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.
Saturday, July 3, 2010
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.
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)
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)
Tuesday, June 29, 2010
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.
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.”
• 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.
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.
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.
Monday, June 28, 2010
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.
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.
Sunday, June 27, 2010
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?
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?
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