NEWSLETTER | January 2019
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Indian Startup Story 2018: Beyond our Wildest Dreams
The year 2018 clearly belonged to unicorns in
India, with eight startups achieving the coveted
tag, the highest in a 12-month period. As new
age firms continue to attract funding from
global investors like Alibaba and Softbank, the
unicorn party in India is far from over.
Unicorn is a latest buzzword. We are not talking
about a single-horned horse with magical powers,
but about companies that have achieved the
valuation of $1 billion. For years, unicorns were
synonymous with Silicon Valley tech startups such
as Uber and Airbnb. Today they are everywhere,
including India where the billion dollar club has
grown at a rapid pace in the past year.
Even though many of the Indian startups aren’t
making profits, but that hasn’t stopped global
investors like Softbank, Naspers, Tencent, Alibaba
etc. from writing large multi-million dollar
cheques for them.
The factors driving their valuations are that most
of these companies are bringing an aspect of
technology to unorganized market, their businesses
are scalable and are addressing specific needs of
the current market.
However, Indian startup founders aren’t blindly
running in the rat race of achieving higher and
higher valuations by diluting stake and raising
funding. They want investors with expertise in
technology enabled services who could help their
companies to grow. For example, PolicyBazaar,
raised $238 million from Softbank and founder
Dahiya made it clear that they only wanted to have
Softbank as their new investor and no one else
because of Softbank’s expertise in fintech.
Taking caution from the case of Flipkart, where the
biggest investor Tiger Global pushed the founders
out from day to day working and finally sold the
majority stake to Walmart, Ola’s founder Bhavish
Aggarwal is trying to pre-empt the fate of the
Bansals and Snapdeal founders by retaining his
control over Ola. He has strengthened his legal
rights and restricted those of SoftBank last year.
He ensures that with every new funding round, he
brings new investors to Ola thereby curbing the
influence and power of any single investor.
Experts feel as long as these global investment
firms remain hooked on to the Indian market, the
deal momentum will continue. However, caution is
always wise in any business, there is a need for
discipline and prudence to keep unicorns from
losing their horns so to speak. Startups today need
to be wary of “toxic-VCs”, who attempt at
producing astonishing results for themselves by
forcing the companies to grow at aggressive yet
unsustainable growth rates finally paving the way
for IPO’s.
 NEWSLETTER | January 2019
Acquisition of Gruh Finance by Bandhan Bank
Background
Gruh Finance (primarily into home finance
segment) is a subsidiary of HDFC Limited,
holding 57.83% of the shares of Gruh Finance.
Bandhan Bank is promoted by Bandhan Financial
and currently holds around 82.28% of the shares.
Bandhan Bank has total assets of ₹44,310.06 crore,
turnover of ₹5,508.48 crore and a net worth of
₹9,382 crore as on 31 March 2018. Gruh Finance
has total assets of ₹15,970.97 crore, turnover of
₹1,687.19 crore and a net worth of ₹1,380.92
crore, as on 31 March 2018.
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Impact
Since the merger is being carried out based on six-
month weighted average price, the Bandhan-Gruh
merger will result in HDFC’s holding falling to
around 15.44% in the merged company and
Bandhan Financial holding will come down to
around 60.27%. The loan book of the combined
lending entity will have 58% microloans, 28%
retail home loans and 14% other loans.
The Bandhan-Gruh Finance merger could probably
result in enhancement of shareholders’ value, new
product development, integration of technology
platforms, enabling the two firms to further their
socio-economic objectives in the long run.

January 7, 2019
Probable reasons
RBI restricted Bandhan Bank from opening new
branches and ordered a freeze on the remuneration
of its managing director and CEO Chandra
Shekhar Ghosh for not meeting the bank promoter Issues
shareholding norms, which require Bandhan
RBI guidelines state that any person/company
Financial to reduce its stake from 82.28% to 40%.
holding more than 10% of the Bank is regarded as
The deadline to dilute the promoter holding was
a co-promoter of the bank. And RBI does not allow
August 2018. The whole deal was entered to lower
the promoter of one bank to hold more than 10% in
the promoter stake in the private sector Bandhan
another bank as a co-promoter. In the current case,
Bank by offering shares in exchange of its
HDFC Limited has been emerged as a co-promoter
subsidiary Gruh Finance. It was also entered to
for Bandhan Bank, apart from being the promoter
broaden and diversify the asset base of Bandhan
of India’s largest private lender HDFC Bank Ltd,
Bank.
HDFC will have to trim its stake further in the
merged entity. To meet this requirement, HDFC
The Deal needs to offload at least 5.5% in the combined
The share swap ratio for the amalgamation would
entity.
be 568 shares of Bandhan Bank for every 1,000
shares of Gruh Finance. The share swap ratio Market Reaction
implies that the pricing for the Badhan-Gruh
Shares of Bandhan Bank tanked from Rs 528.65 to
merger is in line with the six-month weighted
Rs 447.70 i.e. 15.31% in the period from 7th
average price of the two companies. HDFC and
January 2019 to 17th January 2019 whereas the
Bandhan Financial Holding Ltd’s (promoter of
shares of Gruh Finance has tanked from 319.50 to
Bandhan Bank) stakes will come down after the
Rs 236.90 i.e. 25.85% during the same period.
merger.
 NEWSLETTER | January 2019
Bimal Jalan Committee
Introduction
In order to look into the Economic Capital
Framework (It refers to the requirement of capital
by the RBI to deal with the unavoidable risks like
fluctuating foreign exchange holdings and
government securities, asset-related costs and a
contingency reserve to meet the unforeseen
emergencies) of RBI, an expert committee has
been formed under the chairmanship of former
governor Bimal Jalan and Former deputy governor
Rakesh Mohan as the vice-chairman of the
committee.
The other members are Bharat Doshi, Director –
RBI board; Sudhir Mankad, Director- RBI board;
Subhash Chandra Garg, Economic Affairs
Secretary; and N S Vishwanathan, RBI deputy
governor.
Objective
The six-member panel is entrusted with the task of
submitting a report on the Economic Capital
Framework of the RBI after reviewing the best
practices followed by the Central banks worldwide
in relation to the risk assessment and provisioning
in Central banks’ balance sheets.
Background
Earlier the quantum of RBI’s reserves was
examined as per the recommendations of three
committees – V Subhrahmanyam (1997), Usha
Thorat (2004) and Y H Malegam.
While the Subrahmanyam Committee
recommended that a contingency reserve should be
built up to 12%, the Thorat Committee stated that
the adequacy of the reserve should be maintained
at 18% of the total assets.
RBI Board in conflict with the recommendations
made by the Thorat Committee decided to go
ahead with the recommendations made by the
Chairman, Bimal Jalan Committee
Former RBI Governor
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Subrahmanyam Panel. Also, the Malegam
Committee recommended that sufficient profits
should be transferred to contingency reserves
every year.
Conflict between the RBI and the
Central Government
Under section 47 of the RBI Act, at the end of each
fiscal year, the RBI transfers the excess revenue
over expenditure to the Government. The
government wants to set the framework by
reducing the percentage (as a reserve) of assets
held by the RBI from 27 percent to 14 percent (like
the US and the UK). This means that the
government can hand over the excess capital of Rs
4.7 lakh crore.
The government insisted that the central bank hand
over its surplus reserves in the midst of a revenue
shortfall. Excess funds will enable Minister of
Finance Arun Jaitley to meet deficit targets, invest
capital in weak banks to boost lending and fund
welfare. The Jalan panel will decide whether RBI
holds provisions, reserves and buffers in excess of
the standards required.
Subject to the clashes between the central
government and the RBI over the policy issues,
Urjit Patel resigned as governor on Dec 10, 2018
and was replaced by Shaktikanta Das, the Former
Finance ministry official.
January 8, 2019
The First Meeting of the panel to examine the
reserve size of the RBI was held on January 8,
2019 and the panel is likely to submit the report on
the policy related to the suitable profit distribution
between both the parties and the quantum of
reserves to be maintained by the RBI.
Bimal Jalan
 NEWSLETTER | January 2019
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What made these stocks move?

Shares of Avenue Supermarts, operator of

D-mart chain store, fell around 12.5% last
week as its profit for the December quarter
came in flat as against a growth of 10-18
per cent as expected by analysts. Slow
store addition added to investors' concerns.
The flat growth in profit was mainly due to
gross margin reduction on account of price
cuts, the food and grocery retailer told the
BSE.
Consumer financing as a business segment
will continue to grow and Bajaj Finance is
sort of a market leader in that. Business
model, fundamentals, financials, growth
prospects, offerings, management strength,
corp. governance, consumer demand - all
are in favour of the company and is
expected to do well going forward also.

Shares fell around 20% last week to a six

year low amid reports of a new
whistleblower complaint against the
country’s largest drug maker. The
whistleblower complaint filed with SEBI
raises new questions regarding corporate
governance practices at India’s largest drug
maker. Corporate governance practices
matter a lot more because all the global
FIIs have taken exposure to Sun Pharma
stock and fundamentals take a back seat in
such scenario.
A diversified product portfolio of biscuits,
bread, cakes, rusk, and dairy products
including cheese, beverages, milk and
yoghurt makes it a strong competitor in its
segment. The general elections in 2019 and
its spending is believed to increase the
consumer discretionary income and hence
affect the sales positively for the FMCG
industry at large.

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