Underestimating liquidity risks: How investors can suffer


Nupur Pavan Bang[1] and Vikram Kuriyan[2]


This article was first published by Moneylife on January 27, 2014



Risk management models used by professional investors often assume that securities can be traded infinitely. When liquidity dries up, especially in a systemic way during periods of crisis, it becomes very expensive to trade.

“When there is rain, umbrellas become expensive. But when there is no rain, nobody cares about the umbrella and the prices are low. The case of Liquidity is similar”, says Professor Yakov Amihud, Ira Rennert Professor of Entrepreneurial Finance at the Stern School of Business, New York University. Prof Amihud has been actively researching the effects of liquidity of assets on their returns and values, and the design and evaluation of securities markets’ trading methods for over three decades.

In conversation with Dr Nupur Pavan Bang of the Insurance Information Bureau of India and Prof Vikram Kuriyan of the Indian School of Business, Prof Amihud explains that liquidity risk is often ignored by investors. Risk management models used by professional investors often assume that securities can be traded infinitely. When liquidity dries up, especially in a systemic way during periods of crisis, it becomes very expensive to trade. Firms like Morgan Stanley and Long Term Capital Management have suffered huge losses due to underestimating the cost of liquidity.

So when does liquidity dry up? “It is a chicken and egg story”, says Prof Amihud. When prices fall, traders with leveraged positions need to come up with additional funds. If funding is too costly, traders must liquidate part of their positions and this makes stocks less liquid. When stocks become illiquid, their prices fall further; this exacerbates the problem of illiquidity. In addition, information asymmetry is an important determinant of illiquidity. When there is overall panic and information gaps between traders widen, transaction costs go up and liquidity dries up.

The introduction of high frequency trading (HFT), algorithmic trading and technology improvements in terms of direct market access and co-location has not hurt the markets in terms of overall liquidity. Every generation, there are some people who are more technologically advanced than the others and consequently they have an advantage over the others. In earlier times, people who had telephones had an advantage over those who did not have telephones. Then came computers. Initially, only a few had computers. Now, everyone has it.

It’s not an arms race, which imposes a dead-weight cost with no benefit. For example, when both India and Pakistan did not have nuclear weapons, they were equal. Now both have it, and they are still equal, but after burning billions of dollars. Similarly, people argue that when there was no HFT every one was equal in terms of technology. And now with HFT, everyone might eventually reach there and then again everyone will be equal. So why have it? Well, by improving the speed of transactions, HFT helps improve stock liquidity. Limit orders are tighter (have narrower gap between the buying and selling price), which benefits all traders who can trade at lower cost. This applies particularly, to large and more liquid stocks, in which HFTs are more actively involved. The level of illiquidity and its price have declined over time. This is not an anomaly which will disappear once the market finds out about it. It will stay there and benefit all traders and the economy at large.

On being asked about liquidity in the Indian markets, Prof Amihud says that India is among the least liquid markets in the world. Ironically the corporate world would get upset if the Reserve Bank of India (RBI) would raise bank interest rates. Yet, they are not worried about the illiquidity in the securities markets, which raises their cost of capital. If the Securities Exchange Board of India (SEBI) comes out with a regulatory scheme that would make the market more liquid, it will reduce the corporate cost of capital, akin to the RBI lowering interest rates.

[1] Head- Analytics, Insurance Information Bureau, Hyderabad (npbang@gmail.com)
[2] Executive Director, Centre for Investment, Indian School of Business, Hyderabad
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Rolling like a coin: the evolution of money down the ages


Nupur Pavan Bang1

This book review was first published in The Hindu on November 26, 2013


Easy money Easy Money: Vivek Kaul

Sage Publications India Pvt. Ltd.

B 1/I-1, Mohan Cooperative Industrial Area,

Mathura Road, New Delhi-110044

Rs 395


I wish somebody had told me these things when I was a student of Finance and while I was pursuing a PhD in finance. I would have had a much better perspective of how and why things work (or don’t) the way they do! That’s the first thought that came to my mind when I read the first book of the trilogy tracing the evolution of money.

The second thought was that this indigenous writer has written a book which is truly global in every sense. I would take the liberty of placing him in the same league as a Niall Ferguson or a Peter Bernstein, even though this is Vivek Kaul’s first book.

We have heard of many college dropouts who have gone on to become billionaires. Here is an example of a PhD dropout, who it seems, is on the path to becoming a best-seller and an authority on Money, its evolution, regulation and consequences.

‘Easy Money’ published by Sage Publications takes us through the era when anything and everything was treated as money in some or the other part of the world. From salt, to dried cod, cowry shells to cattles and even slaves! Going as long back as the 12th century BC, the book chalks the path for evolution of Gold as money by meticulously laying forth the problems with alternatives and with having too many different money types.

There are many interesting facts throughout the book. It is fascinating to know that it was the Chinese who first started using coins and that they “believed that money is meant to roll around the world, and so it should be round”. That the Chinese thought of this in the 12th century BC is fascinating.

The depreciation of the currency, or debasement, as it was known in the early centuries of the Christian era, and practised by reducing the metal content in the coins, eerily echoes the concept of printing more and more paper money to meet expenses, whereby ‘money’ systematically loses value.

From barter to commodities as money to paper money and then the evolution of the banking system, the journey has lessons, as highlighted by the author in the conclusion, that all regulators would do well to imbibe. Wildcat banking, free banking, bailing out institutions existed centuries ago as well. But we have not learnt from history and hence history repeats itself.

Kaul weaves together stories from Egypt, China, India, Rome, USA and UK effortlessly, as also he does with Marco Polo, Leonardo Fibonacci, Kublai Khan and the kings of the United Kingdom. He explains the evolution of concepts like ‘settlement’ and ‘bill of exchange’ through simple examples which make the book highly readable by even those who do not have a basic degree in Finance, Accounting or Economics. The research is thorough, language simple, stories fascinating. Everyone should read it.
[1] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu.)

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Mohnish Pabrai on Cloning as a Strategy


Nupur Pavan Bang1 and Vikram Kuriyan2


This interview was first published by the Global Association of Risk Professionals on October 29, 2013.


Mohnish Pabrai Photo

As a hedge fund manager, Mohnish Pabrai does not have to be fully transparent with his results- except to the investors who receive his reports. But he makes no secret about his targets and successful results in terms of compound returns, nor about the fact that they are grounded in value investing principles, particularly those espoused by Warren Buffett.

Anyone can gain insight into Pabrai’s way of thinking in books he has written: “The Dhandho Investor: The Low – Risk Value Method to High Returns” and “Mosaic: Perspectives on Investing”.

Pabrai talks up a principle of his own, which he describes as cloning. Successful formulas are visible for all to see, but, as Pabrai observed in a recent interview, there is something in human nature that devalues cloned ideas and strategies. “Be a cloner… but clone the best”, advises the managing partner of Pabrai Investment Funds.

The Irvine, Calif. firm is billed as a family of hedge funds inspired by the Buffett Partnerships, with more than $500 million of assets.

A Mumbai native and former IT consultant- founder of TransTech in 1990, which was sold 10 years later to Kurt Salmon Associates- Pabrai won the 1999 Illinois High Tech Entrepreneur Award given by KPMG, the State of Illinois and the City of Chicago. In 2005 he and his wife, Harina Kapoor, started the Dakshana Foundation, with the goal of recycling most of their wealth. The foundation is focused on alleviating poverty in India through education and scholarship grants.

The interview with Pabrai was conducted by Dr. Nupur Pavan Bang (nupur_bang@isb.edu), senior researcher, and Dr. Vikram Kuriyan, director of the Centre for Investment, Indian School of Business, Hyderabad.


Tell us about your belief in the concept of compounding.

Einstein called compounding the 8th wonder of the world. Let me tell you a story.

One day an inventor of games brought a game to the king- the game of chess. Since it was about battle between two armies, the king was amused and spent a lot of time playing the game. So impressed was he that he offered the inventor to ask for any reward. The inventor asked that he be given an amount of rice that would be equal to what the board could hold if we were to start doubling one grain of rice from the first square of the board up to the 64th square.

The king thought that this was a petty and stupid request and ordered for the reward to be given. The minister who was in charge of arranging this did not return for a few days. Upon inquiring about the delay the minister said that the whole kingdom did not have the 18,446,744,073,709,551,615 grains of rice required, or close to $300 trillion worth. Much greater than the combined wealth of the earth.

Such is the power of compounding. This is a concept that many great investors have time and again used for wealth creation. The celebrated Warren Buffett is a great example.


Warren Buffett and Charlie Munger have had a lot of influence in your life. How did you first learn about them and what got you interested in them?

In 1994, I was 30 years old and heard of Buffett for the first time. I did not have any knowledge about investments or capital allocation. Around that time, a couple of his biographies were published. I read them and looked at his track record from 1950 to 1993. Over 44 years he had compounded money at 31% a year. If you compound money at 26% a year, it will double every three years; at 31% you will double in less than three years. I thought about the story of the chess board again and realized that if Warren continued doing what he was doing, he would become the wealthiest person on the planet. He did became the wealthiest person on the planet.

I have never been to a business school and thought of investment, but few things stood out to me. In the investing world, hardly anyone followed Warren Buffett and hardly anyone generated returns the way he did. However, I thought that his approach to compounding was right, and these things were related. Buffett’s approach looked replicable, but no one was doing that. I liked compounding and thought of giving it a try.


How did you start? Where did you get your initial capital from?

I had sold some assets in the business I was running at that time [1994] and ended up with $1 million in the bank. I had no immediate use for that money. When I read Buffett’s biography,  I decided to play his game for 30 years. If I compounded at 26% a year, and my money would double every 3 years, a million would become a billion in 30 years. I thought that even if I fail by 95%, or 97%, I would be okay.

Swami Vivekananda used to say, “Take one idea, make that one idea your life. Think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body be full of that idea, and just leave every other idea alone. This is the way to success”. That is exactly what I did.


Could you tell us a little bit more about your journey from then on?

In 1995 I started putting the million dollars to work. By 1999, $1 million had become $5.1 million, growing at 43.4% per annum, way above my target of 26%. So I said, I think this could be done.


When did you start Pabrai Funds?

I used to give investment tips to friends and family. They would ask me to manage their money. So, in July 1999, I set up Pabrai Funds with $1 million in assets from nine investors. From 1999 to 2007, we compounded at 37.2% per annum before fees, 29.4% after fees.


Did the financial crisis hit you?

Oh yes, it hit everyone! From the mid 2007, for the next 21 months, we compounded at a negative 47.1%. That came to an end in 2009. Eighteen and a half years after I first started [1995 to mid 2013], I have compounded at 25.8% per annum. Short by 0.2. The good news is that I still have 11.5 years left, and in investments, the more you play, the better you get at the game (unlike tennis). I am excited to see how next 11.5 years unfold.


So how do you compound at 26%- especially since you were not formally educated in finance or investments? [Editor’s note: Pabrai left his master’s degree program at Illinois Institute of Technology to start his consulting and systems integration company, TransTech.]

When I set up Pabrai funds, I looked at the Buffett Partnership. It was closed in 1969; I opened in 1999. In that 30-year period, I did not find a single fund that replicated the Buffett model. I got all the information that I could about the model from published sources, took it to my lawyer and told him to simply replicate it. I adopted cloning in a very serious manner. I then started investing in stocks in which Buffett and his Berkshire Hathaway invested.


Why is it that we don’t see many others succeed like you have? If it’s only about cloning, anyone can do it.

That’s right. Anyone can do it. But nobody does. There is something strange in the human genome which makes people think that cloning is beneath them. Everyone wants to do something unique.

There are other examples of cloning that have succeeded. If you look at Microsoft, Excel was cloned from Lotus; Windows, Word, and a lot of its other products are cloned. It’s not even a great cloner, as most of its products take a number of versions to remove bugs. Even though Microsoft is not a great cloner, it is one the most successful companies in the world.

McDonald’s spends a lot of time to figure out locations for their franchisees. They do a lot of analysis. While Burger Kings that compete with McDonald’s, just look at where McDonald’s is opening up.

There is a lot of debate going on about letting retailers like Wal-Mart into India. What perplexes me is that there is nothing in Wal-Mart’s business model that anyone cannot figure out by walking into their stores. There is nothing in their model that cannot be replicated. India does not need Wal-Marts. It just needs an entrepreneur to look at their model and replicate it.


Do you blindly follow Warren Buffett and invest in any company he is investing in?

There were some professors in the U.S. who looked at every stock Warren Buffett bought from 1975 to 2005, and they did an analysis. If you bought what Buffett bought after it became publicly known, on the last day of the month at a higher price and held it until Buffett started selling and sold it after it was known publicly that Buffett had sold, and got the price which was the lowest price on the last day of the month, and you did this for every stock he bought and sold for 30 years, you would beat the index by 11.5% a year.

Bottom line, cloning is a very powerful notion. No good books have been written on cloning yet. If you take what Buffett did, then you are already beating the S&P by 11.5% per year. Mostly what Pabrai Funds did was to copy the other investors. I just give a slight tweak to it. I don’t buy what others are buying. I look at what they are buying. Then I buy what I can understand and limit myself  to two-three decisions a year.


How has your strategy evolved over the years?

We don’t learn from success. When we stumble we learn a lot. I am grateful that every time I stumbled, it has lead to growth. The period 2007-’09 was wonderful from a growth and learning perspective. Over the entire 1999-’07 period there were no negative returns. Not only did we make 37.7% per annum on a compounded basis, but there were no negative returns. We thought nothing went wrong, and I never saw the housing bubble.

In 2008-’09, financial system was out of oxygen. I had companies which depended on access to capital markets and financing. They just went into a tailspin. In one case, our investment went to zero. We had permanent losses. We had things which were knocked down on price and we had no ability to be offensive. We had no cash. I learned the rule that cash is king. Most of last year I was sitting with 20% cash. That was a big change.

Another change in my approach was the development of a pre-investment checklist, which is very powerful. It looks at mistakes made by other investors. This checklist helps me in catching those mistakes. One of the Warren Buffett biographies reveals that as a kid he used to walk in a strange way. It was to absolutely take out the probability of falling. He picks stocks similarly. He looks at the downside- how can he lose money. So  I did the same…questioning and re-questioning many times about how can I lose money on an investment. The checklist helps me there.

Also, I started having conversations with another investment manager. I got this advice from Charlie Munger, who said he always has someone to talk to about his investments. Until 2008 I never talked to anyone about investments. We mostly never agree, but conversations are helpful.


What about your fee structure?

My investors love my fees structure- which is copied straight from Buffett. Zero management fees for assets under management.  First 6% of returns go to the investor. Above that 6%, I get one-fourth and they get three-fourths. So if the portfolio is up 10%,  I get one-fourth of 4 percent (that is, 1%). If it is up 5%, we get nothing.


Warren Buffett is a Value investor. Isn’t it very restricting to just copy him? There may be many more opportunities out there that may not strictly fall under the Graham and Dodd definition of a value investment, and yet be a great opportunity.

Well, Buffett is a multi dimensional investor. Dozens of investments that he has made are not moat based or may not be value investments. For example he has done a lot of restructuring and arbitrage deals. It is not so much about moat or value investing. It is about what you pay for a business. If you pick four or five investors and decide to pick the best of their ideas with some of your own criteria put in, you will be fine. You can skip the businesses which you don’t understand or which are in conflict with your own criteria, and you will still have enough options to invest. Keeping it simple and buying at a great price are important. It is also important that if you are cloning, you clone the best.

[1] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu.)
[2] Executive Director, Centre for Investment, Indian School of Business, Hyderabad.

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Superman or not, Raghuram Rajan has indeed made a difference


Puran Singh[1] and Nupur Pavan Bang[2]


This article was first published in the business section of www.rediff.com on October 28, 2013




“I am not a superman”, he says, but the reaction of markets to his initiatives has been super indeed. He took over the office of RBI Governor amongst much hustle and media gush on September 4, 2013. Having predicted the financial crisis and carrying an image of an internationally recognised economist, Raghuram Rajan was seen as the savior for the Indian economy that had multiple economic issues to grapple with.

He had his guns ready and fired right away on the day he took over. He endorsed transparency and financial stability in addition to issues related to inclusive growth and development. A range of measures were announced that included elimination of license requirements for new bank branches, appointment of committee to assess RBI’s approach to financial inclusion, allowing rebooking of cancelled forward exchange contracts by exporters and importers, issue of cash settled ten year interest rate future contracts, interest rate futures on overnight interest rates, special concessional window for swapping FCNR (B) dollars, increase in foreign borrowing limit of banks to 100 per cent of unimpaired Tier I capital, etc.

On Financial Infrastructure front, he expressed an intention to implement Electronic Bill Factoring Exchanges to facilitate prompt bill payment facility to Micro Small and Medium Enterprises (MSMEs). He acknowledged the need to have Debt Recovery Tribunals and Asset Reconstruction Companies for efficient loan recoveries.

For households, the governor announced that they will issue Inflation Indexed Savings Certificates, come out with national giro-based Bill Payment System to facilitate bill payments any time, start mini ATMs operated by non-bank entities for better financial access.

These measures were well received by markets as the key economic indicators improved swiftly. Depreciating rupee that had been a cause of concern for some time, gained considerably from a low of Rs 68 per dollar on August 29 to stabilise at Rs 62 per dollar by September 16.

Sensex rode on investor expectations of favourable policies by the RBI and rallied by a maximum of 700 points, eventually crossing the psychological mark of 20,000 points. Forex reserves also remained stable during the time. Gold imports remained low at 7 tons in September helping India’s current account deficit. Only thing that remained unleashed was inflation that rose to 6.46 per cent for the month of September 2013 (see Figure 1).

Figure 1: Key Financial Indicators before and after Raghuram Rajan’s taking over

Figure 1: Key Financial Indicators before and after Raghuram Rajan’s taking over

Source: Reserve Bank of India; www.bseindia.com; www.oanda.com;

In order to arrest inflation, in his first monetary policy review on September 20, Rajan increased the interest rate to 7.5 per cent (by 25 basis points), against the common expectations. This might have irked Finance Minister P Chidambaram, but he remained quiet, while he had openly criticised Rajan’s predecessor Subbarao for a similar move.

Rajan maintained that controlling inflation was important which eventually provided a growth environment pretty much in line with his predecessor’s line of thinking. He made up for the increase in interest rate to some extent by rolling back the rate on Marginal Standing Facility (MSF rate is the rate at which the RBI lends emergency funds to the banks) to 9.5 per cent from 10.25 per cent earlier (it helped reduce the cost of funds to banks and hence their lending rates).

In one of the measures, norms for Non-Resident Indian (NRI) deposits and overseas borrowings by banks were relaxed. This helped the foreign exchange reserves of the country. When Rajan took over, the reserves were at three year low of $274 billion. A month after, the reserves are up by $5.6 billion.

The month of September also saw gold imports go down that resulted in trade deficits to trim down to a 30 month low of $6.76 billion, resulting in a much lower second quarter (July-September 2013) deficit of $29.9 billion as against $50.3 billion in the first quarter (April-June 2013).

On October 3, Rajan met Chidambaram and decided to provide additional capital to banks for lending to auto and consumer durables sector. On October 7, RBI reduced the Marginal Standing Facility rate by another 50 basis points (now 9%) to bring down the cost of funds to the banks (RBI had increased the MSF rate from 8.25 per cent to 10.25 per cent in July 2013). Two reductions in MSF indicated that the rupee position of India was comfortable. According to Rajan, current account deficit of $70 billion was achievable at a stable rupee.

On October 10, RBI allowed banks to raise funds from international institutions until 30 November 2013 for general banking purposes (not for capital enhancement). On October 12, Rajan announced that major reforms in the form of allowing foreign banks to enter and takeover domestic banks were to be introduced in the coming months.

He promised near national treatment to the foreign banks subject to couple of operational conditions. In a meeting at IMF on the same day, he pointed that India must not be seen as a country in crisis as he did not see India running for IMF money in next five years and even beyond.

In a speech at Harvard University, Rajan stated that Indian economy was to pick up in fourth quarter of the financial year as government cleared stalled resource projects worth $115 billion. Also, good monsoon season was expected to boost agricultural production. He also pointed that economic troubles of India had to do with unwinding of stimulus during financial crisis and increased spending on things such as gold rather than any structural problems.

RBI launched new Real Time Gross Settlement (RTGS) system for large-value funds transfer for settlement of inter-bank transactions (first implemented by RBI in 2004) on October 19. Its advanced liquidity and queue management features were expected to make financial markets more efficient.

On October 21, Confederation of Indian Industries and Association of Chamber of Commerce and Industries urged Rajan to cut key policy rates for better liquidity conditions. However, the seven month high inflation figure of 6.46% for September does not go in their favor. Given Rajan’s reputation, we may see another hike in interest rates on October 29 and given his ability to communicate to all stakeholders, the finance minister may not even be in a position to criticize his policies as it may not be received well by the markets.

In this short span of time, Raghuram Rajan has introduced/announced many initiatives, most of them yielding positive reactions from markets. Whether this is first aid or permanent solution, is too soon to tell.


[1] Research Associate, Indian School of Business, Hyderabad (Puran_Singh@isb.edu)

[2] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)

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Concentration: the case for putting all your eggs in one basket


Nupur Pavan Bang[1] and Khemchand H Sakaldeepi[2]


This article was first published in the Financial Times, FTfm, on September 30, 2013



Is diversification the best way to invest in the market today? Not really. The portfolios of major investors worldwide make the case for another, often-ignored, strategy: concentration. Business schools need to refrain from pushing the merits of diversification without highlighting the efficacy of concentration.

“Do not put all your eggs in one basket. Diversify.” In 1952, investment aspirants received this clarion call from Harry Markowitz, a US economist and Nobel laureate. Peter Lynch, the famous US businessman and stock investor, “never saw a stock he didn’t like” and was a great proponent of portfolio diversification. While managing the Magellan fund, at the peak of his career, Mr Lynch’s portfolio had more than 1,000 stocks. To date, portfolio diversification remains the most important lesson taught to students of investment and risk management. The concept is a common thread in the investment approach of most fund managers and investors.

However, if we look at the portfolios of the rich and famous, they are, surprisingly, mostly concentrated. Several great investors, spread across geographies, have very concentrated portfolios. Warren Buffett, George Soros, Rakesh Jhunjhunwala and many others are renowned proponents of portfolio concentration. To Mr. Buffett, over-diversification presented a “low-hazard, low-return” situation and thus he dismissed it. A concentrated portfolio pivots on the absolute conviction of the investor in his or her stocks and his or her risk appetite.

A diversified portfolio, on the other hand, works well if the investor is optimistic about the stock, but wary of the associated risk. Investors like the first billion-dollar Indian investor, Mr. Jhunjhunwala, walk a fine line between the two.

John Maynard Keynes, the influential British economist, was another staunch supporter of concentration. “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes,” he once said.

Mr. Buffett, echoing Benjamin Graham, the father of “value” investing, says he does not just buy an insignificant thing that bounces by a small percentage every day on the stock market. He buys part of a real business and thinks like the owner of a business would.

Mr. Buffett says: “Wide diversification is only required when investors do not understand what they are doing.” Bruce Berkowitz, founder of Fairholme Capital and a leading “value” proponent, adds that just a handful of significant positions are enough to do unbelievably well in a lifetime.

In 2012, the results of a study from the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, University of Technology Sydney, showed that if skilled fund managers invested in concentrated portfolios, they would improve their performance markedly as compared with the portfolios that they would build under the compulsion to diversify. Despite mitigating stock-specific risks, the method of diversification cannot fortify the portfolio against market risks.

Advocates of concentration also opine that building or creating wealth with a diversified portfolio is difficult, unless the entire market is experiencing a bull phase and all the stocks in the portfolio are performing well. Even then, you may not get the full advantage of a multi-bagger as your investment in that particular stock would be just a fraction of your entire portfolio. The anti-diversification camp proposes that to generate wealth some concentration is required, provided people know how to assess their risk appetites and simultaneously pick winning stocks.

Fund managers today are caught in a catch-22 situation. Is wealth generated first by diversification and then maintained through concentration or vice versa? Knowing that concentration has been the mantra for success for most investment gurus, is it savvy to jump on the “diversification bandwagon” by adhering to popular belief? Awareness of such dilemmas and seeking clarity on them is essential for future managers.

It is, thus, time for business schools to introduce concentration as an important strategy in wealth creation, management and enhancement. Special attention needs to be given to this in business pedagogy, as the training of financial advisers and finance students will remain incomplete if it is restricted to the hallowed realm of diversification as the only plausible investment strategy.


[1] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)
[2] Researcher, Centre for Investment, Indian School of Business, Hyderabad (Khemchand_sakaldeepi@isb.edu)
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Where angels fear to tread


Kaushiki Sanyal[1]


This article was first published in the Times of India, The Crest edition on June 29th, 2013


The government is rushing to allow foreign universities to set up campuses here without really debating the move or even framing guidelines the right way, says Kaushiki Sanyal.

It’s rather strange that while the debate over allowing foreign universities to set up campuses in India remains as yet unresolved, the University Grants Commission (UGC), our apex education regulator, is about to notify rules regarding their entry in the country. The government, it seems, is in a bit of a hurry. Presently, Indian institutions can grant degrees and diplomas in collaboration with foreign institutions; but, foreign universities cannot set up branch campuses here without an Indian partner.

There are broadly three perspectives in the debate over the entry of foreign institutions. One, the opponents of the move argue that it would lead to commercialisation of higher education, and restrict access to quality education only to the rich. In response, the move’s proponents argue that it would increase choices for students, enhance competition in the sector – with potential for qualitative improvement in the Indian institutions – and provide technical skills for the job market. They suggest that the government can provide easy loans and scholarships to economically disadvantaged students to ensure that they do not lose out. Three, some experts have taken a middle view. They favour allowing foreign institutions so long as there are appropriate regulations in place to ensure that only good quality institutions are allowed entry.

The proposed UGC regulations have also taken the middle path, it appears, by restricting entry to only institutions that are placed in the top 400 as per ‘world university rankings’ put out by groups such as the Times Higher Education or Quacquarelli Symonds. In addition, only institutions which are accredited and have a track record of a minimum of 20 years in the parent country would be considered. While the purpose for such high entry barriers is to ensure that only quality institutions are allowed to enter, it is an open question whether top institutions would choose to come to India. Till date, hardly any high quality institution has entered India although the regulations notified by the All India Council of Technical Education (AICTE) that allow foreign technical institutions to offer degree or diploma courses either directly or through collaboration with an Indian partner.

It is noteworthy that countries such as South Korea, Singapore, and UAE offer incentives that reduce the costs and the risks associated with establishing a campus in a different country. However, the proposed regulations take it for granted that institutions are willing to come to India and appear to focus on increasing the constraints to entry. These include requiring the foreign institution to operate as a non-profit legal entity; insisting that they maintain a corpus of at least Rs 25 crore for each campus they propose to establish and disallowing any repatriation of surplus income. In fact, it allows foreign institutions to utilise only up to 75 per cent of the surplus income for developing the campus.

Foreign educational institutions would also have to mandatorily publish a prospectus with details of course, fees and other charges and money to be refunded. The institutions would be penalised with a minimum fine of Rs 50 lakh which may be extended to Rs 1 crore if they do not conform to the norms of UGC. However, it is not clear what procedure would be followed to penalise such institutions or whether UGC would have the power to close down these institutions.

According to the National Knowledge Commission and the Yash Pal Committee, the regulations should focus on ‘incentivising quality institutions’ to enter India while disincentivising sub-standard institutions from entering the country. But why would quality institutions be interested in entering the Indian market if they have to operate under such constraints? It is also not clear if these institutions would have the autonomy to setup their own courses and charge their own fees. Sadly, this is not the government’s first misguided attempt to facilitate entry of foreign universities. In May 2010, it introduced the Foreign Educational Institutions (Regulation of Entry and Operations) Bill, which is still pending in the Lok Sabha. This Bill had been examined by the Parliamentary Standing Committee on HRD, which recommended that there be adequate safeguards for stakeholders. It suggested that an independent regulator should monitor fee, curriculum and salary; approvals should be given on a short-term basis first before being extended and the government should devise incentives for foreign institutions to utilise their surplus funds in India.

These current UGC notifications, which do not need legislative approval, are an attempt to bypass the legislative logjam. Besides, there is also a basic lack of clarity in purpose. Does the government want to woo good quality foreign universities or does it only seek to regulate the ones who are interested in coming to India? We can’t assume that the two go together. And these regulations fail to serve either purpose fully since they do not provide incentives for quality institutions to enter India but create high entry barriers for other institutions.

Foreign universities are certainly not the panacea for all the ills of the higher education system in India. They would at best bring in some much needed competition into the sector filled with mediocre institutions. Before framing any policy for foreign institutions, our policy-makers need to have a clear understanding on the fundamental question of whether foreign universities need us or do we need them more.

[1]Senior Analyst, Bharti Institute of Public Policy, Indian School of Business, Mohali (Kaushiki_Sanyal@isb.edu)
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Duvvuri Subbarao: Green Horn that Locked Horns


Puran Singh[1] and Nupur Pavan Bang[2]

This article was first published in the business section of www.rediff.com on September 11, 2013

“May you live in interesting times. I can hardly complain on that count. I had come into the Reserve Bank five years ago as the ‘Great Recession’ was setting in, and I am finishing now as the ‘Great Exit’ is taking shape, with not a week of respite from the crisis over the five years.”

– Duvvuri Subbarao on his term as the Governor of RBI

He began his tenure on September 5th, 2008 as the 22nd Governor of the Reserve Bank of India (RBI). Within days, the roller coaster ride began. Global financial crisis set in and the newly appointed RBI governor, Duvvuri Subbarao, geared up for toughest of the times RBI had seen.

India had limited exposure to international markets in the year 2008. As a result of which impact of global financial crisis was not as severe. However, a comfortable rupee position and foreign exchange liquidity had to be maintained along with economic growth.

Under his leadership, RBI kept the domestic markets, to a large extent, alienated from the international meltdown to avoid liquidity or solvency cascades. Apart from conventional steps for liquidity infusion such as reduction in rates, he took unconventional steps such as rupee-dollar swap facility for Indian banks, refinancing window for Non-Banking Financial Companies and facilitating refinancing of the credit to small industries. Through these measures, liquidity to the tune of $75 billion or approximately 7 percent of GDP of the country was induced in the economy post November 2008.

Everyone agreed that the country had fared relatively better during the global financial meltdown. Subbarao’s original term of three years was extended for another two years by Government of India in September 2011. Most bankers and economists supported the move as any change in apex bank’s policies may not have been the best for the economy at that point of time.

The year 2012 brought more challenges for the Governor. Increased liquidity in the economy had led to a period of high inflation starting from 2009-10 that eventually became a hot potato. In February 2012, RBI decided to increase the bank rate from 6% to 9.5% for the first time in nine years (there had been no change in the bank rate since April 2003) calling it a technical adjustment.

The bank rate was decreased to 9% in April 2012 to support the growth push that the economy needed. But seeing the ineffective efforts of government to rein in the deficit and high inflation, Subbarao decided to hold the bank rate unchanged from then on despite pressure from the Center to lower it further. He had to make a tough choice between reining inflation and supporting growth through fiscal policies that the government had in mind. For lack of belief in the government’s plans, Subbarao took a stand in favor of the common man and refused to further cut the rates much to the disappointment of Mr. Chidambaram who publically expressed his anguish over it.

Listed among ‘India’s 50 Most Powerful People 2009’ by Bloomberg Businessweek, Subbarao stood against the wide calls to cut interest rates by the industry and the government. He stuck to his belief that inflation hurts the common man and hence curbing it was more important even if it meant sacrificing part of the growth.

Subbarao made efforts to make RBI a body that was ‘communicative, honest, open minded and accountable’ rather a black box which was a mystery for people. He had the opinion that people should know what RBI does. He aimed to demystify RBI and make it a role model for central banks globally.

In this direction, RBI designed financial literacy programs and pushed the states to introduce financial education curriculum at school and college levels to help enable the people to demand services from banking system.

In similar direction, he pressed on IT enabled banking, promoting financial awareness, and starting financial inclusion drives. In February 2013, in its new guidelines for banking licenses, RBI mandated that the aspirants, in their business plan, include ways to achieve financial inclusion.

He was criticized for not maintaining high forex reserves when rupee was appreciating during 2009-10. Also, his tenure was worded as the worst by a RBI governor by Arvind Panagariya, Professor of Economics at Columbia University. During the last few months of his tenure, he was blamed for falling rupee. Despite all criticisms he stuck to his guns and defended his decisions. While the government blamed RBI’s tight monetary policy and non-cooperative policy behavior for deteriorating economic situation, RBI governor convincingly reallocated the blame to loose fiscal policies of the government and policy paralysis.

A Green Horn five years back, he retired locking horns with the bosses. On September 4th, 2013, as he handed over charge to Raghuram Govind Rajan as the 23rd Governor of the RBI, he may not have been the favorite of the finance minister of India, Mr. Palaniappan Chidambaram, but had certainly raised RBI’s stature as an autonomous body. He charted an independent path from the government, refused to succumb to the pressure from the Center.

[1]Research Associate, Indian School of Business, Hyderabad (Puran_Singh@isb.edu)
[2]Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)
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Punishing India’s love of gold will not yield result


Puran Singh[1] and Nupur Pavan Bang[2]

This article was first published in the Financial Times, Beyond Brics, on September 10, 2013;
Gold love

“Getting married this year would be very costly for me. With gold prices at all-time high, jewellery shopping will literally wipe out all my savings. My parents will insist that I buy at least 50g of gold jewellery for my future wife. It does not make sense right now at such high prices”, says a friend who is planning to postpone his marriage to his fiancé.

India’s finance minister P Chidambaram has blamed the $86bn (4.5 per cent of GDP) current account deficit on India’s “passion for gold”, and has introduced various measures to curb demand. There are several reasons why such steps are unlikely to succeed.

At the start of 2013 import duty on gold was increased from 4 to 6 per cent. At the same time, the duty on raw gold was doubled to 5 per cent. In February, gold deposit rules were relaxed by the Reserve Bank of India (RBI). In March, the RBI started monitoring gold coin sales by banks. In May, the RBI restricted consignment-based gold imports by banks. In June, import duty on gold was hiked to 8 per cent. In July, RBI tied gold import quantity to total imports.

But, the demand for Gold did not budge downwards. Having failed to curb demand, a hike in import duty was announced in August for the third time. The import duty currently stands at 10 per cent.

The bad news for the RBI and Chidambaram is that 2013 is scheduled to have 31 extra wedding days in India, because according to the lunar calendar only 117 days will be lost to Chaturmas (considered inauspicious) compared to 148 days in 2012.

If it can, the Government of India should come out with an incentive for couples planning to get married to not do so this year. About half of gold jewellery shopping in India happens during weddings.

India produces a negligible 2.3 tonnes of gold a year and consumes almost 1,000 tonnes a year. No points for guessing where the balance comes from. Increase in gold demand in any year has to be met by importing more, and given the importance of gold in Indian marriages, any reduction or postponement in gold demand is not a reasonable assumption.

Apart from weddings, festivals are the second most important occasion for the Indians to buy gold jewellery. Just under a quarter of the demand for gold jewellery is bought during festivals in India, according to a survey by AlphaWise and Morgan Stanley Research in 2012, compared to 43 per cent for weddings.

Diwali, the most important festival for Hindus is in early November and people buy gold on Dhanteras to please Goddess Laxmi (the Goddess of wealth). Our presumption is, given the sentiment attached to buying gold and the returns it has offered post 2008, people will not mind buying gold even at soaring prices.

In history, wars have been fought over the ownership of gold. Now the battles take place in the form of derivatives, exchange traded funds, and mutual funds. Gold is still much sought after, but more so for its financial than aesthetic value. The government of India and RBI are fighting another war against its own people.

People are wondering why the RBI and the government would try to curb gold imports to solve a problem that is created due to government overspending and policy paralysis. Why would a government which is not able to protect its citizens from inflation prevent them from buying gold, which is considered a hedge against inflation?

Gold gives a common backdrop to an India which is otherwise diverse in religion, faith and culture. Embedded in the Indian psyche as symbol of prosperity and wealth, owning gold is akin to the American dream of owning a home.

Hence, the curbs on gold may not yield the desired result. But it will succeed in building up further anger against the ruling government.

[1] Research Associate, Indian School of Business, Hyderabad (Puran_Singh@isb.edu)
[2] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)

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A bit on the virtual currency


Nupur Pavan Bang[1] and Khemchand H Sakaldeepi[2]

This article was first published in the Hindu Businessline, Investment World, September 07, 2013;



The first time I heard of a currency issued by an institution, apart from the Government or the Central Bank of a nation, was way back in 2002. A relative, devotee of Maharishi Mahesh Yogi, told us about “Raam”. Raam is a currency in circulation in Holland and parts of United States, issued by the Stichting Maharishi Global Financing Research (SMDFR), a charitable foundation based in Holland. Two questions came to my mind: First, who guarantees the payment to the bearer? Second, if many more institutions start to issue currencies, wouldn’t it lead to a lot of chaos?

Similar, and more, questions were raised in our minds when we heard of Bitcoin for the first time.

In 2008 Satoshi Nakamoto (a pseudonym for the person or group of people who designed the original Bitcoin protocol) posted a paper describing a cryptocurrency protocol. He created an open source client and issued the first Bitcoins in 2009 that are encrypted so that it cannot be misused or reused. This is just like a wallet (free to create) on your desktop and you can use a currency that does not belong to any country or any region or any organisation, for transactions. Instead of a central bank mining the currency, the mining of Bitcoin is done by users all across the network. There are inbuilt checks in the open source algorithm which prevents any conflicting transactions or prevents people from paying the same bitcoin to two different people.

Bitcoin can also be bought using regular currencies such as dollars, or pounds or euros. Currently, one bitcoin can be bought for approximately $107. One can payout in bits (as in computers). Free email, free calls (skype/viber), now free transfer of money! It’s an absolutely logical evolution. However, my original questions remain. Is the currency backed by some organisation/ bank /or government? No. It has value because there is demand for it. If tomorrow there is no demand, its value will be worthless. Is there a possibility of that happening? Yes and No. Regulators are seriously concerned in the US and other countries and they are watching the currency and allied activities closely. They may take extreme steps and ban the use of Bitcoin. Thailand recently banned trading in Bitcoin.

On the other hand, there is a growing community of users who are in favour of digital currency.

Will it lead to chaos? The value of the currency is definitely very volatile. It is first of its kind. There may be more digital currencies which would crop up in the future. It may lead to chaos, even network security breaches. Adopting good practices by users may be the key.

“All over the world people are trading hundreds of thousands of dollars worth of Bitcoin every day with no middle man and no credit card companies. It’s a startup currency which has never happened before” says weusecoins.com. Organizations like Amazon, Barnes & Noble, iTunes and many more accept bitcoins for transactions. The virtual currency is also very popular in China, as popular as in US and the UK, reported Rob Minto in Beyondbrics, Financial Times (July 9, 2013).

All this sounds cool but how big is it? It has definitely made some headlines recently. Cameron and Tyler Winklevoss, twins known for battling Mark Zuckerberg over ownership of Facebook Inc, have filed for an initial public offering of a Bitcoin ETF designed to allow investors to track the performance of the digital currency bitcoin. It will be just like an index that represents the bitcoins. The response to the proposal is, however, lukewarm at best.

The fear of criminal activity, money laundering, high volatility, no regulation, bubble, are all rife. So are the whole generation of users who swear by the currency and consider it an economic revolution. We are not clear about the implications of virtual currency yet. Though it is definitely challenges the way we conceive money. The question to ask is whether money as we know it is undergoing a tremendous change.

[1] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)

[2] Researcher, Centre for Investment, Indian School of Business, Hyderabad (Khemchand_sakaldeepi@isb.edu)

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Why is Gold so dear to everyone?


Puran Singh[1] and Nupur Pavan Bang[2]


This article was first published in the business section of www.rediff.com on August 28, 2013



‘Dear’ to people, but not so ‘dear’ to Indian Government at the moment. Or rather, too ‘dear’ for Indian government. The gold has kept the finance minister on his toes since the beginning of this year as continuous measures to curb gold imports have failed to reduce the ‘dearness’ of gold to people.

It is worthwhile to muse why the shiny metal has had an inherent appeal and emotional connect with people since ages.

How much gold is there?

Ever wonder how much gold is there? Let us see. Imagine you have a living room that measures 65 feet in length, breadth and height. Now imagine that it is full of gold. That is it. That is all the gold above ground in the world.

However, if you were to convert this block of gold into a wire of five micron thickness (thickness of human hair is – 75 microns), you would be able to wrap planet earth 11.2 million times. Now it seems a lot, doesn’t it? In other words, you can’t judge a book by its cover.

But besides its metallic properties, there is much more to gold that makes it an obsession to mankind.

Who is after gold?

Kingdoms: Gold has been a reason for wars between kingdoms throughout human history. In 1500s, King Ferdinand of Spain destroyed Inca and Aztec civilisations while looking for gold. While some civilisations were lost due to gold’s pursuit, America owes its discovery to it for Christopher Columbus was in search of route to India and China to find the source of China’s gold when he accidentaly found America in 1492.

Individuals: In 1848, people from across the world rushed to California in hope of securing gold flakes for themselves. Later in 1888, discovery of a gold mine near Johannesburg in South Africa triggered another gold rush.

Economies: Gold became vital part of international financial system in 1870s when, to assert the importance of Gold, all major countries linked their currencies to gold and adopted gold standards.

Central banks: Central banks in the world turned net buyers of gold starting 2010. It serves as a guarantee that governments will redeem their promises and secures the value of local currencies.

Investors: Negative correlation of gold with stock market movements is its most appealing attribute for investors helping them safeguard the investments from market movements. In addition, investors use it as a store of value and inflation free investment.

Who else finds value in gold?

Sportspersons: Gold became a prized possession of sportspersons since 1904 Olympic Games in Missouri, US, that started the tradition of gold medals for winners of games.

Astrophysicists: Scientific value of gold was discovered in 1961 when it was used in a spaceship as a protecting device against radiation.

Pharmacists: In 1985, medical significance of gold was discovered when SmithKline & French, a pharmaceutical company in US, developed a gold-based drug for the treatment of rheumatoid arthritis.

Physicists: In 2001, Boston Scientific, a leading medical innovation firm, invented a gold-plated stent used in heart surgery to allow adequate flow of blood to heart.

Is gold the most valuable?

Platinum ($1,521 per troy ounce) is a more precious metals than Gold ($1,417 per troy ounce)

Yet, Peter Jackson chose to use gold ring as ‘The Precious’ in Fiction Film Trilogy ‘Lord of the Rings’ grossing $2.92 billion which is roughly one third of India’s gold import in a year. There is certainly more to gold than its monetary value.

The religious connect

Gold has a huge religious significance, especially in India, a country with diverse religion and cultures.

Hindus: In Puranas, ancient Hindu texts, Hindu God Brahma is referred to as Hiranyagarbha which means born of golden egg. In Hindu mythology, many goddesses have been described as golden-hued that symbolizes purity and ultimate beauty. Manu, the ancient law-giver to Hindu rishis recommended wearing golden ornaments on specific occasions. Also, Indian mythological scripts describe how god and goddesses rode golden chariots.

Sikhs: Maharaja Ranjit Singh in 1830 gold plated the Harmandir Sahib in Amritsar that symbolized wealth and prosperity.

Christians: According to the Bible, on the birth of Jesus, gold was one of the three items gifted by three wise men on behalf of human kind to symbolise sacrifice and love for God.

Is more gold good?

Depends on whose shoes you are in. If you are an investor who can afford to buy gold at peak prices, Good! But ask Finance Minister and he will advise against it.

RBI does not have enough dollars at the moment to pay for gold imports.

Increasing fiscal deficit, falling rupee, are all being attributed to high gold imports by India, apart from the other reasons. The ‘dear’ metal is costing India too much. But, will that make India let go its obsession for Gold or will it be too much of love lost?

[1] Research Associate, Indian School of Business, Hyderabad (Puran_Singh@isb.edu)
[2] Senior Researcher, Centre for Investment, Indian School of Business, Hyderabad (Nupur_bang@isb.edu)


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