1. The Choice between Public and Private Debt: A Survey
The Choice between Public and Private Debt: A Survey
Vol 23, No 1; Article by Jayant R Kale and Costanza Meneghetti; March 2011
The key insight from the seminal work by Modigliani and Miller (1958) is that market imperfections are
necessary for financial decisions such as the debt vs equity to impact firm value. When firms choose debt
finance, they must also decide between public debt (e.g., corporate bonds) and private debt (either bank or
non-bank). While there are excellent articles that summarise the research on the various aspects of the
choice between equity and debt financing, to the best of our knowledge, this paper is the first to survey
research on the firm's choice between public and private debt and on the subsequent choice between bank
and non-bank private debt. There is significant diversity in the sources and design of debt financing used by
firms and evidence suggests that these decisions affect firm value. We present the major theoretical and
empirical findings of the research on a firm's decision to choose between public and private debt, as well as
among the types of private debt. Our discussion of the extant research suggests that the choice between
public and private debt is governed by four basic factors, which are not mutually exclusive. The first is the
degree to which a firm needs certification; the greater the certification need the greater the preference for
bank debt. Second, issuing public debt may result in the leakage of (valuable) proprietary information and,
thus, firms with greater proprietary information will prefer bank debt. Third, when monitoring of managerial
actions (such as investment choices) creates value, bank debt will be preferred over public debt. Finally,
firms will exhibit a preference for bank debt when the flexibility to renegotiate debt contracts is valuable, for
example, when the firm is in financial distress
Revenue Generation in the Information Era: Opportunities and Challenges
Vol 23, No 1; Article by Sreelata Jonnalagedda; March 2011
While innovation in technology has given consumers greater access to and choice of information goods and
presented businesses with tremendous market opportunities, it has also made success in the market seem
elusive. The failures are frequently attributed to the lack of innovation on the technological front but research
has shown that one of the major challenges for businesses in the information era is that of 'appropriability'
or the ability of a firm to profit from its investments in innovation.
IIMB Management Review invited a panel of industry experts and academics who face these challenges in
the field of information goods to share their experiences. The panelists spoke on the criticality of business
model innovation, the technology and production aspect of these goods where the ease of communication
and reduced cost of distribution are a boon as well as a bane, the challenges of reaching out to customers,
dealing with the competition and devising the right marketing strategies. The criticality of innovation and its
many aspects were debated.
Manish Agarwal, CEO of UTV, New Media Ventures, shared the innovations encompassing product, content
and device that his organisation was working on to rise to the challenges in the new media space, driven by
the changing demographics, attitudes and notions of value of the Indian population. Understanding the
reality of 'India vs Bharat' and catering separately to the two, offering a combination of 'the rational plus the

2. emotional' and innovating constantly for the value-conscious customer were the imperatives of marketing in
the digital future.
Constant innovation as the key to revenue generation and distinguishing oneself from the competition, and
understanding the Internet market were emphasised by Om Prakash Subbarao, Technical Advisor, UID;
formerly Head, Consulting, Yahoo! Software Development, India. While the Internet marketplace functions
on the basis of 'fastest finger first', the first mover has to guard against complacency and adapt to market
mutations, as stalwarts like Yahoo! and Google are learning. Internet companies basically compete for an
audience, for advertising and for talent. Advertising still remains the major revenue model in the Internet
space and Google is an example of a company that has been able to convert eyeballs into dollars
successfully.
Speaking from the niche of education, Ratnesh Mathur, Co-founder, Geniekids Learning Resources, spoke
of the advantage of using open source as a way to build community and then offer other services as a
source of revenue. The Internet and social networks are a boon in peer sharing and community building.
Positive word of mouth generated by end to end solutions is the way to success.
Focusing on the customer and capitalising on the first mover advantage by staying on course and being
constantly open to customer needs is the way forward in the Internet space observed Sanjay Anandaram,
MD, Jumpstartup Fund Advisers. The decision to invest in a company is taken on the basis of five broad
parameters: the people, the market opportunity, the defensibility of the proposition; the business model and
finally, the financials. When all these elements are aligned, competitive edge is created.
Given the short shelf life of technology itself, the key to market strategy is business model innovation,
emphasised Prof YLR Moorthi of IIMB. On the question of licensing and communication of information goods
where ease of duplication and piracy are big concerns, the mantra would be, 'license and earn; chase and
corner'. While there is an abundance of information and 'noise' on the Internet, clarity is also increasing and
the same technologies can be used for effective targetting. Co-opetition is a reality in this space; rather than
the competition, companies should focus on coming up with a great idea and executing it at lightning speed.
Productivity and capital investments: An empirical study of three
manufacturing industries in India
Vol 22, No 3; Article by Atanu Chaudhuri, Peter Koudal and Sridhar Seshadri ; September
2010
While manufacturing has long been recognised as an engine of growth and wealth creation in India, the
share of manufacturing in the GDP has stagnated at 17% for almost two decades. In particular, the
investments in this sector do not seem to match the rate of growth of sales. However, there is significant firm
to firm variation in the rate of investment. This study empirically determines factors that explain the within-
firm variation in investment growth in three manufacturing industries—auto components, chemicals and
electronics—using panel data for the five years spanning 2002 to 2006. In particular, it examines whether
successful firms are able to translate their productivity achievements into short and medium term growth
when opportunity exists to grow in emerging markets. The results show that there are common firm-specific

3. factors across industries and also some industry-specific factors that explain variation in investments within
firms. Factors related to capital or labour productivity account for a large amount of variation within firms.
Capital productivity is a significant factor in auto components and chemicals while capital intensity is
significant for chemicals and electronics. Labour productivity is significant only for the electronics industry.
The role of productivity in explaining variation in investment growth suggests that there is a need to manage
productivity improvements from growth point of view and not only for efficiency improvements; firms should
also use the right mix of labour and capital and involve industry associations in educating industries on their
needs. Firm size and firm-specific interest rate on long-term loans are the other factors, significantly
affecting investment growth in all the three industries. We discuss the implications of the findings for firms
and policy makers, based on the central tendencies and trends of the data, as well as an analysis of the
outliers.
Volume 16, Number 3 Article by Sanjay Sehgal & Mamta Arora September, 2004
Bond Rating Variability and Methodology: Evidence from the Indian Bond Market :
Credit rating is an indicator of the current opinion on the capability of capital to service its debt obligations in
a timely fashion. It is a useful source of information for investors, companies, banks and other financial
intermediaries. While the various bond rating areas have been extensively evaluated for mature markets,
similar evidence for emerging markets such as India is limited. In particular, the issues relating to bond
rating variability over time and the consistency of bond rating methodology have been ignored.
In an attempt to fill this lacuna, Sanjay Sehgal and Mamta Arora conduct a two-part study. In the first part,
which deals with bond rating variability over time, the time-series variability of bond ratings has been
analysed. The issue is also addressed sector-wise and industry-wise. A separate analysis has been carried
out for the two leading bond rating agencies - CRISIL and ICRA. The second part relates to consistency in
bond rating methodology adopted by rating agencies.
The results indicate that bond ratings are becoming extremely variable over time and the majority of these
rating changes are on the downside, with price risk implications for investors. While bond rating variability is
high for both the manufacturing and the financial sectors, the figures are relatively higher for the latter.
Rating changes also seem to have an industry pattern with a greater concentration in industries more
affected by economic slowdown and global competition. The findings for consistency of bond rating
methodology are also not encouraging. While the key financial ratios do not vary for companies belonging to
the same rating class, they also do not vary across companies belonging to different rating classes. This
points at probable weaknesses in rating methodology as the important financial factors fail to discriminate
across rating classes. Perhaps the subjective judgments of rating analysts taint the relationship between
bond ratings and key financial factors. Inconsistency in bond rating methodology may partly explain the
increasing bond rating variability over time.
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Volume 15, Number 2 Article by S D Kshirsagar June, 2003
Financial Services in India: A New Perspective :

4. The financial services industry is being reshaped by several forces, chief among them being the customers,
competition, technology and distribution. Volatile cash flows have prompted customers to seek total
solutions at a one-stop-financial services-shop. The convergence in the industry is making it highly
competitive. Technological advancements have influenced distribution channels, customer needs and the
way in which the industry does business. Distribution has undergone a significant transformation, resulting in
mobile, flexible and remote channels. These drivers of change have ensured the demise of the comfortable
`interest rate spread. Economic efficiency is now the only source of value.
This article focuses on the drivers of change for the financial sector in general but non-banking financial
companies in particular, and carries out a value chain analysis for the fund-based asset finance business.
Based on the findings of the pilot research study, it is concluded that the value drivers are designing a
financial product and procurement of funds. Efficient procurement of funds, information and communication
technology and human resource development play a key role in value creation. The industry is now
attempting to create value by undertaking only these `core' activities and outsourcing other activities
including those of marketing, processing, financing and repossession. Marketing is outsourced through
direct marketing agents, back-up operations by employing external agencies for data entry, conversion of
proposals into contracts, collection of instalments and repossession of assets are being outsourced through
specialised agencies. In a broader way, acquisition of customers, financing and servicing their needs
represent the value chain for quite a few financial services companies.
For a financial services company to be successful, it will have to provide Triple A Service —Anytime,
Anywhere and Anyhow. This framework encompasses the market, resources, organisation structure and
processes. The industry will have to be proactive in taking strategic decisions in these four areas to manage
the change process competently.
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Volume 15, Number 2 Article by Sanjay Sinha June, 2003
Financial Services for Low Income Families: An Appraisal :
The ineffectiveness of the vast network of banks and other financial institutions, the failure of poverty-
alleviation programmes, and that of primary cooperatives and Regional Rural Banks, specifically established
to meet the needs of the rural sector and the poor, led to the entrance of non-government organisations
(NGOs) into microfinance.
The delivery methods that most MFIs follow — the dominant Self-help Group (SHG) model, consisting of
15-25 members; the Grameen model, with smaller, joint-liability groups, the Individual Banking Programmes
(IBPs) providing financial services to individual clients; or mixed models _ aim to facilitate frequent and micro
loans and savings transactions to low-income client groups.
Micro-Credit Ratings International Limited (M-CRIL), which pioneered MFI rating services in India in 1988,
analysed the performance of 69 MFIs to provide a broad picture of microfinance in the country. M-CRIL's
analysis reveals that microfinance in India, characterised by a small number of large MFIs that are relatively
strong and a large number of small and weak organisations, reaches some 1.4 million families. While MFIs

5. are increasingly aware of the need to obtain resources from members, donor funds are still the pre-eminent
source of financing and MFIs still prefer to obtain resources from development loan funds on `soft' terms.
Savings services have much potential for improvement and Grameen-type MFIs are the best in portfolio
quality. IBPs fare better in portfolio management and come closest to achieving full operational self-
sufficiency. While Indian MFI operating efficiency compares well with international best practice norms, the
portfolio yields are very low.
While a positive trend in terms of sustainability and growth is discernible, several institutional and systemic
issues such as mediocre staff, too large a scale of operations and geographical spread, want of basic
management information systems and poor financial accounting systems, and the welfare orientation of
most MFI CEOs, constrain the sustainability of MFIs.
Yet, for the first time in the history of Indian development a serious effort is being made to provide
systematic financial services to low-income families and a new economy of financial intermediation is
starting to emerge. Thus, concludes Sanjay Sinha, MD of M-CRIL, the foregoing concerns would, in the long
run, be no more than a documentation of the growth pangs of a new economy.
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Volume 14, Number 2 Article by R Vaidyanathan June, 2002
Financial Markets: Institutions and Regulations :
For the past decade, post liberalisation, riding on the crest of the globalisation wave, the protected Indian
economy has been buffetted by a series of changes. The decade of the 90s has particulary seen significant
changes in the Indian financial markets ? in terms of institutions, instruments and the regulatory framework.
The National Stock Exchange with its computerised systems, SEBI and its reform of the capital markets,
mutual funds, portfolio consultants, and insurance companies, both domestic and global, represent the
changing face of institutions. Universal banking is coming to the fore. Innovative financial instruments
providing more leeway for corporates, reforms in the regulatory framework led by institutions such as SEBI,
RBI and IRDA, have ushered in a new era.
R Vaidyanathan caught up with several functionaries from the securities, insurance and banking sectors to
assess the health of Indian financial markets, the institutions and regulations. Feeling the pulse of the bond
and equity markets, rating credit risks and downgrades, pronouncing on the wisdom of investing pension
funds in equity markets, the necessity of an accurately segmented database and appropriate training of
personnel, whether the Internet will revolutionise customer behaviour, the implications of convergence
between the three sectors and whether the regulator should wield the whip or opt for ?moral suasion?, were
Pratip Kar, Executive Director, SEBI; Sukumar Rajah, Vice President & Fund Manager, PIONEER ITI AMC,
N Rangachary, Chairman, IRDA, Ministry of Finance; R Ravimohan, Managing Director, CRISIL; D
Satwalekar, Managing Director & CEO, HDFC Standard Life Insurance; and K Vaidyanath, Executive
Director, ITC.
In the altered competitive context, credit rating agencies will have to combine credit rating, equity research
and corporate governance appraisal, as much more will be demanded from them. The Enron debacle has

6. brought to the fore the importance of the timely announcement of downgrades and the liability of rating
agencies. The respondents analyse why bond markets are not as popular as the stock market with individual
investors and whether a liberalised interest rate structure will result in more volatile markets; Pratip Kar
traces the developments and analyses the trends in the bond market.
With insurance companies being expected to invest in bond markets, will they churn their portfolios and
trade actively? What are the new markets they seek to tap? Do they have a well segmented data base? Has
the industry invested in training its employees and agents? Do the new entrants in the field have the muscle
to take on old giants like LIC? How will reinsurance and bank assurance fare? Will insurance premiums be
sold on the Net? Stalwarts N Rangachary and D Satwalekar provide some answers.
While there was unanimity on the general trend towards convergence in financial market regulations and the
need for a more co-ordinated regulatory body, the respondents did not think that a common regulator was
feasible.
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