Moneylife 20 February 2014

SUCHETA DALAL ON: HOW TO WAKE UP A DEAF GOVERNMENT

FALSEHOODS IN ADVERTISING

Personal Finance Magazine

RBI’S GAFFE OVER PRE-2005 CURRENCY NOTES

20 February 2014

Rs 30

Pages 68

www.moneylife.in

Are You a

Smart Investor?

What iss tthe he iideal deal pprofi rofile le of of a smart smart saver saver & investor? investtor?? Here are the results of our survey. Check out where youu sstand tand

FIXED INCOME 25 Cover Page_208.indd 2

INSURANCE 44

HEALTH 52

YOU BE THE JUDGE 55 2/1/2014 3:06:07 PM

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LETTER

ISSUE CONTENTS

20 February 2014

FROM THE

EDITOR Behavioural Analysis

I

have heard heads of mutual funds say that proper investor education will ensure that people buy more mutual fund products. Quite possible; except that we don’t see mutual funds providing any meaningful investor education at all. Moneylife Foundation was set up to offer investor education in a consistent, meaningful and unbiased manner. Are our programmes, combined with what we write on our website and in this magazine, more meaningful? Well, while we have not done a formal evaluation, the results a survey, which is the basis for our Cover Story this time, could be a pointer. We are pleasantly surprised to see that an overwhelming number of our respondents have got the answers to most of our 20-odd questions right. Moneylife readers are smart savers, indeed! Sucheta, in her Crosshairs section, delves into the details of regulating advertising and highlights some of the most important takeaways from a highly interactive session conducted by Moneylife Foundation. For those who missed the superb session, do check out our Foundation website and YouTube video. The Aam Admi Party has taken the country by storm with its old-style politics of street-level agitation. Interestingly, some other political parties too have taken to the same strategy, demanding removal of tolls and reduction of power bills. Will this lead to good governance or anarchy? Sucheta discusses this in her Different Strokes column, while reminding us that, sometimes, there is simply no other option to wake up an insensitive government. You will probably be shocked to hear that finance officers in the US have admitted to widespread mis-representing earnings. Many have done so to boost share prices and to earn fat paycheques. But these aren’t the only reasons; check out our Earning Curve section on page 58. Tax-free bonds are getting subscribed fast and you can sometimes miss the bus. Raj Pradhan outlines what you should keep in mind so that you have a better chance of getting an allotment. As always, do write to us with your suggestions and comments. Debashis Basu „

28 Cover Story

Are You a Smart Investor? What is the ideal profile of a smart saver & investor? Here are the results of our survey. Check out where you stand. Analysis by Debashis Basu

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– Exchanging Notes: Confusion over RBI’s Move – Tackling Bad Ads: Self-regulation vs Official Regulator for Ads – People Power: When the State Lies

16 Different Strokes

How To Wake Up a Deaf, Insensitive Government

18 Current Account

?

MONEYLIFE QUIZ

21 Your Money

– India Post To Install 3,000 ATMs, 135,000 Micro-ATMs – Financial Well Being Index – RBI To Withdraw All Pre-2005 Currency Notes from Circulation – RBI Defies the FM, Hikes Interest Rate

Disclaimer: Moneylife has a policy of not allowing its editorial staff to buy and sell stocks that are written about in the magazine. All personal transactions in individual stocks are subjected to internal disclosure rules.

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CONTENTS SMART MONEY

Capital 22 Intelligent Allocation Warren Buffett has become the world’s most successful investor by seeking out companies that make excellent capital allocation. How does this work?

FIXED INCOME

Your 26 Missed Allotment? Advantage, but 27 Tax What about Returns?

YOU BE THE JUDGE

My TRUE (?) 55 “To Love” On the issue of breach of promise

ML FOUNDATION EVENTS INSURANCE

FUND POINTERS

Option 24 AforSmart Retirement?

Not unless you depend on sophisticated research to decide how much to invest FIXED INCOME

IREDA 25 IRFC, Tax-free Bonds – Top-rated Corporate Bond Yields – Bajaj Finance’s Fixed Deposit Scheme – 10-Year G-Sec Benchmark Yield STOCKS

36 Street Beat

44 Insurance Trends Life Insurance – LIC’s Products with Shorter Policy Term Regulation – Dismal Start for Insurance Demat – Banks May Be Forced To Be Brokers Fine Print

39 Long Term Surprise Action: RBI picks up the sledgehammer to control inflation

40 Value Picks Stagflation Risks

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Inflation indexed bonds and taxfree bonds score over bank FD for those in lower and higher tax bracket, respectively

48

Keeping False Advertising Out

The Lamborghini Veneno

How ASCI functions as a self-regulator and how citizens can complain against ads

Just nine of these have been made. One Indian entrepreneur is one of the buyers REAL ESTATE

Told To Refund 50 Builder Forfeited Amount – Land Acquisition Invalid if Compensation Not Paid – Housing Start-up Index Soon – Name of Official Mandatory HEALTH

Rose-tinted View: One more instance of how stock marketplayers are usually weak on understanding macroeconomic trends

Options beyond Bank FD

AUTO

Finolex Cables: Connect with It

38 Which Way

56

Case against 52 The Intervention Healthy people are treated with drugs, leading to adverse reactions, demanding more drugs! – Pulse Beat: Medical developments from around the world

EARNING CURVE

58 Misrepresentation of Earnings A recent research paper, based on a survey of chief financial officers (CFOs), shows how widespread the practice of misrepresenting earnings is

BEYOND MONEY

Knowledge 66 “Where Is Free…” AIREP is a unique exercise to transform lives in villages through knowledge and empowerment, finds Hitisha Jain

LEGALLY SPEAKING

Transaction 54 IsTaxBank a Mirage? Can all direct taxes be abolished in favour of a transaction tax? Seems like a pipe dream

DEPARTMENTS Letters ............................ 8 Book Review ....................60 Money Facts ....................63

2/1/2014 2:27:29 PM

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Volume 8, Issue 26 7 February – 20 February 2014

Debashis Basu

Editor & Publisher [email protected]

Sucheta Dalal

Managing Editor [email protected]

Editorial Consultant Dr Nita Mukherjee [email protected]

Editorial, Advertisement, Circulation & Subscription Office 315, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai - 400 028 Tel: 022 49205000 Fax: 022 49205022 E-mail: [email protected]

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Subscription e-mail [email protected]

New Delhi

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Bengaluru

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Kolkata

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Moneylife is printed and published by Debashis Basu on behalf of Moneywise Media Pvt Ltd and printed at Magna Graphics,101C&D, Government Industrial Estate, Kandivli (West), Mumbai - 400 067 and published at 315, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai - 400 028 Editor: Debashis Basu

Total no of pages - 68, Including Covers

RNI No: MAHENG/2006/16653

Letters to the Editor

their trust in the air-conditioned compartments of the railways seems misplaced. As expected, the railway minister has announced compensation for the victims and also ordered an inquiry into the incident. Can this bring back the people who lost their lives in the fire? We all know the answer. In a few days, this accident will be APATHY TOWARDS forgotten until another one happens. RAILWAY PASSENGERS’ Is there no respite from this? SAFETY Only a few days back, there was The fire in Nanded Express a fire accident in a Volvo bus (28 December 2013) is another (ironically, again, in grim reminder of the Karnataka) in which a few apathy of the government people lost their lives. In and railway officials to both cases, the emergency safety of passengers. A exits were dysfunctional. follow-up report says that Even in the Carlton Towers the Railways are short fire tragedy in Bengaluru, of budget provisions to there was an issue with the effectively implement emergency exit that could safety procedures. Minister not be opened. after minister, politician after politician, has given greater priority Fire safety has now acquired a notional hue with people Write to the Editor! The only investment that Win jewellery not bothering enhances your face value. to check the nitty-gritty—like functioning of emergency exits, conducting periodic mock drills, etc. The presence of fire Congratulations G Venkatesh from Bengaluru! Your letter to the Editor wins a Surat Diamond gift. safety systems is Keep writing! Keep winning! no guarantee for fire protection— these systems need to be functional. to populism when it comes to G Venkatesh, Bengaluru, by email making sweeping reforms in the administration of railways. To appease the vote bank, fares have DELAY IN MAKING seldom been raised to match the PAYMENT BY SHCL demands of the market. Services Stock Holding Corporation of India continue to be shoddy. Ltd (SHCL) is among the largest As if train accidents are not enough, depository participants (DPs) in now we have the additional hazard India. This institution is promoted of air-conditioned coaches catching by the financial institutions fire. People prefer to travel by airincluding IFCI, IDBI, UTI, LIC, conditioned coaches for safety, GIC, etc. As the promoters have a security and comfort; but now all good track record in their respective ``

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LETTERS

` field, people expect more and require excellent service

from SHCL. But my experience is different. I maintained demat accounts with one of SHCL’s branches in Chennai for more than four years in my name and in the name of my family members. Last year, I shifted the accounts to another DP for operational convenience. All my accounts had credit balance at the time of shifting to another DP. The amount which I was remitting to the account towards DP charges (apart from yearly/quarterly maintenance charges, every debit in the demat account attracts charges) was maintained separately by the DP.

When, I sold some shares, debit was being made to the account towards the charges, based on the scrips sold. As I used to remit the amount for their debit towards charges, the account always had credit balance. SHCL did not send its cheque towards the credit balance available in the accounts after transferring my stocks to another DP. I sent e-mails to them. There was no response to my three e-mails sent to customercare@ stockholding.com. As my e-mails did not get any response, I sent letters duly signed by me/family member stating non-receipt of credit balance available in the accounts. In respect of all the accounts, I was ``

OUR READERS WHO CLICK WITH US Here’s a sample of the kind of feedback that we receive from our readers on our vibrant website, www.moneylife.in

‘BLACKLISTED HOSPITALS’

T

his is with regard to “Mediclaim Problems: 10 reallife cases from Moneylife Foundation's Insurance Helpline” by Raj Pradhan. Great work being done by Moneylife; please continue the good work, Raj Pradhan. Regarding Gujarat, I wish to inform you that a large private health insurer has come out with a ‘blacklist of hospitals and doctors’ (many in Surat). If a patient is admitted to these hospitals, or referred by these doctors, no claim is payable—cashless or reimbursement. Imagine, in case of an emergency, a customer has to first find out whether a hospital is on the ‘blacklist’ or not, and then get treated! Deepak Khemani

SC ORDER IS UNEQUIVOCAL

T

his is with regard to “Aadhaar for LPG: Mess created by UIDAI, OMCs (oil marketing companies) and citizen victims” by Yogesh Sapkale. This is easily the most audacious disrespect of the Supreme Court. The order is simple and straightforward; yet, for reasons best known to them, the government derives sadistic pleasure in making things complicated for us citizens. Kaviraj B Patil

‘RESOURCES COME FROM THE PUBLIC’

T

his is with regard to “Making Banks Accountable to Retail Customers” by Sucheta Dalal. A wellresearched analysis. The costing and pricing of products followed in the financial sector is no different from what the MNCs (multinational companies) follow for most products. The objective always is to profit from every transaction. What banks often forget is that their

resources come from the clientele–the public they are expected to serve. When regulatory bodies are not able to work on the same wave-length, the situation is taken advantage of by vested interests. MG Warrier

NO NEED TO SHED TEARS!

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his is with regard to “Morgan Stanley: Quit India” by Sucheta Dalal. It is good that they have quit. Actually, they should have quit long back. No need to shed tears; they proved to be useless and took many investors for a royal ride with their first offering itself. Anil Agashe

‘SLAPPING Rs112 IS INAPPROPRIATE’

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his is with regard to “Should non-KYC complied bank account holder be penalised?” by Vivek Sharma. Most of the readers of this article are urban-based and fairly high-income individuals. Let us not forget that there are crores of low-income rural and urban households who have been persuaded / pressured to open bank accounts either directly or through business correspondents. Most of them would be receiving some of the direct benefits like payment under NREGA through their bank accounts and draw the money soon after it is received, leaving a balance of just a few rupees. So, introducing a uniform procedure of slapping a charge of Rs112/- (I am also surprised at the logic of this amount as mentioned by Yerram Raju. May be converted two US dollars as bank officers are more keen to learn from their overseas experience than from rural segment) is inappropriate. S Santhanam

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LETTERS

` able to get their cheque

like ESSO, STANVAC, Bulls and bears are Write to the editor! BURMAH SHELL and after four months. I was unpredictable. Invest in diamonds. Win jewellery CALTEX, even after surprised to note SHCL’s nationalisation, are still attitude. It is expected covered. The employees to make payment are covered even after immediately after closure retirement up to their of the accounts. Had I death without having not reminded SHCL, I to pay any premium would not have got back Write to the editor. If your letter is the best, You’ll whatsoever after the amount. SHCL did Win Surat Diamond jewellery. retirement. not have the courtesy The burgeoning group to respond to my mails. insurance claim losses are primarily on account of SHCL did not even regret the delay in making the settling even the most frivolous of claims for fear of payment. losing other business if they incur their displeasure. I What is the difference between this institution promoted by government-owned institutions and other can say this with confidence, after having worked in a large Tata group company, covered under group cover, privately-owned depositories? SHCL should set an and later as the CAG-appointed statutory auditor of example to others and respond to customers’ needs immediately. Otherwise, SHCL will lose its identity and New India and United India. Insurance companies do not hesitate to hike the rates brand image. RM Ramanathan, Chennai, by email for senior citizens claiming that the numbers of their claims are high. It is to the contrary. An RTI (Right to Information) query showed that those lodging claims BURGEONING GROUP INSURANCE in the 35-45 years age brackets are the highest and CLAIM LOSSES these are essentially in the group covers; the lowest are In the Cover Story of Moneylife on mediclaims (issue claims are from the 60+ age group because the claims dated 23 January 2014) and in the Fine Print of the procedures are so tedious and the harassment from the Insurance Trends column, there is a reference to TPAs (third-party administrators) so severe that senior “aggressive pricing for group insurance?” The CAG citizens prefer not to lodge claims but continue to (Comptroller and Auditor General) has rightly pulled up public sector insurance companies for huge losses in remain insured from the safety point of view. Now that the CAG has pulled up government insurers, group mediclaims where there is huge variation in the it is time IRDA (Insurance Regulatory and Development premium rates. There is more pre Authority) revisits the entire issue of mediclaim to this than it meets the eye. premiums. As it is, the Bombay High Court has already It is an open secret that the admitted a PIL (public interest litigation) for hearing. premium rates charged to pr Nagesh Kini, Mumbai, by email large corporates come down la substantially depending upon su the th other general insurance HOW TO REACH US business that the companies b Letters to the Editor can be emailed to [email protected] have with them. These other h or can be posted to: The Editor, Moneylife Magazine, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, covers—like earthquake, c Dadar (W), Mumbai 400 028 or faxed to 022-49205022. Letters fire, marine, strike, riots, must include the writer’s full name, address and telephone civil commotion, etc—with number and may be edited for clarity or space. relatively higher premium New Subscriptions & Customer Service For new subscription requests, complaints about current subrates and lower claims scription and books, write to [email protected] or to heavily cross-subsidise the Subscription Manager, Unit No. 315, 3rd Floor, entire group health insurance where the claims:premium Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), ratio far exceeds that of the individual covers. Mumbai 400 028 or call 022-49205000 or fax to 022-49205022. The specially designed health packages for corporates Advertising cover a larger number of risks like pregnancies, dental For information and rates, email us at [email protected] or and optical care that are specifically denied to the aam call 91-022-49205000. janata. Employees of the old MNC petroleum giants

11 | 20 February 2014 | MONEYLIFE

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www.moneylife.in Exclusive news & views with a big difference e EXCLUSIVE NEWS

Sad consequence of easy money policies

News you had better not miss RTI order asks auto-rickshaw permit information to be put in public domain

The real problem with present-day peer-topeer (P2P) lending is that, o en, lenders are clueless about the financial health of the borrower

EXCLUSIVE VIEWS On issues that matter to you How long can the Chinese shadow banking system avoid default?

Underestimating liquidity risks: How investors can suffer Risk management models used by professional investors o en assume that securities can be traded infinitely. When liquidity dries up, especially during periods of crisis, trading becomes very expensive Chief information commissioner, Ratnakar Gaikwad ordered the Maharashtra transport commissioner to disclose information about a case where a Thane RTO PIO had ordered an RTI applicant to fork out a whopping Rs55.44 lakh pertaining to auto-rickshaw permits

Operational risks of KYC and AML policies in India Know your customer and anti-money laundering processes, meant to reduce risks in the Indian banking sector, are fraught with operational risks

William Gamble How RBI can use depositor’s money to educate savers

Edelwiess Research offering 15% ROI to investors: What’s the catch? Edelwiess Research is offering a ‘secured’ 15% return on investment over one year to investors via a share purchase and sale agreement for the shares of K Sera Sera

Vivek Sharma Give bank customers a chance to re-claim their dormant accounts

Now Sonia dispenses economic wisdom; wants duty cut on gold

R Balakrishnan

Interest rate futures is not old wine in a new bottle While there is a fear that, like other derivative contracts, IRFs (Interest Rate Futures) contracts may also get influenced by actions of punters, multiple players and large institutions will rein in that activity

Why more citizens need to file RTI for exposing the loot

The UPA chairperson has reportedly sent a le er to the government for reducing import duty on gold and relaxing the 80:20 import-export rule Vinita Deshmukh

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Price war in airfares: Travellers win for the time being

False Advertising?

Vote in the Moneylife poll on the top issues of the week Will AAP prove to be a challenge to Congress and BJP?

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>> At a Moneylife Foundation seminar, Partha Rakshit, chairman of the Advertising Standards Council of India (ASCI), explained the role of ASCI in monitoring advertisements. You too can benefit from these programmes by registering at www. mlfoundation.in Membership is free.

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Exclusive news, the stories behind the headlines and the truth between the lines by Sucheta Dalal

Exchanging Notes Confusion over RBI’s move

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n a positive move, the Reserve Bank of India (RBI) has decided to mop up currency notes with lower security features which have been widely counterfeited. But the way it went about it caused a burst of initial panic. RBI needs to learn that issues which impact the aam aadmi need clear and comprehensive communication rather than bureaucratic circulars followed by multiple clarifications. Now, here are some facts that should have been communicated along with the mid-January circular to withdraw currency printed prior to 2005 (where the notes do not mention the year of printing and have less security features and, hence, are widely counterfeited). First, RBI’s CVPS (currency verification & processing system) machines have already been withdrawing pre-2005 notes for nearly a year. The new circular is only to mop up the residual notes. This was one of the measures to counter the large number of sophisticated counterfeit notes which can be detected by only CVPS machines. It is, however, unclear why the exercise includes Rs10, Rs20 and Rs100 notes, where counterfeit or fake notes are

of poor quality and easier to detect. RBI had initially instructed banks to exchange notes only after 31st March and this set off panic among users when uninformed shopkeepers and taxi-drivers refused to accept old notes. Immediately, a brisk business of exchanging pre-2005 notes at a 2% commission sprang up in Mumbai, as reported by a local daily. Following a clarification by

currency clean up was not aimed at catching tax-evaders or attacking black money. RBI still needs to put in place a communication strategy to reach out to 300 million-plus unbanked Indians who deal only in cash. A radio campaign in local languages and a programme to work with banking correspondents to facilitate the mop up of old currency must be put in place well before 31st March to avoid another round of confusion and exploitation of those who have limited means.

Tackling Bad Ads Self-regulation vs Official Regulator for Ads

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RBI, banks are now exchanging pre-2005 currency without a murmur. Our sources also tell us that bank ATMs will not dispense old currency notes. By announcing a positive and pre-planned move on the eve of a general election, without adequate public information, RBI caused needless confusion. Governor Raghuram Rajan had to use his post-credit policy press briefing on 28th January to clarify that the

elf-regulation can work quite effectively to curb false and misleading advertisements, even when an impromptu committee of socially-conscious citizens is put together to decide complaints. Marketing and advertising expert Paritosh Joshi demonstrated this most effectively at a Moneylife Foundation seminar on how to hold irresponsible advertisers accountable. “The advertising code revolves around just four words—truthful, decent, safe and fair—to decide whether an advertisement is appropriate,” he instructed the committee drawn from the audience. Despite strong

``

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People Power When the State Lies

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egulations work when an informed and vigilant public keeps up the pressure on the government. The withdrawal of the Rs30-crore Bharat Nirman campaign unleashed across television channels nnels by the government in September last year is the best example of how people power works. The campaign, which claimed credit for

` differences in sensitivity, perception

and attitudes of the audience, decisions by this group mirrored the view of ASCI’s (Advertising Standards Council of India) official committee, in most cases. This is significant because, every year, the ministry of consumer affairs (MCA) threatens to set up a government regulator to monitor advertising. Advertisers and agencies believe, with good reason, that bureaucratic, censor-board-like clearances will lead to delays and corruption. It was clear from the programme that an independent committee, using common sense, could be just as effective in holding advertisers accountable without any knowledge of the ASCI code. Remember, the withdrawal of an expensive advertising campaign, especially one that has celebrity endorsements, imposes a massive financial cost on the advertiser. A strong code is a good deterrent. Unfortunately, consumer organisations and academics, often the beneficiaries of financial grants from the ministry, tend to back the MCA in asking for an advertising regulator. Do we need another censor board for advertising? The common-sense answer would be a resounding ‘No’. In the past

actions and statute that had not been cleared by parliament, raised a storm of protest, especially on social media. Scores of complaints were filed with ASCI, which, after an internal discussion by its board, reiterated its policy of “not taking complaints against government and political advertisements.” Indeed, there is merit in the concern within ASCI that aan attempt to regulate government advertising may gove lead to vindictive retaliatory action acti in the form of a government regulator. gov At the Moneylife Foundation seminar, Fo Brahm Vasudev Br (chairman of Hawkins (c Ltd), who wrote ASCI’s L

initial code as a founder member, was emphatic that nothing precludes ASCI from accepting complaints against political campaigns, but that is a separate debate. ASCI forwarded the complaints against the Bharat Nirman campaign to the TV content regulator (ministry of information & broadcasting) for appropriate action. Consequently, the entire Bharat Nirman campaign was withdrawn, not merely the fake ones about hawkers and a realty regulator. But with elections round the corner, the government has launched a new and more nuanced one to puff up its achievements. These need public scrutiny followed by complaints filed with the government as well as with ASCI.

couple of years, ASCI has, indeed, worked hard to increase its reach through suo moto action and an independent monitoring mechanism to catch false and irresponsible advertising with a special focus on education ads, dubious medicines and slimming products. But a lot more needs to be done. ASCI still attracts criticism for dragging its feet on issues that affect its large advertisers. It also does not cover financial advertising, where misleading claims and calculations are subtler. Three specific areas that ASCI needs to address are: • Disclaimers continue to be unreadable. The text of these disclaimers must also be made available to complainants on request, at least by email. Similarly, complainants must be given access to research reports that form the basis of specific positive claims made in advertisements (15% whiter, 3.5x stronger, twice as soft, etc). This is important because, very often, the results have been found misleading or based on unreliable sources and unrecognised authorities. While these usually become the subject of intra-industry disputes,

there is no reason to deny the information to complainants within a specific timeframe. ASCI’s biggest weakness is its reluctance to act against repeat offenders or habitual offenders. These are usually large multinational companies who are hard-pressed to substantiate the claims of their fairness creams or promise of flawless complexions, anti-pimple remedies or even nutrition products aimed at children. Many believe that the companies have worked out a neat routine of carpet-bombing a new advertising campaign, knowing full well that it will lead to consumer complaints (at least from competitors) which will be upheld and force the withdrawal of the campaign in about six weeks. The next campaign, cynically, makes a new set of unsubstantiated claims that are again upheld. If ASCI fails to respond to demands to step up action against powerful repeatoffenders, it will continue to face the charge of being a weak regulator and the constant threat of the greater evil of a government regulator being set up. „ •

15 | 20 February 2014 | MONEYLIFE

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DIFFERENT STROKES SUCHETA DALAL

How To Wake Up a Deaf, Insensitive Government More and more politicians are adopting old-style agitation, brought back to fashion by Arvind Kejriwal, because it is probably the only way one can force a government to care about us

Y

ou may agree with him or disagree with his tactics, have chosen two middle-class issues for their protest—the but there is no doubt that Arvind Kejriwal, by MNS is going after high toll charges while Congress MP, demonstrating electoral support to his Aam Admi Sanjay Nirupam, wants electricity tariffs cut in Mumbai’s Party (AAP), has shaken up an inconsiderate and insensitive suburbs. MNS leader, Raj Thackarey, exhorted party workers political system. The jury is still out on whether these hit-and-run tactics, devoid of a clear plan for economic not to pay tolls and to attack anybody who obstructed growth or governance, are good for the country or we will them. It led to predictable violence and destruction at dissolve into mindless anarchy and public protests. But several toll plazas near Mumbai. A few weeks earlier, the the AAP’s success has signalled Shiv Sena had resorted to arson that the educated, non-voting, and violence at Kolhapur to chattering, middle-class has protest against toll collection. The Maharashtra government woken up and is willing to go out and vote when it finds a made little effort to check the violence or book Raj seemingly plausible alternative. The AAP experience Thackeray for openly inciting violence. shows that ‘new generation’ political parties (a phrase used The toll issue has been by the founder of NavBharat festering for years and public Sharad Pawar Nitin Gadkari Party) are just as capable of anger against usurious playing to the voters’ gallery Contractors, such as Ideal Road levies, cost escalation, poor road maintenance and nonby making economically Builders (IRB), maintain close unviable promises about transparency in collection have relationships across political government jobs, subsidies or agitated people for several law & order issues. Consider parties as well as the media. This years. Bankers openly tell us nexus was probably key to the the AAP record so far. Delhi’s that toll-collection is a cash law minister, Somnath Bharti, stunning silence BJP leader, Nitin generation machine because encourages mob action against the traffic, in most cases, has far Gadkari, has maintained two women because the police exceeded the projections. The nexus between toll companies refused to obey his order to and politicians is also an open secret. Contractors, such raid without a warrant and arrest women after dark. This was followed by a street protest by an incumbent as Ideal Road Builders (IRB), maintain close relationships chief minister to demand action against the police officials across political parties as well as the media. In 2003-04, who did not heed Mr Bharti’s illegal order. That agitation when I criticised IRB first toll hike for the Mumbai-Pune fizzled out with considerable loss of face to AAP, but its Expressway, IRB promptly sent me a ‘VIP pass’ to avoid already implemented populist decision with regard to toll. This nexus was probably key to the stunning silence power tariffs and water charges, at the cost of the state exchequer, remain in place. Importantly, AAP is in no BJP leader, Nitin Gadkari, has maintained about the hurry to act on the allegations of corruption against the many changes in the Mumbai-Pune Expressway contract previous Congress regime. However, this article is not which ignored alternative modes of revenue generation. about AAP’s actions, but about its fallout in Maharashtra. Mr Gadkari did not utter a word when every non-toll A couple of months before the general elections, the measure to raise revenues and meet construction costs Congress and the Maharashtra Navanirman Sena (MNS) was dropped. A truck terminal, an IT city at Chowk, ``

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DIFFERENT STROKES SUCHETA DALAL

` advertising hoardings along the Expressway and revenue

to the chief minister levelling serious corruption charges from food courts and petrol pumps were supposed to be against Reliance Infrastructure as well as the electricity part of the plan. Mr Gadkari also did not challenge the regulator. He claims that tariff proposals from Reliance repeated increase in toll fees by IRB under a one-sided Infrastructure receive ‘benevolent’ consideration by contract with a hefty escalation clause. the regulator which has been receiving ‘huge payoffs’. The situation gets worse at the entry points to Mr Nirupam wants the government to “rein in vulture Mumbai. A Congress MP admits that his government’s capitalists like Reliance Infra (RInfra) to prevent them inaction, despite many letters of protest, is embarrassing. exploiting and looting their consumers;” he also wants At Dahisar, he says, people pay toll “every time they drop action to ensure that power reforms actually benefit their children to school or go out to the market.” Why consumers. Having openly alleged corruption and payhasn’t the problem of local residents been addressed by offs, he says that if an independent investigation does not issuing them passes? He throws up his hands and points reveal complicity, he will withdraw the allegation. to the current chief minister who has become known for This tactic of alleging corruption and calling names his monumental inaction. was Arvind Kejriwal’s modus operandi before the Delhi Contrary to the national policy on tolls, which elections. He even waved around a bunch of papers mandates a distance of 80 kilometres between two allegedly containing evidence of corruption against former collection points, the Maharashtra government permits Delhi chief minister Sheila Dikshit. It is startling to see a toll plazas at a distance of 35km-40km. Nobody seems Congress MP use the exact same strategy in a Congressruled state without raising any to know why. Chief minister eyebrows. Prithviraj Chavan has asked public works minister, Interestingly, neither Reliance Infrastructure nor Chhagan Bhujbal, to conduct a comprehensive review of the electricity regulator seems the policy governing the road to feel defamed or offended at these charges. There was sector. But many believe that Mr Bhujbal has already failed a time when these companies to act on the recommendation sent out legal notices against that all toll collections in the hard-hitting media reports, Arvind Kejriwal Sanjay Nirupam state must be linked to a central even when they were accurate. server to monitor collections. Sanjay Nirupam, having openly Has corporate tolerance for Meanwhile, media reports abuse increased dramatically alleged corruption, says that if say that there will be no the scams exposed in an investigation does not reveal after change in the 20% hike in the past few years? Or, are complicity, he will withdraw the power companies keeping toll rates from October 2014 allegation. This tactic of alleging mum because they know that at Mumbai’s entry points. Congress leaders themselves corruption and calling names was an independent audit by the express frustration at this Arvind Kejriwal’s modus operandi comptroller & auditor general (CAG) will establish how they attitude. They point out that before the Delhi elections Anna Hazare first protested have reaped huge benefits against arbitrary and nonthrough the transfer of massive transparent toll charges three years ago; the government’s public sector assets (as is alleged in Delhi, where CAG has failure to initiate corrective action makes this a ripe issue already begun an audit) while consumers face repeated for the AAP to capitalise on. AAP, which is hoping to make tariff hikes. a mark in Maharashtra, has already jumped in the take up The rage and political protests over tolls and electricity the cause of traders protesting the LBT (local body tax) tariffs reveal a dangerous new trend in public life and only that replaced octroi. time will tell whether people choose good governance in Congress MP, Sanjay Nirupam’s protest against the coming election or we face the danger of anarchy and high electricity tariffs in the Mumbai suburbs is even violence. „ more interesting. Mr Nirupam went on a fast and had to threaten self-immolation to get the Congress- Sucheta Dalal is the managing editor of Moneylife. She was led coalition in Maharashtra to agree to look into his awarded the Padma Shri in 2006 for her outstanding contribution demands. Having ended his fast, Mr Nirupam has written to journalism. She can be reached at [email protected]

17 | 20 February 2014 | MONEYLIFE

DIFFERENT STROKES.indd 3

1/31/2014 9:11:28 PM

CURRENT ACCOUNT

Moneylife Quiz - 173 Another quiz to tease your brain. The answers are in this very issue. The winner will be chosen by a lucky draw from correct entries and answers published in the issue dated 20 March 2014. Send in your answers to [email protected] with the Quiz no., name, address & telephone number before 27th February. 1. Who wrote, “Hell hath no fury like a woman scorned?” a. William Congreve b. George Bernard Shaw c. Arvind Datar d. William Shakespeare 2. In which city did Ravin Vyas study for his MBA programme? a. Kolkata b. Chicago c. Boston d. Paris 3. Which company has recently launched the DWS Inflation Indexed Bond (IIB) fund? a. Deutsche Asset Management (India) Pvt Ltd b. UTI Asset Management Co. Ltd c. Morgan Stanley India Services Pvt Ltd d. Franklin Templeton Asset Management (India) Pvt Ltd 4. What is the net profit figure of L&T from the information technology business segment, according to the company’s latest annual report? a. Rs69,956 crore b. Rs1,107 crore c. Rs9,326 crore d. Rs8 crore

BOTTOMLINE BY MORPARIA

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5. What is the maximum policy term of the New Endowment Plan launched by LIC from 1 January 2014? a. 60 years b. 55 years c. 40 years d. 35 years 6. Who wrote ASCI’s (Advertising Standards Council of India) initial code as a founder member? a. Paritosh Joshi b. Raghuram Rajan c. Alyque Padamsee d. Brahm Vasudev 7. What is the full form of ASBA? a. Application Serviced by Bank Account b. Application Support from Bank Account c. Application Supported by Blocked Amount d. ASBA for Savings Bank Accounts 8. According to Artha Kranti, how many different taxes are levied by the Central, state and local authorities and can be replaced by a single tax system? a. 12 b. 22 c. 32 d. 42

In all, 49 readers got all the answers right last time. The winner of Quiz-171 is M Sudheer from Calicut. Congrats! You will get a surprise gift from Surat Diamond Jewellery.

MONEYLIFE | 20 February 2014 | 18

Current Account.indd 2

1/31/2014 8:11:05 PM

In an era of paid news & half-baked analysis who tells you the truth about financial products?

M

oneylife has always put the reader first. Launched in 2006 by Debashis Basu and Sucheta Dalal, Moneylife delivers brutally honest opinion and hard facts about financial and consumer products. Our deep research and unbiased articles on all aspects of personal finance, such as our children, Wills & gold, insurance, saving for your nomination, mis-selling and money circulation scams and even medical malpractices, have stood the test of time. We had our feet on the ground when India was in an euphoric phase of soaring stock indices and continued to offer sober information and guidance when the situation turned bleak. sed to accept paid Unlike other media, we refused news. Regular readers know that we argued that f l ffor your unit-linked insurance plans were hharmful wealth, when others were handing out ‘Best ULIPs’ awards with big sponsorship funds. Naturally, there was a cost attached to our pro-customer stand. But policy changes implemented by various regulators

(usually after the horses had bolted) have proved us right many times over—on ULIPs, on misuse of the Power of Attorney, on implications of SEBI rules on commissions, or collective investment schemes, etc. Moneylife Foundation is probably the only nonprofit trust from a media house. We spread financial lit literacy through workshops, lectures by experts, and ad advocacy, to crystallise policy and effect regulatory c g to protect p changes savers’ rights. We offer oneon-one help to savers by handling grievances and counselling. Moneylife Foundation has a touched t lives of tens of the t thousands of people. We campaign for policy change t through the magazine and t through other entities. M Moneylife subscribers automatically become members of Moneylife F Foundation. If you are new to Moneylife, please explore the content of our website. You won’t find anything that’s biased in fa favour financial products or compromises your interests. You will find loads of pro-investor and pro-consumer information.

Moneylife: A completely pro-investor and pro-consumer publication I am a regular subscriber to your magazine. I really enjoy and appreciate the articles that are published with such truthfulness and integrity. Truly, Moneylife stands head and shoulders above of all other personal finance magazines”

You are doing a fantastic job, filling a huge void and re-establishing trust in individuals and institutions who deal in finance. I live in the US and read your weekly updates online without fail. I feel that people like me should pay a monthly or annual subscription for this excellent piece of journalism”

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Your Money INDIAN POST

CURRENCY NOTES

India Post To Install 3,000 ATMs, 135,000 Micro-ATMs

E

ven as its application to start a commercial bank is pending, India Post has drawn a massive plan to install as many as 3,000 ATMs and 135,000 micro-ATMs at post-offices across the country by September 2015. “We will be starting with three ATMs to be installed in New Delhi, Chennai and Bngalore on February 5 and then ramp it up gradually,” postal department secretary, Padmini Gopinath, told the media. She said 1,000 ATMs with the India Post branding will be

NEW INDEX

Financial Well Being Index

P

rincipal Financial Well Being Index 2013 has been launched by the asset management company Principal. The Index is based on a survey of Indian households and covers issues related to household spending; saving and investment aƫtude and trends; financial prioriƟes and aƫtude towards finances; availing services of financial advisors; percepƟons and aƫtude towards reƟrement planning; and employee benefits and saƟsfacƟon levels. The survey aƩempts to highlight the Indian household’s percepƟon of its own financial health and economy, in general. The Principal Financial

put in within the first year; these will be ramped up to 3,000 in the next 18 months. India Post will join the National Financial Switch which will benefit India Post account-holders to transact at the banks’ ATMs and vice versa, she added. India Post has been working with software major Infosys on this project, she added. The Department of Posts is fighting to convert itself into a full fledged bank, asserting that its reach can help achieve the goal of financial inclusion.

Well Being Index will be based on an annual study charƟng the progress / movements on these topics year-onyear. The first study has been conducted with Principal’s research partner— Nielsen & Company—during the last quarter of 2013. The study was conducted in 11 ciƟes—Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Ahmedabad, Pune, Chandigarh, Lucknow & Jaipur and a total of 1,664 Indian households were interviewed. The respondent profile includes: age 25 to 60 years, SEC (socio-economic classificaƟon A & B), annual household income of Rs5 lakh, salaried or selfemployed professionals and employed full-Ɵme/ part-Ɵme with either a small, medium, or large-sized company. QuanƟtaƟve research was conducted using a structured quesƟonnaire.

RBI To Withdraw All Pre-2005 Currency Notes from Circulation

T

he Reserve Bank of India (RBI) has decided to withdraw all currency notes issued prior to 2005, including Rs500 and Rs1,000 denominations, from 31st March. From 1 July 2014, persons seeking exchange of more than 10 pieces of Rs500 and Rs1,000 notes will have to

furnish proof of identity and residence to the bank. As the new currency notes have added security features, they would help in curbing the menace of fake currency.

INTEREST RATE

RBI Defies the FM, Hikes Interest Rate

D

efying the market expectations and those of the finance minister P Chidambaram, Dr Raghuram Rajan, to fight inflation, raised the repo rate 25 basis points to 8%— his third rate hike (of a total of 75 basis points) since taking charge in September 2013. “An increase in the policy rate will set the economy securely on the recommended disinflationary path,” RBI said. RBI’s decision came five days after the finance minister issued a veiled instruction to RBI, that it, too, had a duty to help in economic growth. But RBI has openly declared that its mandate is to fight inflation, and consumer price inflation at that.

21 | 20 February 2014 | MONEYLIFE

Your Money.indd 2

2/1/2014 2:52:17 PM

SMART MONEY R BALAKRISHNAN

Intelligent Capital Allocation Warren Buffett has become the world’s most successful investor by seeking out companies that make excellent capital allocation. How does this work?

W

e buy shares in specific companies because we use these companies as a means to participate in the business they do. For example, if I am betting on Colgate, I am betting on the toothpaste business predominantly. If I buy shares in Cummins, I am betting on their being able to produce and sell diesel engines far more efficiently than many other engine manufacturers. Thus, I expect each company to have its capital almost fully allocated to the main business I choose it for. ‘Capital allocation’ by every company is a key factor for me to take a call on the company. As an example, let us take Larsen & Toubro. It is known for its competence and strength in engineering-related skills. So I would expect the company to use the resources to focus on that business. In case it generates far more cash than what can be used by the business, I would expect the company to pay higher dividends. Or it could do a share buyback. But what does the company actually do? Let us see:

one that contributes less than 10% to the bottom line, before allocations. The case with Developmental Projects seems even worse. Maybe L&T executives know better. Maybe when the company exits these projects, it will make piles of money. Who knows? There are innumerable such examples. For example, I think, ITC’s share prices are depressed because they have allocated capital to poor businesses like hotels, paper and consumer products, etc, which earn far less than the highly profitable cigarette business. I think, if ITC did not have the other cyclical and low-return businesses, its share price could have been a couple of times higher than what it is today. I do not buy the argument of hedging the future of the cigarettes business. If the cigarettes business has to be shut down, as a shareholder, I know the risks. If I want to be present in hotels or consumer products, I may buy shares in Indian Hotels or HUL. In fact, if we take the amount that ITC has shovelled into its FMCG

L&T’s Lopsided Business Segments Rs Cr Total Revenues

Engineering & Electrical / Machinery Information Finance Development Others Elimination Construction Electronics Technology Projects

Total

58,616

4,846

2,880

4,999

4,080

1,406

52

-1,683

75,196

Profit/Loss

6,051

547

458

1,107

848

412

8

-105

9,326

% o f Total

65%

6%

5%

12%

9%

4%

0%

-1%

52,170

3,658

2,146

3,218

36,593

33,755

196

% o f Total

40%

3%

2%

2%

28%

26%

0%

Liabilities

29,782

1,540

944

870

30,141

6,658

21

Assets

The above data is from L&T’s latest annual report from a section called ‘segment’ reporting. Essentially, this section shows the details of assets deployed in various businesses and the revenues the company derives from each segment. There is one section after this that details the expenses and assets that cannot be allocated to a specific business which is a part of the total profits, etc. I look at the data and wonder: Why are they deploying so much money in two segments, namely, ‘Finance’ and ‘Developmental Projects’? I recall that they used to have a modest finance business to support the sales of their earthmoving equipments. But it now seems to be a monster, with nearly 30% of the assets attributed to that company—

1,31,736 0% 69,956

business over the years, including the massive losses, and put it into shares of HUL or Gillette or Godrej Consumer Products, the returns would have been spectacular. When managements or promoters decide to wrongly allocate capital, it is a negative sign. Let us take the latest move of the Government of India to force one company to acquire shares in the other. Why should the government do this? If I wanted to, I would buy mutual fund units or an investment company’s shares. If I buy ONGC’s shares, it is for the prospective return from oil exploration, etc, and not to make money in the share market. Ultimately, if we put money into shares of companies that wrongly allocate capital, based on the whims of owners ``

MONEYLIFE | 20 February 2014 | 22

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SMART MONEY R BALAKRISHNAN

` and managers, the returns suffer. The owner is using our

money to fuel his personal whims and fancies. Whether it be buying a private jet or a helicopter or investing in a totally unrelated business with poor returns, the impact is the same—lowering of returns to the shareholder. Misallocation of capital, as Warren Buffett, has been highlighting for decades, is perhaps one of the most serious corporate governance issues. As a minority shareholder, we never get a choice to have a say in this. For example, we had to learn from the newspapers that Exide (a company that one invested in because it made automotive batteries) suddenly became the owner of an insurance company! The promoter did not even bother to take shareholders’ approval and the independent directors must have simply nodded their heads when the investment call was taken. Or when the Piramals used the cash to buy shares in Vodafone—the principle was the same. Just because a decision turns out to be profitable subsequently, it does not justify the wrong. The same is the case where the Birla group uses one company to hold shares in another. What they are doing is essentially creating holding companies which they can control, using public money. And also spoil the returns for the other shareholders. I get worried when I see companies sitting on large cash balances. It is like money burning holes in the pocket. One day, some investment banker will come and make the promoter buy out some business where there could be personal ego fulfilment, but no shareholder returns. IT companies, like Infosys or TCS, have large cash balances that are kept in bank fixed deposits. Surely, they do not have to worry about finding money, if they have to buy

something. The share is a fantastic currency. And after Satyam, there is always a niggling worry about the existence of the cash balances. In the not too distant past, we recall that DLF, riding high on the back of an overpriced IPO and inflated marketcapitalisation, had diversified into so many businesses, claiming ‘synergies’. Now, they are trying to exit most of those, claiming that they want to be ‘focused’. Again, this is a case of misallocation of capital. Misallocation of capital is even worse when there is leverage or borrowing to fulfil that desire. Only time will tell whether the buying of Corus by Tata Steel or Novellus by Hindalco is good or bad for the shareholder who is left with underperforming shares and a large debt, apart from the ‘goodwill’ (the difference between the value of assets bought and the higher price paid to buy them) that has been eaten away. Ideally, one would have thought that other shareholders should also have a say before such a decision is taken. And it is more relevant in both these cases because the non-promoter stakes are substantially higher than those of the promoter. So, the next time you read an annual report, try perusing this interesting section called ‘segment’ reporting. It is a good indicator of how much the promoter/professional manager cares for the other shareholders. And just to add, don’t fall into the trap of accepting CSR (corporate social responsibility) as an excuse for the manager or promoter doing dumb things with money. „

The author can be reached at [email protected]

What’s Your Bahana for Not Subscribing? I I I I I I

am not interested in honest & insightful advice on money matters never have any problems with banks, credit-cards or insurance always invest on the basis of tips from friends and brokers prefer to keep my money in a bank and let it be eroded by inflation would rather spend two years of knowledge on one evening of eating out always buy from the newsstands

For subscription offers that are a steal, look for a form elsewhere in this issue or our website at www.moneylife.in

23 | 20 February 2014 | MONEYLIFE

column_Balakrishnan.indd 3

1/30/2014 9:24:52 PM

MUTUAL FUNDS POINTERS

ICICI Prudential Retirement Income Fund

If investors choose to withdraw their investments after three years and before the completion of five years, an exit-load of 2% would be charged. After five years and before the completion of 58 years of age, the investor would be charged an exit-load of 1% for any redemption. The only additional benefit this scheme offers, compared to equity diversified schemes, is the tax benefit. Considering the lock-in period of three years, the scheme is similar to an equity linked savings scheme (ELSS). While such a scheme is apt to target the general population of savers who have retirement planning as one of their important financial goals, the whole concept of a retirement-oriented scheme will not work without a strong network of sophisticated advisors. Retirement planning is a complex exercise because there are multiple variables involved. One will have to estimate costs after inflation Not unless you depend on sophisticated research to and invest in products that are decide how much to invest inflation-proof. Even then, nobody can estimate one crucial aspect: how long should the corpus last? This is While many fund houses have CICI Prudential Retirement why even those who participated in planned to launch retirement Income Fund is an open-ended our survey on financial behaviour, tax-savings-cum-pension scheme. schemes which follow an autoand gave smart answers to each allocation formula, only a few The scheme will invest its assets question, told us that they are not under management (AUM) in a mix goal-oriented schemes cater for retirement. There are only three such planning for retirement on a postof equity, debt and money-market inflation basis. schemes—Templeton India Pension instruments. Four investment plans This is why there would be a will be available under this scheme— Plan, Tata Retirement Savings Fund and UTI Retirement Benefit Pension huge gap between the oversimplified Equity Plan, Hybrid Equity Plan, option of this product and the Plan. Except Tata Retirement Hybrid Debt Plan, Income Plan. confusion and inertia in the mind Savings Fund, investments in the As the names of the four plans of the savers. As it is, many savers other schemes qualify for Section suggest, the Equity Plan would simply don’t even invest regularly 80C tax deduction up to Rs1 lakh. allocate a minimum 80% of its in the right products. More assets in equities; the Hybrid Equity Tata Retirement Savings Fund does importantly, how would savers not give this benefit as it is not a Plan would have an allocation of know how much to invest in which notified pension fund under Section 65%-80% in equity and the rest in Plan and in what proportion? This debt and money-market instruments. 80C(2)(xiv) of the Income-Tax Act. piece of advice can only come from The new scheme would have a The Hybrid Debt Plan would invest highly trained and sophisticated minimum lock-in period of three a minimum 5% and maximum of advisors. Such advisors are rare, a years; however, investors can 30% in equity, while the Income lacuna that does not worry mutual Plan would allocate its assets in debt switch their investments from one fund companies much. „ Plan to another within the scheme. and money-market instruments.

A Smart Option for Retirement?

I

MONEYLIFE | 20 February 2014 | 24

Fund pointer.indd 2

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FIXED INCOME

IRFC, IREDA Tax-free Bonds

Bajaj Finance’s Fixed Deposit Scheme

I

B

Top-rated Corporate Bond Yields

10-Year G-Sec Benchmark Yield

ndian Railways Finance Corporation (IRFC) extended the closing date of its tax-free bond issue to 7th February. The struggle to raise subscriptions for AAA rated bonds of IRFC could be due to its big issue size of Rs8,663 crore, lower coupon rates than those offered by recent offers as well as the fact that IRFC had already raised money in the previous financial year. Investors rushed to smallprev size tax-free bond issues of NTPC, NHPC, NHB and NHAI; these were oversubscribed within a few days. It also means that investors are not swayed by just the ratings; there is a need for diversification. IRFC did not have the 20-year investment option which was available for the tax-free bonds of NTPC, NHPC and NHB. t NHAI offered retail investors 8.52% and 8.75% for bond with maturity of 10 and 15 years, 8. while IRFC is offering 8.48% and 8.65% for bonds with tenure 10 and 15 years, respectively. Indian Renewable Energy Development Agency (IREDA) is planning to raise Rs1,000 crore through the issue of tax-free bonds for financing its renewable energy and energy-efficiency projects and to augment the company’s resource base. The bonds are rated AAA by CARE and Brickworks.

ou can expect to get yield of nearly 10% for AAA rated bonds maturing over the next two years. Bonds with lower than AAA rating will give approximately 11% yield to maturity (YTM). The bond yields may increase due to hike in the repo rate by 25bps (basis points) to 8% by Reserve Bank of India (RBI) on 27th January.

Y

Issuer

Maturity Date

Next Coupon

Last Yield (%)

L&T FIN 10.15%

13 Jun-14

13 Jun-14

10.31

INE523E07707 CARE AA+

TATACAP FINSER 0%

12 May-14

10.11

INE306N07138 CRISIL AA

LIC HSG Fin 9.70%

23 Jan-15

9.86

INE115A07BW7 CRISIL AAA

23 Jan-15

ISIN

Rating

NSE data as of last trade date of 27 January 2014

Issuer Tata Steel 11.80%

18 Mar-99 18 Mar-14

11.18

INE081A08165

CARE AA

Tata Power 11.40%

02 Jun-99

20 Apr-14

11%

INE245A08034

CARE AA

Tata Motors Fin 10.15%

28 May-23 28 May-14

10.12

INE909H08147 CRISIL AA

BSE data as of last trade date of 27 January 2014

ajaj Finance Ltd has announced the re-launch of their fixed deposit (FD) scheme which has been rated FAAA by CRISIL and MAA by ICRA. The scheme offers competitive interest rates of 9.75% and 10.00% for one-year to five-year tenors of non-cumulative and cumulative options. Bajaj Finance has offered higher interest rate of 0.25% to senior citizens and existing customers of Bajaj Finance Limited. The minimum deposit across locations ranges from Rs50,000 to Rs1,50,000, based on categorisation of cities. All company FDs are risky because they are unsecured. Recently, the Economic Offences Wing (EOW) conducted search operations in six premises of the directors of Yash Birla's Birla Power Solutions in connection with a cheating case registered on 31 December 2013. Investors are unable to get back their deposits.

he yield on 10-year benchmark government securities (G-Secs), which sets the tone of the fixed-income market, was at 8.52% on 20th January and has risen 25bps to 8.77% on 27th January. RBI’s move to hike the repo rate by 25bps took the markets by surprise. Banks may increase their lending rates which mean higher EMIs (equated monthly instalments) on personal loans. According to Nomura, “The RBI hiked repo rate for two reasons: 1) Even though vegetable prices have moderated, CPI inflation remains above 9% and core CPI inflation has remained sticky at around 8%; and 2) the RBI governor has formally accepted the recommendations of the Urjit Patel committee, which targets CPI inflation below 8% by January 2015 and below 6% by January 2016. In absence of any policy responses, there would be upside risks to these targets.”

T

25 | 20 February 2014 | MONEYLIFE

Fixed Income.indd 1

1/31/2014 8:11:44 PM

FIXED INCOME TAX-FREE BONDS

Missed Your Allotment? Tax-free bond issues are getting oversubscribed fast. Raj Pradhan explains how the system works and what to do

A

few weeks back, Moneylife received an email regarding an application of National Housing Bank’s (NHB) tax-free bonds. This is how it read: “SBI Caps Limited, Belapur, was one of the designated form collection centres. There was no system of marking time of receipt on the application form. The application was also not entered in (the) system so that the sequence could be recorded on (a) real-time basis. I was advised that the centre will collect all the forms during the day and send in the evening to their office in Mumbai. I am perplexed: in this type of scenario, how is the (basis of) ‘first-come-first-served’ applied? There is every chance that powerful and connected people will get their applications entered first and get full allotment, while other common people will be denied allotment since the issue is oversubscribed.” Another email stated: “My NHB application was uploaded by the intermediary on the first day, but I still got only Rs95,000 allotment as against my application of Rs1.30 lakh. Is it correct? NHB issue opened on 30 December 2013 and got oversubscribed by 2.74 times on the first day. For retail category, there was oversubscription by 1.36 times. It means an application of Rs1.30 lakh on (the) first day rightly got the pro-rated allotment of Rs95,000 (73%).” What do these examples indicate? The NHB prospectus clearly states: “In case of oversubscription, allotments to the maximum extent, as possible, will be made on a first-come-

first-serve(d) basis and thereafter on a proportionate basis in each portion, determined based on the date of upload of each application into the electronic system of the stock exchanges, i.e., full allotment of bonds to the applicants on a first-come-first-served basis up to the date falling one day prior to the date of oversubscription and proportionate allotment of bonds

to the applicants on the date of oversubscription.” It means that NHB’s tax-free bonds would have got full allotment one day prior to oversubscription and pro-rated allotment for the applications made on the day of oversubscription. Unfortunately, the bond issue got oversubscribed on the first day itself and, hence, everyone who applied on the first day got pro-rated allotment, based on the amount of oversubscription for the investment category. Anyone whose application was made on the second day got nothing.

It clearly means that one day of delay in your application being uploaded can mean a big difference in getting 73% allotment for retail investor of NHB bonds versus getting no allotment. So, is it true that powerful and connected people get allotment and the common man is denied allotment? Not true. It just depends on whether your intermediary has been able to upload your application. If it’s done, then you are in the race for allotment. If it’s not done on the day you give your application, then you can only hope that the issue does not get oversubscribed early. Finding a right intermediary, who can guarantee that your application will be uploaded on the same day, is important. Today, there are no physical copies of the applications. They are in electronic format, with a unique application number, which can be emailed by the intermediary. Push your intermediary to send you the application form as soon as he gets it and you have to be equally quick in getting the completed application to the intermediary. Alternatively, you can try the online ASBA (application supported by blocked amount) route, to not take any chance. Self Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying through the ASBA process. For example, SBI online banking has an option for ASBA for share and bond IPOs. You can choose the primary market bond issues and apply online. Your application amount is blocked, but deducted only on confirmation of the allotment. You will continue to earn interest on that portion of the money. There is no need to wait for refund, in case of partial allotment or non-allotment. Allotments to ASBA applicants are done only in demat form. „

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FIXED INCOME INFLATION-INDEXED BOND FUND

Tax Advantage, but What about Returns?

expected inflation over the bond tenor and the price of WPI bonds to be auctioned in future. The other option for retail investors is RBI’s Inflation Indexed National Savings SecuritiesDWS Inflation Indexed Bond is a mutual fund option of WPICumulative (IINSS-C), with interest linked bonds instead of directly buying RBI’s CPI bonds. But rate linked to the Consumer Price understand the differences before you jump in. Raj Pradhan Index (CPI) + 1.5%. The CPI in explains the pros and cons December 2013 was 9.87%, sliding from its previous level of 11.24% in November. The key advantage because of which yield has gone up eutsche Asset Management of these bonds is that your returns to 3.62%.” India has just launched are not subject to daily variations DWS would have invested in DWS Inflation Indexed of NAV. It will vary with CPI over the December 2013 auction at the Bond (IIB) scheme—an option for the period of 10 years, but you discounted price of Rs82.71—the those interested in mutual fund know what to expect as returns cut-off price. Those subscribing to option of bonds that are linked to even with CPI fluctuations. Holding the bond issue can expect to get the wholesale price index (WPI). the RBI IINSS-C bonds can be as The key selling point declared in the approximately 3.62% plus WPI safe as it can which declined press release is that “As per the last get. CPI bonds Reserve Bank of India (RBI) auction to a five-month The scheme will be low of 6.16% in December 2013, WPI-linked subject to mark-to-market are only for in December IIBs are currently yielding 3.6% valuation and, hence, the retail investor and, hence, from 7.52% above WPI.” But the actual coupon NAV may be volatile, based there cannot in November of WPI bonds is supposed to give on the current inflation, be a bond 2013. But only 1.44% above WPI. So, what expected inflation and the fund holding your actual explains the difference 3.6 minus returns will 1.44 = 2.16%, which makes the price of WPI bonds to be these bonds. Moreover, vary as 70% offer worth considering? auctioned CPI is more or more of Investors did not find the offer relevant to a consumer than WPI. investment will be in governmentof the RBI’s I’s Capital Indexed Bonds gov IINSS-C bonds do have a lockissued WPI-linked inflation linked to WPI, launched in midatio index in period and carry a penalty for bonds (in December 2013 and 2013, attractive, ractive, as the returns it early withdrawal, but it should future offers) and the balance 30% offered were ere only 1.44% bal not matter for long-term savers. will be invested in other plus WPI. According othe bonds The major concern is taxation and money-market securities to to Vivek Sharma, a se which is at the same rate as bank ensure liquidity. personal-fi nance finance FDs (fixed deposits). Those in the expert, “Due Due Investors can eexpect 2%highest tax bracket will find it less to higher 3% above WPI inflation, attractive when DWS IIB scheme expectation on of provided they remain has the advantage of lower taxation for at least inflation rate ate invested fo applicable to mutual fund schemes. 18-24 months. by the marketrketm The options in DWS IIB scheme players, the he But the DWS include dividend (regular, monthly scheme will bonds have ve been IIB sc and quarterly options: payout be subject to discounted d by a su and reinvestment), growth and mark-to-market higher expected pected mark bonus. The choice is between the valuation and, rate of return. urn. valua tax advantage offered by DWS IIB hence, the NAV These bonds nds hence scheme over the certainty of returns DWS IIB were auctioned ioned of DW when buying IINSS-C bonds directly may be at a price of scheme m without any mutual fund expenses based on around Rs82 s82 in volatile, b to be paid. „ Decemberr 2013 the current inflation,

D

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COVER STORY

Are You a

Smart Investor? What is the ideal profile of a smart saver & investor? Here are the results of our survey. Check out where you stand. Analysis by Debashis Basu

O

ver the past 20 years, the Indian financial market has made tremendous strides. New products, like mutual funds and unit-linked insurance plans, have proliferated. We now have electronic systems for trading, clearing & settlement and depository that are better than those in many other countries. With rising market volumes, the turnover in the cash segment of the stock market has been increasing over the past 20 years. Foreign institutional investors (FIIs) have poured in billions into the market. FII investments have been positive year after year, over the past 20 years, except in 2008-09. In spite of these favourable factors, there has been a decline in the number of retail investors in the market between 1990 and 2009. It is not that there are no buyers. The plethora of financial products is designed to target a large and expanding population. With rising prosperity, the large Indian middle class is increasingly saving more money. India has nearly 200 million savers whose financial savings are distributed across formal and informal channels. About 1.5% or 5 million people in India are employed in the formal sector. But the new business of an essential product, like life insurance, in a country like India with a huge young population, has stalled; broking companies are making meagre profits; and,

in 2013, only Rs1.82 lakh crore were mobilised by all mutual funds put together. Just as there is no dearth of financial products or customers, there is no shortfall of people helping customers to understand these products or make them buy. Millions of people are engaged in information (media) and transaction (distributors, advisors, brokers, wealth managers) in popularising and pushing these products. And, yet, customers seem unconvinced. Why is this so? Our research has helped us diagnose the reason for this situation: wrong buying and wrong selling. Often, buyers are not careful enough. Also, it is not easy for them to decide what to buy, how much to buy, when to buy and when to sell. On the other hand, the sellers are too self-serving, especially mis-selling of equity-linked products, when the going is good. Smart savers, who can navigate the minefield of products and mis-selling, are rare. This conclusion is supported by empirical and anecdotal evidence. Therefore, when we did a survey on financial behaviour, one of the most comprehensive and sharply focused surveys, its results have come as a complete surprise to us. Some 700 savers and investors, from the length and breadth of the country, have responded very smartly to a 24-question ``

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COVER STORY

O

ften, planning your investments is simple and involves taking two steps. One, correcting for the past, in case you have made financial mistakes; and, two, planning safely and smartly for the future. As for correcting your past mistakes, all you need to do is ask three basic questions: • Am I saving enough of my income? • Am I invested in the right financial products? • Have I saved up enough of money, so far, in the right way? We, therefore, asked the respondents about how much they save regularly, what they invest in and what are the goals they are saving for. The first question is really the starting point for a worry-free future. If you don’t save enough, there is no point discussing investment products. Given the high rate of inflation, we feel one must save at least 15% of one’s income. As high as 58% of the respondents save more 20% of their income and another 21% save 10%-20% of their income. This is simply great. Only 3.6% hardly save and 11.6% save between 5%-10% of their income. That leads us to the next question: in what kind of assets do they put in their savings? The financial world is complex. There are at least 16 different publicly-available product Q: Percentage of your total income that you save?

3.6%

20%-30%

24.1%

5%-10%

11.6%

30%-50%

20.6%

10%-20%

20.9%

50%+

14.0%

0-5%

Not sure

5.3%

Q:Your savings are invested in? (multiple choice) 80%

40%

Other

Business initiative

Silver

Foreign assets

Real Estate*

Gold / ETF / MF

Tax-free Bonds

G-sec/RBI Bonds

FMPs

Corporate bonds

Gilt Mutual Funds

Liquid Mutual fund

Debt Mutual Fund

Bank FD

0% Corporate FD

I. Savings: Products & Objectives

categories for a saver to choose from, spread over six primary product groups: fixed-income, gold, real estate, insurance, stocks, mutual funds. There are numerous sub-categories and many individual products under each. These 16 products are:

Stocks

have to deal with. Their understanding of financial products, market intermediaries and financial companies is absolutely on the dot. The results of this survey show what the profile of a smart saver ought to be, what kind of products she should be investing in and what should be her approach to risk and return. Well, it does appear that Moneylife magazine and Moneylife Foundation’s financial education has been able impact a lot of peoples’ thinking and/or that the right thinking savers have been attracted to Moneylife to take this survey. We have clustered these smart responses under four heads: saving & investing behaviour, perception of risk/return, retirement and role of intermediaries. A final section clusters all the answers that profile the respondents. Here are the results of one of the most sophisticated online surveys.

Equity Mutual Funds

` survey that covered virtually every crucial issue that savers

*other than your own home

There are over 3,000 actively traded stocks; over 250 diversified equity mutual funds, hundreds of debt mutual funds, over 100 life insurance products and portfolio management schemes, in addition to fixed deposits, savings accounts, and so on.

In just the mutual fund category, there are equity funds, exchange traded funds (ETFs), growth funds, sector funds, theme funds, index funds, bond funds, liquid funds, gold funds, hybrid funds, foreign funds, MIPs (monthly income plans) FMPs (fixed maturity plans), capital-protection funds— the list goes on. The array of financial products, services, service-providers is endless and keeps expanding every day, which means that the permutations and combinations of products for us to choose from literally runs into hundreds and thousands. The choices are too overwhelming for an average investor to exercise. It is confusing to decide whether to invest in any of these ``

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COVER STORY

` and how much to save and invest. How would we know

which of the 230 equity diversified schemes are right for us? Are bond funds better options than bank fixed deposits? Are gold ETFs a better way to invest in gold than physical gold? Are unit-linked insurance plans (ULIPs) safe and smart options? Our situation is made worse because there are scores of variants available under each of these. That apart, Moneylife’s extensive research shows that many of these products are harmful and irrelevant, either by themselves or in the specific context of the saver. We need to eliminate all these products and invest in only the very few products that we need, depending on our age and dependents.

II. Expected Risk/Return

A

s we have seen, not all financial products are useful. How do we decide which ones are good for our situation? We have to tune out the noise of the marketplace, weed out the junk and whittle the entire product universe down to a select few which would perform well over the long term. To do that, we would have to understand the peculiar nature of each product category, analyse its historical returns, understand the risks, read the fine print and analyse each and every product and to find out whether it is a smart and safe product for our particular need. In short, knowledge of the

Q:You savings are meant for? (multiple choice) 80%

40%

0% Other

risk of each product, returns and what it ideally delivers is a must. Of this, the most important is balancing risk and return depending on your period of investment. It matters whether you are planning for a short term (saving up for a car), medium term (marriage) or for long-term goals (saving for children’s education) or retirement. That alone will determine how much risk you should take. Do our respondents understand this well? Yes, they do. Of the respondents who invested in life insurance, 68.7% `` Q: If you invest in insurance, it is because? (multiple choice) 80%

40%

NA

Guaranteed returns

Reasonable returns

0% High returns

Our survey, which did not go into suitability of the products as per individual profile, tried to capture which product categories investors are saving in. Here, again, we were surprised to know that 62.1% save in stocks and 59.4% save in equity mutual funds. Carefully selected and held over a long period, equity shares can create significant wealth to pay for children’s marriage, college education, vacations, better standard of living and retirement or to just pass on the money to the next generation. Among different forms of investments, such as bank deposits, insurance, gold, etc, equity shares deliver the best long-term returns, if the country’s economic system is reasonably stable. Equity mutual funds are the key to any wealth-creating strategy and reduce your risk considerably by diversifying your investments over a number of stocks. Equity mutual funds are a good way to invest for creating long-term wealth because they invest in stocks. Good quality stocks beat the returns of all other asset classes, if bought systematically. Clearly, our respondents are a savvy lot and have chosen the right asset classes. As expected, bank FDs are very popular (67.1%). As many as 21.3% of our respondents are investing in tax-free bonds, a number that should have been higher. Interestingly, 25% are saving in real estate (other than own home) and 24.9% in debt mutual funds, both of which demand analysis and regular monitoring.

Saves tax

Short-term goals (less than 5 years)

Protection for family

Other longterm goals (over 5 years)

Safety of principal

Retirement

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COVER STORY

Q:Your investment in bonds or debt MFs is mainly for? (multiple choice)

Q: Expected returns from insurance is? 0%-4%

13.0%

12%+

3.0%

4%-8%

30.1%

Not sure

9.7%

8%-12%

12.3%

NA

31.6%

45%

30%

15%

Other (please specify)

NA (I do not invest in bonds or debt MFs)

Tax savings

Short-term goals (less than 5 years)

Other long-term goals (over 5 years)

investing in insurance to save on paying taxes. Interestingly, just 2.3% of the respondents invest in insurance for higher returns. Since insurance products are an important source of channelling savings, we also asked the kind of returns our respondents expect from their savings through insurance? As high as 30.1% of the respondents expected returns of just 4%-8% from insurance products, while 12.3% expected

0%

Retirement

` were doing so for protection of their families and 23.3% were

needs as the reason for investing in shares and equity schemes while 64% identified other long-term goals of more than five years as the reason. These are exactly the right reasons for investing in equity products, as we repeatedly explain in our investor education programmes. Only 8.9% of our respondents do not invest in equity schemes and shares. The survey also found that 21.9% people invest in equities for the short term which is not the best investment horizon for this asset class.

Q:Your investment in shares or equity MFs is mainly for? (multiple choice) 70%

35%

Q: Expected returns from debt MFs over a 5-year period? Other

NA (I do not invest in shares or equity MFs)

Tax savings

Short-term goals (less than 5 years)

Other long-term goals (over 5 years)

Retirement

0%

Q: Expected returns from equity, over a five-year period is? 0%-4%

0.9%

12%-16%

41.9%

4%-8%

1.7%

16%+

24.6%

19.1%

1.4%

12%-16%

4%-8%

6.7%

12.6%

16%+

2.3%

8%-12%

35.7%

Not sure

4.6%

NA

returns between 8%-12% and just 3% expected returns of more than 12%. The expectation from insurance—low return but a means of protection—which forms an important basis of correct product selection was bang on. We then asked about their expectations from shares and equity mutual funds. As many as 47.9% identified retirement

8%-12%

0%-4%

Not sure

4.0%

NA

7.6%

36.4%

We also asked what kind of returns one should expect from shares and equity schemes over a five-year period. As many as 41.9% respondents expected a return of 12%-16% while 24.6% respondents expected a return of 16% or higher. A modest of 8%-12% was expected by 19.1% respondents. Put differently, only a tiny fraction of respondents (2.6%) expected insignificant returns from equities over the next five-year period. We believe that, barring a social and political catastrophe, equities will deliver low double-digit returns over the next five years, since we are not starting from an overvalued market. Moneylife is not enthusiastic about debt funds or bond funds. We wondered whether our respondents are. To our delight, 39.4% said that they do not invest in these funds. Among those who do, 27.3% identified short-term investment ``

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COVER STORY

` horizon as the reason to invest in debt funds. Indeed, debt

funds offer good returns only when interest rates fall. This is usually a short-term window. We also notice that 21.6% respondents invest in debt funds for retirement. We don’t Q: How important are these factors while investing? (Ranking: 1-Highest, 6-Lowest) Safety of principal Returns Risk Liquidity Maturity period

least 20-25 years after retirement which means that you have to plan for those many years of expenses. Many experts say that after retirement your expenses would come down only by about 20%-30% because, while some expenses would be cut, others would rise. Where will all that spending money come from, if you have no regular income? From your savings? But how much savings are needed so that you can get an investment income that is equivalent to 70%-80% of your current expenses—and this for 25 years? Calculation of retirement expenses and the corpus needed to fund it—on post-inflation and post-tax basis—is one of the toughest aspects of planning your finances. Here is an edited version of what we had written on retirement expenses some time ago. (“Retirement fund: How much is enough?”,

Tax savings

0

3 Rating Average

6

think it is a good idea because of the annual charge that mutual funds levy. Administrative expenses consume a large portion of the returns. What is the expected return from bond schemes? A large number of respondents (35.7%) estimated it to be 8%-12% while 12.6% thought it could be 4%-8%. Moneylife is with the minority in this. We doubt if 8-12% returns would be the average yearly return from debt funds, except for a rare five-year period. We also asked about the factors that are most important for savers to choose a financial product. The factors ranged from safety of principal, risk, returns, maturity period, liquidity and tax savings. While ranking the factors at the time of investing, 47.57% of respondents ranked safety of principal as the most important and 21% ranked it as the second most important factor. Interestingly, returns ranked the highest for only 23.57% of respondents.

III. Retirement

M

ost of us, typically, don’t know how much to save for retirement, especially since people are living longer. Thanks to rising longevity, you should hope to live for at Q: Are you saving enough for retirement?

goo.gl/ggC37) Consider someone, 58 years old, with annual expenses of Rs5 lakh at the time of retirement. His spending may shrink to 70% of that level or Rs3.50 lakh a year, post-retirement. That means he needs to have Rs87.50 lakh to fund his expenses over 25 years. But would it be enough if he retires with Rs87.50 lakh? We have to take into account not only his income from savings but also inflation. For example, Sunil and his wife may spend Rs300 per day on food. Therefore, his yearly food expenses would come to Rs300x365=Rs1,09,500. Over 25 years, his food expenses would work out to Rs109,500x25=Rs27.38 lakh. Seems like a lot to spend on food? Here’s another shocker; and these calculations have not factored in inflation. Over the past seven years, food inflation has risen annually ``

Q: Have you calculated your retirement corpus, factoring inflation?

Q: Have you estimated your annual expenses post-retirement?

Yes

39.9%

Yes

40.0%

Yes

39.6%

No

28.1%

No

47.6%

No

47.7%

Not sure

32.0%

Not sure

12.4%

Not sure

12.7%

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COVER STORY

11.9%

Tax Advisor

2.4%

Online financial advisor

1.6%

Research and rating websites Media articles Relationship managers

12.0% 2.4%

13.3%

Distributors

1.6%

Wealth managers

1.7%

on the commissions they can make!) at you. Mis-selling, as regular readers of Moneylife would know, is common. Our respondents know this very well. When asked about the source of information they depended on before buying a financial product, 53.1% respondents replied that it was their own research. Only 1.6% said that they depend on online financial advisor, 1.6% on distributors, 2.4% on relationship managers and 1.7% on wealth managers. Do we need to say anything more? When it came to availing the services of a financial advisor, 52.7% respondents answered that they had never used a financial advisor. Indeed, many of them are investing directly, without the help of an advisor or distributor. As many as 55.1% respondents have invested in mutual funds directly; 62.3% in bank fixed deposits; 58% in equities; and 47.3% have bought insurance directly. This is not a surprise because there is widespread dissatisfaction with financial advisors. As many as 205 respondents (29.29%) strongly agreed and 336 respondents (48%) agreed with the statement, “Most financial services `` Q: Which of the following products have you purchased directly, without the help of an advisor (relationship manager, financial advisor, etc.)? (multiple choice) 70%

35%

Other

Have never purchased any of the above

0% Life Insurance

ne of the reasons why financial products disappoint is because buyers do not do enough of homework and rely on company salesmen, distributors, relationship managers, financial advisors, financial planners and agents who are ready to pitch something or the other (depending

53.1%

Stocks/Equities

O

Own research Independent Financial Advisor / Financial Planner

Corporate FD

IV. Buying Process/Opinion about Intermediaries

Q: Before buying any financial product, you depend primarily on?

Bank FD

retirement on food would be a whopping Rs93 lakh, after factoring in inflation. Shocking, isn’t it? And this is just food expenses. But, of course, he would be earning income on his savings. Let’s factor that in. Assume that after Sunil retires, he earns 8% annually on his savings. How much savings would he need? To cover his yearly food expenses alone, he would have to have Rs13.70 lakh and he will draw down 1% of his costs from his savings each year (9% is the inflation and 8% is the income growth). By this process, his savings would be exhausted in 12 years. But Sunil is not only spending on food. He has a whole lot of other expenses as well, such as utility bills, medical bills, household expenses, repairs, etc. Assume that he does not want to be in the dreadful situation of running out of his savings. How much money does he need at the time of retirement? To cover expenses of Rs3.50 lakh a year through investment income alone that lasts for 25 years (without dipping into the corpus), Sunil needs Rs1.42 crore at the time of retirement. That’s not a small sum and cannot be built overnight. This is why the one thing that everybody—from financial planners to personal finance experts, to market intermediaries—agrees on is this: start saving as much as possible, as early as possible and put your money in assets that grow more than inflation, over time. While we did not ask our respondents to make such detailed calculations, we did ask them three important questions on retirement: Are they saving enough; have they calculated their retirement corpus on a post-inflation basis; and whether they have estimated annual retirement expenses on a post-inflation basis. Unfortunately, our extremely savvy set of respondents is weak on retirement calculation. While 28% of respondents admitted to not saving enough for retirement; 32% were not sure. Worse, as many as 47.6% respondents admitted that they were not factoring in inflation while calculating the retirement corpus and 12.4% respondents were not sure if they were doing so. Similarly, 47% of respondents have not estimated their annual expenses post-retirement, and 12.7% are not sure.

Mutual funds

` by 9%. For Sunil, the expenditure for the 25 years after

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COVER STORY

Profile of Respondents

management and planning tasks, many respondents claimed that they did so on a monthly basis: 359 ho are these savvy people who have responded respondents, out of 700, checked bank statements; to our survey? Some 91% were male, 31% each 323 worked out how much they are spending on living between 20-35 years and 36-45 years and 25% were expenses; 228 planned their budget; 241 reviewed whether they could save more; 205 reviewed whether between 46-60 years. What are their biggest concerns? Some 316 people their savings were getting the best rate of interest. Almost a similar number monitored identified saving for retirement as The responses to our their personal finance on an annual their biggest concern. Finding the survey have come from basis. right investment products to grow So, this is the profile of the their savings was a major concern far and wide. Apart from for 235 respondents and proper all major cities and some smart investor, captured in our allocation of investments to deliver foreign countries, we got path-breaking survey. They have optimal returns was the main responses from, Thrissur, told us what they invest in; what they guard against; what is their concern for 234 respondents. In Palakkad, Manmad, describing their financial situation, Hoshiarpur and many understanding of risk and returns; how they handle the self-serving 37.1% respondents felt that they small towns market intermediaries and financial were trying to save regularly with no specific goal and 27.6% respondents were working companies and their worries about their housekeeping. If is this not your profile, try to align with it now. You hard towards a financial goal. Given that most people are lazy about their record- will be safe and smart. By the way, you will find this keeping and monitoring their finances, the respondents profile diametrically opposed to those figuring in the have again surprised us by their financial housekeeping. dumb advertisements of mutual funds and insurance When asked about the frequency of undertaking money products.

W

` firms/ advisors will mislead their customers if they can make Q:Type of investments discussed with a financial advisor? (multiple choice) 60%

30%

Other

NA*

Corporate FD

Commodities

Real Estate

Bonds

Stocks

Debt/liquid Mutual fund

0% Equity Mutual Funds

more profit by doing so.” As many as 253 respondents disagreed with the statement, “Most financial services firms/advisors treat their customers fairly.” Similarly, 195 respondents strongly agreed and 359 respondents agreed with the statement, “Most financial services firms/advisors put a lot of pressure to buy products they sell.” For the statement, “Most financial services firms/advisors sell the product that pays the most commission, not what is best for you,” 269 respondents strongly agreed and 308 respondents agreed. In short, many savers have understood what a racket ‘intermediation’ is and prefer to manage their personal finance themselves. As many as 206 respondents strongly agreed and

*I have not availed the services of a financial advisor

312 respondents agreed with the statement, “I enjoy finding out about new investment and savings schemes.” On being asked to comment on the statement, “I find it difficult to understand leaflets and materials of financial products,” 99 respondents strongly agreed, 209 respondents agreed. This is a strong indictment of the quality of financial services companies and regulation. „

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Connect with It Steady business with attractive valuation

F

inolex Cables is India’s largest and leading manufacturer of electrical and telecommunication cables. Its wire and cable products are used in applications such as automobile lighting, cable TV, telephone and computers as well as for industrial applications. The company has also diversified into electrical switches and compact fluorescent lamps (CFLs). It has manufacturing facilities at Pimpri and Urse in Pune as well as at Goa and Uttarakhand. The company has, over the years, established a reputation as a leading quality manufacturer by upgrading technology and modernising manufacturing facilities. Its copper cables are manufactured using bright annealed electrolytic grade copper—99.97% purity— manufactured in-house and insulated with virgin grade PVC (manufactured by group company Finolex Industries Limited) formulated in-house. For the quarter ended 30 September 2013, net sales inched up, to Rs593.13 crore (Rs586 crore) while net profit was Rs79.98 crore (Rs57.46 crore), a jump of 39%. According to the company’s management, “CRISIL has upgraded the ratings of the company’s long term facilities to AA+ with a stable outlook.” This was as of October 2013. For the year ended March 2013, the revenue was Rs2,270.68 crore (Rs2,064.16 crore) and the net profit was Rs145.30 crore (Rs98.20 crore). Despite the depressed market situation overseas, the FOB value of exports for the year was Rs48.69 crore (marginally higher than the previous year’s export value of Rs48.39 crore). ``

Key Financials Mar-13

Jun-13

Sep-13

632.13

553.76

593.13

54.39

51.35

76.4

OPM

9%

9%

13%

Y-o-Y Revenue Growth

4%

7%

1%

Stand-alone (Rs Cr) Revenue OP

Y-o-Y OP Growth March Ending RoNW

9%

20%

19%

FY11

FY12

FY13

12%

12%

16%

OP: Operating Profit,Y-o-Y:Year-on-Year, OPM: Operating Profit Margin, RoNW: Return on Net Worth

Steadily Rising 90

Price (Rs/share)

70

50

30 Feb-13 21,00,000

Jul-13

Jan-14

Jul-13

Jan-14

Volume

14,30,000 7,60,000 90,000 Feb-13

Recommended Price Rs114

MONEYLIFE STOCK IDEAS

THAT WORK

Moneylife Issue 19 September 2013

110%*

(MPS)

Exit Price Rs240 On 16 January 2014

* Non- annualised returns

MONEYLIFE | 20 February 2014 | 36

Stock-Streetbeat.indd 2

1/31/2014 8:05:01 PM

STOCKS STREET BEAT

Unbiased & Methodical Stock Picking that Works!

the BSE, not once but twice, for failing to adhere to listing norms. However,

Stories of Price Manipulatio

n

(Rs)

85

Kadvani Securities curities (Rs (Rs62)

T

he company iss supposedly s into finance but changed its name to Atlanta Infrastructure and Finance on 27 January 2014, a common tactic for companies that are losing money. In 1999, its stock-broking licence was suspended after it was found to have indulged in ‘gala’ transactions and failed to issue contract notes. Worse, the company even got suspended from

`

60

309%

35

10 Aug-13

Oct-13

Jan-14

the suspension was revoked by BSE both times. Its fundamentals are a

Finolex has launched new models of lamps including LED-based lighting systems meant for home use, street lighting and commercial spaces. It also plans to enter the contiguous area of switchgears. However, this is an extremely competitive market already dominated by Siemens, Crompton Greaves, etc. The shareholding Valuation pattern of Market-cap Rs1,239.57 cr the company Debt Rs130.33 cr in December Cash and Cash Equivalents Rs39.81 cr 2013 was: Enterprise Value (EV) Rs1,330.09 cr 35.78% with EBIT (annualised) Rs257.20 cr the promoters, EV/EBIT 5.17 1.80% with Price/ BV 1.34 foreign Price/Earning (annualised) 3.87 investors, 9.88% with domestic institutional investors and 52.54% with others. The financials have been steady, if unspectacular. Over the past five quarters, the company’s average sales growth was 7% and its average operating profit growth was 49%. Its average operating margin is 10%. The About Our Stock Selection Process: The Street Beat stocks are selected from over 1188 stocks in the Moneylife database. We normally look for companies that are small, growing, reasonably valued and are in an uptrend. After having selected stocks based on these criteria, we try to eliminate the ones that could throw up governance issues. How To Use this Section: Our buy suggestions are given at the end of each analysis. Please exit if a stock closes 25% below the purchase price. This is called stop-loss. However, if the market price is above 50% of the purchase price, exit if the stock falls by 25%, below any day’s closing price. This is called stop-profit. In other cases, follow this section for our sell suggestions. Disclaimer: This report is for informational purpose only. None of the stock information, data &

joke. In the December 2011 quarter, its net revenues were Rs121.98 crore; however, it fell sharply and recorded negative revenues of -Rs25 lakh during the September 2012 quarter. Fast forward to the latest reported quarter, September 2013; its net revenues are still in negative territory, at -Rs20 lakh. Its net profit is no better; in seven of the nine past quarters, it reported losses. Yet, its share price is up a humungous 309%, from Rs17.85 to Rs72.95, in just over five months since August 2013. Neither our regulators nor the income-tax officials seem to smell a rat. „

attractive part of Finolex is its relative valuation. For a company which has a low debt:equity ratio of 0.14 and a return on net worth of 16%, its market-capitalisation is 0.52 times sales and 4.06 times the operating profit. Its cash earnings per share were Rs12.55. Finolex also pays out generous dividends. Dividend distributed was 60% for FY12-13, 40% and 35%, respectively, for the previous two years. The book value is Rs60.42 on a face value of Rs2. The share price hit a 52-week low of Rs41.25 on 22 March 2013 and rose to a 52-week high of Rs92.10 on 6 January 2014. On 31 January 2014, the company’s share was trading at Rs84.85 and is an attractive buy at the current market price. „ Exits & Returns Street Beat stocks are chosen from a list of undervalued stocks that are earning a high return on capital. We recommend an exit when they are no longer undervalued or not performing as per expectations. 19% Return: Our recommendation has so far fetched 19% since January 2012, based on booked profit and open positions of more than one year. Returns exclude open calls of less than a year.

company information presented constitutes a recommendation or a solicitation of any offer to buy or sell any securities. Information presented is general information that does not take into account your individual circumstances, financial situation or needs; nor does it present a personalised recommendation to you. Individual stocks presented may not be suitable for you. Although information has been obtained from and is based on sources we believe to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute our judgement as on the date of the report and are subject to change without notice. Past performance is no indication of future results. Investors must do their own research before acting on them. Data Source: Centre for Monitoring Indian Economy’s Prowess database.

37 | 20 February 2014 | MONEYLIFE

Stock-Streetbeat.indd 3

1/31/2014 8:07:47 PM

STREET BEAT WHICH WAY

Rose-tinted View

two minutes. Immediately thereafter, it recovered and closed marginally in the negative. I am a great believer in price action as an indication of what the market is thinking; so, I would pay close attention to the fact that One more instance of how stock marketplayers are usually weak on understanding the Nifty was resilient to the RBI action. But, often, the market’s understanding of macro issues is wrong. In macroeconomic trends this case, I believe that the market could be wrong in shrugging off RBI’s policy action. ast fortnight, the market was in for a double Market-players expect a benign inflation scenario nasty surprise. First the US market, which has over the next few months. They are clinging on to been has risen relentlessly in 2013, got sold these words of RBI governor Dr Raghuram Rajan: off sharply. This had an immediate effect all over the “If the disinflationary process evolves according to world, including in India. However, on 28th January, a this baseline projection, further policy tightening in bigger blow was inflicted when the Reserve Bank of the near term is not anticipated at this juncture. In India (RBI) raised the repo rate by 25bps (basis points) fact, if inflation eases at a pace that is faster than we to 8% to control rising consumer price inflation (CPI). currently anticipate, and that reduction is expected Surprisingly, the impact of the first was far more than to be sustained, the Reserve Bank that of the second. While the Nifty will have room to become more fell from 6,345 to 6,135, a move RBI may have no accommodative.” of 3% in sympathy with the sharp chance to cut rates This is a big ‘if’. The fact RBI US decline, it took the far more soon. Indeed, it could itself said yesterday that “The Dr damaging factor of the rate hike in even hike rates, given Urjit Patel Committee has indicated its stride. The consensus, in the morning that CPI will remain a ‘glide path’ for disinflation that sets an objective of below 8% of 28th January when the RBI was stubbornly high CPI inflation by January 2015 and meeting to decide monetary policy, below 6% CPI inflation by January was that the rates would be left 2016… over the ensuing 12-month horizon, and with unchanged. However, having just released the Urjit the current policy stance, there are upside risks to the Patel committee’s report on monetary policy, which central forecast of 8%.” What are the chances of laid down that targeting consumer CPI going below 8% and to 6%? Low, because price inflation would be inflation is being caused by government the most important job of spending and imports, over which the RBI’s monetary policy, RBI has little control. RBI was probably signalling If this is so, RBI may have no what it aims to do. What does it chance to cut rates soon. Indeed, it mean? could even hike rates, given that CPI will Well, first, let us see how the remain stubbornly high. This will affect market reacted to the RBI stance. corporate performance and bank stocks. The moment RBI‘s decision was Medium-term: Down We suspect that the market will adjust announced, the Nifty fell from 6,160 Long-term: — downwards to these negative factors. „ to 6,086, a vertical drop of 74 points in just

L

investment that is

not subject to market risks

Attractive gifts, invitation for events and free online help. For a subscription offer that is unique, look for a form elsewhere in this issue or on our website at www.moneylife.in

MONEYLIFE | 20 February 2014 | 38

Which way.indd 1

1/30/2014 9:28:10 PM

STOCKGRADER LONG TERM

Surprise Action RBI picks up the sledgehammer to control inflation

T

he markets were in a pensive mood prior to RBI’s (Reserve Bank of India’s) decision on policy rates and the US Federal Reserve’s subtle hints at accelerating the tapering programme. The BSE S&P Sensex was trending down until the sell off on 27th January induced fear in the markets. This was exacerbated the next day when RBI hiked repo rates to 8%, an unconventional step. Experts say this is a good thing, but stagflation risk persists and could be a threat. Our portfolio hasn’t been spared. Only three stocks finished in positive territory; Divi’s Laboratories is among the top three of the list which closed marginally higher. One of our IT picks—TCS— managed to stay in the green moving up 0.10% during the fortnight ended 30 January 2014. Banking and financial

institutions didn’t fare well; IndusInd Bank plummeted 11% followed by Kotak Mahindra Bank, IDFC and Jammu & Kashmir Bank which were down 11%, 8% and 6%, respectively. We are 46% in cash and are looking out for investing opportunities. „

Moneylife Long Term Portfolio (MLTP) will have a maximum of 50 stocks, weighted equally. MLTP will be benchmarked against the Nifty and largecap equity funds. But MLTP returns are not adjusted to the following cost and constraints of equity schemes: 1) Yearly equity fund charges of around 2% 2) Buying & selling, based on purchase or redemption pressures 3) Impact cost in buying/selling

Return Ratios@ No. Company

Valuation#

ML Sector

RoE RoCE MC/OP MC/Sales

Entry Price

CMP* Change

1

Hero MotoCorp

Auto

42%

38%

11.99

1.74

1,823.40

1,999.75

2

Shree Cement

Cement

22%

17%

14.23

2.89

4,470.55

4,369.90

10% -2%

3

VST Industries

Lifestyle & Leisure

44%

59%

9.69

2.90

1,786.15

1,591.75

-11%

4

Jammu & Kashmir Bank

Banks

24%

—

3.12

0.88

1,370.10

1,276.95

-7%

5

TCS

Software & IT Services

51%

63%

18.79

6.51

1,344.15

2,217.90

65%

6

ONGC

Oil & Gas

15%

19%

5.81

3.51

339.70

272.40

-20%

7

Sun T V N etwork

Media

24%

35%

10.35

7.49

472.10

354.70

-25%

8

Lupin

Pharma

37%

38%

14.21

4.52

629.05

870.90

38%

9

Mindtree

Software & IT Services

33%

37%

11.58

1.86

914.55

1,415.25

55%

10

IDFC

Financial Services

14%

—

4.97

1.69

154.20

91.90

-40%

11

ITC

Diversified

38%

54%

19.62

7.38

334.90

324.60

-3%

12

HDFC

Financial Services

21%

—

18.79

5.40

845.00

829.15

-2%

13

HDFC Bank

Banks

22%

—

9.74

2.97

683.00

632.40

-7%

14

Kotak Mahindra Bank

Banks

16%

—

21.39

5.02

774.70

650.10

-16%

15

Bajaj Auto

Auto

41%

54%

12.24

2.71

1,820.35

1,920.85

6%

16

Asian Paints

Paints

38%

53%

24.02

4.04

457.37

478.60

5%

17

Sun Pharma ^

Pharma

9%

4%

—

8.77

484.68

593.60

22%

18

IndusInd Bank

Banks

18%

—

7.67

1.89

427.45

378.45

-11%

19

Castrol India

Auto Components

77%

104%

24.09

4.99

310.60

292.05

-6%

20

Titan Company

Lifestyle & Leisure

37%

56%

20.17

1.85

241.85

222.80

-8%

21

NMDC

Steel

21%

25%

9.42

5.67

140.05

141.95

1%

22

Tech Mahindra

Software & IT Services

37%

38%

10.78

2.41

1,794.65

1,719.10

-4%

23

Britannia Industries

Foods & Beverages

51%

48%

17.02

1.62

876.45

869.80

-1%

24

Mahindra & Mahindra

Auto

25%

25%

11.69

1.50

938.90

869.30

-7%

25

Divi’s Laboratories

Pharma

28%

33%

16.95

7.44

1,178.40

1,270.40

8%

26

Eicher Motors

Auto

39%

37%

35.81

6.91

4,910.15

4,688.90

-5%

Exposure is assumed to be 2% for each stock. This means that the portfolio is 48% in cash now. For calculating portfolio return, the cash balance is expected to earn 8% (pre-tax).*Latest price is the closing price of every alternate Thursday in Rs; MC: Market-cap; OP: Operating Profit; # Valuation based on the latest quarter result, annualised; @ Return ratios based on the latest four quarters of profit; ^Consolidated; CMP: current market price

39 | 20 February 2014 | MONEYLIFE

Long Term.indd 2

1/31/2014 8:12:21 PM

STOCKS VALUE PICKS

Stagflation Risks

T

he earning season has thrown up mixed results, so far. But the stock markets are decidedly more influenced by the macro picture and the upcoming elections. As the Reserve Bank of India, in an unconventional move, raised repo rates to 8%, a psychological threshold, markets have weakened once again. The risk of stagflation looks real, even as the market continues to move sideways. Supreme Industries, an excellent company on our core list, enters the list of value picks, thanks to excellent results. A few other companies also entered the list due to better results, namely, Symphony, Tata Elxsi, Finolex Industries and UCO Bank. Mindtree has become pricey, Company

Results Declared

ML Sector

so it is out of the list. Interestingly, as many as 58 stocks are trending up as is almost every sector on the list; just four stocks are down and 13 stocks remained flat. This shows the quality of our list. Many of these stocks are worth buying when the market declines, as it may, over the next few weeks. „ How To Use the Data: This list is mainly designed to reduce your effort while making a shortlist of value picks. Stocks have been sorted and displayed according to a composite rank of high return on net worth and low valuation. You cannot buy these stocks mechanically. To actually select a stock to buy, you may want to glance at other parameters and apply your own understanding of a sector or a company. Remember, for value investors, there is something called a ‘value trap’. This refers to a situation when an attractive company is reasonably valued but its internals are deteriorating – which is probably why the stock was cheap to start with. One way to avoid this is to consider sales growth; so look at the ones with strong sales growth. Also, keep an eye on the tax payout, which is a measure of corporate governance. The best combination is great financials, low valuation and a rising stock price. One should buy in an uptrend, though a flat trend of a value stock is perfectly fine too. A ‘value’ stock in a strong downtrend is best avoided. Remember, price could go down due to an adverse event relating to the company or a severe market decline; in either case you don’t want to catch a falling knife.

Latest Qtr Revenue Growth

Average 3-Qtr Revenue Growth

Valuation (MC/OP) **

Return on Net Worth (%) *

Tax Rate

Price Trend Up

Maral Overseas

Sep-13

Textiles

30%

15%

0.85

133%

0%

Indo Count Inds

Sep-13

Textiles

42%

42%

0.70

94%

13%

Up

Morarjee Textiles

Sep-13

Textiles

16%

17%

1.37

43%

0%

Up

Suven Life Sciences

Sep-13

Pharma

201%

91%

2.94

59%

6%

Up

Sutlej Textiles & Inds

Sep-13

Textiles

15%

16%

1.04

32%

17%

Up

Indian Terrain Fashions

Sep-13

Retail

40%

44%

2.47

37%

14%

Up

Bharat Petroleum Corp

Sep-13

Refineries

9%

6%

3.68

45%

36%

Flat

Bengal Tea & Fabrics

Sep-13

Textiles

23%

26%

0.56

30%

5%

Up

RS Software (India)#

Dec-13

Software & IT Services

24%

19%

3.17

38%

24%

Up

Chaman Lal Setia Exports

Sep-13

Foods & Beverages

108%

55%

0.79

30%

31%

Up

Adi Finechem

Sep-13

Chemicals

18%

3%

2.58

34%

34%

Up

Fluidomat#

Sep-13

Engineering

-9%

2%

3.21

36%

33%

Up

Centum Electronics

Sep-13

Engineering

79%

49%

3.38

36%

-27%

Up

Vikram Thermo (India)#

Sep-13

Pharma

28%

18%

2.58

31%

33%

Flat

Ceat

Sep-13

Auto Components

9%

8%

1.75

29%

31%

Up

AVT Natural Products#

Sep-13

Industrial Intermediates

2%

4%

3.58

37%

33%

Up

Alkyl Amines Chemicals#

Dec-13

Chemicals

9%

20%

3.11

33%

33%

Up

Heritage Foods#

Dec-13

Foods & Beverages

8%

6%

4.40

38%

22%

Flat

Munjal Auto Inds#

Dec-13

Auto Components

25%

13%

2.89

30%

5%

Up

IL & FS Investment Managers

Sep-13

Financial Services

11%

4%

6.73

51%

31%

Up

Deepak Spinners

Sep-13

Textiles

25%

19%

0.46

25%

35%

Up

Gujarat Gas Co#

Sep-13

Oil & Gas

-1%

1%

4.61

37%

30%

Flat

KRBL

Dec-13

Foods & Beverages

30%

26%

2.19

27%

27%

Up

Igarashi Motors India

Sep-13

Auto Components

23%

15%

3.00

28%

27%

Up

MPS

Sep-13

Education

14%

9%

6.54

39%

21%

Up

Indag Rubber#

Dec-13

Auto Components

0%

-1%

4.47

34%

24%

Flat

Shivam Autotech

Sep-13

Auto Components

11%

5%

1.72

25%

11%

Up

Bayer Cropscience

Sep-13

Farm & Farm inputs

27%

29%

8.78

61%

26%

Flat

Ujaas Energy

Sep-13

Engineering

521%

611%

2.15

26%

38%

Down

Ajanta Pharma#

Dec-13

Pharma

31%

36%

8.56

50%

38%

Up

``

MONEYLIFE | 20 February 2014 | 40

Stocks Value Pick.indd 2

1/31/2014 8:09:23 PM

STOCKS VALUE PICKS

Company

`

Results Declared

ML Sector

Latest Qtr Revenue Growth

Average 3-Qtr Revenue Growth

Valuation (MC/OP) **

Return on Net Worth (%) *

Tax Rate

Price Trend

Atul Auto#

Sep-13

Auto

27%

18%

6.99

37%

31%

Up

Atul

Dec-13

Chemicals

31%

14%

3.97

28%

30%

Up

Mayur Uniquoters

Sep-13

Auto Components

20%

16%

8.67

40%

32%

Up

Alembic Pharmaceuticals#

Dec-13

Pharma

29%

25%

9.64

48%

21%

Up

Vinati Organics#

Dec-13

Chemicals

21%

31%

7.13

33%

33%

Up

Eclerx Services

Dec-13

Software & IT Services

28%

24%

10.59

55%

18%

Up

Muthoot Finance

Sep-13

Financial Services

-1%

3%

3.05

24%

33%

Up

Zensar Technologies

Dec-13

Software & IT Services

3%

8%

7.51

33%

29%

Up

Balkrishna Industries

Sep-13

Auto Components

-5%

-2%

4.08

26%

34%

Up Down

Rural Electrification Corp#

Sep-13

Financial Services

28%

28%

3.42

24%

26%

Symphony

Dec-13

Consumer Durables

29%

79%

10.58

44%

29%

Up

Vakrangee

Dec-13

Software & IT Services

26%

21%

7.48

31%

27%

Up

VST Industries#

Dec-13

Lifestyle & Leisure

20%

18%

10.58

44%

31%

Flat

Syndicate Bank

Sep-13

Banks

4%

6%

1.76

22%

-28%

Flat

Accelya Kale Solutions#

Sep-13

Software & IT Services

16%

29%

12.71

89%

32%

Up

Clariant Chemicals (India)

Sep-13

Chemicals

30%

20%

9.89

39%

29%

Up

Tata Elxsi

Dec-13

Software & IT Services

31%

25%

7.68

31%

36%

Up

Yes Bank

Dec-13

Banks

19%

26%

5.43

27%

32%

Down

VST Tillers Tractors#

Sep-13

Farm & Farm Inputs

71%

25%

5.11

26%

30%

Up

Jammu & Kashmir Bank#

Sep-13

Banks

10%

14%

3.51

24%

31%

Up

Finolex Industries

Dec-13

Petrochemicals

6%

5%

6.10

27%

30%

Up

Narmada Gelatines#

Sep-13

Chemicals

0%

4%

2.43

22%

29%

Up Up

Supreme Industries#

Dec-13

Plastics

20%

16%

9.27

35%

33%

Swaraj Engines#

Sep-13

Auto Components

24%

15%

8.80

32%

30%

Up

Torrent Pharmaceuticals#

Dec-13

Pharma

11%

19%

11.66

40%

18%

Up

Triveni Turbine

Dec-13

Engineering

-20%

-17%

13.70

56%

32%

Up

CCL Products (India)

Dec-13

Foods & Beverages

0%

5%

4.09

23%

32%

Up Flat

Hero Motocorp#

Sep-13

Auto

10%

4%

12.44

42%

16%

Amara Raja Batteries#

Dec-13

Auto Components

13%

18%

9.55

33%

32%

Up

National Peroxide#

Sep-13

Chemicals

3%

11%

3.87

23%

34%

Flat

Ahmednagar Forgings

Sep-13

Auto Components

74%

32%

1.08

19%

29%

Flat

Bajaj Auto#

Dec-13

Auto

-5%

0%

12.18

41%

29%

Flat

Poly Medicure#

Dec-13

Healthcare

27%

26%

11.00

37%

29%

Up

Mirza International

Sep-13

Consumer Durables

22%

18%

1.79

20%

33%

Up

Tech Mahindra#

Sep-13

Software & IT Services

176%

108%

11.52

37%

23%

Up

Munjal Showa#

Sep-13

Auto Components

-2%

-3%

3.93

22%

14%

Up

Hexaware Technologies

Sep-13

Software & IT Services

14%

8%

9.20

31%

16%

Up

Indraprastha Gas

Sep-13

Oil & Gas

18%

20%

4.68

23%

33%

Down

NIIT Technologies

Dec-13

Software & IT Services

15%

26%

8.86

29%

26%

Up

Wim Plast#

Sep-13

Plastics

17%

17%

5.13

24%

27%

Up

Acrysil#

Sep-13

Consumer Durables

23%

38%

4.73

23%

23%

Up

Uco Bank

Dec-13

Banks

13%

8%

1.25

18%

4%

Flat

HCL Technologies

Dec-13

Software & IT Services

39%

47%

14.18

48%

18%

Up

Suprajit Engineering#

Sep-13

Auto Components

15%

9%

7.69

26%

28%

Up

DB Corp

Dec-13

Media

18%

18%

8.79

28%

33%

Up

MC: Market-cap (as of 31 December 2013); OP: Operating Profit; * Return on net worth is based on trailing four quarters of net profit; ** Valuation is based on the recent quarter operating profit annualised; # These stocks have been covered in Stockgrader, Street Beat, Cover Stories or Kensource stockletter

41 | 20 February 2014 | MONEYLIFE

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1/31/2014 8:09:50 PM

Weekly stockletters for excellent returns from high-quality stocks

We do it all for you: Screening, Research, Analysis, Grading & Tracking These stockletters are for serious investors who want to commit a substantial part of their savings to creating wealth that well-selected stocks generate.

Annualised Returns over the Past Two Years

Lion Stockletter

35.93%

Antelope Stockletter

What’s Inside

Here is what you get every week: - Weekly market view - A shortlist of stocks to invest in - Weekly updates on all recommended stocks and clear recommendations on when to sell

Disclaimer: The stockletters are for informational purposes only and none of the stock information, data and company information presented constitutes a legally binding recommendation or a solicitation of any offer to buy or sell any securities. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalised recommendation to you. Individual stocks presented

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Two Variants

There are two variants of the stockletter. Antelope: Medium-term growth stocks available, to be held for 6 months to 1 year or more Lion: Long-term value stocks. Usually large companies are recommended

may not be suitable for you. KenSource is a research and information company and not investment advisor. Please consult an advisor about the appropriateness of your investment decisions. Cancel within four issues: You can cancel your subscription within four issues. We will return your money for the remaining period of subscription. You can cancel by email or phone.

1/27/2014 3:01:56 PM

Some Facts about the Stockletters What are these stockletters? We have two stockletters, each pertaining to a different time horizon. Antelope is usually for 6 months' investment horizon and Lion is for stocks that are to be held for more than a year. Each offers a select list of outstanding stocks to buy. We hope to select not more than 30-35 stocks in the portfolio at the best of times. It improves your chances of owning those rare stocks that everyone wishes they had spotted too—earlier. How are these stocks different from the stocks given in Moneylife magazine? The selection pattern is different for Street Beat and stockletters. Street Beat is meant for the average investor and focuses on small-caps unknown to many, while the stockletters are designed to meet investment needs of serious investors who have deeper interest and focus in the stockmarket and want to commit a substantial part of their savings for the long term. Street Beat stocks are chosen for each financial year and the summary performance of these stocks is recorded sometime in May. The profit or loss of each ongoing idea can be analysed from the stockletter itself. Can I know the performance of the stockletters? Yes. Since January 2012, that is, over two years, Lion has given a return of 35.93% while Antelope has given a return of 35.58%. More details of the portfolio are given here: http://moneylife.in/promotion/sl_perf/ index.html. This performance report is updated occasionally, usually every quarter. What is the reason behind this success and will it continue? We believe that the reason behind this performance is our formula. We frankly do not know whether it will be as successful in future as we have been so far, but we think we can beat the returns of the majority of equity mutual fund schemes.

What is the investment strategy? Our investment strategy is to select quality stocks at a reasonable price. We identify companies that are reporting high return on capital but are available cheaper than similar high-quality stocks and then use our knowledge of managements, including corporate governance, to select stocks.

How much should one invest in each stock? You should invest equal amount in every single stock suggested. For instance, if we have selected 30 stocks, and you wish to invest Rs150,000 in all, you must invest Rs5,000 in each stock. What if some stocks have already run up sharply? We try to help our subscribers by identifying stocks that are still worth buying at current prices and leaving out, for now, the stocks that have run up sharply.

How are we different from a mutual fund and stockbroker? 1. Unlike mutual funds that hold your stock through a sharply falling market and often end up with poor returns, we believe that the only objective of an investment is to earn positive returns. Buying scrips of good companies is not an end in itself. 2. Unlike mutual funds, we do not benchmark ourselves against arbitrary indices. We aim to earn positive returns under all market conditions. 3. Mutual funds say that you cannot time the market. This gives them an excuse to invest lazily—hold on to large, well-known companies in a declining market. We believe timing is important. The best stocks can decimate your portfolio if you don’t sell them on time. 4. Unlike stockbrokers, we are not concerned with whether you buy 50 shares or 5,000; whether you buy/sell once a week or 20 times a week. Our income is not tied to your actions. We earn by selling ideas that we want to be responsible for. Our stockletters will survive only if you make money. In contrast, brokers earn their commissions irrespective of whether you make money or not.

How to interpret the ideas given in the stockletter? To enter into a transaction, wait for a new idea after you have started subscribing. We only offer buy ideas. We don’t suggest a short-selling opportunity.

How do subscribers get the stockletter? The stock letter is sent as a pdf file only by email

How can I buy the stockletter? You can buy online at http://www.moneylife.in/ stockletters.html or you can send us a cheque or a demand draft by using the form below.

What is the frequency? You will receive your chosen stockletter every Saturday evening.

How do we know when to exit from the stocks recommended? Exit suggestions are spelt out clearly every week. How much do the stockletters cost? Each stockletter costs Rs2,000. If you buy the two together, instead of Rs4,000, you pay Rs3,500. As a matter of comparison, if you have just Rs5 lakh invested in a mutual fund scheme, the fund company will take away Rs10,000 a year (at 2% a year) from your returns. That is more than 3 times you pay us – for returns that are nowhere as good as ours. If you have Rs10 lakh invested, you are paying Rs20,000 a year to mutual funds. What if I have any queries about specific stocks? Well, we would rather let our performance do the talking but if you have any serious doubts email us at [email protected].

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Annual Price of Each Stock Letter: Rs2,000; Special Combo Offer for Two: Rs3,500 NAME: ____________________________________________________________________________________________ ADDRESS: __________________________________________________________________________________________ PHONE (Office): ____________ Phone (Res): ____________ E-mail address: _____________________________________________ Date of Birth: ____________________ (MM) (DD) (YY) Profession: _____________________ Designation: ____________________________________________________________ ( ) Please find enclosed ( ) Cheque / ( ) Demand draft number ____________________________________ dated __________________ favouring KenSource Information Services Pvt. Ltd. ( ) Please charge it to my ( ) /( ) /( ) My card number is ______________________ & expiry date is ____________ (MM / YY) DATE: ______________________ SIGNATURE: ______________________ Please fill in this order form and mail it with your remittance to Kensource Information Services Pvt. Ltd., 315, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai 400 028. Credit card orders can be faxed to Mumbai 022-24442771. In case payment is through credit card, expiry date of the card should be mentioned. # Rates and offers are valid only in India. This offer is valid for a limited period. # All disputes shall be subject to Mumbai jurisdiction only.

Privacy Policy: We do not give away your e-mail or address, telephone number, or any other information that you provide to us. We use this information solely to service your account

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Insurance Trends New products, regulations, features and options, interpreted from your perspective

L i f e I ns u r anc e

LIC’s Products With Shorter Policy Term Were the ‘favourite’ products sold till 2013 really a better deal?

L

ife Insurance Corporation of India (LIC) has launched new traditional products—New Endowment Plan, New Jeevan Anand Plan, New Money Back Plan, New Bima Bachat and so on. The big change with these new avatars is reduction in the policy term and lower maximum entry age. This may impact consumer interest as insurance products are sold for not just covering death risk, but also for minimising the risks of outliving savings. With increasing longevity, if the insurance products offer a reduced policy term, then the concept of insurance for ‘outliving savings’ is defeated. It is unclear why LIC has adopted this new strategy for its products which seems to be in line with some private insurers’ offerings. Also, a lower term can affect even the bonus rates. For example, LIC’s old endowment plan gave highest final additional (terminal) bonus for policy term of 40 years or more. The old endowment plan was offered for maximum

policy term of 55 years; the New Endowment Plan, launched from 1st January, has a maximum policy term of only 35 years. The maximum entry age is 55 years against 65 years—the maximum entry age under the old endowment plan. New Jeevan Anand Plan has maximum entry age of 50 years when the old Jeevan Anand allowed entry till 65 years. The policy term is only 35 years whereas the old product allowed policy term of 75 minus age at entry. You may have seen LIC agents’ offices putting up display boards in December 2013 stating that your ‘favourite’ products like Jeevan Anand, Jeevan Tarang, Bima Bachat, etc, are getting over and, hence, exhorting you to buy them then. The limited time offers always lure customers. LIC’s advertisements, in print and on TV, were geared to ensure that customers bite the bait of buying the known rather than wait for the unknown next year. With drastic changes in new product parameters, it’s possible that the ‘favourite’ products sold till 2013 were really a better deal. Only time will tell if the product

returns (bonus) of new products are any better than those of the products withdrawn after 31 December 2013. Reduced commission and separate levy of service tax should help to improve the bonus for new products; but improved surrender value can mean increased cost to the insurance company. On the product parameters, the old LIC products score over the new ones.

Regulation

Dismal Start for Insurance Demat Flawed concept and apathy

T

he introduction of insurance repositories is a good initiative from the Insurance Regulatory and Development Authority (IRDA). It will help the insurers as well as the insured to have the policy documents in demat format. E-insurance policies will help insurers to save costs on printing and dispatching policies and renewal notices. But the progress, in the past four months, has been dismal. Less than 50,000 policies have been digitised when the total number of life insurance policies is more than 3.3 million. This can be due to lack of push by insurers or apathy of the insured. IRDA may set a timetable for life and non-life insurers to move from physical policies to the digital format. Will you really be able to enjoy the comfort of storing all your policies electronically, under a single e-insurance account, just like you hold your stock certificates and mutual fund units in dematerialised form? The answer depends on whether every insurance company will tie up with each of `` the five insurance repository (IR)

MONEYLIFE | 20 February 2014 | 44

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Moneylife Insurance Helpline Success The initiative from your group is commendable as it will be helpful to spread awareness about the do’s and don’ts by customers before finalising an insurance product to prevent from being cheated. - Amit Mishra

I am extremely happy about the manner and speed with which my issue was handled. This speaks volumes about Moneylife Foundation. - N Kanitkar

154

cases handled

116

cases guided y correctly

I want to thank Moneylife Foundation for preventing us ordinary people from falling into financial traps. - Brijesh

Within 3 days of writing to the Helpline, Reliance credited the money. This was an amazing turnaround! My sincere heartfelt thanks to the entire team at Moneylife Foundation for acting so swiftly. - Dinesh Shanbhag

40 members got back over We thank you for the support you gave to our cause which also helped LIC accept their mistake. - N K Bhatt

I am honoured to have a great companion like Moneylife in my life. It is a matter of pride and privilege to be a part of it. - Uttam Kumar Dubey

`

23 lakh Special thanks to Moneylife for the comprehensive articles which are full of necessary information. I searched the internet and none is as good. - Girish Kodashettar

Aviva tried to pressurise me to purchase a policy. Thanks to Moneylife Foundation, I have taken an informed decision rather than hurry and fall into a pit. - Tushar

I am indebted to Moneylife for jumping in and taking the reins in their hands. I had lost all hopes of getting my money back till the day PNB Metlife called me and confirmed that they would put Rs25,000 in my account. - Shunila

Have any insurance-related problem? Contact us at hƩp://moneylife.in/promoƟon/insurancehelp/unregistered.html

Insurance Helpline Success.indd 2

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INSURANCE TRENDS

` firms. IRDA has given insurers

the freedom to tie up with one or more IRs licensed by them, which is a flaw. An insured can have an account only with one IR. However, the insurance companies need not have a tie-up with all the IRs, thereby negating the value of the single-point e-policy account concept.

Regulation

selling, etc. IRDA’s diktat on obtaining a broking licence will start with public sector banks. While the idea of making full usage of bank branches to sell insurance products of all insurers, thus giving a choice to consumers, is IRDA’s selling point, will public sector banks that are promoters of an insurance company really look forward to losing captive business for their

Banks May Be Forced To Be Brokers Will customer benefit?

I

RDA is in favour of banks selling products of multiple insurance companies as insurance brokers. IRDA is desperate to improve insurance penetration and persistency in India; the by-product of the initiative will be higher product sales accountability for banks. Currently, banks operate as a corporate agent of an insurance company which places a lower liability onus on them for mis-

Fine Print Life Insurance To Strengthen AML Norms

I

RDA has asked Reliance Life, Birla Sun Life, ICICI Pru Life and LIC to strengthen procedures for complying with the anti-money laundering (AML) norms. There were some violations related to quoting of permanent account number (PAN) for payment above Rs50,000. The requirement of PAN above Rs50,000 was examined at transaction level and not at client level. There is need to put in place systems and controls to

TS Vijayan, Chairman, IRDA

own insurance company? What about the obligation of MoU (memorandum of understanding) signed by the banks with insurance companies? The regulator may even armtwist the insurers by asking them to discontinue the corporate agency arrangement with the public sector banks. Private banks

detect and monitor when a person makes multiple cash transactions aggregating more than Rs50,000 in cash. Detailed due-diligence is needed where the premium payment crosses the threshold limit of Rs1 lakh per annum.

Cashless OPD May Be Offered Soon

M

ediclaim usually covers hospitalisation of 24 hours or more along with a fixed number of day-care procedures. OPD cover for doctor’s consultation, diagnostic tests, dental procedures, etc, in the mediclaim package is expensive and usually available on

may be able to duck it. Corporate agency agreements have a tenure of three years. The industry has a divided opinion on the IRDA move. Companies promoted by banks have opposed the move; the remaining companies are lobbying hard for banks to sign up for broking as it will give them a leg-up for selling their products through a lucrative distribution channel that had thwarted the opportunity for pushing their products. So, where does it leave the consumers? Will they really benefit when banks go for a broking licence? Today, there are some complaints about brokers not acting in the best interest of consumers by pushing insurance products that give higher commissions. There are life insurance policies sold by brokers without even meeting the consumer, e.g., dubious telemarketers hard-selling a policy and logging it under the broker id. Can consumers blindly trust brokers to really be neutral and doing everything in the consumer’s interest? Not really. Buyer beware applies to everything in life, especially life insurance. „

a reimbursement basis. Insurance companies are working on ways to make cashless OPD possible, to make the product attractive.

HDFC Life Told To Reopen Settled Death Claims

I

RDA rejected a plea by HDFC Life and ordered them to reopen all settled death claims and pay an increased amount under two of its policies. The insurer discriminated between two sets of policyholders— those who had bought the HDFC Life Sampoornam Samridhi Plan and HDFC Classic Assure Plan before 31 March 12, and those who bought the policy after 1 April 12.„

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Your Insurance against Insurance In order to offer you diverse choices, insurers end up creating complexity. They seem to have an insurance product, no matter what your need! Children’s education? There is an ‘insurance’ product for that.

Need post-retirement income? There is an ‘insurance’ product for that too. Advertisements to sell these products assure a secure future.

But most of these products deliver poor returns, do not provide adequate coverage of risk and are designed to benefit the insurer.

What You need is insurance against insurance products that you are lured into buying.You will get this from our insurance coverage

Insurance ad.indd 1

Moneylife Insurance coverage: bold, unbiased & practical

1/31/2014 9:50:17 PM

PERSONAL BUSINESS AUTO

Just nine of these have been made. One Indian entrepreneur is one of the buyers

L

amborghini has manufactured just nine Veneno, a limited edition of its latest, and most expensive, cars. Each costs a whopping $4.25 million (without taxes and duty). Of these, it is known that two have gone to buyers in the US, of which one has been delivered to “Kris Singh”, an entrepreneur of Indian origin, and another has gone to a Lamborghini dealer. One has been retained for their own museum, and one has gone to a buyer in West Asia. That still leaves five, whose owners’ identities have been kept private and confidential. Two of these are destined for customers of Indian origin, to be placed in their garages with total secrecy, or in the tax-free playgrounds. Thanks to freedom of information in the US, one can obtain ownership details so that corporate veils behind extravagant purchases can be lifted. In India, on the other hand, such toys are purchased with taxpayers’ money by loss-making corporates. For instance, loans given for infrastructure projects are often used to buy super-cars and other assorted toys. The costs of buying these are then recovered in the form of higher port charges and metro fares. Rules on extravagant purchases made by corporates, especially listed companies, need to be introduced.

Overpriced Repairs

A

friend of mine owns a new-generation sedan, but its width and acceleration are not suited for our streets. Already, there are scratches on the left side since his chauffeur’s driving judgement has been impaired. Also, he left the car’s lights on, on a cloudy day. By the time he got back to his car that evening, his battery had drained out. He tried to jump-start the car for which he called a road-side mechanic. The mechanic took one look at the car and said that the car cannot be jumpstarted by anyone other than the authorised workshop. Why? The circuitry of this luxury brand has been wired

in such a way that it can recognise only the jump-start provided by authorised workshops! He called up the helpline and was told that a mechanic would come and attend to the problem. In due course, a young man came and got the car jumpstarted from the same spot as the other mechanic. The charge for this jump-start was Rs3,500 plus taxes. The road-side mechanic would have done the job for far less, perhaps Rs50 or Rs100 and even cleaned the engine bay.

Tata Motors Spruces Up

O

ver the past few weeks, there have been two interesting developments from Tata Motors. Firstly, the Nano has been provided with power steering. But, in my experience, a better result could have been achieved by providing tyres of the same size, as used for the rear wheels, for all four wheels. It gives the car a better look. The power steering will simply sap away more power from the engine. Secondly, there’s a new engine for the Tata Indica/ Vista/Indigo series of cars. This is more complex and it will take some more time to analyse its actual performance. The existing Fiat diesel engine in the Maruti, Fiat and some Tata cars has become a standard against which all other small diesel engines will be benchmarked. Yes, the new small diesels from Honda and Hyundai are good too. I have always enjoyed both the Tata Motors cars—the Nano and the Indica. But when it comes to making a purchase decision, the cars somehow don’t appear to be attractive.„

Veeresh Malik started and sold a couple of companies, is now back to his first love— writing. He is also involved in helping small and midsize family-run businesses re-invent themselves.

MONEYLIFE | 20 Feburary 2014 | 48

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TION MONEYLIFE FOUNDA

* DONATE to

make our voices heard

Since February 2010, Moneylife Foundation, the Voice of Savers has enrolled 28153 members, conducted 197 workshops, handled scores of grievances & made

four representations to policymakers. We need to do much more

As the Voice of Savers, Moneylife Foundation is proud to have been one of the fastest growing NGOs, reaching out to savers across India (Gurgaon, Kolkata, Bengaluru, Chennai, Nashik, Pune, Hyderabad and Goa), covering a wide variety of subjects. On advocacy, we continued to pursue the government for appropriate legislation to prevent people from being looted by thousands of money-chain schemes. We took up the issue of harassment of senior citizens because of problems with TDS. In August 2011, Moneylife Foundation was accepted as an affiliate member of OECD’s International Network on Financial Education (INFE).

(50% tax exemption). Please send a Cheque/Demand Draft in favour of ‘MONEYLIFE FOUNDATION’ accompanied by a letter indicating if it is a corpus donation.

We did all this with very limited resources. We need to strengthen our institutional and financial base to grow into a powerful entity that speaks for savers and can intervene in policy debates.

“I have made a donation of Rs ________to Moneylife Foundation. This donation shall form a part of the corpus of Moneylife Foundation. My PAN is ________________.” (Please also enclose details of your contribution through cheque/ demand draft/cash.)

There is an urgent need for neutral and non-partisan voices that strongly pitch for more sensible laws, better regulation and more accountability on behalf of the savers. We are sure you have seen the value in our work and recognise the need to help us achieve our objectives by donating to Moneylife Foundation. *Donations to Moneylife Foundation are eligible for tax benefits under Section 80G of the Income-Tax Act 1961

We will also need your Name, Address, Contact No., Email and PAN card details in order to send you the tax-exemption certificate. Donations may please be accompanied by a letter to Moneylife Foundation with the following declaration:

Our Address: Moneylife Foundation, 305, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai 400 028 Tel: 022-49205000

MF Trust Reg No: E-26571; MF Pan: AACTM4377J MF 80(G) Reg No: DIT(E)/MC/80G/685/2010-11 dated 7.2.11 effective 8.9.2010 Moneylife Foundation is a not-for-profit initiative of Moneylife Magazine & Moneylife Digital, which provide fair, fearless and unbiased information on business, industry and personal finance. The Trustees are Debashis Basu, Sucheta Dalal & Dr Nita Mukherjee

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1/31/2014 7:43:20 PM

Real Estate Builder Told To Refund Forfeited Amount

T

he Pune Additional District Consumer Disputes Redressal Forum has directed a city-based builder to repay the advance he had received from a customer, as he failed to deliver the flat booked by the customer. Anant Shankar Keskar had booked a flat in a scheme in Dhankawdi developed by Shree Sai Construction on 24 September 2010, by paying Rs4.5 lakh. The total cost of the flat was agreed at Rs37 lakh, of which Rs10 lakh was to be paid by cash and the rest by

Land Acquisition Invalid if Compensation Not Paid

T

he Supreme Court has held that d if compensation for land acquired ct under the 1894 Land Acquisition Act has not been paid to the landowner, or nd deposited with a competent court and on retained in the treasury, the acquisition d would be deemed to have lapsed and o would be covered under The Right to Fair Compensation and Transparencyy nd in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (the 2013

cheque. An agreement for sale of the flat was duly registered. Since Mr Keskar could not pay the rest of the money in time, the builder sold the flat saying that the customer forfeited Rs4.5 lakh. According to the builder, the forfeiture was as per the clause in the agreement for sale. The Forum rejected the argument that the customer had surrendered the right to get back the money he had paid to the builder if the agreement became void for any reason. “In fact, it was wrong and illegal to insert such a clause in the agreement of sale,” the Forum observed. It, therefore, held that the builder should pay Mr Keskar Rs4.5 lakh along with interest @18%pa (per annum) and a compensation of Rs25,000 for mental and physical harassment. The Forum also ordered the builders to pay Rs2,000 to Mr Keskar as cost of litigation.

g Act)) entitlingg the landowners to higher compensation. However, the rider is that such an award of compensation should be five years or more prior to the enactment of the 2013 Act which was notified on 1 January 2014.

Housing Start-up Index Soon

A

n index, tracking the number of houses being constructed every year across the country, is being launched, Union housing and urban poverty alleviation minister, Girija Vyas, claimed. The housing start-up index (HSUI), which will be another indicator of the economy’s health, is being developed in collaboration with the Reserve Bank of India (RBI) and reflects how many building

permits are converted into actual start-ups. “Work has started in 25 pilot cities and information on 600,000 buildings has been collected—they are at various stages of construction,” Mr Vyas said.

Name of Official Mandatory

T

he local self-government department (LCGD) of Kerala has asked officials in five municipal corporations to include their name and designation in the file along with seal to ensure transparency in awarding various building clearance certificates. The department has asked officials, who grant permits for building plans, allot building numbers, and issue occupancy and other certificates, to clearly mention their name, designation and contact number, along with official seal, to keep a check on allotment of building permits in violation of the Kerala State Municipality Building Rules.

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Mutual Fund helpline Ad.indd 1

2/1/2014 6:26:03 PM

HEALTH BM HEGDE

The Case Against Intervention

is not able to walk even for 10 minutes, despite the fact that he was a fit and habitual morning walker for years! When a smart patient complains of not being able to walk for a few minutes, immediate intervention is required. Most of the time, this is one of the ADR syndromes. Concurrently, most of Mr Singh’s vital systems have been Healthy people are treated with drugs, leading knocked out by all sorts of drugs administered to him, to adverse reactions, demanding more drugs! including beta-blockers, ACE inhibitors and so on. I do not think any of his vital systems is functioning at its best, at illiam Osler, one of the great thinkers in modern age 77. I was surprised that he is still on his feet and had medicine said, way back in 1905, that when a the courage to listen to my lecture for an hour! This is a new syndrome which has not been described patient is not doing well, there should NOT be any intervention. Even today, his statement reverberates in textbooks. Present therapeutics encourages doctors to in my mind when I see healthy people being labelled with give multiple drugs for most, so-called, lifelong diseases. ‘doctor-thinks-you-have-a-disease’ Each one of these drugs has undergone syndrome only to suffer multiple ADRs controlled trials, in isolation, under (adverse drug reactions). The latter, in ideal circumstances. This is what turn, are treated with more drugs! This we call evidence-based medicine of starts the never-ending cycle of human the 21st century! Each combination misery. Worse, people continue to could throw up a new ADR syndrome suffer and doctors do not do anything, which can never be predicted by the as long as the laboratory reports are pharmaceutical representatives that within the doctors’ ‘accepted norms’! educate doctors these days. Alas, there I have had the misfortune of seeing is no study to show what happens when a good friend suffer. Mr Singh (not they are administered in combination to a patient. the real name) is a VVIP. He was a fit 77-year-old, full of enthusiasm. While For instance, one of the vital he was on the way to Bengaluru in chemicals needed for a healthy human The new doctrine is to a train by himself, he woke up at system is mavalonic acid which is intervene when a patient also produced in the liver in the same 2am with a dizzy spell and vomited complains repeatedly repeatedly. He had to wait till pathway as cholesterol. When statin while on drugs. But do not is given, it suppresses mavalonic acid daybreak, when the train reached forget Osler’s dictum—of production. Thus, if one wants to Bengaluru and was too weak to even NOT interfering when a get off the train. To cut a long story suppress the production of human patient is doing well short, he found himself in a corporate healthy cholesterol in the liver with hospital in Bengaluru. statins, one is also suppressing other He was kept in an intensive care liver functions through the same unit (ICU) for four days after which he was sent home enzyme that statin tries to suppress! Children born with along with an assortment of medical gadgets and drugs. congenital mavalonic acid defect resemble ghosts at the When he consulted his personal physician, more tablets age of two to three years and do not live for long. Think were added to the prescription. Every time he went for a of the same defect being brought on by drugs in adults. monthly check-up and asked if the drugs could be tapered The new doctrine is to intervene when a patient off, his physician declined. Instead, his physician repeated complains repeatedly while on drugs. But do not forget the blood tests and assured him that everything would Osler’s dictum—of NOT interfering when a patient is be alright. doing well. „ Mr Singh has been on a sugar pill, three blood pressure lowering pills, infamous statins, blood-thinners like aspirin, Professor Dr BM Hegde, a Padma Bhushan a powerful proton pump inhibitor to counter the gastric awardee in 2010, is an MD, PhD, FRCP irritation, ranitidine, cinerazine (another calcium channel (London, Edinburgh, Glasgow & Dublin), blocker, to prevent a future dizzy spell) and a few vitamins FACC and FAMS. He can be reached at and minerals. He has slowly become lethargic, with aches [email protected] and pains, and has no energy to do anything at all. Mr Singh

W

MONEYLIFE | 20 February 2014 | 52

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HEALTH BM HEGDE

RISK FACTORS

are creating ‘artificial faeces’, with bacterial The first-ever “Diet-Heart colonies grown in a lab, to Study”, in Framingham, MEDICAL DEVELOPMENTS FROM replace FMT. Eventually, which spent $110 million of AROUND THE WORLD nature provides us with taxpayers’ money, showed potent medicines. The no relationship between the human intestine contains millions of make tonnes of money. So, one might diet and heart disease at the end of bacteria which exist in harmony with see another of those reductionist five years. The ‘Heart-Food’ industry chemicals ravaging the human system. our body. The role of intestinal flora, in America, or micro-biota, in maintaining the which had health of an individual is increasingly by then MISDIAGNOSIS? being appreciated. However, this invested What is fibromyalgia? No one method was being used way back billions seems to know. Is it some nutrient in the 4th century when Ge Hong of deficiency? Is it an inflammatory dollars in brain disease otherwise called Central described the use of faecal suspension producing Sensitisation Syndrome? Has it got by mouth for treatment of severe ‘Heartanything to do with the multitude of diarrhoea or food poisoning. People Healthy Food’, chemicals that we eat daily? So far, are trying to use it for other intestinal ensured that the God only knows! This diagnosis was diseases like ulcerative colitis. This results of the “Dietnot there when I was a student in the was the usual practice in veterinary Heart Study” were never published. 1950s. In short, we do not know what medicine in the 18th century! Big business makes billions of dollars it is even today. Of course, we do not of profit by selling cholesterolknow its treatment. GASTRO-OESOPHAGEAL lowering drugs. REFLUX DISEASE FAECAL MICRO-BIOTA Gastro-oesophageal reflux disease (GERD) is a condition that develops OPEN ACCESS SURGERY TRANSPLANTS when the reflux of stomach contents Future surgery, called open access Faecal micro-biota transplant causes troublesome symptoms and surgery, might be done without (FMT) was initially used for simple cutting the skin at all. Some have clostridium defficlie infections resistant complications. This is one condition where proton pump inhibitors and begun but many others are in the to antibiotics which threaten the life H1-blockers are used freely. Little pipeline. However, most of the work do doctors realise that these are is being done on animals. It involves potentially dangerous drugs with a taking out organs, like gall bladder and capacity to increase the Q-T interval ovary, through the mouth and most in the ECG, causing changes in the genetic organs through the vagina conduction system and the prostate gland through the m of the heart! Recent urethra. So it might take some time audits in America before it goes mainstream. show at least 5,000 0 sudden deaths are NEW LOOK AT AN OLD due to the drugs that hat PROBLEM increase the Q-T Anti-depressants, from monoamine intervals. Russians of the patient. With its successes, oxidase inhibitors to selective have been researchers are trying to find out serotonin reuptake inhibitor (SSRI), using raw green if this method could be used for have been a great disappointment, plantain eaten other immune deficiency states also. with more problems and no solution. raw for GERD Currently, preliminary investigation is New research, which is under way, and related being conducted into the role of FMT showed compounds that prevent conditions. brain cell damage but, at the moment, to treat inflammatory bowel disease The proof of the (Cohn’s disease and ulcerative colitis) the drugs have shown serious sidepudding is in the and type-II diabetes. As usual, the effects like damage to the pancreas. moneybags—the biotech companies— eating! „ Drug companies will not stop to

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LEGALLY SPEAKING SD ISRANI

Is Bank Transaction Tax a Mirage?

Can all direct taxes be abolished in favour of a transaction tax? Seems like a pipe dream “We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two.” — Erwin N Griswold

W

hile the kite flying season (Makar Sankranti / Uttaran festival) is behind us, now is the season of fiscal kite flying. We are being tempted with the bait of a single tax in the nature of ‘Bank Transaction Tax’. We, the taxpayers, are always a harried lot, so when a politician or a political party talks of single tax, it sounds like it is Manna from the heaven. But does a transaction tax make much sense? If you are fortunate to have good income, then apart from paying income tax, you will have to pay wealth tax on your savings. If you desire to give gifts to your loved ones, you may be called upon to shoulder the burden of gift tax. If you own property, you are required to pay property tax. Fortunately, there is no estate duty levied, as yet, on the estate of the departed person. So with the myriad taxes that make the life of Indian citizens miserable, they are always looking for some relief by way of some exemptions, enhanced income limits for computation of income tax and so on. In such a scenario,

if somebody comes up with the bright idea of doing away with the entire maze of taxes by replacing them with a single tax, it is natural to feel happy and elated. Over the years, a few countries did try the single tax system but had to eventually revert to multiple tax system. The present debate for tax system has been initiated by two unlikely persons, one a yoga guru while another a former president of the BJP. The intellectual firepower is coming from a Pune-based institution, Artha Kranti, which has advocated abolishing all taxes except customs/ import duty and bringing in a single bank transaction tax. According Artha Kranti, currently, there are 32 taxes levied by the Central, state and local authorities that can be replaced by a single tax system. This would apparently generate enough revenue to make good the taxes that will be forgone. On the face of it, the proposal is appealing; it will simplify everybody’s life. But, is it really so? Is the proposal workable or is it just another big idea that will fall flat after generating exuberance in the intellectual circles? The immediate point that comes to the fore is the fact that a very large percentage of the population is outside the banking system. In addition, a very large portion of trade in India, even today, is conducted in cash. Similarly, cash plays a very dominant role in the construction industry which thrives on black money. If such large segments of the society are outside the banking system, what kind of revenue can banking transaction tax generate? A compulsory bank transaction tax will incentivise many to have off-the-record transactions that will result in generation of more black money, especially in a country where the propensity to generate cash or black money is already high. In the process, not only will the purpose of simplification of taxation be defeated, but it can damage the economy as well. To plug cash transactions, Artha Kranti is proposing abolition of all notes above Rs50, which is another recipe for chaos. Instead of talking big and doing nothing, it is better that the political masters take practical steps by starting with simplification of the existing tax system, making it more compliance-friendly and free of harassment for honest taxpayers. Just as there is an urgent need to simplify the tax laws, it is also imperative to reduce the number of different taxes. So let us not allow ourselves to be fooled by the politicians. It is time they stopped kite-flying and did some real work on the ground to reduce the difficulties faced by an average taxpayer. „

SD Israni is a corporate lawyer and Fellow of ICSI. Email: [email protected]

MONEYLIFE | 20 February 2014 | 54

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with another. Lady number two was, obviously, the better filly in the stakes. But the man was devious. He mentioned to his prior love that people ‘would On the issue of breach of promise talk’, the whole episode being so close to his wife’s death. He prepared a draft note and the woman copied it, affixed her signature and was relieved rvind Datar and Moneylife Foundation had a to ‘find such a gentleman’. The note said that the wonderful session some days ago at Mumbai on two were, in effect, meeting as ‘friends’, and that 10th January. It was preceded by the launch of there was no more to it. When she realised that the Kanga and Palkhiwalla’s latest edition of the income-tax widower was now remarried, she sued. tome, edited and updated by Mr Datar. YOU be the judge. How would you decide in each of Mr Datar started his talk on corporate frauds by explaining to the audience what the word ‘fraud’ means. the four cases above? For the woman or the man? These are true stories. In all the four cases, the courts He said that in terms of a contract, it involves deceit, held for the woman. It decided that there was a distinct concealment, an intention not to fulfil an obligation, breach of promise. It gave new meaning to the even silence when disclosure is necessary. This saying, ‘led up the garden path’. leads us to apply these standards to love and Admittedly, the cases are old ones marriage. and social mores were different then. The papers these days are filled with But thinking of what Mr Datar said stories of ‘rape’ as alleged by spurned of corporate promises, one has lovers. Women, thinking that the to recognise that non-disclosure, man is serious enough to culminate even of eventual intentions, is an their relationship in marriage, act worthy of punishment. But have allowed one thing to lead to why is that so? another. When the truth finally The law believes, very, very dawns on them, naturally, all hell sadly, that people speak the truth. breaks loose. It believes that a person’s word William Congreve, in The is his bond. And so are his actions. Mourning Bride, used prophetic words Behaving in a way that induces another when he wrote: “Hell hath no fury like to believe a certain thing, and that which a woman scorned.” We bring to you some is within the knowledge of the person so behaving famous cases of breach of promise and ask you to not to be true, is sufficient to have a court find a breach. decide. It is based on the belief that all persons need to trust YOU be the judge. their fellowmen. And women. To assume otherwise will A) A man courts a woman for a long time. He asks for be impossible in running a civilised society. her hand in marriage, mom-in-law being present. To be sure, men reading this must be thinking of The very ‘shy’ miss demurs. In other words, she the day when they were jilted by their girlfriends. After murmurs not a bit. Dead silence. all the money spent on the movies and restaurants and B) A man sends a lady a newspaper cutting with the presents! Technically speaking, a woman who drops a words, inscribed on it, ‘READ IT’. The article is an man, after letting him believe of her ‘true’ interest, can, amorous one. The sender of the clipping, however, later refused to marry the girl, denying any amorous and should, be sued. But then, men are chivalrous and damsels are so easily hurt. Or at least that is what we intent. were taught to believe. C) “Call me uncle,” said the gent to the boy, a Anyway, do NOT post page three reports. And, if nephew of a certain maiden. Was this a proposal of you do, write instead, ‘WITHOUT PREJUDICE’. „ marriage? Could it even be considered one? D) Some time back, this page had carried a story of how a dear old widow was tricked into a scheme Bapoo Malcolm is a practising lawyer in of ‘marrying someone rich’. But what about a Mumbai. Please email your comments to widower? One such bereaved ex-husband got a lady [email protected] to pay attention to him. He managed to do the same

“To My TRUE (?) Love”

A

55 | 20 February 2014 | MONEYLIFE

You be the Judge.indd 2

1/29/2014 3:30:46 PM

ML FOUNDATION EVENTS

MONEYLIFE FOUNDATION EVENT ON FIXED INCOME

Options beyond Bank FD Inflation indexed bonds and tax-free bonds score over bank FD for those in lower and higher tax bracket respectively

M

oneylife Foundation held a workshop, titled Mr Pradhan explained to an eager audience the “High Returns, Safe Capital”, for the second different investment options available during the current time. It was conducted by Debashis Basu, high interest rate regime such as RBI’s Inflation Indexed editor, Moneylife and Raj Pradhan, specialising in fixed Bonds (IIBs) from which savers can benefit. IIBs are a good income at Moneylife. Mr Basu started the session by alternative to bank FDs for retirement savings, for those in pointing out that ‘fixed’ does not mean ‘guaranteed’ or the zero to 10% tax bracket, especially for those who do ‘safe’ as investors sometimes assume. There are many not need the funds or interest from it in the next 10 years. options for getting extraordinary fixed returns, but many Tax-free bonds from government companies are are unsafe. Those seeking higher yield may compromise on an excellent option for those in the 20% and 30% tax the safety of capital in the process. bracket. The recent issues of NHB, NTPC and NHPC got Since savers always crave for higher-yield fixedoversubscribed within a couple of days of opening. The income products, many companies take coupon rate of nearly 9% for 20-year advantage of this. Companies use fancy bonds was enticing for savers. Buying Since savers always terms to couch the unsecured nature of in the secondary market is an option crave for higher-yield these financial products—‘optionally those who got partial allotment, fixed-income products, for convertible preference shares’, ‘secured but the recent bonds are already many companies take debentures’ and ‘redeemable preference selling at a premium. This can be due advantage of this bonds’. One of the basic factors that to the expectation that interest rates savers should take into account while are likely to soften due to reduction selecting fixed-income products is the safety of principal in the inflation rate in December 2013. Demat is your best over a defined period. Fixed-income products can be option for holding the bonds; it is mandatory for selling in unsafe because of the nature of the product (for instance, the secondary market, explained Mr Pradhan. if their prices or performance are market-linked) or if these Government Securities (G-Secs) can help you lock-in are unregulated. rates from one year to 30-year term. Savers can buy G-Secs Among the range of fixed-income products, it is and hold them in one’s demat account along with other better to avoid corporate fixed deposits (FDs) as they asset classes like equities/bonds. Mr Pradhan explained are unsecured. Taxable and tax-free bonds are a better that fixed maturity plans (FMPs) offer tax advantage due option, but you need to ensure that you buy secured to indexation/double indexation benefit, but finding an bonds. Investors also assume that bond schemes of mutual FMP that has high safety and gives decent returns is tough. funds are safe. But the variation in returns between the Annuity is an option to lock-in at a fixed rate for lifetime. best-performing and worst-performing bond schemes is But the income is taxable and the investment is locked up huge. Sometimes, investors can even lose a part of their for life. The nominee will be paid the purchase price after principal. Moreover, getting in and out of a debt scheme at the saver’s death if that option is selected. Annuity with the wrong time can lead to losses, Mr Basu pointed out. ‘no return of purchase price’ is risky. „

MONEYLIFE | 20 February 2014 | 56

Event.indd 2

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ML FOUNDATION EVENTS

MONEYLIFE FOUNDATION EVENT ON FALSEHOODS IN ADVERTISING

Keeping False Advertising Out How ASCI functions as a self-regulator and how citizens can complain against ads

M

oneylife Foundation’s seminar “Don’t Let Them Get Away with It – Hold Irresponsible Advertising to Account” featured an interactive presentation by Partha Rakshit, chairman, Advertising Standards Council of India (ASCI) and Paritosh Joshi, founder of Provocateur Advisory. ASCI is a self-regulatory organisation whose members are firms of repute in India: advertisers, media, advertising agencies and other professional/ancillary services connected with advertising practice. Its committee, called the Consumer Complaints Council (CCC) upholds or rejects complaints. Even though ASCI is not a statutory body, its success is evident. Last year, 80% of advertisers have confirmed in writing to ASCI that they have either withdrawn or modified an ad, if a complaint against it w was upheld. According to Paritosh Joshi, member of the technical committee for the Broadcast Audience Research d Council, “In case the advertiser does not give agen an assurance, the concerned agency/media is c advised that the advertisement contravenes the n ASCI code, which can prompt necessary action by agency/media.” c use www. To complain online, you can fee strongly ascionline.org. If you feel an misleading about any a advertisement, be a part of the solution aand complain. You can also email to ASCI at contact@ ascionlin ascionline.org or use the Paritosh Joshi, founder of Provocateur Advisory toll-free ph phone number 1-800-22-2724. What is a false, misleading

or offensive advertisement? According to the ASCI code, an advertisement should not violate four basic tenets: be truthful and honest to consumers and competitors; be within the bounds of decency and propriety; not promote hazardous or harmful products, especially for minors and be fair in competition and not plagiarise. Mr Rakshit explained the role of ASCI in monitoring advertisements and the improved turnaround time for complaint resolution. In a fascinating demonstration of how ASCI judges ads, Mr Joshi invited five volunteers from the audience, chosen at random, to judge three controversial ads. Their discussions, and verdict, brought out the differences in opinions influenced by education, social backgrounds and preferences. ng Monitoring Service ASCI’s National Advertising (NAMS) tracks advertisementss nationally. ASCI has esearch to partnered with TAM Media Research cing misleading strengthen the process of reducing advertisements which harm thee interests of sion of TAM consumers. AdEx India, a division des service Media Research, which provides vertisements of tracking and monitoring advertisements nationally to the advertisementt sector, will m ASCInow check, with support from leased trained personnel, all newly released ents, TV and newsprint advertisements, ’s specifically for violation ASCI’s d, code related to unsubstantiated, misleading or false claims in advertisements. From April 2013 to December 2013, CCC had processed 1,514 Partha Rakshit, chairman, ASCI complaints; 561 were from m non-NAMS and 953 were from NAMS. „

57 | 20 February 2014 | MONEYLIFE

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Learn the basics of saving and investing

poor? Not surprisingly, most CFOs believed that stock price would decrease and that analysts, typically, downgrade or discount their share prices over time. Thus, the constant pressure to keep earnings healthy, to keep shareholders happy. The report said, “Most of the interviewed CFOs believe that the consequences of poor quality, once discovered by the market place, is either an increase in the cost of capital and/or a decrease in stock price.” It is shocking to learn that executives fudge earnings for reasons other than boosting share prices; the most important being the A recent research paper, based on a survey of chief financial ability to get away with white-collar crimes. As many as 60% of the officers (CFOs), shows how widespread the practice of respondents believed that they could misrepresenting earnings is get away with fudging accounts. This is very pertinent in India, is large, averaging about 10% of indow-dressing of where regulation is lax. Our very reported earnings.” accounts is a common own Securities Exchange Board of In fact, a surprising number of practice in the corporate India’s consent mechanism, which world nowadays. With the pressure CFOs have low-balled earnings. The reason? To easily meet analysts’ Moneylife has been constantly to report improved earnings every writing about, only abets this kind expectations. The research paper quarter, managers tend to dress up of behaviour. the numbers to make them look It isn’t just the desire to fool appealing to analysts, so that they GAAP Earnings investors, but greed is also crucial can boost share prices and mislead Misrepresentation to manipulating accounts; over retail investors. 80% of the respondents believed A recent research paper, based 0 100 that fudging accounts will help on a survey of chief financial them garner bigger paycheques and officers (CFOs), shockingly shows Mean Response of CFOs from 19% bonuses. Strangely, herd mentality how prevalent the practice of PUBLIC Firms played a role too; it was found misrepresenting earning is. Worse, that companies that indulge in it found that the motivations for window-dressing do so because fudging accounts go beyond just Mean Response of CFOs from 30% other companies are doing so as boosting share prices. The research PRIVATE Firms well. Other reasons include: internal paper, titled “The Misrepresentation and external pressures to beat of Earnings”, authored by Ilia % of Companies that Use Discretion within benchmarks, influence stakeholders, Dichev, Shiva Rajgopal et al, found GAAP to Misrepresent Performance overconfidence, etc. that many CFOs believe that firms Apart from misrepresenting intentionally fudge their accounts. said, “While most misrepresentation earnings, several executives The paper said, “On earnings have varying definitions of what misrepresentation, CFOs believe that involves earnings overstatement, constitutes ‘high-quality’ earnings. interestingly, one third of the in any given period a remarkable The results of the survey were firms that are misrepresenting 20% of firms intentionally distort interesting and surprising, indeed. performance are low-balling their earnings, even though they are The characteristics of high earnings, earnings or reversing a prior adhering to generally accepted according to respondents, include: accounting principles. The economic intentional overstatement.” What happens when earnings are consistency (ability to forecast magnitude of the misrepresentation ``

Earning Curve

Misrepresentation of Earnings

W

MONEYLIFE | 20 February 2014 | 58

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EARNING CURVE

of generally accepted accounting principles (GAAP). Respondents gave clues to To influence stock price Misrepresentation will 0 20 40 60 80 100 likely go undetected readers about how one can spot Outside pressure to hit problems. Firstly, one should be Managers are earnings benchmarks overconfident or able to understand the business overoptimistic Inside pressure to hit model and be able to connect the earnings benchmarks To reduce dots, especially in terms of numbers. expectations of To influence executive According to the CFOs, some of future earnings compensation the ways one can spot a red flag To influence Senior managers are: earnings inconsistent with fear adverse career customers, suppliers consequences and employees cash flows, deviations from relevant To avoid violation of Because they feel industry and peer benchmarks, debt covenants other companies do meeting and beating earnings too it too Pressure to smooth consistently and too many one-time earnings % of CFOs Who Agree items. Some CFOs also warn of so-called ‘black boxes’; if something is too good to be true, it probably and backed by actual cash flows.” ` without much margin for error is. Specific red flags relate to While 28% of the respondents and less volatility in earnings), acquisition accounting, pension believed that consistency was sustainability (ability of a company important to quality earnings, 23% accounting, use of subsidiaries and to generate revenues regularly from off-balance sheet entities (a common believed that sustainability was the normal course of business and more important; shockingly, just 8% practice nowadays), tax cushioning not through one-off items such as and revenue recognition. believed that good earnings come sale of factory or land or such) and It is no secret that earnings are from good cash flow. Surprisingly, healthy cash-flows. fudged, and will continue to be, researchers found that just 8% The research paper said, “The given the self-serving nature of believed that good-quality earnings essence of earnings quality relates the financial industry, the conflicts come from accurate application to earnings that are sustainable, of interests, along with wrong repeatable, recurring, consistent, incentives. To control it, regulators reflecting long-term trends, and/ have to take exemplary action or has the highest chance of being against officers and directors of repeated in future periods. companies caught fudging their “The second most common numbers. The researchers write: theme, essentially the converse of “As long as incentives to manage ‘sustainable’ and often expressed earnings to influence stock prices in conjunction with the dominant remain, either via managerial equity theme, relates to earnings that ownership or via pressure from the are free from special or onemanagerial labor market or from time items, earnings that are not stakeholders such as analysts to drawn from reserves, fair value ‘hit the numbers,’ we believe that adjustments, accounting gimmicks, earnings misrepresentation will market fluctuations, gains/losses, fluctuations in effective tax rates, Researchers found that live on.” It is better to treat every number that companies report with and/or foreign-currency adjustments. just 8% believed that “A third common theme relates good-quality earnings caution, even upright companies. In other words—do your own to earnings that are supported by come from accurate homework thoroughly. cash flows. In sum, the qualitative application of generally As many as 169 CFOs and highanswers suggest that high-quality accepted accounting level executives of public companies earnings, from the perspective and 206 CFOs of private companies of CFOs, are sustainable and principles took part in the survey. „ repeatable, free of one-time items, Motivations

Motivations To Misrepresent Performance

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BOOKS

H a t c h i n g T w it t er

Twitter Drama The fascinating story behind Twitter’s success

C

ommunication forms the core of our daily lives. Methods of communication have been improved over centuries—right from inscriptions on clay tablets, to the Gutenberg Press, to telephone and, now, Internet. Indeed, Internet has made the world essentially flat, giving a platform to all users to voice their opinions. However, no one has been able to ‘reinvent the wheel’, so to speak, in the post-Internet era. Until Twitter. Within a span of seven years, from 2006 till 2013, this social media company has grown from a scrawny fourperson start-up to a billiondollar company and a force to reckon with. Twitter has redefined how a large part of humanity communicates. Unlike Facebook which is mostly used for keeping in touch with friends and loved ones, Twitter provides an ideal, and a much larger, platform—from politics (Arab Spring) to stock markets (economic discourse, etc) to even cheap gossip and celebrity takedowns (Lady HATCHING TWITTER Gaga, Miley Cyrus and the NICK BILTON Kardashians). However, few Sceptre are aware of the intensity of Pages 302; Rs599 the drama that played out between the four founders, behind the scenes, during these seven years, which includes boardroom battles and arm-twisting of epic proportions. This is what the book brings to light. Hatching Twitter is brilliantly told by Nick Bilton and has the essence of a thriller and a blockbuster. Bilton achieved this by recording several hours of interviews with current and former employees of Twitter, government officials, Twitter executives’ friends, competitors and many more. It is remarkable how the author manages to piece together such disparate information into a cohesive narrative. The best part of the book are the dialogues; it is impressive how the author manages to recreate scene after scene of the events leading to the $25-billion IPO. The atmosphere created on each page is palpable.

The centrepiece of the book is the battle of egos between two of the four co-founders—Evan Williams and Jack Dorsey. The latter was unceremoniously ousted in a boardroom feud. But we learn that even Evan Williams was ‘stripped’ of his CEO title and would soon be out of the job, of the very company he co-founded. The boardroom feuds described in the book remind one of how the late Steve Jobs was ousted from Apple, only to make a triumphant return many years later. And, there’s Noah, a third co-founder, who was very much a part of Twitter’s development over the years, but is now, shockingly, forgotten and ignored—sidelined by even his own friends. The fourth founder is Biz Stone who is more known for defusing tensions between people. Unlike Apple, which was defined by the late Steve Jobs who single-handedly made Apple one of the most admired and respected companies in the world, Twitter had no single visionary or founder. Instead, it had four

Co-founder Evan had no college degree and no idea how to write code. The odds of finding work elsewhere were slim to none. He settled in on the outskirts of town, renting a $600 a month shoebox that sat atop a stranger’s garage over-ambitious geeks, each inherently different from the other, each vying for his place in history. They were not only were they brilliant and hardworking but they had numerous flaws. They simply could not cope with the enormous pressures of being in Silicon Valley’s spotlight. Moreover, they could not stand each other’s egos, typical in many fast-growing company raking in millions. In short, the interpersonal fuse had been lit the day Twitter was hatched. The book essentially is about the feuding more than about the product, and Bilton does a terrific job of bringing them out through the sharp dialogues and rapid pace. The author manages to weave together the ambitions of four young founders to create enough interest to glue you in right from the first page till the last. It is about four human beings trying to be friends with each other while simultaneously trying to change the world. A must-read to understand why Silicon Valley is the most sought after place for the young and why so few are illequipped to handle the jackpot that a breakthrough tech idea can bring. — Aditya Govindaraj „

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BOOKS

T h e Ma n i n t he Are na

One-man Institution Glimpses of John Bogle‘s remarkable life

“T

he principal role of the mutual fund is to serve its shareholders”; thus wrote legendary mutual fund pioneer, John Bogle, in his thesis at Princeton. He served, and continues to serve, the common investor in the United States and an inspiration to many all over the world. By contrast, financial markets in India are littered with rampant cases of mis-selling and outright looting. We have inept regulators who don’t want to enforce fiduciary standards. The problem with regulators and financial intermediaries is simple: the small investor is not important to them. Not for Bogle. For him, the small investor is the kingpin of his success worldwide. Over the years, Vanguard, the fund he founded and ran, became the largest ever mutual fund in America, aggregating over $288 billion in assets after Bogle pioneered the concept of index investing, a low-cost investment approach, in 1975. Index funds are among the few genuine innovations in financial markets that have benefited the average investor. THE MAN IN THE ARENA Moneylife has KNUT A ROSTAD reviewed several Wiley books written on Pages 425; $39.95 or by Bogle. We reviewed Don’t Count on It, a collection of 35 essays of wisdom about his experiences in financial markets. He agitates against the Establishment for ignoring the small investor, against intermediaries for abusing the financial system’s core that is meant to canalise savings into creating jobs. In another book, The Clash of Cultures, he says that long-term wealth creation is what the financial industry should focus on. The latest tome that throws light on Bogle is titled The Man in the Arena, is ambitious in its scope and covers Bogle’s long-lasting legacy, especially his service

to the small investor. The caption of the book aptly reads: Vanguard Founder John C Bogle and his Lifelong Battle to Serve Investors First (emphasis ours). In fact, this is something that even Moneylife has long been trying to advocate—that financial products should be fair, generate long-term wealth, be affordable and be safe. More importantly, the book touches upon critical issues that every Indian investor would relate to: fiduciary duty, or lack of it. With low financial literacy, it is easy for regulators and financial intermediaries to take the small saver for granted, and they do. Our regulators would do themselves a favour if they read this book so that they can take better decisions. They will have a lot to learn from this crash course on governance and protecting the small investor that the book offers. Knut A Rostad, the editor, pieces all of Bogle’s writings, essays, letters to shareholders and even glittering testimonials to a man who brought wealth to millions

Mutual funds must be organised, operated, and managed in the interests of their shareholders rather than in the interest of investment advisors and underwriters. Nothing could be clearer than this mandate of middle-class Americans. Rostad is the founder and president of the Institute for Fiduciary Standard, a nonprofit organisation focused on education, advocacy and propagation of fiduciary duty. He does a terrific job at curating important facts relating to corporate responsibility and investor protection. One of the surprises of this book are the transcripts of the many roundtable meetings and panels attended and addressed by Bogle. We have insights into the conversations between Bogle and other experts like Volcker, Burton Malkiel, William Bernstein and many others—all talking about how the battered financial industry can restore the trust of the small investor. Other notables chip in too, highlighting how Bogle has changed the financial industry in America. This book resembles Essays of Warren Buffet, but is a lot more relevant for not just investors but policy-makers too. There are several points that even a Bogle fan will be reading for the first time. If you’re new to Bogle, you owe it to yourself to read this book. One of the downsides to this book is that it is oddly-shaped which can be difficult to hold. However, it is also available as an e-book. — Aditya Govindaraj „

61 | 20 February 2014 | MONEYLIFE

Book Review.indd 3

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UNIQUE BOOKS FROM MONEYLIFE/KENSOURCE The most thrilling business book ever written in India. A fast, colourful narrative knitting together the life and times of all stock market players involved in two of India’s biggest stock market scams.

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Book Ad.indd 1

1/27/2014 3:13:26 PM

MONEY FACTS STOCKS

INDIAN MARKET TRENDS

FUND FLOWS

The Sensex and the Nifty fell 2% each during the fortnight ended 29 January 2014. ML Large-cap Index, ML Mega-cap Index, ML Mid-cap Index and ML Small-cap Index also fell 2% each. ML Micro-cap Index declined 4%. „

Foreigners: Foreign institutional investors were net sellers of stocks (Rs1,527.84 crore). They sold shares worth Rs25,329.29 crore. „

Share Prices, August 2013=100

435 80

130

-275 -630

FII Net Investments (Rs Crore)

120 -985 -1,340

110

20 Jan-14

29 Jan-14

Indians: Domestic institutional investors were net buyers of stocks (Rs621.69 crore). They bought shares worth Rs9,984.26 crore. „

100

90 Aug-13

Nov-13 ML Large-cap ML Mid-cap

ML Small-cap ML Mega-cap

Jan-14 ML Micro-cap

Nifty Sensex

1,180 865

DII Net Investments (Rs Crore)

550

Index ML Large-cap Index

17 Jan

29 Jan

+/-

122.06

119.66

-2%

21,063.62

20,647.30

-2%

ML Mega-cap Index

111.62

109.15

-2%

ML Mid-cap Index

122.10

119.38

-2%

Sensex

235 -80 -395 20 Jan-14

29 Jan-14

6,261.65

6,120.25

-2%

GLOBAL MARKET TRENDS

ML Small-cap Index

123.68

120.88

-2%

23,900

ML Micro-cap Index

114.61

110.49

-4%

Nifty

Hang Seng 23,460

Mega-cap Gainers/Losers

17 Jan

29 Jan

Change

Aurobindo Pharma

384.95

438.80

14%

Ranbaxy Laboratories

406.40

328.45

-19%

17 Jan

29 Jan

Change

670.60

769.30

15%

16.70

13.75

-18%

17 Jan

29 Jan

Change

Nucleus Software Exports

135.45

182.85

35%

OCL India

192.95

158.60

-18%

17 Jan

29 Jan

Change

75.35

94.90

26%

23,020 22,580

Large-cap Gainers/Losers Vaibhav Global Jaiprakash Power Ventures Mid-cap Gainers/Losers

Small-cap Gainers/Losers Phoenix Lamps Goenka Diamond & Jewels Micro-cap Gainers/Losers Nile Supreme Tex Mart (All Prices in Rs)

6.01

4.15

-31%

22,140 21,700 Aug-13

Oct-13

Jan-14

The Shanghai Composite rose 1%, while the Korean Composite ended flat. NASDAQ Composite and S&P500 fell 2% and Nikkei declined 5%. „ Index

17 Jan

30 Jan

+/-

Shanghai Composite

2,005

2,033

1%

Korean Composite

1,944

1,941

0%

Taiwan Weighted

8,596

8,463

-2%

NASDAQ Composite

4,198

4,123

-2%

S & P 500

1,839

1,794

-2%

Bovespa

49,182

47,244

-4%

17 Jan

29 Jan

Change

61.25

76.30

25%

FTSE

6,829

6,538

-4%

8.50

5.46

-36%

Nikkei

15,734

15,007

-5%

Hang Seng

23,133

22,035

-5%

63 | 20 February 2014 | MONEYLIFE

Money Fact.indd 2

2/1/2014 2:29:06 PM

MONEY FACTS STOCKS

5

What’s H

T

ML SECTORAL TRENDS

Consumer products companies were in demand during the fortnight. Emami advanced 3%. Dabur India and Hindustan Unilever rose 2% each, while Panasonic Energy India Co and Colgate-Palmolive ended flat. „ Companies

17 Jan

29 Jan

+/-

436.60

448.40

3%

ML Consumer Product Index

Emami

485

Dabur India

167.70

171.00

2%

Hindustan Unilever

559.00

569.95

2%

470

455

440

425 Oct-13

What’s

Jan-14

Panasonic Energy

50.75

50.50

0%

ML Sectoral Trends

Colgate-Palmolive

1,320.55

1,313.95

0%

Trading

4% Real Estate

Gillette India

2,100.60

2,089.45

-1%

Packaging

2% Oil & Gas Services

-7%

Marico

215.00

210.85

-2%

Building Material

1% Airlines

-7%

Jyothy Laboratories

204.60

200.65

-2%

Consumer Products

0% Sugar

-6%

Software & IT Services

0% Plastics

-6%

Relaxo Footwears

238.35

230.50

-3%

Godrej Consumer

771.45

739.30

-4%

All Prices in Rs

5

Aug-13

Real estate companies were punished. Orbit Corporation, Ansal Housing and Sobha Developers tumbled 12% each. DLF and HDIL declined 9% each, while Unitech fell 8%. Kolte Patil Dev fell 7%. „ 17 Jan

29 Jan

+/-

18.05

15.85

-12%

ML Real Estate Index

18.80

16.60

-12%

215

302.05

266.85

-12%

Orbit Corporation Ansal Housing Sobha Developers Indiabulls Real Estate

63.65

56.40

-11%

DLF

155.40

141.10

-9%

HDIL

48.60

44.20

-9%

Unitech

13.60

12.45

-8%

Peninsula Land

35.10

32.15

-8%

6.19

5.70

-8%

81.45

75.50

-7%

BL Kashyap & Sons Kolte Patil Dev

-8%

FOOD INFLATION

N T

Companies

Shares of trading companies rose 4%, while shares of consumer products and software & IT services companies ended flat. Stocks of real estate companies tanked 8%; stocks of airlines companies declined 7%; and stocks of sugar companies fell 6%. „

205

Food inflation moderated due to easing vegetable prices. Combined food inflation stood at 11.97% for December 2013, down from 14.45% in November 2013. For rural and urban areas, food inflation stood at 12.38% and 11.02%, respectively, in December. Inflation in vegetable prices came down to 38.76% in December compared to

Moderating? 14.50%

195

185

12.50% Annual Change

175 Aug-13

Oct-13

Jan-14

All Prices in Rs

10.50% Dec-12

BULK DEALS Date

Company

Buyer

Seller

Rs Cr

24 Jan-14

Reliance Power

Reliance Infrastructure

Reliance Enterprises and Ventures

646.00

28 Jan-14

Styrolution ABS

Styrolution South East Asia PTE Styrolution Jersey

21 Jan-14

BF Utilities

BF Investment

Sundaram Trading and Investment

27 Jan-14

Aurionpro Sol

Naresh Nagpal

Vishwanath Prabhu

7.38

530.21 18.06

22 Jan-14

Splash Media & Infra

Sunita Motilal Sinha

Kirit Vasudeo Dave

0.77

29 Jan-14

Master Trust

Convexity Solns. & Advisors

Shiv Narayan Investments

0.70

29 Jan-14

Rajasthan Petro

Gauri Shankar Poddar

Poddar Pigments

0.14

Jun-13

Dec-13

61.07% in November. Fruit prices rose 14.64% year-on-year in December, while pulses were dearer by 2.15% y-o-y. Inflation for cereals stood at 12.14% and inflation for milk products was 9.87%. The price rise of nonvegetarian items, such as eggs, meat and fish, was 12.64% in December compared to 11.88% in November 2013. „

MONEYLIFE | 20 February 2014 | 64

Money Fact.indd 3

2/1/2014 2:29:20 PM

MONEY FACTS COMMODITIES

COMMODITY TRENDS

INDEX TRENDS

Steel

MCX Commodity Indices Particulars

17 Jan

29 Jan

Change

52-Week High

52-Week Low

Energy

4,119.94

4,333.40

5%

5,301.62

3,335.05

Comdex

3,931.21

3,994.80

2%

4,798.68

3,352.03

Agri

2,420.66

2,432.49

0%

2,669.43

2,169.40

Metal

4,890.88

4,836.83

-1%

5,887.99

4,249.45

COMMODITY FOCUS MCX Gold Future (Rs/10gm) 34,000

32,000

30,000

28,000

ndia manufactured 81.2 million tonnes of steel in 2013 and clocked the highest growth rate in steel production in the world with a growth of 5.1%. This also makes India the fourth largest manufacturer of steel in the world, behind China, Japan and the United States. The spot price of steel (long variety) on the NCDEX stood flat at Rs33,500/metric tonne on 27th January compared to Rs33,800/metric tonne at the beginning of the year. A glut in global steel supply is expected. „

Cardamom

26,000 Jul-13

Oct-13

Jan-14

The US Federal Reserve announced an accelerated tapering of its quantitative easing programme, bringing down its bond buying to $65 billion from 1st February. This caused emerging markets, particularly India, to react sharply and see a flight of capital from equities to other asset classes, particularly gold. The rupee remained stable, hovering around Rs62/US$. But the price of gold on the MCX shot up 5% since the beginning of January, from Rs28,418/10gm to Rs29,738/10gm. „

MCX PRICE TRENDS Particulars

I

Active Contract

14 Jan2014

28 Jan2014

Change %

High

Low

Global Commodities

S

pot prices of cardamom (bada dana variety) in Gangtok mandis rose to Rs1,075/kg as on 18 January 2014 compared with Rs1,065/kg recorded on 21 December 2013. However, prices are 56% higher compared to the same time a year ago. The price rise is due to supply constraints from producing regions, anticipation of demand and speculation. According to provisional estimates for 2012-13, production stood at 12,000 metric tonnes. „

Gold Rs/10gm

Feb-14

29,096

29,521

1.46%

34,897

26,600

Silver Rs/kg

Mar-14

44,941

44,169

-1.72%

62,068

41,600

Lead

Copper Rs/kg

Feb-14

455.55

453.00

-0.56%

537.00

417.50

Lead Rs/kg

Jan-14

133.85

134.35

0.37%

146.25

128.05

Nickel Rs/kg

Jan-14

882.00

886.10

0.46%

920.00

830.40

T

Zinc Rs/kg

Jan-14

127.60

125.05

-2.00%

135.80

116.60

Crude Oil Rs/barrel

Feb-14

5,747

6,133

6.72%

7,610

5,688

Natural Gas Rs/mmBtu

Feb-14

267.10

309.10

15.72%

328.30

242.40

Cardamom Rs/kg

Feb-14

712.10

728.90

2.36%

919.10

697.00

Cotton Rs/bale

Jan-14

20,200

20,350

0.74%

22,570

18,500 515.00

Others

CPO Rs/10kg

Jan-14

530.80

528.90

-0.36%

585.80

Mentha Oil Rs/kg

Jan-14

840.10

813.70

-3.14%

933.00

811.00

Potato Rs/100kg

Mar-14

959.20

1,063.10

10.83%

1,097.00

802.20

he price of lead on the MCX was flat, with a slight downwards bias. The prices of lead stood at Rs135.55/ kg on 27 January 2014, down from Rs137/kg recorded at the beginning of the year. Slowdown in manufacturing and subdued demand in automobiles during the lean winter season kept lead prices low. India produced 8.5 million tonnes of lead in 2012-13. „ 65 | 20 February 2014 | MONEYLIFE

Money Fact.indd 4

2/1/2014 2:29:31 PM

BEYOND MONEY

“Where Knowledge Is Free…” encouraging cultural activities and celebration of festivals. Teaching at AIREP is a voluntary activity; it has coined the word ‘Volunteachers’ for those who dedicate their time to ensure that knowledge is free and freely imparted. “We invite individuals, institutes, corporate, NGOs, government organisations—everyone—to adopt this philosophy and help empower those who wish to live a quality life,” says Mr Vyas. Over six months, or 24 Sundays, AIREP managed to convince the parents of 120 kids to send their kids to school to attend Sunday classes. Motivating parents was one of the toughest challenges for AIREP. “It was very hard for us to make them understand that we are working for them and not against them,” says Mr Vyas. On the first AIREP is a unique exercise to transform day, only 10 kids attended school. It was very important lives in villages through knowledge and for the Volunteachers to retain their interest. But seeing empowerment, finds Hitisha Jain other kids learning and playing encouraged others to join. Mr Vyas and Ms Mehta also wanted to do something here the mind is without fear and the head for the village women who needed to find ways to earn held high; where knowledge is free…” in the village itself. “Project Mahek” was the solution. These famous lines by Rabindranath They brought machines to make incense sticks and trained Tagore are recited by all, but does anyone work at making women to use them. The incense sticks are then sold to it happen? Well, two rare individuals are working together bigger businesses for further processing and sale. Income to impart knowledge at the grassroots in Gujarat. from making incense sticks is nearly Rs4,000 a month Ravin Vyas, an MBA from Chicago, returned to India and adds to the household kitty. and started Avbodh Knowledge Foundation in 2006, to “Aapki Technology” is another project to get clean work in the villages near Ahmedabad. Just a year earlier, drinking water by setting up an RO (reverse osmosis) Hiral Mehta had decided to follow her grandfather’s water plant in the village. Since May 2011, it has been dream and brought the Innovative Quality Group (IQG) providing clean drinking water to the villagers @Rs2 for of Boston to India. IQG works at individual empowerment 10 litres. The objective is to prevent waterborne diseases through leadership development among the less privileged instead of the huge effort involved in curing them. Next sections of society. The founders of the two organisations on the agenda is a “Sustainable Sanitation Project”. were quick to realise that they shared a common goal—to Innovative solutions include training to use computers. make learning a joy—and decided to team up. This led The “Rural BPO” started in 2013 teaches young boys and to a movement called Avbodh IQG Rural Empowerment girls to use computers and do data-entry. This programme Program (AIREP) in 2009, which later became the All also helps generate income while they learn. India Rural Empowerment Program. An interesting aspect of AIREP’s work is its AIREP focuses on three core areas of rural determination to be financially independent. “We do empowerment—education, livelihoods and healthcare. not, and will not, take any grant from government. It started its work at Paldi Kankaj, a village around Whenever we have a requirement that cannot be funded 30km from Ahmedabad. Paldi-Kankaj has over 1,000 by us, we ask regular contributors to donate in kind by buying stationery, books, pens, etc, children of school-going age and the village school had only 13 teachers. required for VolunTeaching,” says To improve the student teacher ratio, Mr Vyas. Various events and cultural ALL INDIA RURAL the first step to making education fun programmes keep the villagers EMPOWERMENT PROGRAM involved and participate actively. and meaningful, AIREP began to work 30, Subhash Park, with the school. They used multimedia Donations to the organisation are Opp. BRTS Bus Stop Nehrunagar techniques and encouraged children exempt under Section 80G of the Char Rasta, Ambawadi, to shed the apathy towards school by Income Tax Act. „ Ahmedabad 380015, Gujarat.



“W

MONEYLIFE | 20 February 2014 | 66

Beyond_money.indd 1

Phone: +91 99250 05837 E-mail: [email protected] Website- www.innovativequalitygroup.org www.avbodh.org/airep.html

1/29/2014 3:31:45 PM

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