NETWORTH | THE SIIB NEWSLETTER
Confident Investor & Eternal India
Optimist – Rakesh Jhunjhunwala
- Shashank Shekhar Prasad
The Indian investor with the
Midas touch, Rakesh
Jhunjhunwala, who passed
away on 14th August 2022,
was called India's Warren
Buffet & The Big Bull. He was
born on 5th July 1960, the son
of an income tax officer;
Jhunjhunwala Ji started in
stocks while he was in college.
He was enrolled in the Institute
of Chartered Accountants of
India & he began investing in
1985 in the share market
Bombay Stock Exchange with
Rs 5000 when the index was at
150; it now trades above
50000. Jhunjhunwala Ji was a
risk taker from the start. He had earned his first big
profit in 1986 when he bought 5000 shares of
TATA tea at Rs 43, and the stock rose to Rs 143
within three months. Over the years, Jhunjhunwala
Ji successfully invested in TITAN, CRISIL, SESA
GOA, PRAJ INDUSTRIES, and AUROBINDO
PHARMA, LUPIN.
In the 2008 global recession, his stock portfolio fell
more than 30 % but eventually recovered in 2012.
Jhunjhunwala Ji started a privately owned stock
trading firm RARE Enterprise, the first two initials
of his name and his wife Rekha Jhunjhunwala
name. He is ranked as the 36th richest man in India,
with a net worth of over $ 5 billion. The most
valuable holdings in his portfolio at his death were
AUGUST 2022
the watch and jewellery maker
TITAN, part of the TATA
conglomerate.
His acute understanding of the
Indian stock market,
farsightedness and legacy will
certainly inspire generations to
come who want to want their
name in the stock market. Some
of his life & market learnings
are –
ON RISK – It is a four-letter
word but different for different
people. However, remember –
we all try to predict risk, debt,
markets, and weather but
cannot be 100% sure. Only the
future knows what it holds. However, I know one
thing- calculated risk is the essence of life. If you
do not take it, you have nothing.
ON FAILURES -- The highest cost of mistakes is
not learning from them. Moreover, he says that one
must not be afraid to make a mistake. The only
mistake I can afford so that I can live to make
another one." If I am afraid to make a mistake, I
will not progress."
ON STOCK MARKETS-- Come to the market and
getting away with money is exciting. Nevertheless,
remember, it is not the racecourse. The first thing
he tells people is to invest after they earn.
Everybody jumps in when the stock markets are
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 NETWORTH | THE SIIB NEWSLETTER AUGUST 2022

high, and when it is low, everybody vanishes. You Jhunjhunwala was on the Edelgive Hurun India
require a far more mature attitude in the share Philanthropy list 2021.
market. Markets and cooking—they cannot be
taught. They have to be learned. The Big Bull donates 25% of his annual income

Source: Livemint

ON INDIAN ECONOMY STANCE—He has

always maintained a bullish view of India's growth
story. He says India will take another 15 years to
become a superpower. "India is on the threshold of
the next stage of growth."

ON CRYPTOS --"People say why don't you buy

crypto? However, I do not have to go to every party
in town?" He cautions against cryptocurrencies as it
is still unregulated by RBI & daily volatility in
cryptocurrencies is something that kept him away.

ON START-UPS & VALUATIONS- "I wish start-

ups focus more on a business model that produces
cash rather than taking money & becoming
unicorns in valuation. It is not the capital that will
build great companies in the world. So capital is not
very important. It is your business model."
ON AKASA AIRLINES – "If I fail, I will say I
knew nothing. However, I am prepared for failure. I
am conscious of all the risks, and I am conscious of
the returns I can possibly get. After all, life is a
risk-reward ratio and mitigating your risks."
ON PHILANTHROPY— With an annual donation
of ₹50 crores, ace stock market investor Rakesh
towards charitable work. Jhunjhunwala's
philanthropic efforts are focused on the education
sector. He is a trustee of the Agastya International
Foundation and supports Ashoka University.
On his demise, leaders from political and business
circles paid tribute to him. Prime minister Narendra
Modi tweeted, "Rakesh Jhunjhunwala was
indomitable. Full of life, witty and insightful, he
leaves behind an indelible contribution to the
financial world." India will surely miss him and
will never forget him.

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Green Financing: The Cost of Net Zero
- Jaina Patel
A sustainable financial system generates values and
transacts financial assets in a manner that generates
real wealth to suit the long-term needs of an
inclusive, environmentally sustainable economy.
Therefore, green finance refers to any financial
instruments whose earnings are used for sustainable
development projects and initiatives, environmental
products, and policies, with the sole purpose of
fostering a green economic transformation toward
low-carbon, sustainable, and equitable pathways.
UN Environment has been working with countries'
financial regulators and other finance sectors to
align the financial system by 2030 for the
Sustainable development agenda. The capital we
allocated today will help shape the ecosystem and
the production and consumption of tomorrow. UN
Environment is helping the countries review their
policy, develop financial roadmaps, and assist the
central banks in improving the framework of
domestic financial markets. The public sector will
foster multi-stakeholder partnerships that include
significant financial market participants, banks,
investors, micro-credit firms, and insurance
businesses.
So, green finance is essential to the concept of
economic growth's sustainability as a whole. Often,
the rapid economic expansion comes at the expense
of the environment. Depleting natural resources, a
damaged environment, and pervasive pollution
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endangers human health and impedes sustainable
economic progress. To conserve and significantly
enhance the environment, nations around the globe
have progressively prioritized the use of eco-
friendly technologies. However, a suitable incentive
system is required for a greater allocation of funds
toward developing or adopting ecologically
sustainable projects. Once finances are liberated
from traditional businesses and redirected to green
and environmentally-friendly sectors, other
resources, such as land and labour, may follow.
This eventually results in an optimal allocation of
resources that supports long-term sustainable
growth. In order to attain these aims, significant
countries have developed specific policies on green
financing, including all economic growth partners,
corporations, governments, and central banks.
GREEN FINANCING IN INDIA:
India has recently increased its climate action goals
significantly beyond its previously established
Nationally Determined Contribution (NDC) targets,
committing to reach a non-fossil energy capacity of
500 GW and reduce the carbon intensity of its
economy to less than 45 percent by 2030 and a Net
Zero emissions target for the year 2070. In addition,
India has admitted that approximately $1 trillion is
required in green finance to achieve these
objectives. India has commenced its journey for
carbon neutrality and put forward a ' Green Deal' to
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be achieved by 2070. The Green Deal identifies
green finance as an accelerant for decarbonization.
It emphasizes the need for a more significant influx
of funds from the federal government and
commercial entities in order to develop green
infrastructure. It has developed four primary
emphasis areas to advance India's green financing.
Initially, a clear and solid taxonomy facilitates the
development of green projects and reduces
transaction costs. Second, developing a pricing
structure for carbon in India. Carbon pricing will
ensure that the costs of climate change mitigation
and adaptation methods are integrated into
mainstream investments. Thirdly, use national
investments by including "Green Infrastructure
Investment Trusts," which encompass bond markets
and green finance instruments—finally, entering
global markets by minimizing prevarication costs,
foreign borrowing rules, and any other legislative
barriers that impede green financing in India.
Source: unep.org
The Indian financial sector, especially banking, is a
leader in green finance. In 2007, the Reserve Bank
of India (RBI) released a notification on banks and
sustainable development. In this reference, these
principles give a framework for recognizing,
managing, and evaluating environmental and social
risks when monetizing projects. In 2016, the RBI
released sustainable financial systems report with
UNEP and India. The research examines India's
financial systems and green finance. The
Companies Act, 2013 requires significant capital
companies to provide 2% of their annual profits to
Corporate Social Responsibility (CSR) initiatives
such as environmental sustainability, ecological
protection, healthcare, rural development, and
education. The Indian government has introduced
many initiatives and funds to promote greener
AUGUST 2022
production. 'Perform Achieve and Trade'
incorporated carbon trading into the country’s
policy framework.
The government has also emphasized sectoral
development in its objective to shift to green
energy. The RBI has encouraged renewable project
loans up to 15 crores for companies and ten lakhs
for individuals. In 2021, RBI joined the Network
for Greening the Financial System (NGFS), a group
of nationalized banks that supports the transition to
a green economy by promoting environmental and
climate-related risks in the financial sector. SEBI
introduced the "Business Responsibility and
Sustainability Report" to increase disclosure in
Environment, Social, and Governance standards to
steer businesses toward adopting sustainable
practices.
Business Responsibility and Sustainability Report
applies to the top one thousand enterprises and will
be required starting with the fiscal year 2022-23.
The Business Responsibility and Sustainability
Report framework incorporates worldwide
Environment, Social, and Governance standards
such as the Global Reporting Initiative, and both
qualitative and quantitative data are reported. It is
expected that forty percent of the private enterprises
in the NIFTY 50 have a favourable Environment,
Social, and Governance record.
According to the World Economic Forum, the
green bond market can be worth $2 trillion by
2023. Green bonds are issued by government and
commercial companies like ordinary bonds, but the
revenues finance eco-friendly and net-zero
initiatives. India began buying green bonds in 2015
to fund green infrastructure. SEBI controls green
bond issuance and listing. From 2018-2020, India's
financial market will have 0.7% green bonds, more
than the US, UK, Australia, etc.
India issued $6 billion in green bonds in the first
half of 2021. India is considering offshore green
bond finance to reach net zero. A reputable Indian
think tank predicts the government will need to
invest $10.103 trillion to achieve carbon neutrality
by 2070. The goal is to switch from coal to
renewable energy and invest in green hydrogen
technology. Top renewable energy businesses in
India, such as Adani, and Power Finance Co., have
issued 10-year green bonds, and the World Bank
has invested in them.
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Mutual Funds – What Are They
And Their Future
- Shakti Singh Tomar
Source: PrintImages
A mutual fund is a trust that pools money from
several individuals with similar investment goals
and invests it in securities such as stocks, bonds,
money market instruments, and/or other
investments. Moreover, by determining a scheme's
"Net Asset Value," or NAV, the income/gains
created from this collective investment is
distributed proportionately among the investors
after considering any necessary expenses and
levies. As explained, a mutual fund is constituted of
the money that many different investors have
pooled together. Here is a straightforward
explanation of the idea of a mutual fund unit:
Let us say that a box of 12 chocolates costs 40
dollars. Since the shop only sells by the box, and
the four friends only have ten dollars, they decide
to buy the same thing. Consequently, the friends
decide to combine their money—₹ ten each—and
purchase the box of 12 chocolates. They each
receive three chocolates or three units if mutual
funds are used as an analogy, based on their
participation. Furthermore, how can you figure out
how much one-unit costs? Divide the entire sum by
the total number of chocolates: 40/12 = 3.33. As a
result, each friend becomes a unit holder in the
chocolate box they jointly own, making each
individual a part-owner of the box.
AUGUST 2022
Mutual funds are the best option for
investors who do not have much
money to invest or who do not have
the time or desire to do market
research but still want to increase
their wealth. Professional fund
managers invest the money raised
in mutual funds in accordance with
the scheme's declared goals. The
fund house charges a small fee in
exchange, which is subtracted from
the investment. The Securities and
Exchange Board of India (SEBI)
has set limits on the fees charged on
mutual funds.
One of the highest rates of global saving is found in
India. Indian investors must look beyond the
traditionally preferred bank FDs and gold to mutual
funds due to this propensity for wealth creation.
Retail investors have a great opportunity to take
advantage of the upward trends in the capital
markets through mutual funds. Mutual fund
investing can be advantageous, but choosing the
correct fund can be difficult. As a result, investors
should conduct thorough due research on the fund,
examine the risk-return trade-off, consider their
time horizon, or seek the advice of a professional
investment adviser. Additionally, diversification
across several fund categories, such as equity, debt,
and gold, is crucial for investors to get the most out
of mutual fund investments.
While investors of all types can invest in the
securities market independently, a mutual fund is
preferable simply because all advantages are
included in one package. According to reports, the
mutual fund sector in India has entered a high-
growth era and is expected to double in size over
the next five years. According to KFin
Technology's draft IPO prospectus, this growth will
be fuelled by five key drivers, ranging from the
economic expansion of India to the tax advantages
of mutual fund investments.
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 NETWORTH | THE SIIB NEWSLETTER
The nominal GDP is expected to expand by 11%
between FY 2021 and FY 2025, which could be
advantageous for the mutual fund business. The
Indian mutual fund business is anticipated to grow
due to economic expansion, an increase in the
population of middle-class families, and an increase
in personal savings. Regulatory and governmental
activities targeted at increasing financial literacy
among the populace will result in greater mutual
fund penetration.
Source: PrintImages
Investor education, along with improved risk
management and transparency within the mutual
fund sector, will, in CRISIL Research's assessment,
promote investor trust and encourage more
investments and industry expansion.
Retirement planning is an untapped market in India
with significant potential for improvement in
household penetration if channelled through mutual
funds. A sizable portion of the country's young
population also presents a significant opportunity
for mutual funds in retirement planning. Similar to
how the tax advantages of ELSS are projected to
spur mutual fund growth as more people enter the
formal sector.
While many factors can spur growth for mutual
funds, they also face various obstacles, from
AUGUST 2022
taxation to competition from other financial
products.
On all purchases of mutual funds beginning July 1,
2020, a stamp tax of 0.005% is applicable. The tax
has become a barrier to the expansion of mutual
funds since it raises the cost of transactions. Large
corporations, who invest their money mostly in
liquid funds for shorter periods, have been hurt by
this move.
Market performance and sentiment significantly
impact retail engagement, inflows into mutual
funds, and other market-linked products. According
to a survey, any downturn or volatility could cause
investors to steer clear of market-linked products
and toward less hazardous investments.
Mutual funds face fierce competition from ULIPs.
Unit-linked investment products (also known as
"ULIPs"), which offer the benefits of both
protection and long-term savings, are among the
insurance products that are vying for market share.
The B30 markets would require significant
marketing and distribution investments, which
could strain fund institutions' profit margins.
According to CRISIL, political instability in India
or other parts of the world, severe protectionist
actions by major countries, or a tightening
monetary policy more quickly than necessary might
affect growth and international commerce.
Overall, the mutual fund sector has a tonne of
potential for growth in the future. Many asset
management firms with foreign bases are
expanding into the Indian market. Commodity
mutual funds have been approved for introduction
by SEBI. Effective corporate governance of mutual
funds is being prioritized. In India, mutual funds
can potentially encroach on semi-urban and rural
areas. The market is opened to financial advisers,
enabling greater financial planning for the people.
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The Economic Crisis in Sri Lanka:

The Perils of Sovereign Debt in an Era of
Geopolitical Competition
- Swathi Nair
Sri Lanka has been facing its worst economic crisis development. High tax-free thresholds caused a
since its independence in 1948, with historic 33.5% drop in registered taxpayers. Rating agencies
inflation levels, a near-depletion of FOREX downgraded the sovereign credit rating because of
reserves, shortages of medical supplies, and an the significant loss in tax revenue, making it more
increase in the cost of essential commodities. The challenging to take on further debt.
crisis has had a significant impact on human rights
as well, severely affecting those who are unwell, The Central Bank started printing unprecedented
pregnant women, and breastfeeding mothers who amounts to pay for government spending. This
need life-saving assistance, as well as those whose pushed down the market value of the rupee and led
access to food and healthcare has been disrupted for to foreign workers remitting money through
an extended period. unofficial channels causing Sri Lankan banks to run
out of foreign currency and foreign remittances to
After months of growing unrest, the
Rajapaksa administration fell, further
destabilizing the nation. As a result of
chronic fuel and food shortages and
international loan defaults, Sri Lanka's
economy hit an all-time low, and the
government declared a state of
emergency.

HOW SERIOUS IS THIS CRISIS?

The government owes $51 billion and
cannot pay its debts, let alone make
interest payments on its loans. Its
currency has fallen by 80%, increasing
the cost of imports and escalating the
already out-of-control inflation, with food prices
soaring by 57%. Sri Lanka barely has $25 million
in viable foreign reserves and requires $6 billion to
survive for the upcoming six months.
HOW DID SRI LANKA GET HERE?
THE ROLE OF TAX CUTS AND MONEY
CREATION
Instead of concentrating on economic changes that
may boost foreign reserves, the Rajapaksas adopted
several tax reductions to boost political support.
Budget deficits increased because of significant tax
cuts, including lowering VAT to 8%, cutting
corporation tax from 28% to 24%, eliminating the
Pay as You Earn (PAYE) tax, and eliminating the
2% "nation-building tax" that funded infrastructure
crash with a 61% reduction in official remittances
in January 2022.
FALLACIES IN EXTERNAL DEBT PATTERNS
Sri Lanka's constantly rising foreign debt
obligations have played a significant role in the
current economic difficulties the country is
experiencing. Due to the interactions between the
domestic and international markets, Sri Lanka's
reliance on commercial borrowings without
considering the structural weaknesses in the
economy—such as decreased trade levels as a
percentage of GDP (from 33% in 2000 to 13 % in
2019), low levels of FDI, and declining tax
revenues—has severely damaged the country's
economy.

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CAUGHT IN A STRATEGIC DEBT TRAP
China is Sri Lanka's biggest bilateral lender and
holds 10% of the island's foreign debt. The country
has had a severe balance of payments (BOP)
problem, which compelled the government to seek
external help for its troubles. As a result, the nation
became more dependent on China, which was
essential to its prosperity. Since 2005, the
government has borrowed much money from
Beijing for infrastructure projects, most of which
became white elephants. When Sri Lanka could not
pay the $1.4 billion debt from Beijing used to
develop it, it leased the important Hambantota port
to a Chinese business in 2017. Almost one-sixth of
Sri Lanka's $45 billion in total external debt, or $8
billion, is owed to China. China has rejected Sri
Lanka's request to restructure its enormous debts or
make repayment concessions.
THE IMPACT ON AGRICULTURAL AND
TOURISM SECTORS
Adding salt to injury, the government abruptly
declared that Sri Lanka would only permit organic
farming and would forbid the use of inorganic
fertilizers and agrochemicals-based fertilizers. This
reduced tea production by over $425 million, and it
caused a 20% drop in rice production in the first six
months, undoing the nation's previously attained
rice self-sufficiency and forcing it to import rice for
$450 million.
The tourism industry contributed more than 10% of
Sri Lanka's GDP. The 2019 Easter bombings had a
negative impact on the industry, and the COVID-19
pandemic made a recovery impossible. In 2018,
tourism brought in $4.4 billion and contributed
5.6% to the country's GDP, but by 2020, this had
decreased to barely 0.8%.
The Russian invasion of Ukraine further
exacerbated the economic calamity of the country
AUGUST 2022
as Russia is the second biggest market to Sri Lanka
in tea exports, and Sri Lanka's tourism sector is
heavily reliant upon both.
WHAT IS NEXT FOR SRI LANKA?
The following urgent steps are needed to address
Sri Lanka's economic crisis:
SOCIAL PROTECTION
To protect humanitarian rights, the government
should work with international partners, including
the IMF, to establish a new social protection system
that is both adequate to protect everyone's rights
from the effects of the economic crisis and
designed to prevent mismanagement and
corruption.
FAIR TAXATION
The government should ensure that any new tax
measures are progressive and do not risk further
eroding economic rights. Measures can include re-
negotiating contracts with foreign investors that pay
little or no taxes, increasing corporate taxes,
increasing income taxes for the wealthiest Sri
Lankans, or a wealth tax.
EQUITABLE DEBT RESTRUCTURING
Sri Lanka is currently negotiating debt restructuring
with its creditors. If these debts are not sufficiently
reduced, the government's domestic debts will also
need to be restructured, which could trigger a
banking crisis and throw the country into deeper
turmoil.
The economic collapse of Sri Lanka requires rapid
attention on a worldwide scale, not just from
humanitarian organizations but also from
international financial institutions, private lenders,
and other nations that must come to the nation's
help. The Sri Lankan government and the IMF, and
foreign creditors need to act urgently to reverse the
tide driving millions into poverty.
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Non-performing Assets: What are They,
and What Steps are Taken to
Address NPAs?
- Dev Agarwal
A non-performing asset (NPA) refers to a
classification for loans or advances that are in
default or in arrears. A loan is in arrears when
principal or interest payments are late or missed. A
loan is in default when the lender considers the
loan agreement to be broken and the debtor is
unable to meet his obligations.
An asset is anything that is owned by the bank. A
loan is an asset for a bank because the interest
which is paid by the loan takers is significant
earnings for a bank. So, when the loan takers are
not able to pay the loan interest or principal, one of
the most significant earnings for a bank stops.
Hence, the Reserve Bank of India has defined NPA
as assets that stop generating income for them.
NPA's are classified into three parts:
SUBSTANDARD ASSETS: Assets which has
remained NPA for a period of less than or equal to
12 months.
DOUBTFUL ASSETS: An asset would be
classified as doubtful if it has remained in the
substandard category for a period of 12 months.
LOSS ASSETS: As per RBI, a loss asset is
considered uncollectible and of such little value
that it continues as a bankable asset is not
warranted, although there may be some salvage or
recovery value.
NPA's are listed on the balance sheet of a bank or
other financial institution. After a prolonged period
of non-payment, the lender will force the borrower
to liquidate any assets that were pledged as a part
of the debt agreement. If there were no assets pled,
the lender might write off the asset as a bad debt
and then sell it at a loss to a collection company.
For example, assume a company with a $1 million
loan with interest-only payments of $50,00 per
month fails to make a payment for three
consecutive months. The lender is required to
AUGUST 2022
categorize the loan as a non-performing asset to
meet regulatory requirements. Alternatively, a loan
can also be categorized as non-performing if an
individual makes all interest payments but cannot
repay the principal at maturity.
Having NPA's on the balance sheet places a
significant burden on the lender's cash flow, which
can decrease the earnings. Carrying a significant
amount of NPA's on the balance sheet over a
period of time is an indicator to regulators that the
financial of the bank is at risk.
There are primarily two metrics that help us to
understand the NPA situation of any bank.
GROSS NON-PERFORMING ASSETS (GNPA):
It tells the gross non-performing assets of a bank in
a particular quarter or financial year as the case
may be.
NET NON-PERFORMING ASSETS (NNPA):
NNPA deducts the provisions made by the bank
from gross NPA. Hence, NNPA gives the exact
value of NPA after the bank makes specific
provisions.
NPA PROVISIONING:
Leaving aside the technical definition, provisioning
refers to the sum that banks set aside from their
income or profits in a given quarter to cover non-
performing assets or assets that might ultimately
lead to losses. It is a method in use by banks to
account for complex assets and keep a clean ledger
of transactions. Provisioning is done according to
which category the assets belong. The categories
have been mentioned above. Provisioning also
depends on the type of bank; Tier-I banks and
Tier-II have different provisioning norms.
THE STEPS TAKEN TO ADDRESS NPA'S
The actions taken to resolve and prevent non-
performing assets can be broadly classified into
two categories: first, regulatory means of resolving
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 NETWORTH | THE SIIB NEWSLETTER
NPA's in accordance with different laws like the
Insolvency and Bankruptcy Code), and second
corrective actions for banks that are required and
governed by the RBI for internal transfer of
stressed assets.
The RBI imposed a strict 180-day deadline for the
execution of a resolution plan in the updated
framework, which took the role of the older
schemes. If this time is not met, stressed assets
must be reported to the NCLT under IBC within 15
days. The framework also included a provision for
one-day default monitoring, where stress is
identified earlier and flagged when repayments are
a day late.
Now,
As many business owners, especially those within
the MSME sector, may not be able to withstand the
heat of the coronavirus pandemic, which caused a
historically significant economic contraction in the
first half of the current fiscal year, dealing with
non-performing assets will be a significant
AUGUST 2022
challenge for the banking industry in the coming
year.
Another challenge banks will encounter in the
months ahead is the impact that reduced private
investment will have on expanding corporate
loans. Bankers are hopeful that a faster-than-
expected recovery will help India, even though
there is plenty of liquidity in the system and
relatively little demand from the corporate.
NPA's have been a concern to India because a
majority of the Public Sector banks have very NPA
compared to Private Sector Banks. The public
sector banks have raised around 65,000 crore
rupees from equity & bonds. Besides this, the
government has allotted 20,000 crore rupees for
capital infusion into public sector banks. NPA
problem seems to be the biggest "hidden" issue.
However, at the moment, the government and
banks are confident that there are enough
provisions to absorb any future shock.
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Decentralized Finance and future
- Aditya Dewan
Decentralized Finance (DeFi) is a unique method of
providing financial services that eliminate
traditional centralized intermediaries in favour of
automated protocols. DeFi participants, in a
nutshell, are members of a peer-to-peer network
(based on a public blockchain) in which assets
represented in the network can be transferred
automatically. (Via so-called intelligent contracts).
Most DeFi applications do not offer new financial
products or services but instead, replicate those
offered by the existing financial system within the
crypto-asset ecosystem. The fundamental
distinction is that DeFi does not rely on centralized
intermediaries to supply services. This mode of
service delivery carries its dangers and offers issues
for traditional financial services regulation, notably
due to the lack of intermediaries as regulatory
"entry points." Against this backdrop, this focus
article examines DeFi, concentrating on the
parallels and contrasts between DeFi and traditional
Finance, what this means in terms of risks, and
AUGUST 2022
potential pathways for risk mitigation and
regulatory compliance.
DeFi's market capitalization has expanded
tremendously during the last year but remains small
compared to the total crypto-asset market
capitalization. While the concept of a decentralized
system began with the creation of the Ethereum
blockchain, the significant expansion of DeFi began
in 2021. (Chart A). The sum of all digital assets
placed in DeFi protocols ("total value locked,"
TVL) climbed from roughly €18 billion in January
Sources: Defi Llama, CryptoCompare
2021 to more than €240 billion by December 2021.
DeFi tokens, a type of crypto asset used in DeFi
networks, increased over tenfold in 2021. However,
in relation to the overall size of the crypto-asset
market, DeFi remains a minor segment (Chart A,
panel b). Following the meltdown of the stable coin
TerraUSD in early May, TVL in DeFi dropped by
over 40%, or €80 billion, with credit and staking
systems suffering the most.
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Essentially, the primary financial services provided
by DeFi are unregulated and decentralized
replications of traditional financial services within
the crypto-asset ecosystem. The most common
DeFi applications provide credit services, such as
lending crypto-assets against crypto collateral,
enabling automated trading of crypto-assets against
liquidity pools containing crypto-assets, or offering
crypto-asset or derivative investing services.
DeFi characteristics such as how crypto-assets are
held or trusts are produced, the system's openness
and composability, and its governance structure set
Sources: CoinMarketCap, CoinGecko
it apart from traditional Finance. The system is non-
custodial since members maintain their digital
assets directly, without using a centralized
mediator. Instead of depending on a centralized and
controlled intermediary to establish trust in the
system, coding is done with predefined norms.
Transactions are executed peer-to-peer using
intelligent contracts based on pre-set rules that
require little or no human control. Over-
collateralisation and the enforcement of needed
margins, for example, are used in place of a credit
risk assessment of the borrower. DeFi applications
use open-source technology, which allows for a
high level of customization. As with Lego bricks,
the various applications can then be merged to
construct new applications (but primarily when
using the identical blockchain). However, recycling
AUGUST 2022
digital assets within different apps adds to the
system's complexity.
Although DeFi protocols or platforms claim to offer
a decentralized governance structure, control is
frequently concentrated. Decentralized governance
is based on voting rights distributed through
governance tokens and decentralized autonomous
organizations. Governance token holders can
influence the protocol's fundamental features, such
as collateral requirements and asset eligibility.
While multiple parties, in theory, can own
governance rights/tokens, governance tokens are
frequently concentrated in
the hands of developers,
early investors, or holders
with substantial balances at
this time, implying
institutional ownership.
For example, the Uniswap
team, early investors, and
token holders with balances
of above 1 million UNI
possess 80% of the entire
supply in the circulation of
Uniswap's governance token
UNI. Furthermore, about
97% of the total governance
token supply is held by 1%
of total token holder
addresses. As a result, while
ostensibly decentralized,
DeFi programs retain a
significant amount of
centralization.
The nature of DeFi may permit regulatory
arbitrage, and it may slip outside the regulatory
perimeter despite providing current financial
services. DeFi protocols and code must be
deployed, managed, and improved by human
interaction. As a result, holders of governance
tokens, decentralized autonomous organizations,
and platform developers may be included in the
regulatory framework. DeFi may also need to
implement technology-based regulatory systems,
often called embedded regulation, in which
regulatory obligations are technically embedded in
DeFi. Because of the global nature of DeFi and the
dispersion of its stakeholders, international
coordination is required to maintain a consistent
approach. However, given the unresolved
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 NETWORTH | THE SIIB NEWSLETTER
uncertainties about its regulation, real-world use
cases, and future scalability, it is unclear how DeFi
will evolve. Regulation, for example, might either
Insider Trading
- Yash Bansal
Insider trading refers to buying or selling public
company stock or other securities based on
information not publicly available about that
company. Insider trading is illegal as it gives an
unfair advantage to some people. For example, if
some star investors like Radhakrishnan Damani,
Mukul Agarwal, and others are going to invest in a
company, and if this information is known to any
person in advance, then he can take advantage of it
by buying it initially. It can be in reverse as well,
like if a company files bankruptcy and its directors
or managers know this, and they are also the
shareholders in that company, then they start selling
stock to get reasonable prices, and the rest retail
investors will trap. So that is how Insider trading
gives unfair advantages to some people. In Insider
trading, the top management or top leadership of
the company can take advantage of price
manipulation due to the information not yet
released publicly by the company.
The board of directors, managers, employees,
stockbrokers, and large shareholders can benefit
Source: Trading View
AUGUST 2022
increase institutional interest and growth or harm
the business model's viability if DeFi benefits are
lost.
easily if they have access to information. There are
certain examples of insider trading in the past. I
want to share the incident of Saurabh Mukherjea,
the former CEO of Ambit Capital. Saurabh
Mukherjea recently paid a penalty fee of about Rs
1.38 crore for settling an insider trading case with
SEBI. The case was in relation to the stockbroker,
whom he distributed the report among his clients
regarding the quarter losses of Manappuram
finance in 2013. Mr. Mukherjea sent the reports to
its investors before Manappuram finance made
them public. SEBI, in its verdict on the case, found
Mukherjea guilty of violating the code of conduct
and had to pay the penalty fees for settling the case.
Another renowned case is of Shreejesh
Harindranath, General Manager of SpiceJet, which
was found guilty in 2016 of violating the code of
conduct. Mr. Harindranath had bought 3100 shares
of SpiceJet based on unpublished information
regarding the earnings of the company. SEBI then
penalized him with Rs 23 lakh penalty for
generating a profit by doing insider trading.
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 NETWORTH | THE SIIB NEWSLETTER
What I think is the promoters of future Retail are
also doing Insider trading as their holding in future
Retail is continuously decreasing. They started
selling stocks when the price was at Rs 170, and at
that time, promoter holding was over 70%, and
public holding was less than 10%, and now when
the price of future Retail was Rs 4, Promoter
holding was just 14.31%, and the public holding is
over 80%. So, what happened was when they
realized that the deal between Future Retail and
Reliance could not be fulfilled. The company could
not sustain itself; they started selling their holdings
and designing a trap, and the retail investors got
caught in that trap. However, we cannot say
anything about it because the promoters of Future
Retail, i.e., Kishore Biyani, founder and CEO of
Source: Screener
AUGUST 2022
future group, and Ravindra Dhariwal, Independent
director, are not found guilty.
Insider trading is banned, and if someone is found
guilty, he has to face the consequences depending
on the country. In India, according to section 15G,
if a person finds guilty of insider trading, then he
has to be penalized by money, which shall not be
less than ten lakh rupees, which may extend to
twenty-five crore rupees or three times the amount
of profits made out of insider trading, whichever is
higher. In the USA, if someone is caught in insider
trading, he can either be sent to prison, charged a
fine, or both. According to the SEC (U.S. securities
and exchange commission) in the U.S., a conviction
for insider trading may lead to a maximum fine of
$5 million and up to 20 years of imprisonment.
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NETWORTH | THE SIIB NEWSLETTER AUGUST 2022

The team
Editor
Naman Agarwal

Art, design and layout

Saunak Dam
Samiksha Dashore

Article contributed by
Aditya Dewan
Dev Agarwal
Jaina Patel
Shakti Tomar
Shashank Prasad
Swathi Nair
Yash Bansal

Your feedback is valuable to us. Write to

us at finequity@siib.ac.in

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