tag:blogger.com,1999:blog-52099709298545410442024-03-14T00:32:14.672+05:30iDEATiONManagement & Financial Consultants
Yashodhan Apartments
1119 B Shivajinagar
Model Colony Pune 411016
Maharashtra IndiaiDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.comBlogger78125tag:blogger.com,1999:blog-5209970929854541044.post-79426362294220781672010-01-14T08:26:00.003+05:302010-01-14T08:26:23.623+05:30Banking Terms .... SimplifiedThe primary business of a bank is to accept deposits and give out loans. So in case of a bank, capital (read money) is a raw material as well as the final product. Bank accepts deposits and pays the depositor an interest on those deposits. The bank then uses these deposits to give out loans for which it charges interest from the borrower. <br />
Of the cash reserve, a bank is mandated to maintain a certain percentage of deposits with the Reserve Bank of India (RBI) as CRR (cash reserve ratio), on which it earns lower interest. Whenever there is a reduction in CRR announced in the monetary policy, the amount available with a bank, to advance as loans, increases. When the RBI increases this percentage, the amount actually available with the commercial banks comes down. The RBI may increase the CRR to draw out excessive money from the banking system and thus checks increase in prices. The second part of regulatory requirement is the amount which a bank has to maintain in the form of cash, gold or approved securities - Statutory liquidity ratio (SLR). <br />
The bank’s revenues are basically derived from the interest it earns from the loans it gives out as well as from the fixed income investments it makes. <br />
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Apart from this, a bank also derives revenues in the form of fees that it charges for the various services it provides (like processing fees for loans and forex transactions) . In developed economies, banks derive nearly 50% of revenues from this stream. This stream of revenues contributes a relatively lower in the Indian context.<br />
Before we proceed further, let us define some key ratios/terminologie s used in day to day:<br />
Prime lending rate (PLR) is a benchmark against which the lender sets his rate of interest. The Reserve Bank of India (RBI) announces key changes and increase in rates to contain inflationary forces and to stabilise the economy. The RBI contains inflation and liquidity by toggling parameters like cash reserve ratio (CRR), repo rate and reverse repo rates. The CRR is a tool used by the RBI to control the money supply and interest rates. A hike in the CRR will draw out excess money supply from the banking system and check the rise in prices. Here are some major parameters that directly affect the PLR which impacts your home loan rate.<br />
Repo rate (Repurchase Agreement)<br />
If banks face any shortfalls of funds, they may borrow from the central bank. The repo rate is the rate at which banks borrow money from the RBI. If the RBI reduces the repo rate, it will be cheaper for banks to borrow money. On the other hand, if the repo rate goes up, borrowing becomes expensive.<br />
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Reverse Repo rate<br />
The RBI can borrow money from the banks and offer them a lucrative rate of interest. This is called the reverse repo rate and banks will be very glad to have their money with the RBI for a good interest rate as the money is safer here. When the reverse repo rate is increased banks find it more attractive to have their money with the RBI, and hence money is drawn out of the system.<br />
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If a borrower has opted for a pure fixed rate loan, then his EMI repayments remain constant. Most fixed rate loans come with certain clauses that empower the lender to increase their lending rates. Monthly EMI repayments fluctuate in case of floating rate loans. If the interest rates go up, the EMI increases. In case interest rates go down, the EMI decreases. The benchmark, PLR against which the banks fix their rates varies from lender to lender. It is not the RBI but the bank itself that sets this benchmark that decides the rate of interest. Borrowers must look into what their rate is measured or benchmarked against. <br />
Having looked at the basic terms, let us consider some key factors that influence a bank’s operations. One of the key parameters used to analyse a bank is the Net Interest Income (NII). NII is essentially the difference between the bank’s interest revenues and its interest expenses. This parameter indicates how effectively the bank conducts its lending and borrowing operations (in short, how to generate more from advances and spend less on deposits).<br />
Interest revenues = Interest earned on loans + Interest earned on investments + Interest on deposits with RBI.<br />
Interest on loans:<br />
Since banking operations basically deal with ‘interest’, interest rates (read bank rate) prevailing in the economy have a big role to play. So, in a high interest rate scenario, while banks earn more on loans, it must be noted that it has to pay higher on deposits also. But if interest rates are high, both corporates and retail classes will hesitate to borrow. But when interest rates are low, banks find it difficult to generate revenues from advances. While deposit rates also fall, it has been observed that there is a squeeze on a bank when bank rate is soft. A bank cannot reduce interest rates on deposits significantly, so as to maintain its customer base, because there are other avenues of investments available to them (like mutual funds, equities, public savings scheme).<br />
Since a bank lends to both retail as well as corporate clients, interest revenues on advances also depend upon factors that influence demand for money. Firstly, the business is heavily dependent on the economy. Obviously, government policies (say reforms) cannot be ignored when it comes to economic growth. In times of economic slowdown, corporates tighten their purse strings and curtail spending (especially for new capacities). This means that they will borrow lesser. Companies also become more efficient and so they tend to borrow lesser even for their day-to-day operations (working capital needs). In periods of good economic growth, credit off take picks up as corporates invest in anticipation of higher demand going forward.<br />
Similarly, growth drivers for the retail segment are more or less similar to the corporate borrowers. However, the elasticity to a fall in interest rate is higher in the retail market as compared to corporates. Income levels and cost of financing also play a vital role. Availability of credit and increased awareness are other key growth stimulants, as demand will not be met if the distribution channel is inadequate.<br />
Interest on Investments and deposits with the RBI:<br />
The bank’s interest income from investments depends upon some key factors like government policies (CRR and SLR limits) and credit demand. If a bank had invested in G-Secs in a high interest rate scenario, the book value of the investment would have appreciated significantly when interest rates fall from those high levels or vice versa.<br />
Interest expenses:<br />
A bank’s main expense is in the form of interest outgo on deposits and borrowings. This in turn is dependent on the factors that drive cost of deposits. If a bank has high savings and current deposits, cost of deposits will be lower. The propensity of the public to save also plays a crucial role in this process. If the spending power for the populace increases, the need to save reduces and this in turn reduces the quantum of savings.<br />
Current Account Savings Account (CASA): These deposits pays no or very low interest. They tend to be cheaper than the bank issuing time deposits / certificates of deposit (CDs) and are considered more dependable as well. From a bank's perspective, it is a source of cheap fund and is always encouraged.<br />
Unlike, any other manufacturing or service company, a bank’s accounts are presented in a different manner (as per the banking regulation). The analysis of a bank’s accounts differs significantly from any other company due to their structure and operating systems. Those key operating and financial ratios, which one would normally evaluate before investing in company, may not hold true for a bank. We have attempted to throw light on some of the key ratios, which are unique for banks and determine the financial stability of a bank.<br />
Before jumping to the ratio analysis, lets get some basic knowledge about the sector. The Banking Regulation Act of India, 1949, governs the Indian banking industry. The banking system in India can broadly be classified into public sector, private sector (old and new) and foreign banks.<br />
• The government holds a majority stake in public sector banks. This segment comprises of SBI and its subsidiaries, other nationalized banks and Regional Rural Banks (RRB). The public sector banks comprise more than 70% of the total branches.<br />
• Old private sector banks have a largely regional focus and they are relatively smaller in size. These banks existed prior to the promulgation of Banking Nationalization Act but were not nationalized due to their smaller size and regional focus.<br />
• Private banks entered into the sector when the Banking Regulation Act was amended in 1993 permitting the entry of new private sector banks. Most of these banks are promoted by institutions and their operating environment is comparable to foreign banks.<br />
• Foreign banks have confined their operations to mostly metropolitan cities, as the RBI (earlier) restricted their operations. However, off late, the RBI has granted approvals for expansions as well as entry of new foreign banks in order to liberalize the system.<br />
Now lets look at some of the key rations that determine a bank’s performance.<br />
1. Ratios for evaluating operating performance<br />
1. Net Interest Margin (NIM)<br />
2. Operating Profit Margin (OPM)<br />
3. Cost to Income Ratio<br />
4. Other income to total income<br />
2. Other key financial ratios<br />
1. Credit to deposit ratio (CD ratio)<br />
2. Capital adequacy ratio (CAR)<br />
3. NPA ratio<br />
4. Provision coverage ratio<br />
5. ROA<br />
3. Efficiency ratios<br />
1. Interest income per employee<br />
2. Profits per employee<br />
3. Business per employee<br />
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A. Ratios for evaluating operating performance<br />
1. Net Interest Margin (NIM): For banks, interest expenses are their main costs (similar to manufacturing cost for companies) and interest income is their main revenue source. The difference between interest income and expense is known as net interest income. It is the income, which the bank earns from its core business of lending. Net interest margin is the net interest income earned by the bank on its average earning assets. These assets comprises of advances, investments, balance with the RBI and money at call. <br />
2. NIM = Net Interest Income (NII) = Interest income – Interest expenses<br />
3. ------------ --------- ---- ------------ --------- --------- ------<br />
Average earning assets Average earning assets <br />
4. Operating profit margins (OPM): Banks operating profit is calculated after deducting administrative expenses, which mainly include salary cost and network expansion cost. Operating margins are profits earned by the bank on its total interest income. For some private sector banks the ratio is negative on account of their large IT and network expansion spending. <br />
5. OPM = Net Interest Income (NII) – Operating expenses<br />
6. ------------ --------- --------- --------- --------<br />
7. Total Interest Income<br />
<br />
8. Cost to Income ratio: Controlling overheads are critical for enhancing the bank’s return on equity. Branch rationalization and technology upgradation account for a major part of operating expenses for new generation banks. Even though, these expenses result in higher cost to income ratio, in long term they help the bank in improving its return on equity. The ratio is calculated as a proportion of operating profit including Non-Interest Income (fee based income). <br />
9. Cost to Income ratio = Operating expenses<br />
10. ------------ --------- -----<br />
11. NII + Non Interest Income<br />
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12. Other income to Total income: Fee based income account for a major portion of the bank’s other income. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. This stream of revenues is not depended on the bank’s capital adequacy and consequently, potential to generate the income is immense. The higher ratio indicates increasing proportion of fee-based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy.<br />
B. Other key financial ratios<br />
1. Credit to Deposit ratio (CD ratio): The ratio is indicative of the percentage of funds lent by the bank out of the total amount raised through deposits. Higher ratio reflects ability of the bank to make optimal use of the available resources. The point to note here is that loans given by bank would also include its investments in debentures, bonds and commercial papers of the companies (these are generally included as part of investments in the balance sheet). <br />
2. Capital Adequacy Ratio (CAR): A bank's capital adequacy ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets. The RBI has sets the minimum capital adequacy ratio for all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank do not expand their business without having adequate capital. <br />
Note: Tier I capital is core capital, this includes equity capital and disclosed reserves (generally these instruments that can't be redeemed at the option of the holder). Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more. Tier III capital or Tertiary capital is held by banks to meet part of their market risks (commodities risk and foreign currency risk), that includes a greater variety of debt than tier 1 and tier 2 capitals.<br />
CAR is used to protect depositors and promote the stability and efficiency of financial systems around the world.<br />
CAR = Tier I capital + Tier II capital<br />
------------ --------- --------- --- <br />
Risk weighted assets<br />
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3. NPA ratio: The net non-performing assets to loans (advances) ratio is used as a measure of the overall quality of the bank’s loan book. Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality of loans. <br />
4. NPA ratio = Net non-performing assets<br />
5. ------------ --------- ------<br />
6. Loans given<br />
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7. Provision coverage ratio: The key relationship in analyzing asset quality of the bank is between the cumulative provision balances of the bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the bank has provided against the troubled part of its loan portfolio. A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip). <br />
8. Provision coverage ratio = Cumulative provisions<br />
9. ------------ --------- --<br />
10. Gross NPAs<br />
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11. Return on Assets (ROA) is the net income (profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets. Similarly, ROE (returns on equity) indicates returns earned by the bank on its total net worth. <br />
ROA = Net profits<br />
------------ ---<br />
Avg. total assets<br />
C. Efficiency ratios<br />
1. Interest income per employee<br />
2. Profits per employee<br />
3. Business per employee<br />
4. Business per branch<br />
5. Employees per branch<br />
The first three ratios indicate the productivity level of the bank’s employees. Since state run banks are operating with large employee base, the productivity ratio for these banks lags behind when compared with new generation private sector banks. Banks can improve these ratios by increasing the technology infrastructure, frequent offering of innovative products and also employee rationalization.<br />
Moreover, a bank’s performance cannot be judged only from its large network. It has to be in relation with the bank’s ability to capitalize on its network. Large number of branches are sometimes unviable if they are situated at places where the business opportunity is low. Private sector banks are likely to have better ratios vis a vis their PSU peers on account of their concentration on top 100 business centers. Unlike PSU banks, private banks in general lack presence in rural areas. Since state run banks are present in every corner of the country, it impacts their average productivity ratios (as business opportunity differs)<br />
Banks' Valuations parameters<br />
1. Price to Book Value: Unlike other manufacturing/ services company, a bank’s market valuations cannot be only measured from its price to earnings ratio (P/E ratio). This is due to following reasons. As discussed earlier, cash is the raw material for a bank. The ability to grow in the long-term therefore, depends upon the capital with a bank (i.e. capital adequacy ratio). Capital comes primarily from net worth. Also, a bank’s net earnings are influenced by the amount of non-performing assets provision, which again depends on the bank’s internal policy. Consequently, the bank could make low provisions to show a better picture. Therefore it’s prudent to remove non-performing assets for which no provisions are made from the net worth of the bank to arrive at the adjusted book value. <br />
2. Market Cap to Total income: This ratio helps in judging the market valuations of the bank’s total income. It is similar to the market cap to sales ratio for a manufacturing company. It indicates valuations accorded by the market to the total income of the bank.<br />
The banking sector plays a very vital role in the working of the economy and it is very important that banks fulfill their roles with utmost integrity. Since banks deal with cash, there have been cases of mismanagement and greed in the global markets. And hence, in the final analysis, investors need to check up on the quality of management. This is the last factor but not the least to be brushed aside.<br />
Non Performing Assets (NPAs):<br />
Advances are classified as standard assets and non-performing assets<br />
• Standard assets: Standard Asset is a performing asset with interest and principal being serviced properly. Banks need to maintain a general provision on standard assets of 0.25% on agricultural advances and 0.40% on all other advances. Consumer loans and mortgage loans (more than Rs. 3mn) carry higher provision of 2% and 1% respectively<br />
• Non-performing assets (NPAs): A standard asset becomes non-performing when it ceases to generate income for the bank i.e., interest and/or installment of principal remain overdue for a period of more than 90 days. NPAs are classified as sub-standard, doubtful and loss assets on various criteria<br />
o Sub-standard: An asset would be classified as sub-standard if it remained NPA for a period less than 12 months. A general provision of 10% to be made for such assets<br />
o Doubtful: An asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. 100% provision required for the unsecured component. For secured portion, a total provision of 20% up to one year, 30% for one to three years and 100% for more than three years<br />
o Loss: A loss asset is one where loss has been identified by the bank as noncollectable but the amount has not been written off<br />
Income from NPAs are recognized on cash basis, not accrual basis. Investment portfolios of banks are classified under three categories:<br />
• Held to maturity (HTM): Securities acquired by the banks with the intention to hold them up to maturity will be classified under HTM. Such securities do not get marked-to-market on a quarterly basis and are instead, valued at acquisition cost. Premium paid is amortized over the tenor of the security. Banks were allowed to include investments included under HTM category only up to 25% of their total investments till Sept 2004. Since then, fearing MTM losses, banks are allowed to exceed the limit provided the excess comprises of SLR securities and are not more than 25% of their demand and time liabilities.<br />
• Held for Trading (HFT): The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under HFT. <br />
• Available for Sale (AFS): The securities which do not fall within the above two categories will be classified under AFS.<br />
AFS and HFT securities are marked-to-market on a quarterly basis, net depreciation is provided for and net appreciation is ignored. MTM losses provided for in an earlier period can be reversed in future periods if such provision is rendered redundant. Banks may shift investments to/from HTM with the approval of the Board of Directors once a year after providing for any MTM losses.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-4519256433842089852009-11-29T18:27:00.000+05:302009-11-29T18:27:12.325+05:30Seamless InvestingBy Dhirendra Kumar | Nov 23, 2009<br />
A few days ago, the Securities and Exchange Board of India (SEBI) issued an order opening up a new channel for investors to buy mutual funds. Stock brokers, operating through the same system as used for stock transactions, will be able to act as fund distributors. This is an entirely new way to route mutual fund transactions and promises to offer many conveniences that the current system doesn’t. However, based on my interactions with investors over the last few days, it also offers considerable potential for confusion, which it’s worthwhile to try and clear.<br />
The biggest confusion seems to be between the new system and the trading of closed-end mutual funds that has been done on the stock exchanges for more than a decade now. A number of investors have asked if funds will be available at a discount to the net asset value (NAV) from brokers, just as closed-end funds typically are. The answer is that no, they won’t; the two systems have nothing to do with each other. Listed closed-end funds are bought and sold on the exchanges just like shares. This trading is done between investors; the fund company is not involved in the transaction.<br />
Typically, closed-end funds cannot be redeemed from the fund company till their tenure is over. Fund companies are required to provide an early exit option for such funds by listing them on a stock exchange. Investors who need to redeem their investments prematurely can do so by selling them to other investors on the stock exchange. Since these transactions are typically driven by the seller’s need to encash his holdings, they are often done at a discount to the NAV of the fund.<br />
The new system has nothing to do with this. It is basically a way of extending the stock exchanges massive network to facilitate the buying and selling of mutual funds. This network extends to over 2 lakh terminals in 1,500 cities and towns across the country which are linked to a centralised system. Apart from an extended reach, the new system offers greater convenience for investors. Investors will need to get their KYC (Know Your Customer) identity verification done just once and use it seamlessly for all their investments. Also, they will be able to hold their fund units in dematerialised form and get a single, consolidated statement of holdings just as they get for stocks today.<br />
Investors who already have a depository account and have had their KYC done through a depository participant need not do so again. The new system essentially uses the existing stock exchange mechanism as a system for routing mutual fund investments from investors to fund companies. However, this is early days and some details of the system are not yet clear and will probably evolve as the system is implemented.<br />
Beyond the mechanics of this system, its success will depend on stockbrokers and sub-brokers getting into the business of selling mutual funds. Its not as if every one of them will get up tomorrow morning and be raring to go out and sell funds. They’ll have to take the trouble of getting an Association of Mutual Funds of India (AMFI) certification and everything else that is needed to set themselves up as fund sellers. It remains to be seen how many of them will find the commercial motivation to do so after the abolition of entry loads.<br />
Nonetheless, this is an innovative move that has the potential to become a significant milestone in the development of mutual funds in India. Hopefully, all the pieces that are needed to fulfil that potential will fall into place quicklyiDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-15872077171833203232009-11-24T14:32:00.003+05:302009-11-24T14:34:11.141+05:30Indian PSUsIn the era of globalisation and finance capitalism, the PSUs with their conservative management emerged as a countervailing force. In his Budget speech this year finance minister Pranab Mukherjee made a statement that left many wondering. While emphasising on the economic success of the previous UPA regime, Mr Mukherjee talked about the 'critical' role played by the public sector banks in insulating the Indian economy from the adverse affects of the global financial crisis. He talked in a manner that justified the nationalisation drive undertaken by the former prime-minister Mrs Indira Gandhi nearly 40 years ago. <br />
The majority of Indians of this generation have grown up in an environment where government owned enterprises dominated our life; be it the slow moving telecom utility, or an airline which would not fly on time, or the local power distributor which could never match the rising demand. The situation was equally worse in the all important banking and financial services sector, where employees never seem to have the time or inclination to serve retail customers. <br />
So when the Indian economy opened up in 1991 and the private sector was allowed entry into sectors earlier reserved for the public sector, it gave an opportunity to Indians to teach a lesson to the state-owned companies they used to deal with. In almost every sphere, PSUs lost market share and customers flocked to the new private sector entrants, who turned out to be much smarter and sleek in serving the customers. It was a new experience for Indians, who were used to standing in queues to buy everything-from a telephone connection to an airline ticket to a domestic gas connection. <br />
Given this, Indians especially the urban middle class is not wrong in viewing PSUs in a certain manner. But it tells only half the story. The consumer's side of the PSUs was always small and has shrunk further in recent years, as private sector has made inroads in one consumer segment after the other. The public sector with their elaborate systems and procedures was never built to be great consumer organisation. Rather they were supposed to provide economic ammunition to the country. <br />
The idea of PSUs was conceptualised at a time when, India hardly had any industrial infrastructure to talk about and it could not have been left to the domestic private sector or foreign companies to provide it. This is because, establishing the infrastructure is a long-drawn process, which may not have yielded profits in the short to near term. Besides, the projects of these kinds are highly capital intensive and was mostly beyond the scope of the fledgling private sector in 1950s and 1960s. <br />
If India today is effortlessly implementing some of the world's largest and most complex industrial and infrastructure projects right from power projects to refineries to dams to mass rapid transit systems, it's because, there is expertise and resources available locally. It was not the case a few decades ago. In the decade following India’s independence, the biggest constraint that India faced was technical know-how and the ability to successfully implement large and nationally important projects. And worse, the technical expertise was either not available in the international market or it was prohibitively expensive. Now that India has successfully nurtured anchor companies across strategic sectors-BHEL (capital goods), SAIL (steel), Indian Oil (oil refining), Bharat Electronics (defence electronics), NTPC (Thermal Power), ONGC (oil exploration) and GAIL (gas) among others, the country has the requisite industrial ecosystems to conceptualise and implement the biggest and the most complex of projects. In fact, the presence of these large domestic companies is now forcing foreign firms to look at the Indian market in favourable terms and this has helped to boost the competition in the domestic market and has thus aided India’s growth story. <br />
The situation was not very different in banking industry either. Though India had a thriving banking industry in 1950s and 60s, its presence was limited to urban areas. But a sustainable economic growth required them to open branches in smaller towns and villages. Not just for equity, but by mid-1960s, the country was facing a food crisis, also called wage-good constraint in development economics. Without cheap food readily available in urban areas, industrialisation was just not possible. <br />
In such as situation a forced industrialisation would have resulted in spiralling wages making entire project economically unviable. Stepping up food production however required investment in new technology and inputs. But given the income levels in rural areas, farmers were not in a condition to invest in fertilisers, modern seeds, pesticides and farm mechanisation on their own. They needed credit and that also at favourable terms. The private sector dominated banking systems was however not geared for it. The agriculture credit was expected to be much less profitable than industrial or consumer loans. So why would a privately owned enterprise take a hit on its profitability? <br />
This had put the government in a Catch 22 situation. So when the push came to shove, the then prime minister Mrs Gandhi did the unconceivable-nationalisation of all large commercial banks in 1969. <br />
The nationalisation led to a massive expansion in the bank branches and farm credit that helped the country to step-up farm productivity and by early 1980s, India was self-sufficient in food. This eliminated the risk of food-price inflation that had weighed heavy on the India’s economic growth in the past. The newly nationalised banks also spread the reach of the formal economy in the farthest corner of the country, which dramatically improved the effectiveness of monetary and fiscal policies. This in itself was a big achievement. Another beneficial impact of a nationwide bank network was a sharp rise in domestic savings, which was now available for investment. In early 1950s, India’s gross saving rate was around 9% of GDP. In next twenty years, it grew at a snail's pace and was 12% on the eve of bank nationalisation. Given India’s long-term capital-output ratio of around 4x, this savings rate would have supported a GDP growth of not more than 3-4% per annum and this was that we were achieving in those days. In the next 20 years country's savings rate rocketed to reach 25% of GDP on the eve of the economic reforms of 1991. Now the Indian economy was ready for the take off. <br />
So in many ways, the current generation is reaping the benefits of the economic plumbing provided by the PSUs. The government-owned companies have proved beneficial in other ways as well. In the post-1991 era, when unfettered globalisation and aggressive finance capitalism acquired the status of a religion, the PSUs with their conservative management style and commitment to the domestic economy emerged as a countervailing force. <br />
While initially this approach was criticised by market men for being anti-growth and typical of PSUs inability to change with times, it proved to be a masterstroke. It saved nation's economic fabric in the aftermath of the global economic crisis. And nowhere was this more visible than the financial market. At the height of the credit crunch in second half of 2008, large PSUs such as State Bank of India and Life Insurance Corporation emerged as the lender of last resort for India Inc. "Many private sector and foreign banks withdrew from the market just when their clients needed them most. In contrast, PSU banks not only honoured their commitments but tried to their best to fill the vacuum," says SBI chairman Mr O P Bhatt. In the stock market LIC emerged as a large investor even as foreign investors were fleeing in hordes putting companies and retail investors in great peril. <br />
A big complaint against PSUs has however been their lacklustre financial performance. But it seems to a case of stereotyping them. PSUs account for nearly half of the combined dividend payout by all listed companies in FY09. The stock market is now also waking up to this reality. In the past, market used to give PSUs a discount. Now companies such as BHEL, SBI, NTPC and Power Grid, among others, rank among one of the most valuable companies in their sectors. (See PSUs lead the way on page 67) <br />
Also while analysing PSUs' past record we must also keep in mind that most of them are much younger than we believe. For instance, BHEL is nearly 20 years younger than its nearest peer L&T, while NTPC was established as late as 1975 compared to its private sector peer Tata Power, which is nearing 100 years of existence. So many of their past investments are still to bear fruit and it may be early to pass a judgement on their finances. <br />
While PSUs are believed to be conservative and slow moving, the last few years have shown that they can be agile in spotting new opportunities and milking them full. Nothing illustrates this better than the MRPL acquisition and swift turnaround under ONGC's management despite stiff bureaucratic opposition. Subir Raha, the then chairman of ONGC still remembers, "The petroleum ministry refused to recognise the public sector status of MRPL for many more months." The deal was however recognised as best M&A deal in Asia in 2003 by Asia Money. The company's total investment in this acquisition was around Rs 1,000 Crore, less than 10% of a Greenfield refinery of same configuration and complexity. The oil major followed it up with large overseas acquisition of Imperial Energy, which it closed at the height of credit crisis last year. <br />
In the banking industry meanwhile, PSUs have learnt their lessons and most of them are investing huge sums in brand building and promotion. (See Today's mega corporations, tomorrow's big brands on page 54). A similar revolution is sweeping through other sectors. For instance, NTPC, which is implementing its 10-year vision plan, has begun the preparatory work on drawing out its corporate plan for next 25 years. Just as last 15 years saw the emergence of a select band of global brands from India’s private sector, the next 20 years may see the emergence of global corporation from the public sector. <br />
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****Thanks are due to ET Intelligence Group's Krishna KantiDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-68152875331917088782009-11-24T07:13:00.000+05:302009-11-24T07:13:51.023+05:30Red Alert: The Second Wave of The Financial TsunamiThe Wave Is gathering force & could hit between the first & second quarter of 2010<br />
<br />
by Matthias Chang<br />
<br />
Many of my friends who have been receiving my e-mail alerts over the last two years have lamented that in recent weeks I have not commented on the state of the global economy. I appreciate their anxiety but they forget that I am not a stock market analyst who is paid to write articles to lure investors back into the market. My website is free and I do not sell a financial newsletter so there is no need for me to churn out daily forecasts or analysis.<br />
However, when the data is compelling and supports an inevitable trend, it is time for another review. This Red Alert is to enable visitors to my website to take appropriate actions to safeguard their wealth and welfare of their families in the coming months.<br />
Since the last quarter of 2008, unrelenting currency warfare has been waged by the key global economies and while this competition thus far has been non-antagonistic, it will soon be antagonistic because the inherent differences are irreconcilable. The consequences to the global economy will be devastating and for the ordinary people, massive unemployment and social unrest are assured.<br />
The policy-makers of these countries faced with the total collapse of the international financial architecture have concluded that the solution, the only solution is quantitative easing (i.e. massive injection of liquidity) to salvage the “too big to fail” banks and reflate their depressed economies. This is best reflected in Bernanke’s candid remark that, “the US government has a technology, called the printing press (or today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost”.<br />
This is the crux of the problem!<br />
The Irreconcilable Differences<br />
Some two decades ago, it was decided by the global financial elites that the framework for the global economy shall consist of:<br />
1) A global derivative-based financial system, controlled by the US Federal Reserve Bank and its associate global banks in the developed countries.<br />
2) The re-location from the West to the East in the production of goods, principally to China and India to “feed” the developed economies.<br />
The entire system was built on a simple principle, that of a FED-controlled global reserve currency which will be the engine for growth for the global economy. It is essentially an imperialist economic principle.<br />
Once we grasp this fundamental truth, Bernanke’s boast that the “US can produce as many US dollars as it wishes at no cost” takes on a different dimension.<br />
I have talked to so many economists and when asked what is the crux of the present financial problem, they all respond in unison, “it is the global imbalances... the West consumes too much while the East saves too much and consumes not enough”. This is exemplified by the huge US trade deficits on the one part and China’s massive surpluses on the other.<br />
Incredible wisdom and almost everyone echoes this mantra. The recent concluded APEC Summit was no different. This mantra was repeated as well as the call for freer trade between trading nations.<br />
This is a grand hoax. All the current leaders on the world’s stage are corrupted to the rotten core and as such have no interest to call a spade a spade and expose the inherent contradictions within the existing financial system.<br />
The call for a multi-polar world is meaningless when the entire global financial system is based on the unipolar US dollar reserve currency. This is the inherent contradiction within the present system and the problems associated with it cannot be resolved by another global reserve currency based on the IMF’s Special Drawing Rights as advocated by some countries. It was stillborn, the very moment it was conceived!<br />
The leaders of China, Japan and the oil producing countries of the Middle East are all cursing and pissing about the current situation, but they don’t have the courage of their convictions to spell it out to their countrymen that they have been conned by the financial spin masters from the Fed acting on the instructions from Goldman Sachs.<br />
Tell me which leader would dare admit that they have exchanged the nation’s wealth for toilet papers?<br />
The toilet paper currency pantomime continues.<br />
We have now reached a stalemate in the current currency war, not unlike the situation of the Cold War between the NATO pact countries and the Warsaw pact countries. Both sides were deterred by the MAD (Mutually Assured Destruction) doctrine of nuclear wars. The costs to both sides were horrendous and it was only when the Soviet Union could not continue with the pace and cost of maintaining a nuclear deterrent and was forced into bankruptcy that the balance tilted in favour of the NATO alliance.<br />
But it was a pyrrhic victory for the US and it allies. What kept the ability of the US to maintain its military might and outspend the Soviet Union was the right to print toilet paper currency and the acceptance of the US dollar by her allies as the world’s reserve currency.<br />
But why did the countries allied to the US during the Cold War accepted the status quo?<br />
Simple! They were all conned into believing that without the protection of Big Brother and its military outreach, they would be swallowed up by the communist menace. They agreed to march to the tune of the US Pied-Piper.<br />
The next big question – why did the so-called “liberated” former communist allies of the Soviet bloc jump on the bandwagon?<br />
Simple! They all believed in the illusion that was fostered by the global banks, led by Goldman Sachs that trading and selling their goods and services for the toilet paper US reserve currency would ensure untold wealth and prosperity.<br />
But the biggest game in town was the Asia gambit. Japan, after a decade of recession following the burst of her property bubble did not have the means and the capacity to bring the game to the next level as envisaged by the financial architects in Goldman Sachs.<br />
And China was the biggest beneficiary. The senior management of Goldman Sachs brokered a secret pact with China’s leaders that in exchange for orchestrating the most massive injection of US dollar capital and wholesale re-location of manufacturing capacity in the history of the global economy, China would recycle their hard-earned US toilet paper reserve currency wealth into US treasuries and other US debt instruments.<br />
This was the necessary condition precedent for the global financial casino to rise to the next level of play.<br />
Why?<br />
<b>The New Game</b><br />
The financial architects at Goldman Sachs had a master plan – to dominate the global financial system. The means to achieve this financial power was the Shadow Banking System, the lynchpin being the derivative market and the securitization of assets, real and synthetic. The stakes would be huge, in the hundreds of US$ trillions and the way to transform the market was through massive leverage at all levels of the financial game.<br />
But there was an inherent weakness in the overall scheme – the threat of inflation, more precisely hyperinflation. Such huge amounts of liquidity in the system would invariably trigger the depreciation of the reserve currency and the confidence in the system.<br />
Hence the need for a system to keep in check price inflation and the illusion that the purchasing power of the toilet paper reserve currency could be maintained.<br />
This is where China came in. Once China became the world’s factory, the problem would be resolved. When a suit which previously cost US$600 could be had for less than US$100, and a pair of shoes for less than US$5, the scam masterminds concluded that there would be no foreseeable threat to the largest casino operation in history.<br />
China agreed to the exchange as it has over a billion mouths to feed and jobs for hundreds of millions needed to be secured, without which the system could not be maintained. But China was pragmatic enough to have two “economic systems” – a Yuan based domestic economy and a US$ based export economy, in the hope that the profits and benefits of the export economy would enable China to transform and establish a viable and dynamic domestic market which in time would replace the export dependent economy. It was a deal made with the devil, but there were no viable alternative options at the material time, more so after the collapse of the Soviet Union.<br />
<b>The Next Level of the Game</b><br />
The next level of the game was reached when the toilet paper reserve currency literally went virtual – through the simple operation of a click of the mouse in the computers of the global banks.<br />
The big boys at Goldman Sachs and other global banks were more than content to leave Las Vegas for the mafia and their miserable billions in turnover. The profits were considered dimes when compared to the hundreds of trillions generated by the virtual casino. It was a financial conquest beyond their wildest dreams. They even called themselves, “Master of the Universe”. Creating massive debts was the new game, and the big boys could even leverage more than 40 times capital! Asset values soared with so much liquidity chasing so few good assets.<br />
However, the financial wizards failed to appreciate and or underestimate the amount of financial products that were needed to keep the game in play. They resorted to financial engineering – the securitization of assets. And when real assets were insufficient for securitization, synthetic assets were created. Soon enough, toxic waste was even considered as legitimate instruments for the game so long as it could be unloaded to greedy suckers with no recourse to the originators of these so-called investments.<br />
For a time, it looked as if the financial wizards have solved the problem of how to feed the global casino monster.<br />
Unfortunately, the music stopped and the bubble burst! And as they say the rest is history.<br />
The Goldman Sachs Remedy<br />
When losses are in the US$ trillions and whatever assets / capital remaining are in the US$ billions, we have a huge problem – a financial black-hole.<br />
The preferred remedy by the financial masterminds at Goldman Sachs was to create another hoax – that if the big global banks were to fail triggering a systemic collapse, there would be Armageddon. These “too big to fail” banks must be injected with massive amount of virtual monies to recapitalize and get rid of the toxic assets on their balance sheet. The major central banks in the developed countries in cahoots with Goldman Sachs sang the same tune. All sorts of schemes were conjured to legitimize this bailout.<br />
In essence, what transpired was the mere transfer of monies from the left pocket to the right pocket, with the twist that the banks were in fact helping the Government to overcome the financial crisis.<br />
The Fed and key central banks agreed to lend “virtual monies” to the “too big to fail” global banks at zero or near zero interest rate and these banks in turn would “deposit” these monies with the Fed and other central banks at agreed interest rates. These transactions are all mere book entries. Other “loans” from the Fed and central banks (again at zero or near zero interest rates) are used to purchase government debts, these debts being the stimulus monies needed to revive the real economy and create jobs for the growing unemployed. So in essence, these banks are given “free money” to lend to the government at prior agreed interest rates with no risks at all. It is a hoax!<br />
These “monies” are not even the dollar bills, but mere book entries created out of thin air.<br />
So when the Fed injects US$ trillions into the banking system, it merely credits the amount in the accounts of the “too big to fail” banks at the Fed.<br />
When the system is applied to international trade, the same modus operandi is used to pay for the goods imported from China, Japan etc.<br />
For the rest of world, when buying goods denominated in US$, these countries must produce goods and services, sell them for dollars in order to purchase goods needed in their country. Simply put, they have to earn an income to purchase whatever goods and services needed. In contrast, all that the US needs to do is to create monies out of thin air and use them to pay for their imports!<br />
The US can get away with this scam because it has the military muscle to compel and enforce this hoax. As stated earlier, this status quo was accepted especially during the Cold War and with some reluctance post the collapse of the Soviet Union, but with a proviso – that the US agrees to be the consumer of last resort. This arrangement provided some comfort because countries which have sold their goods to the US, can now use the dollars to buy goods from other countries as more than 80 per cent of world trade is denominated in dollars especially crude oil, the lifeline of the global economy.<br />
But with the US in full bankruptcy and its citizens (the largest consumers in the world) being unable to borrow further monies to buy fancy goods from China, Japan and the rest of the world, the demand for dollar has evaporated. The dollar status as a reserve currency and its usefulness is being questioned more vocally.<br />
<b>The End Game</b><br />
The present fallout can be summarized in simple terms:<br />
Should a bankrupt country (the US) be allowed to use money created out of thin air to pay for goods produced with the sweat and tears of hardworking citizens of exporting countries? Adding insult to injury, the same dollars are now purchasing a lot less than before. So what is the use of being paid in a currency that is losing rapidly its value?<br />
On the other hand, the US is telling the whole world, especially the Chinese that if they are not happy with the status quo, there is nothing to stop them from selling to the other countries and accepting their currencies. But if they want to sell to the mighty USA, they must accept US toilet paper reserve currency and its right to create monies out of thin air!<br />
This is the ultimate poker game and whosoever blinks first loses and will suffer irreparable financial consequences. But who has the winning hand?<br />
The US does not have the winning hand. Neither has China the winning hand.<br />
This state of affairs cannot continue for long, for whatever cards the US or China may be contemplating to throw at the table to gain strategic advantage, any short term gains will be pyrrhic, for it will not be able to address the underlying antagonistic contradictions.<br />
When the survival of the system is dependent on the availability of credit (i.e. accumulating more debts) it is only a matter of time before both the debtor and creditor come to the inevitable conclusion that the debt will never be paid. And unless the creditor is willing to write off the debt, resorting to drastic means to collect the outstanding debt is inevitable.<br />
It would be naïve to think that the US would quietly allow itself to be foreclosed! When we reach that stage, war will be inevitable. It will be the US-UK-Israel Axis against the rest of the world.<br />
<b>The Prelude to the End Game</b><br />
The US economy will be spiraling out of control in the coming months and will reach critical point by the end of the 1st quarter 2010 and implode by the 2nd quarter.<br />
The massive US$ trillions of dollars stimulus has failed to turn the economy around. The massive blood transfusion may have kept the patient alive, but there are numerous signs of multi-organ failure.<br />
There will be another wave of foreclosures of residential and more importantly commercial properties by end December and early 2010. And the foreclosed properties in 2009 will lead to depressed prices once they come through the pipeline. Home and commercial property values will plunge. Banks’ balance sheets will turn ugly and whatever “record profits” in the last two quarters of 2009 will not cover the additional red ink.<br />
Given the above situation, will the Fed continue to buy mortgage-backed securities to prop up the markets? The Fed has already spent trillions buying Fannie Mae and Freddie Mac mortgages with no potential substitute buyer in sight. Therefore, the Fed’s balance sheet is as toxic as the “too big to fail” banks that it rescued.<br />
In the circumstances, it makes no sense for anyone to assert that the worst is over and that the global economy is on the road to recovery.<br />
And the surest sign that all is not well with the big banks is the recent speech by the President of the Federal Reserve Bank of New York, William Dudley at Princeton, New Jersey when he said that the Fed would curtail the risk of future liquidity crisis by providing a “backstop” to solvent firms with sufficient collateral.<br />
This warning and assurance deserves further consideration. Firstly, it is a contradiction to state that a solvent firm with sufficient collateral would in fact encounter a liquidity crisis to warrant the need for a fall back on the Fed. It is in fact an admission that banks are not sufficiently capitalized and when the second wave of the tsunami hits them again, confidence will be sorely lacking.<br />
Dudley actually said that, “the central bank could commit to being the lender of last resort... [and this would reduce] the risk of panics sparked by uncertainty among lenders about what other creditors think”.<br />
To put it bluntly what he is saying is that the Fed will endeavour to avoid the repeat of the collapse of Bear Stearns, Lehman Bros and AIG. It is also an indication that the remaining big banks are in trouble.<br />
It is interesting to note that a Bloomberg report in early November revealed that Citigroup Inc and JP Morgan Chase have been hoarding cash. The former has almost doubled its cash holdings to US$244.2 billion. In the case of the latter, the cash hoard amounted to US$453.6 billion. Yet, given this hoarding by the leading banks, the New York Federal Reserve Bank had to reassure the financial community that it is ready to inject massive liquidity to prop up the system.<br />
It should come as no surprise that the value of the dollar is heading south.<br />
When currencies are being debased, volatility in the stock market increases. But the gains are not worth the risks and if anyone is still in the market, they will be wiped out by the 1st quarter of 2010. The S&P may have shot up since the beginning of the year by over 25 per cent but it has been out-performed by gold. The gains have also lagged behind the official US inflation rate. It has in fact delivered a total return after inflation of approximately minus 25 per cent. When Meredith Whitney remarked that, “I don’t know what’s going on in the market right now, because it makes no sense to me”, it is time to get out of the market fast.<br />
In a report to its clients, Société Générale warned that public debt would be massive in the next two years – 105 per cent of GDP in the UK, 125 per cent in the US and in Europe and 270 per cent in Japan. Global debt would reach US$45 trillion.<br />
At some point in time, all these debts must be repaid. How will these debts be repaid?<br />
If we go by what Bernanke has been preaching and practising, it means more toilet paper currency will be created to repay the debts.<br />
As a result, debasement of currencies will continue and this will further aggravate existing tensions between the competing economies. And when creditors have enough of this toilet paper scam, expect violent reactions!iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-18325085471462712072009-11-15T17:28:00.001+05:302009-11-15T17:30:29.048+05:30Price Earnings Ratio: The Cyclically Adjusted P/E RatioToday, we’re presenting a technical discussion on an interesting investment concept, care of Manshu Verma from One Mint, an investment blog that covers topics ranging from Indian IPOs to U.S. ETFs, and everything in between.<br />
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<b>Cyclically Adjusted P/E Ratio (CAPE)</b> is an enhanced way of calculating the P/E ratio which considers the average inflation adjusted earnings of a company over the last 10 years. This smoothens out the fluctuations in earnings that occur from one year to the next, while still giving a sense of how high or low the price of a particular stock is.<br />
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To understand how CAPE is calculated, we need to take a look at how P/E Ratio is calculated first.<br />
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Price to Earnings Ratio considers two things:<br />
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* Market price of the stock.<br />
* Earnings Per Share or EPS of the company.<br />
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P/E Ratio is calculated by dividing the market price by the earnings per share of the company.<br />
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P/E = Market Price / Earnings Per Share<br />
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EPS can be last year’s earnings or even the projected earnings for the next year. CAPE takes the average earnings of the last ten years and adjusts it for inflation: this smoothens out the fluctuations in earnings due to booms and busts, which occur from one year to another.<br />
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CAPE was originally developed by Benjamin Graham, and has been used by various analysts since then; the most notable proponent has been Professor Robert Shiller of Yale University. You can find data on CAPE on Professor Shiller’s website.<br />
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In this interview, Prof. Shiller states that the highest CAPE ratio in the US market has been 46 during the boom of 2000, and the average CAPE has been 15. Also in the interview, Prof. Shiller makes two very interesting points.<br />
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1. Mean Reversion: The first is about mean reversion: if CAPE is higher than the average of 15, and certainly, when it is as high as 46, it is quite likely to revert to the mean — and come back to 15. The same is true in reverse also; when the market is trading below the average CAPE, it is likely to move higher. So, that means it is a fairly good indicator to know which direction the market is headed.<br />
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2. No one knows when it will turn around: If you want to time the market or predict market direction, knowing that the CAPE is below or above the mean is not good enough. You really need to know when it will turn. If it is at 10, mean reversion indicates that it should go back to 15 — but that doesn’t mean that it can’t go to 6 first. So, there is no way to know the exact bottom of the market, and trying to predict that is like catching a falling knife.<br />
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I personally think that this measure is pretty useful for helping us gauge extremes. While there is no way to predict the top or the bottom of a stock’s (or market’s) price — you certainly don’t want to be buying a stock when its CAPE is at 46, and you don’t want to be selling a stock when the P/E ratio is at 6! <br />
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(Thanks to Smart Wallet)iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-11000935219798702732009-11-15T17:06:00.001+05:302009-11-15T17:06:42.291+05:30LEARN LEADERSHIP SACHIN TENDULKAR WAY<b>What are the things that set the great man apart from mere mortals? The ability to read the game acutely, pick the ball early, dedication, discipline and more</b><br />
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<i>Virender Sehwag on Sachin Tendulkar As told to Nagraj Gollapudi</i><br />
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The first time Virender Sehwag met Sachin Tendulkar was in March 2001, at a practice session ahead of the first ODI of the home series against Australia. For Sehwag, Tendulkar was the man who had inspired him to skip exams in school and allowed him to dream of cricket as a career. Sehwag was shy then, and didn't speak to his hero. He got 58 off 51 balls and picked up three wickets. Tendulkar later walked up to him and said, "You've got talent. Continue playing the same way and I'm sure you will make your name." That ability to motivate youngsters is one of the traits, Sehwag says, that makes Tendulkar special. Here he tells Cricinfo about 10 things that make Tendulkar stand out. <br />
<b>Discipline</b><br />
He never comes late to any practice session, never comes late to the team bus, never comes late to any meeting - he is always five minutes ahead of time. If you are disciplined, it shows you are organised. And then he is ready for anything on the cricket field. <br />
<b>Mental strength</b><br />
I've learned a lot of things from him as far as mental strength goes - on how to tacke a situation, how to tackle a ball or bowler. If you are not tough mentally, you can't score the number of runs and centuries he has in the last two decades. He is a very good self-motivator. <br />
He always said to me: whatever the situation or whichever the bowler you face, always believe in yourself. There was this occasion in South Africa, early in my career, when I was not scoring runs fluently, so he suggested I try a few mental techniques that had worked for him. One of the things he said was: Always tell yourself you are better than others. You have some talent and that is why you are playing for India, so believe in yourself. <br />
<b>Picking the ball early</b><br />
He can pick the ball earlier than other batsmen and that is a mark of a great batsman. He is virtually ready for the ball before it is bowled. Only great players can have two shots for one ball, like Tendulkar does, and a big reason is that he picks the ball very early. <br />
<b>Soft hands</b><br />
I've never seen him play strokes with hard hands. He always tries to play with soft hands, always tries to meet the ball with the centre of the bat. That is timing. I have never been able to play consistently with soft hands. <br />
<b>Planning</b><br />
One reason he can convert his fifties into hundreds is planning: which bowler he should go after, which bowler he should respect, in which situation he should play aggressively, in which situation he should defend. It is because he has spent hours thinking about all of it, planning what to do. He knows what a bowler will do in different situations and he is ready for it. <br />
In my debut Test he scored 155 and he knew exactly what to do every ball. We had already lost four wickets (68 for 4) when I walked in, and he warned me about the short ball. He told me that the South African fast bowlers would bowl short-of-length balls regularly, but he knew how to counter that. If they bowled short of a length, he cut them over slips; when they bowled outside off stump, he cut them; and when they tried to bowl short into his body, he pulled with ease. Luckily his advice had its effect on me, and I made my maiden hundred! <br />
<b>Adaptability</b><br />
This is one area where he is really fast. And that is because he is such a good reader of the game. After playing just one or two overs he can tell you how the pitch will behave, what kind of bounce it has, which length is a good one for the batsman, what shots to play and what not to. <br />
A good example was in the Centurion ODI of the 2006-07 series. India were batting first. Shaun Pollock bowled the first over and fired in a few short-of-length balls, against which I tried to play the back-foot punch. Tendulkar cautioned me immediately and said that shot was not a good option. A couple of overs later I went for it again and was caught behind, against Pollock. <br />
<b>Making bowlers bowl to his strengths</b><br />
He will leave a lot of balls and give the bowler a false sense of security, but the moment it is pitched up to the stumps or closer to them, Tendulkar will easily score runs. <br />
If the bowler is bowling outside off stump Tendulkar can disturb his line by going across outside off stump and playing to midwicket. He puts doubts in the bowler's mind, so that he begins to wonder if he has bowled the wrong line and tries to bowl a little outside off stump - which Tendulkar can comfortably play through covers. <br />
In Sydney in 2004, in the first innings he didn't play a single cover drive, and remained undefeated on 241. He decided to play the straight drive and flicks, so he made the bowlers pitch to his strengths. It is not easy. In the Test before that, in Melbourne, he had got out trying to flick. After that when we had a chat he said he was getting out playing the cover drive and the next game he would avoid the cover drive. I thought he was joking because nobody cannot not play the cover drive - doesn't matter if you are connecting or not. I realised he was serious in Sydney when he was on about 180-odd and he had missed plenty of opportunities to play a cover drive. I was stunned. <br />
<b>Ability to bat in different gears</b><br />
This is one aspect of batting I have always discussed with Tendulkar: how he controls his game; the way he can change gears after scoring a half-century. Suddenly he scores 10-12 runs an over, or maybe a quick 30 runs in five overs, and then again slows down and paces his innings. <br />
He has maintained that it all depends on the team's position. If you are in a good position you tend to play faster. He also pointed out that the batsman must always think about what can happen if he gets out and the consequences for the team. The best example is the knock of 175. I was confident he would pull it off for India and he almost did. <br />
<b>Building on an innings</b><br />
I learned from Tendulkar how to get big hundreds. He told me early on that once you get a hundred you are satisfied for yourself. But it is also the best time to convert that into a bigger score for the team because then the team will be in a good position. <br />
If you look at my centuries they have always been big. A good instance of this was in Multan in 2004, when he told me I had given away a good position in Melbourne (195) the previous year and the team lost, and I needed to keep that in mind against Pakistan. In Multan, in the first hundred of the triple century I had hit a few sixes. He walked up to me after I reached the century and said he would slap me if I hit any further sixes. I said why. He said that if I tried hitting a six and got out the team would lose the control over the game, and I needed to bat through the day. So I didn't hit a single six till I reached 295. By then India were 500-plus and I told him I was going to hit a six! <br />
<b>Dedication</b><br />
This is the most important aspect of his success. In his life cricket comes first. When he is on tour he is thinking about nothing but cricket, and when he is not on tour he dedicates quality time to his family. That shows his dedication to the game and to his family. He has found the right balance.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-82862231718681786052009-11-15T17:01:00.000+05:302009-11-15T17:01:33.867+05:3014 Management Principles from Henri FayolThe <b>14 Management Principles from Henri Fayol </b>(1841-1925) are:<br />
1. Division of Work. Specialization allows the individual to build up experience, and to continuously improve his skills. Thereby he can be more productive.<br />
2. Authority. The right to issue commands, along with which must go the balanced responsibility for its function.<br />
3. Discipline. Employees must obey, but this is two-sided: employees will only obey orders if management play their part by providing good leadership.<br />
4. Unity of Command. Each worker should have only one boss with no other conflicting lines of command.<br />
5. Unity of Direction. People engaged in the same kind of activities must have the same objectives in a single plan. This is essential to ensure unity and coordination in the enterprise. Unity of command does not exist without unity of direction but does not necessarily flows from it.<br />
6. Subordination of individual interest (to the general interest). Management must see that the goals of the firms are always paramount.<br />
7. Remuneration. Payment is an important motivator although by analyzing a number of possibilities, Fayol points out that there is no such thing as a perfect system.<br />
8. Centralization (or Decentralization). This is a matter of degree depending on the condition of the business and the quality of its personnel.<br />
9. Scalar chain (Line of Authority). A hierarchy is necessary for unity of direction. But lateral communication is also fundamental, as long as superiors know that such communication is taking place. Scalar chain refers to the number of levels in the hierarchy from the ultimate authority to the lowest level in the organization. It should not be over-stretched and consist of too-many levels.<br />
10. Order. Both material order and social order are necessary. The former minimizes lost time and useless handling of materials. The latter is achieved through organization and selection.<br />
11. Equity. In running a business a ‘combination of kindliness and justice’ is needed. Treating employees well is important to achieve equity.<br />
12. Stability of Tenure of Personnel. Employees work better if job security and career progress are assured to them. An insecure tenure and a high rate of employee turnover will affect the organization adversely.<br />
13. Initiative. Allowing all personnel to show their initiative in some way is a source of strength for the organization. Even though it may well involve a sacrifice of ‘personal vanity’ on the part of many managers.<br />
14. Esprit de Corps. Management must foster the morale of its employees. He further suggests that: “real talent is needed to coordinate effort, encourage keenness, use each person’s abilities, and reward each one’s merit without arousing possible jealousies and disturbing harmonious relations.”<br />
What is Management? Five elements<br />
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<b>Fayol's definition of management roles and actions distinguishes between Five Elements:</b><br />
1. Prevoyance. (Forecast & Plan). Examining the future and drawing up a plan of action. The elements of strategy.<br />
2. To organize. Build up the structure, both material and human, of the undertaking.<br />
3. To command. Maintain the activity among the personnel.<br />
4. To coordinate. Binding together, unifying and harmonizing all activity and effort.<br />
5. To control. Seeing that everything occurs in conformity with established rule and expressed command.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-84711950037312554692009-11-14T06:57:00.002+05:302009-11-14T06:57:15.586+05:30Diversity ManagementTo some extent demographic changes and globalization are rendering moot the motives that drove equal employment legislation. Employers, in other words, now have little choice but to willingly push for more diversity. White males no longer dominate the labour force, and women and minorities represent the lion’s share of labour force growth over the foreseeable future. Furthermore, globalization increasingly requires employers to hire minority members with the cultural and language skills to deal with customers abroad. (Thus America’s Central Intelligence Agency is aggressively recruiting applicants with Middle Eastern language skills). As the Wall street Journal recently put it: companies do more and more business around the world, diversity isn’t simply a matter of doing what is fair or good public relations. It’s business imperative. So, employers are increasingly striving for racial, ethnic, and sexual workforce balance and harmony as a matter of self interest. In this context, diversity greatly refers to the variety or multiplicity of demographic features that characterize a company’s workforce, particularly in terms of race, sex, culture, national origin, handicap, age, and religion. <br />
However, diversity is potentially a double edged sword. Managing diversity means maximizing diversity’s potential benefits (greater cultural awareness and broader language skills, for distance) while minimizing the potential barriers (such as prejudices and bias) that can undermine the company’s performance. <br />
In practice, diversity management involves both compulsory and voluntary management actions. For example, we’ve just seen that there many legally compulsory actions employers must take minimize employment discrimination. But while such compulsory actions can reduce the more blatant diversity barriers, blending a diverse workforce into a close knit and productive community also requires other steps. Any such diversity management program usually mans starting at the top, as follows: <br />
Provide strong leadership: companies with exemplary reputations in managing diversity typically have CEOs who champion diversity’s benefits. For example, they take strong stands on advocating the need for and advantages of a diverse workforce, and act as role models for exemplifying pro-diversify behaviours, such as by promoting employees even handedly. <br />
Assess the situation: The diversity management program itself typically starts with the company assessing the current state of affairs with respect to diversity. In particular, how diverse are we, and are there any diversity-related issues we need to address? Common tools here include equal employment hiring and retention metrics, employee attitude surveys, management and employee evaluations and focus groups. <br />
Provide diversity training and education: Assuming the assessment reveals issues the firm needs to address to address, some type of change program is in order. This frequently involves some type of employee training and education program, for instance having employee discuss with expert trainers the values of diversity and the types of behaviours and prejudices that may undermine it. Diversity training often aims at sensitizing all employees to the need to value differences and build esteem and at generally creating a more smoothly functioning and hospitable environment for the firm’s diverse workforce.<br />
Change culture and management systems: To reinforce the training, management also needs to reinforce the words of the training with deeds. Ideally, combine the training with other concrete steps aimed at changing the organization’s values, culture, and management systems. Change the bonus plan to incentive plan for managers; to improve their departments’ inter group conflict and employee attitude survey scores.<br />
Evaluate the directly management program: For example, do employee attitude surveys now indicate any improvements in employees’ attitudes towards diversity? <br />
In creating diversity management programs, don’t ignore obvious issues. For example, training immigrants in their native languages can facilitate learning and ensure compliance with matters such as safety rules and harassment policies, and thus ease their entry into your workforce. Supervisor resistance is another issue. One study, in a large British retailer, found that typical diversity prescriptions like “recognize and respond to individual differences” conflicted with the supervisor’s inclinations to treat everyone even handedly.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-77118693208801938462009-11-14T06:55:00.002+05:302009-11-14T06:55:30.221+05:30Social Responsibilty of a FirmSocial responsibility: A firm’s obligation, beyond that required by the law and economics to pursue long term goals that are beneficial to society. <br />
What do we mean when we talk about social, responsibility? It’s a business firm’s obligation, beyond that required by the law and economies, to pursue long term goals that are good for society. Note that this definition assumes that business obeys the law and pursues economic interests. We take as a given that all business firms those that are socially responsible and those that are not will obey all laws that society imposes. Also note that this definition views business as a moral agent. In its effort to do good for society, it must differentiate between right and wrong. <br />
Social obligation: The obligation of a business to meet its economic and legal responsibilities and no more <br />
We can understand social responsibility better if we compare it with two similar concepts: social obligation and social responsiveness. Social obligation is the foundation of a business’ social involvement. A business has fulfilled its social obligation when it meets its economic and legal responsibilities and no more. It does the minimum that the law requires. A firm pursues social goals only to the extent that they contribute to its economic goals. In contrast obligation, both social responsibility and social responsiveness go beyond merely meeting basic economic and legal standards. For example, both might mean respecting the community in which the company operates, treating all employees fairly, respecting the environment supporting career goals and special works needs of women and minorities, or not doing business in countries where human rights violations occur.<br />
Social responsiveness: The ability of a firm to adapt to changing societal conditions. <br />
Social responsibility also adds an ethical imperative to do those things that make society better and not to do those that could make it worse. Social responsiveness refers to the capacity of a firm to adapt to changing societal conditions. Social responsibility requires business to determine what is right or wrong and, thus, seek fundamental ethical truths. Social responsiveness is guided by social norms that can provide managers with a meaningful guide for decision making. <br />
For example, many multinationals and large Indian companies are now making a move towards including differently enabled people on their payrolls. Companies such as HSBC, Sony TV, Essar, Hiranandani Group, Bharti, Prudential and Zenta even attempt to design their infrastructure and facilities to be as user friendly as possible for differently enabled employees, and are making a committed move towards integrating them with the mainstream workforce. <br />
However, as responsible citizens, and future industry leaders, we need to examine whether this is a case of too little, too late. India has an estimated 6 percent of its population as possessing some disability. This figure is a highly conservative estimate, given the narrow definition of “disability” as well as the obvious problems of relying on the census figures in a country like India. Moreover, even going by conservative estimates, this means a population of 6 crores in India finds it a challenge to get through mainstream education, to travel, and to find employment. Corporate India needs to examine whether it is doing enough for this very significant part of our population. <br />
Regardless of one’s own view, whether a manager acts ethically or unethically will depend on several factors. These factors include the individual’s morality, values, personality, and experience; the organization’s culture; and the issue in question. A recent survey, for example, indicated that 82 percent of corporate executives surveyed admitted that they cheat at golf – and 72 percent of them believe that golf and business behaviours are parallel.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-10382615182487720842009-11-11T17:40:00.000+05:302009-11-11T17:40:51.093+05:30Investing in Indian Shares for NRIs - A Guide<b>Portfolio Investment Scheme </b><br />
Portfolio Investment Scheme (PIS) allows NRIs to invest in shares of Indian companies in the secondary market on a repatriation or non-repatriation basis. These must be either shares or convertible debentures sold or purchased through a registered stock broker on a recognized stock exchange. <br />
<b>Investments by NRIs </b><br />
NRIs can invest on either a repatriation or non-repatriation basis using the PIS route for up to 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. This must fall within overall permissible limits and is subject to compliance with RBI (Reserve Bank of India) guidelines, which may change from time to time. Therefore it is wise to be familiar with the overall guidelines and keep up to date on the changes. You may require professional assistance to make sure you comply with the rules. <br />
The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. He cannot trade intra day (i.e. buy and sell on the same day). <br />
<b> <b> On Repatriation basis </b></b><br />
Investments on a repatriation basis must be made using funds sourced from foreign exchange through normal banking channels, or from funds held in NRE*/FCNR* accounts maintained in India. <br />
<b> On Non-repatriation basis </b><br />
Investment in shares purchased on a non-repatriation basis can additionally be made by utilizing funds from NRO* accounts. <br />
Restrictions on Sale/Transfer <br />
Shares purchased by NRIs on the stock exchange under the PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI. <br />
An NRI/OCB (Overseas Corporate Body) can appoint only one designated bank for the purpose of routing the transactions under PINS (Portfolio Investment Scheme is the permission that a NRI requires to trade in the Indian stock market. An NRI can have only one PINS account) <br />
As per recent RBI guidelines, NRI/OCB should have a separate bank account exclusively for PINS purposes. Transactions relating to their personal banking as well as on account of transactions relating to shares acquired other then under PINS, including IPOs, should be routed in a separate bank account not linked to PINS. <br />
The orders need not be placed through the designated bank. However, the reporting of the transaction must be made to the designated bank on the same day of transaction along with the original contract note. The payment and receipt of funds in settlement of such a trade has to be routed through the designated bank account. <br />
<b> Notes on Procedures for opening of PIS Account/ Demat/ Tradin</b>g <br />
Basic KYC (Know Your Customer) requirements are: <br />
- PAN Card (mandatory) <br />
- Overseas Address Proof (DL, Utility Bill and the latest bank statement) <br />
- Indian Address Proof (this would include one or more of: Indian Passport, Driving License, Latest Bank Statement, Ration Card, Utility Bill) <br />
- Passport/ Visa (copy of all the relevant pages) <br />
- Non Citizens require a PIO/OCI** Card <br />
- NRI must provide copy of Power of Attorney given to the Registered Broker for undertaking sale/purchase of shares on his behalf to the designated branch. <br />
Regulations regarding NRI Trading:<br />
• Intra-day trading is not allowed for NRI clients. <br />
• The client must settle his transactions on Delivery Basis, hence has to take delivery of shares & give delivery of shares ( <br />
• Every sale transaction will be credited to client account net of tax. Hence for every sale transaction capital gains will be calculated. Long term capital gains are nil & for short-term a 15% capital gains tax will be charged (For FY08-09). <br />
• TDS (Tax deducted at source) certificates will be issued by the bank and certificate charges will be levied for each sale transaction. <br />
• No set off will be allowed but while filing returns the client can claim set off against the TDS deducted. <br />
• NRI’s have restrictions on buying certain scrips (ie shares) which are daily updated on www.rbi.org.in <br />
• If the client has bought restricted scrip then same will be reversed in the books of the broker & if loss occurred it will be debited to client’s account. Please note that profit will not be passed to client.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-9176945725247016872009-11-05T07:43:00.001+05:302009-11-05T07:44:43.425+05:30DEPRECIATION – A SOURCE OF FUND OR NOT?<b>Arguments in favour of considering it as a source of fund</b><br />
1. Depreciation is considered as an expired cost. It is included within cost of goods sold. It is an allocated cost which is realised when goods / assets are sold. If sale of an asset is considered as a source of fund, depreciation should also be treated as a source of fund.<br />
2. When fund from operations is found out, depreciation is added back with that.<br />
3. Depreciation does not cause any outflow of cash. Naturally, current assets increase; the working capital also increases. If working capital is considered as a fund, depreciation causes its addition. So, it is a source of fund.<br />
<b>Arguments in favour of not considering depreciation as a source of fund</b><br />
1. Depreciation is an expense. No other expense is considered as a source of fund. So, it cannot be the solitary exception.<br />
2. Depreciation may be considered as a recovery of capital cost allocated over years. If depreciation is deemed to flow back into the business that cannot cause any inflow of cash. As such, it is never a source of fund.<br />
3. It is added back with fund from operations because the profits taken there are calculated after deducting depreciation. The subsequent addition compensates for the deduction already made. It is an internal adjustment which does not enhance ‘fund’.<br />
4. A concern suffering from paucity of fund cannot solve that by charging more depreciation. It cannot establish itself as a source of fund.<br />
5. There may be no sale or no profit in a year. Still depreciation has to be matched. In that year it cannot be said that fund has been generated through depreciation.<br />
6. Even if there is a sale of any depreciable asset, that cannot be technically considered as a source of fund. It is the amount recovered against capital outlay. So, depreciation is a tool in the process of recovery of capital.<br />
<b>Conclusion:</b> Depreciation is a process of allocation of cost. It cannot be a source of fund. At best by charging adequate depreciation, the taxable profit may be legally reduced. The tax burden may be reduced. It may help to conserve working capital. It may indirectly regulate the fund position but cannot increase funds.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-60655992198597728342009-11-04T06:50:00.002+05:302009-11-04T06:50:28.495+05:30Experiences and YouIf you will call your troubles experiences, and remember that every experience develops some latent force within you, you will grow vigorous and happy, however adverse your circumstances may seem to be.<br />
- James Russell MilleriDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-59037564958662566472009-11-04T06:49:00.003+05:302009-11-04T06:49:36.299+05:30Fire Walk for employees.- New HR techniqueWith many out of the box initiatives undertaken by organizations to help their employee address issues arising out of stress at the workplace, the latest stress busting measure that HR is resorting to boost morale, say experts, will help ‘ignite’ employees’ true potential quite literally. Walking on fire as an HR initiative, is gaining immense prominence at the workplace. <br />
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions. <br />
Enough has been said and discussed about the ongoing situation and its impact on productivity of employees worldwide. Also, it’s known fact that the current economic situation has thrown a lot of challenges at employers and employees alike. This has led to increased stress levels and added immense pressure on employees for they are expected to deliver more in the presence of less resources. Hence, in an endeavour to address issues arising out of increased stress levels among employees, organizations are leaving no stone unturned to ensure that their employees are able to keep stress at bay and productivity levels high. Amongst the many initiatives undertaken by HR departments across organizations, one very unique and new initiative gaining grounds, is the concepts of making employees ‘walk on fire’ a concept propagated by PS Rathore, a behavioural trainer and philanthropist. Is this for real? Well, it is, say experts and the advantages derived out of this practice promises to have a positive impact on the productivity and efficiency of employees. And hence, in a quest to achieve just that, many companies are encouraging their employees to experience this out of the box concept and derive maximum benefit out of it. <br />
So, what does this entail an employee to do? As the name suggests, it expects the employee to do just that – walk on fire. Fire – walking is the act of walking barefoot over a bed of hot embers or stones. It has a long history in many cultures as a test or proof of faith and is also used in modern motivational seminars and fund-raising events as a self empowering, motivational activity. There is a lot of fear in our minds. The kind of result we obtain depends on the way we think and how we behave. We are empowered with lots of energy and power within ourselves and once we realize that power, every fear fades away and success becomes achievable. Talking about how his organization came up with the idea of getting their employees experience this unique exercise. HR Head saint Gobain says, ‘We had started our new business vertical in India with new product lines. At that time, employees were subjected to a lot of pressure due to added responsibilities they had to shoulder, in a quest to attain superior delivery. It was important to make, employees acquaint with this concept and imbibe in them the need to understand that success, under stressful times, can be achieved through self confidence and persistence’. <br />
This concept is entirely different as opposed to the other forms of stress busting techniques that exist. It is fun filled, interactive and interesting and gives you a sense of tranquillity. Towards the end of the day, one feels more rejuvenated and self-reliant about one’s skills and self. So, how has this initiative helped people fight stress and made them feel more confident about themselves? A few endeavours may seem difficult at the workplace, but when you actually attempt it, you may find them easy. The fire walk too seems to be impossible at the start, but then the misconception gets shattered eventually. Our employees are more confident of themselves now. They have grown more competent and are more interested to work with the best of their efforts to get the best of their output. Individual and company goals seem to run hand in hand in the minds all employees.<br />
We create impossible situations through our mental blocks. This program hammers out those blocks and makes the mind more stable, erases fear and helps take more practical decisions. We can certainly challenge ourselves and break our limits. We need to find out our real potential and the power hidden inside. Once we do it, we can perform well in ways more than one. We make the participants focus and concentrate on the mission are targeting. This requires patience and concentration. On completion of the seminar, the participants gain confidence, patience and become more goal oriented. <br />
The increasing popularity of this concept and says, people keep harbouring guilt about relationships, financial problems, health issues etc. But the fact is that all guilt must be eliminated if we want to realize our true potential. Strong conviction and guilt make uneasy companions. We work for the complete transformation of individuals that includes the acceptance of accountability and responsibility. <br />
So if you feel that stress at work or home is taking is toll on you, go ahead and experience this mind boggling exercise of walking on fire and unleash the power within you.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-18106380706771535232009-11-04T06:46:00.002+05:302009-11-04T06:46:54.396+05:30Leaders in a CrisisGenerally when a crisis looms, a leader needs to quickly understand the situation, risks or problems and reassure key stakeholders that the organizations is taking the right steps to address them. He / she also need to ensure that the organization is prepared for any fallout continues to remain viable and relevant to its key stakeholders and can emerge stronger to take advantage of post crisis opportunities. <br />
In a crisis, many leaders experience fear like everyone else. A focus on short term results is often the way for leaders to ensure their own survival. Such behaviours are also fed and reinforced by the growing demand for quarterly and monthly results and the short three to five year tenures of chief executives. This is where real leaders stand out from the flock who are focused on short term gains and fattening individual payouts. <br />
For a long time; the world has looked to the west for leadership. However, as the US and Europe face a period of economic weakness, the world is looking towards Asia to drive expansion to be sources of consumption, investment, confidence and leadership in the global economy Asia will account for about one third of the world’s trade and money quartered of the world’s gross domestic product by 2020. By 2040, three of the world’s largest countries will be Asia, with the largest being China and India and Japan in the top four. <br />
During a recession, leaders tend to go into protective mode, hunker down and hope over time that the crisis will abate and the situation will go back to normal. Leaders should be prepared to face the crisis and take advantage of uncertainties that are thrown up. Many a times, the best opportunities arise in times of crisis.<br />
Leaders should adapt their strategies to the new reality and not rely solely on what worked in the past. This may mean reinventing themselves and promoting growth and new business in a weak economic climate. This recession is very much a crisis of capitalism and failed leadership especially those of Wall Street leadership seduced by money and recognition. The post-recession business environment needs transformational leaders who can create value over the long term for shareholders, employees and customers. <br />
Organizations have to adapt to the changing business environment in order to excel. Fresh talent hired into the organization is a good source of new ideas and energy. Firms need to have structured ways to imbibe best practices to hone their skills. At the same time, one should not deviate too much from the core policies and practices that are integral to the organization striking a balance is of utmost importance. <br />
In a competitive world, the concept of a futuristic organization cannot be achieved if the foundation itself is built on historic policies and processes that are redundant today. The changing environment and the competitive scenario make it mandatory to continually re-look at policies and processes to achieve desired results from its employees. <br />
Robust policies and practices are recognized as essential components of internal control. It should be made according to the nature or line of business and should be adhered to religiously. Policies and practices are macro terminologies and should be formulated once, for all, but if the dynamics or compositions of businesses keep changing, there is no harm in amending the same to keep pace with the evolving times.<br />
Organizations have to continuously re-look at their processes and policies and bring in innovative policies to retain talent. It becomes all the more important in case of dealing with a generation that wants to grow in their careers at a rapid pace.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-13240313289942870502009-10-26T07:22:00.002+05:302009-10-26T07:22:54.981+05:30FAQ on Mutual FundsIntroduction<br />
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.<br />
With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.<br />
What is a Mutual Fund?<br />
Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.<br />
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.<br />
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.<br />
What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?<br />
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.<br />
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.<br />
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.<br />
All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.<br />
<br />
How is a mutual fund set up?<br />
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.<br />
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.<br />
What is Net Asset Value (NAV) of a scheme?<br />
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).<br />
Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.<br />
What are the different types of mutual fund schemes?<br />
Schemes according to Maturity Period:<br />
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.<br />
Open-ended Fund/ Scheme<br />
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.<br />
Close-ended Fund/ Scheme<br />
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.<br />
Schemes according to Investment Objective:<br />
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:<br />
Growth / Equity Oriented Scheme<br />
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.<br />
Income / Debt Oriented Scheme<br />
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.<br />
Balanced Fund<br />
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.<br />
Money Market or Liquid Fund<br />
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.<br />
Gilt Fund<br />
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.<br />
Index Funds<br />
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.<br />
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.<br />
What are sector specific funds/schemes?<br />
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.<br />
What are Tax Saving Schemes?<br />
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.<br />
What is a Fund of Funds (FoF) scheme?<br />
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.<br />
What is a Load or no-load Fund?<br />
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.<br />
A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.<br />
Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?<br />
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.<br />
What is a sales or repurchase/redemption price?<br />
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.<br />
Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.<br />
What is an assured return scheme?<br />
Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.<br />
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.<br />
Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.<br />
Can a mutual fund change the asset allocation while deploying funds of investors?<br />
Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.<br />
How to invest in a scheme of a mutual fund?<br />
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.<br />
Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.<br />
Can non-resident Indians (NRIs) invest in mutual funds?<br />
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.<br />
How much should one invest in debt or equity oriented schemes?<br />
An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.<br />
How to fill up the application form of a mutual fund scheme?<br />
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.<br />
What should an investor look into an offer document?<br />
An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.<br />
When will the investor get certificate or statement of account after investing in a mutual fund?<br />
Mutual funds are required to despatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.<br />
How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?<br />
According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.<br />
As a unitholder, how much time will it take to receive dividends/repurchase proceeds?<br />
A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.<br />
In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).<br />
Can a mutual fund change the nature of the scheme from the one specified in the offer document?<br />
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.<br />
How will an investor come to know about the changes, if any, which may occur in the mutual fund?<br />
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.<br />
At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.<br />
How to know the performance of a mutual fund scheme?<br />
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place<br />
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.<br />
The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.<br />
Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.<br />
Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.<br />
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.<br />
How to know where the mutual fund scheme has invested money mobilised from the investors?<br />
The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.<br />
The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.<br />
Some of the mutual funds send newsletters to the unitholders on quarterly basis which also contain portfolios of the schemes.<br />
Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?<br />
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.<br />
If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?<br />
Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.<br />
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.<br />
On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.<br />
How to choose a scheme for investment from a number of schemes available?<br />
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.<br />
Are the companies having names like mutual benefit the same as mutual funds schemes?<br />
Investors should not assume some companies having the name "mutual benefit" as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilise funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.<br />
Is the higher net worth of the sponsor a guarantee for better returns?<br />
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.<br />
Where can an investor look out for information on mutual funds?<br />
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors.<br />
Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.<br />
There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.<br />
Can an investor appoint a nominee for his investment in units of a mutual fund?<br />
Yes. The nomination can be made by individuals applying for / holding units on their own behalf singly or jointly. Non-individuals including society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot nominate.<br />
If mutual fund scheme is wound up, what happens to money invested?<br />
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.<br />
How can the investors redress their complaints?<br />
Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors should approach the concerned Mutual Fund / Investor Service Centre of the Mutual Fund with their complaints,<br />
If the complaints remain unresolved, the investors may approach SEBI for facilitating redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with it regularly. Investors may send their complaints to:<br />
<br />
Securities and Exchange Board of India<br />
Office of Investor Assistance and Education (OIAE)<br />
Exchange Plaza, “G” Block, 4th Floor,<br />
Bandra-Kurla Complex,<br />
Bandra (E), Mumbai – 400 051.<br />
Phone: 26598510-13<br />
<br />
What is the procedure for registering a mutual fund with SEBI ?<br />
An applicant proposing to sponsor a mutual fund in India must submit an application in Form A along with a fee of Rs.25,000. The application is examined and once the sponsor satisfies certain conditions such as being in the financial services business and possessing positive net worth for the last five years, having net profit in three out of the last five years and possessing the general reputation of fairness and integrity in all business transactions, it is required to complete the remaining formalities for setting up a mutual fund. These include inter alia, executing the trust deed and investment management agreement, setting up a trustee company/board of trustees comprising two- thirds independent trustees, incorporating the asset management company (AMC), contributing to at least 40% of the net worth of the AMC and appointing a custodian. Upon satisfying these conditions, the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacs For details, see the SEBI (Mutual Funds) Regulations, 1996.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-19347848660448224642009-10-26T07:21:00.000+05:302009-10-26T07:21:00.201+05:30Why Debt Mutual Funds?Debt mutual funds invest in debt instruments like government bonds, fixed deposits and approved private deposits. There are rating agencies that grade the debt instruments. Based on the fund philosophy, the fund manager will choose the instruments with different risks.<br />
<br />
Current income<br />
The debt mutual fund is primarily focused on getting a regular return. The investments of the fund are in deposits/bonds with different maturing tenures and different interest rates. We need to take care to match our time frame for investment to the time frame of these. The current income from these funds will be in the range of 8 to 10 per cent.<br />
Generally, the current income is received format the debt mutual funds in the form of dividend. Hence, this cash flow is tax free in our (investors') hands.<br />
Capital appreciation<br />
Through investing in debt instruments only, there is a possibility for capital appreciation in debt funds. This is a major advantage that we get from investing in mutual funds rather than directly in a bank deposit.<br />
This capital appreciation is possible because debt instruments that mutual funds invest in are market tradable. Thus, when the market interest rates come down as in the current scenario, the debt mutual funds get much higher bond yield.<br />
The average return from the top 15 debt mutual funds in the last one year has been 25.96 per cent.<br />
Risk<br />
When the interest rates go up in the general market, the bond yield comes down, leading to capital erosion when debt instruments are traded. This can lead to very low or even negative returns from debt instruments.<br />
So no financial tool can be said to be risk free. However in the short term, debt instruments are a good place to preserve capital.<br />
Liquidity<br />
Debt funds have high liquidity. They can be converted to cash between 2 to 4 days. The high liquidity and conservation of capital are key benefits for temporary parking of funds. Many companies make use of these features for the cash management of their corporate funds.<br />
Tax treatment<br />
Debt mutual funds like the debt instruments are taxed higher then the equity mutual funds. The short term capital gains are taxed at 20% and the long term capital gains tax is 10%. The tenure for long term capital gains is an investment period of over 1 year (365 days). (Similar to equity mutual funds)<br />
Convenience<br />
Like any mutual fund, the debt mutual fund also gives the 4 conveniences:<br />
Convenience of knowledge<br />
Convenience of time<br />
Convenience of small investments and<br />
Convenience of payment frequency<br />
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Summary<br />
Debt mutual funds score better than the debt instruments directly because of the tax benefits that we get from their dividends compared to interest from the debt instruments.<br />
Preservation of capital is a major advantage that we get from the debt mutual funds. The potential for capital appreciation and higher returns that the traditional debt instrument can be maximised from these funds.<br />
By nature of their investments and the tax treatment, these are for investment for the short term only.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-71288890172725403732009-10-21T19:07:00.000+05:302009-10-21T19:07:01.424+05:30GST in IndiaIndia is a Country of varied traditions and customs; same is the case in its Tax regime structure. Recently the Government has initiated its efforts towards introduction of a new tax regime GST. In this article an attempt has been made to analyze and highlight the key features of GST (Goods and Service Tax). Further an endeavour has been made with the help of this article to bring to light the problems likely to be faced by Central Government in successfully implementing this tax in India.<br />
<br />
What Is GST?<br />
<br />
GST is a part of the proposed tax reforms in India having a broad base that instigate the applicability of an efficient and harmonized consumption tax system. This system is basically structured to simplify current indirect tax system in India. It integrates the union excise duties, customs duties, service tax and state VAT into a single point levy i.e. GST. It may be rightly termed as a national level VAT on goods and services with one of the differences that it also covers Service under its scope.<br />
<br />
Basically, Goods and Service Tax is that tax credit mechanism wherein the tax is levied on goods and services at each point of sale or provision of service. Under this tax regime the seller of goods or the service provider can claim the input credit of tax paid by him (i.e. input GST) for purchasing the goods or procuring the service. Thereafter he can utilize that credit of GST to set off against the amount payable on the supply of goods or services (i.e. output GST). Precisely, it can be termed as a consumption tax collected on the value-addition made in the goods and services at each stage of the supply chain.<br />
<br />
Further the peculiarity of this tax structure is that the end consumer, being the last person in the supply chain, has to bear this tax and so, in many respects, GST may also be referred to as a last-point retail tax. It is basically a tax on final consumption.<br />
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A quick look into the history of GST around the Globe: -<br />
<br />
France was the first country which introduced a comprehensive goods and service tax Regime in 1954. The Goods and Service Tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. The GST rate in various countries ranges from 5 per cent in Taiwan to 25 per cent in Denmark.<br />
<br />
In the late 1980s, the federal government of Canada replaced its MST (Manufacturer’s Sale Tax) with a new value-added sales tax called the Goods and Services Tax (GST). The basic motive behind this reform was to introduce a new nationally harmonized sales tax which would replace individual provincial sales taxes (PST), and both the levels of government would share the revenues generated there from.<br />
<br />
Subsequent negotiations to harmonize the provincial and national sales taxes proved unsuccessful for the Canadian Government. Various provinces challenged the introduction of national sales tax on the ground that the federal government was exceeding its constitutional powers by operating in a taxation field historically reserved for the provinces. But as a result of constructive efforts by the Canadian Government National Sales Tax was implemented in 1989-90.<br />
<br />
In Australia It was introduced by the Howard Government on 1 July 2000, replacing the previous Federal wholesale sales tax system and designed to phase out a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty. This proved a milestone in the taxonomy of Australia.<br />
<br />
Today, it has spread to about 150 countries.<br />
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Seeds of GST in India: -<br />
<br />
The effort to introduce the GST was reflected, for the first time, in Union Budget Speech 2006-07. The then Finance Minister Mr. P. Chidambaram remarked that there is a large consensus that the country must move towards a national level GST that must be shared between the center and the states. He proposed 1 April 2010 as the date for introducing GST. The relevant part of his speech is as under: -<br />
<br />
“It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent. Let me hasten to add that since service tax paid can be credited against service tax payable or excise duty payable, the net impact will be very small.”<br />
<br />
Thereafter the Empowered Committee of State Finance Ministers agreed to work with the Central Government to prepare a roadmap for introducing a national level GST. In May 2007 Empowered Committee (EC) of State Finance Ministers in consultation with the Central Government, constituted a Joint Working Group (JWG), to recommend the GST model. Within 7 months of its constitution that is in November 2007, JWG presented its report on the GST to the EC. The EC has accepted the report on GST submitted by the JWG.<br />
<br />
The JWG of EC laid down various recommendations. A brief list of them is produced as under:<br />
<br />
• The committee suggested that GST must have two components a Central tax and a single uniform state tax across the country;<br />
<br />
• A tax over and above GST may be allowed to be levied by the states on tobacco, petroleum and liquor;<br />
<br />
• The GST may have a quadruple tax structure comprising: -<br />
<br />
• a central tax on goods extending up to the retail level;<br />
• a central service tax;<br />
• a state-VAT on goods, and<br />
• a state-VAT on services.<br />
<br />
• Given the four-fold structure, there may be at least four-rate categories- one for each of the components given above. In this system the taxpayer may be required to calculate tax liability separately for the different rates of tax;<br />
<br />
• The states must tax intra-state services while inter-state services must remain with the Centre.<br />
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• Petroleum products, including crude, high-speed diesel and petrol, may remain outside the ambit of GST.<br />
<br />
• Central cess like education and oil cess may be kept outside the dual GST structure to be introduced from April 2010;<br />
<br />
• The report has also recommended keeping stamp duty, which is a good source of revenue for states, out of the purview of the GST. Stamp duty is levied on transfer of assets like houses and land;<br />
<br />
• It has also suggested keeping levies like the toll tax, environment tax and road tax outside the GST ambit, as these are user charges; and<br />
<br />
• The draft report has recommended that if the levies are in the nature of user chargers and royalty for use of minerals, and then they must be kept out of the purview of the proposed tax.<br />
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In addition to the above mentioned recommendations, one of the major recommendations given by Kelkar Task Force (KTF) was the implementation of a single union GST. It was contradictory to the recommendations given by most of the scholars and that given by the JWG. KTF recommendation may pose a lot of constitutional hurdles as it demands many amendments to the existing articles of our constitution.<br />
<br />
The present rates for service tax and CENVAT, that is most proximate to the global GST rate, and the continuous steps towards phasing out of Central Sales Tax (CST), clearly hints at the endeavor on the part of Government of India towards successful implementation of GST. Its implementation will completely eliminate revenue deficit as per the goals set out in the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). Meeting with the FRBM target, may help in proper introduction of the new tax regime that is GST.<br />
<br />
All these developments in the Indian tax Scenario, is quite evident of the governments incessant effort towards the successful introduction and implementation of the GST regime.<br />
GST and Constitutional discrepancies: -<br />
<br />
Presently, there are parallel systems of indirect taxation at the Central and State levels. Each of the systems needs to be reformed to eventually harmonize them.<br />
<br />
For its implementation the Finance Ministry resorted to a constitutional amendment to allow States to tax services as recommended by the G.C. Srivastava Committee. Earlier G.C. Srivastava Committee on service tax had recommended either bringing services in the concurrent list or allowing States to tax services on the lines of the Central Sales Tax Act. Before the amendment, the power to levy tax on services is not mentioned either in the Union List or State List contained in the Schedule VII of the Constitution. With the then constitutional framework the only option is to invoke entry 97 of the Union List which has been vested with residuary powers to levy any tax not mentioned in the State List or the Concurrent List. The Central Government had invoked the entry 97 and taxed various services. Entry 97 which reads as ‘Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists.’<br />
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The 95th Constitutional Amendment Bill for the inclusion of services for levying service tax has been approved by the Cabinet and passed by both Houses of the Parliament. By this amendment, the Bill proposed to insert a new entry 92C, and a new article 268A to enable the levy by the Union, but collected and appropriated by the States and to frame a law to determine how the proceeds of tax would be shared with the States.<br />
<br />
The Empowered Committee has reached an agreement on the basic structure of GST in keeping with the principle of fiscal federalism enshrined in the Constitution of India.<br />
<br />
Why GST<br />
<br />
When we have VAT in almost the whole country and the system of central excise and service tax is well equipped with the Cenvat credit, then why is there a need of GST? Well, this is needed to match the international phenomenon. It is needed to reduce the burden of Central excise.<br />
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The introduction of GST will certainly change the Federal system of Governance in our country in which states also have the right to collect taxes on goods.<br />
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Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector.<br />
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GST will facilitate seamless credit across the entire supply chain and across all States under a common tax base. The various advantages that will come along with the introduction of GST can be summed up as under: -<br />
• It will boost up economic unification of India;<br />
• It will assist in better conformity and revenue resilience;<br />
• It will evade the cascading effect in Indirect tax regime. For instance, when a paper making company produces registers, the Central Government charges an excise duty on them as they leave the factory. Whereas on the lower end of the supply chain i.e. at the retail level, VAT is charged, without giving credit of the excise duty levied earlier. But in GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.<br />
• It will certainly reduce the tax burden for consumers;<br />
• It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST;<br />
• It will bring uniformity in tax rates with only one or two tax rates across the supply chain;<br />
• It will result in a good administration of tax structure;<br />
• It may broaden the tax base;<br />
• It will increased tax collections due to wide coverage of goods and services; and<br />
• It will result in cost competitiveness of goods and services in Global market.<br />
• It will reduce transaction costs for taxpayers through simplified tax compliance.<br />
• It will result in increased tax collections due to wider tax base and better conformity.<br />
Hurdles in Implementation of GST in India<br />
<br />
Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is not a babyish job. The Constitution of India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post- production levies rest with the states.<br />
The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or entering in the state under various entries of the state list. A harmonised, integrated and full fledged GST calls for the following hurdles in its successful implementation in India:<br />
• Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. In the current scenario it is difficult to visualise constitutional amendments of such far reaching implications going through, more so in view of the fact that sharing of legislative powers is such an essential element of our federal polity and it may be perceived to be a basic feature of the Constitution;<br />
• services have to be appropriately integrated in the tax network;<br />
• One of the other major issue concerned is the appropriate designing and structuring of GST in India. The issues involved includes, how the issue of inter-state movement of goods and services may be addressed, taxes on services originating in one state and being consumed in other state etc.;<br />
• Another contentious issue that is bound to crop up in this regard is the manner of sharing of resources between the Centre and the states and among the states inter se as also the basis of their devolution;<br />
• Finally, apart from all these, there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and services.<br />
Systems of GST<br />
<br />
Internationally, there are three systems:<br />
<br />
(a) Invoice System<br />
(b) Payment System<br />
(c) Hybrid System<br />
<br />
(a) Invoice System: In this type of system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received. Under this system there is no concern whether payment has been made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment is immaterial. In other words we can treat it as mercantile system of accounting.<br />
<br />
The advantage of invoice system is that the input credit can be claimed without making the payment. The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.<br />
<br />
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for when the payment is made. Under this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not. This is similar to the system adopted as regards Service Tax in India.<br />
<br />
The advantage of cash invoice system is that the Tax (output) need not be deposited until the payment for the goods and/or services is received. The disadvantage of the payment system is that the GST (input) cannot be claimed without making the payment.<br />
<br />
<br />
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is accounted for on the basis of payment, if allowed by the law. This system is adopted in some countries around the world. Under this system the dealers have to put their option for this system or for a reversal of this system before adopting the same.<br />
<br />
It always depends on the law of the country, which decides the system of GST to be followed by the dealers.<br />
<br />
Presently, in India the system of sales tax on goods is an invoice system of VAT, whereas the system of Service Tax is a Payment system. Thus, this issue is yet to be unveiled whether the Payment system or Invoice system will be adopted under GST. Moreover it may be stated that Government may issue a Hybrid system wherein the choice of system is left on the dealer himself.<br />
è GST model around the World and in India: -<br />
There are several models of GST, each with its own merit and demerit. A look at some of the models in circulation around the world is as under:<br />
<br />
Australian Model: In Australia GST is a federal tax, collected by the Centre and distributed to the states. But India is a heterogeneous country and there is no chance that states may allow the Centre to collect all the taxes while they become just spending institutions;<br />
<br />
Canadian Model: The GST in Canada is dual between the Centre and the states and has three varieties:<br />
<br />
• Federal GST and provincial retail sales taxes (PST) administered separately - followed by the largest majority;<br />
<br />
• Joint federal and provincial VATs administered federally (Harmonious Sales Tax - HST); and<br />
<br />
• Separate federal and provincial VAT administered provincially (QST) - only for Quebec as it is like a breakaway province.<br />
<br />
Kelkar-Shah Model: This model of a unified GST model, which is based on a grand bargain to merge central excise, service tax and state VAT into one common base. Two different rates of tax are to be levied by the Centre and the states. The collection may be by the Centre. This is like the HST model in Canada;<br />
<br />
Bagchi-Poddar Model: This model, just like Kelker-Shahs, envisages a combination of central excise, service tax and VAT to make it a common base of GST to be levied both by the Centre and the states separately. This means that the Central Excise Act 1944 may be abolished and the goods tax may be only on the sale of goods. It may merge in it the service tax.<br />
<br />
Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both Federal and State or provincial Governments. In India, a dual GST is being proposed wherein a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. The Centre and the State will each legislate, levy and administer the Centre and State GST separately.<br />
<br />
However it was recently indicated by the Government that the tax rates will be triplicate in nature as regards the goods are concerned. Lower rates will be charged on necessary and mass consumed goods and services, on the contrary a higher rate of GST will be charged for goods of luxurious nature and in between the two there will exist a normal rate structure for the goods not falling among the two.<br />
è Various Question which are yet to be unveiled?<br />
<br />
Will GST be levied in addition to the existing taxes?<br />
No, the introduction of GST will replace the various taxes presently being levied by Central & State Government(s). The CGST will subsume following taxes levied by Central government: -<br />
<br />
• Central excise duty (Cenvat),<br />
• Service tax,<br />
• Additional duties of customs;<br />
• Central sales tax<br />
<br />
And SGST will subsume following taxes levied by State Government: -<br />
<br />
• Value-added tax (VAT),<br />
• Entertainment tax,<br />
• Luxury tax,<br />
• Octroi,<br />
• Lottery taxes,<br />
• Electricity duty,<br />
• State surcharges related to supply of goods and services &<br />
• Purchase tax.<br />
<br />
What will be the rate of GST?<br />
<br />
The rate of GST is yet to be announced, and is currently being discussed in length by the Centre and the EC. The rate is expected to be in the range of 14-16 %. Once the total GST rate is determined, the states and the Centre have to agree on the CGST and SGST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.<br />
<br />
Will prices go up after the implementation of GST?<br />
<br />
In fact, the prices of commodities are expected to come down in the long run as dealers will be allowed to avail the CENVAT credit of Excise duty paid by Manufacturers and more over he will be allowed to avail the CENVAT credit of tax paid on services also. This passing of the benefits of reduced tax incidence to consumers by slashing the prices of goods will definitely reduce the prices.<br />
<br />
What are the implications of GST on imports and exports? <br />
Imports would be subject to GST. Exports, however, will be zero-rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded as similar to the present scenario.<br />
<br />
In a GST regime, how and what type of goods and services would be subject to GST?<br />
<br />
All goods and services are subject to GST, unless specifically exempt. Companies providing exempt supply will not be able to recover as input tax of the GST incurred on purchases made.<br />
<br />
The GST incurred will become part of the cost of doing business. It is anticipated that the number of exemptions under the present sales tax regime would be significantly reduced. Goods and services that are subject to GST can be taxed at standard rate, which is at a fixed rate of, for example 5% or 10%, and at zero rate. Zero rating is a concept only found under the GST framework. Suppliers of zero rated supplies do not collect GST because the GST rate is zero. Export of goods is one of the zero rated supplies in many countries under the GST type regime. The following table gives a summary of the types of supply under a GST regime.<br />
<br />
Taxable supply Standard-rated supply GST incurred on purchases is recoverable<br />
Zero-rated supply <br />
Non-taxable supply Exempt supply GST incurred on purchases is NOT recoverable<br />
<br />
Who is required to be registered for GST? <br />
<br />
Under a GST regime, any person who provides supply of taxable goods and services in the course or furtherance of any business will be required to be registered for GST. However it may be possible that the Government may exempt small businesses from the registration requirements. This is to ensure that the low-income group will not be burdened by the implementation of GST. <br />
<br />
It is anticipated that a person who carries on a business of providing taxable supply of goods and services need only be registered for GST purposes if his annual sales turnover reaches a certain threshold. A person who is not registered for GST purpose will not be able to claim the GST incurred on purchases made for the supply of his goods and services. <br />
<br />
Are imported services will be subject to GST? <br />
<br />
Imported services will be subjected to GST by way of a reverse charge. Under the reverse charge mechanism, the recipient of the imported services has to account for the GST on the imported services as if he is providing the services himself. He will then claim the GST accounted for on the imported services as his input tax to be credited against his output tax.<br />
<br />
Conclusion<br />
Before parting and to bring an end to this article we summarize that GST is a harmonized consumption tax system, whose introduction will bring an end to a varied number of Indirect taxes presently being levied by Central Government and State Government. The proposed date of Introduction of GST has been announced by the Government to be 1st April, 2010. Till now Government has not yet issued any Draft of GST model or various provisions to be applied, all we can do is to wait for the Draft to release. Till then we can only predict the outlook of the GST model in India and nothing can be said with utmost certainty.<br />
Further we would bring in light that the Finance Ministers categorical statement in Parliament regarding GST implementation on April 1, 2010 clearly indicates the Governments clear and incessant intention towards bringing this tax regime by its due date. Accordingly, based on indications, as also on the basis of our subsequent interactions with senior Government Officials, we believe that the April 1, 2010 timeline for introduction of the dual GST will be duly met and we must welcome this new levy as this is the future of forthcoming India.<br />
<br />
( Adopted From Internet)iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-73183703375700531192009-10-19T06:48:00.000+05:302009-10-19T06:48:28.273+05:30Happy Diwali 2009With gleam of innumerable lights of Diwali<br />
And the Echo of the Chants<br />
May Happiness and Contentment Fill Your life<br />
Wishing you a very happy and prosperous Diwali!!iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-42153247447170081902009-10-14T07:33:00.002+05:302009-10-14T07:33:21.450+05:30What Determines Oil Prices?What Determines Oil Prices? <br />
by Paul Kosakowski<br />
<br />
With each passing year, oil seems to play an even greater role in the global economy. In the early days, finding oil during a drill was considered somewhat of a nuisance as the intended treasures were normally water or salt. It wasn't until 1857 that the first commercial oil well was drilled in Romania. The U.S. petroleum industry was born two years later with an intentional drilling in Titusville, Pa. <br />
<br />
While much of the early demand for oil was for kerosene and oil lamps, it wasn't until 1901 that the first commercial well capable of mass production was drilled at a site known as Spindletop in southeastern Texas. This site produced more than 10,000 barrels of oil per day, more than all the other oil-producing wells in the U.S. combined. Many would argue that the modern oil era was born that day in 1901, as oil was soon to replace coal as the world's primary fuel source. Oil's use in fuels continues to be the primary factor in making it a high-demand commodity around the globe, but how are prices determined? Read on to find out. (For more, read Oil And Gas Industry Primer.) <br />
<br />
The Determinants of Oil Prices<br />
With oil's stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact. The two primary factors that impact the price of oil are:<br />
<br />
supply and demand <br />
market sentiment <br />
The concept of supply and demand is fairly straightforward. As demand increases (or supply decreases) the price should go up. As demand decreases (or supply increases) the price should go down. Sound simple? (For background reading, see Economics Basics: Demand And Supply.)<br />
<br />
Not quite. The price of oil as we know it is actually set in the oil futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of the transaction on the specified date. <br />
<br />
The following are two types of futures traders: <br />
<br />
hedgers <br />
speculators <br />
An example of a hedger would be an airline buying oil futures to guard against potential rising prices. An example of a speculator would be someone who is just guessing the price direction and has no intention of actually buying the product. According to the Chicago Mercantile Exchange (CME), the majority of futures trading is done by speculators as less than 3% of transactions actually result in the purchaser of a futures contract taking possession of the commodity being traded. <br />
<br />
The other key factor in determining oil prices is sentiment. The mere belief that oil demand will increase dramatically at some point in the future can result in a dramatic increase in oil prices in the present as speculators and hedgers alike snap up oil futures contracts. Of course, the opposite is also true. The mere belief that oil demand will decrease at some point in the future can result in a dramatic decrease in prices in the present as oil futures contracts are sold (possibly sold short as well).<br />
<br />
Additionally, from a historical perspective, there appears to be a possible 29-year (plus or minus one or two years) cycle that governs the behavior of commodity prices in general. Since the beginning of oil's rise as a high-demand commodity in the early 1900s, major peaks in the commodities index have occurred in 1920, 1951 and 1980. Oil peaked with the commodities index in both 1920 and 1980. (Note: there was no real peak in oil in 1951 because it had been moving in a sideways trend since 1948 and continued to do so through 1968.) If this cycle remains valid, many commodities, including oil, may exhibit some downward price pressure during the period 2008 through 2010 , with the next potential top thereafter occurring during the period 2037 thru 2039. It is important to note that supply, demand and sentiment take precedence over cycles because cycles are just guidelines, not rules. (Find out how to invest and protect your investments in this slippery sector in Peak Oil: What To Do When The Well Runs Dry.)<br />
<br />
If one wishes to pursue his or her education of oil beyond this brief introduction, recommended educational material on oil can be obtained directly from OPEC. Information on the oil futures market can be obtained through the CME.<br />
<br />
Conclusion<br />
Unlike most products, oil prices are not determined entirely by supply, demand and market sentiment toward the physical product. Rather, supply, demand and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination. Cyclical trends in the commodities market may also play a role. Regardless of how the price is ultimately determined, based on it's use in fuels and countless consumer goods, it appears that oil will continue to be in high demand for the foreseeable future.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-35893866382528584612009-10-01T07:58:00.001+05:302009-10-01T08:05:39.412+05:30Win / Win situationThe idea is in thyself. The impediment, too, is in thyself.<br />
- Thomas Carlyle<br />
<br />
Win / Win is a frame of mind and heart that constantly seek mutual benefit in all human interaction. Win/Win means that the agreements or solutions are mutually beneficial, mutually satisfying. With a Win / Win solution, all parties feel good about the decision and feel committed to the action plan. Win / Win sees life as a cooperative and not a competitive arena. Most people tend to think in terms of dichotomies:<br />
Strong or weak, win or lose. But that kind of thinking is fundamentally flawed. It is based on power and position rather than on principle. Win / Win is based on the model that there is plenty for everybody, that one person’s success is not achieved at the expenses or exclusion of the success of others. Win / Win is a belief in the Third Alternative. It is not your way or my way; it is a better way, a higher way.<br />
If individuals do not come up with a synergistic solution one that was agreeable to both they can go for an even higher expression of Win / Win or no Deal.<br />
No deal basically means that if we cannot find a solution that would benefit both of us, we agree to disagree agreeably – No Deal. No expectations have been created, no performance contracts established.<br />
We do not take on a particular assignment together because it is obvious that our values or our goals are going in opposite direction. The Win / Win or No Deal approach is most realistic at the beginning of a business relationship or enterprise. In a continuing business relationship, No Deal may not be a viable option, which can create serious problems, especially for family business or businesses that are begun initially on the basis of friendship.<br />
In every Win / Win agreement, the following five elements should be made very explicit:<br />
Desired results: To identify what is to be done and when.<br />
Guidelines: To specify the parameters (principles, policies, etc) within which results are to be accomplished.<br />
Resources: To identify the human, financial, technical, or organizational support available to help accomplish the results.<br />
Accountability: To set up the standards of performance and the time of evaluation.<br />
Consequences: To specify – good and bad, natural and logical – What does and will happen as a result of the evaluation. These five elements give Win / Win agreements a life of their own.<br />
Seek First to Understanding, then to be understood.<br />
This habit, seek first to understand then to be understood is the key to effective interpersonal communication.<br />
Communication is the most important skill in life. People spent years learning how to read, write and speak, but what about listening? What training or education one has that enables him to listen so that he really understands deeply another human being from that individual’s own frame of reference?<br />
Technique alone cannot help in being effective in the habit of interpersonal communication because technique can be sensed as duplicated and manipulated. We typically seek first to be understood. Most people do not listen with the intent to understand, they listen with an intention to reply. They are either speaking or preparing to speak or reading their autobiography into other people’s lives.<br />
To be effective one has to build the skills of emphatic listening (from empathy). Empathic listening is not active listening or reflective listening, which basically involves mimicking what another person says. Empathic listening means listening with an intention to understand to really understand.<br />
Empathic listening gets inside another person’s frame of reference. You look out through it, you see the world the way they see the world, you understand their point of view, you understand how they feel.<br />
Empathic listening is so powerful because it gives you accurate data to work with. Instead of projecting your own autobiography and assuming thoughts, feelings, motives, and interpretation, you are dealing with the reality inside another person’s head and heart. You are listening to understand. You are focused on receiving the deep, communication of another human soul.<br />
The habit, seek first to understand, then to be understood is very critical in reaching win /win solutions. Seeking to understand requires consideration; seeking to be understood takes courage. Win/Win requires a high degree of both.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-61908189928722651512009-09-29T06:37:00.002+05:302009-09-29T06:37:53.943+05:30Ice breakers - Management GamesIce breakers - Management Games<br />
Alphabetic Introductions<br />
<br />
Each participant is asked to choose a letter of the alphabet. Duplicate letters are permitted. They are then given five minutes in which to describe themselves using single words beginning only with that letter. You could award a small prize for the person with the most number of words.<br />
<br />
A further optional stage is to ask participants to write down their chosen words on a sheet of paper with their name at the top and display it on the wall for the duration of the event. Others could be asked later on in the event as to whether the words accurately describe the individual.<br />
<br />
Anagrams<br />
<br />
Make up anagrams of the participants' names and either: display as pairs on a flip chart (for finding pre-allocated partners), or use them on name plates (for pre-arranged seating).<br />
<br />
Back-to-Back<br />
<br />
Ask participants to find a partner and sit on the floor (or on chairs) back-to-back with that person. Now ask them to take turns telling the other person about an event in their life which is particularly significant for them. The partner may respond non-verbally, but not verbally. Allow at least five minutes for each partner. At the end of the activity ask them to<br />
turn and face each other and discuss the activity for five minutes.<br />
<br />
Catch Ball<br />
<br />
Instead of going round the class in order when making introductions etc, throw a ball (preferably a soft one) at one of the students who then does the first introduction. This student then throws the ball to someone else. Challenge the class to complete the introductions without throwing the ball to the same person twice. It's probably a good idea to clear the coffee<br />
cups before starting this exercise.<br />
<br />
Change<br />
<br />
This simple exercise makes people aware of the impact of change and how they feel about it. Ask the participants to fold their arms. Then ask them to fold their arms the other way round. Wait in silence for a few moments before asking them to unfold their arms. Debrief by asking: how difficult it was to fold their arms the other way; what it feels like with their arms folded the other way round; and did they have an urge to unfold or re-fold their arms.<br />
<br />
Chinese Whispers<br />
<br />
The traditional version of Chinese Whispers is to whisper a sentence to the first person in the class, who whispers it to the next person and so on until the last person repeats the message out loud to the rest of the class.<br />
<br />
Typical of the kind of distortion you can get is the classic where: 'Send reinforcements, we're going to advance,' becomes: 'Send three-and-fourpence, we're going to a dance.'<br />
<br />
Debrief the exercise by asking:<br />
<br />
Where did the message get distorted?<br />
<br />
How can we help the communication process? • Big picture • Key points •<br />
Headline • A bit at a time • Look for meaning and connections<br />
<br />
Circulate<br />
<br />
Have the group form two concentric circles with the same number of participants in each circle - the people in inner circle facing outwards and the people in the outer circle facing inwards. The inner circle remains stationary and the outer circle moves one person anticlockwise every 30 seconds. The aim is for everyone to introduce themselves in the shortest<br />
possible time.<br />
<br />
Count the F's<br />
<br />
Hand out copies of the following quote:<br />
<br />
FEATURE FILMS ARE THE RESULT OF YEARS OF SCIENTIFIC STUDY COMBINED WITHTHE EXPERIENCE OF YEARS.<br />
<br />
Ask people to count the number of F's there are in the passage. Very few people will identify all 6 at the first attempt.<br />
<br />
Crash Test<br />
<br />
The objective of this exercise is to design and construct a device that will protect a raw egg from cracking or breaking when it is dropped from a height of 10m or more. The group is given 30 minutes to plan and 15 minutes to construct the device using only the following materials:<br />
<br />
• 12 drinking straws • 2m of masking tape • 1m of string • 1 000 cm2 of tissue paper<br />
<br />
Delegation<br />
<br />
This is an exercise which demonstrates the difficulty of delegating. Just before lunch or the evening meal, divide the group into pairs and ask that everyone delegate the task of getting or ordering their meal to their partner.<br />
<br />
No further communication is allowed between the pair once the task has been set.<br />
<br />
Debrief by asking if anyone got a meal that was close to what theywanted. Ask how the situation might have been improved.<br />
<br />
This exercise works best with a self-service cafeteria and before the group gets used to the cafeteria's layout and menu. This makes the task more complex and involves the 'delgatee' in showing initiative.<br />
<br />
Variations include preventing the use of note taking.<br />
<br />
Describe it!<br />
<br />
This is an exercise which demonstrates the importance of feedback in communication.<br />
<br />
Ask a volunteer to sit with back to class and to describe a drawing that has a number of touching rectangles.<br />
<br />
The class attempts to draw the arrangement of rectangles without giving any feedback or asking any questions.<br />
<br />
Repeat the exercise with another drawing. This time the class is allowed to ask questions and to give feedback.<br />
<br />
Discuss feelings, emotions, results and effects.<br />
<br />
DIY Quiz<br />
<br />
This is a good exercise for warming up a group when you are part way through a course. It's also great for revising course content. Divide the group into two teams. Give the teams a pile of blank cards and challenge them to write as many questions (and answers) as they can, in 15 minutes which cover the course content to date.<br />
<br />
The trainer alternately selects a 'valid' question from one team and directs the question to the other team. The process continues until all 'valid' questions written by both teams have been asked.<br />
<br />
The teams score one point for every question they answer correctly and another point for every one of their questions which is selected as 'valid'by the trainer.<br />
<br />
Floating Cane<br />
<br />
This is an excellent exercise for developing teamwork. First obtain a long bamboo cane or other long, light, small-diameter pole for each group. Line the groups up so that people face each other, then ask one side to take a step sideways to the left so that their eyes are in line with the gap between the shoulders of two opposite participants. Ask them all to put out<br />
their hands palm up and at the same height (about elbow height). When all people have their palms out and lined up, place the cane along their hands.<br />
Let them know that they should keep their hands in contact with the cane, but they shouldn't grasp it. Now ask them to lower the cane down to the ground. The cane always rises. Repeat the exercise until they can achieve the task.<br />
<br />
<br />
Flying Eggs<br />
<br />
Stand the members of the group in a circle, spaced 2m away apart. The objective is for each participant to each throw a raw egg to the next participant until a the egg makes a complete circuit without being dropped.<br />
<br />
Once a circuit has been completed successfully, the participants should move three paces away from the center of the circle and try again. The process is repeated until the group runs out of time or they find it impossible to throw the egg around the circle. 20 points are awarded every time the egg is thrown round an enlarged circle.<br />
<br />
Get Knotted!<br />
<br />
This exercise is best done in a large area - preferably outdoors. Get the group to space themselves along a rope. Say that they should grip the rope tightly and, without removing their hands, tie the rope into a reef knot.<br />
If anyone asks, a reef knot is 'left over right and under; right over left and under'.<br />
<br />
Hangman<br />
<br />
The children's game of hangman can be used as a diversion during a course and for reinforcing terminology that has just been learnt. At its simplest, the trainer selects a word from a list of words that are related to the subject and, on a overhead transparency, draws a number of dashes equal to the number of letters in the word. The participants guess a letter that<br />
might be part of the word. If the letter is part of the word, it is written above the dash or dashes where it occurs. If the guess is incorrect, an element of the hangman diagram is drawn on the transparency. The exercise continues until either the word is guessed or the hangman diagram is completed.<br />
<br />
Magic Carpet<br />
<br />
Provide a length of stair carpet for each group and get the group to stand on it. The objective is to turn the carpet over without any group member touching the floor. 50cm per person in the group should be more than long enough, but you can always use shorter lengths to make the exercise more interesting.<br />
<br />
Mug Shot<br />
<br />
Ask the students to bring either a passport photograph or their identity badges to the course. Display the photographs on the wall along with an identifying letter (the identity badges should have the names taped over). Supply each student with a copy of the course list which has had the names substituted with the identifying letters. The objective of the exercise is<br />
to write the names of the other students against their identifying letters on the course list. This involves matching the people in the room with the photographs on the wall. When approached, people should only give their<br />
name.<br />
<br />
They should not say which photograph is theirs. The worse the photographs,the better this exercise works.<br />
<br />
Paired Interviews<br />
<br />
Some people do not like talking about themselves in front of the class. In this type of introduction the students pair-up with the person they know the least and interview each other. After about 15 minutes each person reports back with a brief biography of their partner.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-41531332996581404972009-09-26T07:22:00.002+05:302009-09-26T07:22:44.511+05:30Debt Recovery Systems In IndiaMost of us and the companies approach Banks and Financial Institutions for loans. The reason for the loan may differ from person to person and company to company. All Banks should function in accordance with the guidelines/norms issued by the Banker’s Bank ‘The Reserve Bank of India’. Subject to the lending norms of Reserve Bank of India, the banks and financial institutions sanction loans for different purposes. Though, the Banks and Financial Institutions can lend money even without security, normally, the Banks and Financial Institutions insist for security for the repayment of loan. The fixed assets, receivables etc. can be securities acceptable to the Banks and Financial Institutions for sanctioning the loans. The loan entitlements, the procedure for sanctioning the loan, the security issues etc., are exclusively governed by the guidelines/norms issued by the Reserve Bank of India. Again, loan, being an agreement or understanding between the Bank and the borrower, the general laws like Law of Contract, Transfer of Property Act, Specific Relief Act, Specific Performance etc., are applicable to all banking transactions depending upon the nature of transaction. The prime objective of Bank is to receive deposits and use those deposits efficiently so as to make money. The Banks will also render certain specific services on behalf of its customers. The Reserve Bank of India will issue guidelines and norms considering the policy of the Government too. Exercising control over flow of money from Banks and Financial Institutions, the Reserve Bank of India promotes the balanced growth. The Reserve Bank of India can contain inflation through certain measures and it is a financial measure to contain inflation as everybody knows.<br />
When a borrower fails to repay the money to the Bank, what the Bank can do for recovering the loan is to file a civil suit earlier. We all know the issue of delay in rendering justice in traditional civil courts and with the inevitable delay, the Banks could not recover its dues effectively and it resulted in liquidity problems. Bank pays interest to the deposit holders; however, the Banks could not make money by using the deposits as the recovery gets delayed frequently. This led the government to appoint various committees for financial sector reforms. The concentration was on effective recovery by the Banks and Financial Institutions apart from other things.<br />
Thus, a need has arisen to constitute special tribunals for recovery of debts by the Banks and Financial Institutions. The Government has enacted a law called “The Recovery of Debts Due to Banks and Financial Institutions Act, 1993” under which Debt Recovery Tribunals were constituted to recover dues by the specified Banks and Financial Institutions. The RDDBI Act, 1993 provides Banks and Financial Institutions to approach the Debt Recovery Tribunal by filing an application for recovering its due. Only when the amount of due qualifies under the Act, the Banks and Financial Institutions could approach the Debt Recovery Tribunals under RDDBI Act, 1993. When the Bank approaches the Tribunal for recovery, then, the Tribunal will look into the claim made by the Bank in accordance with the procedure prescribed under RDDBI Act, 1993 and finally passes an award. The award can be executed by the Bank.<br />
Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBI Act, 1993, the Banks could not recover its dues to the extent expected. This led to further reforms in the process and curtailing the delay in adjudication.<br />
In furtherance of financial reforms and extending the object of RDDBI Act, 1993, the Government has enacted “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”. The SARFAESI Act, 2002 is to curtail the delay in the process of adjudication between the Banks and its borrowers. The question of recovery by the Banks and Financial Institutions will arise when the borrowers commit default in repaying the debt. When there is default, then, the Banks will categorize the account as “Non-performing Asset” in accordance with the norms prescribed by the Reserve Bank of India.<br />
The main difference between RDDBI Act, 1993 and SARFAESI Act, 2002 is as follows:<br />
1. The RDDBI Act, 1993 enables the Bank to approach the Tribunals when the debt exceeds the prescribed limit.<br />
2. Under RDDBI Act, 1993, the Debt Recovery Tribunal will adjudicate the amount due and passes the final award.<br />
3. The SAFAESI Act, 2002 provides a procedure wherein the Bank or Public Financial Institution itself will adjudicate the debt. Only after adjudication by the Bank, the borrower is given right to prefer an appeal to the Tribunal under SARFAESI Act, 2002.<br />
4. The Banks or Financial Institutions can invoke the provisions of SAFAESI Act, 2002 only in respect of secured assets and not all.<br />
Thus, under SARFAESI Act, 2002, the Banks are given powers under section 13 to carryout the adjudication exercise. The procedure is as follows:<br />
a. The Bank or Financial Institution gives a notice under section 13 (2) to the defaulting borrower whose account was categorized as “NPA”.<br />
b. The borrower who receives the notice under section 13 (2), can send his objections to the Bank’s claim within the time limit.<br />
c. The Bank shall consider the objections and however, it need not pass any order after considering the objections. This enables the Bank to correct itself if it is wrong in the process of adjudication. When the Bank feels that the objections are not tenable, then, the Bank can take possession of the secured asset by issuing a notice under section 13 (4). When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession.<br />
d. Steps under section 13 (4), gives the borrower a right to file an appeal to the Debt Recovery Tribunal under section 17 and further appeal to the Debt Recovery Appeal Tribunal under section 18.<br />
e. Not only the borrower, any person who is aggrieved by the action taken by the Bank under section 13 of the Act, can approach the Tribunal in accordance with the procedure.<br />
f. Initially, the SARFAESI Act, 2002 mandates to deposit certain amount before filing an appeal. The SARFAESI Act, 2002 and its validity was under challenge before the Supreme Court and the Hon’ble Supreme Court has upheld the validity of the Act, however, reduced the amount of deposit to be made before filing an Appeal under section 17.<br />
g. The Bank will sell the secured asset if it is not prevented by any order by the Debt Recovery Tribunal or any competent court.<br />
While it all appears to be simple, there is lot of criticism on this SARFAESI Act, 2002. The criticism is that it is being misused by the Banks and Financial Institutions. In the course, we had to consider the following aspects:<br />
a) Whether a borrower can approach the High Court challenging the action taken by the Bank or Financial Institutions under SARFAESI Act, 2002.<br />
b) Whether it is right to say that the provisions are being misused.<br />
c) Whether the Borrowers’ right to protect the wrong doing is secured and effective remedy is provided.<br />
Answering the first issue is very difficult. The High Court exercises extraordinary power under Article 226 of Constitution of India. Again, the courts say that as the alternative remedy is available under the Act itself, the High Court will not have jurisdiction under Article 226 in respect of SARFAESI proceedings. But, it all depends upon the facts and circumstances of the Act and there can’t be any straight answer as to whether the High Court can be approached questioning the action taken by the Banks or the Financial Institutions under SARFAESI Act, 2002.<br />
I have seen many cases and at times, it appears to me that the Act is being misused. But, it can’t be a justification to say that the Act oppresses the borrowers. It’s a special and balancing Act with very good objective and it is to be implemented well. In view of many transactions and issues, the Banks and Financial Institutions may commit some mistakes in the course and it gives rise to the Borrower to approach the Tribunal seeking stay of proceedings etc. What happens normally is that, the borrower gives a request to the Bank seeking to allow him to settle the account under “One Time Settlement Scheme”. Depending upon the norms prescribed by the RBI, the Banks may accept for “One Time Settlement Scheme” or may not.<br />
In many cases, the borrower ignores the Bank notice under section 13 (2) and then, approaches the Tribunal when the Bank takes steps to take possession of the Property and takes step to sell the same. It is not right. When the notice under section 13 (2) is received, then, the borrower has to make detailed objections if any, as otherwise, his appeal under section 17 of the Act may not sustain normally.<br />
<br />
Thus, the borrowers are to be careful when the Bank exercises its powers under SARFAESI Act, 2002 and with the expert guidance and assistance; they can protect their rights effectively.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-12109988841648496762009-09-26T07:21:00.002+05:302009-09-26T07:21:21.194+05:30Importance of DraftingIn order to reduce the delay in courts and in the process of traditional adjudication mechanism, the Alternative Disposal Mechanism (ADR) was mooted. The dispute resolution through Conciliation, Arbitration and Mediation etc., is regarded as alternative mechanism to resolve the disputes between or among the parties in a defined legal relationship. The dispute resolution through Arbitration has occupied great significance in India in the recent past though it was successfully practiced in the developed nations like United States etc. The Arbitration and Conciliation Act, 1996 replacing the earlier act of 1940, governs the issue of dispute resolution through Arbitration. Any dispute arising out of a defined legal relationship can be resolved through Arbitration. In Arbitration Mechanism, the parties themselves will choose the Arbitrator; agree to the procedure for appointment of Arbitrator, the procedure to be followed by Arbitration, the place of Arbitration proceedings etc. It is all meant to provide the parties to resolve their dispute effectively and speedily without burdening the traditional courts.<br />
Now-a-day, in all transactions and the pursuant documents, the Arbitration clause is incorporated mechanically. Admittedly, the Arbitration mechanism is useful for resolving the disputes and it is costly. In commercial transactions, where there is a genuine dispute and where the stakes are very high, the Arbitration mechanism is useful. But, the common man may not benefit much from the Arbitration mechanism as it is costly.<br />
Section 7 of Arbitration and Conciliation Act, 1996 deal with the “Arbitration Agreement” and the same is extracted below:<br />
“7.Arbitration Agreement. – (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.<br />
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.<br />
(3) An Arbitration agreement shall be in writing.<br />
(4) An arbitration agreement is in writing if it is contained in –<br />
(a) a document signed by the parties;<br />
(b) an exchange of letters, telex, telegrams, or other means of telecommunications which provide a record of the agreement; or<br />
(c) an exchange of statements of a claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.<br />
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”<br />
Whether an Arbitration clause will oust the jurisdiction of Company Law Board/Tribunal and the Company Court?<br />
When there was a dispute between the company and other, between the company and its shareholder and between two companies, then, the issue will be complicated and stakes will be huge very often. The parties in a company dispute may require immediate orders having the binding nature. Generally speaking, there is no bar on referring a company dispute to an Arbitrator, but, the question is as to whether the Arbitration clause will oust the jurisdiction of Company Law Board/National Company Law Tribunal or the Company Court. This issue is to be carefully considered as otherwise, the dispute resolution process may get unnecessarily delayed on the basic question of legal sanctity of an Arbitration Clause in Company documents. This is very very significant issue. Company Law is very very complicated by its very nature and the question as to whether an Arbitration Clause will oust the jurisdiction of Company Law Board or the Company Court, is really interesting to consider. <br />
Normally, unless there is a specific bar on the party concerned in providing an arbitration clause, the parties concerned may have an arbitration clause with regard to the contractual relation between or among them or otherwise. But, the arbitration clause may not come in the way of Company Law Board/Tribunal or Company Court in passing various orders exercising powers under the Companies Act, 1956. Because, the process of winding-up a company cannot be handled by Arbitrator. Again, even by agreement, the procedure prescribed for sanctioning a scheme of amalgamation or compromise can not be ignored and it can only be done by the Company Court as provided under the Act. Thus, the question very often comes is as to whether the Arbitration clause in a document or a company document will oust the jurisdiction of Company Law Board or the Company Court. Referring the issue of providing a arbitration clause between the company and members whatsoever and connecting the same to the right of the member/s to file an application under section 397/398 of the Act, the High Court of Delhi, in In the matter of Surendara Kumar Dhawan and another Vs. R.Vir and others, (1977) 47 Com Cases 277, was pleased to observe that “the shareholders of a company have a right to file a petition under section 397 or section 398 of the Companies Act, 1956, for relief against mismanagement or oppression, if the provisions of section 399 are satisfied. Their right is a statutory right which, by section 9, can not be ousted by a provision in the articles of association of the company. Any article providing that a difference between the company and its directors or between the directors themselves or between any members of the company or between the company and any person shall be referred to arbitration can not debar the jurisdiction of the court in the matter of a petition under section 397 or 398. The court will not stay a petition under section 397 and 398 on an application under section 397 or 398 on an application under section 34 of the Arbitration Act, 1940, based on the arbitration clause”. On the same lines, the High Court of Delhi, inO.P.Gupta Vs. Shiv General Fianance (P.) Ltd. and others, (1977) 47 Com Cases 279, was pleased to observe that“merely because there is an article in the articles of association of the company to the effect that any dispute between the company on the one hand and its members on the other will be referred to arbitration, the court will not stay a petition under section 397 and 398 of the Companies Act, 1956, for relief against mismanagement or oppression in the affairs of a company. Such an article can not be called into play for the purpose of staying proceedings under section 397 or section 398. The provisions of sections 397 and 398 and of section 434 give exclusive jurisdiction to the court and the matters dealt with thereby can not be referred to arbitration. No arbitrator can possibly give relief to the petitioner under sections 397 and 398 or pass any order under section 402 or section 403”. Again, on the same lines, it was reiterated by the Bombay High Court, in Manavendra Ckhitnis and another Vs. Leela Chitnis Studios P.Ltd. and others, (1985) 58 Com Cases 113,wherein the court was pleased to observe that “merely because there is an arbitration clause or an arbitration proceeding, or for that matter an award, the court’s jurisdiction under ss.397 and 398 of the Companies Act, 1956, can not stand fettered. On the other hand, the matter which can form the subject-matter of a petition under ss.397 and 398 cannot be the subject-matter of arbitration, for an arbitrator can have no powers such as are conferred on the court by sections such as s.402.”<br />
The reason assigned by the courts as can perceived for saying that the Arbitration Clause will not oust the jurisdiction of Company Court is the requirement of “expertise”. This is very interesting to dealwith. Even in other matters, where there is a special set-up or law, can that subject matter be referred to Arbitration? For example, the Rent Control Law provides for depositing the rent in court, how can that issue be handled by an Arbitrator if the lease agreement between the landlord and the tenant contains an Arbitration Clause and the dispute is referred to arbitrator. These are all the problems we very often encounter when it comes to invoking the law of Arbitration for resolving the disputes. The issue is to be carefully looked into and we need clarity in this regard.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-26136966326509053422009-09-26T07:20:00.002+05:302009-09-26T07:20:22.863+05:30ArbitrationIn order to reduce the delay in courts and in the process of traditional adjudication mechanism, the Alternative Disposal Mechanism (ADR) was mooted. The dispute resolution through Conciliation, Arbitration and Mediation etc., is regarded as alternative mechanism to resolve the disputes between or among the parties in a defined legal relationship. The dispute resolution through Arbitration has occupied great significance in India in the recent past though it was successfully practiced in the developed nations like United States etc. The Arbitration and Conciliation Act, 1996 replacing the earlier act of 1940, governs the issue of dispute resolution through Arbitration. Any dispute arising out of a defined legal relationship can be resolved through Arbitration. In Arbitration Mechanism, the parties themselves will choose the Arbitrator; agree to the procedure for appointment of Arbitrator, the procedure to be followed by Arbitration, the place of Arbitration proceedings etc. It is all meant to provide the parties to resolve their dispute effectively and speedily without burdening the traditional courts.<br />
Now-a-day, in all transactions and the pursuant documents, the Arbitration clause is incorporated mechanically. Admittedly, the Arbitration mechanism is useful for resolving the disputes and it is costly. In commercial transactions, where there is a genuine dispute and where the stakes are very high, the Arbitration mechanism is useful. But, the common man may not benefit much from the Arbitration mechanism as it is costly.<br />
Section 7 of Arbitration and Conciliation Act, 1996 deal with the “Arbitration Agreement” and the same is extracted below:<br />
“7.Arbitration Agreement. – (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.<br />
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.<br />
(3) An Arbitration agreement shall be in writing.<br />
(4) An arbitration agreement is in writing if it is contained in –<br />
(a) a document signed by the parties;<br />
(b) an exchange of letters, telex, telegrams, or other means of telecommunications which provide a record of the agreement; or<br />
(c) an exchange of statements of a claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.<br />
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”<br />
Whether an Arbitration clause will oust the jurisdiction of Company Law Board/Tribunal and the Company Court?<br />
When there was a dispute between the company and other, between the company and its shareholder and between two companies, then, the issue will be complicated and stakes will be huge very often. The parties in a company dispute may require immediate orders having the binding nature. Generally speaking, there is no bar on referring a company dispute to an Arbitrator, but, the question is as to whether the Arbitration clause will oust the jurisdiction of Company Law Board/National Company Law Tribunal or the Company Court. This issue is to be carefully considered as otherwise, the dispute resolution process may get unnecessarily delayed on the basic question of legal sanctity of an Arbitration Clause in Company documents. This is very very significant issue. Company Law is very very complicated by its very nature and the question as to whether an Arbitration Clause will oust the jurisdiction of Company Law Board or the Company Court, is really interesting to consider. <br />
Normally, unless there is a specific bar on the party concerned in providing an arbitration clause, the parties concerned may have an arbitration clause with regard to the contractual relation between or among them or otherwise. But, the arbitration clause may not come in the way of Company Law Board/Tribunal or Company Court in passing various orders exercising powers under the Companies Act, 1956. Because, the process of winding-up a company cannot be handled by Arbitrator. Again, even by agreement, the procedure prescribed for sanctioning a scheme of amalgamation or compromise can not be ignored and it can only be done by the Company Court as provided under the Act. Thus, the question very often comes is as to whether the Arbitration clause in a document or a company document will oust the jurisdiction of Company Law Board or the Company Court. Referring the issue of providing a arbitration clause between the company and members whatsoever and connecting the same to the right of the member/s to file an application under section 397/398 of the Act, the High Court of Delhi, in In the matter of Surendara Kumar Dhawan and another Vs. R.Vir and others, (1977) 47 Com Cases 277, was pleased to observe that “the shareholders of a company have a right to file a petition under section 397 or section 398 of the Companies Act, 1956, for relief against mismanagement or oppression, if the provisions of section 399 are satisfied. Their right is a statutory right which, by section 9, can not be ousted by a provision in the articles of association of the company. Any article providing that a difference between the company and its directors or between the directors themselves or between any members of the company or between the company and any person shall be referred to arbitration can not debar the jurisdiction of the court in the matter of a petition under section 397 or 398. The court will not stay a petition under section 397 and 398 on an application under section 397 or 398 on an application under section 34 of the Arbitration Act, 1940, based on the arbitration clause”. On the same lines, the High Court of Delhi, inO.P.Gupta Vs. Shiv General Fianance (P.) Ltd. and others, (1977) 47 Com Cases 279, was pleased to observe that“merely because there is an article in the articles of association of the company to the effect that any dispute between the company on the one hand and its members on the other will be referred to arbitration, the court will not stay a petition under section 397 and 398 of the Companies Act, 1956, for relief against mismanagement or oppression in the affairs of a company. Such an article can not be called into play for the purpose of staying proceedings under section 397 or section 398. The provisions of sections 397 and 398 and of section 434 give exclusive jurisdiction to the court and the matters dealt with thereby can not be referred to arbitration. No arbitrator can possibly give relief to the petitioner under sections 397 and 398 or pass any order under section 402 or section 403”. Again, on the same lines, it was reiterated by the Bombay High Court, in Manavendra Ckhitnis and another Vs. Leela Chitnis Studios P.Ltd. and others, (1985) 58 Com Cases 113,wherein the court was pleased to observe that “merely because there is an arbitration clause or an arbitration proceeding, or for that matter an award, the court’s jurisdiction under ss.397 and 398 of the Companies Act, 1956, can not stand fettered. On the other hand, the matter which can form the subject-matter of a petition under ss.397 and 398 cannot be the subject-matter of arbitration, for an arbitrator can have no powers such as are conferred on the court by sections such as s.402.”<br />
The reason assigned by the courts as can perceived for saying that the Arbitration Clause will not oust the jurisdiction of Company Court is the requirement of “expertise”. This is very interesting to dealwith. Even in other matters, where there is a special set-up or law, can that subject matter be referred to Arbitration? For example, the Rent Control Law provides for depositing the rent in court, how can that issue be handled by an Arbitrator if the lease agreement between the landlord and the tenant contains an Arbitration Clause and the dispute is referred to arbitrator. These are all the problems we very often encounter when it comes to invoking the law of Arbitration for resolving the disputes. The issue is to be carefully looked into and we need clarity in this regard.iDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0tag:blogger.com,1999:blog-5209970929854541044.post-29306119927660854852008-11-28T06:41:00.000+05:302008-11-28T06:44:18.464+05:30Long and short of capital gains taxHow is capital gains tax applied to bonus, rights offers, open offers and buybacks?And what do you do with capital losses? Here's a ready reckoner. <br /><br /><br />As the old adage goes, 'Nothing is certain but death and taxes'. If stock market investing has caught your fancy, here too, you cannot avoid the taxman. Whether you are busy making money or burning your fingers out in the markets, take time off to comprehend how tax laws treat the gains and losses on your investments. <br />Taxing language <br /><br /><br />'Long' and 'short' in the taxman's parlance have quite a different meaning than when used in the stock market context. To understand how the gains or losses we make on our stocks are taxed, we first need to get a grip on the distinction between long term and short term, in the tax context. <br />Shares are considered short-term assets if held for not more than twelve months. If the holding period exceeds twelve months, it is a long-term capital asset. Knowing this difference is important because the method of calculation of capital gains and the applicable tax rates vary under the two circumstances. <br />A capital gain is the excess of consideration received on transfer, over the cost of acquisition and incidental expenses. As a thumb rule, remember that for the assessment year 2009-10 (FY 2008-09), a short-term capital gain (STCG) from the transfer of shares is taxable at a flat rate of 15 per cent (excluding any surcharge/cess); long-term capital gain (LTCG) is exempt from tax. But this applies only when the transaction takes place through a recognised stock exchange and Securities Transaction Tax (STT) is paid. <br />Buybacks and open offers <br />What if the above conditions are not satisfied? This may happen in such circumstances as the sale of shares through off-market deals, buyback of shares by companies, and open offers or sale of shares of private companies. <br />Choppy market conditions, such as those that prevailed over the past year, have prompted many companies to announce buybacks. These companies may have bought back their shares held with you directly instead of routing it through the stock exchange. In that case, the tax treatment for LTCG and STCG varies. <br />Let's say Anuj holds 1,000 shares of a company, which he bought at Rs 50 per share in June 2008. The company offers to buy back the shares directly at Rs 65 in November 2008 and he accepts the offer. In this case, the difference of Rs 15,000 ( 1000*65 – 1000*50) will be treated as STCG in the hands of Anuj. Since this transaction was not routed through the stock exchange and Anuj did not pay STT, the gain will be added to Anuj's normal income under 'other' heads and taxed at his applicable slab rates.<br />Had Anuj bought these shares in June 2005 instead of June 2008, the holding period would have crossed 12 months by November 2008. Here, the LTCG , unlike in the previous case, is taxable. Income-tax law gives him an option in the method of calculation of gains. <br />He can choose to pay a tax of 20 per cent after indexation of his acquisition cost or pay a tax of 10 per cent without indexation, based on whichever is beneficial to him. With indexation, his cost would be 50,000 * 582/497 = Rs 58,551. (Cost of acquisition * Cost Inflation Index of the year of transfer / Cost Inflation Index of the year of purchase). <br />So, the gains would be Rs 65,000 – Rs 58,551 = Rs 6,449. Tax at 20 per cent will be Rs 1,290. Without indexation, the tax will be 10 per cent of Rs 15,000 = Rs 1,500. In this case, by opting for indexing his cost of acquisition, he saves on taxes. <br />When the acquirer of a company makes an open offer to you as a shareholder, you may be transferring your shares through an investment banker and may not pay STT. In that case too, you may have to shell out short term and long term capital gains tax at different rates than what would be applied to transactions made through the exchange. <br />Bonus, rights issues <br />Ashok holds 500 shares of a company, which he bought at Rs 20 per share. Let's assume he receives a 1:1 bonus from the company. Ashok now holds 1,000 shares altogether. Theoretically, his total cost of acquisition of Rs 10,000 (500 *20) is now spread over 1,000 shares @ Rs 10 per share. <br />However, according to tax laws, the cost of acquisition for bonus shares (although theoretically Rs 10 per share) is to be taken as 'nil' for the bonus shares. Cost of acquisition of the original lot will be the price at which he bought the shares initially.<br />Hence, in the sale of bonus shares, the entire consideration received will be taxed as STCG or as LTCG, as per the rules already discussed. To figure out whether the capital gains are short-term or long-term, the date of the receipt of the bonus is considered.<br />When transferring shares acquired through a rights issue, the cost of acquisition will be the amount actually paid to obtain the right. The holding period will be calculated from the date of allotment of the rights shares. <br />First in, first out <br />Say, you bought 100 shares of Maruti at Rs 725 in June 2008. When the stock price fell further, you bought another 50 shares at Rs 500 at end October 2008. Today, you sell 30 shares at Rs 480. What will be your cost of acquisition? Rs 725 or Rs 500? Enter FIFO — the first in, first out principle. Accordingly, these 30 shares will be considered sold from the lot that first entered your account — 100 shares @ Rs 725 per share. <br />FIFO also ensures that you do not have a choice with respect to selling your bonus shares first. When holding shares in dematerialised form, you cannot 'choose' to sell the bonus shares before your original lot. <br />When a sale happens after a bonus issue, the price of shares sold will be matched with your originally held lot to calculate capital gains; only then will the bonus lot (with nil acquired cost) be taken into account. <br />Well, with the kind of turbulence that the markets have witnessed for nearly a year now, many of us are looking not at the prospect of a capital gain, but at that of a loss. So what are your options? <br />Capital loss <br />Tax laws allow you greater leeway on short term losses, than on long term losses. If you have incurred a short-term capital loss, it can be set off against any STCG or LTCG. <br />If there is no STCG or LTCG in the current year, you can carry forward the loss for a period of eight assessment years immediately succeeding the current assessment year (2009-10), during which you have incurred the loss. <br />A long-term capital loss can be set off only against a LTCG or carried forward (for eight years). <br />If you have incurred a long-term loss on shares which, had it been a gain, would have been exempt from tax, then, this loss has to be ignored and can neither be set off nor carried forward. Otherwise, it can be set off or carried forward and set off against any taxable LTCG.<br />Another point to be noted here is that if you propose to carry forward loss under the head " capital gains", then you must file your return of income showing the loss within the due date for filing the return (July 31 for individuals). If you don't, you will forfeit your right to carry it forward. <br />Courtesy: Parvatha Vardhini C The Hindu Business LineiDEATiONhttp://www.blogger.com/profile/17743742101929736557noreply@blogger.com0