Wednesday, December 30, 2015

Common Tax Planning Mistakes

If you have been a regular follower of this blog, you will agree that, articles on Tax related matters probably outnumber all other categories by a long way. Every year around New Years’ Time there are more articles on Tax Planning because the financial year ends in March and everyone is scrambling through to save as much tax as possible. So, in keeping with the tradition, let’s talk about some of the common tax planning mistakes we do almost every year… 

Before we Begin: This article is not one of those that talks about the mistakes people do while Calculating & Filing their Taxes. Those were covered in one of my prior articles titled "Are You an Innocent Tax Evader?"

What is Tax Planning? 

Every year around Jan, Feb time period, everyone is trying to save as much tax as possible but have you ever thought about this – Can we really Plan to Save Taxes Properly? Tax Planning is an often overlooked subject because most people think it is synonymous with Tax Saving. 

Are you one of them? 

Yes, the outcome of Tax Planning is a “Plan” that helps with the Tax Saving. However, proper Tax Planning can also help you Plan for your future financial goals. If you scroll up and see the title of one of my books, it’s about Indian Income Tax and Retiring as a Crorepati. The Book utilizes just the Section 80C Benefits and talks about a Plan to put those Savings into good use thereby saving up a corpus of over 1 crore by the time you Retire. Sounds Exciting doesn’t it? 

This is exactly what I mean by Tax Planning. If you properly plan your taxes, you can not only save a lot of tax but also accumulate a sizeable corpus. 

Now that you know what Tax Planning is, let’s dive into the Most Common Tax Planning Mistakes..

Mistake No. 1: No Tax Planning 

Ok, this one is a No Brainer. Not doing any form of Tax Planning is probably the biggest and most common mistake most of us do. As explained in my book, utilizing your Section 80C benefits and saving 1.5 lakhs diligently each year can help you retire with a big fat corpus. If you don’t plan your taxes properly, you will probably end up with a meager corpus or worse nothing at all. 

Mistake No. 2: Last Minute Hurried Tax Planning 

Holistic Tax Planning takes into account many factors like your age, your family commitments, your insurance requirements etc. and is not something that can be arrived at in just a few days. Ranking a close Second in the mistakes list is the last minute tax planning which basically is a hurried up effort in trying to do something in the name of tax planning. Though we call it Last Minute Tax Planning, the eventual outcome is more along the lines of last minute tax saving because unless you spend time and plan properly, the end result isn’t going to be what you want it to be… 

Mistake No. 3: Buying Insurance just to Save Tax 

If you take out the no tax planning and last minute tax planning, the single biggest mistake everyone and I mean EVERYONE does is Buying Insurance Policies just to Save Tax. 

Yes, Insurance Policies offer tax benefits but that isn’t the only reason you get one. People invariably overlook the need for insurance, what product suits them etc. and just buy Insurance because their Insurance Agent tells them it’s a good idea to Save Tax. To make matters worse, most of the time, these agents sell us ULIPs that are either too costly or poor performers which end up eroding our investment. In case of Traditional Endowment Insurance, you at least get your money back with a little bit of growth however in case of ULIPs I actually haven’t spoken to someone who has actually made sizeable profits after staying invested for 5 or even 10 years. 

Remember - When you think about insuring yourself, it should purely mean protecting your life against any unforeseen events; and hence my Recommendation would be pure term insurance plans, which gives due importance to your human life value. 

Also remember that, ULIPs are investment-cum-insurance plans where there is always a risk of losing your capital and all those fancy workups shown by the Agent are just selling gimmicks. In 99.9% cases the investor into the ULIP is left regretting his/her decision. 

Mistake No. 4: Not Utilizing All Possible Tax Saving Avenues 

When you say Tax Savings, most people by default go to Section 80C and overlook almost everything else. There are numerous other sections under which the Government allows its citizens to offset some % of their income to reduce their tax liability. I have explained each and every one of them in my book which would be very useful for you in your Tax Planning Exercise. If you are interested in reading a preview of the book, drop me a note @ There is a special offer going on where you can buy the book for just Rs. 149 (Usual price Rs. 299) only for a limited period. 

Some Last Words

Tax Planning is not an exercise where you just huddle up with your friends near the water cooler and decide where you invest 1 or 2 lakhs to save some tax at the end of the year. It requires a lot of meticulous planning and can have significant impact on your Retirement Corpus as well as your future financial situation. After all, it’s your hard earned money and as I have said it many times before, if you don’t care about it, nobody else will. 

To save you time and effort, I have spent a lot of time researching on how to utilize your tax saving investments to form a portfolio that could potentially help you retire with 1 crore or more. 
Think Wisely and Plan your Taxes Properly..

Happy Tax Saving!!!

Sunday, December 27, 2015

RBIs New Interest Rate Formula for Loans

Ever since Mr. Raghuram Rajan took over as the head of the Reserve Bank, economists and experts from world over expected him to help transform the Indian Banking Industry into a world class one. For almost 2 decades now, we have been considered an Emerging Market for all intents and purposes and unless we did radical improvements, we are going to stay that way for the foreseeable future. 

This all starts with changes to monetary policies that can help us move forward as a powerhouse. The purpose of this article is to review a recent ruling by our Central Bank that can help make lending rates more responsive to policy rate changes. 

So, What is Lending Rate and How is it Usually Determined? 

Lending Rate is nothing but the rate of interest charged by a Bank (or Financial Institution) for any loan that you might want to avail from them. It could be a Home Loan or a Car Loan or even a Personal Cash Loan. 

Banks currently set their lending rates based on the average cost of funds on deposits outstanding. i.e., Banks take the rate at which it is borrowing money (mainly from Deposits), add a "Spread" and then arrive at the loan interest rates. This Spread basically covers their operating costs, profit margins, risk coverage for loans that might not be repaid etc. However, there isnt much clarity on how the rates are arrived at and even if the central bank reduces the rates, the impact on end customers isnt much. 

Why RBI Has Passed this New Ruling?

The RBI governor Raghuram Rajan has repeatedly emphasized the need for banks to pass on the benefits of Central Bank interest rate cuts to the public however that isnt the case and customers have barely gotten 50% of the benefit this year. 

While RBI has cut its benchmark rate by 125 basis points in 2015, lending rates have come down only by 60 basis points, RBI said in its December monetary policy review. 100 Basis points translates to 1% in rate of interest. So, while the RBI Cut its rates by 1.25% the benefit passed on to the customers was only 0.6% 

The purpose of this new ruling is to make sure that the lending rates from banks are more responsive to policy changes. 

So, What is this New Ruling by RBI?

RBI has asked banks to do the following:

For all loans sanctioned from April 1st 2016, the interest rate will be set with reference to their Marginal Cost of Funds based Lending Rate or MCLR. This MCLR is something banks will calculate based on the banks deposit rates, their internal spread etc. 

Banks will publish an MCLR for overnight loans, one-month, three-months, six-months and one-year loans. This MCLR will act as the minimum or base lending rate for that tenor of loans irrespective of the borrower. The final lending rate will be MCLR plus the spread that banks will charge for individual categories of borrowers. 

Banks will also have an option to periodically reset their MCLR rate and for any loans that are offered, the MCLR Prevailing on the day the loan is sanctioned will be applicable until the next day the MCLR gets reset. 

The RBI has brought out the draft guidelines on banks adopting this Marginal Cost of Funds methodology for calculating base rates on the 1st of September 2015. 

I already have a Loan - How does this Impact me?

If you are on a Fixed Rate Loan, this ruling has no impact on you. This ruling is only for floating rate loans. In case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the new MCLR guidelines.

Existing borrowers will have the option to move to this MCLR based loan at mutually acceptable terms. But, this is one area where I have my doubts because mutually acceptable basically means Banks have to accept and the current lending formula is in favor of Banks and they will lose a lot of money by allowing existing loan customers to move over to this new formula. 

What If My Bank isnt Helping Me to Move over to the MCLR Based Loan?

The new RBI Ruling applies to all new loans granted by banks. You may be an existing loan customer for X Bank but they wont be able to stop you from moving over to Y Bank if they offer you a better deal - right?

With the new MCLR Based pricing, the loan rates are expected to come down and bank would want to attract new customers to increase the sales volume to offset the reduction in rates. So, as a customer you are free to switch to a new bank and all X Bank can do is watch you move on. They might as well allow you to switch on to their MCLR based loan - right?

What are the Benefits of this New MCLR Based Lending?

This helps improve the transmission of policy rates (set by the RBI) into the lending rates of banks. It improves transparency and RBI would have better control over the rates at which borrowers get money. With the inclusion of even short term MCLR Rates, banks can even compete with the Commercial Paper market. 

This will be beneficial to banks too because banks can now price their loans based on the rates offered on deposits of corresponding tenor. Usually only short-term deposits of 3-6 months are used for computing base rates for loans. This new rule will greatly reduce the cost of borrowing funds for not just individuals but also companies. 

Lets see how things go...

Sunday, December 20, 2015

Sectorwise Expectations for the Indian Stock Markets – 2016

In the previous article, I had written about what to expect from the Stock Market as a whole in 2016. We talked about blue chips, mid-caps and small-caps. But, that’s just the broader picture. The Stock Market is comprised of stocks from various different sectors and not all of them perform similarly. Some sectors do well while some don’t.

As a continuation to the previous article, in this article we are going to review the sectorwise expectations from the Indian Stock Markets for 2016…

Before We Begin: As with any article on stock markets, let me start off by saying that there is no Guarantee that whatever you read in this article will happen in 2016. There is a chance the markets may behave totally opposite of what we expect. This is just an assessment based on my judgment of the markets and future prospects in 2016.

A Word of Clarification:

When I say outlook as Positive or Neutral or Negative to summarize a particular sector, it is basically in comparison with the broader index like Sensex or Nifty. As you may recall, overall I feel 2016 is going to be bullish which basically means sectors where the outlook is Positive may Outperform the Sensex while those where the outlook is Negative may Underperform. Those that are Neutral will more or less follow the Sensex.

The Automobile Sector – Slightly Positive

The Auto Sector was one of the good performers in 2015. In fact, the single biggest gainer of the BSE Sensex in the last 1 year – Maruti Suzuki is from the Auto sector. Though other Auto Manufacturers lost some ground in 2015, they did not lose as bad as other segments. India has a good public transportation system but it is still far from world class and is definitely not enough to meet the transportation demands of our growing population. The growth in Infrastructure and increasing roads in India coupled with the increasing purchasing power of our people is going to keep the demand for Automobiles strong in 2016.

With concerns about pollution and congestion in our roads, Auto Manufacturers will be forced to invest in more energy efficient vehicles that are more environment friendly. But, the general trend will be positive and will remain that way for months to come.

I think the Auto Sector will at least meet the broader Index benchmark like Sensex or most likely even beat it. Hence the Positive Outlook.

The Banking Sector – Neutral

Three of the 4 Major Banks that are part of the BSE Sensex ended up making losses with SBI and ICICI losing over 20% over the past 1 year. If we take the overall sector, majority of the Banking stocks are in Red from their peak in January 2015.

Though majority of the banking stocks have taken a beating, this has created interesting buying opportunities which Investors would be looking to take advantage of. With India’s growing population and need for Banking & Financial services, there is no way the banking stocks are going to make horrible losses in 2016. However, with increasing competition as well as bad loans that are plaguing most banks, the chances of them being classy outperformers are pretty slim.

Though some of the banks may outperform I think that the Banking sector will be more or less in line with the broader index benchmark like Sensex or maybe even be slightly lower. Hence the Neutral Outlook.

The Capital Goods Sector – Neutral to Slightly Negative

You may be wondering what I mean by Capital Goods. We are talking about companies from Engineering, Electrical, infrastructure and other related areas. For ex: Bharat Electricals, BHEL, Siemens, Crompton Greaves etc would constitute the Capital Goods Sector.

The last one year hasn’t been so great for companies in the Capital Goods Sector. In fact, over the past 3-5 years the stocks of the Capital Goods sector have been relatively flat and have mostly underperformed the broader indices like Sensex. With many of these stocks near their 52 week or lifetime lows, chances of consolidation and renewed buyer interest are quite high. Plus, with the governments emphasis on the India Growth Story, there is a chance that the fortunes of this sector may get revived this year.

Overall, I think the stocks in this sector are going to be most likely underperformers while some may try to meet the returns of Sensex. Hence the Neutral to Slightly Negative Outlook.

The Fast Moving Consumer Goods Sector – Positive

Fast Moving Consumer Goods (FMCG) refers to majority of the products we use every day. If you are struggling to visualize what constitutes FMCG, think of  Hindustan Unilever the well-known maker of majority of our day to day utility items. If you review the statistics for 2015, HUL was one of the strong performers where investors made gains of about 15%. On the other side of the spectrum, we can see that over the last 1 year, the stock prices of majority of the FMCG Players has relatively stayed flat and have gone down.

With our rising population, the demand for FMCG items is going to continue to remain strong. However, strong competition may impact the margins of the smaller players but companies that enjoy market dominance may continue to be profitable.

Overall, I think the stocks in this sector are going to be outperformers as against the broader index and hence the Positive Outlook.

The Information Technology Sector – Neutral

The IT Sector had been the dream investment option for the better part of a decade now with investors of IT Giants like Infosys, TCS, Wipro etc making handsome gains. However, the last year hasn’t been that noteworthy for this sector. If we review the stock price movements of the IT Co’s its evident that majority of them have either remained flat or have lost ground.

With rising competition and increasing costs in India, companies are now forced to expand into other locations like China and aggressively cut operating expenses to retain their profit margins. Also, the IT spending of the companies that avail these services are under immense pressure due to the uncertain economic outlook across the globe especially in US and Europe which constitute to almost 90% of their business.

The demand for IT Services is no doubt going to be steady but, the rising operational expenses especially the cost of retaining talent and the adjustment to the pricing structure to combat the heavy competition are going to heavily strain the profit margins. This in return is going to impact investor interest.

Overall, I think the stocks in this sector are going to perform more or less in line with the broader index, hence the Neutral Outlook.

The Metals & Mining Sector – Negative

The Metals & Mining Sector has been plagued by rising costs as well as immense competition from China. Almost all the stocks from this sector have ended up losing a lot of ground with some of them losing as much as 30-50% of their market value in the last 1 year.

With no major relief in sight, I think it is highly likely that stocks from this sector are going to continue to underperform, hence the Negative Outlook.

The Oil & Gas Sector – Neutral

Companies in this sector have been under tremendous pressure & spotlight due to falling crude oil prices and a weak rupee. The falling crude prices looked like great news for the refineries but the weak rupee and the reduction in prices by the central government kind of nullified the gains.

Though the state owned Indian Oil, Bharat Petroleum and HPCL have done pretty well, the Oil & Gas Sector as a whole has lost considerable ground in the past 1 year. The global crude price situation doesn’t seem to be improving much and nor does it look like the Rupee is going to get stronger.

Overall, I think that the stocks in this sector will more or less in line with the broader indices and hence the Neutral Outlook.

The Pharma & Healthcare Sector – Neutral to Slightly Negative

With India’s rising population and healthcare needs, this is one sector where companies that have a good pipeline of products and operating model are going to be profitable no matter what. This is very much evident from how the stocks in this sector have performed in the past year. While some companies have made double digit profits in terms of stock prices, some have made double digit losses while many have stayed relatively flat.

Over the past 3-4 years many of the Pharma stocks have given investors extravagant returns and we are potentially looking at stocks at their multi-year peak prices. This could potentially trigger some profit booking which could cause some kind of correction in prices.

However, the first sentence of this paragraph is very much true and hence I think the stocks in this sector will more or less be in line with the broader index with some of them facing correction. Hence the Neutral to Slightly Negative Outlook.

Some Last Words

As you can see from the sectorwise review, the outlook is mostly Neutral or Positive and in-line with the broader expectation of a decent bull-run in 2016. That being said, I want to reiterate that if a sector is classified as Positive or Negative that doesn’t mean that all stocks in the sector are going to outperform or underperform. A good stock in the negative outlook sector it could still outperform and a bad stock in the positive outlook sector could underperform. This outlook classification is by no means applicable to all stocks in a particular sector.

If you do your due diligence and choose good stocks, invest regularly and at attractive prices, your chances of making good profits are pretty good for 2016.

Happy Investing!!!

Disclaimer: This article is by no means a recommendation to buy or sell stocks of any particular company or sector. This is just the authors interpretation of the current market situation and outlook for the upcoming year. Stock Investments are subject to market risks and the chances of losing all or part of your investments are very real. The Author does not accept any liability arising out of stock buy or sell transactions done after reading this article.

Saturday, December 19, 2015

What to Expect from the Indian Stock Markets for the Year 2016

With barely 2 weeks left until the New Year 2016 dawns on us, everyone is busy making New Years Resolutions. The investor community is abuzz with chatter about what the new year is going to bring for us from the Indian Stock Markets. The year 2015 was exciting, we started with a lot of Euphoria about a Bull on the verge of breaking lose and then we had a major halt in momentum and it looks like the bull is off its shackles and is starting to gather pace.

This article is my attempt to predict what the year 2016 might have in store for us from a Stock Market perspective…

Disclaimer Before Starting: The Stock Markets move in a mysterious way and in its long history, Nobody has been able to accurately predict it. People are right sometimes but are wrong most of the times. This article is a best effort attempt to reasonably predict what to expect but there is no guarantee. I would be lying if I said, this is what will happen. That’s why I used the words “Might”…

The Year that was – 2015

The year 2015 started off really strong. The new BJP Government headed by Mr. Modi had just taken charge and the Stock Markets were reeling under a Ton of momentum on the Bull side. 2014 was a Phenomenal year where the BSE Sensex started at around 21200 in Jan and ended at around 27500 by the end of the year – A rise over 6000 points or a 28% growth.

Coming of this phenomenal run, we started 2015 when the BSE Sensex was around 27500 and right now the Sensex is actually hovering around 26000 – a fall of around 1500 points or a 5% decline. If we further analyse the data for the year 2015, the year has been more of a See-Saw than anything. See the picture below:

We saw a slight correction in March & April where the Index erased the gains it had posted until Feb. Then there was an incredible bull run of about 2000 points in May and then a slight correction in July-August wherein the Index lost some ground. Then we had another bull run of about 2000 points in September-October and then the market has been Steadily declining ever since. The index has lost almost 4000 points since the start of November and we are presently trailing the start of 2015 by about 1500 points.

What is In Store for Us in 2016?

I think 2016 will most likely be a good year for the stock market. Am expecting the Stock Market to perform strong this coming year. Numbers wise – we can expect the Sensex to inch closer toward the 30,000 mark and the Nifty the 9000 mark. Based on the present Index values that would represent a growth of about 15-20% in One Year.

What is the Basis of this Opinion?

There are many reasons why I feel that the year 2016 will overall be bullish for Investors. They are:

1. India – A Preferred Emerging Market Choice for Investment

Have you heard of the MSCI Emerging Markets Index? This is an Index that comprises of many emerging market nations like India, China, Brazil, South Africa, Russia etc. India has a weightage of about 8% on the overall index and the MSCI Index is a consolidated/weighted average of the indices of all these countries. If we compare the MSCI EM Index, the indices of the major nations that comprise this index and our BSE Sensex, one thing is very clear.

Over the past two years, these indices have either stayed more or less flat or have lost a ton of ground. But, Sensex has gone up significantly. If you recollect the index figure from the start of 2014, sensex was trading at around 21200 and we are presently closer to 26000 which is an almost 22% growth in 2 years.

This is proof enough that India is still one among the most promising Emerging Market Nations in the world. With the steps taken by the Government to increase industrial productivity, power generation, improve infrastructure, collaboration with foreign nations and attracting Investments etc., this trend is expected to continue.

2. Strong Domestic Interest in the Stock Market

There was once a time when Foreign Investors could literally make or break the Indian Market. Flashback to the economic crisis about 6-7 years back. Companies with fantastic track record, profitability and prospects for strong growth were losing value in the market rapidly. Foreign investors from the US and Europe were liquidating assets in India to recoup their losses and as a result our market took a deadly toll. The BSE Sensex was trading at around the 8000 mark.

However, the situation now is markedly different. Yes, if today foreign investors decide to pull out drastically, our markets will lose value but not as badly as it did in 2008-09. We may expect a correction of about 10-15% at most if such an event happens.

You may be wondering why – right?

That’s because, the domestic investors are really investing into our markets. Over the past 6 months, even though FII Investors have liquidated a ton of their assets, our domestic investors (especially mutual funds) have seized the buying opportunity which has cushioned the blow. Yes, the index has gone down but not as badly as it could’ve been if our domestic investors hadn’t stepped in.

This trend is expected to continue with Indian investors buying more into our markets. Couple that with strong foreign investment interest, don’t you think the outlook for 2016 is positive already?

3. Strong Performance by Good Companies

Though the BSE Sensex is indicative of the overall stock market situation of India, it is a 
collective/weighted average of about 30 companies. If we review the performance of these 30 companies individually, we can see that, 11 of them actually made gains in the last one year and 7 of them made double digit gains ranging from 13% to 42%. Of course, as the broader index went, 14 of the 30 companies made double digit losses ranging from 13% to 55%.

If you investigate further, even though the broader market lost value, companies that were posting strong profits in their quarterly financials and stayed out of the news for the wrong reasons, their stocks did well.

Coming to the interesting part. Though the BSE Sensex lost almost 1500 points, the BSE Midcap Index actually has gained over a 1000 points in the last year with numerous midcaps offering fantastic returns to Investors. Similarly the BSE Smallcap Index has also gained about 800 points in the last year with numerous smallcaps offering good returns to Investors.

The point here is, this strong performance by good companies is expected to continue in 2016 and will help fuel the market upswing.

4. Market Correction Presents Good Buying Opportunities
Many Companies with Strong Fundamentals especially Bluechips are presently trading at near their 
52 week lows. Long Term Investors usually wait for such good buying opportunities and start buying good stocks when they fall to attractive valuations. This coupled with the earlier 3 points is going to renew the interest in the stocks of good companies and propel the market higher.

Some Last Words

Long Term Investors do not fear the market corrections. In fact, they see corrections as opportunities to buy into companies with strong fundamentals. I feel the present correction has uncovered good buying opportunities. Investors with a long term investment horizon should start cherry picking company’s with strong fundamentals and start investing on a regular basis. Don’t buy in one big lump. Buy in small quantities but do it at a regular frequency – more like a Systematic Investment Plan. Set aside a certain amount each month that you are comfortable investing, shortlist good stocks and buy into them each month.

Happy New Year 2016 folks…

So, What Do You Think? Sound off in the comments section and do remember to share this article in social media so your friends could read it too…

Disclaimer: This article is purely based on the Authors assessment of the market situation and data gathered from the Internet. This article is not a recommendation to buy shares of any company. Stock Investments are always subject to Market Risks and you may lose all or part of your money. Please be careful while selecting stocks for Investment. The Author does not accept liability for losses arising out of stock buy/sell transactions done after reading this article. 

Thursday, December 17, 2015

The Essar Oil Delisting – What To Do Next If You Are a Shareholder

Essar Oil is the second largest Non-Government owned Oil Refiner of India. Recently, the company announced that it is currently in discussion with the Russian Oil Giant – Rosneft wherein Rosneft will acquire a 49% stake in the company. Accordingly, they want to delist their shares from the local bourses. Delisting is the situation wherein the shares of the company involved will no longer be bought or sold in the stock exchange. 

So, if you are one of the shareholders of Essar Oil – Please read this article without fail. If you know someone who owns shares of Essar Oil – forward this article to them so they can benefit. Even if you don’t own shares of Essar Oil or know someone who does, you can still read this article to understand what exactly happens when Delisting happens for a listed company because in future, one of the company’s you have invested in, could Delist…

So, Whats Happening Here?

The Russian Oil Giant Rosneft is acquiring a 49% stake in the company. Essar Oil currently is listed in the Indian Stock Market with the promoters & global depository participants holding almost 90% of the total equity paid up capital. The remaining outstanding shares amounts to about 14.2 crore shares. Due Diligence exercise for this acquisition transaction is currently underway.

As part of this acquisition by Rosneft, the promoters of Essar Oil are currently acquiring this balance shares from the public by a Reverse Book Building route. On December 30th 2015, the Discovered Price of offer and its decision to Accept or Reject the offer would be declared by the Promoters. If the Promoters accept the offer, the price will be shared with the Shareholders.

  • Bid Open Date: 15 December 2015
  • Bid Close Date: 21 December 2015
  • Floor Price of the Offer: Rs. 146.1 per share

This basically means that, if you subscribe for this delisting, you are going to get either 146.1 or the offer price as discovered by the reverse book building process – whichever higher.

What is SEBI’s Say on This?

SEBI understands that there are potentially lakhs of investors across India that may be impacted due to this delisting. The company may also compromise investor interest by offering a lower price to the investor and make a profit at their expense.

So, they have instructed the Promoters of the Company as follows:

They have to Pay the Difference (if any) between the Transaction Price received from Rosneft and the Delisting price paid to the public shareholders whose equity shares are being accepted under this delisting offer.
This way, SEBI is trying to Safeguard Investor Interest which is basically part of their Job Description, isn’t it?

A Little Bit about Rosneft - The Buyer

Rosneft is probably the largest publicly traded petroleum company in the world. The best part is, the Russian Government owns a 69.5% stake in this company. The Petroleum Major BP owns a 19.75% stake in Rosneft and the remaining 10.75% is traded publicly.

So what are the Investors Options?

Investors basically have 3 options:

  1. Subscribe to this Delisting Offer
  2. Sell the Shares in the Market – NOW
  3. Sell the Shares to the Promoters up until a Period of 1 year from the date of Delisting

Lets Review these options – Shall We?

Before we start reviewing these options, we need to understand the tax liability on the sale proceeds. As per the Prevailing Tax Laws, If you sell a share via a recognized Stock Exchange after paying the Securities Transaction Tax (STT), the taxation is as follows:
  • If the shares were held for more than a year, the tax is 0
  • If the shares were held for less than a year, the tax is 15% of the capital gains

If you sell shares outside the exchange, the taxation is as follows:
  • If the shares were held for more than a year, the tax rate is 20% of the Indexed Capital Gains
  • If the shares were held for less than a year, the capital gains are added to your net taxable income and taxed per the tax rate applicable to you.

So, here – Options 1 & 2 would be considered selling via an organized exchange while option 3 would be considered selling outside the exchange.

Option 1: Subscribe to the Delisting Offer

This is the straight forward option – just subscribe to the promoters Delisting Offer. Once Delisting is confirmed and they accept the book building price, you will get your money. Plus if the price paid by Rosneft is higher than the delisting offer price, the promoters have to share that profit with you as well.

Option 2: Sell the Shares to the Promoters after Delisting

Not everyone is always informed of the stock market developments. Some people may be out of town/country or due to some reason and unable to subscribe to the Delisting offer. So, to help such people, SEBI has mandated that any company that gets delisted should give an option for investors to sell their shares to the promoters for a period of up to 1 year at the Delisting Price.

So, even if you cannot subscribe to the Delisting offer now, whatever is the Delisting Price, you can get that for a period of up to 1 year after Delisting.

Option 3: Sell in the Market – NOW

This is an option you always have with any share you own. You can sell your share in the open market as long as the share is traded and get the transaction price. Since the share isn’t delisted yet, you can exercise this option if you want. However, the point here is – the capital gains arising out of the sale will be taxed as per the prevailing tax laws.

Which Option Gets My Vote?

After Reviewing these 3 options, you are probably wondering what’s my take on this.

Option 1 – Subscribing to the Delisting Offer is for the Investor who doesn’t need the money right now and is willing to wait & watch to see how things play out. Plus if the price at which Essar Oil shares are acquired by Rosneft are higher than this, the promoters will also compensate the Investors for this. So, this is definitely a “Good & Safe” Option.

Option 2 – Selling during the Exit Window is for the Investor who basically missed the bus and did not realize his shares got delisted. Though the Taxation aspects are not favorable, you can still get a decent price for your shares. So, this would be your “Worst Case Scenario” Option

Option 3 – Selling in the Market Now is what I would recommend right now because of the following reasons:
  • Delisting is always an uncertain process. The whole share buy-back through reverse book building is subject to approval by the promoters. You never know whether they will accept the offer.
  • The stock is currently trading @ Rs. 220 per share (as of End of Trading on 16th Dec) and is expected to trade at around this number in the near future.
  • The discovered price is not expected to be much higher than the current market price. In fact, Market Experts feel the most likely price would be around the Rs. 190 - 200 mark.
  • Tax Treatment wise, selling now or subscribing to the offer price are the same. The chances of making a better profit now are higher than waiting for the Delisting to Happen.

So, I think Option 3 is better than Option 1.

Note: If you are someone who bought shares of Essar Oil last year during the last week of December, Option 1 will be better because selling in the open market now would attract short term capital gains tax @ 15% while if you wait and subscribe to the Delisting offer, you would’ve finished 1 year and would have 0 capital gains tax.

Some Last Words

Share Delisting usually causes a lot of speculation and interest in the market and there can be short term spikes in prices. The price of Essar Oil stocks have increased in the last couple of days and will most probably continue until the decision is made by the buyer company. However, even if some sort of bad news spills out, share price tank and tank hard.

So, I would recommend you choose between Options 1 or 3 and decide on whichever suits you Best.

Happy Delisting!!

Disclaimer: The Author does not hold any shares of Essar Oil. This review is based on his current assessment of the company's stock and the Acquisition situation. Please think carefully before deciding what to do with the shares of Essar Oil that you hold. The Author will not be liable for any losses arising out of your decision to sell or not sell the shares you own. 

Saturday, December 12, 2015

4 Things to check before applying for a Loan

Loans have become an integral part of modern life. Most of working people access loans to achieve various financial objectives, ranging from buying a house, funding child education, buying a car or a consumer durable. There are people who even take loans to fund their vacations. Based on the loan type a person may be required to keep collateral or may be able to get a cash loan. Home loan, gold loan, vehicle loan are few examples of secured loans where the loan is secured against the collateral. A personal loan, credit card are examples of unsecured loans.

Not all loans that get applied are approved by lending institutions. The loan applications undergo the underwriting process where it is reviewed on various parameters. Let us look at four highly important things that one should be reviewing before applying for any credit facility. 

Check your eligibility

Eligibility to repay the loan is of high importance. Not only from the approval of the loan application but also from personal perspective. While the lending institution checks on the income to decide how much loan you shall be eligible for, not every expense actually gets captured in the evaluation process. It is only you who would know the exact extent of your expenses. It is highly recommended that you should calculate your own eligibility based on your actual expense. At any given point of time, your EMIs and other outstandings should not be more than 50% of your net income. Any amount higher than this can lead to financial stress and non-payment of obligations. 

It is important for you to know that the non-payment leads to impairment in CIBIL report and can lead to outright rejection of all credit facilities that you may want to apply in future.

Check your credit score

It is highly recommended that you check your CIBIL score before applying for any loan. The credit scores not only play an important role in the approval of loan but can also have a direct bearing on the rate of interest being charged. A low score can lead to higher interest getting charged and hence will impact the EMI being paid. The score can be low for three primary reasons:
  1. For Impairments and Repayment issues on credit facilities in the past
  2. For an error
  3. For Low Activity
In case the score is low, it becomes important to know the reason for it and working to improve upon it. One can also get in touch with Credit Counseling Companies to seek help on improving the credit health.

Check product that suits your requirement

There are various products available from different lenders. You can look out for the product details given on the websites of various lenders or can check various product offerings through websites that give comparison and extensive details on all lending institutions extending a particular type of loan or credit facility. This shall help you in identifying the product that suits your requirements.

Interest rate 

Interest rate getting charged on the loan may have some variation from one lender to the other. So it is important to check on the same before applying for loan. A higher interest can have bearing on the amount of monthly installment being paid. In fact, an incremental interest of 1% on a home loan of Rs 50 lakh can result into an additional payout of about Rs 10 Lakh in interest over 20 years of loan tenor. Therefore getting to know the interest rate is to your benefit.


Since a loan or any other credit facility can grossly impact the finances and financial life of any individual, it is extremely important to check on the above factors, most importantly your CIBIL score before submitting application with any bank or lending institution.

This Blog Post was Sponsored by 

About the Author: This guest post is written by Mr Arun Ramamurthy, the co-founder of Credit Sudhaar, a company which aims to spread awareness about importance of credit health and help people improve their credit score . He also co-authored the book ‘Unlock the Power of your Credit Score’.

Thursday, December 10, 2015

The New Goods and Services Tax (GST) and You

If you follow the news articles in India, you are bound to have come across points about the Winter Session of the Parliament being underway and that the opposition parties are blocking proceedings. One of the big points of contention between the ruling BJP and Opposition (Esp. Congress) has been over the proposed or should I say Much Awaited GST (Goods and Services Tax) Bill. 

This article is not a political wrap up of the situation, rather it is about what would be the impact of this GST on the Indian Economy and the common man - You and Me...

So, What is this Goods and Services Tax?

GST is an indirect tax that will be levied on manufacture, sale and consumption of goods and services across the country. The existing indirect tax system is highly complicated and inefficient. There are overlapping taxes levied by the Centre and the states. So, GST is expected to create a single umbrella uniform indirect tax code on goods and services across India. 

In simpler words - this new GST is bound to make the lives of majority of Indian citizens a lot simpler from an indirect taxation stand point. 

As you probably know, I am an NRI working in Singapore. Singapore has a fantastic GST System and does not have the multiple overlapping/complex indirect taxes like India. There is just one GST that I pay for all goods and services and have nothing else to worry about. This proposed GST from the Indian government is along the same lines. 

Some History - Shall We? 

Before we dive into the details of the GST Bill, it would be a good idea to review some history isnt it? 

You may have read in the news that the Monsoon Session of the Parliament was a complete washout and the passage of the bill was Stalled. Ironically, the GST Bill was first introduced by the Congress led UPA in 2009 but they couldnt get it passed. After the BJP Led government came to power last year, they modified the bill slightly and passed it in the Lower House (Lok Sabha) in May 2015. 

As this is a major tax reform which requires a constitutional amendment, this bill has to be passed in both houses of the parliament and with a 2/3rd Majority. Since the BJP doesnt enjoy the majority in the Rajya Sabha - we are basically stuck because the Opposition is stalling the bill passage. 

What is the Current Situation?

Before the start of the Winter Session, the political deadlock surrounding this GST bill seems to have been broken after our Prime Minister called on the opposition President and former Prime Minister from Congress to resolve the points of contention. The Bill is expected to be implemented from 1st April 2016 if it is successfully passed in this current ongoing session. 

Enough History and Politics. Lets get down to facts about what would be the impact of this GST Bill on the Indian Economy and more so the common citizen of India...

Will the GST Bill Boost Economic Growth? 

First things first - a Tax Reform CANNOT boost Economic Growth directly. However, as you may recall from a few lines above, this single indirect tax policy will make life easier for business to establish and run in India. This will impact the countrys Economic Output in a positive manner and of course help push our Gross Domestic Product or GDP further higher. 

One of the reasons for the Indian Stock Markets below-expectation performance over the past 6-9 months has been owing to the fact that our political situation is more or less a deadlock between BJP and Congress. With both parties having a majority in either house of the parliament, major reforms like the GST are being stalled just to push a political agenda rather than for the good of the nation. 

Investors expect a clear economic agenda from a country that supersedes political differences between the ruling and opposition parties. This GST Deadlock has been a really bad showcase example about India and our Economic Policy to the world. Thankfully things seem to be moving ahead and if  the bill gets passed, the global investor confidence is bound to return and help boost our Indian Economy further. 

So, indirectly, the passage of the GST Bill will definitely "Help" the Indian Economy. 

Will the GST Bill be a Game Changer? 

One of the things we Indians expect is an overnight miracle. We are so accustomed to folklores and magical stories from our history that we expect things to change overnight. When the Modi Government took charge last year, there was a buzz around what they could do to revive the Sagging Indian Economy. The Stock Markets reacted positively, investors from across the world reacted positively and to be fair the Indian Economy is in a much better state than it was a couple of years ago. But, at the same time things are cooling down now and the reality of the situation is setting in. The stock market isnt growing as explosively as it did last year but as I said, things arent as bad as they were 2 years ago. So, there is still hope. 

Something like this GST Bill can be a Game Changer in the long run - for sure but, if you are expecting an overnight miracle, then you are bound to get disappointed. Not to mention the teething problems and actually implementing this GST concept across a country as big and populous as India. 

I Personally have high hopes for the GST but I dont have high expectations for the next 2 - 3 years. This is to avoid disappointment during the initial stages. 

I am confident this GST will be a Game Change in the Long Run...

How Does this Impact the Common Man?

When you visit an establishment and buy something, some charge sales tax, some charge state specific tax, some charge you VAT and I am barely beginning to scratch the surface. There are so many indirect taxes in our country that its quite hard to explain all of them.

Thankfully this GST Bill aims at scrapping all those taxes and replace them with a single tax to make things simple. You buy something for X rupees, you add a small % GST and thats it. No need to worry about what state you are in or where you are buying it from.

This does look simple and much better - doesnt it? 

Some Last Words

GST will be a powerful symbol of change and may help the government gain the confidence of not just the foreign investors but also its citizens who are hassled by the complex Indirect Tax structure. 

But, if history is a good teacher, nothing is for granted and only time will tell what happens If and When the GST Bill is passed. 

So, lets wait and watch...

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