Wednesday, December 18, 2013

Your Complete Guide to Indian Income Tax and Retiring as a Crorepati

Dear All,
Its been many weeks since I posted articles regularly in this blog. Over the past couple of months, I have been working on my maiden attempt at writing a book. The title of this book is - "Your Complete Guide to Indian Income Tax and Retiring as a Crorepati"

Tax Saving is a yearly exercise for most of us and after scrambling through to invest the 1 lac under Section 80C and submitting our House Rent or Medical bill proof, we call it a Day. The Indian Tax Laws are fairly complicated but there are numerous options for to us to legally reduce our tax liability. The purpose of this book is multi-fold:

1. To explain the Individual Income Tax Laws in our country in easy to understand language

2. To help you retire as a "Crorepati" by just using the Section 80C Benefits

3. To help you form a "Portfolio" that is appropriate to your age and risk appetite

Hope you find this book useful.

Click Here to buy this book at an offer price of US$ 4.99 only

Happy Tax Saving & Retirement.

Buy This Book

Friday, December 6, 2013

Have you Subscribed to the Power Grid FPO?

Power Grid Corporation, one of India's largest public sector companies has come out with a “Further Public Offering” of 787 million shares to the public. The FPO closes today – 6th December. The purpose of this article is to review his issue and suggest whether you should subscribe to the issue.

About the Issue:

The offer comprises a fresh issue of 60,18,64,295 equity shares by the company and an offer for sale of 18,51,89,014 shares by government. The funds from this sale would go to the company. The offer opened a couple of days back on the 3rd December and closes today 6th December.
The price band for the issue is set at Rs. 85 to 90/- which will help the company generate around Rs.51 billion to Rs. 54 billion in funds depending on the price at which the offer is closed. A point to note here is that, “Retail Investors” get an extra 4.5% discount on the offer price.

About the Company – Power Grid Corp:

Power Grid Corp began operations in the year 1992 as part of the Government of India's initiative to consolidate all the interstate and inter-regional electric power transmission assets of the country in a single entity. It is currently India's principal electric power transmission company, and owns and operates most of the country's interstate and inter-regional electric power transmission systems.
The company also has a presence in the telecom sector, as it has created a network using its overhead transmission infrastructure. PGCIL has been leasing this network to telecom companies like BSNL, Tata Communications, Tata Teleservices, Reliance Communications and Bharti Airtel. The company also earns consultancy revenues. Income from these two businesses formed less than 5% of revenues during FY13.

Purpose of this issue:

Power Grid Corp is going to use this capital to meet its funding requirements for future projects. There are 27 projects in the pipeline which are a mix of generation linked and grid strengthening projects. The money raised from this FPO would be used for the same.
We have always been talking about the “Governments Divestment Program” wherein the Government sells its stake in government owned cos and this is one of the plans for 2013 coming to fruition…

Lot Size and Minimum Investment

The Lot Size for this issue is 150 shares which means, the minimum investment one has to make would be Rs. 13,500/- but, retail investors get 5% discount which means you need to invest a minimum of Rs. 12,825/-

Performance of Power Grid Corp – In the Recent Past:

Based on the results published by Power Grid Corp at the end of the last quarter the key numbers are:
 Net sales rise by 28% YoY during 2QFY14.
 Operating profits grow by 25% YoY during the quarter.
 Profit before tax, when adjusted for extraordinary items and prior period items, grows in line with operating profits.
 Net profits rise by 10% YoY (24% YoY after making adjustment).

This proves that the company has been able to post good profits…

What Should We Do – Should We Subscribe To The Issue?

Ok, now we are entering the god part. Should we subscribe to the issue?

As of now the stock is trading at around 10 times its trailing twelve month earnings. Even at the higher price band of Rs. 90/- per share the FPO is priced at around 1 time the company’s FY16 estimated book value.
Given the fact that Power Grid Corp has virtual monopoly in the interstate power transmission space, the company is in a strong position to capitalize on the growth prospects in power sector. The company has been able to take up expansion plans and execute them successfully. Even though some people find government co’s as Not-So-Well-Managed, I find Power Grid Corp as one of the exceptions.

Add in the 4.5% discount for retail investors, the FPO offer price is greatly inviting for us.

So, My Verdict is –


Happy Investing!!!

Disclaimer: Investing in stocks is risky. Even though Power Grid Corp is a good company, investing in this issue may result in losses in case the market tanks. The reader is advised to take into consideration his/her risk appetite before investing in this issue.

Thursday, November 7, 2013

A Laymans Guide to Private Banking

Have you heard of the term "Private Banking"? You may have found this term in news articles in our papers and websites about major banking conglomerates like a JP Morgan or a Credit Suisse setting up their private banking services in India. We all know what a bank is and the kind of service a bank provides for customers like you and me but this term Private kind of makes it a little confusing isn’t it? If you are one of those people who do not understand the term fully, don’t worry. The idea behind this article is to explain just that!!!

So, What is Private Banking?

Private Banking is nothing but regular banking and financial services provided by banks to customers who have sizeable assets. The term "private" refers to customer service rendered on a more personal basis than what happens in a regular bank, usually via dedicated advisers. Each adviser has only a handful of customers and they dedicate their time and attention towards keeping the customer satisfied.

History of Private Banking

Actually speaking, private banking was the start of the whole banking revolution. Many centuries ago, royal families and the incredibly wealthy folks needed someone to manage their finances. Knowledgeable folks pitched in, managed their money and provided customized services triggering the birth of Private Banking. The kind of personalized service has been almost similar in spite of the fact that it has been many generations since it all started. As banks grew in size, they wanted to expand their customer base to include the rest of the population who could not afford Private Banking which led to the birth of the modern day "Retail Banking" which you and me use everyday.

Service Offered To a Private Banking Customer

The Term "Financial Services" is an umbrella term within which all possible services a customer could get can be grouped under. But, to be specific Private Banks offer many or all of the service as listed below:
• Bank Accounts
• Credit Cards
• Loans
• Investment Advisory Services
• Brokerage Services
• Safety Deposit Lockers
• Etc.

Personalized Service, Unbiased Advise, Anytime/Anywhere Access etc. are some key tag lines that Banks would use to attract customers for their Private Banking Services...

Is Private Banking Profitable?

Yes, VERY!!!

Did you expect any other answer? Did you think that a bank would offer personalized services to the ultra-rich folks if it isn’t profitable for them? Each customer is probably worth in crores and banks usually charge a fixed fee ranging from 0.5% to 1% of the average assets maintained by the customer with them as the annual charges. So, one customer who maintains a 1 crore portfolio would be paying a fee of around 1 Lakh every year just to be a customer.

Private Banking in India

Private Banking is still in its infancy in India but as one of the fastest growing Emerging Markets, India is considered an untapped market by the finance community. The Reserve Bank of India has started giving out Private Banking Licenses to a few major players to operate within India and the momentum seems to be picking up. With the Income levels of the Average Indian going up on a yearly basis with more and more millionaires, the future seems extremely bright for the Private Banking Industry in our country. No Wonder all major multinational banks are trying to enter India and set up their Private Banking practice...

In order to be eligible to be a Private Banking Customer, most banks will expect you to have assets worth at least Rs. 50 lakhs with them.

Top Private Banks in the World

The Top 15 Banks in the world by just the size of the money in their Private Banking Division is as follows:

RankNameAssets Under Management
(In US$ Billions)
2Bank of America1670+
3Wells Fargo1400+
4Morgan Stanley1300+
5Credit Suisse850+
6Royal Bank of Canada625+
8Deutsche Bank380+
9BNP Paribas340+
11JP Morgan Chase310+
12Citi Group250+
13Goldman Sachs240+
14AMN AMRO210+

You may be wondering why there is a + at the end of each number in the table. The + indicates that the number could be much higher than this today due to the fact that the numbers were all picked from the Internet which could be at least a few months old.

Just to give you the size in rupees - 200 billion USD is 1,24,63,00,00,00,000 rupees which is the expanded form for 12 Lakh Crores. The bank in 15th place has assets worth 12 lakh crores. Imagine the assets that UBS has in Rupees. The number of Zeros could probably give us a headspin...

Best Private Banks in the World

Based on the type and quality of services offered to its customers, the top 5 Private Banks in the world as of 2013 are:

1. UBS
2. Credit Suisse
3. JP Morgan
5. Citi

These 5 banks have been the top 5 (Trading places up/down each year) for many years now...

Banks that Offer Private Banking Services In India

After RBI started approving licenses for Private Banking Services in India a couple of years ago, many banks (both Indian and Foreign) applied for the same. The RBI has a very tight scrutiny process after which only a few applications were approved.

Some of the large Indian Banks whose licenses were approved are (In No Specific Order):

1. ICICI Bank
2. HDFC Bank and
3. Kotak

Some of the Foreign Banks whose licenses were approved are (In No Specific Order):

1. Credit Suisse
3. Royal Bank of Scotland
4. ING Vysya

Foreign Banks like HSBC, Credit Suisse, Royal Bank of Scotland, ING Vysya Bank etc. too offer Private Banking Services in India..

Happy Private Banking!!!

Friday, October 18, 2013

The Best Route to Building Wealth

Best Route to Building Wealth - The title sounds like one of those Spam Emails we keep getting in our inbox with lofty claims about making us millionaires, isn’t it?

No, I am not one of those guys and I can assure you that this article is not a get-rich-quickly articles. However, one thing I can assure you is that, this article is going to give you pointers on how you can actually build wealth. That is not going to happen overnight. Slowly but surely you can achieve your dream of being wealthy..

Are you curious?

So, What is a Sensible Way to Build Wealth?

If you talk to some random guy to find out ways to build wealth you may get any or all of the following ideas:

1. Invest in Property
2. Speculate in Stocks
3. Find Get Rich Quick Schemes
4. Start a Business
5. Play the Lottery
6. Switch to a Better Paying Job

Let’s take a moment and think about these ideas - Are they sensible? Except Switching to a Better Paying Job, the other ideas are either purely based on luck or require a huge capital investment.

So, What is the Possible Alternate?

Investing in the Equity Markets on a regular basis is the best way to build wealth.

Quick Trivia:
You may be wondering why I have put "Speculate in Stocks" as item no. 2 in the list above but say Invest in Equity Markets in this section, aren’t you? Speculating means buying some random stock and praying to god that the stock price goes up. Investing means, doing proper research, identify a good stock and then investing in it with a timeframe in mind...

What Prevents us from Being Good Investors?

Everyone would like to be good investors but unfortunately things are not that simple in the Investing World. Some of the most common problems we face are:

1. We all have a full-time job
2. Plus, we spend the remaining time (beyond our office hours) with our friends and family
3, Time Required to acquire knowledge about Equity Markets is pretty high
4. Understanding the Equity Markets is complicated and requires dedicated effort (which points us back to problem no's 1 & 2)
5. Ability to come up with lump sum capital amounts to invest in options like Real Estate or Starting a Business

Are you one of those people who will fall under many or all of the problems listed above? If so, this article is going to give you a simple solution to overcome this problem...

So, What is this Best Route to Build Wealth?

The best route I would say is to start a "Systematic Investment Plan" on either a good Index Mutual Fund or an Index Exchange Traded Fund

Why the Systematic Route?

As I have said numerous times in this blog, investing on a regular/monthly basis is great for two important reasons:

1. The Monthly Outflow of funds is not huge. You can start with amounts as small as Rs. 1000/- per month
2. You have the ability to average out your investments in the long run irrespective of market volatility

Benefits of Starting an SIP in an Index Mutual Fund or Index ETF:

The Following are the Advantages of following the above said option:

1. You get wide diversification in a single package
2. ETF/Index Funds have low operating expenses
3. ETF/Index Funds have low internal trading expenses
4. ETF give you control of your exposure to the specific asset classes you want
5. When you buy an Index ETF, you know what you are getting, the performance of an index
6. You will most likely get average returns
7. You won’t have to worry about monitoring the performance of a fund manager
8. The rebalance is automatic without you worrying whether by selling, you will miss out on a manager’s "hot streak"

What kind of returns can you get?

The thing about equities is that you won’t know whether you will be getting 3%, 6% or 9% in future. That is why all stock market investments come with the mandatory disclaimer that says "Past Performance may or may not be sustained in future". However, if we take history as a yardstick to predict future performance, we can conclude that in the long-run regular investments in the Equity Markets can out-perform all other investment classes - Always.

For Ex: If you had Invested in an Index Mutual Fund or ETF that is based on the Nifty (National Stock Exchange) Rs. 5000/- every month starting 1st January 2002 (Almost 12 years ago), as on date your investment would be worth over 1.5 crores. The amount you invested over the past 12 years would work out to Rs. 7,05,000/- at the end of last month.

As you can see, your money has more than doubled in 12 years, which is great, isn’t it?

Will you lose money?

Let us be realistic here. Stock Market Investments are really risky and you may end up losing money if you want to stay invested only for a short duration. For ex: If you had invested a lump sum of Rs. 10,00,000/- in Jan 2008 your investment would have been worth around 8.5 lakhs in May 2008 and less than 5 lakhs in December 2008. Even now, your investment would be only worth around 9.5 lakhs as of today.

Whereas if you had invested Rs. 5,000 every month starting 1st January 2008, your investment would be worth 4.2 lakhs as on date while your investment would have been 3.5 lakhs. Even though the profit is only Rs. 70,000/- over the past 5 years, you were able to average out your losses because you stayed the course and invested every month. If you continue to do so, for another 5 years or so, your investment would definitely be worth a lot more.
To Summarize: Chances of Not Losing Money increases with TIME

Do ETF's and Index Mutual Funds Pay Dividends?

Yes, they do. As Index Mutual Funds and ETF's only invest in the most profitable and large corporations in the country, there is a good chance that these companies declare good dividends every year. Index Mutual Funds and ETF's declare Dividends on a regular basis depending on the dividends they receive from the companies they hold stocks in. Remember that this dividend is at the discretion of the fund manager and will only happen if the economy is doing well. For ex: During the crisis between 2008 to 2010 most ETFs did not declare dividends but the past couple of years, they have declared decent dividends.

What Other Benefits Does Investing in Index ETF or Mutual Funds have?

India is an emerging market. Our economy is growing. As our country progresses, newer conglomerates come into the picture. When the country does well, the underlying companies that support the country do well too. When new companies replace old ones in the Index because of their growth, you don’t have to worry about the same because your ETF or MF automatically does the replacement and you get the benefit. For ex: In 2011, Coal India and Sun Pharma replaced Reliance Communications and Reliance Infrastructure in BSE Sensex. You can read the article I wrote at that time "By Clicking Here" to learn the why part. Since Coal India and Sun Pharma were better prospects, switching to them was a good idea for the Index and would have been a good idea for the investor too.

Some Final Words:

Building Wealth is a time taking activity and you need to invest regularly and religiously for at least 10 or 15 years in order to accumulate and build Wealth. That is exactly why I suggest this route because these funds are not dependent on one fund manager’s brilliance or ability to pick winning stocks. These funds move along with the country's economy. For a country like India which is still in growth mode, this idea is all the more impressive.

At the end of the day this investment comes with a risk. If you are willing to take the risk this is a wonderful opportunity.

Before I wrap up, let me say that if you feel investing in the stock market is not your cup of tea due to the risk, at least start a monthly "Recurring Deposit" with any bank for whatever small amount you can afford every month. Just let the money accumulate for 5 or 10 years and you are sure to save up a good amount of money.

Happy Accumulating Wealth!!!

Monday, October 14, 2013

How To Plan Your Childs Financial Future and Do It Well!!!

Today is Vijaya-Dashami, a day that is considered auspicious for all good things for our future. So, todays aim is to start planning for something that is most important and crucial for all of us...

Becoming a parent is a great step forward for any couple. It brings in tons of joy and happiness to not only the couple but also to their parents, relatives, friends etc. However, along with this happiness comes a great deal of responsibility and financial burden that has to be prudently planned. A Parent who does not plan for his/her children’s future is similar to a batsman entering the pitch to bat against Shoaib Akhtar or Brett Lee without Helmets, Pads, Elbow Guard etc. Eventually they will end up getting hurt, unless of course they get out first ball.

Analogies apart, being a good parent is not only about being affectionate and caring on our kids, it is also about planning for a safe financial future for our kids and making sure that we stick to the plan over the next 15-20 years when our kid will actually need the money...

Why Plan for our Kids Future?

This is the million dollar question. Every parent dreams of their kids to have the best education, to go to the best college etc. For parents of the girl child in India comes the added responsibility of planning for their daughter’s wedding. All these goals that you set in your mind about your children require money and a lot of it. Unless you start planning now, there is a chance that you may face a budgetary constraint many years down the line when your kid is ready to go to college or is ready to get married.

Are you thinking?

My kid's college or wedding is so far away. I will definitely save up money for it by then...

This article does not doubt your commitment or love towards your kids. Instead this article is about starting the thought process that will help you save up the kind of money you need, in time for the big spend...

How To Calculate The Future Money Requirement?

Now that we have established that you are a responsible parent and are going to save up money for your children’s future, the next step is to plan and identify how much money you actually need. For ex: The fee in a reputed Engineering College these days in Chennai works out to around 50,000 to 75,000 per year. So, for a 4 year education including special fee, exam fee and all those unknown fees colleges rip us off, the total fee for education would work out to approx. 5 Lacs.

The next step is calculating when your kid will be joining college. Let us say your kid is 1 year old now and will join college when he is 19 years old, you have 18 years to accumulate this money.

Lastly, you need to take into account inflation because when I studied Engineering a decade ago, my fee per year was approx. 20,000 whereas the fee now has almost doubled in just 10 years. Who knows what will happen 18 years from now? But, for simple calculation purposes let us assume Inflation will be at 10% per year.

Now, we have all the requisite information to calculate the "How Much" part. The formula for that is:

Amount * (1 + Inflation Rate %) ^ No. of Years.

So just plug in your numbers and you get:

5,00,000 * (1 + 10/100) ^ 18

500000 * 1.1^18


So, at the end of 18 years, you will need almost 28 lacs for an education that is costing 5 lacs today.

So, How to Accumulate the money?

Once you know how much money you need, the next step is to start accumulating the corpus. You have two options - Either do one time lump sum investments or make monthly contributions. Let us take our earlier example where we need 27.8 lacs for our kids’ education.

One Time Contribution: If you put 5 lacs today into a Fixed Deposit that pays you 10% interest which is compounded every year once, you will end up with exactly this 27.8 lacs that you need for your child's education 18 years from now. So, if you have surplus in your hand and want to ensure that your kid gets the best education, just put the money into a fixed deposit for 18 years and just forget about it. When your kid is ready for college, so will the money to fund his education.

Formula to calculate the Maturity Amount is: Amount * (1 + Rate of Returns %) ^ No. of Years.

Monthly Contributions: To accumulate this much money, you would need to invest 5000 rupees every month for the course of the next 18 years into an investment that pays you at least 9% returns per annum. Doing so will accumulate 27 lacs at the end of 18 years

This formula is a little bit complicated, so I suggest you use the SIP Returns Calculator Widget embedded in our Retirement Planning Home Page. Click Here to view the page.

So, What Next?

You now know how to calculate the future value required for a certain event and how to calculate the investment required to achieve it. The next step is to make sure we cover everything. Two of the key events in our kid's future which will need a big influx of cash are:

1. Higher Education (Degree, Post-Graduation, Masters etc.)
2. Marriage

If you want to plan for anything else, you can always include the same into your financial plan for your child.

Step 1: Calculate the Target Timeline. Ex: Higher Education - 18 years, Marriage 25 years etc.

Step 2: Calculate the amount required for each event. Use the formula in the section above

Step 3: Calculate the amount you need to invest every month (This is much easier than one time lump sum investments). But, if you have surplus, don’t think too much, go ahead and invest it.

Step 4: Keep track of your investment every 3 months and make adjustments if required...

Points to Remember:

The following are some points you need to remember while planning for our children’s future...

1. One of the biggest mistakes people do is dipping into this kind of corpus every time they need money. This will significantly deplete the final maturity value. As we are trying to save money for our children’s future, let us take a decision that we will not be touching this unless it is a real life & death kind of emergency. If you want to go for a cruise or get that luxury car, don’t even think about touching this corpus...

2. Proper Asset Allocation is vital. During the initial stages of the saving plan, you can try an Aggressive approach and keep a healthy allocation towards Equities because in the long run, they are the best asset class. As your target goal comes nearer, start shifting your assets slowly towards a Balanced approach and when your goal is just a couple of years away, go in for a conservative approach.

For ex: If I were starting an SIP for Rs. 5000/- every month for the next 15 years for my Sons education, I would choose a Diversified Equity or a Large Cap Mutual Fund Initially. After 8 years I will switch over the corpus into a Balanced Fund and continue my SIP. After 12 years I will switch over to a Debt fund or start up a FD for the full corpus as-on-date and start up a Recurring Deposit with the bank. This way, am ensuring that my overall corpus does not get affected by the short-term stock market volatilities.

3. DO NOT get carried away by fancy financial products especially ULIPs. Read the details carefully, analyze the pros and cons before you make any investment decisions. Remember that the Insurance Agent is getting paid to sweet-talk you into buying those products. You are the one who will be affected if the product does not do what it is supposed to. Remember an article titled Financial Resolution No. 3: I will not blindly trust my Insurance or Investment Advisor? Please Read it once...

A TIP for the Parent Who is Extremely Busy:

Most of the children’s future themed ULIP Products have great advertising campaigns with lots of Insurance Agents and Banks selling them aggressively. The catch here is that, these are just standard ULIP plans which have been sugar coated with the key-word "Children" to appeal to the parents of today. If the products were that amazing in protecting our children’s future, the agents and banks need not have to get paid a hefty commission just to sell these to you and me.

Anyways, if you are someone who cannot spend so much time into deciding on Investment options, Asset Allocation etc., then, these ULIP options are good provided you are willing to incur the cost of the advertisement campaign, the commission paid out to the person who sells you the policy etc. However, this is obviously much better than doing no planning at all...

Some Last Words:

On an average, if someone actively tracks & manages his/her portfolio even if it is just Bank Fixed Deposits or Mutual Funds, they will probably make at least 2-3% more in profit when compared to someone who selects a ULIP scheme that invests in the same category. This is not because the people who manage those ULIP schemes are incompetent. They are obviously more competent than you and me but the fees and charges they end up paying to all the parties involved is just so much higher that it eats into the profits from the investors perspective...

But, as long as you are able to do some sort of planning for your kids future, that would be a great start..

Happy Planning & Investing!!!

Friday, October 11, 2013

List of Miniratna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have Miniratna Status.

We have a total of 53 PSU's that come under the Category I Miniratna Status. They are:


We have a total of 16 PSU's that come under the Category II Miniratna Status. They are:

15. PEC LTD.

List of Navratna Companies in India

List of Maharatna Companies in India

List of Navratna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have the Navratna Status.

We have a total of 14 PSU's that come under the very well respected Navratna Status. They are:


List of Maharatna Companies in India

List of Miniratna Companies in India

List of Maharatna Companies in India

In one of our previous articles titled Different Categories of Public Sector Companies in India we had taken a look at the classification of the various public sector enterprises in India. The idea behind this article is to list down the companies that have the most respected Maharatna Status.

We have a total of only 7 PSU's that come under this Maharatna Status. They are:


List of Miniratna Companies in India

List of Navaratna Companies in India

Different Categories of Public Sector Companies in India

Are you one of those folks that hear the term Navratna or Maharatna being used while referring to large government owned public sector companies and do not fully understand what that means? I am one among those individuals and that is why I started searching the Internet on what each of these terms mean. After detailed research, I was able to narrow down on the most important details reg. these classifications. The idea behind this article to explain the same...

What are these Categories?

The Government of India categorizes our Public Sector Companies based on their size into 3 main categories:

1. Maharatna
2. Navratna and
3. Miniratna

Let us take a look at them one by one in ascending order of size...

Miniratna Public Sector Company or Miniratna PSU:

Miniratnas are those small to mid sized public sector enterprises that are making good profits and have started building a reputation. Because of the sheer number of companies that come under this grouping, the government has gone a step further to classify companies as Miniratna Category 1 and Miniratna Category 2.

1. Category I companies should have made profit in the last three years continuously, the pre-tax profit should have been Rs. 30 crore or more in at least one of the three years and should have a positive net worth.
2. Category II companies should have made profit for the last three years continuously and should have a positive net worth.

In addition - These companies should not have defaulted in the repayment of loans/interest payment on any loans due to the Government. Also, these public sector enterprises shall not depend upon budgetary support or Government guarantee for their functioning.

To view the list of companies that fall under this Miniratna status - click here

Navratna Public Sector Company or Navratna PSU:

Any PSU that is already in the Miniratna Category 1 group can get Navratna status if the company can score at least 60 points out of 100 in the following performance parameters combined:

Performance ParametersMaximum Points
Net Profit to Net Worth Ratio25
Manpower cost to cost of production or services15
Gross margin as capital employed15
Gross profit as Turnover15
earnings per Share10
Inter-Sectoral comparison based on Net profit to net worth20
This Navratna Status was originally granted to nine PSU's that were extremely large and were making great profits. That is how the "Nava" part of the name came in and over the years many more companies have joined this exclusive club.

To view the list of companies that come under this Navratna status - click here

Maharatna Public Sector Company or Maharatna PSU:

Any PSU Company that is already in the Navratna Status and meets the following additional conditions can be categorized as the most elusive Maharatna Company...

1. Listed on the Indian stock exchange, with a minimum prescribed public shareholding under SEBI regulations
2. An average annual turnover of more than Rs. 20,000 crore during the last three years
3. An average annual net worth of more than Rs.10,000 crore during the last three years
4. An average annual net profit of more than Rs. 2,500 crore during the last 3 years

The performance of Maharatna CPSEs would be reviewed annually by the Inter-Ministerial Committee, and thereafter by the Apex Committee headed by the Cabinet Secretary which will recommend continuation/divestment of Maharatna status. The review will focus on the eligibility of Maharatna CPSEs vis-à-vis the criteria laid down for grant of Maharatna status, and their performance during the previous year(s).

There are only 7 Companies in our country that can boast of this status of being a Maharatna Company. To view the list of companies that come under this Maharatna status - click here

Tuesday, October 8, 2013

Is Your Take Home Salary Much Lower Than Your Salary Package???

Are you someone who wonders where all my on-paper salary goes when your salary gets credited every month? Did you think that the salary package offered by your employer was good when you actually signed the offer and regret it now because the take home salary doesn’t reflect the salary raise? If so, read this article carefully. The purpose of this article is to understand why our take home salary does not match up to our offer letter and what we can do to handle it...

Before we Begin - What is CTC?

These days, most private companies combine all salaries and benefits offered to its employees using a blanked term called "Cost To Company" a.k.a CTC. This CTC includes all costs that the company incurs in order to retain you as an employee.

Why is my Take Home Salary SO LESS in comparison to my CTC?

As I just said, CTC includes all monetary expense the company incurs on your head, not just your actual monthly salary. Unfortunately, many of us fail to realize the fact that, not all components of our CTC salary directly translate to "Take Home" salary. That is why your take home salary is so less in comparison to what is printed out on your offer letter (or CTC)

So, How Does our Employer Accomplish this?

The following are some commonly used ways by which employers boost your CTC in your compensation letter. This list is in decreasing order of impact on your take home salary:

1. Including Variable Components as part of CTC

A Variable component in your salary package is something that is not guaranteed. The compensation letter clearly states that this variable component will be paid out at the end of the year depending on your individual performance as well as the company's performance as a whole. Technically, this is not part of your monthly take home salary and you will get it in lump sum at the end of the year.

So, if your annual CTC is 12 lacs and this variable component is Rs. 15,000/- per month, your actual CTC for calculating the Take Home Salary is only 10.2 lacs. The remaining 1.8 lacs is variable salary which you may or may not get at the end of the year.

2. Including Transport Facilities, Insurance etc. as part of CTC

Most companies these days offer Transportation Facilities and Insurance coverage to all of their employees.

For ex: If the company offers you free Transportation pick-up and drop to office, they assume a notional expenditure of some amount (Say Rs. 2000/-) per month and add that as part of your CTC. This 2000 rupees is added to your salary for CTC purposes but this is something you will never get in your hand. Similarly, if the company is offering health insurance to the employee and his immediate family, they happily include the insurance premiums into the overall annual CTC.

Technically speaking, the company actually incurs expenditure in providing transportation or insurance to the employee. By adding an assumed value for the same, they hike up your CTC which reflects badly when you get your salary at the end of the month.

These are just two commonly used examples. Any other benefits like food coupons, shift allowance etc could also be clubbed up with your overall pay package to make the CTC seem much higher than it actually should.

3. Adding Employer EPF & EPS Contributions as part of CTC

In India, every company is expected to contribute 12% of the employee's basic salary into EPF and EPS schemes. For an employee whose basic salary is Rs. 10000/- the company has to shell out an additional Rs. 1,200/- for this. Remember the article titled Employee Provident Fund Demystified where we had covered the detailed breakup of the money that goes into the EPF and EPS schemes?

12% of the basic salary is contributed by the employee and another 12% is contributed by the employer. So, technically speaking 24% of your basic salary is not part of your take home salary. The company will include their 12% share as part of your overall CTC.

Is this list - Exhaustive? Actually No. These are the 3 biggest means by which company's inflate our CTC and we end up heartbroken when the salary actually gets credited into our bank account...

Is this Illegal?

No. What our employer is doing is perfectly legal. All he is doing is, just including all of your monetary benefits in one package and calling it "CTC". If they mention that the variable component will be paid out 100% in the offer letter and give you only 80%, that is illegal. But, if they clearly mention that the amount paid-out will depend on company performance, it is perfectly legal...

So, what can I Do?

If you are already working for some company, chances of re-negotiating your salary package is almost impossible. However, if and when you actually switch jobs in the future, remember to do the following:

TO-DO No. 1: Don’t Go Blindly by CTC/12. Your Take Home Salary will never be that much...

In the first page of the offer letter, the company will quote a notional figure as your annual CTC pay package. Your actual monthly take home salary will never and I mean never equal that number divided by 12. DO NOT accept an offer just based on that number. Go to the breakdown section and see what are the actual components that get paid out every month. Add them up and see if this number is a reasonable or acceptable raise in comparison to what you are earning now...

Real Life Trivia:
In my first job, my pay package had 3 variable components - One based on my performance, One based on company performance and One based on my Business Unit performance. Almost 30% of our salary went into these 3 buckets. So, technically my CTC was a healthy number but my take home was not so healthy.


DO NOT and I mean DO NOT accept an offer without negotiation. If you feel some components are too high (for ex: Variable components) talk to the hiring HR Manager and ask them to reallocate the numbers so that a bigger chunk falls into the fixed salary components. If they give you this standard statement that says - we usually pay out around 2 months’ salary as bonus and adds that 2 months into CTC, tell them that this bonus is not part of the guaranteed pay-out and hence you cannot consider than as motivation enough to take up the offer...

Real Life Trivia:
When I switched from my 2nd Job, I was offered a healthy 20% raise from a CTC to CTC Perspective. When the HR called me up with the number I was pretty impressed and asked them to send the offer letter. When I opened the offer letter I saw that around 15% of the actual raise was on company performance based variable components and technically my hike was only a couple of thousand rupees. When I called up the HR Manager she was like, your current company doesn’t offer performance bonus but we do. We usually pay 2 months bonus and blah blah blah, I just said that the offer was not good enough and refused to accept it.

Care to venture a guess on what happened after that?

The Lady called me back the very next day with an offer that was significantly higher than what was offered initially with around 80% of that raise going into the monthly fixed salary...

At the end of the day, it is our pay package and we have the right to negotiate as well as refuse the offer if we do not like it. Please note that all this negotiation is only possible until you sign the offer letter. Once you join the company your salary structure is fixed/frozen and you cannot negotiate any more. So, make sure you do all the negotiations up front, otherwise you will end up repenting your decision to switch to a new job...

Happy Negotiating!!!

Sunday, October 6, 2013

Is a Mutual Fund House Consolidation On the Cards?

Remember an article titled “Top Mutual Fund Houses in India by AUM” in Feb last year in this blog? We had seen the top 25 and the bottom 5 fund houses in the country by “Assets Under Management”. We have more than 40 fund houses in our country and the stock market regulator SEBI is thinking about some new regulations that might make investors happy. At the same time, this might spell bad news for the small mutual fund houses and schemes. Gone will be the days when fund houses can happily flout some new fund scheme and forget about it soon after. The idea behind this article is to go over these recent developments and how this might affect the fund houses in our country.

New Development No. 1: Revised Net Worth Requirements for Fund Houses

The current requirement for any Fund House to start is 10 crores. SEBI is planning to raise it to 100 crores.

Why: The idea behind this rule is to restrict cash-strapped entities from flouting their own fund house and starting a mutual fund scheme to attract investor funds.
Impact: As of end of last quarter (Sep’13) all the fund houses in our country are more than 100 crores by size. The smallest fund house Daiwa Mutual Fund has 131 crores worth of funds in its corpus. So, this scheme might not impact any of the existing fund houses but it might prevent newer entities from entering the fray.

New Development No. 2: Sponsors Need to Invest in their own Funds

As of now, there is no requirement for fund houses and the sponsors to invest their own funds into the mutual fund schemes they flout. SEBI may ask sponsors to invest in its own New Fund Offers (NFOs) to the extent of 1% of total amount raised through a new fund or Rs 50 lakh whichever is higher.

Why: The idea behind this rule is that, if the fund house has its own funds invested in a scheme, it will give them additional motivation to perform better. If they don’t manage their funds properly, they will end up with losses themselves.

Impact: This would only impact the NFO’s of fund houses but still, this will force fund houses to be more prudent in their decisions to ensure that their capital is preserved too. If I were managing a fund that has 50 lakhs worth of my money, would I be reckless in my investment decisions?

What Does This Mean for Fund Houses?

Smaller Fund Houses might be forced to stay cautious and smart in order to survive. If they are unable to meet the minimum requirements set forth by SEBI they may be forced to sell their businesses. This may result in consolidation between fund houses with smaller ones shutting down shop and selling their assets to larger and more established fund houses.

What Does This Mean For Investors?

As Investors our first and foremost priority while selecting a mutual fund house is that, they will make the best choices with respect to our investments. If the fund sponsor is putting his own money into the fund, which will increase the probability of the fund manager making the best investment decisions. So, as investors we stand to win – big time…

My Thoughts:

As someone who has been following the Indian stock market for many years, there is a very good probability that there will be a mutual fund house consolidation in the near future once these guidelines are enforced.

At the end of the day - these new guidelines by SEBI will be good news for investors.

Happy Investing!!!

Friday, September 13, 2013

Save Additional Tax Using the New Section 80TTA of the Indian Tax Laws - Did you know?

If you have filed at least one income tax returns, you already know that there are countless sections in our Indian Tax Regulations and there are many that we dont even know about. The Government and the Tax Department have recently made amendments to Section 80TTA that would be greatly beneficial to Individuals across the country, especially those that are used to keeping substantial sums of money in their Savings Accounts at the Bank.

The idea behind this article is to elaborate on these amendments and throw light on the same.

So, What is this Section 80TTA?

Section 80TTA was added recently to the Indian Income Tax Regulations which will kick-in starting this financial year Apr 2013 to Mar 2014. According to Section 80TTA, up to Rs. 10,000/- is exempt from Income Tax if the income is the interest earned from Savings Bank Account. This 10,000 rupees exemption is over and above all other deductions like the 1 lakh exemption under Section 80C and so on.

This exemption is available to both Individuals and HUF's (Hindu Undivided Families) and the interest could be earned on any savings account held with a Bank or a Post Office or even a Society.

Limitations of Section 80 TTA

1. The Interest earned from Fixed Deposits or Recurring Deposits is not included under this Section 80TTA
2. The Interest earned must be from a regular/normal Savings Bank Account
3. The Section is applicable only starting 1st April 2013
4. The Upper Limit on the Exemption is Rs. 10,000. If the Interest earned in a financial year is above Rs. 10,000/- the Remaining amount is fully taxable
5. The Combined Interest earned from all your Savings Accounts must be taken into consideration for this 10,000 rupee limit.

For Ex: If you earn Rs. 6,000/- from your ICICI Account, Rs. 7,000/- from your HDFC Account and Rs. 4,000/- from your SBI Account, you can deduct Rs. 10,000/- from the total interest earned and still pay tax on the remaining amount of Rs. 7,000/-

Is this a good news?

Absolutely, YES. It makes things a lot easier. Most of us do not have hefty bank balances but still a few hundred rupees of interest will be credited into your account by your bank ever year. According to the existing tax regulations (Up until the last financial year) all these interest amounts must be included into your Taxable Income. Most of us did not know about this rule and would make the mistake of not including it. I wrote an article last year in Feb titled "Some Common Tax Filing Mistakes where not including Bank Account Interest was one of the mistakes.

Going forward, not including it would not be a mistake because, since you have an exemption of up to Rs. 10,000/- you will no longer be an Innocent Tax Evader

If I were to fully utilize this 10,000 rupee exemption limit, how much can I Keep in my Savings Account?

The amount actually depends on which bank you have an account with and how much interest they offer you. Most banks offer interest at the mandatory minimum of 4% in which case you can keep up to Rs. 2.5 lakhs. Some private Banks like Kotak or YES Bank offer much higher interest rates. So, assuming your interest rate is 5% you can keep up to 2 lakhs and if your interest is 6% you can keep up to 1.66 lakhs.

Comparison Between FD's and Savings Account Interest Income:

Lets say you have 1 lakh in a FD that earns 9% Interest per annum, you will get 9,000 as interest and if you fall into the 30% tax slab, your effective Interest income is only 6000 which works out to only 6%. Alternately if you put this money in a savings account that actually offers you 6% you will still get the same 6,000 rupees as Interest Income and pay no tax on the same because the amount is still under the 10,000 rupee exemption limit under Section 80TTA.

Impact of this Rule:

Remember the article titled Awesome News for Savings Account Holders that was written in 2011 wherein we talked about a ruling from RBI that allowed banks to set their own Interest Rates for Savings Account with a minimum of 4%? So, this new ruling will add extra motivation for individuals to keep money in their savings account which would give banks additional motivation to hike interest rates on savings accounts to woo new customers.

Some Final Words:

This rule would come as a great relief to every individual who earns a few hundred rupees as interest from his/her bank account. Because of this rule tax exemption thing, moving small amounts of money (upto 1 lakh) into a FD actually has very little incentive because, the interest earned from your FD is fully taxable and if you deduct the Tax the actual interest earned will workout approximately to be the same as what you would get from your Savings Account. On top of this, banks will be competing with one another to offer the best interest rates on Savings Accounts for customers.

All in all, this is a WIN-WIN situation for us as...

Happy Saving!!!

Thursday, September 5, 2013

The RBI Governor Raghuram Rajan's Starts with a Knock Out Punch!!!

Over the past few articles the topic about Mr. Raghuram Rajan the new Governor of the RBI and his impact on the Indian Economy and Rupee has come up. Every time I have been positive of Mr. Rajan's influence and based on his speech yesterday, International Investor confidence has gone up many-fold. The stock market went up significantly yesterday and is continuing the upward momentum today as well. Similarly the Rupee posted impressive gains yesterday and might do the same today as well.

If we go through the key points in his speech yesterday, you will see that he has actually started his tenure as Governor with a knock-out punch and that too within the 1st minute of the 1st round. It was a pleasant surprise to see him come out with such a detailed speech within the 1st week of his tenure as Governor. He must have spent days analyzing the situation and contemplating on the next steps. He finished his speech with the following words:

Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook likes. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism

Without further delays, let me try to give you just the key features and points from his speech yesterday. You can do a simple Google search and read his full speech if you want...

Highlights from Raghuram's Speech - About the Indian Monetary Policy

RBI's Goal: To Sustain confidence in the value of the Rupee, to keep inflation low and stable

RBI's Steps: Deputy Governor Urjit Patel along with a panel of experts will come up suggestions in the next 3 months on what needs to be done to revise and strengthen our monetary policy framework

Highlights from Raghuram's Speech - About the Indian Banking System

RBI's Goals:

1. To accelerate Financial Development.
2. Greater financial access in all parts of the country, rather than meeting bureaucratic norms.
3. To make credit available as required esp. to Sectors of the Economy that need it more
4. To remove the lazy attitude when it comes to recovering loans or cleaning up their books

RBI's Steps:

1. Branch Banking regulations and requirements will be altered to help banks set up new branches quickly and service customers effectively. RBI will require banks to fulfill certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the ones that are poorly managed.

2. The RBI will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near national treatment on a reciprocal basis. We are in the process of sorting out a few remaining issues so this move can be made.

3. RBI will try to ensure that credit is available to the productive sectors of the economy. Banks may require to venture into sectors where they don’t usually enter, but RBI will push them to do so, to ensure that credit is available to everyone who needs it. This might also mean that banks would have to stop investing in Government Securities. The RBI will help banks reduce this in a controlled manner.

4. Banks will be forced to clean up their balance sheets. They can’t sit on bad loans in their books forever. Though the NPA's and Bad Loans situation isn’t alarming yet, it will if left unaddressed. Banks will be forced to raise capital if necessary.

Highlights from Raghuram's Speech - About the Indian Financial Markets

RBI's Goals:

1. To Liberalize the Markets
2. To Make India an Attractive Investment Destination for everyone

RBI's Steps:

1. RBI will work with the Stock Market Regulator (SEBI) to slowly and steadily liberalize the Markets. Restrictions on investments and position taking will be amended to ease the process.

2. Exporters are permitted to re-book cancelled forward exchange contracts to the extent of 25% of the value of cancelled contracts. This facility is not available for importers. To enable exporters/importers greater flexibility in their risk management, RBI will Enhance the limit available to exporters to 50% and Allow a similar facility to importers to the extent of 25%.

3. Cash settled 10 year interest rate future contracts will be introduced to develop the Money Market and the G-Sec Market

Highlights from Raghuram's Speech - About Increasing Capital Inflows

RBI's Goals:

1. To help our banks bring in capital to fund our Current Account Deficit

RBI's Steps:

1. RBI will be opening a special concessional window for swapping FCNR deposits. During this window, banks can swap the fresh FCNR (B) dollar funds, mobilized for a min of 3 year or more Tenors at a fixed rate of 3.5% per annum

2. Current overseas borrowing limit of 50% of the unimpaired Tier 1 capital will be raised to 100%. The borrowings mobilized under this provision can be swapped with the RBI at the discretion of the bank at a concessional rate of 100 basis points below the ongoing swap rate prevailing in the market

The above schemes will be open up to November 30, 2013 and RBI reserves the right to close the scheme earlier with due notice.

The RBI's swap window to banks for new foreign currency nonresident (B) dollar funds is expected to lead to an estimated $10 billion of inflows. This is relatively substantial and could help to fund the current account deficit.

Highlights from Raghuram's Speech - About Strengthening the Financial Infrastructure in the Country

RBI's Goals:

1. To improve the efficiency of the Debt Recovery System
2. To improve the payments and Settlements network in the Country
3. To promote information sharing between financial institutions, banks and credit agencies

RBI's Steps:

1. Unique ID's (Aadhar Cards) will be used to uniquely tag individual’s credit histories so that financial institutions can take properly informed decisions
2. Promoters can no longer stay in charge regardless of how badly they mismanage an enterprise. Nor can they use our banking system to recapitalize their failed ventures.
3. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures

Highlights from Raghuram's Speech - About Individual Investors/Households

RBI's Goals:

1. To help individuals save money at a rate that beats inflation
2. To make Bill payments easier for individuals and to make anytime, anywhere bill payments a reality

RBI's Steps:

1. As a joint effort with the Government, RBI will be issuing Inflation Indexed Savings Certificates that will be linked to the CPI New Index which will be made available by end of Nov-2013

2. A GIRO Based National level Bill Payment system will be introduced which individuals can use to link up with their bank accounts and make payments like school fees, medical bills etc.

3. Electronic Funds transfer systems like NEFT and RTGS will be optimized to make person to person funds transfer quicker and more efficient

4. Non-Banking Institutions will be allowed to set up ATM's and Point-Of-Sale Terminals across the country to improve access to financial services in rural and remote areas

My Opinion On These Proposed Changes:

Personally, I am really glad that a person of Mr. Raghuram's knowledge and capabilities is being given control of the RBI. If there is anyone who can bring back investor confidence in our markets, save the rupee and resurrect our economy, it is him.

Let us just hope that our political infrastructure does not interfere with his operations and lets RBI truly be the autonomous body that it is supposed to be. This will greatly help the country, its economy and at the end of the day, the common man.

Let’s hope for the best!!!

Tuesday, September 3, 2013

Why is the Indian Rupee Recovering?

After two weeks of intense pressure and uncontrolled downward movement, I am happy to share with you that the Indian Rupee is indeed recovering. Over the past 72 hours the fall has been arrested and in fact the rupee has posted handsome gains. So, what was it that happened 3 days ago that has stopped this devaluation of the Rupee?

The idea behind this article is to go over the many policy changes that were done by the RBI and our Finance Ministry over the past few days that has played a positive role in this rupee recovery. To top it all off, the new Government of the RBI is taking over as of today and the market sentiment is positive given his impressive resume...

The following are the 10 important measures announced by the Authorities over the past few days that have caused this positive movement for the Rupee:

No. 1: Availability of Dollars for State Owned/Run Oil Refineries

The RBI announced late on Wednesday last week that, a special window to sell dollars through a designated bank to Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp

Why: Oil is India's largest import item and state refiners are the biggest buyers of dollars in the foreign exchange market. As you may know, our oil refineries Indian Oil Corp Ltd , Hindustan Petroleum Corp and Bharat Petroleum Corp import oil from foreign countries and pay for it in US$. To make this payment these oil co.’s purchase USD from the open market which affects the rupee and its value negatively. The move will remove USD 400 million to 500 million of daily demand from the spot market.

No. 2: Restricting the Import/Purchase of Gold

The government has come up with the following restrictions:

* Import duty on gold has been raised for the third time in eight months to 10% from 8%
* Factory Gate Duty on Gold Bars is hiked to 9% from 7%
* Import of Gold Coins and Medallions is banned
* All imports of gold now need a license from the foreign trade office and would have to be brought into a customs-bonded warehouse.
* Unrefined gold will now be included under an existing rule stipulating that 20 percent of all imports must be used for exports, which is usually in the form of jewelry.

Why: Just like oil, Gold too is one of the biggest contributors for the Governments current account deficit as well as the pressure on the Rupee. The government is looking to contain gold imports at 850 tonnes this fiscal year, compared with 950 tonnes last year. Finance Minister P. Chidambaram said this would lower the import bill by USD 4 billion and help reduce our Current Account Deficit as well as reduce the pressure on the Rupee.

The Government has hiked the Import Tax on Silver too from 6% to 10%. Though this will not has as big an impact on either the Current Account Deficit or the Rupee, it will have a slightly marginal impact on the same lines as what Gold does.

No. 3: Importing Oil from Iran

The Government of India is looking for ways to boost its oil imports from Iran instead of the traditional oil sources in the Gulf.

Why: The price of oil sold by Iran is slightly lower when compared to other gulf countries and by doing so, it may bring down our oil import bill by around 1-1.5 billion USD which will help reduce our current account deficit as well as strengthen the Rupee.

No. 4: Restrictions on Import of Non-Essential Items

Though there have been no official rulings or communication from the Finance Ministry, there are plans to restrict/reduce the import of non-essential commodities like Fridges, TV's etc. The amount of restriction would vary depending on our Trade Agreements with foreign nations.

Why: Any Import into the country has a negative impact on the Rupee as well as on the Current Account Deficit. Restricting Imports will bring marginal savings to both the Rupee and the Current Account Deficit.

No.5: Quasi-Sovereign Bond Issues By State Owned Finance Corporations

The Government has given permission to State Owned Finance Corporations like Indian Railway Finance Corp Ltd (IRFC), Power Finance Corp (PFC) and India Infrastructure Finance Co Ltd (IIFCL) to raise funds from Overseas investors through Quasi-Sovereign Bond Issues. Around 4 billion USD is expected to be raised through this process. RFC will raise USD 1 billion. PFC and IIFCL will raise USD 1.5 billion each.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

No. 6: Allowing Sovereign Wealth Funds from Abroad to Invest in Tax Free Bonds

The government will allow Sovereign Wealth Funds (from abroad) to invest in Tax Free Bonds floated by State Run Infrastructure Companies. This will be in-synergy with the item no. 5 above and help raise the kind of funds that the government is planning to do so through IRFC, PFC and IIFCL Bond Issues.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

Sovereign Wealth Funds are funds that are owned by the Governments of various countries that invest in financial assets in foreign countries.

No. 7: Relaxing the Overseas Corporate Borrowing Rules

The Finance Ministry has relaxed the guidelines for overseas borrowing by Corporate Co.’s which will help them raise funds from overseas money markets. This is also called "External Commercial Borrowing". Under the new guidelines subsidiaries of MNC's that are operating in India will be allowed to raise money from their parent companies. Even Private co.’s incorporate in India, that are interested in raising money from overseas borrowers are being encouraged to do so. Even the State Run Oil Co.’s will be raising additional funds from offshore money markets and trade financing options.

Without considering Oil Co.’s, this relaxed guideline is expected to bring in around 2 billion US$ funds into our economy. Oil Co.’s for their part will bring in the following funds: Indian Oil - USD 1.7 billion, Bharat Petroleum - USD 1 billion and Hindustan Petroleum - USD 1 billion.

Why: Influx of US$ funds from foreign investors will boost the supply of US$ and reduce pressure on the Rupee.

No. 8: NRI Deposits

With the falling rupee, the amount of money remitted into the country by NRI's has seen a huge spurt in volumes. To tap on this opportunity the Finance Ministry has liberalized the NRI FD schemes which will likely bring in at least USD 1 billion.

The new guidelines are:

1. Incremental flows of deposits into Non-Resident Rupee Account Scheme (NRE)/Foreign Currency Account Scheme (FCNR) will be exempt from cash reserve ratio and statutory liquidity ratio requirements for Banks.
2. For NRE Deposits, the Interest rate will be deregulated for maturity periods of 3 years or more.
3. For FCNR (B) deposits of 3-5 year tenures, the ceiling on interest rates has been related to LIBOR plus 400 bps (From 300 bps)

Why: Influx of funds from NRIs will boost the supply of US$ and reduce pressure on the Rupee.

No. 9: Higher FDI limits

The Cap on Foreign Direct Investment in asset reconstruction companies has been hiked from the current 49% to 74%. This is subject to the condition that no sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. The prohibition on investment by FII in ARCs will be removed through this ruling as well.

Why: Higher capital inflows from Foreign Investors will help support the Rupee

No. 10: Measures to Reduce Forex Outflows

The RBI has announced a few measures to reduce the foreign exchange outflows by resident Indians. They are:

* The RBI has also reduced the limit for remittances made by resident individuals under the liberalized remittance scheme to USD 75,000 from USD 200,000 per financial year
* Remittances cannot be used for purchase of property outside India
* For Companies, the limit for overseas direct investments (ODI) under the automatic route for all new transactions is being reduced to 100% of net worth from 400%
* The reduced limit would also apply to remittances made by Indian companies setting up unincorporated entities outside of the country in the energy and natural resources sectors, but would not apply to ONGC Videsh Ltd, the foreign unit of Oil and Natural Gas Corp or Oil India Ltd .

Why:Lower Forex Outflows means, lower demand for the US$ in the open market and hence reduced pressure on the Rupee

Some final words:

These 10 action items by the Government and RBI seem to have a positive effect on the Rupee and the momentum is expected to be sustained over the next few weeks and bring the Rupee to its intrinsic value against the US$ as well as other foreign countries. It will also make India a favorable investment destination and help boost the Economy. As you can see, the stock market has responded positively over the past 3 days where the market has ended in Green to help Investors recover their losses...

Let us hope for the best!!!

Friday, August 30, 2013

Is the Indian Stock Market Really Recovering?

Yesterday was a crazy day for the Rupee and the Indian Stock Market. The Rupee halted its downward spiral and stabilized. After days of southward movement the market stabilized and went north. The BSE went up by 404 points and the NSE for its part went up by 124 points. Logically speaking, a market goes up when people start buying stocks and the no. of buyers outnumber the no. of sellers. Simple - Demand and Supply logic. But, with the economic growth sluggish in our country, the rupee being as beaten up as it is and with no visibility on recovery measures from our government and policy makers, do you really think that people have already regained confidence in our markets?

To top it all off, FIIs are still selling and liquidating their positions as explained in my previous article titled - The Falling Rupee and Falling Stock Market - Connection Explained!!!

So, given all this information, what do you think made the stock market recover? Care to venture a guess???

LIC Has Started Buying Shares

Did you expect this to be the reason for the upward momentum? I am sure you did not...

Though there is no official or confirmed notification from either market regulators or from LIC, we cannot be 100% sure that they are indeed the reason for this upward momentum but I guess they are at least partially responsible for this upward movement.

Is this the first time LIC is rescuing our markets?

Absolutely Not. LIC has been coming to the rescue of our stock markets every time there is some kind of crisis like what we are facing right now. The finance ministry requests LIC to pitch in and pump in some cash into the markets to boost volumes and to stop the free-fall and almost always LIC obliges.

In 2010-11, the government raised Rs 22,763 crore by divesting stake in six companies - SJVN, Engineers India, Coal India, Power Grid, MOIL and Shipping Corporation of India. LIC had invested close to Rs 8,000 crore for buying shares in these companies.

Last year we had a divestment by ONGC and LIC picked up 88% of the shares divested by the Government. This year in Hindustan Copper Offer for Sale, they picked up 22.5 million shares which again was a huge chunk of the total shares divested. Experts expect this trend to continue in the future divestment programs that are coming up in government owned entities.

How Does LIC Manage to do this?

Funds have never been a problem for the government owned Insurance Co. Every year the senior management comes up with a % allocation of their funds that is to be invested in the Equity Markets and the funds work out to approximately 40,000 crores or more. This year sources claim that LIC has already set aside around 2000 crores to invest in Banks in our markets and another 10000 crores for the government divestment programs. They still have room in their equity allocation limits which is what they are using now to invest into our stocks and stabilize our market.

Quick Statistics:

1. In case of ONGC, LIC has picked up over 40 crore shares, or 93 per cent of the 42.78 crore shares sold, at a price of Rs 304.25 per share, including brokerage and STT. It shelled out Rs 12,179 crore for buying ONGC shares.

2. In case of the NTPC OFS in February 2013, LIC picked up 12 crore shares worth Rs 1,765 crore, of the 78.33 crore shares on that were available for sale.

3. In NMDC disinvestment in December 2012, LIC bought 1.86 crore shares for Rs 278 crore, against 39.65 crore shares that were available for sale.

4. In case of SAIL, LIC purchased 12.45 crore shares, out of the 24.04 crore shares that were put up for sale. LIC's investment was Rs. 786 crores

5. In case of NALCO, LIC purchased 7.22 crore shares, out of the 15.69 crore shares that were put up. LIC's investment was valued at Rs. 289 crores

6. In case of MMTC share sale in June, LIC bought 4.81 crore shares, of the 9.33 crore shares on offer, thereby investing Rs 289 crore.

As you can see, LIC has been repeatedly investing huge sums of money in government companies on a regular basis.

Is this a Good Idea?

No, I don’t think so. When the investment experts in LIC come up with a detailed rationale on why they should invest in a stock there is merit in the decision but investment decisions triggered by the finance ministry to stabilize the market isn’t always the best idea.

From the statistics in the previous section, LIC has invested over 15,000 crores into Government run corporations. If we compare this against the current valuations, LIC is looking at, at least 20% or more losses.

Where is all this money coming from? - Money Invested by Policy Holders through their Insurance Premiums.

What Will be the Impact?

Impact No. 1: Earnings for Policy Holders will come down

LIC guarantees only around 4-6% returns on the premiums that are collected. The final bonus component that gets accrued into your policy is based on the company's overall performance and given the magnitude of losses LIC is making due to investment in Government run corporations, I highly doubt policy holders getting good bonuses.

Isn’t that bad news?

Impact No. 2: The government may have to bail-out LIC in Future

LIC has one of the lowest Solvency Margins in the Indian Insurance Industry. The solvency ratio is 1.54 for LIC and to compare HDFC Standard Life has 1.88 times while ICICI Prudential has 3.71 times

The solvency ratio is the sum of capital and market value of assets that insurers have to maintain over their insured liabilities.

So, surprisingly the private Insurance co's have a higher solvency ratio and hence are probably safer than LIC. Shocking isn’t it?

If the Solvency Margin goes below the mandated levels (1.5 times) then the government would have to come up with a fresh fund infusion - which is technically a bailout. If LIC does not have enough funds to keep up its solvency ratio, it is technically putting in danger all of the insurance policies and the maturity amounts of millions of middle class Indians.

This is probably the biggest risk. This random investment in the stock markets by LIC is putting the livelihoods of millions of Indians at risk which I feel is a really bad idea. Let us just hope that the market recovers and LIC's prospects improve and the Government does not have to bail-out LIC.

Some Last Words:

Investments in Equity Markets is always risky especially when we invest because we are asked or told to rather than by our own accord. LIC is treading on the dangerous line and is investing because it is helping the Government Raise Funds through its divestment programs. But, at the end of the day LIC is owned by the Government and so technically, it will definitely pitch in and rescue LIC in case of the unfortunate situation (Like what the US Government did a few years ago to bailout AIG). But, that will put further pressure on our Economy and Markets...

As I said before, the markets will continue to remain volatile. So, stay cautious and invest only after thorough analysis and for the long-term. For the short-term CASH IS KING.

Disclaimer: All views expressed above are the authors personal opinion and the data was gathered from the Internet. The author does not guarantee the accuracy of the claims in the article.

Thursday, August 29, 2013

The Falling Rupee and Falling Stock Market - Connection Explained!!!

The Stock Market has tumbled over the past couple of weeks and one group of people claim that the fall in the value of the rupee is one of the key culprits. Then we have another group that claims that the fall in the stock market is partially the reason for the depreciating rupee. What do you think is correct?

For a change, let me start off this article with the answer - Both group of people are right in their claims. The purpose of this article is to understand why both groups are correct!!!

FIIs & Their Role in the Indian Stock Market

FII's are an integral part of any stock market especially the ones like India which are considered extremely attractive.

Definition of an FII: Source Investopedia

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

Though the actual % of FII Investments in the stock market will keep varying on a daily basis, they account for a pretty big chunk of money that is invested in our markets. The chunk is big enough that when FIIs start selling our markets tank and tank big time. The recent stock market fall is a classic example. FII's have turned sellers and are liquidating their positions therefore the stock market is falling freely.

So, What Triggered this Panic Selling?

Let me give you a real life scenario. Let us take myself as an Example. Let us say I have bought 1000 shares of Infosys on 1st April 2013 at Rs. 2943/- per share. On that day 1 SGD was worth 43.73 Rupees.

Amount Invested in Indian Rupees: 29,43,000
Amount Invested in Singapore Dollars: 67,299

As of Today, the price of 1 share of Infosys is selling at 3108 (At the time of writing this article) which is a gain of 5.6% in 5 months which is cool. But, 1 SGD = 53 Rupees today.
Current value of Investment in Indian Rupees: 31,08,000
Current value if Investment in Singapore Dollars: 58641.5

So, technically my stock has gone up by 5.6% in Rupee terms but since the Rupee is so devalued when compared to the time I invested, I am currently sitting at a loss of over 12%

Given the current economic outlook and the fact that the rupee may fall further, do you think I would want to continue to stay Invested?

Absolutely Not

This is exactly the reason why all FII's are pulling out their investment because, they want to salvage whatever they can of their investment before it erodes further in value. This mass selling is resulting in the stock market going further and further south.

So, we have proved one groups theory - The Falling Rupee is the reason for the Stock Market Crash.

Does this Market Crash have an impact on the Rupee?

Definitely Yes. All these foreign investors who are selling their shares in the Indian market are effectively pulling out foreign currency from our Market. Overseas investors have pulled out nearly Rs 18,500 crore from the Indian capital markets in July. In their highest monthly outflow, overseas investors pulled out a record Rs 44,162 crore in the month of June. Outflows of this magnitude has put a continuous pressure on rupee not allowing it to come out of the slump. With FII's selling more and more on a daily basis to salvage their investments, the rupee is continuing to get beaten down further.

so, we have proved the other groups theory too - The Falling Market is also a reason for the Falling Rupee

What to Expect in the Near Term?

The Rupee has actually stabilized today and so has the stock market. In fact it has posted handsome gains as of this writing. However, I highly doubt if this will last in the long run. Though as an Indian I really want the Indian currency to recover and our markets to get back on the bull, the policymakers are the ones who can really have an impact. The new governor of RBI is taking charge in a few days and given his impressive resume market analysts and industry experts are expecting him to turnaround the fortunes of the Rupee and save the economy.

But, in the short-term (around 3-6 months) don’t expect the market to go up by much. It will remain volatile as it is now and will be going up and down until there is clear-cut picture of what to expect from the new RBI Governor, the elections in 2014 and the overall Indian Economic scenario.

Stay Cautious and Happy Investing!!!

Wednesday, August 28, 2013

Impact of the Food Security Bill on the Indian Economy

In the previous article we took a look at the impact the Food Security Bill will have on our budget. The amount of money we will end up spending, where we will get the money and so on. To quickly recap, the Food Security Bill is going to offer rice, wheat and other food grains at heavily subsidized prices which will result in an expenditure of around 1.2 to 2.4 lakh crores. So, now we know that our government is keen on pushing for this scheme and in the next few months it will eventually be put in practice. We will start incurring this huge expenditure which invariably will have a significant impact on our Economy.

The idea behind this article is to analyze the impact this will have on the various aspects of our Nation’s Economy...

Impact on Economic Growth:

Remember the last section from our previous article on how the government will fund this huge expenditure? The government would resort to borrowing to fund it. When the government enters the borrowing market, in order to entice investors, it would have to offer good interest rates. The private sector too would have to hike their interest rates in order to stay competitive. This means, the Interest Rates will continue to remain high. High Interest rates is never good for economic growth.


Impact on Food Inflation

Have you heard of the term - "Minimum Support Price or MSP"?

This is something the government sets/declares every year as the price at which it buys grains from farmers. This grain is then used by the government for all its various schemes. The grains to be distributed under this Food Security Program too will be procured like this.

Minimum Guaranteed prices means, farmers will have more incentive to grow rice/wheat and other grains covered under this scheme. This might result in Vegetable production getting affected which will further affect the nation’s Food Inflation.

In the last 5 years, food inflation contributes to over 41% of our overall Inflation. So, by subsidizing the price of rice, wheat and a few cereals, it might result in an unintended consequence of other items becoming costlier which will result in overall higher food inflation.


Impact on Overall Inflation:

An alternate to funding this scheme is for the government is to "Print Money". World History is full of classic examples where governments resorted to printing more currency to fund its cash requirements. This is never a good idea and will result in the country's overall Inflation going higher.

Let us just hope that the finance ministry does not resort to this technique otherwise our economy would be doomed for a very long time


Impact on Savings

Higher food prices mean higher inflation. Higher inflation means people will end up spending a higher % of their income to meet their day to day needs. This will result in much lower savings.


Impact on Economic Growth

Lower Savings and lower surplus income means - people will spend a lower amount of money on consuming good and services and therefore the economic growth will slow down further.


Impact on the Current Account Deficit:

We all know that Importing of Gold and Petroleum products is the biggest contributing factor to our nation’s Current Account Deficit. Right?

The Food Security Bill guarantees food for the people covered under the scheme. So, if in a particular year, the in-country production of either rice or wheat is not sufficient we would be forced to import it. So, if we start importing rice, wheat or any other food grains, it will further widen the Current Account Deficit.


Impact on the Rupee

The Rupee is bleeding left, right and center. It is falling freely and god knows when it will stop. Anyways, lower savings and wider current account deficit will impact the rupee.

If India does not save enough money, it means that, we will have to borrow capital from foreign countries/investors. When these foreign borrowings need to be repaid, it will almost always be using dollars. This will put pressure on the rupee and lead to further depreciation against the dollar.

On top of this, buying rice or wheat from the international market means, we will be paying in dollars. This will lead to increased demand for the dollar and result in further depreciation of the rupee.


Impact on Fertilizer and Power Subsidy:

In order to grow food grains, farmers use fertilizers and electricity. Both of these items are already heavily subsidized for farmers. The procurement needs of the Food Security Bill will result in intensive cultivation using more fertilizer and power, which will push up central subsidies on fertilizer and state subsidies on power.

So, in order to procure enough food grains, the government will be forced to shell out more subsidies for both fertilizers and power which again will leave a big dent in the nation’s budget


Some Final Words:

As you can see, the Food Security Bill will have a significant negative impact on almost every aspect of our economy. The impact is huge and with high inflation, slow economic growth and depreciating rupee, the chances of the stock markets regaining its upward momentum are very slim as of now.

With the market going down by more than 2000 points in the past couple of weeks, some amazing investment opportunities have turned up. However, the market is not for the faint of heart right now. As of now, things don’t look very bright and hence further downside is a very real possibility. So, if you are looking at investing in the stock markets, be cautious and split up your investments across a wide time period to average out your cost. Do not invest money that is earmarked for emergencies into the market in the current volatile scenario. Keep it as cash in your bank account or park it in a bank FD.

Invest only in blue-chips or large organizations whose stock prices are much more stable than mid or small cap companies. Stay cautious.

Happy Investing!!!

Disclaimer: The idea behind this article is not to cover the political motives of either the ruling party or the opposition. This article is my personal opinion about this Food Security Bill purely from an investment and economic stand point. The author does not guarantee the accuracy of any of the claims in the article.

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