Jayanth R. Varma

Indian Financial Sector Reforms: A Corporate Perspective

Until the early 90s⁄ corporate finance managers in India were given very little freedom in the choice of key financial policies as the government regulated the pricing of debt and equity instruments and directed the flow of credit. Financial sector reform over the last six years has exposed managers to complex financial choices amidst increased volatility of interest rates and exchange rates, and made them accountable to an increasingly competitive financial marketplace. Nevertheless, the slow pace of financial liberalization so far has given Indian corporates the luxury of learning slowly and adapting gradually. Gradualism has also meant that there is a large unfinished agenda of financial sector reforms. According to Jayanth Varma⁄ Indian companies should now prepare themselves for further changes that lie ahead. The East Asian crisis is a warning for the Indian corporate sector to pursue more prudent and sustainable financial policies.

Financial Literacy among Working Young in Urban India

The paper reports investigation of a study on the influence of various socio-demographic factors on different dimensions of financial literacy among the working young in urban India. While the influence of several factors such as gender, education and income is similar to what has been reported in other contexts, a few factors specific to India, such as joint-family and consultative decision making process are found to significantly influence financial literacy. The study also investigates the relationship between the dimensions of financial literacy. Adding to the growing empirical understanding of financial literacy across countries, the study provides an analytical basis for enunciating policy for enhancing financial literacy of youth in India.

Research on the Indian Capital Market: A Review

The Indian capital market has been attracting considerable attention in recent years especially after the opening up of the Indian economy. As a result, several researchers have addressed various issues pertaining to the capital market in India. What has been the trend of research in this field over the last 15 years? This article by Barua, Raghunathan, and Varma examines this issue and provides a comprehensive review on the nature of research in the field of capital market in India. In the process, it also identifies research gaps and research issues that need attention from researchers.

Securities Scam Genesis, Mechanics and Impact

The term “securities scam” refers to the diversion of funds from the banking system to various stockbrokers in a series Of transactions—primarily government securities—during the period April 1991 to May 1992. An understanding of the scam is a prerequisite for any meaningful analysis of policy alternatives to improve the functioning of the financial system. This paper by Samir K Barua and Jayanth R Varma presents a plausible reconstruction of how the scam originated, how it was perpetrated, and what would be its aftermath.

Four Factor Model in Indian Equities Market

We compute the Fama-French and momentum factor returns for the Indian equity market for the October 1993 - December 2013 period using data from CMIE Prowess. We differ from the previous studies on this topic, in the Indian market, in several significant ways. First, we cover a greater number of firms relative to the existing studies. Second, we exclude illiquid firms to ensure that the portfolios are investible. Third, we have classified firms into small and big using more appropriate cut-off considering the distribution of firm size. Fourth, as there are several instances of vanishing of public companies in India, we have computed the returns with a correction for survival bias. During the period from January 1994 to December 2014, the average annual return of the momentum factor was 21.9%; the average annual return on the value portfolio (HML was 15.3%; that of the size factor (SMB) was 15.3%; that of the size factor (SMB) nearly 0%; and the the average annual excess return on the market factor (MRP) was 11.5%. This is a revised version of our earlier paper on this topic. The revision is carried out to primarily accommodate the data of firms which are retrospectively added to the prowess database by CMIE. The time series of daily, monthly and yearly returns of the factors and the underlying portfolios are made available at an online data library. The authors would update the library on a monthly basis.

Indian Financial Sector and the Global Financial Crisis

Though the Indian financial sector had very limited exposure to the toxic assets at the heart of the global financial crisis, it suffered a severe liquidity crisis after the Lehman bankruptcy. This liquidity crisis could have been averted with timely injection of liquidity into the system by the Reserve Bank of India, claims Jayanth Varma. Apart from the liquidity crisis, India also had to deal with the collapse of global trade finance; deflation of an asset market bubble; demand contraction for exports; and corporate losses on currency derivatives. Looking ahead, the paper argues that the crisis is a wake-up call for the Indian banks and financial system for better managing their liquidity and credit risks, re-examining the international expansion policies of banks, and reviewing risk management models and stress test methodologies. Rejecting the widely held notion that financial innovation caused the global crisis, the author offers examples from bond markets and securitization to establish the necessity of continuing with the financial reforms. While India has high growth potential, growth is not inevitable. Only the right economic and financial policies and a favourable global environment can make rapid growth a sustainable phenomenon.

Analysis of the Indian Securities Industry: Market for Debt

In the current liberalized environment, the Indian debt market appears to be all set to take off. With the commencement of trading of debt instruments by the National Stock Exchange this year, the secondary market of the Indian debt market is expected to achieve a significant level of activity. In this context, a closer understanding of the Indian debt market in terms of the private corporate sector, public sector, government sector, and the housing finance sector assumes increased importance. In this paper, the authors provide the much needed perspective on the Indian debt market as a whole and make recommendations for its development wherever necessary.

Betting Against Beta in the Indian Market

Recent empirical evidence from diff erent markets suggests that the security market line is flatter than posited by CAPM. This flatness implies that a portfolio long in low-beta assets and short in high-beta assets would earn positive returns. Frazzini and Pedersen (2014) conceptualize a BAB factor that tracks such a portfolio. We fi nd that a similar BAB factor earns signi ficant positive returns in India. The returns on the BAB factor dominate the returns on the size, value and momentum factors. We also nd that stocks with higher volatility earn relatively lower returns. These findings indicate overweighting of riskier assets by leverage constrained investors in the Indian market.

The Satyam Story: Many Questions and A Few Answers

On January 2, 2009, Mr. Raju disclosed to the stock exchange that his family had pledged all its shares held in its holding firm, SRSR Limited, to institutional lenders, following which, in the next two days, the share of the Raju family in Satyam fell from 8.6 per cent to 3.6 per cent. During the intervening period, three of the independent Directors at Satyam resigned. On January 7, Mr. Raju confessed to his crime and absolved all the top functionaries of Satyam stating that they had no clue as to what was being done by him to orchestrate the elaborate fraud. Mr. Raju’s letter to the board stated that Satyam’s balance sheet as on September 30, 2008, carried fictitious cash and a bank balance of Rs. 5,040 crore. In addition, it carried an equally made-up accrued interest of Rs. 376 crore. There was an understated liability of Rs. 1,230 crore and an over-stated debtors’ position of Rs. 490 crore.

Corporation and its Shareholders: What Should B-Schools Teach?

Presents a colloquium on the role of business schools in teaching students about the kind of objectives the top managers should pursue. Principles behind the corporation and its shareholders; Purpose of business school instruction; Need for business schools to articulate their position and reflect the same in their curriculum, culture and incentive and punishment systems.