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Back to Newsletter Vol 3, Issue 03, Aug 2021
Finance
Central banks around the world regularly change the benchmark policy rates not only to target inflationary spikes but also to ensure strong economic growth. But these changes in the benchmark rates effect the bond markets and the performance of the bonds as the bond yields and bond prices changing. This poses a challenge to the bond fund manager who regularly has to reshuffle the portfolio in order to achieve the goals of the fund and achieve better performance. The case discusses the various factors which influences the central bank’s decision to change the benchmark policy rates. The relationship between interest rates and bond prices and how the performance of bond funds is related to changing interest rate scenarios is brought out. The case also emphasises on how bond fund managers change duration of fund portfolios in anticipation of changes in interest rates in order to maximize the return on investment of the investors.

Interest Rate Changes and Duration Management
During the last week of November 2020, the Government of India (GoI) approved the merger of Lakshmi Vilas Bank (LVB) with Singapore-based DBS Group Holding’s Indian subsidiary, DBS Bank India Limited (DBS). This was the first time in the history of banking in India that a local bank was being merged with a foreign bank. By initiating the merger proceedings of LVB with DBS, the Reserve Bank of India set a benchmark and, in the process, safeguarded the Indian banking system by allowing banks that were struggling financially to receive investment from strong foreign banks. The present case study can be used to discuss the concept of moratorium period, Prompt Corrective Action, challenges Indian banks face, and the operational challenges that foreign banks in India are confronted with.

Lakshmi Vilas Bank and DBS Merger
In November 2019, the Government of India (GoI) announced the disinvestment of Bharat Petroleum Corporation of India (BPCL) as a part of its plan to meet the fiscal deficit of Rs. 2.1 trillion for the financial year 2020-21. Before the plans could fructify, the economic situation across the world turned volatile due to the COVID-19 pandemic. After postponing the proceedings several times, the GoI finally called for the submission of Expressions of Interest (EoI) from potential bidders at the end of the year 2020. The response was lukewarm as the major players who had evinced an interest in BPCL initially, did not show much enthusiasm due to the prevailing uncertainty in the global markets. The much delayed disinvestment was expected to be completed during the second quarter of the financial year 2021-22. The present case study can be used to discuss the Disinvestment Policy, the rationale behind the disinvestment, the process and procedure for executing the disinvestment strategy, and the related challenges in valuation.

Disinvestment of Bharat Petroleum Corporation of India
The case study ‘Options Strategies for a Bullish Market’ is set in the aftermath of the market crash in March 2020 due to the negative effects of COVID-19 on the Indian economy. Dr. Chhavi Mittal, a faculty member of Finance at Excellent Business School (ESB), Noida, India, discusses economic and market scenarios with third-semester MBA students. After a lot of brainstorming, they conclude that the market is going to be bullish during the month of November 2020. Dr Chhavi asks the students to put themselves in the shoes of a professional trader and, using the Nifty data, devise options strategies useful for bullish markets and choose the best strategy.

Options Strategies for a Bullish Market
The case study discusses ace investor Warren Buffett’s Berkshire Hathaway, Inc. (Berkshire) securing a private placement deal with Bank of America Corporation (BoA) in 2011. Berkshire paid US$5 billion in cash to BoA in exchange for Cumulative Perpetual Preferred Stocks and Warrants to purchase 700 million common shares of BoA. Later, in 2017, Berkshire exercised BoA’s warrants and brought 700 million common stock of BoA. This move helped Berkshire to get US$11.50 billion capital gains in six years. Against the backdrop of this story, the case helps learners understand warrants and various related financial instruments and concepts. It helps them get to know about the significance of warrants, different types of warrants, and how stock warrants are useful to the issuer and investor, among other things. Additionally, it also helps them understand the difference between a stock warrant, employee stock option, and option.

Earning Profits fromStock Warrants
The case study discusses how Tesla, Inc. with a below investment-grade rating successfully issued convertible bonds one after another since 2013 and funded its electric cars business at a relatively low interest rate. However, over the period, things changed. Tesla’s stock price saw incredible growth, and this, it was felt, could end the era of convertible bonds at Tesla. Now, the CEO of the Tesla has to look at another low-cost long-term source of financing to fund the company’s business.

Tesla’s Convertible Bonds
In March 2020, SBI Cards and Payment Services Limited (SBI Card), the second-largest credit card issuer in India and a subsidiary of State Bank of India, came up with the fifth-largest Initial Public Offer (IPO) ever by any Indian company. The IPO included a Fresh Offer of equity shares and an Offer of Sale by existing shareholders. The IPO was phenomenally successful in terms of investors' response and was oversubscribed by more than 26 times. But SBI Card share listing got a tepid debut as the scrip listed at Rs. 661 on the NSE, a 12.45% discount to its issue price of Rs 755, due to prevailing globally negative market sentiments after the rise of COVID-19. Many investors, who were optimistic about a substantial listing gain from the SBI Card IPO, must decide whether they should sell off their SBI Card shares, hold these shares for long-term gain. or even buy more shares of SBI Card. The case allows students to discuss the growing Indian credit card industry, various aspects of the IPO including the rationale for it, the basis of IPO pricing, the book-building process, IPO expenses, grey market premium, use of net proceeds, the listing of the stock, listing gain, and the timing of the IPO, among others.

The SBI Card IPO
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