
After the turmoil in 2009 and 2010, the multiplex industry is on a revival mode. With an array of films lined up for release in 2012 and the success of many of the releases so far make it an attractive buy for the near future.

References:

PwC Global Entertainment & Media Outlook2011-2015, PwC Research Reliance Media Works PwC Global Entertainment & Media Outlook2011-2015, PwC Research

I would not pre-pay. I would invest instead and let the investments cover it. - Dave Ramsey The four most dangerous words in investing are: this time its different. - Sir John Templeton Wide diversification is only required when investors do not understand what they are doing. - Warren Buffett

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role oF msmes

Taking India Forward : Role of MSMEs in Achieving Double Digit Growth

By Vaibhav Sharma, MDI Gurgaon

and Ministry of Small Scale Industries have been merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises. The role of MSMEs in the economic and social development of the country is widely acknowledged. They are nurseries for entrepreneurship, often

Description Micro Enterprises Small Enterprises

INR Up to Rs. 10Lakhs

India has grown at a healthy pace during the last decade. But still, it has been unable to match the scorching growth of China and the fact that China has pulled millions out of poverty while India is still struggling to do so. China has exploited its strength in manufacturing coupled with cheap labour to produce goods that are exported all over the world. If India wants to attain the goal of Inclusive growth, it needs to identify the strengths which will help in doing so. One of the strengths is the MSMEs (Micro, Small and Medium Enterprises) of India.

above Rs. 10 Lakhs & up to Rs. 2 Crores above Rs. 2 Crores & up to Medium Enterprises Rs. 5 Crores

Source: MSME Ministry

driven by creativity and innovation, and make significant contribution to the countrys GDP, manufacturing output, exports, and employment generation. SSI contributes 8% per cent to the country's GDP, 45 per cent to the manufactured output, and 40 per cent to exports. The labour-capital ratio in MSMEs is much higher than in larger industries. SME's Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. Also, a significant number of MSMEs are owned by people belonging to the disadvantaged sections of society. For instance, nearly 13% of MSMEs are owned by women entrepreneurs. MSMEs are a major link in the supply chain to corporate and the PSUs. Also, MSMEs are better dispersed geographically than the larger Industries. The high labourcapital ratio of MSME industries will create more jobs than any Large Scale Industry. Due to these factors, MSMEs are important for achieving the national objective of growth with equity which is required for reducing unemployment and achieving inclusive growth.
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Manufacturing Enterprises - Investment in Plant & Machinery

Description Micro Enterprises Small Enterprises Medium Enterprises INR Up to Rs. 25Lakhs above Rs. 25 Lakhs & up to Rs. 5 Crores above Rs. 5 Crores & up to Rs. 10 Crores

Service Enterprises - Investment in Equipments

In May 2007, Ministry of Agro and Rural Industries

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In a significant number, they also are inter-related and inter-dependent on the agricultural/horticultural/other forest and non-forest produce. It adds wealth to the local economy and at the same time provides major employment and in the long run acts as deterrence against rural to urban migration. Diverting unproductive labour forces from agriculture sector to productive enterprises would add to rural economy and simultaneously reduce the disguised unemployment in agricultural sector. The number of SSI units in the country, both registered and unregistered, has risen to 29.808 million units in 2009-10 from 10.521 million in 2001-02. Similarly, employment has gone up to 69.538 million in 2009-10, up from 24.933 million in 2001-02. SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale sector generates employment for four persons. SSIs alone manufacture over 8000 products.

enormous due to the following factors: Less Capital Intensive Extensive Promotion & Support by Government Reservation for Exclusive Manufacture by small scale sector Funding - Finance & Subsidies Reservation for Exclusive Purchase by Government Export Promotion Growth in demand in the domestic market size due to economic growth

ISSUES
Small-scale industries in India could not progress up to the potential because of the various problems they are confronted with while running enterprises. In spite of having huge potential, the major problems the small industries face are: 1. Problem of skilled manpower: The success of a small enterprise revolves around the entrepreneur and his/her employees,provided the employees are skilled efficient. and Lack of skilled manpower created many problems for the survival of small industries. 2. Inadequate Credit Assistance: Adequate and timely supply of credit and finance are desirable by each SSI unit. Lack of credit creates problem for their survival. This is partly due to the scarcity of capital and partly due to weak creditworthiness of the SSI unit in the country. 3. Irregular supply of raw material: These units face problems in procuring the raw materials. The problems arise due to the faulty and irregular supply of raw materials. Increased cost of raw materials and lack of knowledge are some other obstacles. 4. Absence of organized Marketing: In the absence of organized marketing, their products are at disadvantage compared to those of the large scale units. They also fail to get adequate information about consumer's choice, taste and preference of the type of product. 5. Lack of machinery and equipment: SSI units are striving hard to employ modern machineries and equipment in their process of production in order to compete with the large industries. Most of them employ outdated and traditional technology and equipment. 6. Absence of adequate Infrastructure: Most of these units are having one or more problems like lack of power supply, water and drainage problem and poor connectivity. This absence of proper infrastructure adversely affects the quality, quantity

EXPORTS

SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather, gems and jewellery units from this sector.
TRENDS IN GROWTH SSI & INDUSTRIAL SECTOR (in %) Year SSI Sector Industrial Sector 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 3.1 5.6 7.1 10.1 11.4 11.3 8.43 7.7 8.16 0.6 2.3 6 9.4 12.1 7.1 5.8 4
Source: Chamber of Commerce

6.5

OPPORTUNITIES
The opportunities in the small-scale sector are
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and the production schedule which ultimately results in under-utilization of capacity. 7. Competition from large scale units and imported articles: These units find it very hard to compete with the products of large scale units and imported goods which are comparatively very cheap and of better quality than SSI units. 8. Poor implementation of Government Schemes: The present structure also suffers from poor delivery of services at the field level. The schemes and programmes have limited outreach with a large number of very small schemes. 9. Subsidy and Reservation Dependent: A major weakness is a heritage weakness. Due to the protectionist, subsidy-driven, reservation based regime, the sector continues to demand similar treatments thus limiting their competency.

dispersed locations.

Export Promotion Programmes

More and more International exhibitions and fairs are being held. Regular training programs for these units are being held to train them on packaging of finished goods. To protect their interests, Government has issued a list of reserved items to be manufactured exclusively by this SSI sector. To improve upon the quality aspect, National Awards for Quality products have been introduced.

Small Industries Cluster Development Programme

The Ministry of MSME and Government of India (GoI) has adopted the cluster approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of small enterprises and increasing their collective bargaining power over the suppliers and buyers. Among other things, this approach also facilitates substantial economies of scale in terms of deployment of available resources for effective implementation and more sustainable results in the long run.

WHAT THE GOVERNMENT IS DOING

Policy Support
The Ministry of MSME has brought out a specific list of hi-tech and export oriented industries which would require the investment limit to be raised up to Rs. 5 crores to get of suitable technology up-gradation and to enable them to maintain their competitive edge.

MSMED Act, 2006

In an attempt to correct these discrepancies and neglect, the Micro, Small and Medium Enterprises Development Act was enacted on 16 June 2006. This Act provides the first-ever legal framework recognizing the concept of enterprise (comprising both manufacturing and service entities), defining medium enterprises and integrating the three tiers of these enterprises, namely, micro, small and medium. The functions of the MSME Ministry include inculcation of entrepreneurial culture among youths, facilitation of credit flow to MSMEs, improving competitiveness of MSMEs, promotion of MSMEs through cluster-based approach, marketing support to MSMEs, creation of new Micro Enterprises through Prime Ministers Employment Generation Programme (PMEGP), support to Khadi and Village Industries (KVI) sector, support to Coir Industry, entrepreneurship and skill development.

Fiscal Support
To improve the competitiveness of Small Scale Sector, the exemption for excise duty limit raised from Rs. 50 lakhs to Rs. 1 crores.

Credit Support
These units are eligible for Priority lending from public sector banks.

Infrastructural Support
Regarding upgrading the Industrial Estates, which are languishing, the Ministry of MSME is drawing up a detailed scheme for the consideration of the Planning Commission.

Technological Support and Quality Improvement

To encourage Total Quality Management, the Scheme of granting Rs.75000 to each unit for opting for ISO9000 Certification was there till the end of the 10th plan. Commercial Banks are being advised to develop schemes to encourage investment in technology upgradation and harmonise with SIDBI on the same.

MSMES AROUND THE WORLD

The real importance of the SMEs, however, can be seen in China where over 68% of the exports come from the SMEs. China has created more SMEs in the last 20 years than the total number of SMEs in Europe and the US combined. In Brazil, MSEs represent 20% of the total GDP. Of the countrys 4.7 million registered businesses, 96.8% are MSEs and along with the other 9.5 million
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Marketing Support
Market Development Assistance (MDA) Programme is being provided to the MSME units. Also, Vendor Development Programme, Buyer-Seller Meets and Exhibitions will take place more often and at

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informal enterprises they employ 59% of the economically active population. Similarly, informal and micro enterprises account for 39% of labour force and contribute to 24% of the GDP in South Africa; SMEs employ 27% of the labour force and contribute 32% to the GDP; while large enterprises employ 34% people and account for 44% of GDP. SMEs comprise over 90% of all industrial units in Bangladesh contributing between 80% and 85% of the industrial employment and 23% of the total civilian employment (SEDF, 2003). They contribute three-quarters of the house hold income in both the urban and the rural areas. In Japan, SMEs employ more than 70% of the wage earners, contributing over 55% of value added in the manufacturing sector.

In a recent move, aimed towards boosting the MSE sector in India, Public Procurement Policy for goods produced and services rendered by Micro and Small Enterprises (MSEs) has made it mandatory for PSUs and government departments to procure 20% of their products and service needs from MSMEs. The Government has set up a Credit Guarantee Fund Trust for Micro & Small Enterprise (CGFTMSE). Under the scheme, credit facilities extended to micro and small enterprises are guaranteed up to 75% of the amount in the event of a default. The Performance & Credit Rating Scheme of the Ministry is also an important way of empowering the small enterprises to face internal and global competition. Under this Scheme, financial assistance to the extent of 75% is provided for rating of MSMEs by a third party national or international rating agency. This rating benefits the units in many ways like establishing their creditworthiness, which helps them in accessing quicker and cheaper credit. Per-unit employment generation among SSIs was much higher during 1970s. This was the time when the policy of reservation for SSIs was in full force and small units were sheltered from competition. This may also lead us to deduce that reservation policy in some form be continued for the MSMEs. However, the policy of reservation created distortions in the system that allowed the inefficient enterprise to thrive. This is unsustainable in the post-liberalisation period where the demand is for quality products at world-beating prices. Thus, in the long run, reservation policy cannot be continued, but right now it can be continued for some vital products for MSMEs to ensure inclusive growth. At a macro level there is need for a strategy for a horizontal geographical spread of the various outreach programmes for balanced growth. On the other hand, there is also a need to emphasize the inclusive nature of any strategy to target women entrepreneurs and other weaker sections of the society. Thus, we need to tap and milk the MSMEs if we wish to achieve inclusive and sustainable growth. These units are well positioned to help India achieve a double-digit growth. All we need is a big push.

CONCLUSION/RECOMMENDATIONS
No doubt, some amount of help is required for SSI units, but this could be done through a policy of promotion rather than protection. It is an irony that to tackle increasing competition from foreign goods, they need superior technology. But that will reduce the manpower employed in the SSI. The way to go is that more and more SSIs are absorbed in the MSI sector and boost production. The MSI units would also have greater absorptive capacity for labour. Besides, policy support by way of marketing and technology assistance, easing of bottlenecks in land buying, fast-track clearances in environment, water supply, power, etc, for start up units and unshackling of inspector raj at the state level are important. Since these units comprise of 40% of our exports, it would also be appropriate to consider an SEZ for SMEs ensuring provision of world-class infrastructure, single-window clearance and exemption from labour laws. Furthermore, it is important to ensure availability of cost-effective bank credit. This would provide the much-needed resources for capacity creation and expansion of small units. Indeed, the share of the SME sector in net bank credit has steadily declined from 14.6% in 2000 to 10.9% in 2009. Assuming that the share of the small-scale credit in total bank credit had remained at 14.6% in 2009, there would have been anadditional 75,000 crore available for lending to this sector that would aid the unit to optimise its potential, realise scale economies and create jobs in the process.

References:

http://planningcommission.nic.in http://msme.gov.in http://indiabudget.nic.in/survey.asp http://commerce.nic.in http://www.indianchamber.org http://www.sidbi.com

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Fin Quizzitive
1. Identify the personality Connect the pictures 7.

2. If a holder is allowed to lock in a profit while maintaining the right to continue participating in gains without a loss in locked in monies then he is holding a ___________ 3. X is one of Indias biggest conglomerates. It is speculated that X would be buying a controlling stake in Y, one of New Yorks leading hotels for nearly $570 Million (Rs 2,615.55 crore). Identify X and Y. 4. Seen as one of the worlds most influential celebrities, some analysts believe that companies connected with him/her will outperform their competition. This particular celebrity also has an index to his/her name. Name the celebrity and the index. 5. Recently a scam was highlighted which was valued over 20 lakh Crore INR. At one point it was deemed to be much bigger than the much publicised 2G scam and earned concern from American President Barack Oabama himself for its role in recent financial crises. Although over 15 banks were indicted in it, they got away paying a negligible fine. What are we talking about ? 6. In the financial world, what is a zombie?

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