Issue I Feb 2012

YES-CFO Insights A comprehensive compilation of thought leadership articles

Investment and Growth Opportunities in FY13 - CFO on the centre stage

Foreword It gives me immense pleasure to present the first edition of YES – CFO Insights, a quarterly publication which aims to become a valuable repository of experiences, thoughts, and insights of erudite CFOs across India. The YES – CFO Insights covers contemporary themes, and includes contributory articles on topics pertinent to recent economic developments and policy changes that will help CFOs to make far-sighted decisions and seize hidden opportunities leading to consistent growth of their organizations and industry at large. I am also pleased to share with you that further to the successful launch of the YES BANK - National CFO Forum on September 7, 2011 in Mumbai, we have launched the New Delhi Chapter of the Forum on February 14, 2012. The YES BANK – National CFO Forum has been conceived to recognize the deeper role of CFOs, and provide them with a unique knowledge and thought leadership exchange platform. The Indian economy has been one of the fastest growing economies in the world; however, in the past one year, it has witnessed volatilities on the back of the global crisis. Despite the magnitude and proliferation of the financial challenges, India Inc. has been able to effectively showcase its combined abilities and competencies in managing and responding to the new economic global order, and is now looking forward to take a giant leap in the next growth cycle. As we move to the new financial year, the introductory edition of YES - CFO Insights has attempted to collate opinions of some renowned thought leaders and industry experts on the theme ‘Investment and Growth Opportunities in FY13 - CFO on the centre stage’. My sincere thanks to Mr. Y.M. Deosthalee, Mr. Deepak Amitabh, Mr. Gautam Sen, Mr. Milind Sarwate, Mr. O K Balraj, Mr. P K Goyal, Mr. Prabal Banerjee, Mr. Rajender Prasad, Mr. Shekar Viswanathan and Mr. T.N. Subramaniyan , for sharing their valuable thoughts with fellow CFOs, and the industry at large, towards the formation of this treasure of innovative ideas, key insights and valued experiences. I look forward to the continued support and active contribution from all Forum members in the future editions of YES - CFO Insights. Thank you. Sincerely,

Dr. Rana Kapoor Founder, Managing Director & CEO - YES BANK Chief Mentor - Governing Council - YES BANK National CFO Forum

1

Message from the Chairman’s Desk We are indeed in the midst of challenging times. The world is grappling with lower growth, high indebtedness and fiscal consolidation. Overall, there is stress in the financial system. India has huge potential and opportunities to gain position of significance, globally. However, India needs to focus on growth, better fiscal management and a disciplined approach in decision making. Economic agenda needs to be separated from political ambitions and the country needs to march ahead at a galloping pace. In such testing times when the Balance Sheets of many companies are stretched, capital is scarce, liquidity continues to be challenging. There are tremendous responsibilities on CFOs to strike a delicate balance between judicious capital allocation and growth. While there is no doubt that Cash is King, CFOs should not lose opportunities to help the organization gain market share and consolidate their position in the business. There are several ways in which CFOs can add value. It is time to create 'Centres of Excellence'' in services. It is a difficult concept for the businesses to accept. However, sharing a common technology platform, promoting operational excellence in areas such as Human Resources, Accounts and Procurement will go a long way in creating an efficient organization. Every organization needs to have a Risk Management framework. Given the volatility in markets, dealing with all aspects of Risk including Financial, Business, Regulatory, Market and Reputational Risk is essential. CFOs have a major role to play in establishing such a Risk Management Framework. They need to look at global practices and emulate relevant practices within the organization. One of the important attributes of a successful CFO is efficient and responsible communication within and outside the organization. They are a link between the Investors and the Management. The process of communication has to be continuous and both ways. Most of the CFOs today regularly interact with media and are important constituents in the value growth journey of organizations. The economic landscape of the world is changing very rapidly and Indian companies are aspiring to be global. Creating a global mindset is central to exploiting global opportunities. CFOs have played a very crucial role in shaping their organizations. They need to continuously work smartly with speed. These challenging times will also throw opportunities for career growth and personal development. My best wishes for the CFO Forum.

Mr. Y. M. Deosthalee Chairman and Managing Director - L&T Finance Holdings Ltd. Chairman – Governing Council - YES BANK National CFO Forum 3

Managing Volatility and Risk in the current Global Economic Scenario - Shubhada Rao, President & Chief Economist, YES BANK Ltd. In common parlance, making a distinction among uncertainty, risk, and volatility can be tricky. Uncertainty describes a situation where several possible outcomes are associated with an event, but the assignment of probabilities to the outcomes is not possible. Risk, in contrast, permits the assignment of probabilities to the different outcomes. Volatility, on the other hand is allied to risk. Volatility provides a measure of the possible variation or movement in a particular economic variable or some function of that variable, such as a growth rate. After the Great Moderation observed in the world economy during 2002-07, a period which was characterized by low unpredictability in asset prices and economic variables, the period thereafter has seen quite the contrary. The growing linkages of national markets in currency, commodity and stock with world markets and existence of common players, have given volatility a new importance – Based on the property of its speedy transmissibility across markets. Since the collapse of the Lehman Brothers in 2008, volatility has seen a structural shift upwards for most of the asset classes like currencies, equities, and commodities. Measured by the five year moving average of the coefficient of variation, the trend in volatility has almost doubled for the Rupee, BSE Sensex, and Crude oil in the last fifteen years! The speed and severity of the global economic downturn and the accompanied surge in volatility, illustrate the importance of a comprehensive risk management strategy and the need to be attuned to changing forces across the business landscape. It is perhaps difficult to recall a more challenging environment of enduring volatility, mitigating risks and struggling for growth. Experiences such as these prepare all including us as banks to focus on coping with short-term headwinds while positioning for creation of long-term safety nets simultaneously. Managing volatility thus requires institutions including banks to promote domestic financial stability, ensure that domestic instability is not transmitted internationally, and guarantee that international institutions and the rules of the game are not themselves a cause of volatility.

Source: YES BANK, Bloomberg

With business cycles becoming shorter and harder to predict in terms of turnaround, businesses and industry have inevitably to contend with, and manage, not just their normal core business risks, but also financial risks like foreign exchange, interest rate, and commodity price risks. Financial institutions, and, in particular, banks, are supposed to and must build up their resilience to both expected (i.e., risks) and unexpected (i.e., shocks) losses. Creation of a three tier risk management structure as a proactive measure within banks can be constructive. At the first level, the top management must play a critical role to create controls to ensure that overall risk remains within acceptable levels and rewards compensate for the risks taken. The second level could be at a macro level, encompassing measures to manage risk within a business area. The third and perhaps the most crucial is the mitigation of risk at a micro level – with measures performed by individuals who take risk on behalf of the bank. From a micro perspective, managing volatility pertains to the effective management of expected risks. Although expected risk induced volatility falls into the realm of known unknowns, it is important for firms to determine their level of threshold for pain and tolerance, and then adequately align their internal policies around them. Besides maintaining adequate capital, the banking system can consider some of the following:

4

§ Carve out a Volatility Fund from their capital to deal with any exigency § Prepare robust internal models for predicting turning points for business cycle through a framework of leading indicators § Submitting internal projections to regular stress testing and ring fencing balance sheet operations from asset price volatility to the extent possible through a judicious use of hedging techniques

Not only are the internal strategies crucial, but as a bank, playing an indomitable role in the economy's financial intermediation, it must disseminate and share with its clients across all sectors, the in-depth knowledge and technical expertise to improve both technical and financial soundness of projects. YES BANK has placed risk and volatility management at equal footing with revenue and cost management. The approach towards de-risking has been a continuous process through judicious utilization of proactive rather than reactive policies. On the relationship side, our knowledge based prescient approach not only helps us in understanding our customers better, but it is also instrumental in mitigating credit risk to a large extent. An advanced technological support system further fortifies the early warning signals that are in sync with the regulatory environment. From a macro perspective, greater financial development (measured by credit to the private sector as a ratio of GDP) is associated with lower growth volatility as long as the supporting institutions are strong. Alignment of monetary and fiscal policy to the business cycle helps in reducing policy induced volatility. The overall regulatory and financial architecture has to support the evolving nature of financial development through effective technological intermediation.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

5

Policy interventions to further accelerate FDI / FII inflows and to arrange finance for capital creation / infrastructure development - Gautam Sen, Director Finance, RCF Ltd. Capital flows into India have been predominantly influenced by the policy environment. Recognizing the availability constraint and reflecting the emphasis on self-reliance, planned levels of dependence on foreign capital in successive Plans were deliberately held at modest levels. Economic growth in the recourse to foreign capital was achieved through import substitution industrialization in the initial years of planned development. The possibility of exports replacing foreign capital was generally not explored until the 1980s.It is only in the 1990s that elements of an export-led growth strategy became clearly evident alongside compositional shifts in the capital flows in favour of commercial debt capital in the 1980s and in favour of non-debt flows in the 1990s. The approach to liberalization of restrictions on specific capital account transactions, however, has all along been against any "big-bang". India considers liberalization of capital account as a process and not as a single event. While relaxing capital controls, India makes a clear distinction between inflows and outflows with asymmetrical treatment between inflows (less restricted), outflows associated with inflows (free) and other outflows (more restricted). Differential restrictions are also applied to resident's vis-à-vis non-residents and to individuals' vis-à-vis corporate and financial institutions. The control regime also aims at ensuring a well diversified capital account including portfolio investments and at changing the composition of capital flows in favour of non-debt liabilities and a higher share of long term debt in total debt liabilities. Thus, quantitative annual ceilings on External Commercial Borrowings (ECB) along with maturity and end use restrictions broadly shape the ECB policy. Foreign Direct Investment (FDI) is encouraged through a progressively expanding automatic route and a shrinking case-by case route. Portfolio investments are restricted to select players, particularly approved institutional investors and the NRIs. Short-term capital gains are taxed at a higher rate than longer-term capital gains. Indian companies are also permitted to access international markets through GDRs/ADRs, subject to specified guidelines. Capital outflows (FDI) in the form of Indian joint ventures abroad are also permitted through both automatic and case-by-case routes. The Committee on Capital Account Convertibility (Chairman: Shri S.S. Tarapore,2006) which submitted its Report in 2006 highlighted the benefits of a more open capital account but at the same time cautioned that Capital Account Convertibility (CAC) could cause tremendous pressures on the financial system. The purpose of the flow of capital to underdeveloped countries is to accelerate their economic development upto a point where a satisfactory rate of growth can be achieved on a self sustaining basis. Capital flows in the form of private investment, foreign investment, foreign aid and private bank lending are the principle ways by which resources can come from rich to poor countries. The transmission of technology, ideas and knowledge are other special types of resource transfer. The capital flow of countries increases due to the amount of resources available for capital formation, over and above what can be provided by domestic savings. It also raises the recipient economy's capacity to import goods: capital flow provides foreign exchange and eases the problem of making international payments. Indian policy is following a determined gradual path towards economic liberalization and international integration. Following the liberalization of transaction on the current account, restrictions on capital inflows have been relaxed steadily with an emphasis on encouraging long-term investment and saving. The pattern of liberalization of capital inflows in India has been the gradual easing of quantitative restrictions on inflows and the size of flows that are automatically approved. To sustain GDP growth rate at 9 percent per annum in the medium term, investment in infrastructure would have to be substantially augmented. According to the Government, India would need about USD 1 trillion investments in various infrastructure sectors during the 12th Five Year Plan (2012-17). One of the key constraints in infrastructure financing is the lack of availability of risk capital to support debt raising. Adequate flow of equity capital into infrastructure sectors has not been forthcoming, despite the fact that the domestic equity market is well developed. This underlines the need for developing the market for other forms of risk capital such as mezzanine financing, subordinated debt and private equity. Shortage of risk capital in the domestic market is the ground for seeking larger FDI into infrastructure, which would not only

6

narrow the risk capital gap, but also usher in requisite skills to implement and monitor projects in line with global best practices. §

Improving intermediation of domestic financial savings so that they are channeled to meet the specific requirements of infrastructure investment such as those relating to risk, tenor and scale

§

Facilitating targeted access to foreign financial savings

§

Distributing financial risk more widely and efficiently across the domestic financial system and abroad, to avoid excessive concentration

§

Making infrastructure financing--especially in sectors where it has not been traditionally forthcoming--relatively more attractive for a wide spectrum of investor/ financier classes by providing more liberal regulatory regimes for infrastructure vis-à-vis non-infrastructure sectors and in some cases, offering well-designed fiscal incentives

§

Achieving all the above through facilitating (rather than directive)

The Government’s strategy has been to focus on creating incentives for the private sector as well as participate directly as a key investor. Some of the steps taken in this direction are: §

Progressively reducing Government control and allowing easy entry of the private sector. Foreign Direct Investment norms have been continuously eased with 100 per cent investment allowed in most of the sectors.

§

Announcing consistent long-term policy measures and delegating control to independent regulators. The enactment of the Electricity Act in 2003 and the establishment of the Telecom Regulatory Authority of India (TRAI) are important examples.

§

Undertaking programmes to step up the quantum of infrastructure facilities through public-private partnerships.

Some of the Policy Initiatives the Government could consider going forward Ÿ

Enhancing the foreign holding in and tapping the potential of the insurance sector

Ÿ

Providing incentives for banks’ and NBFCs’ participation in infrastructure financing

Ÿ

Facilitating equity flows from overseas into infrastructure

Ÿ

Inducing foreign investments into infrastructure

Ÿ

Utilizing foreign exchange reserves

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

7

FDI/FII Inflows in India – Problems and Way Forward - Deepak Amitabh, Director Finance, PTC India Ltd. In the past decade, the role of emerging economies in the global economy has increased significantly. The rise of BRICS countries (Brazil, Russia, India, China and South Africa) is changing power dynamics in world affairs. The huge market size (40 % of world's population and 25 % of global GDP) and cost advantage of these countries have been creating various opportunities for Foreign Direct Investment (FDI) and Foreign Institutional Investors (FIIs). All these countries have surpassed the growth expectations in the last decade, since the term BRIC was coined by Goldman Sachs, and have emerged virtually unscathed from the global financial crisis. However, a detailed analysis of the growth of these countries in last decade shows that India's record on productivity, FDI and reform has been mostly disappointing. FDI inflows in India have been lower than the rest of the BRIC countries every year (see chart below). The story of FIIs is not encouraging either. Though FIIs have been selling across markets and pulling out money, their outflow was the highest from India in 2011 (USD 4 Bn) when compared with BRIC peers. What could be the possible reasons for this apartheid of global investors against India? There are various potential variables like Market Size, Economic Stability and Growth Prospects, Labour Cost, Infrastructure Facilities, Trade Openness, Currency Valuation etc. that determine FDI inflows to a country. India scores fairly well in some of these variables while it lacks in some important ones like infrastructure facilities, trade openness etc. Most importantly it is the ability of the leadership of the country to implement reforms in letter and spirit which plays a vital role. Source: World Investment Report, 2011; Columbia FDI Profiles; India Brazil Chamber of Commerce

Many sectors in India allow for 26% or 49% FDI. This restrictive policy of the government is a big barrier. When a foreign investor invests in a country, it would like to have controlling stake in the investment; as it brings intellectual and financial capital and hence would like to drive things in its own proven way. It sees no benefit in having non-controlling stake despite of putting heavy investment. Even where 100% FDI is allowed, the path is not smooth. For instance, in the power sector, 100% FDI is allowed but the sector is yet to realize any substantial benefit out of it. the Government of India (GOI) initiated many fast track projects after liberalization in 1991. One such project was Enron's Dhabol Power Project, the most promising projects of its time. However, due to disputes between the owner (Enron) and the off-taker (Maharashtra State Electricity Board (MSEB)), the project ran into trouble. The Power Purchase Agreements (PPA), though expertly drafted and legally a sound document, could not be implemented. Later on, Enron also collapsed as a company. The ripple effects of this one investment which went bad are still in the minds of foreign investors, keeping them away from the Indian Power Sector in spite of 100% FDI. If we have a look at the sectors which have been able to attract more FDI, it is clear that opening up of the sector (s) is the key. Services, IT and Telecom sectors have been attracting more FDI than any other sector in India since the past 6 years and the benefits are evident. These sectors now comprise a major portion of our GDP. Infrastructure, especially the Power sector has not been able to draw much foreign investment mainly due to regulatory hurdles. The main objective of any regulator should be to ensure level playing field that encourages greater but fair competition so as to provide the consumers large gamut of

8

services at affordable prices. The Government's recent decision of allowing 100% FDI in single brand retail is a welcome step and is expected to create millions of jobs. The mandatory 30% sourcing from micro and small industries will help the local enterprises achieve higher growth but many big brands are not enthusiastic about this condition. There is also a fear of rollback due to political pressure. The FDI cap in the insurance sector should also be raised to more than 50%. India is one of the most under-insured countries and stalling the reform process will hurt the sector's growth. When FDI cap in banking sector is 74%, there is no reason why it th should not be raised in the insurance sector. Similarly, FDI in pension funds may be allowed. In the 12 Five Year Plan, total infrastructure investment required would be US$ 1 trillion (Planning Commission estimate). An Assocham study estimates that 30% of the equity FDI investment in pension funds can meet 10% of the infrastructure investment required in the next plan. India has massive inherent growth advantages including the most favorable demographics in the world, and the fundamentals that attracted investors remain intact but it isn't able to get its act together on reforms. As Jim O' Neil of Goldman Sachs says “India is the greatest mystery among the BRICS” with problem of state of mind and leadership. The GOI must realize that reforms and liberalization are not once in a lifetime events, but a continuous process. It has to provide transparency and better infrastructure. If we can tackle the barriers listed above, large scale investment is waiting to come to India and we can achieve faster and sustainable growth.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

9

External Commercial Borrowings in India: A Treat or Threat - P K Goyal, Director Finance, IOCL There has been tremendous growth in External Commercial Borrowings in India in the last about five and half years. External Commercial Borrowings have grown by about 281% from USD 26 billion in March ‘06 to USD 99 billion in Sep ‘11. A careful analysis of Commercial Borrowings in the external debt of India reveals that by end of March 2006, External Commercial Borrowings were 19% of the total external debt and by Sep ‘11, it increased to 30% of the total external debt.

Treat The trend of increase in commercial borrowings has been as under: Financial literature is replete with the reasons as to why a corporate would borrow from overseas. However, the cardinal reason of borrowing from overseas market is Interest Rate Differential (Arbitrage) between domestic and overseas interest rates. Around this cardinal reason revolve various peripheral reasons like limitations of domestic market (in terms of lack of liquidity, legal requirements of issuance e.g. in India long term Rupee bonds need to be issued against security), diversification of debt portfolio (in terms of different currencies and different investors), application of natural hedge (in terms of matching foreign currency receivables against foreign currency loans), acquisition of credibility (in terms of issuer of overseas paper) etc.

Commercial Borrowings (USD Billion)

Mar-01

Mar-06

Sept-11

Source: Department of Economic Affairs, Ministry of Finance, GoI

In the context of external Commercial Borrowings in India, while the peripheral reasons did play a major role, the cardinal principle was the key driver of increase in Commercial Borrowing. The London Interbank Offered Rate (LIBOR) followed an upward trend till FY 06-07 from an average 1.70% in FY 02-03 to an average 5.40% in FY 06-07. However, it was reasonably clear that LIBOR was peaking in FY 06-07 as IRS (Interest Rate Swap i.e. Fixed rate in lieu of floating LIBOR), was nearing the prevailing LIBOR. The downtrend of LIBOR after FY 06-07, shown in the chart, was a treat to borrowers and source of widening the interest rate differential.

Source: Reuters Data

In the domestic bond market, mainly due to inflationary pressure in the economy, interest rates were following an upward trend. Since, FY 06-07 to Sep ‘11, average AAA yield on 5 and 10 years bond has been 9.06% and 9.24% respectively.

The differential between domestic and overseas interest rates would give rise to arbitrage only if the differential is more than the spread over LIBOR, tax (if any) and forward premium. Here, an interesting point is that high inflation results into high domestic rates and therefore theoretically exchange rates should move (domestic currency to depreciate) in such a fashion as would neutralise the interest rate differential between domestic and overseas interest rates. However, emerging countries like India have been growing at a pace much faster than that of the developed countries and therefore this pace of growth has given rise to the

10

expectation of appreciation or lesser depreciation of domestic currency. Based on this expectation, corporates could leave external borrowings unhedged resulting into a greater opportunity of arbitrage. In the Indian context, this expectation has been realistic as in the last about six and half years, the Indian Rupee has depreciated by only about 0.7% (from average Rs 44.95 in FY 04-05 to average Rs 45.26 in FY 11-12 (till Sep 2011). While Commercial Borrowings in terms of loans were the outcome of widening interest rate differential, commercial borrowings in terms of Foreign Currency Convertible Bonds (FCCBs) was the outcome of the boom period from 2005-08 in the Indian capital markets. On a yearly average basis, the Sensex rose by about 42% annually from average 5740.44 in FY 04-05 to average 16568.89 in FY 07-08. RBI in the Financial Stability Report, Jun 2011, has mentioned that during the three financial years in FY 05-06 to FY 07-08, Indian firms raised foreign capital through Foreign Currency Convertible Bonds (FCCBs) which were very popular at the time. The conversion price on such bonds was 25 - 150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons.

Threat External Commercial Borrowings are an important means to meet the investment requirements of the country. However, the financial world has been rather more uncertain in the past few months. The uncertainty is Applications for ECB to RBI (USD Billion) emanating mainly from Euro zone, which is impacting the flow of funds in terms of amount as well as interest rates. The initial indication is a drop in applications to RBI for availment of ECBs, which is depicted as below: RBI in the Financial Stability Report, Dec 2011, has mentioned that the recent tensions arising from Europe may potentially impact the flows under ECBs. RBI further concludes that the environment for carrying out refinancing of FCCB (and ECB) liabilities by firms over the next few quarters has worsened due to correction in domestic equity markets, depreciation of the Source: RBI, Based on Form 83 submitted for allotment of Loan Registration Number Indian rupee and rise in domestic interest rates. Translation and transaction exposures that remain unhedged could cause hardships to some firms. It may be mentioned that during FY 2012-13, External Commercial Borrowing of about USD 16 billion (including FCCB of about USD 4 billion) are maturing.

Impact of Oil Prices on Foreign Exchange Reserves Keeping the above in view, it is likely that repayment of maturing ECBs in near future may put pressure on the country’s foreign exchange reserves. However, if the Euro zone crisis worsen, it may have an impact on growth and consequently on oil consumption and prices. OPEC (Organisation of Petroleum Exporting Countries) in January 2012 MOMR (Monthly Oil Market Report) states that if the situation (Euro zone crisis) was to worsen, the effect on the oil market could be seen not only through a further decline in oil demand in Europe but also with spill over effects on oil demand in the emerging economies, amid an adequately supplied market. Here it may be interesting to mention that as India imports about 164 million tons of crude oil per year, a decrease of USD 13.34 / bbl would result into saving of about USD 16 billion i.e. equivalent to the maturities of ECBs happening in next fiscal. But the irony is if the price of oil increases, it may result into a double whammy.

On the guard From the above, it is evident that External Commercial Borrowings, which till very recent were a treat to Indian firms in terms of low interest rates are in the wake of current global scenario more of a threat as these low cost debts might be replaced with high cost domestic funding in the months to come, should Euro zone crisis deepen.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

11

FCCB / ECB Repayment - Predicament In FY-2012-13 - Prabal Banerjee, CFO, Adani Power Ltd. If I am allowed to present a Contrarian Opinion, in my view, FCCB Repayment hurdle should be treated as a normal repayment obligation for any corporate loan – and there should hardly be any occasion for concern. For the country as a whole, it could be an issue of clustered dollar demand, which can weaken the Rupee further due to Dollar Demand Spree for FCCB repayment – and there is no denying the fact that this would impact the redeeming corporates since their payment will be higher in weakening Rupee scenario. Without going into statistics of how much FCCB redemption will be there in Financial Year 2013 – it may be worth its while to deep dive into reasons of such redemption coming up and then explore possible way outs – if at all. But before we start such an exercise, my initial reaction would be – as a corporate – I am happy if I am paying back the FCCB since – §

Cannot get a Cheaper Debt than FCCB due to its inherent Equity Optional Value.

§

Do not have to dilute Equity and can Refinance the FCCB with another Debt and get Tax shielded FCCB Interest in my profitability.

With that positive frame of mind, let us see what belied our conversion expectation in the first place:§

The Credit Default Swap (CDS) of most Corporates moved up substantially thereby disrupting the Implied Bond Floor and Equity Option Value.

§

While the Implied Volatility of Stocks has become more aggressive, it has still failed to match the original Conversion Premium that was fixed so aggressively.

§

With Indian Equity Market not at its peak and growing, obviously the originally thought out Investor's Conversion Premium Hurdle is not going to be met in foreseeable future.

With such conditions of Equity Markets in India, Bond Holders are segregating outstanding Bonds in four categories:§

Distressed / Default Category

§

Debt Category

§

Balanced – Debt / Equity Category

§

Equity Category

In each of above category of bonds, the following four variables are in different axis of value to Investors §

CB Value

§

Bond Floor

§

Parity

§

Issue Price

and consequently, option values are different at different zones for different issuers.

12

Buyers of these assets themselves are stretched – from Distressed Debt Funds, Special Situation Funds to Fixed Income and CB Investors. One fact that can hardly be ignored here is that there will not be many buyers of Indian CB papers in today's market mainly due to the lackluster performance of the local Capital Market. Indian Corporates appears to have no other option than to redeem FCCBs today – and Re-financing also will be extremely difficult in today's global market environment.

Depending on the Company's Cash Position, CAPEX Plans, DE Ratio, Equity Hedge, Market Capitalization, etc. some of the possibilities open to corporates to reduce their FCCB payment could be as below:§

If one has the Cash, they can, subject to RBI guidelines, buy the CBs at a substantial discount – since most of the Indian CBs today are trading at a discount. With 2012-13 corporate results not likely to be stellar, most of the CBs are expected to trade near their Bond Floor Value with low Equity Sensitivity. Right Time to buy and extinguish them, if you ask me.

§

If one has prior capital commitment and yields are better with capital deployed elsewhere – management may decide to reduce the Conversion Price suitably and achieve conversion as part of the gradual process – though it may have a negative impact on market capitalization in the long term horizon. Such reduction of Conversion Premium is a smooth way for Forced Conversion which will help corporates to minimize the outgo and certain the route to Dilution. Hence, it also depends on the shareholding of each corporate if they would be willing to adopt such a route.

§

One other route for Corporates could be to refinance FCCBs from the Indian Loans Markets instead of going to the Bond Market. This would not increase the DER of respective companies being a replacement – and if one wants to convert the liability into FOREX as it was before the Refinancing of the FCCB – then they may well avail of POS (Principal Only Swap) or FCS (Full Currency Swap) which will bring them somewhere close to the same standing as FCCB in the books – but without any dilution risk. Hence, such corporates will carry all risks and benefits of FCCB but without any dilution risk.

§

Other option for FCCB redeeming corporates could very well be refinancing, through Zero Coupon Exchangeable Bonds or Perpetual Bonds which are useful in replacing the FCCBs by an Equivalent Forex Exposure in the Balance Sheet.

With above in the background, I am of the opinion that §

Repayment of FCCB should hardly be a real constraint for a reasonably performing company.

§

Repayment, if planned in advance, can be refinanced easily through refinancing from the Loan Market or Bond Market – either in Foreign Currency or Indian Rupee.

§

Stronger Companies with resources should find it useful to buyout FCCBs at a discount and Extinguish Debt.

For ECBs, Corporates are supposed to repay ECBs in normal course – hence they will have no other option. The difference between ECB and FCCB is that ECB is repaid over a period of time whereas FCCB is mostly bullet repayment, though, ECB can also be refinanced in the same process as FCCB. While India Inc. is concerned with FCCB and ECB repayment, in my opinion, they should be more concerned with Equity Dilution, and Re-finance the FCCB / ECB after enjoying the tax deductable but low cost FCCB through any methods, mentioned earlier. Possibly, that is the best option available for Indian CFOs today who are faced with FCCB / ECB repayment.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

13

Power Projects Financing - T.N. Subramaniyan, COO-Finance, Lanco Infratech Significant rise in investment required The Planning Commission has proposed an investment of USD 1,046 Billion for Infrastructure in the 12th Five-Year Plan, which is more than double of the 11th Five-Year Plan commitment. Investment requirement in the electricity sector alone for the 12th Five-Year plan is stated to be around USD 323 Billion. The Working Group on Power for the 12th Five-Year Plan has now proposed a target of 75,787 MW for power generation installed capacity addition. There is a high likelihood of not meeting this target, unless sweeping reforms take place urgently addressing the Indian power sector concerns.

Funding sources have dried up The execution of power projects is done mostly through the formation of a Special Purpose Vehicle (SPV) under project finance mode with limited or non-recourse to the parent company's balance sheet. It exclusively relies on the project's assets and cash-flows. On account of immense challenges being faced by the industry, the perceived risk of power projects has grown manifold. Acute shortage of domestic fuel, high cost of imported fuel, lesser power off-take due to mounting financial losses of distribution companies (discoms) and SEBs, non-payment of dues by discoms, transmission bottlenecks and severe delays in project execution owing to intractable issues in land acquisition, environmental and forest clearances have acted as major hindrances. Equity funding for the power projects has been brought in through promoters' equity, internal accruals, primary markets, QIP, and private equity funding. In the current market conditions, raising equity through primary markets for the funding of new power projects is becoming even more difficult. Since promoters have a limited amount of capital, the participation of financial investors is important to enable developers to meet the equity requirements for fresh projects. However, the participation of Private Equity (PE) and Foreign Direct Investment (FDI) sources is subdued due to enhanced risk perception of the power projects. It is understood that a few financial institutions plan to set-up a joint venture private equity fund for the financing of power projects. It would benefit the nation's economic interest, if this plan can be executed in a fast-track mode. Debt financing has traditionally constituted about 70-80% of power project costs. Historically, most of the funding has come from Commercial Banks and Financial Institutions (FIs). It is unlikely that banks and FIs alone can fund this sector going forward, primarily on account of two reasons. One, the size of funding requirement has grown drastically; the aggregate funding requirement of the electricity sector in the 12th Five Year Plan (2012-17) is double the size of that in the 11th Five Year Plan (2007-12).Two, most of the banks have approached or are fast approaching the group exposure limits (for lending to large infrastructure players) set by the respective boards. Given the ceilings on individual and group lending and the prudential credit exposure limit laid down by the RBI, the amount of additional debt the commercial banks can provide to new power projects is very limited. Moreover, power projects have to compete with other infrastructure projects to secure debt funding.

Sweeping reforms should replace incremental attempts Long term financing agencies such as pension funds and insurance companies are small sources of finance for power projects due to the norms and statutory guidelines set for investment in infrastructure projects. According to the investment guidelines set by the Insurance Regulatory and Development Authority (IRDA), insurance companies have to invest 15% in infrastructure. However, insurers can invest only in AA rated infrastructure papers. It is improbable for a greenfield private power project being implemented through the SPV route to get AA ratings. Credit Enhancement measures by the Government of India institutions could bridge this gap. These measures include taking effective steps to contain and reduce losses of the discoms and SEBs, making it mandatory to revise tariff each year, improving collection efficiency, and provisioning of escrow accounts to service debt. Refinancing Commercial banks are severely constrained by the asset-liability mismatch. Lending by banks is at best restricted to 15 years door to door tenor despite the projects having a Power Purchase Agreement (PPA) of 25 years. In order to address this issue, the Government of India attempted to initiate take-out financing, through the creation of India Infrastructure Finance

14

Company Limited (IIFCL), which can take out some of the banks' loans and provide long term financing to the developers. This scheme is purported to free up more capital for enhanced lending, once the projects attain commercial operation. However, the banks are reluctant to transfer an operating asset, since they have taken the crucial funding risk during the construction period. This scheme has so far failed to take-off due to intricate issues that deserve to be sorted out at the earliest. The Reserve Bank of India has also allowed take-out finance through External Commercial Borrowings (ECBs), under the approval route, to refinance rupee loans taken from domestic banks. However, there are critical issues related to the jurisdiction of domestic courts in case of overseas lender, and the jurisdiction of foreign court in case of domestic lenders and borrowers (in case of tripartite agreements). Further, the borrowing of US dollars has become more expensive with the perceived dollar scarcity in the market. Moreover, foreign lenders are less comfortable taking non-recourse long-term financing risks for these projects.SecuritizationPost commercial operation, a developer can leverage the project further by borrowing additional loans based on the project's cash flows. Typically, the interest rate for the new borrowing should be lower as compared to the original borrowing, due to a reduction in project risk. The additional debt raised can be utilized towards equity infusion in future projects. However, in the current grim scenario, securitization transactions have dried up due to increased risk perception of the industry. Recently the ECB policy has been liberalized to enable upto US$ 750 Million per year under automatic route without any change in the prevailing all-in-cost ceilings. However, under the prevailing scenario, wherein the risk premium sought for power projects is higher, it would be difficult for the SPVs to gain direct access to ECBs or through financial intermediaries (which requires prior approval of RBI) at the all-in-costs ceiling. ECA FundingAs an alternate source of funding, developers are keenly looking at the possibility of ECA funding from countries, where the equipment is being sourced from. Though it is understood that discussions are being held by developers with ECAs such as US-Exim and China-Exim, no significant progress has been made on this front barring the one-off kind of transactions being heard.

Safeguarding the overall economic interests of lenders and developers The banks and FIs in India normally lend at floating rates of interest for 15-20 years. In India, such interest rates have moved from 7% in 2006 to 14% in 2011. Assuming that infrastructure projects are funded on 75:25 debt-equity ratio, if the actual bank lending rate exceeds the originally assumed bank financing rate by about 5%, then the developer stands to get almost 0% Return On Equity (ROE) as against the originally planned 16% ROE. The reverse is also true and in that case, the developers stand to make extra-ordinary returns while the end consumer will continue to pay higher infrastructure costs despite the decrease in interest rates. To mitigate the risks of lenders and developers neutrally and to serve the nation's economic interests better, the solution could be to give actual infrastructure costs to the end consumer. When a developer wins the bid, the prevailing SBI linked interest rate plus or minus 1% can be borne by the developer during the course of the project. The impact of any movement of interest rate, either up or down, beyond 1% should be passed on to the end consumer. This would bring risk-neutrality and transparency in financing costs. It would encourage the development of projects and lending by banks by reducing the risk of macro-economic uncertainties. The only alternative solution is for lenders to give 15-20 years of fixed rate loans, which is a pipe-dream for now. In the backdrop of limited sources of funding, the Government of India and allied agencies have to ensure that the barriers to the existing modes are addressed well and if possible, also bring out innovative means of financing. It is high time that all stakeholders recognize the crying need and press hard to bring in sweeping financial reforms that can propel the Indian power sector growth back on track. §

It is important to distribute the risks of financing power projects widely across the domestic financial system. Solving the interest rate risks conundrum would help the Indian economy.

§

The Government of India urgently needs to take potent measures to encourage take-out finance by domestic financial institutions as well as overseas lenders.

§

The participation of pension funds, insurance companies and other financial institutions in long term financing of the power projects needs to be enhanced in order to create a deep and liquid corporate debt market.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

15

Challenges of Corporates in Global Crisis - Rajender Prasad, President and CFO, SRF The prevailing financial crisis that began in 2008 with the bursting of United States' housing bubble is undoubtedly the worst that we have experienced in our lifetime. The sovereign debt crisis of Europe that engulfed Portugal, Ireland, Italy, Greece and Spain, has made the environment that much more uncertain. The global terrorism combined with political turmoil as seen in many countries such as Libya, Egypt, Yemen and Syria further compound the matter. The results have been disastrous. In such a situation it is but natural, that the corporate world too would have had its share of nightmares. Volatility and uncertainty are twins which partner economic crisis on most occasions. Without one of the twins, the crises would lose its edge. In both the cases, corporates don't know how to plan and what to plan for. As late as July 2008 there was no indication of an impending crisis that erupted soon after and snowballed rapidly, entering by September into a full blown economic crisis. Following are certain examples that highlight the impact of volatility on industry: With USD ranging between Rs.44 to Rs.50+ per dollar in a span of 7 months, which was not steady but a roller coaster ride, businesses which have any link with exports or imports would have had to cope with this volatility. If one had to cope with only the foreign exchange related upheavals, life could still be simple, but there is volatility everywhere – in foreign currency markets, in interest rates, in commodities. While some factors impact economic activity as a whole, there are others which impact specific sectors or industries. Recently a manufacturing company with diverse products and multiple sites went through the midyear business review. While the past 6 months performance was relatively easily explained and analysed with the benefit of hindsight, none of the experienced leaders were prepared to take a view on the next six months performance. The consensus view was that no estimates can be made. Even where the corporates have only simple obligations to meet like – repayment of loans, payment of interest and dues to creditors – it has become impossible for them to plan and schedule their activities. Source: SRF Ltd. These examples clearly illustrate the wide ranging extent and depth of the existing volatility, and that too only in one or few aspects of the external environment. Add to this other variables in the external environment like – government regulations, power supply, civil commotion etc. which happen on a daily basis. Yet, industry as well as the government and banks do have to make some plans to base the future on however uncertain they may be.

Interdependency and inter-linkages: The expanse of the crisis highlighted the inter-linkages between countries. Even though India is a domestic consumption country, but part of the consumption comes from those businesses or households or individuals whose fortunes are hitched to the global bandwagon. Industry has increasingly been cognizant of what is happening in the world around it, but it would need to build its capability to predict what is likely to happen in the future, not only to itself but also to its partners as well, and cope with it when it happens. Inflation and interest rates: India & China are unique since they have been experiencing high inflation, while developed countries have minimal inflation. RBI has increased interest rates 12 times in 15 months. While inflation continues to rise, industry suffers from high interest cost. The treasury management of companies needs to identify linkages – precedents and dependencies – which have correlation to interest rates. Innovative models need to be thought out so that the impact of interest costs is reduced.

16

Buoyed by the booming economy between 2009 and part of 2010, many corporates embarked upon aggressive growth. This was fuelled by optimism and largely funded by debt. Borrowing, which was not an exceptionally bad step, except where companies went over-board, was made in the hope that as the projects took shape and progressed, the debt would be replaced by issuing fresh equity. However, the sentiment reversed and equity raising activity came to a grinding halt. The corporates with high borrowings were stuck with the high debt with no way out. Besides the challenge of servicing the existing debt, corporates now face the risk of debt roll-over at higher interest rates. Managing uncertainties and volatility – Success factors: Innovation: There is a widely held view that America is on a decline. However, it continues to be a leading innovation country in the world. While in the short term, i.e. 5 to 10 years, it may face growing challenges; ultimately the ideas and innovation that emerge will bring it back to a powerful nation status. It must be recognized that while American corporates spend large amounts of their budget on R&D, most of the scientific discoveries are based on government funding and government R&D programs. While India ranks quite high in citable scientific papers published, but it is still a long way behind the developed world. Developing a culture of research and innovation, topped with a quality approach would hold the corporates in good stead. Capital outlay: For continuous growth of any economy, investment in capital goods, which are involved in creating employment and enhancing GDP, is essential. Unfortunately, this activity, because of generally large amounts involved, risks associated and high interest costs, is the first casualty of uncertainty prevailing in the environment, specially in the case of private sponsored capital outlays. Any slowdown in investments also leads to revenue loss for the government impacting its fiscal deficit negatively. Political will and appropriate intervention is needed to continue investment in capital goods and infrastructure. Talent acquisition and retention: The challenges are not just limited to monetary side of the business, but to the human aspect as well. Acquiring talent with appropriate skills, and retention of employees are other challenges which the corporates face. India has been experiencing rapid growth for the past few years and hence the demand for employable talent has increased to an extent that the required talent is sorely in short supply. The labor arbitrage which Indian corporates enjoyed over developed nations, is rapidly vanishing, which again puts industry and India at a disadvantage. While institutions of higher learning are producing more graduate students they are very often not employable. This leads to the question; why is every Indian trying to become an unemployable graduate? Why are they not seeking vocational skills which are in great demand. Perhaps it has to do something with the false perception of white collar versus blue collar workers particularly in the minds of parents even though skilled blue collared workers may be far better paid than somebody from the unemployable graduate pool. This mindset has to change in tandem with opportunities for good vocational training institutes being established. Ethics and governance: Industry in general and companies in specific face a host of complex and conflicting situations both external and internal. There is enough evidence to show that companies that have high ethical standards and robust governance policies and procedures, have a greater chance of survival for longer periods of time, and in difficult times too. Image Management and transparency: In times of crises, corporates could be driven to take desperate measures which may not go down well with various stakeholders – regulators, lenders, shareholders, vendors and above all customers. The key challenge for any corporate in crunch situations is how to retain its esteem, prestige and market standing without sacrificing its existence. Communication with stakeholders and transparency in all actions is the key for long term gains, even though in the immediate situation other less truthful actions may seem more attractive. Social responsibility: Industry & corporate cannot shy away from their social responsibility. We must remember that CSR often dovetails with the need to increase skill, talent and employability. This challenge poses a win-win opportunity for the industry and the society at large. In my view, corporates with higher levels of consciousness involve themselves or promote activities centered around social betterment not only for the benefit of the society, but for their own survival as well. From the entrepreneurs' perspective, demand growth is slowing, global capital markets are weak, high material prices are hurting margins, higher interest rates are resulting in higher cost of capital and tailwinds of corruption-related investigations are affecting sentiment. To say the least, the landscape is challenging and daunting. This is the time when our values would be tested. The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

17

Development of a Robust Corporate CSR Strategy - O. K. Balraj, Group CFO, Escorts Limited Corporates in India or for that matter anywhere in the world cannot or should not take their social responsibility lightly. Despite phenomenal economic growth that we have witnessed, we as a country still continue to face major challenges on the development front and the gap between haves and have-nots continues to widen. Poverty, illiteracy and lack of environmental hygiene continue to affect a large section of our society. Most top global organizations have acknowledged their social responsibility in their respective countries and spell out their CSR plans from time to time. We should pursue this in India as well. Having said that, there are many challenges in evolving an effective and sustainable CSR strategy from a company's perspective, the most important being the sum available to spend on CSR. Many corporates may not be able to afford large sums to be spent on CSR on an ongoing basis. So, personally I do not want to give a number say 2% or 5% of profit and so on and so forth. All we need to emphasize and realize as corporate management is that we have a social responsibility to fulfill as we roll out our business strategies and a sum has to be set apart exclusively for this purpose. The choice of the CSR program will of course depend on the corporate and their core business. The CSR objectives should be carefully crafted so as to spread awareness around. Many corporates would like to discharge their social responsibility in line with their main activities so that it helps in building up their brand image. There is nothing wrong in this. The mission and vision should reflect the values a corporate would like to own, propagate and cherish. To begin with, some of the Corporate Social Responsibility Focus areas, Strategies and Endeavors by a few of the leading corporate groups from India are as follows:

CSR Focus and Strategies of Leading Corporates* Corporate

18

Area of Business

CSR Focus

CSR Strategy/Key Endeavors

Aditya Birla Group

Conglomerate

§ Education § Health Care § Sustainable livelihood § Infrastructure

§ All projects are identified in a participatory manner. § Prior to the commencement of projects, a baseline study of the villages is carried out, based on which a 1-year plan and a 5-year rolling plan are developed. § The Aditya Birla Centre for Community Initiatives and Rural Development provides the vision. § Collaborative partnerships are formed with the Government, the District Authorities, the village panchayats, NGOs and other likeminded stakeholders. § A specific budget is allocated for CSR activities. This budget is project driven. § The Company's engagement in this domain is disseminated on its website, annual reports, and house-journals and through the media. § Board of Directors, Management and all employees subscribe to the philosophy of compassionate care.

Coal India Limited

Coal Mining

§ § § § §

§ A Corporate Social Responsibility Committee interacts with the concerned State Officials/Govt. officials and NGOs for identification and implementation of activities. § A budget is decided based on the total activities to be undertaken. The fund for the CSR is allocated based on 5% of the retained earnings of the previous year. § The Committee monitors and reviews the progress of activities undertaken/completed. § An annual audit of all activities undertaken by the company is done by local Authorized auditors. The CSR activities are reflected in the Annual Report and Accounts of Coal India Limited under Social Overhead (CSR).

Education Water supply Health Care Environment Social empowerment § Infrastructure § Sports & Culture

Corporate

Area of Business

CSR Focus

CSR Strategy/Key Endeavors

YES BANK Limited

Banking

§ Sustainable livelihood § Food Security § Public Health § Education § Climate Change

Program called Responsible Banking with the objective of developing innovative business solutions to social and environmental problems. Key initiatives include Thought leadership, Responsible Corporate Citizenship Advisory, YES Community, Agribusiness, Rural & Social Banking and Sustainable Investment Banking etc.

Mahindra & Mahindra

Conglomerate

§ § § § §

Various Schools, Colleges, Education Grants and Scholarships, Sponsorship program, Environment initiatives (LEED certified residences, energy conservation initiatives), Lifeline Express, Health institutes and various other initiatives have been rolled out by Mahindra Group.

Education Environment Health Culture Sports

GAIL (India) Gas Transmission § Environment Limited and marketing § Infrastructure § Drinking water § Healthcare § Community Development § Education § Empowerment

§ GAIL allocates 2% of its previous year's Profit after Tax (PAT), as its Annual CSR Budget. § To the extent feasible, Strategic CSR initiatives are undertaken in the areas that align to GAIL's business operation. § Based on above, seven 'Thrust areas' are identified. CSR programmes are undertaken to the best possible extent within the defined ambit of the identified 'Thrust Areas'. § At least 60% of the CSR programmes are executed in and around the areas adjoining GAIL installations in remote areas/along the GAIL pipeline. § Project activities identified under CSR are to be implemented by specialized agencies. § A project monitoring mechanism is put in place by the work centre head. § CSR initiatives of the Company are reported in the Annual Report of the Company.

Escorts Group

Engineering Conglomerate

§ Horticulture & agriculture § Environment § Community § Development § Healthcare § Rural Environment

§ Awareness generation campaigns in the rural areas on effective agriculture and horticulture practices. § Provide assistance to farmers by making available certified seeds, fertilizers and pesticides. § Liaisoning with banks and district agencies for the generation of bank loans and government subsidies, or educating the farmers on preservation of food grains. § “Social Forestry Program” in order to improve the environment in and around the villages of rural Haryana. § Support NGOs working in the field of community development. § Program on “quality reproductive health care services”, covering 25 villages. § Program in collaboration with the National Association for the Blind. § Funding for other agencies, working in the field of improving rural environment

ICICI Group

Financial Services

§ Primary Health § Elementary Education § Sustainable Livelihood § Access to Finance

§ A dedicated organization – ICICI Foundation for Inclusive Growth is set up to take charge of all CSR initiatives. § ICICI Foundation works within public systems and specialised grassroots organizations to support developmental work in four identified focus areas.

19

Corporate

Area of Business

ACC Limited Cement

CSR Focus § § § § § §

Rural Welfare Education Healthcare HIV/AIDS Disaster relief Mason's training § Conservation of Heritage

CSR Strategy/Key Endeavors ACC's focus revolves around the community residing in the immediate vicinity of its Cement Plants and Mines where it seeks to actively assist in improving the quality of life and making this community self-reliant.

*Source: Company websites/CSR Policies

Of course, above are some of the biggest names in the Indian industry and the ones which follow CSR best practices. What is important to note is that first, all of them make a public commitment to CSR efforts. Their senior management recognizes that CSR is important and they convey this to the public in a transparent manner! In most cases, a senior committee decides on the projects to be taken up and approves the budget. So there is absolute clarity both externally and within the company. Second, these corporations treat their CSR efforts as an integral part of business objectives and strategy. E.g. GAIL mentions “To the extent feasible, Strategic CSR initiatives are undertaken in the areas that align to GAIL's business operation”. This is an important preposition - CSR goals contribute to the achievement of GAIL's business objectives. Similarly, ICICI Foundation for inclusive growth focuses on “Access to Finance”. Personally I believe that CSR vision should be derived from the mission and vision of the corporation. Third, it may be a good idea to seek partners in the CSR initiatives as there are quite a few organizations that have developed expertise and identified gaps in the social sector, so that the funds are spent judiciously. Finally, there is a need for ongoing monitoring mechanism. Clear performance metrics or key performance indicators that can help measure the impact of the entire CSR effort. This is very important if one has to prove the effectiveness of the effort and sustain it over time. To summarize, while charting out a robust Corporate CSR Strategy, one should focus on the following: a. CSR initiatives should be made as transparent as possible and communicated. b. From a Corporate's perspective, should undertake initiatives which are sustainable going forward. c. Monitoring end use is crucial, so that focus is not lost. d. Seeking the assistance of partners who are engaged in CSR, could be of help to provide the guidance and also the right project. I am sure that, going forward, our organizations and their leaders will wake up to this reality and play a pro-active role in promoting our social responsibility. Our government has already made a head-start through various initiatives such as: a. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business were released by Ministry of Corporate Affairs, making it mandatory for India Inc to disclose its CSR activities to stakeholders. b. It is now mandatory for all public sector oil companies to spend 2 per cent of their net profits on corporate social responsibility. c. The government is also ensuring that the public sector companies participate actively in CSR initiatives. d. Department of Public Enterprises (DPE) has prepared guidelines for central public sector enterprises to take up important corporate social responsibility projects. e. Ministry of Shipping has directed 12 major ports in the country to create a mandatory CSR budget. The Indian Government's corporate governance and CSR efforts are undoubtedly laudable and will go a long way in helping grow acceptance for CSR among Indian Corporates. It is up to us, the corporates, to now rise to the occasion and do our bit towards giving back to the society which enables our existence.

20

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

Building the CSR strategy of the company In light of increased emphasis on inclusive growth - Milind Sarwate, Group CFO & CHRO, Marico Ltd. Corporate Social Responsibility (CSR) has gained increasing importance as an area of corporate strategy. This is in line with the evolution of the corporate sector in India as a strong responsible pillar of the society. CSR as a strategy area is critical since it seeks to institutionalize the role that business would play in the society. Strategizing about CSR also brings in the long term angle which is so essential to distinguish a one-off effort at helping someone from concerted long term efforts to bring about specific sustainable improvements in the lives of people in the society. CSR Strategy helps to achieve a shift from 'charity' to 'philanthropy'. It encourages us to note and work upon the difference between tackling causes rather than symptoms. Social Contributors must be strategic in their giving. The term “inclusive growth” too has gained currency in recent times. To my mind, inclusive growth sits on the same page as sustainability. We would like business to behave responsible and keep sustainability as the primary lens in its operations. This ensures that business activities are sustainable over a long term with only an optimum use of natural resources. Similarly, viewed from the social lens, business must look at leveraging of human resources around it in a sustainable manner. Social sustainability is achieved only with the belief in and practice of true interdependence of the various parts of the society – business or non business. The business which targets social sustainability promotes interdependence and through that inclusive growth, because such a business is built to practice the motto of “Together, we grow”. CSR, or for that matter many of the concepts that I have mentioned above, are highly vulnerable to platitudes. There is also a danger of displaying far more than what has been or will be done. Therefore it is necessary to avoid these traps as one builds the CSR strategy around inclusive growth. It is best to begin with what the corporate already has – namely, the set of business associates which have helped bring that company to its present state. It is easy to work with them and ensure that the company helps them elevate their own standards of business management, governance, talent management and sustainability. Making associates capable of sustainable growth can be a very meaningful CSR strategy. The CSR efforts of the company in the inclusive growth area should typically trickle sideways in all directions. If they are marshaled properly, they could be sustained over several years.

Here is what I can share from Marico's experience. §

Marico is a beauty and wellness products and solutions company, with strong roots in the Indian economy and society. It has an intense connection with agriproducts such as Copra (dried coconut Kernel) and Kardi (Safflower). We, at Marico, have sought to constantly add value to our associates in these two crops. We have encouraged farmers to improve their individual productivity and find better means of delivering quality. We have also helped them by providing them direct access to the company instead of going only through middle men.

§

We encourage use of Information Technology, such that the farmers are able to transact with Marico using IT. These efforts from Marico have no doubt helped Marico's business. However, in the process, they have also helped Copra and Kardi farmers and convertors to grow not only as farmers but also as individuals with access to means of productivity improvements. We believe we have practised our purpose statement here – Be more. Every day.

§

Marico also leverages a formidable sales and distribution system with over 30 depots across the country catering to over 27 lac retail outlets through over 800

21

distributors. Here, we have sought to be thought leaders and action leaders in development of Information Technology in sales and distribution. Over 75% of our distributors use IT systems developed by Marico (appropriately called MIDAS, the system with the golden touch). These systems are not restrictive as they allow distributors to transact business with companies other than Marico too. These enable distributors to pull Marico products from the Marico supply chain system, without the burden of Marico dumping stocks on them at its own will. Marico's Vendor Management Inventory approach has enabled distributors to improve their return on investment. This helps Marico's business for sure but more importantly it creates a strong IT capability amongst our distributor associates. It enables them to think in a systematic manner and run their business better. Here again, we believe, we have created capabilities which are sustainable. We have also taken steps to help our distributors optimize their cost structure thereby increasing their long term profitability

Finally, one cannot overlook the importance of the Corporate Brand in CSR. An Inclusive growth approach to CSR must leverage the three B's- Business, Beliefs and Brand. §

The CSR strategy should draw energy from the strengths of the company's Business.

§

It should also take into account the softer aspects of the Company philosophy and its Beliefs.

§

The strategy should fit into and nurture a strong corporate Brand.

A strong corporate brand, supported by leadership beliefs and business strengths, ensures that CSR efforts are recognizable and sustainable. That way, the efforts can also be more and more inclusive. I believe that the stronger the Corporate Brand, greater is the circle of influence of that corporate. A company with a wide circle of influence can afford to keep a wide circle of concern and over time encompass large number of CSR ideas. The wider the circle of concern gets the more inclusive the company's growth and more influential its efforts. I feel satisfied that Marico is well on this journey with a firm belief in our Purpose Statement - Be More. Every Day.

22

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

Building the CSR strategy, profitability and inclusive growth - Shekar Viswanathan, Deputy Managing Director, and Asia Pacific Regional Officer, Toyota Kirloskar Motor Private Limited In recent times, spurred by political developments, there has been intense debate within the corporate sector on various aspects of Corporate Social Responsibility (CSR). Key questions that are being asked and answered focus on how much spending should be undertaken, what projects would qualify, the basis of selection of such projects, the long term resource planning for conceiving and executing such projects, and finally of course the focus on corporate profitability as the means to promoting social responsibility and inclusive growth. The most popular interpretation of inclusive growth is often related to the overall prosperity of the vast majority in the country and includes every person; whether he is skilled or not, educated or otherwise, hardworking or lazy. The hardworking and prosperous are expected to share their hard earned gains with everybody else who may or may not be as hardworking as they have been. However, the more practical approach to inclusive growth on the part of a Corporate would be one that is limited in its sweep but certainly more focused in its effectiveness. Let us now look at an example. When a Corporate sets up shop by acquiring land for a mega project (say around 300 to 1,000 acres), it brings prosperity and sometimes fortune to those who find employment at the Corporate- be it a petrochemical plant, an automobile plant, or a steel plant. Many of them find their wages and economic standards of living going up dramatically as the Corporate establishes itself in the market place. But it also brings with it the promise of contracts for infrastructure development, employment, appreciation in property prices and better road connectivity; just to name an illustrative list of benefits that accrue to the landscape and those who inhabit them. However, the key point to note is that many of them who were part of the landscape before the mega project was established may find that their economic future has not brightened at all– the villages that surround the project site continue to languish without sanitation, without electricity in many cases, no drinking water supply, poor school facilities, and there is little chance for some of the many inhabitants to acquire any skills or be gainfully employed. Clearly a Corporate that has gone to a particular area has, in the broadest sense, brought prosperity to the region where it has invested. Apart from the employees who gain through the growth of the company, those who live in nearby towns or in the catchment area benefit through the increased economic activity that the project generates– scrap dealers thrive, downstream units spring up, tea stalls mushroom, ATM centers come up, more auto rickshaws ply, the demand for reasonable accommodation goes up along with rental incomes, the demand for quality eateries experiences a surge, and secondary and tertiary employment opportunities go up. But for many this increased economic activity does not touch them at all for a variety of reasons. Therefore, in the ultimate analysis, the focus shifts inevitably to those who have been left behind in the prosperity sweepstakes and it is with this group that the Corporate must focus their efforts on and engage effectively. In the above scenario how should a Corporate fashion its CSR strategy? Should it become a cash dispensing unit for the local population to celebrate village festivals, or should a more equitable method of spending corporate money be found? Corporates often find that the expectations from the local community are ever increasing– that the appetite for corporate largesse and freebies is insatiable. Many Corporates have over the years established schools, colleges, technical training institutes, hospitals and similar institutions, all of which are targeted at giving back some of their fortune to the deserving but less privileged sections of the society. This inevitably begs the question as to how much should they give? The latest Companies Bill states that “the Board of every company shall make every endeavor to ensure that the company spends in every financial year at least 2 pct of the average net profits of the company made during the 3 immediately preceding financial years in pursuance of its Corporate Social Responsibility policy.” This has been made applicable to all

23

those companies who have a net worth in excess of Rs. 5 billion or a turnover in excess of 10 billion or a profit level of Rs.50 million or more in a financial year. So the question has already been answered by the intended passage of the Companies Bill 2011. However, can a company that has started a programme of activities afford to stop, in part or whole, citing the lack of profitability or the threat of continued losses a programme that is of immense economic value to the targeted recipients? For example, having started a technical institute that will take in 100 students a year, can the company afford to skip the intake of students in any particular year for want of profitability? Or can, for example, a company that regularly conducts a health camp in nearby villages where over 10,000 people receive benefits such as free spectacles, dental attention etc., suddenly be deprived of this only source of receiving medical attention? Clearly no Corporate can, should, or will cut back on funds earmarked for the less privileged sections- particularly where the activity has already commenced. Very often even if profitability is severely dented, or a company starts making losses; it has the responsibility to continue its CSR activities– it is a fixed cost. As part of its CSR strategy, should a company spend money on activities in areas where it is not present? For example, can a company spend money on education facilities in Jharkhand while its operations are in generally prosperous Gurgaon? Or would it be more appropriate for it to institute academic scholarships for the poor and needy throughout the state of Haryana to enable children to attend school. Clearly, the CSR strategy must be fashioned to target not only those who are in need of economic attention, but also those who touch the spheres of economic activity the Corporate operates within. In this manner alone can we ensure that the money is spent for the benefit of those for whom it is intended. Furthermore, such activity will then be valued by those who receive its benefits. The establishment of a social contract between beneficiaries and benefactors is crucial if the goals of a CSR policy and inclusive growth are to be achieved and the Corporate is to prosper.

24

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

Sustainable Value Creation through Transparency, Governance & CSR

As a member of the YES BANK - National CFO Forum I shall facilitate the recognition and appreciation of the broader role of the CFO and also provide practitioners' insights to the industry at large. I further affirm that I shall endeavor to champion the objectives of Sustainable Value Creation through Transparency, Governance & CSR within my internal and external stakeholders. I will promote the foregoing values industry-wide and amongst my peer group through sharing insights, best practices and knowledge sharing initiatives:

1. CFO Conclaves A “By Invitation” only annual off-site event, which will be a platform for intense & practical interaction and debate amongst CFOs, peer networks and International Experts to recognize CFOs and their Industry Best Practices. It will also provide a peer level networking opportunity to the CFO's teams – as a means to fast track his/ her development.

2. CFO Insights YES BANK – National CFO Forum will publish quarterly contributory articles on pertinent topics including macroeconomic indicators - global & domestic, regulatory changes, industry best-practices, issues relating to Governance & CSR etc. This publication will be circulated / made available to all member organizations, as well as the industry at large.

3. CFO Value Chain The YES BANK – CFO Value Chain will endeavor to develop and up-tier the SMEs in areas of Finance & Accounting, adoption of best practices, being compliant to international norms & standards etc. This will be achieved through Regional Roundtables and mentorship platforms, facilitated by select CFOs, as part of their industry leadership role.

4. CFO – Talent Management The YES BANK – National CFO Forum will partner with select institutes like ICAI, Business Schools etc. and provide inputs towards curriculum setting and training interventions in order to prepare students for better careers.

SEVEN YEARS OF INSTITUTIONAL EXCELLENCE ROBUST FINANCIAL PERFORMANCE

FINEST HUMAN CAPITAL

KNOWLEDGE BANKING

WORLD-CLASS BRANCH INFRASTRUCTURE

SERVICE EXCELLENCE

RESPONSIBLE BANKING

TRUST AND TRANSPARENCY

Since inception in 2004, YES BANK has created a new paradigm in Indian Banking, through continuous Innovation th and Excellence. On our 7 Anniversary, as a full-service commercial and retail Bank, we re-dedicate ourselves towards delivering the Finest Banking Experience in India.

Over 330 Branches Pan India | 425 ATMs | 2 National Operating Centres Corporate and Registered Office: Nehru Centre, 9th Floor, Discovery of India, Dr. A.B. Road, Worli, Mumbai- 400018. India. www.yesbank.in