हिम्मत करने वालों की हार नहीं होती...

लहरों से डर कर नौका पार नही होती
हिम्मत करने वालों की हार नहीं होती॥

नन्ही चींटी जब दाना लेकर चलती है,
चढ़ती दीवरों पर सौ बार फिसलती है।
मन का विश्वास रगों में साहस बनता है,
चढ़ कर गिरना, गिर कर चढ़ना ना अखरता है।
आखिर उसकी मेहनत बेकार नहीं होती,
कोशिश करने वालों की हार नहीं होती॥

डुबकियाँ सिँधु में गोता-खोर लगता है,
जा-जा कर खाली हाथ लौट आता है।
मिलते ना सहज ही मोती पानी में,
बहता दूना उत्साह इसी हैरानी में।
मुठ्ठी उसकी खाली हर बार नहीं होती,
हिम्मत करने वालों की हार नहीं होती॥

असफलता एक चुनौती है, स्वीकार करो,
क्या कमी रह गयी, देखो और सुधार करो।
जब तक ना सफल हो, नींद चैन की त्यागो तुम,
संघर्षों का मैदान छोड़ मत भागो तुम।
कुछ किये बिना ही जय-जयकार नहीं होती,
हिम्मत करने वालों की हार नहीं होती॥

जो बीत गई सो बात गई !

जो बीत गई सो बात गई !


जीवन में एक सितारा था,
माना, वह बेहद प्यारा था,
वह डूब गया तो डूब गया;
अंबर के आनन को देखो,
कितने इसके तारे टूटे,
कितने इसके प्यारे छूटे,
जो छूट गए फिर कहाँ मिले;
पर बोलो टूटे तारों पर
कब अंबर शोक मनाता है !
जो बीत गई सो बात गई !

जीवन में वह था एक कुसुम,
थे उस पर नित्य निछावर तुम,
वह सूख गया तो सूख गया;
मधुवन की छाती को देखो,
सूखीं कितनी इसकी किलयाँ,
मुरझाईं कितनी वल्लिरयाँ
जो मुरझाईं फिर कहाँ खिलीं;
पर बोलो सूखे फूलों पर
कब मधुवन शोर मचाता है;
जो बीत गई सो बात गई !

जीवन में मधु का प्याला था,
तुमने तन-मन दे डाला था,
वह टूट गया तो टूट गया;
मदिरालय का आँगन देखो,
कितने प्याले हिल जाते हैं,
गिर मिट्टी में मिल जाते हैं,
जो गिरते हैं कब उठते हैं;
पर बोलो टटे प्यालों पर
कब मदिरालय पछताता है !
जो बीत गई सो बात गई !

मृदु मिट्टी के हैं बने हए,
मधुघट फूटा ही करते हैं,
लघु जीवन लेकर आए हैं,
प्याले टूटा ही करते हैं,
फिर भी मिदरालय के अंदर
मधु के घट हैं, मधुप्याले हैं,
जो मादकता के मारे हैं,
वे मधु लूटा ही करते हैं;
वह कच्चा पीने वाला है
जिसकी ममता घट-प्यालों पर,
जो सच्चे मधु से जला हआ
कब रोता है, चिल्लाता है !
जो बीत गई सो बात गई !

Fiscal Deficit for 2010-11

Finance minister Pranab Mukherjee today presented a budget with a fiscal deficit of 5.5% of the gross domestic product (GDP).

He pegged the total expenditure at Rs11.09 lakh crore while the total tax and non-tax revenue was estimated at Rs6.82 lakh crore for the year 2010-11.

The deficit is much lower than the budgeted estimate for the current fiscal (6.8%), which, however, has been revised to 6.9%.

To meet the shortfall, the government has estimated borrowing of Rs3.81 lakh crore for fiscal 2010-11, lower than the current fiscal's Rs4.01 lakh crore.

"I am happy to report that against a fiscal deficit of 7.8% in 2008-09, inclusive of oil and fertiliser bonds, the comparable fiscal deficit is 6.9% as per the revised estimates for 2009-10," Mukherjee said.

The rolling targets for the fiscal deficit are pegged at 4.8% and 4.1% for 2011-12 and 2012-13, respectively, he said.

Understanding Balance of Payment terms

BOP consist of two accounts
1.Current Account
2.Capital Account


The Current accounts which measures the net balances in
1. Trade in goods
2. Trade in Services
3. Investments income from overseas assets
4. Transfers (private and government) between counties
The Capital account measures the net flows of capital between the nations
1. Direct Capital Investment including FDI (Inflow of Capital spending by foreign firms, Take overs of domestic business by foreign owned business)
2. Financial Investment Flows ( Inflow of money from overseas into Government bonds and Securities)
3. Banking flows

In principle a country running a current account deficit can ‘balance’ things up by running a surplus on the capital account - the UK is a good example, because the economy has been a favoured location for FDI and there is a strong appetite among foreign investors for UK government bonds
A country running a current account surplus can run capital account deficits i.e. invest heavily overseas or just accumulate foreign exxchange reserves e.g. China, Norway, Oil exporting nations .... some of whom have created their own sovereign wealth funds
In principle the BoP must balance .... it does so because of adjustments that countries make to their foreign exchange reserves using IMF agreed accounting measures and also because of the balancing item which reflects errors and ommissions!

How Indian Rupee appreciation worsen current account deficit?

How Indian Rupee appreciation worsen current account deficit?



When the INR increases in value, it is then more expensive for other countries to invest in India ( ie. money flowing into India for exports or foreign direct investment). Analysts believe that we'll see the Rupee strengthen about 12.4% this year and 6% in 2011.

At the same time, India is having an increased demand for oil and is required to import. With higher prices, India will pay more for that oil (ie. money flowing out of the country). So as you can see, the deficit is created by spending more money for oil (and other exports based on demand), and making less money in exports for goods and services.

Does this mean that India is going to be doing worse in the future? Not necessarily, however the country will be battling inflation and agricultural output also. (We know this is a big issue because the RBI raised the target inflation for March 2010 from 5% to 6.5% back in October). Many of those still investing in emerging markets like India will be watching for decisions in government taxation and what areas of spending will be curbed to maintain mid-term growth.

If a country’s current account is in deficit, it would imply that its imports of goods and services are higher than its income from exports and remittances from non-residents .

The current account deficit also implies that the country is pushing for its investments to be higher than that supported by its savings. While India’s savings rate has increased to 33-36 % of GDP from 21-23 % in the early 1990s, investment has also increased commensurately with current account largely remaining deficit.

Since the balance of payments (BoP) crisis in 1991, policymakers, however, have managed to keep the current account deficit within a range of 0.5-2 % of GDP considering the macro stability aspect. Running a small current account deficit for higher investments and GDP growth is the appropriate policy approach for a developing economy. During the initial phase of the take-off , the current account balance for other Asian economies was also in deficit or saw a very small surplus. For instance, China moved into high growth of 9%- plus on a sustained basis for the first time in early 1980s from an average of 6.2% in 1970s. In China, current account balance remained in small deficit or negligible surplus until mid-1990s.

The globalisation of capital markets and the steady rise in capital inflows make it easy to fund the current account deficit through stable non-debt creating inflows. Over the past 10 years, while India’s current account deficit has averaged 0.5% of GDP, net capital inflows have averaged about 3.4% of GDP. The current account plus net FDI has been in a manageable deficit range of 0-1 .5% of GDP over the past 10 years.

Indeed, the total net capital inflows (FDI plus portfolio equity and external debt) have persistently been higher than the current account deficit. The net balance of payments surplus (current account balance plus net capital inflows ) has cumulatively resulted in a rise in forex reserves to over $280 billion as the central bank has intervened to prevent excessive appreciation in the exchange rate.

Policymakers have also ensured that capital inflows are not highly geared towards building external debt. The RBI and ministry of finance’s policies discourage short-term debt inflows. Equity-oriented capital inflows (net FDI plus portfolio equity inflows) have accounted for 55% of total capital inflows over the past 10 years.

Post the 1991 BoP crisis, policymakers in the country have ensured that the current account deficit does not rise above 2% of GDP, a kind of self-imposed prudential limit. However, the dynamics of current account have changed over the past two years. In 2008-09 , for the first time since the 1991 BoP crisis, India’s current account deficit widened to more than 2% of GDP (2.4%). In the first half of 2008-09 , a large spike in crude oil prices in mid-2008 to $145/bbl pushed oil imports up suddenly. Oil balance (imports less exports) deteriorated to -5 .4% of GDP in 2008-09 from -4 .3% of GDP in 2007-08 .

GST

1. What is GST?

GST is abbreviation for Goods and Service Tax. GST would be levied on all the transactions of goods and services made for a consideration. This new levy would replace almost all of the indirect taxes. In particular, it would replace the following indirect taxes:

At Central level

* Central Excise Duty
* Service Tax
* Additional Excise Duties
* CVD (levied on imports in lieu of Excise duty)
* SAD (levied on imports in lieu of VAT)
* Excise Duty levied on Medicinal and Toiletries preparations,
* Surcharges and cesses
* Central Sales Tax

At State level

* VAT/Sales tax
* Entertainment tax (unless it is levied by the local bodies)
* Luxury Tax
* Taxes on lottery, betting and gambling
* Entry tax not in lieu of Octroi
* Cesses and Surcharges

2. What are the international practices on GST?

Internationally, GST was first introduced in France and now more than 150 countries have introduced GST. Most of the countries, depending on their own socio-economic formation, have introduced National level GST or Dual GST.
3. How GST would be levied in India?

India is implementing ‘dual GST’. In ‘dual GST’ regime, all the transactions of goods and services made for a consideration would attract two levies i.e. CGST (Central GST) and SGST (State GST).
4. Why GST is being introduced?

A product or service passes through many stages till it reaches the final consumer. Governments at Central and State level have, as and when the need arose, introduced many indirect taxes on various taxable events in this value chain (such as Excise duty on manufacture, VAT on sale etc). As these taxes are levied on different taxable events they have their limitations. To illustrate further, let’s take an example of Excise Duty. Excise duty is levied on ‘manufacture’ and it fails to tax the value addition at distribution level. Additionally, at present, ‘goods’ suffer two levies (Excise and VAT) whereas ‘taxable services’ suffer only one levy i.e. service tax. This leads to distortion: distortion arises because the relative prices of services would be lower as compared to goods. Even, as current tax system treats goods and services differently, in certain cases there is double taxation (software being one of such case where the industry has taken conservative stand and both VAT and Service Tax is being currently levied). Also, there are restrictions on availment of credit such as a service provider cannot avail credit of VAT and a trader cannot avail credit of Service tax.

The above lacunas affect free flow of goods and services. Additionally, it brings uncertainty in the trade which is not good for the economy as a whole. GST is now being projected as a solution to all these problems.
5. Whether GST will cure all the problems prevalent in the current tax structure?

Though not all, but surely, most of the current issues will be resolved such as the classification, valuation, double taxation disputes etc. On a positive note, most of the credit which is not available will be available in GST regime such as the service provider will be eligible to avail credit of VAT, Luxury tax, Entertainment Tax etc. The compliances are also expected to reduce drastically.
6. How GST is different from the current taxes?

GST is different from the current tax structure in many ways. Currently, taxes treat goods and services differently. As mentioned above, ‘goods’ attract Excise at manufacturing level and VAT at the time of sale. In contrast, services attract only one levy i.e. Services tax on provision of taxable services.

This distinction, in GST regime, would loose its importance as both goods and services would be treated as par for taxing purposes. A transaction in goods and services for a consideration would attract CGST and SGST. Also, the State Government now gets the power to tax services and Central Government gets the power to levy tax at the distribution and retail level.
7. When would GST be introduced?

As the news are unfolding, the proposed date April 2010 for implementing GST seems unlikely. However any date near October 2010 or April 2011 seems likely.
8. What about the legislations and the rules?

GST would be implemented with single CGST statute which would be applicable across India. However, for SGST, each state will have its own statute. At present, the Government is working on the draft legislation and the rules.
9. What would be the rate?

The Government is yet to freeze on the rates. As per the various news reports, the rate would be around 8% for CGST and 8% for SGST. However, the 13th Finance Commission has suggested a rate of 5% CGST and 7% SGST.

There would be a lower rate for goods of special importance and a standard rate for other goods. Also, precious metal would have special rate. However, services will have single rate for CGST and SGST.
10. Whether credit of CGST and SGST can be set off against each other?

No. Input tax credit of CGST would be available for payment of CGST and input tax credit of SGST would be available for payment of SGST. However, cross utilization of tax credit between the Central GST and the State GST would be allowed in the case of inter-State supply of goods and services under the IGST model.
11. What about the input tax credit balance?

From the past experience we had on VAT introduction, it appears that, the input credit balances would be allowed to be carried forward and set off against CGST and SGST.
12. Whether there would be any basic exemption limit?

A dual basic exemption threshold is being proposed for CGST and SGST. For CGST, the basic exemption for goods would remain at Rs. 1.5 crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be Rs. 10 lakhs.
13. How Interstate transactions will be taxed?

All the inter-State transactions of goods and services would attract IGST (which would be CGST plus SGST). Also, there would be appropriate provision for consignment or stock transfers.

The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
14. Which state will tax transaction in interstate supply of ‘services’?

At present, place of supply rule exist in case service export [Export of Services Rules, 2005] and import [Taxation of Services (Provided from outside India & Received in India), Rules, 2006. To tax interstate supply of services, the Government may introduce place of supply rules on similar lines. The Government should also consider the ‘Place of Supply Rules’ which are prevalent in European Union (EU has 27 member countries).
15. Whether there would be any special provisions for small tax payers?

Tax payers having turnover less than Rs. 50 lacs can opt for Composition scheme wherein they need to discharge tax at a floor rate of 0.50%.
16. Whether exports and SEZ would benefit?

Exports would be zero rated, as currently they are. In case of SEZ, if the supply of goods or services is for consumption in processing zone then it would be zero rated. Supply of goods and services from SEZ to domestic are would be treated as domestic transaction and taxed.
17. How imports would be taxed?

Currently, import of ‘goods’ suffers CVD (in lieu of Excise duty) and SAD (in lieu of VAT). On import of taxable services, Service tax is attracted. In GST regime, both CGST and SGST would be levied on import of goods and services. GST paid on goods and services would be eligible for input tax credit.
18. What about special area schemes which are prevalent today?

The exemptions available under Special Industrial Area Schemes would continue up to legitimate expiry time both for the Centre and the States. Later, after the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives would be converted, if at all needed, into cash refund schemes.
19. Whether all the products would be under the GST regime?

No. Items containing Alcohol and petroleum products would be outside the GST regime. Inclusion/exclusion of Purchase Tax, Electricity Duty and taxes on natural gas in GST regime is being discussed and decision on the same is yet to be made.
20. How GST would be administered?

CGST will be administered by ‘Central Government’ and SGST will administered by the respective State Governments.
21. What is ‘Empowered Committee’ (EC)?

‘Empowered Committee’ of 29 State Finance Minister was constituted. This EC is headed by Dr. Asim Dasgupta. EC, on 10.11.2009, issued ‘First Discussion Paper on GST’. This paper outlines why GST is being introduced and the basic structure of GST. Interestingly, this Discussion Paper has no statutory force.
22. What is the role of the 13th Finance Commission (TFC) and its report?

The Finance Commission is a Constitutional body set up every five years under Article 280 (1) of the Constitution of India. The 13th Finance Commission is headed by the former finance secretary Vijay Kelkar. In the report, released on 15th November 2009, Task Force has made following important recommendations

* CGST rate of 5% and SGST 7% on all goods and services
* Inclusion of all of the current indirect taxes, such as purchase tax, taxes on natural gas, electricity duty, stamp duty
* Emission fuels, tobacco products and alcohol should be subject to a dual levy of GST and excise with no input credit for excise
* Exemption to:
o Public services of Union, state and local governments,
o Service transaction between an employer and employee,
o Unprocessed food articles sold under the public distribution system,
o Educational and health services provided by non-government schools, college and agencies

THC’s report was submitted to the President of India on 31st December 2009. Thereafter, the President will cause every recommendation made by the TFC with explanatory memorandum on the action taken thereon before each House of Parliament (Article 281 of Constitution). Further, as TFC is a statutory body, the views of the TFC will also need to be considered by the Finance Ministry before it finalises the structure of GST.
23. What is the role of Prime Ministers Economic Advisory Committee (PMEAC)?

The Economic Advisory Council to the Prime Minister was constituted on 29th Dec 2004 with the Chairman of Cabinet rank. Dr. C. Rangarajan is the current Chairman. Apart from advice on policy matters referred to the Council by the PM from time to time and it also monitors economic trends on a regular basis and bring to the PM’s attention important developments.

PMEAC has favoured a single slab or common rate for goods and services. This is in contrast with the Empowered Committee’s proposal.
24. What should the businesses do?

The business should:

25. What should the consultants do?

The consultants should keep themselves updated on the GST front on day to day basis. On individual level, they can start assessing the impact of GST on their clients businesses and keep them informed about the changes.

The above article has been authored by CA Pritam Mahure

Dispute over ULIPs

Dispute over ULIPs
Ulips are hybrid instruments where a part of the amount paid by sub-scribers is invested and a small portion goes towards insurance pre-mium. SEBI passed an order in April this year saying that regulation of Ulips should be its responsibility rather than IRDA’s, as the funds were mostly invested in stock markets. Sebi had justified it by saying that in some of the products 90% of the money was channelised into markets and not insurance. On April 9, it had banned 14 insurance companies from selling ULIPs without its approval, saying they needed to register with the market regulator. This was opposed by IRDA, which asked insurance compa-nies to ignore the directive. The finance ministry intervened and asked both sides to seek legal recourse to the problem. How was the dispute settled?
The President promulgated an ordinance last month clarifying that life insurance business includes Ulips, which meant that IRDA would con-tinue to regulate Ulips. Four Acts -- RBI Act 1934, Insurance Act 1938, Sebi Act 1992 and Securities Contract Regulations Act 1956-- had to be amended for the purpose. The decision was taken just days before the Supreme Court was scheduled to hear the matter on July 8.
What is the new controversy surrounding the joint committee envisaged by the ULIP ordinance?
In a bid to ensure that similar disputes that may arise in the future are taken care of, the ordinance provided for a joint mechanism headed by the finance minister, two other government representatives and the four regulators, for settling conflicts over hybrid products. What are the RBI’s concerns?
The RBI has said that it the central bank had certain reservations and concerns relating to the ordinance. Reportedly, the central bank feels that the dispute resolution mechanism worked out can undermine the autonomy of the regulators. It is more inclined towards the current mechanism for dispute resolution, --the non-statutory High Level Coordination Committee on Financial Markets chaired by the RBI gover-nor. It is holding discussions with the finance ministry on the issue. What is the way ahead?
The government has to move a bill in Parliament in the monsoon ses-sion of parliament to get the ordinance, a temporarily law, passed into a law. The government can make changes when it moves the bill or allow the ordinance to lapse by not moving the bill altogether. What were fallouts of the dispute?
It prompted the IRDA to look within and reform ULIPs by issuing fresh guidelines. Ulips launched after September 1, 2010 will have lower charges, guaranteed returns, longer lock-in period and larger insurance cover.


CLASH OF THE TITANS
THE dust is yet to settle on a very public spat between market regulator SEBI and insurance watchdog IRDA over regula tion of unit-linked insurance plans, or Ulips. The RBI is op posing a joint committee under the finance minister, envis aged to settle jurisdiction disputes on hybrid products ET brings you the story so far.

A NEW TURF WAR REGULATORS A WORRIED LOT

A NEW TURF WAR REGULATORS A WORRIED LOT
Sebi against arbiter role for apex financial body
Wants FSDC To Stick To Financial Stability Issues

Editor Shaji Vikraman NEW DELHI


THE Securities and Exchange Board of India (Sebi) does not want the proposed apex financial stability council to set itself up as an arbiter in disputes between regulatory bodies, bringing into sharp focus regulators’ concerns about the government intruding into their domain.
The capital markets regulator has told the government that it does not like the proposed structure of the Financial Stability and Development Council (FSDC) and that the new agency should only concern itself with issues relating to financial stability, an official with knowledge of the development said.
On Monday, Reserve Bank of India (RBI) governor D Subbarao took the unusual step of publicly proclaiming the central bank’s opposition to an ordinance that gives a committee headed by the finance minister the power to resolve disputes between regulatory bodies. The ordinance, which ended a turf war between Sebi and the insurance regulator over unit-linked insurance products, can undercut regulatory autonomy, RBI believes.
The central bank also has some reservations about the FSDC, which will be chaired by the finance minister and comprise two committees—one on inter-regulatory issues with the RBI governor proposed to head it and another on financial stability with the finance secretary at its head. In particular, the apex bank does not like the idea of the finance secretary chairing a panel on financial stability.
Sebi, on the other hand, does not want any committees; it thinks the FSDC should not be hampered by rigid structures and that it should not cramp the style of regulators.
While the government has sought the views of RBI and Sebi regarding the FSDC, neither was consulted before the ordinance was issued last month. The Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority have also been asked to send their views on the government’s FSDC concept note. Officials from both agencies were not available for comment.
CROSSING SWORDS
What's FSDC?
The Financial Stability and Development Council, or FSDC, has been proposed to address inter-regulatory issues and to focus on financial literacy and financial inclusion. It was announced by FM in this year's budget
What's Sebi's take?
Sebi wants FSDC to restrict itself to just addressing issues relating to financial stability and not emerge as an arbiter who rules on regulation of products and other oversight issues.
What's RBI's take?
The central bank feels that in the light of recent global developments, the responsibility for financial stability should optimally rest with it. Its monetary role equips it to manage liquidity more efficiently.
It's also not happy with the suggestion that a committee headed by the finance secretary should chair a committee on financial stability.
What's the take on Ulip ordinance?
While RBI has said the Ulip ordinance has serious implications for regulatory autonomy, Sebi has not reacted Reserve Bank feels it has better sense of market conditions
AJAY Shah, a professor at the National Institute of Public Finance and Policy, said the RBI governor’s concerns over autonomy seem unfounded.
“Internationally, the central bank is given autonomy only for setting short-term interest rates and for deciding on specific transactions. On all other policy issues, it is the government which takes a call as it is accountable to the people," he observed.
But the government was not “fully correct” either when it promulgated an ordinance to settle the Sebi-Irda spat, Mr Shah said.
“There are problems in the world of Ulips, but giving powers to Irda is definitely not a solution. Sebi has a much better history of investor protection.”
Governments defend the decision to oversee financial stability saying it is the taxpayers who pick up the tab when there is a systemic crisis and the government can intervene because it is accountable to Parliament.
But those such as Mr Subbarao are of the view that the monetary authority gets a better sense of market conditions and being the lender of last resort it can provide emergency liquidity support.

RBI’S KEY POLICY RATES

What are the key policy rates used by RBI to influence interest rates?
The key policy or ‘signalling’ rates include the bank rate, the repo rate, the reverse repo rate, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). RBI increases its key policy rates when there is greater volume of money in the economy. In other words, when too much money is chasing the same or lesser quantity of goods and services. Conversely, when there is a liquidity crunch or recession, RBI would lower its key policy rates to inject more money into the economic system.
What is repo rate?
Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. If the central bank wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. The current repo rate is 5.50%.
What is reverse repo rate?
Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks in the short term. Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the central bank and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.
What is Cash Reserve ratio?
Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The central bank increases CRR to impound surplus liquidity. CRR serves two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money. The current CRR is 6%.
What is SLR? (Statutory Liquidity Ratio)
Apart from keeping a portion of deposits with RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio. The current SLR is 25%. In times of high growth, an increase in SLR requirement reduces lendable resources of banks and pushes up interest rates.
What is the bank rate?
Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are delinked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to other banks (or financial institutions) The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, longterm interest rates also tend to move up, and vice-versa.

Monetory Policy

THE Reserve Bank of India has accelerated its planned exit from the crisis-induced extra accommodation of credit demand by raising both the repo and reverse repo rates, each by a quarter of a percentage point, on Friday. The goal, of course, is to tame inflation, which has been adamantly defying gravity for quite some time. While the ongoing exit from the crisis-response monetary policy is fine, the RBI needs to take into account the reality that the bulk of inflation arises from the supply side. Globally as well, commodity prices have gone up quite substantially over the last one year, except in the case of food. The Economist index is up 27% for metals, 38.8% for all industrial commodities. Such rise in global prices cannot but have a sympathetic effect on Indian commodity prices, too. So, just because two-thirds of the wholesale price inflation in May was contributed by non-food products, it does not automatically mean that overheating domestic demand is the reason why these prices have gone up. The official press release says that the RBI takes into account the 1% rise in the wholesale price index arising from the recently announced hike in petro-fuel prices and the second round effects in the months ahead, but does not say what these second order effects would be. To the extent the higher fuel retail prices ease the burden of subsidy on the exchequer, it would reduce the fiscal deficit and the build up of excess demand in the economy. So, some of the second order effects of the petro-fuel hikes definitely would dampen inflation. Similarly, to the extent higher retail prices release oil companies from the need to borrow from the market tens of thousands of crore rupees to finance working capital needs, the move would release credit for other, hopefully investment, purposes. Such extra availability of loanable resources would put a downward pressure on lending rates, regardless of the rise in policy rates.
Concerted moves to hike output and to increase productivity are needed, to combat inflation. A fast-growing economy raises income levels, hiking the demand for everything. The government must facilitate the economy’s traverse to a higher level of efficiency.

Debate on oil decontrol

THE government has finally hiked the prices of diesel, kerosene and LPG, though by less than recommended by the Kirit Parikh Committee. It has decontrolled petrol, and hopes to decontrol diesel in due course. But its timidity suggests that price controls will return if global oil prices shoot up again.
Financial TV channels had discussions clearly favouring decontrol. But politicians on news channels were overwhelmingly against any price rise. Their objections included exaggerations, halftruths and plain falsehoods.
They said this was a political issue affecting the common man, and could not be treated just as an economic matter. Yet, dozens of countries across the globe have no price controls. The common man in Japan, the Philippines or the US treats changes in petrol and diesel prices as no more political than changes in the price of bananas or eggs. Only when governments impose price control do prices become political, and that’s the best reason for avoiding controls. India had no oil price controls till 1973, and price changes were not seen as political then.
Indian politicians claim that the common man will be pushed into poverty and privation by the price hike, while farmers and agriculture will be ruined. That’s plain wrong, and such claims have no basis either in other country experiences nor India’s own past. The common man faces price changes up and down in any market system. In a non-market communist system, all prices can indeed be controlled forever, but the collapse of the Soviet Union showed how myopic and bankrupt such an approach really was. Price controls can provide shortterm relief to consumers, but act as longer-term disincentives to production and efficiency, the cumulative impact of which toppled communism.
Deng Xiaoping in China moved towards the market fast enough to escape a Soviet-type collapse. Countries without price controls have far outperformed those with controls, in terms of poverty removal no less than GDP growth. Yet, Indian politicians on TV talk as though Soviet-style price controls are the only rational and humane way to manage economies.
Indian politicians claim that price decontrols will spur inflation. But despite price controls, India has 10% wholesale price inflation and 14% consumer price inflation. By contrast, inflation is just 2-3% in the US, Europe, Japan, the Philippines and other countries without price controls, where consumers are paying in full for the doubling of crude price from $40 to $80 a barrel over the last year. Inflation is caused by faulty fiscal, monetary and trade policies, not by price decontrol.
Diesel and petrol have gone up around 5%, which is hardly sensational. Yet Indian politicians say the back of the common man will be broken.
Really? Between 1970 and 1973, crude went up from $1.20 a barrel to $3.65 a barrel, and this tripling was passed on in full to the Indian consumer. Then Opec became an effective oil cartel in 1973-74, and oil shot up to $10 a barrel. Once again, the Indira Gandhi government passed on the rise to the consumer. Obviously it hurt. But the economy adjusted, and agriculturists did not commit suicide.
NEXT came the second oil shock of 1980. Crude tripled from $10 a barrel to $30 a barrel. Again, Indira Gandhi passed on almost all the burden to the consumer. Once again, the consumer adjusted, with no economic collapse or impoverishment. Indeed, poverty started falling for the first time after Independence. Leftists claimed that farmers would be decimated. In fact, the green revolution spread fast after the first oil shock of 1973-74, and again after the second oil shock of 1980. Higher petrol and diesel prices went hand in hand with falling poverty and rising farm production.
Communists are the biggest critics of higher prices, claiming that these are an artificial creation of speculation by ‘international financial capital’. This is eerily Hitlerian. Hitler too claimed that the global economy was controlled and distorted by financiers, who were mainly Jews, and so resorted to mass murder of Jews. Communists perpetrated mass murder of another sort, based on class rather religion, but with as little moral or factual basis.
To be fair, communists are not alone in blaming financial speculation for artificially driving up oil prices. The trading volume of oil futures and derivatives has skyrocketed in the last decade, when prices too skyrocketed before nosediving. Academic studies have investigated the possibility that financial speculation made oil prices especially high and volatile.
But these studies failed to establish a link. Other commodities like iron ore, coal, uranium and cobalt are traded for physical delivery only in the spot market, and have no derivative markets. Yet, the prices of iron ore and coal proved if anything more volatile than that of oil. Iron ore shot up from $40 to over $200 a tonne in the boom.
Why so? Well, 2004-08 witnessed the mother of all booms, with world GDP growing at a record rate. Environmental and safety clearances made the opening of new mines a lengthy process. Hence, commodity supplies could not keep up with demand, and enormous price spikes were the result. The oil price spike was not exceptional. For every financial seller there was necessarily a buyer too, so speculation did not create one-way trends.
Why has trading in oil futures and derivatives skyrocketed? Some of it is pure speculation. But much trading is now related to risk management, both by suppliers and consumers, who hedge against adverse developments by locking in future prices. This constitutes a rational form of insurance. Communists who condemn this blindly as ‘international financial capital speculation’ are simply exposing their ignorance.
These comrades need bogeymen to justify their life-long defence of communist murder and torture in pursuit of a bankrupt economic ideology. Rather than learn from the collapse of the Soviet Union, they would rather use old, hollow slogans to justify the unjustifiable. When exposed by newspapers like this one, they have no factual reply, but repeat empty slogans about the pink press being the voice of international financial capital. How pathetic!

Base Rate in Banks

THE Indian banking industry is stepping into an age of probable transparency in lending to customers with the new base rate regime, as the Reserve Bank of India (RBI) corrects its past mistake and in the process raises the prospect of a more effective monetary policy.
Nearly 80 banks, ranging from the nation’s biggest—State Bank of India—to the only locally-listed foreign bank—Standard Chartered—will now stop lending below 7%, even if it is to a blue chip, some of which were paying lower than funding costs. The base rates range between 7% and 8.75%, and can differ among banks since costs vary.
The base rate—the floor below which a bank cannot lend even to its top-most client—is arrived after factoring in a bank’s cost of funds and other operating expenses. It is effective Thursday and replaces the muchabused benchmark prime lending rate (PLR).
“The base rate will be transparent,’’ said SBI chairman OP Bhatt. ``Credit will henceforth revolve around the base rate as it will be the reference rate over which all loans will be priced and it will succeed in monetary transmission.”
A central bank panel in October last had recommended the new system after finding that banks, mostly private sector ones, were not passing on the reduction in policy rates to customers while they were quick to act whenever rates climbed. That blunted monetary policy actions. The lack of transparency in lending also led to accusations that small companies and retail customers were subsiding the so-called triple A customers.
`Prime lending rates continued to be rigid and inflexible in relation to the overall direction of interest rates in the economy,’’ the panel had said. An issue often raised is ``the asymmetric downward stickiness of BPLRs. This not only raises an issue of equity, but also result in poor transmission of monetary policy in credit markets’’.
The main reason for the lack of transparency and cross-subsidising by banks can be traced back to the central bank’s decision in 2001 to allow banks to lend below benchmark rates. That was after banks represented they need a provision to lend below the prime rates since it was an international practice. With many international practices now discarded after the credit crisis, the sub-PLR rate too goes.
After SBI, with a fifth of the market share, fixed its base rate at 7.5% on Tuesday, HDFC Bank on Wednesday set it at 7.25%, and Axis Bank and ICICI Bank at 7.5%. Most staterun banks have set it at 8% while Corporation Bank’s is at 7.75%.
The base rates of Thrissur-based Dhanalaxmi Bank at 7% and Mangaloreheadquartered Karnataka Bank at 8.75% are at the two ends of the range.
Although customers are expected to benefit from the new regime, they may not move in hordes seeking lower rates as many factors such as customer service, branch proximity and comfort levels play a significant role in choosing a bank.
A NEW BEGINNING
BASE FACTORS
The base rate factors in a bank’s cost of funds, profit margin and administrative costs. Risk premium is charged over and above the base rate.
BASE CAUSE
The failure of the PLR system to transmit monetary policy changes forced the central bank to introduce the base rate. This was particularly evident in home loans, where existing customers failed to benefit from a fall in rates.
BASE EFFECT
Top corporates, who currently get the best rates, may bargain for loans at the base rate, or closer to it. But for short-term loans, they will have to tap the commercial paper route or the bond market. For most banks, the migration is unlikely to impact their net interest margin — the difference between the interest earned on deposits and cost of deposits. RATE CARD BASE RATES FIXED BY LEADING BANKS
7% Dhanlaxmi Bank, DBS Bank India 7.25% HDFC Bank 7.5% SBI, Axis Bank 7.75% Corporation Bank, State Bank of Mysore, Federal Bank 8% BoB, OBC, Allahabad Bank, BoI, Indian Bank, IDBI Bank, UCO Bank, PNB 8.25% Syndicate Bank, Dena Bank, IOB 8.5% Karur Vysya Bank 8.75% Karnataka Bank 11-13.75% Range of existing benchmark prime lending rate that will end today Customer loyalty may be tested
MANY of these players have been banking with us for a long time and are loyal to us,’’ said KSR Anjaneyulu, MD & CEO of Lakshmi Vilas Bank, referring to small companies and traders. “This segment of customers is unlikely to be impacted significantly by a 0.25-0.5% rise in interest rates.”
But that claim of customer loyalty may be tested in the next few months as SBI looks set to lure customers with teaser rates even as rivals who pioneered them are bidding adieu to the scheme. It has extended the special home loan scheme for three more months till September 30 while HDFC and ICICI Bank have ended it.
The SBI scheme offers a fixed rate of 8% in the first year and 9% in the second and third years irrespective of the loan amount. It floats from the fourth year with market rates. SBI’s home loan portfolio grew 31.5% last year to Rs 73,400 crore. “We are not looking at increasing market share at the cost of our profitability,” the bank’s chairman said.
Investors believe that migration to the base rate may not impact the profitability of banks since they are factoring in the costs. “There would be no change in the net interest margins,’’ said Vaibhav Agrawal, VP-research, banking, Angel Broking. ``We are not re-rating the banking stocks under our watch.”
There is room till December to tweak, if the formula does not work.
`We do not know how the base rate will play out,’’ said Mr Bhatt. `RBI has enabled us to change it once. If there is anything wrong with the methodology, it can be corrected.”

Impact of fuel price rises?????

India has moved to ease price controls on petrol and raised other fuel rates, and Prime Minister Manmohan Singh signalled his resolve to push bold reforms with intentions to free up diesel prices at a later date.

Here are some questions and answers about the implications of the fuel price rises.

WHAT WILL BE THE POLITICAL IMPACT?

Opposition parties will likely try to block legislation in the next parliament session by seeking support from the ruling Congress party's coalition allies.

Congress could be hit in state elections, including West Bengal and Tamil Nadu, in early 2011. But the rises come months before the votes and voter backlash can be mitigated by using savings from fuel price deregulation to boost social spending.

There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What sharply means is unclear and it could be used politically to justify a new increase in subsidies.

The protests are seen as a test of the opposition's mettle, having struggled to find its feet after electoral defeat last year. The strike call has drawn a mixed response, with parts of opposition-controlled states at a near standstill amid violent protests while other areas remained relatively untouched.

WHAT WILL BE THE IMPACT ON INDIA'S RETAIL OIL MARKET?

State firms such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd, which control more than 95 percent of about 40,000 refined fuel pumps in India, are likely to lose market share.

Reliance Industries Ltd., which operates the world's biggest refining complex at Jamnagar, is expected to revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil is also expanding its retail network.

HOW SOON WILL PRIVATE FIRMS EXPAND RETAIL NETWORKS?

The government has only freed the price of petrol, which accounts for about 10 percent of oil products sold. The government has said it will also free up diesel, used by trucks, buses and a growing number of cars, and which accounts for more than a third of the oil consumed. Private firms will speed up retail expansion once price controls on diesel are removed.

Essar has said it plans to increase its retail network to 1,700 by end-March from 1,342.

WHAT IS THE EXTENT OF THE PRICE RISE?

Domestic fuels are taxed differently by the states. In New Delhi, petrol prices were raised by 7.3 percent, diesel by 5.2 percent, kerosene by 32.5 percent and LPG by 11.3 percent.

HOW WILL PETROL PRICES BE SET?

Companies will fix their own prices. This could see more competition in the retail sector and eventually push down prices.

HOW WILL IT IMPACT EXPORTS OF OIL PRODUCTS?

Exports may fall. As Reliance increases domestic sales, it may reduce exports from its 660,000 bpd plant to sell to the domestic market, which is usually more lucrative.

HOW DOES IT IMPACT THE FINANCES OF OIL FIRMS?

State firms will gain from market rates of petrol and higher prices of diesel. Before the price rises, state-run retailers were expecting a revenue loss of $24.4 billion this year, based on an average crude price of $85 a barrel.

WILL ISSUANCES AFFECT THE BOND MARKETS?

No. Oil companies issue bonds to borrow money from the corporate bond market largely to finance a shortfall in working capital on selling fuel below cost. However, dealers have said that bond issuances by oil companies will now come down because they will have more cash in their books after the move to raise domestic fuel prices.

WILL INFLATION STAY AT ELEVATED LEVELS?

Yes. That is very likely. The Finance Ministry's chief economic adviser, Kaushik Basu, said the price rises would impact headline inflation by 0.9 percentage points.

Analysts have also estimated that the price increases may lead to a rise in headline inflation of more than 100 basis points with a lag of a few weeks. A senior government official said June headline inflation could even touch 11 percent.

But forecasts from the Indian Meteorological Department suggest that rains this year are expected to be normal, which should bring down food prices and inflation. The central bank expects headline inflation to ease to 5.5 percent by the end of this financial year.

HOW DOES IT IMPACT RATE EXPECTATIONS IN THE MARKETS?

The fuel price rise will likely aggravate existing double digit inflationary pressure, which already prompted the central bank to a surprise 25 basis points rise on Friday citing worries over prices of fuel and manufactured goods.

Markets are expecting another rate rise in a July 27 policy review, of at least 25 basis points. However, Finance Minister Pranab Mukherjee may have clouded predictions of the bank's next step, saying the latest rise could be "subsumed" at the review.

TO WHAT EXTENT WILL THE FISCAL DEFICIT COME DOWN?

With windfall gains from the sale of telecom spectrum and a lower fuel subsidy bill the government expects the fiscal deficit this financial year to ease to about 4.5 percent of gross domestic product from 6.7 percent.

Correct diagnosis on MFs

THE Sebi chief has done well in asking mutual funds to stop chasing short-term gains and instead enhance returns for the retail investor. The regulator's concern, aired after Sebi was denied the right to oversee unit-linked insurance plans (Ulips), is valid. Mis-selling of marketlinked products, be it mutual funds or Ulips, is unacceptable. Sebi should tighten the rules for fund houses to improve disclosures and make distributors accountable for their advice to investors. Sure, it scrapped entry loads and allowed agents to negotiate fees directly with investors. It has also rightly changed the accounting norms to discourage fund houses from declaring artificial dividends. Distributors have, however, failed to act as advisors and this defeats the goal of a fee based model. Reforms are needed to make mutual funds a vehicle for mass investment. Today, there are around 3,000 mutual fund schemes in the market. Proper disclosures on the performance of the scheme are a must to enable investors to make the right choice. Sebi's mutual fund advisory committee has reportedly recommended that distributors maintain written records of their recommendations and fund houses present a clear picture of the performance of the scheme to investors. This should be implemented. The cost structure for market-linked products should be simple. The pension regulator has shown the way, making the new pension scheme load free. A clean-up in the cost and incentive structure of Ulips is underway to prevent mis-selling. Mutual funds too should put their house in order.
Fund houses rely on banks and companies to make short-term money. Companies and banks invest in mutual funds when they have cash that needs to be parked for short periods. Banks also prefer to lend to one another and to companies through MFs due to the tax arbitrage. However, mutual funds face redemption pressures when banks pull out their money. The RBI too wants moral suasion to stop banks from putting their money in mutual funds. Fund houses should stop banking on short-term money. Individual investors are more stable and their money yields higher margins. Widening retail investor participation, therefore, makes eminent sense.

Assured Returns On Equity Plans- Is IRDA justified?

THE insurance regulator Irda’s new rule mandating life insurers to offer a minimum guaranteed return of 4.5% on unit-linked pension and annuity plans is unsound and defies free-market principles. Equity is risk. So, risk-averse investors should not buy unit-linked insurance plans. Irda should have sent out this message to policyholders instead of being populist and forcing life insurers to offer guaranteed returns on unit-linked pension plans. In 2002, the government was forced to bail out UTI to honour its obligations to unit holders, after a massive erosion in the portfolio of US-64 and other assured-return schemes. Irda should have drawn lessons from UTI. Sure, insurers have to earmark enough capital to cover guaranteed payouts. But pressures to bail out policyholders cannot be ruled out if a company goes bust. Irda should reverse its decision. This will help policyholders earn higher returns and improve profitability of the insurers. Equity investments will yield investors a 10-12% compounded return over a 20-year span. The yield will be lower on guaranteed returns as insurers will have to invest policyholders’ premium in fixed-income plans. Life insurers also have to set aside more capital for guaranteed products and a strain on capital will dent their profitability.
Life insurers in Japan, for instance, had a disastrous experience with guaranteed products. Many of them turned unviable when interest rates on government bonds crashed. In the UK too, Equitable Life was almost ruined in 2000 after it failed to earmark enough capital to cover guaranteed payouts on some of its pension plans. Irda has retained the right to review the guaranteed rate of 4.5% based on macroeconomic developments. However, forcing insurers to guarantee a return, and that too on equity-linked pension plans, is flawed. There are other ways for Irda to achieve its goal of encouraging long-term savings and helping policyholders build a nest egg. A longer lock-in period of five years instead of three years is one way. Lower commissions will also contribute to better returns. So, guaranteed returns on equity investment should be shunned.

All about ULIPs

The life insurance industry is going to undergo dramatic changes both in its products and in the way they are sold, following the introduction of new regulations on unit-linked insurance plans (ULIPs).

The new regulations ensure that all segments of policyholders get a fair deal. By getting insurance companies to spread charges across the first five years, the insurance regulator has also reduced chances of mis-selling by agents who position regular premium plans as ones with single premium plans or short-term plans.

Here we try to deconstruct the new regulation in terms of what it means for existing and prospective customer of ULIPs.


The new guidelines, which come into force from September 2010 will bring down charges imposed by insurers on ULIP plans at various points of time.

This means that almost every ULIP plan being sold at present will have to be reworked by life insurance companies and a fresh approval sought from the regulator.

The cap on charges would translate into better returns for policyholders, including those who chose to exit early for any reason.

Given the additional flexibility that new regulations provide for early withdrawals (after five years), it makes sense not to buy ULIPs now but wait until September when the new guidelines take effect.


Everybody knows about the power of compounding, but few allow their investment enough time to compound returns. ULIPs are the only product that forces systematic savings,” says Sanjiv Bajaj, joint MD of Bajaj Capital.

The new charge structure brings ULIPs more close to mutual funds then ever. According to Mr Bajaj, the guidelines on a minimum level of insurance cover for all ULIPs is a positive.

“People save with a goal in mind. If the saver dies, his savings stop but the financial goal remains whether it is a child’s education or marriage. Even if one is saving only for retirement, protection is necessary to ensure that one’s spouse gets the retirement funds,” he says.

It is always disappointing to know that a new mobile phone has been launched with many more features at the same price that you bought yours a month ago. But take heart.

If you have bought an existing policy with the intention of continuing to pay premium until maturity, you may not need any of the new features. The new features are aimed at providing a fair deal to those who exit early. If you already hold a ULIP, make the best of your existing plan by paying your premium diligently through the life of the policy.

The insurance company has already collected their charges and you can average a better return by staying for the term of the policy.

One tricky issue that companies have to address is — how do we continue to reward agents for selling long-term policies and at the same time give policyholders the flexibility to exit without deducting significant charges.

There is a possibility that fewer agents will push ULIPs. There is also a likelihood that insurance companies may introduce a condition where the law backs commissions from agents for policies that are surrendered early.

If that happens, the chances of agents mis-selling will come down considerably.

For those who are above 45, the minimum level of insurance that has to be compulsorily purchased is half of what is prescribed for those up to 45.

This means that out of every Rs 100 invested, a lesser amount would go towards insurance and more towards investment.

If you have a very low risk appetite and are the type who would rather keep his money in bank deposits. The pension plan with minimum guaranteed returns of 4.5% is the right plan for you.

The flip side of the pension plan is that to ensure a guaranteed return, insurance companies will invest most of the funds in government bonds where the best of returns would be around 8%.

If you have a higher risk appetite and wish to see a significant part of your retirement funds to be invested in equity, you can always opt for the New Pension Scheme regulated by the Pension Fund Regulatory And Development Authority (PFRDA)

Partition in Windows Vista?

Can I create a new Drive or Partition in Windows Vista?
Carefully follow these steps to create a new drive or partition in Windows Vista.
I am sure you had a hard time creating additional drives in your older version of Windows. Vista makes it very simple - just few clicks and there you go. You have a new born drive. Let me take you through the steps:
1. Lets click on Start and then click on Computer.


2. Right click on it and select Manage.
That will take you to Computer Management screen.


3. Double click on Storage.


4. Now double click on Disk Management.


5. Right click on the drive and select Volume shrink.


6. Enter the amount you want to shrink to.



7. And now click on Shrink.
Now you can see your free space like this:


8. Now right click on the free space and click on New Simple Volume.


9. Click on Next


10. Click on Next


11. Click on Next


12. Click on Next


13. Now click on Finish.


14. Once you click on Finish, your new drive is ready for you.



Hey that was so easy. Now you can have as many drive you want and keep your data safe.

Quotes

• I know friendship is hard to keep. But even if it gets harder I won`t give up coz if its hard to keep you. It`ll be lot harder to find you again!

• I met money one day. I said, "You are just a piece of paper." Money smiled and said, "Of course I'm a piece of paper, but I haven't seen a dustbin yet, in my life

• When you are dissatisfied and would like to go back to youth, think of Algebra.

• Written outside a temple: Q: Why should we believe in GOD? A: Because there are still some questions which cannot be answered by GOOGLE.

• When you are dissatisfied and would like to go back to youth, think of Algebra.

• The older you get, the tougher it is to lose weight, because by then your body and your fat have gotten to be really good friends.

• The real art of conversation is not only to say the right thing at the right time, but also to leave unsaid the wrong thing at the tempting moment.

• A statistician is someone who can have his head in an oven and his feet in ice, and will say that on the average he feels fine.

• "I have learned that only two things are necessary to keep one's wife happy. First, let her think she's having her own way. And second, let her have it."

• Baby mosquito came back after its 1st flying. His dad asked him- How do you feel? he replied `It was wonderful, everyone was clapping 4 me! That' s Attitude

• "Life is too short to spend your precious time trying to convince a person who wants to live in gloom and doom otherwise. Give lifting that person your best shot, but don''t hang around long enough for his or her bad attitude to pull you down. Instead, surround yourself with optimistic people."

• “The longer I live, the more I realize the impact of attitude on life. Attitude, to me, is more important than facts. It is more important than the past, the education, the money, than circumstances, than failure, than successes, than what other people think or say or do. It is more important than appearance, giftedness or skill. It will make or break a company... a church... a home. The remarkable thing is we have a choice everyday regarding the attitude we will embrace for that day. We cannot change our past... we cannot change the fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our attitude. I am convinced that life is 10% what happens to me and 90% of how I react to it. And so it is with you... we are in charge of our Attitudes.”

• “Sometimes you put walls up not to keep people out, but to see who cares enough to break them down.”

Interview

1) Elaborate on section 25 of I.C.A. 1956.
2) L.C.S
3) Working capital & Quasi working capital .
4) Gross profit & net profit.
5) Super normal profits.
6) Capital adequacy norms- Risk ,BASEL 1&2.
7) Working capital cycle .
8) IRR
9) BEP
10) Tandon Committee.
11) Ratios
12) Fund flow & cash flow statement.
13) Principle of accounting.
14) Debenters and stocks
15) Why MBA?
16) Why FMS-BHU?
17) Bank risk.
18) contigent liability
19) Monitory control by RBI.
20)Inventory valuation technique.
21) Difference between product marketing and service marketing.

Direct Tax Code: Impact on mutual funds & capital gains

By Rajan Ghotgalkar
Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company.


Before going ahead I believe the honourable Finance Minister deserves to be complimented on the manner in which he has managed this very intricate piece of legislation whilst ensuring transparency and more importantly reacting to suggestions with an open mind in keeping with the best traditions of democratic consensus building process.

Hopefully the legislation will be able to live up to its promise to impart Indian Tax laws the much required stability which is so very important for business investment especially when we seek to import the much required foreign capital to finance infrastructure needs.

(To read Rajan Ghotgalkar’s earlier columns on Reuters India, click here)

Simultaneously, there is a move away from the directive taxes which belong in the past when we were a closed and planned economy. Tax laws are not meant to push money into government coffers but only to motivate right investing behaviour.

There is no reason why the government should accept the onerous burden of assured returns as it presently does on PPF, etc. This of course is distinct from the need for affirmative action to improve the lot of the significant portion of our population which is below poverty levels.

In the absence of a social security system, it is heartening to see the government extending the EEE status to specified retirement accumulations.

The discussion paper (June 2010) has made changes which may result in a reduction in the tax base as proposed in the Direct Tax Code (August 2009) and has therefore, held in abeyance the tax rates and slabs stated in the DTC. It is expected that these will now form part of the Budget 2011-12 but may not be as liberal.

The more significant reversal has been on the Minimum Alternate Tax (MAT) which in its earlier form was to say the least retrograde. It would have been a significant disincentive for setting up heavy industry which is not only capital intensive but also suffers long gestation periods.

It would have been unfeasible to invest in a gas refinery or a computer chip plant or for that matter even infrastructure projects. Thankfully the damage has been avoided and the MAT will now be computed with reference to book profits.

We also have our government employees to thank for prevailing on the powers that be to retain the perquisite taxation structure. It was very wise not to introduce the Retirement Benefits Accounts Scheme keeping in with the move to get away from managing investments.

The other significant rethink has been on the proposal to determine notional rent on a presumptive basis at the rate of 6 percent, which is nowhere even near the rental returns in many urban areas especially Mumbai.

It has also done away with the proposal to tax house property not let out. Anyway capital gains through appreciation of property are taxed and tax as proposed would have been repressive and highly discouraging for investment into house property, an important source of legitimate financing for housing development.

It is to the government's credit that, it has retained its position to do away with profit linked deductions for SEZs.

I would like to now touch upon the two significant changes proposed by the DTC.

First the taxation of mutual funds and secondly the changes in capital gains taxation whilst addressing the possible impact on the investing environment, especially FIIs.

Mutual Funds and Life Insurance companies have been called "pass through entities". Income in their hands will not be subject to Dividend Distribution Tax (DDT) nor will they pay tax on income they receive on behalf of their investors.

However, the investors will be liable to tax on "any" income which accrues to them from investment with any of the pass through entities.

It is important to clarify what the DTC means when it says "any income which accrues to them". Mutual funds can only pay dividends out of equalised and realised profits so the need to mention accruals seems out of place and needs to be remedied lest it results in chaotic accounting requirements for mutual funds and confusion for investors.

Therefore, whilst the dividend from corporates will be subjected to DDT as now, the dividends paid by Mutual funds it seems will be taxed as there seems to be no mention of DDT to be recovered by mutual funds. This also seems to hold true for debt funds as the DTC does not make any distinction between debt and equity funds.

Undoubtedly, this will place the already besieged mutual fund industry at a significant disadvantage.

On the other hand, any sum received under a life insurance policy (including any bonus) shall be exempt from tax provided it is a "pure insurance policy"; which is only if the premium payable for any of the years during the term of the policy does not exceed 5 per cent of the capital sum assured.

I would believe that in the interest of providing a level playing field to mutual funds the DTC should very clearly provide for investment income in products like ULIPs to be taxed like mutual funds. One would not expect this to prove too challenging a task.

Income under the head "Capital Gains" will be considered as income from ordinary sources in cases of all tax payers including non residents and taxed at the rate applicable to that tax payer. This includes short term capital gains which will be taxed as above without any indexation.

Long term capital gains arise on capital assets held for a period of more than one year from the end of the financial year in which they were acquired. This prevents 'double indexation benefits'.

Long term capital gains are divided into; listed equity shares or units of an equity oriented fund and; from 'other assets', which would include house property, debt instruments and units of debt oriented funds.

Long term capital gains on equity shares and units of an equity oriented fund shall be computed after allowing a deduction at a specified percentage of capital gains 'without any indexation'.

This adjusted amount will be included in the total income of the tax payer and taxed at the rate applicable. Losses can be carried forward.

The base for long term capital gains on 'other assets' will firstly be moved to 1st April 2000 (from 1st April 1981) and then subjected to indexation before being taxed at the applicable rate. The proposed Capital Gains Savings Scheme will not be introduced.

Significantly, the Discussion Paper leaves the 'Securities Transaction Tax' (STT) open to calibration to provide for the change in the taxation of capital gains as proposed in the DTC.

It is obvious that, the intention will be to make up tax lost in providing for deductions on capital gains by retaining all or part of the STT. We may have to await the Budget 2011-12 to see the actual position.

Closely associated with capital gains is the issue of FIIs when seen in conjunction with the Double Taxation Avoidance Agreements (DTAA). It was realised surprisingly later that, the manner in which the DTC had sought to unilaterally override DTAAs was against the spirit of the Vienna Convention and that it would adversely impact direct investment due to the resultant uncertainty regarding the cost of doing business in India.

Therefore, between the domestic law and the relevant DTAA, the discussion paper clarifies that; the one which is more beneficial to the tax payer shall apply.

Most FIIs invest in India through companies incorporated in tax havens like Mauritius covered by DTAAs and what this simply means is that such FIIs will continue to retain both short and long term capital gains tax free because most countries where they are incorporated do not tax capital gains.

In the case of the remaining few FIIs which are not covered by DTAAs, they will be subjected to capital gains tax as described above.

The discussion paper also clarifies that FII income from buying/selling shares will be treated as capital gains and not business income. Of course it will no longer be possible for them to claim 'absence of permanent establishment in India' and avoid tax (15 percent on short term capital gains) by treating their profits as business income.

The government will benefit from higher tax through normal rates on short term capital gains.

The FIIs will also benefit from the clarified rules on the 'Test of Residence' which state that, it will be determined by the place where the board of directors make or approve decisions (although, the domestic MNCs will need to now watch out).

The taxation for FIIs has therefore, now become much easier.

However, with the advent of stringent Anti Money Laundering requirements and the need to prevent inflow of funds from 'unwanted' sources, the government has been continuously making efforts to block FIIs which cannot demonstrate transparent corporate structures e.g. SEBI requirement for greater disclosures in participatory notes.

In a step to further this effort the government has empowered the Commissioner of Income Tax to invoke the 'General Anti-Avoidance Rule' (GAAR).

Undoubtedly, differentiating between tax avoidance and tax evasion leads us down the slippery slope of litigation and extensive apprehensions were expressed on the sweeping nature of this law.

The GAAR can now be invoked only if the arrangement besides obtaining tax benefit is also; not at arms length, represents abuse of the provisions of the DTC, lacks commercial substance or is not for bona-fide business purposes. Apart from the above safeguards to avoid arbitrary application of this potentially repressive provision, the discussion paper also provides for a ‘Dispute Resolution Panel’.

It seems to be a general expectation that, the changes to the taxation of capital gains would result in volatility in equity markets during the first quarter of 2011 because many would liquidate holdings to book profits prior to the implementation of the DTC on 1st April 2011. Also that, the tax on capital gains will prove to be a disincentive for holding stocks long term leading to added churn.

In my view the fears seems exaggerated. Firstly because most FIIs have invested through entities incorporated in tax havens sheltered by DTAAs (for whom things have only got better) and for the small minority, there is enough time to reorganise their structures so that, they can take advantage of DTAAs.

And for the obstinate remaining few, all it will require is to sell and buy in the nature of a 'journal entry' which at the most will involve the cost of transacting and STT.

Irrespective of the above, it is important to appreciate that, professional investors will not take investment decisions on the incidence of tax (albeit it could be one of the subsidiary factors) but on the underlying fundamentals within stated investment objectives.

FIIs are in India (and China) mainly because they possibly provide the most favourable risk reward ratio in markets they can influence whilst deploying the surplus liquidity at their command.

As for the domestic retail investors, the zero capital gains tax has hardly encouraged them to substantially increase participation in equity markets, which have left them on the sidelines whilst they have become increasingly dominated by FII flows.

I therefore, do not foresee that, the DTC will in anyway disadvantage them because it would more than likely exempt their capital gains through deductions at lower slabs, so as to also limit the administrative burden.

However, whilst in our country which harbours extreme economic inequalities, one can hardly grudge taxing of capital gains on equity investments; it is saddening to see that, the opportunistic FIIs will continue to get away without paying tax and domestic investors will be taxed on similar heads of income.

I would believe that, domestic investors who are really here to stay in the longer term and contribute to the domestic economy, may they be retail or institutional, surely deserve an equal playing field.

We may even be well advised to retain the STT as it is and make it a permissible deduction from the capital gains tax payable in India.

Reliance Comm after tower deal

Reliance Communications'(RLCM.BO) deal to sell its telecoms towers will help India's No. 2 mobile operator cut its debt by more than half to about $3.9 billion, a source said, in a move that triggered broker upgrades in a cut-throat sector.

Carriers in India's cellular market, the world's fastest-growing, with more than 600 million users, have been shedding their tower businesses and renting capacity to cut costs.

The deal prompted Macquarie to raise its rating on Reliance Comm to "outperform" from "underperform", making it the brokerage's only positive pick in a crowded Indian telecoms sector that is locked in a fierce battle for customers.

Controlled by billionaire Anil Ambani, Reliance Comm had flagged a deal in its tower unit, and also plans to sell up to a 26 percent stake in itself, after the government sold licences for 3G wireless services at a price far higher than expected.

On Sunday, Reliance Comm agreed to offload its telecoms towers to GTL Infrastructure(GTLI.NS) and said the combined operations would have an enterprise value of over $11 billion and own more than 80,000 towers

GTL Infrastructure shares rose as much as 9 percent, and were the most active major counter in Mumbai.

Exact terms were not disclosed, but the deal will see Reliance Comm reduce its debt by 180 billion rupees ($3.9 billion), a person with direct knowledge of the matter said.

"I think that the stock has reached a level from where further upside is limited. Most positives are already priced in" said R. K. Gupta, managing director of Taurus Mutual Fund.

Reliance Comm's debt before the deal stood at about 330 billion rupees, including the cost to finance its recent third-generation (3G) spectrum licences.

"We believe this is a significant positive catalyst for RCOM and positive for RCOM's shareholders, as it sets the company up for focused execution of its access and wholesale businesses," Macquarie analyst Shubham Majumder said in a note.

Macquarie lifted its earnings per share forecasts for Reliance Comm by 9 percent and 8 percent, respectively, in the financial years ending in March 2011 and 2012.

Reliance Comm shareholders will receive shares in GTL Infrastructure. The swap ratio has not yet been finalised.

"It also gives the power to RCOM shareholders to continue to participate in the towers growth story in India through a significantly improved, much larger and focused vehicle," Macquarie said.

Karvy Stock Broking also upgraded its rating on Reliance Comm, to "market performer" from "under performer."

The deal values the towers of Reliance Comm's Reliance Infratel unit at 7 million rupees each, a 46 percent premium to the 4.8 million rupee per tower valuation in GTL Infrastructure's recent acquisition of towers from carrier Aircel, Karvy wroe.

India's 15-player cellular industry is fiercely competitive, with carriers engaged in a margin-crushing tariff war.

IN SEARCH OF INVESTOR

Several potential suitors cited in media reports based on unnamed sources have denied being in talks with Reliance Comm. So far, only Abu Dhabi's EtisalatETEL.AD has acknowledged that it is considering a deal with Reliance Comm.

Shares in Reliance Comm are up 39 percent in June, far outperforming the 5.0 percent gain in the Sensex.

Anil Ambani has been in dealmaking mode since ending a pact last month with his long-estranged brother, Mukesh Ambani, that forbade the two from competing on the other's turf. That pact had enabled Mukesh Ambani, the world's fourth-richest man, to assert a right of first refusal two years ago that blocked a deal between Reliance Comm and South Africa's MTN.

The brothers have been mending fences, and on Friday agreed to a renegotiated gas supply deal, resolving a dispute that had been at the heart of their feud.

Under the terms of Sunday's deal, GTL Infrastructure Chairman Manoj Tirodkar would own 30 to 35 percent of the combined tower business and Anil Ambani's Reliance ADA Group would own 26 percent, with shareholders in the two firms holding the remainder, sources with direct knowledge of the matter said.

Spinning off tower holdings into an independent firm is intended to make it easier to attract rival carriers as tenants. The combined tower operations of Reliance Comm and GTL Infrastructure would be the largest telecoms infrastructure firm in the world not controlled by a carrier, Reliance Comm said.

Rival Indus Towers -- jointly owned by Indian cellular heavyweights Bharti Airtel, Vodafone Essar and Idea Cellular -- has more than 100,000 telecom towers and says it is the largest tower company in the world.

Quotes from one of my favorite movie "P.S I love you"

Gerry Kennedy: Dear Holly, I don't have much time. I don't mean literally, I mean you're out buying ice cream and you'll be home soon. But I have a feeling this is the last letter, because there is only one thing left to tell you. It isn't to go down memory lane or make you buy a lamp, you can take care of yourself without any help from me. It's to tell you how much you move me, how you changed me. You made me a man, by loving me Holly. And for that, I am eternally grateful... literally. If you can promise me anything, promise me that whenever you're sad, or unsure, or you lose complete faith, that you'll try to see yourself through my eyes. Thank you for the honor of being my wife. I'm a man with no regrets. How lucky am I. You made my life, Holly. But I'm just one chapter in yours. There'll be more. I promise. So here it comes, the big one. Don't be afraid to fall in love again. Watch out for that signal, when life as you know it ends. P.S. I will always love you.



Holly Kennedy: Dear Gerry, you said you wanted me to fall in love again, and maybe one day I will. But there are all kinds of love out there. This is my one and only life, And its a great and terrible and short and endless thing, and none of us come out of it alive. I don't have a plan... except, it's time my mom laughed again. She has never seen the world... she has never seen Ireland. So, I'm taking her back where we started... Maybe now she'll understand. I don't know how you did it, but you brought me back from the dead. I'll write to you again soon. P.S... Guess what?

Impact on inflation coz of Increased Petro Products Prices

Raising fuel prices would stoke inflationary pressures, already at levels uncomfortable enough for voters to slam Congress in recent municipal elections in West Bengal.

India's food inflation accelerated in mid-June and further inflationary pressures could lead the central bank to raise interest rates ahead of a July 27 policy review.

"Yes, a rise in petrol and diesel prices will be reflected in the fuel inflation numbers and there will also be second-rung impacts reflected in transport costs, etc," said Atsi Sheth, chief economist at Macro-Sutra in Mumbai.

"The fiscal implications, too, regarding the subsidy bill, are positive. On the monetary front, I don't see the Reserve Bank of India (RBI) reacting to this as an immediate trigger."

"Global commodity prices, even before this hike, have been contributing to high inflation and the RBI will, therefore, consider all these factors and will not react solely to this decision," he added.

Any move to remove price controls will help Reliance Industries(RELI.BO), which operates the world's biggest refining complex but exports most products as the local market is dominated by state firms that sell cheap fuel, helped by government subsidies.

Finance Minister Pranab Mukherjee said earlier this week he believed a strong harvest following a normal monsoon would tame food prices.

Indian farm ministry officials on Friday gave their most optimistic forecast yet for the annual rains -- which irrigate 60 percent of the country's farms -- saying the June-September rainfall would likely be 102 percent of the long-term average.

Historical Decision on Petro Products by Government

The government on Friday freed up state-subsidised petrol prices and hiked other fuels as high global oil prices and pressure to trim the budget deficit outweighed concerns about the political impact of the measures.

A panel of ministers increased prices of state-subsidised diesel, kerosene and cooking gas prices, which could help reduce the fiscal deficit from the projected 5.5 percent of 2010/11 GDP and free up revenues for other programmes.

The panel said petrol prices would be market driven, rising 3.50 rupees per litre, while kerosene prices would rise by 3 rupees a litre. While petrol is mainly used by the middle class for cars, kerosene is used by the poor for power.

Diesel prices will rise 2 rupees per litre and will be freed up in the future. Cooking gas prices were raised by 35 rupees a cylinder.

"It was decided that the price of petrol will be market determined both at the refinery gate and at the retail level," Oil Secretary S. Sundareshan told reporters.

India's benchmark bond yield rose 2 basis points immediately after the news on concerns that the hikes would push up inflation.

The benchmark 5-year swap rate rose 1 basis point to 6.74 percent while the 1-year swap rate rose 2 basis points to 5.50 percent. Shares in Indian oil firms rose more than 3 percent on the news.

In early June, the Congress-led government held off the decision after two powerful ministers from coalition parties stayed away from a ministerial panel meeting, signalling opposition to the move on fears of voter backlash.

Finance Secretary Ashok Chawla told Reuters this month he expects the fiscal deficit to shrink to 4.5 percent of GDP in fiscal year 2011 if fuel prices are deregulated and on the back of other revenues including the 3G spectrum auction.

Fuel accounts for a quarter of its estimated subsidy bill of 1.2 trillion rupees ($25.5 billion). Before Friday's announcement, projected losses for oil firms are estimated at $24.4 billion this year, based on an average crude price of $85 a barrel.

Congress was handed a second term in office last year on the back of the ruling party's pledge to share the spoils of years of economic boom and protect hundreds of millions living below the poverty line. The government backed out a few months ago on freeing up farm prices after street protests.

Asia's third-largest economy has been eyeing new ways to reduce subsidies since the failure of its 2002 attempt to get state-owned refiners to fix prices every two weeks in step with global rates.

Rival Asian giant China by contrast abandoned similar fuel price subsidies from January 2009 to great effect for then-struggling refiners grappling with losses, as Indian state-owned refiners do now.

Reliance buys 45 pct in U.S. shale gas JV for $1.36 bln

Reliance Industries(RELI.BO) will invest $1.36 billion in the U.S. shale gas assets of Pioneer Natural Resources(PXD.N), its second such investment in as many months as it builds business beyond the Indian energy sector.

Under the agreement, India'a largest listed company will make a cash payment of $263 million for a 45 percent stake in U.S. firm Pioneer's Eagle Ford shale acreage in south Texas. Reliance said it will also contribute $1.052 billion towards drilling costs over four years.

The deal is expected to close within five business days, Pioneer said in a separate statement.

"Reliance has lot of cash and as an investor I would like to see them investing more on getting access to resources like these," said Taina Erajuuri, portfolio manager at FIM India, which owns about $150 million worth of Indian shares in Helsinki.

"It's a step in the right direction for Reliance," she said.

The deal is the second this year in the promising U.S. shale gas sector for Reliance, a petrochemicals-to-refining giant with a market value of $75 billion, making it India's most-valuable company. The deal had been widely expected and Reliance shares were little changed on Thursday.

In April, Reliance agreed to pay $1.7 billion to Atlas Energy (ATLS.O) to form a joint venture and own a 40 percent stake in Atlas' Marcellus Shale operations in the eastern United States.

Under the new agreement, Pioneer will get $1.15 billion and partner Newpek LLC will receive about $210 million. After the deal, Reliance will own 45 percent in the Eagle Ford shale acreage, while Pioneer and Newpek will hold 46 percent and 9 percent respectively.

Last week, Reliance Chairman Mukesh Ambani, the world's fourth-richest man, said his company planned to expand its presence in the U.S. shale gas business, in addition to a foray into India's high-potential power sector and a return to the telecom business.

BULKING UP

Reliance has said it will pursue joint development opportunities with the best operators as well as on its own to build a substantial upstream business in North America.

Companies from around the globe are increasingly investing in U.S. shale plays -- underground rock formations that hold reserves of oil and natural gas.

Shale gas accounts for between 15 percent and 20 percent of U.S. gas production but is expected to quadruple in coming years, touching off a scramble among producers large and small for access to resources.

Based on the joint venture development plan, Pioneer's net production in the Eagle Ford asset will increase to between 32,000 and 41,000 barrels of oil equivalent per day (BOEPD) in 2013, from 2,000 barrels BOEPD in 2010, Pioneer said in a statement.

"This strong production growth, coupled with the up-front cash payment and drilling carry from Reliance, is expected to generate positive cash flow from upstream and midstream activities in all years going forward," it said.

Pioneer plans to increase the drilling program to approximately 140 wells per year within three years.

Reliance will have an option to acquire a 45 percent share in all newly acquired assets by the JV and will also act as development operator in certain areas in coming years.

Reliance said it would also form a separate midstream joint venture with Pioneer to service the exploration and production unit, investing $46 million for a 49.9 percent stake.

Reliance was represented by Barclays and UBS for the deal, while Bank of America Merrill Lynch represented Pioneer.

At 12:45 p.m. (0715 GMT), shares in Reliance, the biggest constituent in the Sensex index, were trading 0.35 percent higher at 1,062.25 rupees in Mumbai, while Pioneer shares closed up 0.33 percent in New York, ahead of the announcement.

Isner beats Mahut 70-68 in final set

WIMBLEDON, England – John Isner has won the longest tennis match on record by beating Nicolas Mahut 70-68 in the final set at Wimbledon.
Picking up at 59-59 in the fifth set Thursday, the match continued on serve with no break points until the American hit a backhand passing shot to finish the contest in front of a packed crowd on Court 18.
Isner finished with a total of 112 aces and Muhat 103.
The first-round match surpassed the 11-hour mark stretching over three days. The fifth set alone went over 8 hours.

Technical Analysis vs Fundamental Analysis

At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity. It is based on three assumptions:
1) the market discounts everything,
2) price moves in trends and
3) history tends to repeat itself.


Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.

ULIPs vs Mutual Funds

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.
Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.
However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs.
How ULIPs can make you RICH!
Despite the seemingly comparable structures there are various factors wherein the two differ.
In this article we evaluate the two avenues on certain common parameters and find out how they measure up.



1. Mode of investment/ investment amounts
Mutual fund investors have the option of either making lump sum investments or investing using the systematic investment plan (SIP) route which entails commitments over longer time horizons. The minimum investment amounts are laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single premium) or using the conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity.
This is in stark contrast to conventional insurance plans where the sum assured is the starting point and premiums to be paid are determined thereafter.
ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure. For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.


2. Expenses
In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India.
For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all their expenses; any expense above the prescribed limit is borne by the fund house and not the investors.
Similarly funds also charge their investors entry and exit loads (in most cases, either is applicable). Entry loads are charged at the timing of making an investment while the exit load is charged at the time of sale.
Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority. This explains the complex and at times ‘unwieldy’ expense structures on ULIP offerings. The only restraint placed is that insurers are required to notify the regulator of all the expenses that will be charged on their ULIP offerings.
Expenses can have far-reaching consequences on investors since higher expenses translate into lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses have been dealt with in detail in the article “Understanding ULIP expenses”.


3. Portfolio disclosure
Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio.
There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our interactions with leading insurers we came across divergent views on this issue.
While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory, the other believes that there is no legal obligation to do so and that insurers are required to disclose their portfolios only on demand.
Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the lack of transparency in ULIP investments could be a cause for concern considering that the amount invested in insurance policies is essentially meant to provide for contingencies and for long-term needs like retirement; regular portfolio disclosures on the other hand can enable investors to make timely investment decisions.


4. Flexibility in altering the asset allocation
As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely comparable. For example plans that invest their entire corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from the same fund house, he could have to bear an exit load and/or entry load.
On the other hand most insurance companies permit their ULIP inventors to shift investments across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are allowed free of charge every year and a cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across asset classes as per his convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull market when the ULIP investor’s equity component has appreciated, he can book profits by simply transferring the requisite amount to a debt-oriented plan.


5. Tax benefits
ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds good, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked savings schemes) are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example diversified equity funds, balanced funds), if the investments are held for a period over 12 months, the gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @ 10%.
Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term capital gain is taxed at the investor’s marginal tax rate.
Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both offerings and make informed decisions.