Friday, June 28, 2013

What is Basic Services Demat Account (BSDA)?

Today early morning I received an email from my DEMAT Provider with a notification asking me if I would like to enroll for the Basic Services DEMAT Account (BSDA) facility. It was news to me and surprisingly this wasn’t a new development. So, I did some research and found out what exactly this Basic Services DEMAT Account was. If you have a DEMAT account, then, in all probabilities you would've already received this email or will be receiving it shortly.

The idea behind this article is to understand what this Basic Services DEMAT Account is and whether it is a useful idea for the common investor...

So, What is this Basic Services DEMAT Account?

As per SEBI guidelines under CIR/MRD/DP/22/2012 dated August 27, 2012, all DEMAT Providers are expected to offer this Basic Services DEMAT Account to their customers. The Basic Services DEMAT Account or BSDA is just a category of DEMAT Account that a customer can open if he/she meets certain criteria.

Why did SEBI Come up with this circular?

Most people who actually have a DEMAT Account don’t invest regularly in stocks, mutual funds or other Market Instruments. Unfortunately, your Annual Maintenance Charges will still be debited/deducted from your bank account irrespective of whether you use your account or not. The Market Regulator SEBI Felt that majority of DEMAT Account holders don’t really use their accounts as much as they should and still end up paying high fees. So, to help out such investors they came up with this circular which directs DEMAT providers to charge considerably lower fee for customers who aren’t active users of their accounts.

So, Who can open a basic service Demat account?

Any Individual who currently has a Demat account or plans to open a fresh Demat account can use this facility. If the value of securities (All stocks, mutual funds, bonds etc.) held in your account is less than Rs. 2 lakh then you are eligible to either convert your existing account or select this as your choice while opening your new account.

What is the Fee Structure?

1. Customers having Demat holding from Rs. 0 to Rs. 50,000 will not be charged any Fee
2. Customers having Demat holding value of Rs, 50,001 to Rs. 2 lakh will be charged Rs. 100 as Annual Fee

What Happens if the value of my DEMAT Holding crosses these limits?

In case you open a Basic Services Demat Account and start transacting, until you reach the 50,000 rupees mark your Demat Provider (will refer as DP going forward) will not charge you any fee. However, once it crosses the Rs. 50,000/- limit the DP will charge you an annual fee of Rs. 100/- and once your balance crosses the 2 Lakh limit he will start charging you the standard rate that the DP charges other customers.

For ex: The Average Charge that ICICI Charges its customer starts at around Rs. 500/- and goes upwards depending on the services you opt for. Until my account holding crosses the 2 lakh limit my annual fee will be Rs. 100/- and the moment it crosses this limit, my DP will start charging me the full-fee on a pro-rata basis.

What Benefit Do I Get out of this?

The fee is only a few hundred rupees every year, so you may feel that it is insignificant. But, if you take my case as an example - During the first 2-3 years of my investing career my portfolio in my DEMAT Account never cross Rs. 50,000/- but still I was paying the annual fee. I was a cautious retail investor who never invested more than a few thousand rupees here & there in the stock market. As years went by and my confidence grew my portfolio value went up and crossed the Rs. 50,000/- mark only by the 4th or even the 5th year. So, during all these years the fee of around 500-600 that I paid every year was too much, wasn’t it?

This is exactly what SEBI wants to address - For a small retail investor this much fee doesn’t make sense because they are not really using all the services offered by the DP. So, what better way than to reduce fees and charges for the investor?

Lastly - Who decides this holding value against the limits?

The DP is at his discretion to calculate your portfolio holdings net-value after every trading day and then compare against the limits. The moment your portfolio value crosses the limits they can charge you the fees based on the slab you fall into, on a pro-rata basis.

Some Last Words:

Remember that - An individual shall have only one BSDA in his/her name across all DP's. You cannot have one BSDA with ICICI with holdings less than 2 lakhs and one more with HDFC for the same 2 lakh limit for the Rs. 100/- fee. If found, both DP's will charge you the full fee. Why pay double fee when you can do it with just one DP.

If you are thinking who will notice if you have two BSDA Accounts, think of this: The DP Gets extra fee from you if they find that you have more than one BSDA. They also ask for your PAN details when the account is opened. So, do you think the DP will be so careless and let you get away with such actions??

Hope you found this article useful...

Happy Investing!!!

Monday, June 24, 2013

Top 50 Dividend Paying Stocks in India

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often neglected aspects of stock market investing is the “Dividend Income”. Dividend Income is one of the key constraints I look at when I want to choose a stock to invest. The idea behind this article is to list down the top 50 companies in India based on the dividend they declare on a yearly basis.

Before we begin: The list is correct as of the date this article was compiled. This list may keep changing on a regular basis based on which company declares more dividends.

What is a Dividend?

A dividend paid out by a stock is nothing but a share in the profits that the company has made over the past half year or one year which they want to share with their shareholders. It is usually declared as a % of the face value of a share. For ex: If Company X declares a 25% dividend on a share of face value Rs. 10/- it means that they will pay Rs. 2.50/- for every share that is held by you. So, if you hold 1000 shares of company X, you will get Rs. 2,500/-

The Dividend is declared only on face value and not market value. A share could have a face value of Rs. 10/- and be trading at Rs. 1000/- in the market. But still, their dividend % will be at the face value of Rs. 10/- and not Rs. 1000/-.

What does a healthy dividend payout signify?

A good company that is making good profits will always and I mean always share a % of their profits through Dividends to their investors. So, one of the measures of finding out how well a company is doing is through how much dividend they are paying. IT Majors like TCS and Infosys are preferred by Investors not only for the capital appreciation aspect of investment but also on the dividend payout part. These 2 companies have been paying out healthy dividends year after year for the past 5-10 years making them a preferred stock among Investors. Only a company that is making good profits can afford to pay out dividends. So, a good dividend payout is a sign of an healthy management and successful business.

The Top 50 Dividend Paying Companies in India:
1. ACC Limited
2. Alstom India Ltd
3. Allahabad Bank
4. Andhra Bank
5. Ashok Leyland
6. Bajaj Auto
7. Bajaj Holdings & Investments Ltd
8. Bank of Baroda
9. Canara Bank
10. Castrol India
11. Chambal Fertilizers
12. Colgate Palmolive
13. Corporation Bank
14. Cummins India
15. Dena Bank
16. DHFL (Dewan Housing Finance Ltd)
17. Engineers India Ltd
18. Glaxo Smithkline Pharmaceuticals
19. Glaxo Smithkline Consumer Healthcare Ltd
20. Gujarat Gas Company
21. Hero Motor Corp
22. Hexaware Corp
23. Hindustan Petroleum
24. Hindustan Unilever
25. IDBI
26. Indian Bank
27. Indian Overseas Bank
28. ITC
29. Jammu & Kashmir Bank
30. Karur Vysya Bank
31. Karnataka Bank
32. LIC Housing Finance Ltd
33. Mahindra & Mahindra Financial Services
34. McLeod Russel India Ltd
35. Mphasis Technologies
36. NIIT Technologies
37. National Thermal Power Corpn (NTPC)
38. Oil India Ltd
39. ONGC (Oil and Natural Gas Corpn of India)
40. Oriental Bank of Commerce
41. Piramal Enterprises
42. Power Finance Corp
43. Punjab National Bank
44. Rallis India
45. Rural Electrification Corporation
46. South Indian Bank
47. Syndicate Bank
48. UCO Bank
49. Union Bank of India
50. Vijaya Bank

Disclaimer: This is not investment recommendation or advice. Readers are requested to do their own research before investing in any of the stocks mentioned above.

Thursday, June 20, 2013

Employee Unique Identification Number (EUIN) De-Mystified!!!

Almost all of us are salaried employees of some organization or the other and so we know what an Employee number is. We also know that it is a unique ID using which an organization can identify its employees. But, what is this Employee Unique Identification Number (EUIN)?

The Securities & Exchanges Board of India (SEBI) has come up with a recent ruling that is aimed at controlling mis-selling of Investment products esp. Mutual Funds. This whole Employee Unique Identification Number (EUIN) concept is a great step towards protecting the investor interest. The idea behind this article is to learn what this is and how it will be useful to the common investor.

So, What is this Employee Unique Identification Number?

The Employee Unique Identification Number or EUIN is a unique alpha numeric value that can be used to identify the employee or relationship manager or sales person of all the distributors in the country who sell Mutual Funds to Investors. It will start with an "E" and will have 6 digits in it. For ex: E123456 or E987654

A Little Bit of Background on why this Employee Unique Identification Number concept came up:

As you might be aware, a majority of the investor population in this country depend on the investment advice by the agents and sales persons who actually sell some sort of investment product. In order to sell their products, they go to great lengths to explain how good their product is, even though there may be better products that are available in the market and suit the needs of the investor better. This is called Mis-Selling. This is rampant all over the country and every day hundreds of innocent investors fall into this blatant misselling of investment products.

With numerous complaints lodged by investors with grievances to SEBI, there was absolutely no way that the governing body could locate who was the sales agent who mis-sold the product to the investor. I may have wanted to invest in a fund where safety of capital is my utmost priority. If I do not know much about mutual funds, the sales person could tell me that one of the most aggressive equity mutual funds is a conservative fund where capital preservation is top priority and I could believe them. What if the market tanks after 6 months and my investment is worth only 50% of what I put in 6 months ago? I can complain to SEBI that this XYZ person sold me this Mutual Fund wrongly but they cannot help much because there is no proof that this XYZ person only sold it to me.

So, on September 13th 2012, SEBI issued a circular to the Association of Mutual Funds in India (AMFI) to create an unique identification number (EUIN) of the employee/relationship manager/sales person of the distributor interacting with the investor for the sale of mutual fund products.

The following are some questions you may have about this new Employee Unique Identification Number scheme. I have tried to answer them as best as I could. If you have any further questions, feel free to leave a comment and I will try to answer them!!!

1. What are the Benefits of this Employee Unique Identification Number?

EUIN will assist in addressing the problem of mis-selling even if the employee/relationship manager/sales person leaves the employment of the ARN holder/Sub broker. Once the EUIN of the person who sold the investment product gets registered in the investor's application form, this will be stored forever and in future in case of any complaints both SEBI and AMFI can go back and find out who was the agent who sold this product.

Think of it this way, if I knew that in future if the product I recommend to you does not do well and you file a complaint with SEBI and SEBI can easily find out that I was the guy who gave you the wrong advise, do you think I will play-around and give you random ideas? I won’t. I will make sure I do my homework and give you only good advice. This is amazing news as an investor, isn’t it?

2. Is Employee Unique Identification Number Applicable for all Investments?

No. It is applicable only for Mutual Fund Investments that are routed through a registered ARN Holder.

ARN stands for AMFI Registration Number. It is the unique number with which AMFI can identify the company that is selling the services. EUIN will be provided to all of the staff of this company who will do the actual selling part to investors

3. Is it Mandatory to provide this Employee Unique Identification Number for all transactions done through an ARN holder?

Again No.

This EUIN is aimed at identifying mis-selling or wrong financial advice cases. If I go to an advisor and ask him what is the best mutual fund for me for my long-term retirement goal and he suggests I invest in XYZ scheme, I need to mention the EUIN of this guy who gave me the advice.

If I have already decided that I want to invest in XYZ scheme and just go to this ARN holder and ask him to execute my transaction, the EUIN is not required because the agent hasn’t given me any advice yet.

4. So, what should I do for such Execution Only Transactions?

In case of Execution-only transactions, the following declaration available in application form should be ticked by the investor.

"I/We hereby confirm that the EUIN box has been intentionally left blank by me/us as this is an "execution-only" transaction without any interaction or advice by the employee/relationship manager/sales person of the above distributor or notwithstanding the advice of in-appropriateness, if any, provided by the employee/relationship manager/sales person of the distributor and the distributor has not charged any advisory fees on this transaction"

Once you tick this declaration it means yours was an execution only transaction and that the EUIN did not give you any advice. In such cases, in future if your investment backfires, you cannot claim any liability or responsibility from the EUIN because all he did was do what you told him to do...

5. Do I need EUIN for all Mutual Fund Transactions?

No. You need it for fresh purchases, Switch between schemes and registration of a new Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP). Other transactions like Redemption, Dividend Reinvestment etc. do not require EUIN.

6. In case the sales person gives me an invalid EUIN, will my transaction fail?

No. Your purchase or subscription request will still go through, even if the agent gave you an invalid EUIN. However, the ARN under whose employment this agent got his EUIN will be intimated of this failure.

7. What is an Invalid EUIN?

The Employee Unique Identification Number (EUIN) mentioned in the application form is considered invalid if:

1. It is not available in the EUIN Master list
2. The validity period of the EUIN has expired or
3. EUIN and ARN details mentioned in the Application form do not match. For ex: EUIN was got for Mr. X for Org. ABC but is currently working for Org. XYZ and still using his old EUIN. The ARN used will be that of XYZ but Mr. X's EUIN is still tagged to ABC in the system.

8. Would the ARN Holder company care if it receives an Invalid EUIN message?

Of course it would care. The company and its agent are selling you Mutual Fund products so that they can earn an income out of it. If a transaction ends up in the Invalid EUIN category, the brokerage fee that the company is eligible for, is "Held" and will not be paid out until the company clears out the situation. The company has 90 days to clear out the situation failing which the brokerage fee will be permanently forfeited.

Things TO-DO as an Investor:

If you are an investor who is availing advisory services from any individual/company, you need to ensure the following:

1. Ask for the new application forms/transaction forms which have spaces for ARN code, Sub Broker ARN code, EUIN, Sub broker code (as allotted by ARN holder).
2. Make sure to ensure that the Agent does not "Tick or Check" the declaration explained in Question No. 4 if you have availed advisory services from him. They may try to trick you into putting a tick mark on the declaration to relieve themselves of all responsibility even though, they recommended that product to you. Be cautious and put a tick mark in the section only if you decided to buy that fund all by yourself.

Some Final Words:

Personally, I am really glad that both SEBI and AMFI are coming up with steps to protect Investor interest and curb mis-selling. Though this scheme isn’t fool-proof (Agents could still not mention their details and put a tick mark on the declaration as if the investor took the decision himself), it is a step in the right direction. I am sure that in the forthcoming years, this scheme will be fortified and made better to protect the common man from the rogue agents...

Happy Investing Folks!!!

Wednesday, June 19, 2013

Is Your Portfolio Over Diversified?

"Don't Put All Your Eggs in the Same Basket" is an age old saying that holds good for our investments too. That is why we have Portfolio Diversification. Investors are encouraged to select multiple asset classes and spread out their investments between them so that, in case one asset class fails (like what happened to gold prices in the past few months) the other asset classes can help prevent extensive damage to your portfolio. Sounds good doesn’t it?

Unfortunately, the average Indian Investor fails to understand this concept and ends up over-diversifying his/her portfolio which can have counterproductive effects. The idea behind this article is to try to understand what Over-Diversification is and how to curb our impulse to over-diversify our portfolio...

Before We Begin: If you are someone who hasn’t accumulated an investment portfolio yet, I would strongly urge you to read the articles under the Investment Portfolio page and understand how to create a portfolio for yourself.

So, what is Over Diversification?

Over Diversification is a term that is used to signify a portfolio that has too many instruments.

Go back to the first line of this article - "Don't Put All Your Eggs in the Same Basket". Let us say I am carrying 100 eggs from my house to my friends place. So, to avoid the risk of breaking the eggs, what do you think is a reasonable number of baskets?

4 baskets with 25 eggs each?

5 baskets with 20 eggs each?

10 baskets with 10 eggs each?

50 baskets with 2 eggs each?

100 baskets with 1 egg each?

The first or second option of carrying my eggs in 4 or 5 baskets is an example of diversifying my portfolio thereby reducing my risk. The last two options of 50 or 100 baskets is what is meant by over diversification.

Even though your chances of taking all of the eggs safely to your friends place are going higher as you increase the number of baskets, you need to draw the line at the point where the number of baskets actually becomes an overhead and ends up hurting your process.

Are you still not clear? Let us do some numbers to understand...

Let us say each basket can carry up to 50 eggs but there is a chance that 4 to 5 eggs can get damaged if you load the basket beyond 20 eggs.

Let us say each basket costs you Rs. 5/- and each egg costs you Rs. 3/-

Technically speaking, if you buy 5 baskets and put 20 eggs each, you will end up spending Rs. 25/- more but your chances of all 100 eggs reaching safely are considerably higher. But, to carry eggs worth Rs. 300, do you think it is a good idea to buy baskets worth Rs. 250 or Rs. 500?

If you buy 5 baskets and spread out your risk that is DIVERSIFICATION.

If you buy 100 baskets and spread out your risk too much that is OVER DIVERSIFICATION.

Get the picture?

A Real-Life Over Diversified Portfolio:

I can hear you mumbling, enough of this story on eggs, let’s talk money sense and find out what a real-life over diversified portfolio would look like.

Let us say Mr. X has a portfolio worth Rs. 50 lakhs which he is accumulating for his retirement. He has invested across the following asset classes:

1. Equities
2. Mutual Funds
3. Gold
4. Real-Estate
5. Bonds
6. Bank FD's and
7. ULIPs

Can you sense the over diversification already?

His Equity Portfolio consists of around 50 stocks across the large, mid and small cap space. He has invested in 23 MF schemes (More the merrier, isn’t it?) and has invested in 12 corporate Bond Issues. He also holds FD's in 6 different banks and has 4 ULIP Plans.

What are the Drawbacks of an Over Diversified Portfolio?

The biggest drawback is the difficulty in tracking your portfolio performance.

Any good investor would periodically (at least once a quarter and preferably at least once a month) revisit all his investments and check if they are performing as expected. This would give him/her an opportunity to eliminate any bad performing stock or fund and replace it with something that will perform better.

Imagine the difficulty if you had to review 50 stocks, 23 mutual funds, 12 bonds every month and find out what is performing well and what isn’t?

Because of the sheer volume, you will end up overlooking key facts and details that may hurt your investment in the long run.

For ex: Let us say MF Scheme A is a part of Mr. X's portfolio for 5 years now. It was the top performing fund in 2008 when he bought Rs. 50,000/- worth units. It was an aggressive diversified equity scheme and currently his investment is worth Rs. 60,000/- which works out to a meagre 4% returns on an average over the past 5 years. Do you think Mr. X should remain invested in this scheme when the category average for equity mutual funds is much higher and even a bank FD would've earned him 8% per year?

If Mr. X had say 6 or 8 schemes in his portfolio, he could've easily located such bad performers during his quarterly review and weeded them out. But, since he has so many schemes, he just overlooked it and has ended up making real poor returns.

Easily 50% or more of the MF schemes that are launched end up as mediocre or worse end up causing people to lose money. All Equity investments come with a risk and if you invest in a scheme that either takes too many or too little risks, you will end up losing money instead of making profits. Only a few MF schemes have been able to consistently outperform their peers for a period of over 5 years. You should concentrate on such funds and invest in them. Fund houses usually focus on their new fund and make it generate extraordinary returns for 2 or 3 years and then lose track of it. Eventually such funds end up in the mediocre or bad performing list. A smart investor always identifies such funds by comparing the funds returns with the category average every quarter to ensure that his/her fund is performing well.

So, What is a Good or Well Diversified Portfolio?

A Well Diversified Portfolio will have exposure to at least 3 or 4 asset classes. Remember, you need not have exposure to all asset classes to form a diversified portfolio. A healthy combination of Equities, Mutual Funds and Bank FD's are more than enough to form a good portfolio. Add in a little bit exposure to Gold and your portfolio goes from Good to Very Good.

An Ideal number of entities in each of the categories would be:

1. Equities - 10 to 12 stocks with at least 50% exposure to Large Caps. 30% to Mid-caps and 20% to Small-Caps. No single stock should be worth more than 10% of your Net Equity Portfolio worth
2. Mutual Funds - 6 to 8 Schemes with at least 1 each in the following categories: Equity Diversified, Large Cap, Mid & Small Cap, Balanced and Long Term Debt. Based on your risk appetite you can add one more good scheme in each of these categories but I would personally put the cap on 10 schemes - This is the absolute Max.
3. Bonds - 4 to 6 good Bond Offers
4. Bank FD's - Choose 2 banks - One Private and one Government and split your FD's across these 2 banks. If you are tempted by awesome interest rates offered by any other bank, go ahead but keep 3 banks as the absolute Max.

A Tip About Fd's:
Don’t have only one or two FD's. Split up your surplus and invest it across multiple FD's. If I had Rs. 1 lakh as surplus today, I would probably split it up as 2 or 3 FD's and deposit it. This is because, in future if I need Rs. 30,000/ urgently all I need to do is, break just one of those FD's and the others remain untouched. Practically speaking, do you think that if you break the 1 lakh FD, you can be sure you won’t spend the remaining 70,000 too? We always end up doing that. So, better to split up FD's into multiple chunks so that it is easier to withdraw in case of any emergency.

5. ULIPs - I have always been sceptical about ULIPs due to the high cost that we end up paying to the agent and the insurance co. These days ULIPs have realized that and are coming up with good schemes with competitive fees & charges. If you want to have exposure to ULIPs, I would suggest you limit yourself to 2 or at most 3 ULIP Schemes.

Aren’t we forgetting something?

Pause for a moment and ask yourself. Aren’t we forgetting something?

Insurance Policies

Even though Insurance Policies can’t be considered an investment, in India a majority of the population considers Insurance Policies as Investments. You find out a random stranger in his 40's and ask him what are his investments, there is a 50 to 70% chance that he will say "I have "N" Insurance policies worth Rs. X lakhs". No matter how much we try to explain to people that Insurance and Investment must not be confused, people will still continue to purchase Insurance Policies for Investment Purposes. So, if you look at a person's portfolio you will end up finding multiple Insurance Policies.

Now that we have actually started talking about Insurance Policies, what do you think is a reasonable number of policies for a person?

Whatever I explained above about Equities and Mutual Funds holds good for Insurance Policies too. Too many policies is not good for you. (It is very good for your Insurance Agent though, but that is not part of this article. We are only talking about what is good for you the INVESTOR). Try to limit the number of Insurance policies to 4 or 5. Your Insurance agent is going to try to convince you to buy a new policy every year during the tax planning season. On top of that, these Insurance companies come up with newer schemes every 2 to 3 years. So, every time this happens you can expect a visit from your Insurance Agent. Don't just buy insurance policies out of impulse. Think first and keep the number to around 5.

The general rule of the thumb is, you must be insured to at least 6 to 10 times your annual salary. So, if you are earning Rs. 5 lakhs ever year, you must have insurance worth at least 30 lakhs to 50 lakhs. If you already have 50 lakhs worth insurance and switch to a job where your salary is 8 lakhs, you will have to take a new policy to cover the additional income. In such a case, go for the higher limit - 10 times and wait for your salary-insurance ratio to come down to the 6 times number before you buy an additional policy.

Some last words:

The main reason behind maintaining a portfolio is to save up for our retirement and to make an additional income source. Over-Diversification can kill returns and make portfolios unmanageable. So, be a smart investor and prune your portfolio for unwanted instruments and keep your portfolio in peak shape.

Happy Portfolio Diversification Folks!!!

Monday, June 17, 2013

Property & Wealth Inheritance Laws in India - For Women

India as a country is known for its family ties and relationships worldwide. But, one of the things that is rampant in India but is unknown to everyone is that, Men still continue to cheat their female siblings of their fair share in their parent’s wealth. Most people I know are not aware of the Property and Wealth Inheritance laws and are not aware of the rights that the Women of this great country have. The idea behind this article to create awareness on the rights that women are entitled to so that they can get their share of their parent’s wealth.

If you read this article and found it useful, please share it with your friends both Men and Women. If Men know these rules, they can help their Wives get their fair share too, isn’t it?

Why are Women Unaware of their Rights?

Our Indian culture has for many thousands of years treated men as people who lead families and be the heads of next generation and women as someone who will go to some other family after marriage and start a new life. Women don’t usually involve in important decision making processes and are confined to the households. Though this mind-set is changing or should I say has changed a lot in the past 2 or 3 decades, the fact of the matter is that, this mind-set is deeply rooted in all the minds of still a vast majority of the population in our country. This is one of the biggest reasons as to why Women in India are not aware about their rights when it comes to Inheritance Laws...

What are the rights that Women have when it comes to Property Inheritance?

Women have equal share in their parent’s assets & property - the same as what their Male siblings have.

If Mr and Mrs. X have 3 children, all 3 children will get 33.33% of their parent’s assets irrespective of whether they are Male or Female. This is the current Law in the country.

Quick Question: Did you know this???

Is this what happens in Real Life?

The current reality if I have to summarize the situation in one sentence is

Brothers do not share wealth with Sisters - Period...

I am not saying that all men cheat their sisters but the sad reality is that, knowingly or unknowingly men end up doing this. Being unaware of a law doesn't justify doing a mistake. In most families where there are both sons and daughters, the property sharing usually happens only between the male children of the house. The women are considered a part of the family into which they are married into and hence are not considered as rightful shareholders in the parent’s property. So, in almost all cases the property gets equally divided among the sons and the daughters of the house are left out.

Are Women Really a Part of only the family into which they got married into?

No. The Indian Laws are very clear in this aspect. If I have Rs. 100 as assets at the time of my demise and I have one son and one daughter, my assets must be split equally and my son and daughter both will get Rs. 50/-

Yes, Women Too are valid and legal heirs to their Parents Wealth!!! The daughter has as much rights to her parent’s wealth as what the son has.

Do Women have equal rights at all time?

Actually No.

If a legal WILL is written and registered, the property will be shared according to the will & wish of the owner of the property. However, this concept of writing a WILL hasn’t really caught up in our country. So, in almost all cases the legal inheritance happens as per the Indian Succession Laws. The sad part is, most people do not really understand the laws clearly and think that only the Son gets his parents wealth.

Last year I had written an article titled Have you Written your WILL? where I had explained about the importance of having a WILL. As a parent, it is our responsibility to ensure that our children do not end up like those movie children who fight over their parent’s wealth after their parents are dead. If we write a WILL which clearly states who gets what, we can avoid a lot of problems in future, can’t we??


If the father or mother have a legal WILL that is written and registered which says that all their wealth belongs only to their son, the daughter has no right to inherit anything from her parents. For that matter, in case if the deceased individual left all his assets to his dog-walker and left out both his son and daughter out of the WILL, neither gets a penny.

The Indian Legal Succession laws of equal share come into picture only if there is no WILL in place.

If you are a woman who was cheated or know a woman who was cheated, you might be wondering what their options are. Isn’t it?

Next Steps - If you got cheated out of your fair share in your Parents property:

Consult a good lawyer and explain the situation. As of the date of death of your parents, whatever assets they had has to be equally divided (based on its monetary worth as on that date) and be shared among all the children. So, if you had a brother who cheated you out of your parent’s wealth, you can legally file a lawsuit against your brother to get your 50% share on your dad's wealth.

There are a lot of people who are not ok doing this because of the uncomfortable family situation that will arise due to this kind of a legal case and so, they are ok to give-up on their rightful share. If you are ok with that, then there is not much anyone can do. But, if you are someone who needs some financial support and are seeing that your sibling has inherited all your parents’ wealth and has cheated you off your share, you can always stake your claim and get the share that you deserve.

As I said before, I strongly urge you to read my earlier article titled Have you Written your WILL? and make sure that you create your WILL before your time to ensure that our son does not cheat our daughter out of her rightful share in our assets. At the end of the day, you never know if your son is going to do in future. He may be the loving brother who takes amazing care of his darling sister or end up the cold-hearted villain who cheats his sister...

Friday, June 14, 2013

Everything You Would Ever Want To Know About Bank Lockers

Do you have a Safety Deposit Locker with a bank in India? Are you thinking about availing one? Irrespective of whether you have or don’t have a locker, the topic of Safety Deposit Lockers provided by banks is bound to be of interest to everybody. With the rising crime rate in the country, Bank Safety Lockers are one of the few alternatives for the population of our country to store their valuables. Though there have been cases of bank lockers being broken into, once in a while, such cases are few and very rare. So, the general feeling among the public in our country is that Bank Lockers are extremely safe which is 99.9% true...

All this said, opening or availing a Safety Deposit Locker or simply a Bank Locker is not an easy task. The purpose of this article is understand what these lockers are, how to avail them and many more things about this facility. If you have any further questions about Bank Lockers at the end of this article, please feel free to leave a comment and I will try to answer them as best I can.

So, What is a Bank Locker?

A Bank Locker is a "Safe" or a "Vault" or a "Locker" that is rented out by banks in exchange for a fee. The Lockers are guarded heavily and made out of extremely strong metals which can’t be easily forged into. These lockers can be used to store physical valuables like jewellery, legal documents & agreements, cash etc. What is stored inside a locker by the customer, from a banks perspective is "None of my business".

The bank protects the locker on our behalf and we can keep whatever we want inside it.

How Does a Bank Locker Work?

Simple - Just like any locker. It has keys and once the requisite keys are inserted, the locker opens.

In case of Bank Lockers, they have two keys. One is maintained by the bank and the other by the customer. Only if both keys are used simultaneously, the locker will open. Usually the bank representative will help customers open the locker by providing the bank's key and then leave the customer alone inside the vault room to use their locker.

In return for the locker facility, the customer pays a yearly fee which varies depending on the size of the Locker held by them. Smaller lockers cost a few hundred rupees fee every year whereas larger lockers cost many thousands of rupees every year.

How do Banks Rent Out these Lockers?

Banks are supposed to rent out or should I say allot these lockers on a first-come-first-served basis. When a bank sets up a safety vault in one of its branches, it is supposed to take applications from customers who would be interested in renting out a locker and allot the lockers in the order in which the customers applied.

In case there are more takers than the no. of lockers available, the bank is supposed to maintain a Waiting List and allot the lockers to the person at the top of the waiting list when availability (due to surrender or closure by an existing customer) comes up.

Is this how banks rent out lockers in real life - Unfortunately NO...

So, How do Banks Rent Out Lockers in Real Life?

Banks these days are asking for hefty fixed deposits (depending on the size of the locker you wish to rent out) from customers in return for the Locker Facility. Some banks go a step further and give the customer an option to either open an FD or invest in one of the high-commission-paying Insurance/ULIP product sold by the bank branch in return for the Locker Facility.

Can Banks as for a Security Deposit while Availing a New Locker Facility?

Yes, Absolutely Yes but only to new customers. Existing customers cannot be forced to come up with security deposits after they actually opened their locker accounts.

But, the important kicker here is that - Banks can only ask for a security deposit to cover 3 years’ worth of Rent for the Locker and a fee to open the locker when a customer wants to open a locker account. The RBI Guidelines are very clear in this regard. According to RBI:

To ensure prompt payment of locker rent, banks may at the time of allotment, obtain a Fixed Deposit which would cover 3 years rent and the charges for breaking open the locker in case of an eventuality. However, banks should not insist on such Fixed Deposit from the existing locker-customers.

This is done to ensure that, in case the customer does not use the locker for a period of 3 years, the bank has enough funds to cover their charges for the "Locker Rental" for 3 years as well as to open the unused locker.

So, for example, if your lockers rental is Rs. 1000/- per year and the nominal charge to open a locker of the size that you wish to rent is Rs. 500/- the bank can ask for a security deposit of Rs. 3,500/- only.

Unfortunately, Banks actually ask for large FD's like 2 lakhs or 5 lakhs if you want a Bank Locker. So, this brings us to the next "BURNING" question...

Is it Mandatory to Open a Large Fixed Deposit while Availing the New Locker Facility?

No. Absolutely Not. The RBI Guidelines are clear in this aspect. Banks cannot force customers to come up with large Fixed Deposits in order to allot them a Locker.

Remember: This practice of asking for a large sum as FD or asking you to invest in some hi-fi ULIP product etc. is 100% illegal and banks are not supposed to engage in such unfair practices. The Sad state of affairs is that, Banks continue to blatantly disobey the RBI guidelines in this regard.

What are My Options if a Bank Officer Asks me for a Large FD in return for a Locker?

Option 1:

You can tell the bank officer that you know the RBI Guidelines for opening a locker and that they cannot demand such hefty deposits. This will probably result in a shock on the bank officer’s perspective and he will end up with either of the following responses...

Response No.1: No, no, I was not demanding an FD. The waiting list is quite high and a good FD may just prioritize your name, that’s all. The decision to open an FD is entirely yours and we will get back to you once a locker is available.

Response No. 2: Sorry, we currently do not have lockers available. We will add your name to the Waiting list and get back to you once they are available.

As you can see, your knowledge of banking guidelines is not going to get you a locker because, Lockers are one of the biggest source of FD's especially large value FD's for Banks. So, they will not give-in to your request that easily.

Option 2: This option is only applicable for Government Banks. Private Banks do not come under RTI so, check Option No. 3.

You can tell them you will file an RTI and find out if the bank actually does not have any locker vacancies.

This will result in an even bigger shock and the bank officer will probably give in to your request and try to bargain on the amount you need to deposit in an FD to open the locker. I would say that, if the number is quite reasonable like Rs. 10,000 or so, just don’t argue too much and get your locker.

If the bank officer is still adamant about the large sum FD, then the only option you have is to actually file an RTI complaint.

A Few months back when I was writing a series of articles about EPF, there was an article titled What Options Do I Have if the EPFO Grievance Redressal Does Not Work? which explained the steps on how to file an RTI Complaint against the regional EPF Office. The Steps to file an RTI complaint are the same in this case too.

When you file a RTI letter against any Government Bank, it has to be addressed to Central Public Information Officer (CPIO) or Central Assistant Public Information Officer (CAPIO). Now all the major branch heads of Nationalized Banks are also CPIO’s and you can directly write the RTI letter to the branch head, but address them as CPIO’s. So in the place of address, mention the branch name and the name of the bank with full address.

When you file RTI complaint, you can ask the following questions:

1. How many lockers are available in the branch?
2. What is the size of the different lockers available?
3. How many lockers are currently free and available to new customers?
4. What is the Rental amount per year for the different Locker types?
5. How many people have requested for locker facility and are currently on the waiting list?
6. Is there any requirement to make a Fixed Deposit for getting the Locker?
7. What is the amount of fixed deposit to be opened and what are the rules for it?
8. In how many days will a bank locker is allotted depending on your current position in the Waiting List?


Option 3:

If you are requesting a locker in a private bank, your options are pretty limited. Check out the banks website and try to find out the contact details of the Grievance Redressal department or the Compliance department of the bank. Once you find it, contact them.

Once you contact such people in responsible positions via email/written communication, they are obliged to act in a fair and ethical manner. They cannot arm-twist us like the managers or officers in the bank branches. Since even private banks come under the RBI guidelines, they are supposed to act on your grievance; there is a very good chance that your grievance will be addressed by the appropriate person even though it is a private bank.

If you receive no response from these people, you can contact the Banking Ombudsman to get your grievance addressed and this will definitely help you get a solution to your situation.

Let us say, you managed to get a locker somehow, there are many more things you need to know.

Can the Bank Open my Locker without my Permission?

Yes, sure...

If you fail to pay the rent on time or if the bank or police suspect illegal activities on your part they can open your locker even without your written consent.

At the beginning of this article I said that bank lockers are 99.9% safe. So, what happens if someone manages to break into the Lockers?

This can be big news to most of you, and more importantly a shocker.

The truth is that - Banks are not responsible for the contents inside your bank lockers for any unforeseen events which are beyond the control of banks, provided they have done proper due diligence from their side to protect it.

So, this means that, if the Bank has constructed the locker in the best possible manner and is guarded by armed guards and still someone managed to break into the locker and steal some items, there is actually not much the bank can do for you. Nor are they responsible in case of natural calamities like an Earthquake or a Fire Accident or Cyclone Flood etc.

The Important point here is that the banks have to ensure that they take all possible steps to ensure the safety of the items held inside the lockers by customers. If there is water leakage and it resulted in stuff being soaked in water in the bottom locker shelf, the bank will be held liable to the damage. If the lockers were not guarded properly and as a result a robbery occurred, again, the bank will be liable because they failed to protect the locker adequately.

So, In Case, the bank was found Irresponsible which resulted in the Robbery - What will I get?

It depends....

As there is no written record or verification of what you stored inside your locker, you can’t actually quantify the value of the items that were kept inside. However, Banks insure the lockers to cover for such rare instances. In such cases, you as a customer must provide receipt to show that you in fact owned such an item and that it was lost due to this Robbery. In such case you will get some sort of compensation.

As, there is nothing written or noted down about the contents of your locker, there is a good chance that you will end up on the losing side here. If you are lucky, you may get around 20% or 30% of the value of the items you held inside.

Remember - You cannot quantify actual cash that was kept inside the locker because you are not supposed to keep cash in these lockers. That is why Bank accounts are for!!!

Some General Safety Precautions While Using Lockers:

1. Keep your Locker Key in a Safe Place and make sure that your spouse or at least one more family member knows how to access the locker
2. Open your locker only after the Bank representative leaves the Locker Vault Room
3. Make sure to lock the Locker properly before leaving the Vault Room
4. Keep your eyes and ears open. Make sure that you are not watched or followed when you are operating your Locker
5. Visit your locker frequently - at least once every 2 or 3 months and make sure that all your items are safe
6. Always keep a list of the items that you have kept in the Locker. In case of the improbable event of your locker being compromised, you can at least know what was lost and try to establish a value for it

A General Suggestion:

Most Banks accept Jointly Held Locker Accounts where 2 or 3 people who are blood relatives - mother/father/spouse/son/daughter. It is always a good idea to open up lockers as jointly held because in case one of the locker holders is out of town or for some reason unable to access the locker, the other person can still access the locker.

A Real life example could be, let us say, Mr. X opens up a locker and places all his wife's gold jewellery inside it for safe-keeping. His wife knows that her husband rents a locker at XYZ Bank but she is not a co-holder of the locker. One fine day Mr. X met with a bike accident and is hospitalized. The doctors ask for a big sum of money and Mrs. X knows that she has more than enough jewellery to sell and pay for her husbands treatment. But, she is not a joint-holder of the locker. So, legally the bank cannot and will not allow her access to her jewels which can save her husbands life.

This story above may sound cinematic, but the truth is, we never know what is going to happen next to either us or our family relatives. "Hope for the best but, Plan for the Worst" is a saying that holds good in most financial situations. So, make sure that you include your wife/husband/mom/dad/son/daughter as a joint holder when you open a locker or edit the current settings and include them as a joint holder.

I have tried to cover as much details as possible regarding Bank Lockers in the article above. If you have any questions reg. these lockers that aren’t covered above, do feel free to leave a comment...

Happy Banking!!!

Wednesday, June 12, 2013

Things you may not know about the NPS

The National Pension Scheme or NPS has been covered in this blog multiple times in the past and is one of the top viewed articles. The article titled The National Pension System - De-Mystified covered the basic details about NPS and the article titled National Pension Scheme (NPS) - All your Questions Answered!!! tried to answer the possible questions you may have had about NPS. In August 2012, I wrote an article titled Is National Pension Scheme (NPS) A Worthwhile Investment Option? where we analyzed the fact that NPS Funds have outperformed many other investment options. Of late, there is significant interest in NPS because of the fact that NPS schemes have been able to give better returns than regular investment schemes.

Though the above 3 articles cover a lot of information about the National Pension Scheme, there are a few things that many investors do not know about the NPS. The idea behind this article is to dig deep and uncover those points so that people can reap the most benefit out of this wonderful scheme...

Unknown No. 1: You can use Your Employer to avail more Tax Benefits

Did you know that there is something called an NPS Corporate Investment Option?

Most of you are aware of the NPS Individual Scheme which gives tax deductions of up to Rs. 1 lakh ever year under Section 80C. However, under the Corporate NPS scheme, the limit is much higher. Under corporate NPS, your employer's contribution to your NPS account, subject to a maximum of 10% of your basic plus dearness allowance (DA), will not be included in your taxable income.

For ex: Let us say, your annual salary is Rs. 10 lakhs of which Rs. 6 lakhs is Basic + DA (Rs. 50,000 per month)

Your employer agrees to contribute Rs. 5,000/- every month towards your NPS account, your effective taxable salary comes down by Rs. 60,000/- every year. This Employers contribution towards NPS is not included in your annual taxable salary.

If you are someone in the 30% tax slab, you are effectively taking of Rs. 18,000 from your Tax Liability per year.

This does not mean your employer is going to be burdened more or is paying you more. Absolutely not. He is just deducting a portion of your basic salary and paying it towards your NPS account. Your monthly take home salary will come down accordingly but, your tax liability comes down as well plus you are saving money for your future.

Remember - Employers these days have started including NPS as part of the standard compensation package just like EPF, Gratuity etc. All that is required here is some commitment and effort your employers part to restructure the pay packages of their employees to help them get the maximum tax benefits. Plus, I read somewhere that Employers can deduct this as business income for their tax purposes and reduce their tax liabilities as well.

No matter how high your salary is, only 10% of your Basic + DA can be deducted from your taxable salary, if it is contributed by your employer every month towards your NPS Account. However, your individual contribution will still come under the Section 80C and will be subject to the 1 lakh upper limit. If you contribute lets say Rs. 25,000 per month to NPS, your tax benefit will still be Rs. 1 lakh only.


Talk to your employers Finance Department about tweaking your salary structure. You can remove any existing allowances which you may not use and is fully taxable and direct that towards NPS. Your employer may or may not agree to your request immediately. But, if more employees turn up requesting this option, the employer will eventually agree. Strength In Numbers!!!

Unknown No. 2: Investing In Equity Schemes is not Mandatory

One of the main reasons why people are scared about investing in NPS is the fact that, they invest in Equities as well. The unfortunate part here is that, most people do not know the fact that, Investing in Equity Schemes is not Mandatory.

There are three schemes in NPS:

1. Scheme E or equity fund option (maximum of 50% of one's investment)
2. Scheme G or gilt fund option, and
3. Scheme C or corporate bond fund option.

As you can see, as the investor you can choose to invest 100% of your monthly contributions in just the Schemes C & G. Some people choose the Auto option. Even in that option, only 50% of your corpus will go into equities and the rest will go only into Scheme G or C.

Equity exposure in NPS is restricted to stocks that have derivatives. This means that in India you have approx. 150 odd stocks, mostly blue chips and large caps which fall into this bucket. These aren't small-caps or mid-caps and are therefore much more stable in terms of price.


If you did not open an NPS account for fear of investing in Equities, just relax and go open an account by choosing Schemes C & G as your options. Personally, I would suggest that you retain a 15-20% exposure even if you are the most conservative investor because, in the long run, Equities have always been the best investment product and you will not regret the decision. At the end of the day even Schemes C & G have done really well and with compounding of interest for many many years until you retire, even this can help you accumulate a Sizeable Retirement Corpus.

Unknown No. 3: You can Do a One-Time Lump Sum Withdrawal at Retirement

Question No. 29 in the article titled National Pension Scheme (NPS) - All your Questions Answered!!! in our blog dealt with the question on withdrawal of our corpus at retirement. Though the answer was correct at the time the article was written, there have been some recent developments that made the answer incorrect - Today.

Through a recent change in policies, NPS will now allow you to withdraw the 60 per cent corpus as a lump sum any time between the age of 60-70. The Remaining 40% has to be used to buy an Annuity plan (Just like before). Earlier, you had to do only a phased withdrawal every year. This recent change gives us more control on what we do with our retirement corpus. We can use it for some purpose or invest it in other instruments as well.

Note: This rule is only applicable at retirement. This does not affect your investments up until you reach your 60 year mark or retire...

Unknown No. 4: Taxation at Maturity

Another big worry for Investors into the NPS Scheme is the Taxation at Maturity aspect. There are currently rumors going around that the Direct Taxes Code has proposed to make the Maturity Proceeds tax free at the hands of the Investor. Though this proposal hasn't been approved yet, there is a pretty good chance that it will be approved by time you and I retire (which is at least 10 years or more from now)

In the odd-chance that the Maturity corpus is taxable, there is not much to worry either because, post retirement we will obviously fall under lower tax brackets. So, the actual tax we may end up paying will be little or even none.

So, for now, let us just concentrate on investing and building our retirement corpus using NPS as one of the instruments. Eventually the DTC Tax Code will make the maturity proceeds tax free which will just be the icing on the cake.

Happy Investing!!!

Wednesday, June 5, 2013

Great News for Home Buyers - The New Real Estate Bill in India

Are you one of those people who got lured by these catchy advertisements by builders only to realize that most of the features advertised aren’t available? Are you one of those people who paid the full amount to the builder and had to painfully wait for months before the project got completed? Are you a prospective home buyer who is scared of these kind of misleading Ad's and delays from builders?

There is great news for all Indians who want to buy or invest in real estate. The government of India has come up with a New Real Estate Bill that is bound to make the lives of the common-man much easier when it comes to buying property.

The idea of this article is to take a high level look at this new bill and how it would benefit us. Please note that only high level details reg. the bill are available and there may be amendments to this bill if our parliament sees fit. The Union Cabinet Minister for Housing & Urban Poverty Alleviation Ajay Maken is expected to address the Press and elaborate on the intricate details of the bill very soon. So, for now, let us take a look at the highlights of this proposed bill.

Highlight No. 1: A Regulator for Real-Estate is proposed

On the lines of SEBI that regulates the stock market and IRDA that regulates the Insurance industry, a regulatory body that governs real-estate in India will be created. It will have the powers along the lines of what a SEBI or an IRDA has.

Highlight No. 2: This Bill only covers Residential Property

This bill as well as the proposed regulatory agency will govern or supervise only the residential property market. The commercial real-estate market is currently out of bounds. It may get included in future, but the current idea is to protect the common man first.

Highlight No. 3: No More Misleading or Deceiving Advertisements

Most builders flout advertisements that grossly mis-state the facilities or amenities available in the property and mislead the customer. The bill will tighten such regulations and any such intentional mis-stating of facts may result in stiff punishments. If the builder promised a recreation club, a gym and swimming pool when you signed up for the Apartment and instead built yet another block of houses in the place ear-marked for those facilities, you as the buyer can complain.

A first time offender faces penalties of up to 10% of the Project Cost. Repeat offenders can expect stiffer penalties as well as Jail time of up to 3 years.

Highlight No. 4: No More Flouting of Projects without Proper Approvals

One of the main causes for delays of housing projects is the fact that builders flout projects and start collecting money from customers even before getting all the requisite clearances and approvals. Sometimes or should I say, most of the times the government machinery in India works in its own pace and such approvals may get delayed. This results in projects getting delayed for no fault of the buyer. The bill mandates that the builder obtain all necessary permits and approvals before they start collecting money from buyers.

Highlight No. 5: No More Asking Huge Down-payments to Book Your House

Builders in prominent residential areas demand high up-front down-payments for customers to book their dream home even before the documentation and legal agreements are signed. The Bill mandates that Builders cannot ask or take more than 10% of the project/property cost without a proper written agreement. Buyers can ask and claim a full refund of the money they paid if the builder delays the written agreement formalities.

Highlight No. 6: No More Diverting of Funds from One Project to Another

Developers usually collect money for one project and use it to complete other projects or use it in other business ventures. This results in delays in case they are unable to come up with cash to continue with the current project. The Bill mandates that developers must put aside at least 70% of the proposed project cost in a Separate Bank Account and track it properly to ensure that the project progresses as planned and without any delays.

Highlight No. 7: Specify Usable Area or Carpet Area Clearly

Most Builders these days sell projects under the "Super-Area" concept where the customer buys a property by knowing just the overall area of his house. The actual carpet area or the usable area is around 20 to 30% lesser than the area the customer pays for. The common area like lift lobby’s, veranda’s etc. are not part of the usable area for the customer and in most cases the buyer is not aware of how much common area he/she is paying for. The Bill mandates that builders clearly specify how much carpet area or usable area comes under each house and how much common area each buyer is paying for. Though the amount the buyer is going to pay will remain as before, the clarity on how much area each house is will increase.

Some Last Words:

Most builders advertise like

3 bedroom 1200 sq. ft. house starting from 48 lakhs

The actual price of the house including car park, Electricity and water deposits, registration etc. will be much higher and will work out to the range of around 52 to 55 lakhs. But, the advertisement will state only 48 lakhs. On top of that, the actual living area of the house will only be around 900 odd sq. ft. and the builder advertises a 1200 sq. ft. house.

In future the advertisement will be like

3 bedroom 1200 sq. ft. apartment with a carpet area of 950 sq. ft. starting from 52 lakhs

Sounds a lot better isn’t it? What do you think about this new bill? Feel free to leave your comments in the comments section...

Happy Real Estate investing!!!

Monday, June 3, 2013

Can Mr Murthy work his magic with Infosys this time too?

Mr Narayanamurthy, the most iconic name in the Indian IT space is being forced out of his cushy retirement after close to 3 years. From the man's eyes, it must have pained him immensely to see the conglomerate he built for over 2 decades and help grow from nobody to the 2nd largest IT Company in India, go spiralling down. Infosys is no longer the brand that people respected. 9 years ago, when I began my career in Infosys, when someone asked me what I was doing or where I was working, their reaction was that of pure respect when I said, I am working in Infosys. Ever since the gentleman left his throne at the helm of the company, things have gone south both from an Employee's perspective and an Investors perspective.

The idea behind this article is to analyze what kind of impact Mr NRN (This is how he is addressed by people within Infosys) will have on the company and its shares from an Investors Point of View.

Before we begin: This article is pure speculation from my part on how Mr NRN's impact will be on the IT behemoth. Only time will tell if things actually will work out for the best or not. This is not investment advise to either buy/sell or hold Infy shares. Nor is this a review of Infosys as an employer or a place to work.

A Brief History of Infosys and Mr Narayanamurthy:

Mr Narayanamurthy is an Electrical Engineer from the National Institute of Technology. He along with his few friends founded Infosys in the year 1981. He was the CEO of the company for 21 years up until 2002 and was succeeded by co-founder Mr Nandan Nilekani. Mr Murthy was the Executive Chairman of the board between 2002 and 2006. In 2006, NRN became the Chief Mentor and retired completely in August 2011.

Infosys's Position in the Indian Markets:

Infosys is the Third Largest Indian IT Company (Behind TCS and Cognizant) and is a part of both the BSE Sensex and NSE Nifty. It is one of the most, well respected shares in the Large Cap space and people have been trusting the stock for years on the basis of its performance as well as other aspects like bonus shares, dividends etc.

To say that - Infosys was a darling for the Investors for close to 20 years would be the Understatement of the Century. Of late however, the share has lost its charm due to mismanagement as well as stiff competition.

So, Why is Mr NRN returning as head of Infosys?

There are many reasons for this sudden decision.

Main Reason: Lack of Consistent Performance

Infosys was considered best IT Company in India up until a few years ago and it was just a matter of time before it overtook TCS to take its rightful place as India's No. 1 IT company. Unfortunately, things did not work out as expected and the management was not able to keep up its incredible performance while under Mr NRN.

Over the past few years, its earnings have consistently failed to bring any special cheer to the investors and recently it lost its No.2 position in India's IT world. Its peers like Cognizant and TCS have been able to post far better numbers than Infosys could.

Additional Reason: Low Staff Morale & Dwindling Quality Talent (Attrition)

Many investors and industry experts feel that the low morale among the staff, especially in the customer facing group and the pre-sales group is one of the key reasons why the company is unable to attract new business or expand existing agreements.

Infosys has always been known to hire and attract the top talent the country has to offer. But, this has mostly become a story of the past. Because of not-so employee friendly policies adopted by the management over the past 5 years, has resulted in a significant number of talented staff jump ship to other competitors. Because of the negative publicity created by bad-press from the unhappy staff that are either with the company or have left it, people are not willing to consider the offers Infosys is making in recruitment drives.

I am firm believer in Mr NRN's words. He always said - "Don't Love Your Company. You Never Know When Your Company Will Stop Loving You". This is what happened to the thousands of enthusiastic individuals who joined the company between 2000 and 2010. The company's HR policies were termed atrocious by many and even ridiculous by a few but still the management stuck on to them. When staff realized that the company wasn’t loving them back, the talented ones moved on while the ones that had no place to go (either due to professional or personal commitments) had to stay back.

Will Mr NRN's 2nd Innings with Infosys recreate the old Magic?

I think, Yes Because - The Man is a visionary and will definitely be able to work his magic and boost the sentiments across the board.

Will This Magic be quick?

I don’t think so. Years of hard work can be undone in just a few days of stupidity. On the other hand, to undo months and years of bad work, it will take many many years. This is what Mr NRN is setting out to do - to undo years of bad work and trust me, it won’t be quick.

I am not doubting the man's ability. I have met him and he is one of the most humble and charismatic individuals I have ever seen. If anyone can restore the company to its lost glory, it is him...

What do Shareholders Think about his Return?

A Majority of them are pleased and it is evident from the fact that the stock has risen around 7% today in the morning session. In short term, the stock will do good but unless investors see actual results, even the charisma or name value of Mr NRN cannot sustain the stocks upward price movement.

Short Term - Yes Positive

Long Term - Only Time Will Tell

Is Bringing In Rohan Murthy a Good Idea?

Personally, I am not sure.

Mukesh & Anil Ambani, succeeded their dad, the great Dhirubai Ambani. Rishad Premji is in one of the top positions in Wipro and is primed to take over when his dad Mr. Azim Premji retires. So, Rohan Murthy coming in to succeed his father is no surprise. In fact, the man is ultra-talented. He has a PhD in computer science from Harvard University and by merit he is more than capable of handling such a high profile role.

All this said, this is something the company & even Mr NRN has said, it will never happen.

For as far as anyone can remember, Mr. Murthy has held that no family member of a founder can ever come to work at Infosys. It is a rule he set himself and all these years he has taken great pride in living by it.

The whole mystique about Infosys was the fact that when it gave its word it knew how to keep it. If it made offers to employees and the market tanked, it still honoured them no matter what. If it made a promise to shareholders about meeting its revenue and profit guidance, it kept it, quarter after quarter. If it said founders would retire at 65, it made sure they were gone by that time. If it said founder’s family members would not join the company, it enforced the rule strictly.

Now, things have changed. Over the past few quarters, it has been unable to meet its revenue or profit guidance. Many people may say that the market played spoilsport, and I agree with them 100%. But, a couple of other promises have just been broken over the weekend which makes the company lose that Mystique...
* Mr NRN is 66 and is coming back into the company.
* Rohan Murthy is Coming into the company as NRN's Executive Assistant

Technically Rohan is not given any leadership role at Infosys and he is just an assistant to Mr NRN. His job is to help his dad work effectively and efficiently. In favor of this argument, we can all understand that Mr NRN is 66 and isn’t as technically savvy as many of the younger generation people are. His son can effectively use all the latest technological advances and help his dad do a better job.

But, is this a bad precedent? Will this result in other founders bringing in their son's and daughter's into the company in a similar capacity? - Only time can answer this question.

Couldn't Infosys find a senior employee with the kind of capabilities and vision like Rohan has and entrust this responsibility? We can’t really answer this question because we never know. A guy like NRN would not have decided on something without a good reason for it.

Some Last Words:

Many people feel that the current soup of a mess that Infosys is in, is a direct result of the policies implemented over the past couple of years by its current leaders. When Nandan took over from NRN, NRN was there to back him & guide fully, but he wasn’t around to do the same to Shibulal. The shareholders have been critical of Shibulal and Kris many times and some even publicly. So, maybe NRN is coming back to protect his friends and co-founders from further criticism.

At the end of the day, as an Investor I would want the most well-known share in the Indian Stock Market to do well. Personally too, I have a lot of good feelings towards Infosys esp. since it was my first job. It pained me immensely when my friends resigned from the company one by one with bad experience after bad experience. Almost all of my friends who joined along with me in Infosys in 2004 are no longer with the company. Nonetheless, I still want the company to bounce back and I am confident that Mr NRN can work his magic and take the company back to its glory days!!!

Lets hope for the best !!!

A Laymans Guide to Islamic Banking

Have you heard of the term Islamic Banking? The concept of Islamic Banking is becoming more and more popular in India where there is a significant % of Muslim population. The concept is already prevalent in the Gulf and many south-east Asian countries where high concentration of Muslim populations live in. This article is not an everything you want to know guide of Islamic Banking. Instead, it is a high level - layman’s guide kind of article to help you understand the basics of Islamic Banking.

So, What is Islamic Banking?

Islamic banking is banking or banking activity that is consistent with the principles of sharia. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees (known as riba) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also haraam ("sinful and prohibited").

Simply put, an Islamic Bank is just like a regular bank, it will give you banking services like bank accounts, deposits etc. but the banks operating principles will be consistent with the Islamic Sharia laws. The bank will not give or take Interest.

So, is an Islamic Bank - a Non-Profit Organization?

No, Absolutely Not.

For the Islamic Bank, providing Islamic Banking services is a business and their aim is to make a profit by conducting this business. However, they conduct their business in accordance to sharia laws.

If they won’t give or take interest, how will they give loans?

Simple, Islamic Banks do not give out loans. They use a buy and sell mechanism.


Let us say, you want to buy a car. As you are a devout Muslim, you do not want to take an auto loan where the regular bank will charge you an interest. So, you approach the ABC Islamic Bank of India. They ask you for details like, what car you want, what make & model, where you want to buy etc. Then they will verify your identity, income requirements etc. (like any other bank).

Once they verify that you can indeed repay the money, they will go ahead and buy the car themselves. Once they buy it, they will sell it to you for a higher price which will include their profit share. You on the other hand will take the car home and repay the bank in easy instalments. This way, you are only repaying the money you owe the bank. There is no interest paid out by you.

Get the picture??

The same is the case with Home loans as well.

As, the Islamic bank indulges in buying and selling at a higher price method in order to grant its customers loans, it does not give out any non-collateralized loan. Unless there is an entity that the bank can physically own and then re-sell to its customer, the concept of buy and sell will not exist and hence, the repayment may be considered an interest. So, most Islamic banks do not give out non-collateralized loans.

So, what happens if I default on my Payments?

Until you finish repaying all your monthly instalments, the bank has the right to take possession of the car/home. So, in case you default, the bank will take possession of your car or house and liquidate it to cover its losses.

Do, Islamic Banks offer Interest on Bank Accounts & Deposits?

Yes and No.

Islamic Banks do not make periodic fixed interest payments like regular banks because; they cannot collect interest from customers. However, they are going to use your deposit money to engage in the buy and sell activity as explained above. So, they are morally bound to share a % of their profit with you. At the end of each financial year, the bank will consolidate its statements and based on the profit they make, they will declare a profit share to their deposit customers. This amount may not be fixed like regular banks. In a year where the bank did incredibly well, the % share could be high and if the bank did terribly this year, they may not share anything at all...

Today, Islamic banking still accounts for only a tiny fraction of the global banking industry. The amount of money held in Islamic banks totals to less than 1 % of global financial assets. But in many countries Islamic banking is growing rapidly and this number can be expected to grow in the near future.

Hope you found this introduction to Islamic Banking interesting and useful...

Happy Banking!!!

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