Q&A

Taxing treaty

2011-09-19T03:07:00.000-07:00

What is treaty shopping?
Sinduja Bhojwani, Mumbai
It refers to the practice of foreign investors looking to become the resident of a country, with which the investment destination country has the most favourable Double Taxation Avoidance Agreement (DTAA). The Indo-Mauritius DTAA springs to one's mind at once. US, German, Swiss and French companies first set up a shell company in Mauritius, repatriate capital to these shell companies and from there route their investments into India, thereby becoming residents of Mauritius, and becoming eligible for exemption from capital gains tax in India as well as in Mauritius — an obnoxious feature of the treaty, but the one that foreign investors in India like the most.
Currency convertibility
Why can't I maintain 25 per cent of my savings account balance in US dollars, 25 per cent in Indian rupees, 25 per cent in Euro and the remaining 25 per cent in Swiss francs? My bank manger turned down my request.
Pushpa Natarajan, Chennai
The bank manager was not acting whimsically or on an impulse. His was the right response given the fact that only non-residents and NRIs are allowed to maintain saving bank accounts in India designated in foreign currencies. India has not embraced capital account convertibility fully and it is some distance away. Till then, you have to rein in your well-thought desire to diversify your currency portfolio, so to speak, which, of course, makes eminent practical and economic sense, given the fact that rupee's true worth is now taking a battering, thanks to unrelenting inflation.
Banking business
Why does the RBI want to bar real estate companies and brokers from entering the banking business?
Shruti Mahajan, New Delhi
This is because these are the sectors prone to asset bubble. When the Real Estate sector is awash with funds, it results in artificially high valuations for houses. This is true for the stock market. The RBI has rightly opined that if any promoter has even a 10 per cent interest in these sectors, he would invite disqualification. But this country has witnessed several labyrinthine and crooked versions of diversion of funds, and one suspects that despite the sound safeguard, there is no guarantee that wily promoters of banks would not be able to find ways and means to channelise funds into these sectors through subterfuges.

Royalties and profits

2011-08-29T02:10:00.000-07:00

What is the difference between royalty and share of profits?
Padmapriya, Chennai
Royalty is paid with reference to production or sales — Rs 5 per unit or 1 per cent of sale etc. It is generally paid for the user of intellectual property rights belonging to someone else, such as trademark, patent etc. Share of profits, on the other hand, is conditional and based upon profits. The one agreeing to take a share of profits is more intimately involved in the running of an enterprise and is a risk taker at that, but the supplier of technology, who has no financial stakes in an enterprise, usually settles for less alluring, but steady and sure royalties.
Mutual fund taxes
Why is it that dividend to corporates handed out by mutual funds attract a 30 per cent distribution tax, whereas in the case of individuals and HUFs it attracts only 12.5 per cent tax?
Ramya Gopalakrishnan, Coimbatore
With the years, the government has been viewing with growing dismay the steady hijacking of mutual fund investments by corporates and high net worth individuals, whereas it was essentially meant for the common man, the one with very little financial literacy, who ought not be exposed to the vagaries and volatilities of the stock market. The government found that the benign tax regime for mutual funds was the major reason for corporates warming up to mutual fund investments. A 30 per cent tax corresponds to the corporate rate of tax, and should dissuade corporates from seeking the mutual fund route. At the other end of the spectrum, a soft tax of 12.5 per cent on dividend paid to individuals and HUFs by mutual funds, besides liquid and money market funds, would serve to promote equity cult amongst the middle class.
Golden shares
What is a golden share?
Jim Rodrigues, Panaji
It was an instrument pioneered by the Margaret Thatcher government in the UK, on the eve of disinvestment. A golden share in the hands of the government vested it with the right to veto any proposal of significance, so that the new private promoter does not run amok and ride roughshod over public interests by assets stripping etc.

Economic stagflation

2011-08-17T02:59:00.000-07:00

What is liquidity trap, a term doing the rounds in the context of the crisis in the US and Euro zone?
Prabhat Khandelwal, Jodhpur
It is a situation where there is ample liquidity in the system but no investments in productive assets are forthcoming. This may be due to a variety of reasons. Investor confidence might have reached a plateau. Imports from abroad might stymie domestic investments. These precisely are in evidence in the US. The system is awash in dollars, yet domestic investments and employment are not improving. Liquidity trap is a caution to the pump-priming enthusiasts. There is a limit to which increasing the liquidity can tone up the moribund economy. The resultant improvement in purchasing power might actually be fuelling inflation, thus giving rise to economic bugbear — stagflation — inflation without increase in production capacities.
Currency union
What exactly is the root cause of the problem in the European region?
Santosh Rane, Pune
In my mind, the root cause is the incomplete nature of the union. You have the European Central Bank, whose writ runs all over the union. Thus its remit is to make the monetary policy for the entire European Union. But the fiscal policies are in the hands of the individual nations. This was a clear recipe for disaster. With nations pursuing their own economic agendas on the back of independent fiscal, manufacturing and labour policies, the power keg was waiting to explode. Laggards took it easy, counting on a bailout from better performers. Germany is actually ruing its decision to have spearheaded the union.

Company shares

2011-08-12T03:17:00.000-07:00

Isn't it unethical for a company to trade in its own shares? How then does the Company Law in India permit it?
Shyamal Chatterjee, Durgapur
Share capital, historically, was held too sacrosanct to be trifled with, but the financial engineers in the US couldn't restrain themselves. They went overboard, and the result was legislation that not only permitted purchase of a company's shares by the company itself, but also allowed the company to keep them on its portfolio for buying and selling in a cycle of investment activities. This is insider trading at its worst. The UK government showed some restraint and its law mandates that the shares bought back must be cancelled forthwith. This is a lesser evil and India hasfollowed the UK model.
Medical tourism
Isn't the Indian medical tourism success story more a reflection on the economics of treatment here rather than its quality?
Bhargav Rajan, Gainesville, Florida
I think that would be uncharitable, because medical treatment is too serious a matter to be frugal with, even if one is in dire straits financially. It is true that the cost of a surgery in India is way below what it takes in the US, for example, especially if one is underinsured, but that isn't the only reason why Americans are making a beeline to Indian hospitals. Despite the negative campaign, discerning people see both savings and quality medical care in Indian private hospitals.
What is the idea behind the Swiss auction model?
Manish Chowdhry, Gurgaon
The idea is to encourage a project which would cater to the larger public good, like an expressway or a causeway above a large water body. The originator of the proposal is not awarded the project straightaway but is asked to wait till others interested offer better terms. The originator is allowed to have the last laugh by being entitled, in his capacity as the originator, to the privilege of doing away with the competition by initially padding up his quotation and bringing it down in a manner of double-take. This is why critics aver that the model encourages crony capitalism.

Investing abroad

2011-08-03T03:07:00.000-07:00

Can I invest in shares and units of mutual funds abroad?
Ramesh Anavekar, email
The RBI has been ushering in capital account convertibility in a calibrated manner during the past few years. An Indian resident is now allowed to invest upto 2 lakh dollars abroad under the automatic route, which means one can do these transactions straightaway through his / her Indian banker(s). This includes shares and units of mutual funds abroad. The right to invest, thus, impliedly, also includes the right to open a savings account abroad for quick and easy consummation of transactions. But I suggest you take a second opinion on this aspect.
Foreign retailers
I understand the government has at last agreed to FDI in retail. Is this correct?
Mehak Ahuja, Amritsar
It isn't quite. It is only at the secretaries' level that the decision has been taken. The Cabinet has to ratify the proposal mooted by the committee of secretaries. The committee has been guarded in its proposal — Foreign Direct Investment (FDI) in retail is to be allowed only in cities with a population of more than a million. That makes 36 in our country. Anyway, if approved, it would be a good beginning with better supply chain management and extensive use of cold storage, resulting in all-round economies to the nation. Besides, it would also make for a better shopping experience. But the moot question is how the foreign retailers could afford land so crucial for a sprawling retail store, given the fact that in most of the cities, land is scarce and, therefore, their prices are skyrocketing.
Subsidiary chains
Why is the Companies Bill, 2009, against the idea of subsidiaries?
Ratan Gupta, Agra
It isn't really opposed to the idea as such, but wants to contain the process of subsidiaries in turn spawning subsidiaries, befuddling the identity of true ownership. Thus it would be fine for company A to spawn company B but it wouldn't be alright for company B in turn to spawn C. Chain or pyramid holdings has been the bane of this country and investigators are often stymied in their work while setting out to investigate the true ownership of a company, as it happened in the recent IPL controversy. Many teams' ownerships are caught in a web of complicated holdings with the strings ultimately being controlled from a distant tax haven.

Income-tax liability

2011-07-26T01:33:00.000-07:00

I am a senior citizen. My sources of income are my annual pension of Rs 2,70,730 ( tax deducted at source amounts to Rs 3,170), agriculture income of Rs 60,000 and an income of Rs.25,000/ month since August 2011 with a total deduction of tax at source of Rs 1,968 from leasing my car to a company. What is my tax liability?
G Venkateshwer Rao, e-mail
Your income from salary is Rs 2, 70,730 and from other sources are agricultural income Rs 60,000 (added only for rate purposes) and car rental Rs 2, 00,000 . The total income is Rs 5, 30,730. The tax on this works out to Rs 32, 146 considering your senior citizen status. But since this includes agricultural income of Rs 60,000, you get the following rebate- tax on Rs 2,40,000 + Rs 60,000 i.e. Rs 6,000. Thus your net tax liability is Rs 26, 146 plus a surcharge of 3 per cent. The total tax due from you is Rs 26, 930. Since you have already paid tax by way of TDS (Rs 3,170 and Rs 1,968), you need to pay only the balance. Pay this together with the applicable interest for the short fall in payment of advance tax as well as for the interest on the balance of the tax due from you. Since the calculations especially of interest are slightly involved, take the help of a chartered accountant.
Timing the market
What is timing the market?
Soumya Sachdev, New Delhi
It is a utopian situation, when a person buys at the rock bottom price and sells at the peak in a stock market. Even for the best chart buster, it is a near impossible task. What one can, however, do is to buy when the market is down and sell when the market is peaking. It is wrong to sit on one's investments. One must book his profits periodically.
Equity investments
Should I start my investments in equity in the cash segment or in the F&O segment?
Priya Godbole, Sholapur
For the first-time investor not well-versed in the nuances of equity, the one who is likely to slip on the slippery surface of share market, the best beginning is through the primary market i.e. IPOs.
The alternative is to invest through mutual funds that have expertise and experience besides infrastructure in investments.

Income-tax liability

2011-07-22T03:27:00.000-07:00

Timing the market
What is timing the market?
Soumya Sachdev, New Delhi
It is a utopian situation, when a person buys at the rock bottom price and sells at the peak in a stock market. Even for the best chart buster, it is a near impossible task. What one can, however, do is to buy when the market is down and sell when the market is peaking. It is wrong to sit on one's investments. One must book his profits periodically.

Equity investments
Should I start my investments in equity in the cash segment or in the F&O segment?
Priya Godbole, Sholapur
For the first-time investor not well-versed in the nuances of equity, the one who is likely to slip on the slippery surface of share market, the best beginning is through the primary market i.e. IPOs.
The alternative is to invest through mutual funds that have expertise and experience besides infrastructure in investments.

Thin edge of the wedge

2011-07-20T02:09:00.000-07:00

I fail to understand why National Stock Exchange has been punished so severely by waiving off charges for currency futures trading.
Dharam Pal Tokas, Gurgaon
Competition laws the world over frown on predatory pricing perceived to be anti-competitive. Predatory pricing includes fee waiver. Apparently, predatory pricing may appear to benefit customers, but could well be the thin edge of the wedge which is why it is perceived to be anti-competitive. You must have heard introductory offers. The rationale is the same —hooking the customers by making the services availed of indispensable.

Walmart strategy
In the USA, Walmart follows a policy of allowing ungrudging refunds for sales returns. How does it sustain this?
Roshan Tulzapurkar, Mumbai
It is a marketing strategy, the one designed to win the goodwill of the customers and woo new ones. WalmMart not only accepts returns but also refunds the current price even if higher. It does not lose out much in the bargain because it in turn passes the buck up the supply chain. The vendors do not complain either because they would not like to alienate a power house like Walmart which gives huge volume business to them.

E-filing tax returns
The due date for filing income tax return is round the corner. What are the pros and cons of filing online?
Shantanu Bhonsle, Thane
The chief merit is the ease of filing which is always the case with structured computer software. No computation mistakes are likely with the calculator built into the system taking care of this. Returns are processed faster and refunds, if any, granted quickly. But the downside is the TDS part. There is sometimes a huge discrepancy between the TDS certificates in hand and what the system shows thanks to the lag between feeding of data into the system which could result in lesser credit for TDS than warranted. In fact, individuals wanting to file online are disenchanted by this and plump for manual filing.

Wealth tax liability

2011-06-21T02:09:00.000-07:00

Why is wealth tax payable only on six types of assets and not on others?
Jayanto Chatterjee, Kolkata
This was not so till 1992 when the Direct Taxes Reforms committee headed by Dr Raja Chelliah recommended that wealth tax better be abolished in view of its woefully low contribution to the exchequer; but if it is sought to be persisted with, it should be only unproductive assets. Its choice of unproductive assets has been controversial. Motor cars irrespective of their size are included and so are houses irrespective of their size. Paintings and race horses, often the symbols of the rich, are conspicuous by their absence. The draft Direct Taxes Code did the right thing by seeking to revert to the old law of taxing all assets, but the final version before Parliament has plumped for the status quo even though it has enlarged the list with some inconsequential items such as imported watches! Shares are another conspicuous omission.
Inheritance tax
Why India does not have inheritance tax ?
Jayanto Chatterjee, Kolkata
Estate Duty Act has been in a suspended animation for more than three decades now. Almost all the States in the US have some sort of inheritance tax with the maximum marginal rate in a few States creeping up to a frightening 55 per cent, goading industrialists and tycoons to morph into philanthropists! In India, in the absence of estate duty or its variant inheritance tax, a Will becomes the central plank of estate planning, especially when its author has considerable self-acquired properties to bequeath. There is, indeed, a case for reviving estate duty law sans its complications. There is nothing wrong in the government mobilising funds from the estates of the super rich though it should not yield to the temptation of making the sad event a happy occasion for confiscation which a 55-per-cent tax certainly would be.

RBI move on foreign banks

2011-06-16T03:36:00.000-07:00

Why is the Reserve Bank of India insisting that foreign banks operating in India must function not as branches, but as units of a subsidiary registered in India?
Ratnakar Pandey, Allahabad
The RBI perhaps has taken a cue from its insurance counterpart, the IRDA which right from the inception has been steadfast in its belief that foreign insurance companies can operate in India only through their subsidiary companies in India. The reasons are not far to seek. A branch does not lend itself to control as much as an Indian subsidiary. The branch manager is not one of the directors who can be held accountable. In case of subsidiaries its directors can be directly held accountable should something were to go wrong. Moreover, a subsidiary has to prepare and submit accounts of its Indian operations whereas branches at best submit individual balance sheets. What the RBI proposes to do is what it should have done long ago. A possible downside of this move could be a foreign bank would draw a Chinese wall between its Indian and global operations so as to wash its hands off huge liabilities whereas a branch can always dip into the reserves of the global balance sheet.
Accounting for NPAs
Why are banks allowed to set off their bad debts against their income ?
Manju Taneja, New Delhi
This was the norm earlier which was latched onto with alacrity by adverse publicity-shy banksAny disclosure of bad debts would have an adverse impact on a bank's credibility with its customers and hence this leeway. But regulators and accounting standard setters realised the futility of this protection in the current milieu of transparency and maximum disclosures. State Bank of India's profits took a hit thanks to its provisioning going back to the past and it has made no bones about it. Banks cannot be allowed to opaque on bad debts given the fact that apart from the depositors, many have another important constituency to address - shareholders.

‘Strip'ping interest in bond market

2011-06-10T02:54:00.000-07:00

What are STRIPs in the bond market?
Alka Pandey, Noida
It is another product of the US financial innovation. The value of a bond in the market depends mainly upon the coupon rate of interest vis-à-vis the prevailing rate of interest for a similar maturity. Any reduction in the prevailing interest rate for similar maturity vis-à-vis the coupon rate pushes up the valuation and vice-versa. Enter STRIPs and it can distort this picture because a bond is stripped of its interest and the principaland the interest components are traded separately. Obviously the principal component would languish and, if anything, trade at a steep discount - the longer the maturity, the steeper the discount. A bond is valued in the market mainly on the touchstone of the interest rate and if it's denuded of interest, all trading interest vanishes except when the needy ones infuse interest in the dormant market.
Insurance benefits
Which one is more needed, life or health insurance?
Shah Alam Khan, Moradabad
For a bachelor with no dependents, life insurance is not required at all. On the contrary, he would certainly feel the need for a health cover sooner than later in his life, especially when the middle age blues shake him upHealth insurance is a must for everybody unless of course his employer undertakes this burden. But even an employee who enjoys health protection from his employer would be advised to have his own cover just in case he leaves his job or loses it.
Full-time directors
Should all directors of a company be full-time? Part-time directors invoke visions of laid- back luxuriating.
Adam Malik, Mumbai
This is the reaction of many people to the idea of independent or part-time directors. They attend board meetings but are not hands-on whereas an executive director tends to know the ins and outs of the company and its external environs in view of his day-today and closer association with the company. But then the accent on independent directors by regulators all over the world including in India is for a different reason - to function as a spring board for ideas for execution by the executive directors and to rein in on their vaulting ambitions. Independent directors often bring considerable domain expertise to the table for the company to profit from. There is a need for an ideal blend of independent and executive directors on boards of companies.
Asset stripping
What is asset stripping?
Rajat Aggarwal, Gwalior
It refers to the rapacious practice of acquiring a company or business not enamoured by its business possibilities but by its assets. A prime land could be owned by a company and this could be coveted by an acquirer. The M&A saga is replete with instances of acquirers having no abiding interest in the basic business of the target company, with their interest being confined to biding the time for disposal of the asset. The income-tax law allows the right to carry forward the losses of the amalgamating company only when the amalgamated company refrains from asset stripping for the prescribed number of years and restores the production capacity of the unit taken over within the prescribed time.

Differential voting rights

2011-05-19T02:43:00.000-07:00

Why is the Companies Bill 2009 conspicuously silent about shares with differential voting rights?
Shreelatha Namboodhri, Kottakal
Shares with differential voting rights were permitted for the first by the amendment Act of 2000. But it has turned out to be a damp squib with just two companies, Tata Motors and Pantaloon, evincing interest in it.
The genesis of shares with differential voting rights is rooted in the reality that shareholders other than promoters are hardly interested in voting rights; instead they are focused on their economic rights such as dividend and bonus issues.
Given this proclivity, it was thought that small shareholders will settle for lesser voting rights in lieu of a small hike in dividend vis-a-vis shares carrying full voting rights. But soon it was realised that a share becomes a hot commodity when a raider sets his sights on a company.
And a raider obviously is more interested in shares with full voting rights because he is not in for a passive stay in the company he is seeking to buy into.
The market regulator was right in realising that shares with lesser voting rights effectively, if unwittingly ,belittle the small shareholders when a takeover battle is raging. Hence the rethink in the Ministry of Corporate Affairs.
An apparent omission
When an individual transfers his or her assets to his or her daughter-in-law without adequate consideration, the income therefrom bounces back to the donor. Why doesn't this law apply to gifts to sons-in-law?
Jenny Fernandez, Panaji
Feminists have often wondered with a sense of injured innocence at this seeming omission. But the truth is the government is aware of the Indian social realities in this regard.
While the daughter-in-law, especially the one with no income or little income, can be roped in as an ally in tax evasion, the groom cannot be. In-laws may not mind this seeming imposition especially if they are past their eighties now that the government has opened its purse strings to very senior citizens.
Proxies at AGM
Why are proxies not allowed to speak at the general meetings of companies?
Pushpendra Tiwari, Nainital
Filibustering is the nightmare of chairpersons of companies and speakers of legislatures. It means speakers hogging the mike for a sustained period of time with a view to obstructing legislative business. Much the same was apprehended in company meetings if proxies are allowed to hold forth. But this can be easily overcome.
All that a professional speaker has to do is to acquire a single share of the company thus becoming its full-fledged member who in any case is allowed to speak even if he represents others as a proxy. The point is a rival intent on disrupting the proceedings can well have his way by vesting the intended proxy with privileges of a full-fledged member.
Copyright and patent
What is the difference between copyright and patent?
Bhaskar Ghosh, Kolkata
Copyright is available to authors and painters among others whereas a patent is essentially a protection for inventors.
An author would not be worse off even if he is not careful in getting his rights registered whereas non-patenting of an invention before a rival steals a march could be suicidal to an inventor's economic interests. But a copyright is qualitatively inferior to a patent right in that anyone can do the same work in a different form.
In other words, copyright extends to form, and not to an idea whereas the patent is all about an idea which cannot be replicated by others if patented.
Thus I cannot produce a drug in India through a different process if it is patented in India by a drug company from anywhere in the world but I can import all the ideas of the Nobel laureate, Prof Samuelson, were I to write a book on economics so long as I do not substantially imitate the form of his book.

IFRS convergence

2011-05-19T02:41:00.000-07:00

Why we in India are modifying IFRS as IND-AS?Does not that mean we are not at all converging to the IFRS and Indian companies may not be able to raise money from outside Indian markets?
Kiran Kumar Komaravolu, e-mail
While it would be ideal for every company in every country to conform to IFRS across the board without any exception whatsoever so as to make for uniformity that facilitates comparison and consistency, IFRS itself is not a perfect set of accounting standards.
Its accent on fair valuation as panacea for all valuation problems, for example, is meeting with resistance from knowledgeable quarters including in India.
As for mobilising funds from abroad, the Ministry of Corporate Affairs has made convergence mandatory for companies that raise money from abroad.
Wrong PAN number
I have a fixed deposit with a bank. I have given a photostat copy of my pan number. When I got Form 16 A. I found that there was mistake. The bank has deducted TDS but deposited in wrong PAN number. What will happen with the TDS which bank has already deducted.
Rattan Lal, Phagwara
The onus is on the bank to rectify the mistake not only by issuing a fresh certificate to you, but also by rectifying its returns with the department because these returns become the basis of the information contained in Tax Information Network (TIN) maintained by NSDL for the tax administration.
Special Drawing Rights
What are Special Drawing Rights?
Shreya Vasudevan, Chennai
Special Drawing Rights are not a currency as such. The IMF uses it as an expedient in settling the inter-se accounts of member-nations. In other words, it is a currency not at the universal level, but at the levels of governments for inter-country transactions.
But it hasn't been a great hit with member-nations. It is based on the weighted average of quotations for the dollar, Euro, Yen and Pound - the four leading floating currencies of the world. There is a move afoot to include the Chinese Yuan as well.
In international financial markets, one needs an actual currency to settle transactions and not a nebulous idea of amalgam of currencies.

Gold standard

2011-05-11T01:52:00.000-07:00

What is wrong with the idea of gold standard?
Kumud Mittal, New Delhi
Nothing except that it simply is not feasible. In its pristine form, gold standard started off as gold specie standard under which currencies were minted in gold.
Then there was a migration to gold bullion standard in which paper currencies were backed by gold with central banks prepared to give the promised gold represented by the paper currency on demand.
Gold standard resulted in jockeying for gold and plundering of gold-rich nations, especially South Africa. In any case it worked against nations that either were not blessed by nature with huge gold reserves or lacked the acquisitive zeal. It would in addition be unfair to nations that are rich in other minerals, say oil.
But those pining for the return of gold standard do have limited point - today no currency is under gold standard or for that matter under any standard at all so much so that currencies are printed with gay abandon in the absence of any restraint.
Of course, countries mindful of financial prudence do not do so; but the US dollar itself is not backed by any assets.
Reverse engineering
What is reverse engineering, a term used in the discussions on patent?
K.S. Panchapakesan, Mannargudi
It is less heard now in India specially after 2005 when India agreed to amend its patent law to forbid cloning of patented products through reverse engineering under a convenient arrangement called process patent. Process patent gave a leg up to reverse engineering, a euphemism for plain copying. On the contrary, a product patent brooks no exception whatsoever.
A product enjoying patent protection cannot be manufactured by other without licence from the patent holder even through a different process.
The western drug firms were upset with India for encouraging cheap medicine substitutes through process patents. But that is no longer possible now. Generic drugs can be manufactured cheaply after they come out of patent i.e. once they become off patent.

Options contract

2011-04-26T01:56:00.000-07:00

What is in-money and what is out-of-money in an options contract?
Satya Sheel, Meerut
Suppose you buy a call option that gives you the right to buy a share at Rs 1,000 after a month by paying an option fee of Rs 5. And after a month the quotation for the share is Rs 1,010. You are in the money.
Suppose you had bought a put option that gives you the right to sell a share at Rs 1,000 after a month by paying an option fee of Rs 5, and after a month the share quotes at Rs 990.
Again you are in the money. In-the-money means an option the exercise of which leaves some money on the table for the buyer of the option.
In the first case, you can buy at the strike price of Rs 1,000 and sell in the cash segment for Rs 1010 and in the second case you can buy the share in the cash segment for Rs 990 and sell at the strike price of Rs 1,000.
In both the cases, you are in the money. Of course the option fee has to be factored in while computing the overall profit. Out-of-money means when you stand to incur a loss by exercising the option.

Exchange-traded product

2011-04-26T01:55:00.001-07:00

I am a B.Com student. Tell me why an exchange traded product is supposed to be superior to a product traded over the counter.
Sidanshu Gupta, Ghaziabad
A forward contract is between a party and his counter-party and hence bilateral in nature. That is why it is called an OTC. The advantages of an OTC has more than neutralised by disadvantages. Flexibility is the key advantage which an ETP naturally lacks owing to its very nature -standardisation.
In fact, the hallmark of OTC is customisation, the opposite of standardisation. A customised contract naturally gives a lot of scope for flexibility in terms of size and duration. But on the flip side, it also exposes one to the danger of counter-party risks. What if the counter-party reneges on the contract? It is here that ETP scores over OTC.
The exchange acts as the counter-party to both the buyer and the seller in the futures market, freeing both of the anxiety of counter-party risks. The downside is futures contracts being ETP is standardisation.
For example, the future contracts for rupee-dollar have a standard size of $ 1,000 necessitating several such contracts to be bought in case the exchange risk sought to be covered runs into millions of dollars. But the disadvantages are actually more in terms of inconvenience, and not substantive.

Gold ETFs offer many pluses

2011-04-18T03:25:00.000-07:00

What are the advantages of investing in the gold exchange traded funds? Mallika Mukherjee, Burdwan There are several advantages and practically no disadvantages at all which is surprising given the fact any system or regime would have a flip side as well. Owning physical gold is fraught with many dangers including the fear of robbery and loss of value due to the rapacity of the jeweller who polishes off a gram or two out of every ten grams on some specious ground or the other including wastage.

Rationale for export sops

2011-04-05T03:33:00.000-07:00

Rationale for export sops

Why are exports spared the tax-burden? Manisha Pant, Nainital Currently not all exports are tax-free. Exports from Special Economic Zones (SEZ) alone are income tax-free for 15 years, with full exemption in the first five and 50 per cent in the remaining ten years. Of course, all indirect taxes are either reimbursed on exports or waived.

FCCB redemption premium

2011-03-23T02:16:00.001-07:00

What is redemption premium in the context of FCCB?
Riddhi Bhatt, e-mail
It is the extra amount payable by a company issuing foreign currency convertible bonds on redemption of bonds in terms of the issue documents. In case the FCCB has been converted into shares fully in terms of the agreement, there is no scope for such premium. Such premium may have to be paid by companies with weak financials or goodwill.
Weather futures
Are weather futures the same as say wheat futures?
Karuna Shanbag, Mumbai
No. Weather futures are purely speculating on the weather in terms of rainfall, cold or heat at a given future point of time. Wheat futures are to protect oneself against increase in prices from the baker's point of view and from reduction in prices from the farmer's point of view. A speculator, of course, can make money from both though.
Options vs futures
Why options market the world over is growing and not futures?
Manisha Shetty, Mumbai
Options are like insurance. The upfront premium paid on call or put options, the right to buy and sell respectively, is like insurance premium. An insurance premium does not give bang for bucks unless a mishap takes place. Similarly, an option might not be exercised if the future events do not conform to the option buyer's expectations. For example, one might agree to buy 1,000 shares of Reliance Industries at Rs 1,000 each one month hence by paying a premium of Rs 10 per share. He would exercise this option only if the scrip quotes above Rs 1,000 one month hence. If he does not exercise his option, he would have lost Rs 10,000 paid as premium. Option therefore has become an admirable instrument to leverage one's profit if he has strong reasons to believe that his information would be borne out.Futures are not so simple to deal with. One has to honour his commitments whereas under options one has the right, but not the obligation, to go through with the right given by the option. Moreover, there is a system of margin and marked-to-market on a daily basis involving daily settlements.

Selective depreciation

2011-03-14T03:11:00.000-07:00

Selective depreciation

Why is 100 per cent depreciation being offered selectively on an incremental basis? Can't it be implemented across the board?
Pragya Mehta, Ahmedabad
Investment-based tax incentive came to replace profit-based tax holidays a couple of years ago, the idea being to incentivise investments which is what 100 per cent depreciation amounts to. To start with cold storage and gas pipelines alone made the grade but last year hospitals and hotels fulfilling certain norms were also added to the list. Even the DTC Billkeeps the list selective.

Senior citizen criterion

2011-03-03T02:12:00.000-08:00

Senior citizen criterion
Why is there difference in perception as to when one becomes a senior citizen?
Mohini Bhatnagar, New Delhi
The Railway Budget 2011-12 has elevated a large number of women to the rank of senior citizens — they will achieve that status at 58 itself. Men will get concession in the matter of rail fare at the age of 60.
One wonders whether the Budget will follow suit and vest females the status of senior citizens much early . As it is, the Income-Tax law grants this status on reaching 65 irrespective of one's sex.
More

What is mallassurance?

2011-02-26T03:16:00.000-08:00

Gauri Loganathan, Chennai
The Future group has pioneered the concept of mallassurance in India — selling its own insurance products through its own malls, Big Bazaar. Mallassurance is akin to bancassurance wherein banking and insurance services are offered under the same roof. It was born in France where banks conveniently combined banking services with insurance, giving rise to considerable savings in costs and greater productivity of employees.
The synergy between the two services has been questioned by the cynics, but others acknowledge that given proper training, a banking specialist can acquire insurance skills and vice-versa.
Sometimes a bank acts as a sales agent for an insurance company. Corporation Bank in which LIC has got a 26 per cent stake, sells the latter's products at its branches.
Cynics might be even more sceptical about mallassurance given the fact that while the blue-collar sales personnel at malls may be able to push a wide range of products of day-to-day use, they may not measure up to the more demanding task of selling insurance products calling for considerable white-collar skills.
But then Big Bazaar boasts a 5-6 per cent contribution from insurance products which is not a small feat given the fierce competition in the insurance sector.

‘Unfair' exemption

2011-02-26T03:15:00.000-08:00

Why are capital gains from share markets exempted while salaried employees are taxed heavily?
Manuram Jaipuria, Jodhpur
While short term capital gains from share market are taxed at a flat 15 per cent, long-term gains are completely exempt from tax.
Of course both are subject to Securities Transactions Tax which while setting the government's cash registers ringing given the high turnover in the bourses, gives the distinct impression that the government is indulging the wealthy .
Therefore it must be brought back into the tax net to usher in horizontal equity, if not for revenue considerations.
The original draft DTC promised to do this, but the DTC Bill has quietly restored the status quo .

How are currency exchange rates determined ?

2011-02-16T00:46:00.000-08:00

Shishir Kumar Naik, Kolkata
Exchange rates are to some extent determined by market forces only in respect of floating currencies. All currencies are not floating. Indian rupee and Chinese yuan are not, for example, whereas British pound, euro, US dollar and Japanese yen are. When a currency is not floating, its exchange rate is often fixed by authorities. For example, the yuan is pegged to the dollarAs for floating currencies , there are a number of explanations as to how the markets find the exchange rate.
Purchasing Power Parity (PPP) theory says a currency is only as strong as its purchasing power. Interest parity theory says the country offering higher rate of interest should be able to attract funds from the other and thus its currency should be stronger. All these are oversimplified theories and the truth is there are several factors at work that influence the exchange rate. The US dollar for example has been commanding a premium disproportionate to its economy's fundamentals thanks to its first mover advantage and the TINA (there is no other alternative) factor.

I-T on flat rentals

2011-02-16T00:45:00.000-08:00

I have executed a gift deed in favour of my wife for two flats. My wife doesn't have any salary income, but receives a house rent of Rs 1.6 lakh per annum from the flats gifted . Can my wife file a separate ITR for her income?
Sivaramaprasad, e-mail
The two houses are deemed to be owned by you since you had transferred them to your spouse without consideration and the rental income therefrom would be taxable as your income in case it is more than the market rent. The tax is on annual value which normally means actual rent or market rent whichever is greater. You can claim a standard deduction of 30 per cent on the net annual value i.e. annual value minus municipal taxes actually paid. Assuming there is no municipal tax, you can straightaway claim Rs 48,000 as standard deduction and for this you do not have to produce any proof. Interest payable on borrowing can also be deducted. Since the income is taxable in your hands, your wife does not have to file any return ase she has no taxable income.

Voting rights in pvt banks

2011-02-16T00:44:00.000-08:00

There are reports that the government is set to lift the cap of 10% voting rights in private banks. Would this be a good move?
Prema Ramachandran, Chennai
That voting clout should be proportionate to one’s shareholding is the cornerstone of corporate democracy and to this extent the extant norm of restricting voting rights to 10% no matter a person has got higher stakes is antediluvian though the RBI had compelling reasons to do so when the norm was installed. Right now a promoter can subscribe to as much as 40% of the equity but has to contend himself with 10% voting power. To be sure, he is required to bring down his capital stakes to accord with his voting power within the prescribed time but that is neither here nor there because of the exemption clause that allows one to continue with higher capital stake. There must be other means found to address the danger of concentration of power like restrictions on lending to group companies and knocking at the doors of the Competition Commission assuming the turf war between the RBI and Competition Commission is resolved.

FDI

2011-02-16T00:43:00.000-08:00

The government seems to be considering encouraging ADRs to make up for the fall in FDI. What is your take on this?
Manish Randhawa, Ludhiana
I think while there is nothing wrong in accessing the American investors for equity through the American Depository Receipts (ADR) route, it cannot position itself as a substitute for Foreign Direct Investment (FDI) inasmuch as, for one, the American regulators especially the SEC are not likely to roll out the red carpet for Indian companies and for another ADR/GDR is good only for those Indian companies which while needing foreign capital are confident of their own technological and managerial strengths. FDI, all said and done, is the best form of foreign investment---it brings state-of-the-art technology if FDI limits are high or none at all, employment levels improve and government also gets more revenue from taxes both direct and indirect—for a developing nation. ADR/GDR obviously cannot bring foreign technology so crucial to catch up with the world in many areas. Yes, it has its use for those Indian promoters who fear foreign interference so common in FDI inasmuch as ADR/GDR holders do not enjoy voting rights unless they get the underlying shares released.

Thai baht's strength

2011-02-02T02:32:00.002-08:00

Why is Thai baht stronger than the Indian rupee when India is an economically stronger nation?
Harit Dhariwal, e-mail
There are some appealing home truths about foreign exchange rate. In the long run, a currency is only as strong as its purchasing power is. Also, a stronger economy would have a stronger currency. But the ground reality is something different. The US economy has been in the doldrums, yet its currency has neither lost relevance nor weakened precipitously. This is because of the status of international referral currency enjoyed by the dollar since 1944. Similarly, China is the second largest economy, world's largest exporter and enjoys $4 trillion GDP. But it has chosen to keep its currency deliberately weak to promote exports. The point is exchange rates are hardly determined on rational or scientific basis. Demand and supply mar more rational considerations as much as government and central bank policies.
Overseas bank accounts
Is it legal for an Indian resident to deposit money in bank accounts abroad without government permission? Don't the banks abroad question the source of funds? Aren't there international conventions against money laundering? In the face of all these, how is Switzerland blase about the whole thing?
Shyam Sundar, Chennai
An Indian resident is not free to deposit in foreign bank accounts because the Indian rupee is not fully convertible on capital account. When that happens, both Indian residents and foreigners would get a lot more freedom in flow of capital from and out of India. There is an international convention against money-laundering. In fact, our anti-money laundering law was strictly at the behest of and in keeping with the international convention. But today international and multilateral agreements are under challenge. UN is increasingly becoming irrelevant. Narco-terrorism in which Pakistan excels is all about money-laundering. Countries which give sanctuary to tax evaders and money launderers are doing a positive disservice to the world financial order and Switzerland should take the lion's share of blame in this regard, but it is showing no signs of contrition.
S. MURLIDHARAN

Telecom licence pricing

2011-02-02T02:32:00.001-08:00

What can be the alternative to the vexed issue of pricing of telecom licences?
P.S. Chokalingam, Chennai

Experts are veering round to the view that the government of the day can meter the airwaves used by telecom companies in the same manner as electricity usage is metered, and bill them monthly or in any other periodicity with the rates being pre-announced and subject to revision based on the demand and availability factors among others.
But spectrum or air waves being a scarce commodity, the government will either have to ration it or fix the rate so high that lesser players are crowded out in the inevitable shake-out. It would be less conducive to fraud if instead of a one-time payment, charges are collected depending upon the usage. This will also ensure the survival of the fittest.
Of course, the bottom line could be increase in the telecom user charges for the customers given the fact that telecom companies would pass on the burden to customers, but charges of favouritism and corruption would not arise.
S. MURLIDHARAN

Securitisation vs factoring

2011-01-25T00:57:00.001-08:00

How is securitisation different from factoring?
Vineet Jain, New Delhi
Securitisation is unlocking of illiquid assets with a classic example being receivables of a mortgage finance company whose funds are typically locked for long durations depending on the period over which EMIs are payable by borrowers. These receivables are sold to an SPV (special purpose vehicle) at a discount which in turn issues bonds on the security of the receivables. The buck therefore stops with the bond holders who are enticed by the high rate of interests carried by such bonds on the back of mortgage loans.
Factoring, on the other hand, is outsourcing of receivables to the factoring company.
Factoring may be with or without recourse and when it is without recourse, that is, the risk of bad debts is borne by the factoring agency, it resembles securitisation. But there is a vital difference. Unlike in securitisation where the SPV pays off the mortgage finance company with the proceeds of the bonds issue, a factoring agency does not resort to issue of bonds back to back but instead pay a portion of the receivables upfront with the remaining being paid at regular intervals as and when debts are collected.
S. MURLIDHARAN

Telecom licence pricing

2011-01-25T00:56:00.000-08:00

What can be the alternative to the vexed issue of pricing of telecom licences?
P.S. Chokalingam, Chennai

Tax benefit for repayment of joint housing loan

2011-01-20T01:58:00.000-08:00

My wife and I are repaying a housing loan including interest a sum of Rs 6,25,000/ per annum.( Rs 4,50,000 as principal and Rs 1,75,000 as interest. Both of us are tax payers. Please clarify the amount of exemption under I-T for both of us.
Madhusudhanan, e-mail
I take it that the interest and the principal are being paid by the two of you in equal shares, 50:50, and that the house is self-occupied for your residential use. In that case, half of the interest amount can be claimed as a deduction from the nil value of the house which is the starting point of computing income from house propertyBoth of you can claim a loss of Rs 87,500 each from income from house property which would abate against your incomes from salary or business or profession or against any income at all. Likewise, the principal amount to the extent of Rs 1 lakh each can be claimed under Section 80C as deduction from your respective gross total income. The maximum permissible deduction under this section is Rs 1 lakh.
What exactly is a wealth management scheme which is at the back of the Citibank employee-related scam?
Bhavana Mohan, New Delhi
Call it wealth management or portfolio management scheme – both target the high net worth individuals (HNIs). Banks often lure HNIs with such schemes in return for their parking funds with them. There is nothing wrong with such schemes so long as there are strong Chinese walls erected by the bank and the time-honoured auditing principle of internal check is in place. The entire show should not be allowed to be hogged by a relationship manager. Concentration of power and duties in one person is a strict no-no in an auditor's checklist. Relationship managers must report to a high ranking official and there must be rotation of relationship managers at reasonable intervals as well as the official they report to. Moreover, the custodial and buying and selling activities must be separated. All these tend to minimise the chances of fraud unless there is a collusive fraud which is unlikely if a large number of people are involved and they all know that rotation is round the corner. One is not sure what happened in Citibank — a systemic fraud or fraud by a single employee.
S.MURLIDHARAN

PPF year

2011-01-11T02:03:00.000-08:00

What is the financial year for PPF---calendar or April to March? I want to deposit Rs 70,000.
Faheema Syeda, e-mail
It is April to March.PPF account closure
My PPF account completed 15Years on March 2009. During March 2010 I applied for an extension and remitted Rs. 10000. Now I am urgently in need of money in connection with the education of my daughter. Please advise of how to close the account.
Parag Pavitran, e-mail
In case of accounts extended beyond maturity period partial withdrawals are allowed once in a year with the condition that the amount of withdrawal during a five year block period should not exceed 60 per cent of the balance in the account at the commencement of the block period. Having extended the account by five years, you have to stay put, but I am sure the facility to withdraw 60 per cent should help. You can keep the account alive for the next four years by depositing the minimum required.Sound move
It seems the government is going to stop closing of Provident Fund accounts on cessation of employment. Is it a good move?
Padma Srinivasan, Hyderabad
I think so because there are statistics to show that 80% of people close their Provident Fund account on change of employment whereas PF is meant for one's post retirement life i.e. to provide for the rainy days. Therefore the move to permit closure on retirement or death is a sound one. While changing jobs, the PF balance must be mandated to be transferred to the new employer.
S. MURLIDHARAN

Oil slippages

2011-01-11T02:02:00.000-08:00

We have been buying oilfields/ interest in various parts of the world (Sakhalin, being one). Why are we still vulnerable to the fluctuating oil prices? Are our fields abroad not producing oil?Are we not able to bring them here?
Ramkumar R, e-mail
We import close to 75 per cent of the crude oil requirement. The overseas investments can only meet a minuscule part of our needs, with bulk of them being in the form of production sharing agreements. China has entered into oil-for-infrastructure deal with a few African nations. We are trying to emulate China, but China seems to have stolen a march.
S. MURLIDHARAN

NRIs and property registration

2011-01-05T01:01:00.001-08:00

I had registered for a flat in Haryana during my last visit to India. Now the flat is ready, but I am unable to visit India, though my wife is going to. The property is booked under our joint names. Is her presence alone sufficient for registration purposes?
Vikas Kumar, e-mail
Most of the State governments are now taking the extra care to photograph everyone - the seller, the buyer and the witnesses. If anything, it is a good measure and should not be resented as it is in everyone's interest. In view of this, I think your physical presence at the time of registration will be unavoidable.
S.MURLIDHARAN

Useful definitions

2011-01-05T01:00:00.000-08:00

Please explain to me in layman's language the meaning of GDP, capital account, globalisation and inflation
Madhu, Trivandrum
Gross Domestic Product or GDP measures the income earned by a nation during a financial year. It comprises all economic activities, both production of goods and services. When it is divided by the size of the population, you get the per capita income which is a much more accurate indicator of a nation's prosperity.
China has a huge GDP, but its per capita income is not as big and nowhere near those of the US and Switzerland.
Capital account is a term used in discussions on Balance of Payments (BOP). BOP is broadly divided into capital and current account. While exports of goods and services figure prominently under current account, inflows from abroad towards foreign direct investment or foreign institutional investment are on capital account.
Globalisation means having the world becoming one's as one's oyster. In a globalised scenario, one is acutely aware of the impact of international developments on India and India's impact on the world. The more a country opens its doors to foreign investments and trade, the more globalised it is said to be.
Inflation means increase in prices over a period of time. It is measured by indices with wholesale index and consumer price index being the most prominent ones. For the common man, the latter has got a greater relevance. Dearness allowance is linked to inflation.
S.MURLIDHARAN

ADRs outperform underlying equities

2011-01-01T02:08:00.000-08:00

ADRs outperform underlying equities

Tata Motors, Dr. Reddy's report strong show.
K.S. Badri Narayanan
Chennai, Dec. 26
Indian American depository receipts (ADRs) listed on the NYSE and the Nasdaq have outperformed the underlying equities in 2010.
This was despite the US and Indian indices generating almost similar returns.
The average return generated by the Indian ADRs stood sharply higher at 14.86 per cent as against just 3.9 per cent posted by the underlying equities in the Indian bourses.

Escrow account

2011-01-01T02:07:00.001-08:00

What is an escrow account?
Bipasha Majumdar, Kolkata
It is an account maintained with a neutral third party in whom both sides to a contract have faith. For example, a financier may secure his position by entering into an agreement with heavy duty customers of the beneficiary electricity company by roping in a reputed bank into which the payments would be made by such customers. The neutral bank would not release the money for any purpose other than to pay off the financier periodically in terms of the loan agreement towards principal and interest.
S.MURLIDHARAN

Derivatives

2011-01-01T02:06:00.001-08:00

What are derivatives?
V. Vinod Kumar, e-mail
Derivatives are products which derive their value from their underlying assets. The value of futures in shares as well as in options on shares in turn is derived from the value of the shares themselves. In a way, a share itself is a derivative product , because the underlying assets of a share are the value of the fixed assets, intellectual and other properties of the company.
S.MURLIDHARAN

Bridge finance

2011-01-01T02:05:00.000-08:00

What is bridge finance?
Chittipolu Srikant, e-mail
As the name suggests, it is an interim or temporary financing arrangement pending disbursal of a loan being negotiated. A company negotiating a long-term loan from a bank for a new project might in the interim seek a bridge loan from another cash-rich company or a non-banking financial company. The bridge loan typically is for less than six months and carries a slightly higher rate of interest vis-à-vis the principal loan itself.
S.MURLIDHARAN

Monopolistic tendencies

2011-01-01T02:02:00.000-08:00

Why are patents given when they are intrinsically dangerous inasmuch as they foster monopolistic tendencies?
Kritika Rajamani, Chennai
The patents regime is a via media between perpetual monopoly and consumer interest. If an invention is kept under wraps infinitely assuming that is possible, it would be injurious to consumer interest whereas if an invention straightaway comes into the public domain, the inventor has very little to make him go. Patent is the via media which gives the inventor a limited monopoly typically for twenty years whereafter the invention comes into the public domain. An off-patent item then can be produced by anyone.
S.MURLIDHARAN

Stop scams

2010-12-23T01:08:00.000-08:00

Stop scams

Both Mr Deepak Parekh and Mr Ratan Tata have gone on record saying that too much of negative publicity emanating from scams is taking a toll on the economy. What is your take on this?
Parminder Singh Sarna, Amritsar
It is true that the harried Indian industrialists are now investing more abroad than in India to the country's detriment and foreigners also look down upon India. But the media cannot be expected to let the shady deals go unreported. Concerted efforts must be made to stop scams from occurring. Discretionary powers have been the bane of India. Influence peddlers must be stopped in their tracks.

Dividend not allowed as business expenditure

2010-12-23T01:05:00.000-08:00

Why is dividend not allowed as business expenditure?

Rajati Rajamani, Chennai.
It is the old shibboleth that shareholders are the owners of the company that still weighs with the Income Tax law when it does not allow dividend as expenditure. You are right. When interest, cost for a source of fund, can be allowed as expenditure, dividend should also be allowed as expenditure given the fact that equity is also a source of fund. That shareholders have ceased to be owners, and are mere purveyors of funds is now apparent to everyone. For, if anyone can be termed as the owner , it is the promoter who calls the shots.

FDI vs FII

2010-12-12T23:59:00.000-08:00

What is the difference between FDI and FII? Which one is better for India?
Sanju, Bangalore
Foreign direct investment (FDI) flows into a company's coffers and, therefore, fuels production, employment, taxes and growth, whereas foreign institutional investment (FII) flows into the secondary market, that is, stock exchanges. While both are important, FDI has a special importance for a developing country such as India. Maruti's enduring collaboration with Suzuki is a testimony to the potential of FDI. The entry of FIIs, has added depth and substance to the share market.

RBI intervention

2010-12-12T23:58:00.000-08:00

India often faces the problem of liquidity crunch and the Reserve Bank of India intervenes to provide liquidity in the money market by initiating various measures. The problem became more frequent after the recent economic downturn. Is there any specific reason for this?
N. Asokan, Chennai
In recent times, there is no liquidity crunch. The problem in fact is one of plenty. Capital is flowing from abroad because of higher interest rates as well as the robustness of our economy vis-à-vis others. While this more than offsets our current account deficit , its side effect is the fear of asset bubbles building. Most of this money could find its way into speculative markets such as real estate and stock market, fuelling price rise that could burst at the first hint of flight of money.

Loan against shares

2010-12-12T23:51:00.001-08:00

How does a bank safeguard its interest against volatility in the market when it grants loan against shares?
Ravi Arora, New Delhi
By retaining a sufficiently large margin vis-à-vis the existing quotations. Suppose a promoter seeks a loan on 10 lakh shares held by him in a listed company whose market quotation is Rs 100 on a face value of Rs 10. The bank will not give him a loan of Rs 10 crore, instead it will retain at least 40 per cent as margin and at best give a loan of Rs 6 crore. Banks always keep a watch and ask the borrower to increase the margin amount in case the market price falls precipitously.

Stop-loss strategy

2010-11-30T01:58:00.000-08:00

Stock analysts tell us to keep a stop-loss on a closing day basis. What does this mean? If, at the end of the day, a stock has closed below my stop-loss level, should I sell it the next morning? What if the next morning the stock price has risen again above the stop-loss level?
Anil Kumar, Trivandrum
I think stop-loss is not a good strategy when the price movements are explained only by technical corrections, especially when operators book their profits. A stop-loss order is warranted only on the basis of economic fundamentals or fundamentals of the company or industry.
S. MURLIDHARAN

Listing gains

2010-11-30T01:57:00.000-08:00

I invested in the Coal India IPO, just want to know if I should book profit on listing or stay invested. I am a short-term investor.
Vinoi, e-mail
A short-term investor should exit with listing gains, and Coal India gave sizeable listing gains.
S. MURLIDHARAN

PPF and nominees

2010-11-30T01:56:00.000-08:00

Can a nominee continue the PPF account without any further deposits after the death of the subscriber? Will such an account continue to earn interest till final claim and closure? Is there any time limit for nominee to close the account and make the claim?
Rajaravishekar, e-mail
In law, a nominee has no decision-making powers. He is there simply to collect the proceeds in the account. He should take steps to produce the death certificate of the accountholder and claim the balance in the PPF account.
S. MURLIDHARAN

Rights and FPOs

2010-11-30T01:55:00.000-08:00

What are the considerations that should weigh with a listed company in choosing between a rights issue and a follow-on public offer (FPO)?
V. Siva, Tirunelveli
A rights issue is generally a mini bonus issue and, therefore, a listed company that is in need of greater funds should go for an FPO rather than a rights issue even though it has the potential of diluting the net worth and market price of shares post FPO.
Strictly speaking, a rights issue is the ideal as it protects the interests of the existing shareholders more fully but often it is not preferred if it is felt that the existing shareholders may not be able to bring in the requisite money even though there is a valid counter to this argument — let such shareholders who are unable to subscribe sell their rights in the market.
S. MURLIDHARAN

Non-resident status

2010-11-29T01:28:00.001-08:00

An Indian citizen employed by a foreign oil company is working on foreign soil. His work schedule comprises working in the sea for four to eight weeks followed by four weeks of recuperation. During the recuperation period the person has to come back home to India, as the employer does not provide mainland accommodation. In effect, although he works on foreign soil, he still has to spend anything between 120 days to 180 days (maximum) in India, during a financial year. Will this person be adversely affected by the introduction of the DTC. In other words, will he lose his non-resident status on account of his unique work cycle?
Saumitra Kumar Talukdar, Abu Dhabi
Yes, I am afraid such a person would also be done in by the DTC that is on the anvil. As it is, a visit to India for less than 182 days would have gotten him the status of non-resident. Now he will have to further ensure that he was not in India for 60 days or more during the relevant financial year, failing which he must ensure that:
during the four financial years preceding such financial year his aggregate stay in India was not for 365 days or more; or
during the block of 10 financial years preceding the relevant financial year, he was not a resident of India for two years or more; or
during the seven financial years preceding the relevant financial year, he was not in India for 730 days or more in aggregate.
S. MURLIDHARAN

Gambler's den?

2010-11-29T01:27:00.000-08:00

Share market even today is perceived as a gambler's den. Do you agree?
Ravi Arora, New Delhi
Well, to the extent people invest and exit on the basis of hearsay and gossip, it is quite true that it is a gambler's den. In the futures and options segment, people do take up positions on the basis of their perceptions which might not be borne out. That said, it must also be pointed out that people who invest and exit on the basis of fundamentals after a thorough and dispassionate study do not gamble. Mutual fund investments belong to this category, by and large.
S. MURLIDHARAN

Non-voting shares

2010-11-18T01:27:00.001-08:00

What are non-voting shares?
Mythili Parthasarathy, Musiri
These are a variant of equity. They get all economic benefits sans voting rights or reduced voting rights. For example, Tata Motors has shares with differential voting rights — 10 shares carry one right as against 1:1 for the other category of shares. As compensation for the sacrifice, an extra five percentage points dividend is payable to them.
Since only two companies have resorted to shares with differential voting rights coupled with the fact that dual-quotations inevitable in such a scheme of things cause avoidable confusion, the Companies Bill, 2009 proposes to stop shares with differential voting rights or non-voting shares.
S. MURLIDHARAN

A barter deal?

2010-11-18T01:26:00.000-08:00

The three-day visit of US President Barack Obama to India, which was highly focused on the emergence of new jobs for the US, is supposedly seen as a barter deal in which India too would be looking for the same opportunities. It is also said that Obama is doing all these to please his domestic constituency which seems to be unhappy as evident from the recent midterm election results. He also wants New Delhi to remove trade barriers. What would happen if after signing all the deals and pacts, Obama or his successor try to wriggle out of their commitments?
Himanshu Sehgal, New Delhi
Well, Obama does want his country's exports to register a quantum jump. He wants India to open up farm imports. But there are certain problems on the dairy front. For example, in the US, cattle are fed with animal feed as well which is not acceptable to Indians. The US of course has promised to export dairy products emanating strictly out of vegetarian cows and buffaloes, as it were, but as you know this is easier said than done. Anyway, he is not strictly looking for a barter deal, but may be some sort of informal counter-trade. Of course, both sides would be paying for each other's imports.
Every head of state has to please his domestic constituency and Obama cannot be faulted for doing that. As for reneging on promises, there is something called sanctity of sovereign contracts. Whether you like or not you have to honour the agreements signed by your predecessor unless of course you can revoke the contract itself in terms of the sunset clause contained in the agreement.
S. MURLIDHARAN

Achuthan panel

2010-11-10T02:23:00.001-08:00

Why is SEBI (Securities and Exchange Board of India) reluctant to implement the Achuthan panel report on takeover code reforms?
Shailaja Rao, Mangalore
Because the reforms proposed are not cosmetic but deep and telling. For example, 100 per cent takeover mooted by the panel would call for humungous resource mobilisation effort for the acquirer. I think this is the major issue on which SEBI has got bogged down. Insistence on either all or nothing kind of takeover may have the effect of snuffing out interest in takeover of a company, especially when huge amounts are called for. It is true that this is the model in several European countries and Tatas had to take over Corus lock, stock and barrel paying through its nose. Moreover, Indian financial institutions do not lend for takeovers. The RBI might have to relook this issue in consultation with SEBI.
S. MURLIDHARAN

Share buyback

2010-11-10T02:22:00.000-08:00

Buyback of shares of listed companies is being implemented in many companies since its introduction. Apart from certain known merits for corporates — lean financial statements or book value increase — are there any merits for the investors?
N. Asokan, Chennai
The economic rationale for buyback is shedding equity overhang dragging the EPS down. But there are often sinister reasons. For example, in India, promoters who are not comfortably ensconced with less than 26 per cent stakes, resort to buyback because that takes their stakes up without spending a rupee from their resources. To wit, if a promoter has just 20 per cent equity, he might announce a 20 per cent buyback in which obviously he would not participate. The bottom line would be after the exercise his stake would be 25 per cent, that is, 20 out of 80, the reduced capital.
S. MURLIDHARAN

Distribution tax

2010-11-10T02:21:00.000-08:00

Why does DTC, 2010 want to change the tax regime for unit-holders?
Prahalad, Anand
Yes, the Direct Taxes Code wants to abolish the regime of distribution tax for units except in the case of equity-oriented funds. In other words, while unit-holders of equity-oriented funds would continue to be immune from tax, with distribution tax being paid, all others would be taxed directly. In other words, those earning dividend from a money market fund, for example, will have to pay tax themselves.
S. MURLIDHARAN

Annual value

2010-11-01T02:20:00.002-07:00

Why has the Direct Taxes Code dropped the concept of annual value in house property taxation?
Rohit Seksaria, Jhunjhun
This is quite inexplicable because the concept was working reasonably well, putting the fear of God at least on law-abiding landlords.
Now with the market rent ceasing to be a factor, it is the word of the landlord that is final. He may take part of the rent on the sly outside books. I think this move sticks out as a glaring example of a change for change's sake without achieving anything.
S. MURLIDHARAN

Why dollar still rules

2010-11-01T02:20:00.001-07:00

Why is the world still stuck with the US dollar even when the US economy is in the doldrums?
Mamta Sharma, New Delhi
This indeed is the question agitating the minds of many right-thinking people. But there are a variety of reasons why the world is stuck with the dollar by and large.
Many countries are holding their foreign exchange reserves in the dollar with China leading the pack with a whopping $2.5 trillion at the last count.
India too has sizeable dollar reserves at around $285 billion. China especially would not like to rock the dollar boat because its economy would also capsize along with that of the US if it takes any precipitate action to dethrone the dollar. But the world has realised the folly of putting all eggs in the dollar basket. Time hopefully will throw up a viable alternative.
S. MURLIDHARAN

What's GDR?

2010-11-01T02:19:00.000-07:00

What is GDR (Global Depositary Receipt)? Is it like pledging of shares? Are the shares issued under GDR eligible for dividends, splits, and so on? Please explain.
Lakshmanan, email
A GDR is nothing but a set of shares of an Indian company issued abroad for trading in a foreign stock exchange. It is denominated in a foreign currency, usually the US dollar. Resort to this via media is necessary because an Indian company cannot list its shares in foreign bourses as Indian shares are denominated in Indian rupees whereas in New York, for example, the quotations are in dollars. Yes, GDR holders are eligible for all economic rights but do not have voting rights till they convert their GDRs into underlying shares of the Indian company issuing it.
S. MURLIDHARAN

Issues in microfinance

2010-10-26T02:05:00.001-07:00

What exactly is the problem with microfinance in India?
Srilekha Sridhar, Chennai
The issue is when an innately noble venture is run on commercial lines, profit motive assumes ascendancy.
Some of the microfinance institutions in India are listed companies answerable to shareholders and which swear by EPS (earnings per share).
Naturally, they charge what appears to be exorbitant interest but nowhere near dyed-in-the-wool moneylenders which then makes them a lesser evil.
In Andhra Pradesh, where MFIs have taken strong roots, the government is incensed over what it calls greed and strong-arm tactics employed by them and wants to rein in on them.
But it seems to have gone overboard. For example, it wants commercial banks to swap the expensive loans taken from MFIs with loans on reasonable terms.
The truth is rural banking is expensive and tiring and not everyone's cup of tea.
S. MURLIDHARAN

Coal India rating

2010-10-26T02:04:00.001-07:00

How did Coal India get 5 out 5?
Rahul Mahendra, Hyderabad
Well, rating of equity is more subjective than rating of debt instruments. But SEBI (Securities and Exchange Board of India) has stuck its neck out and ushered in an optional regime of IPO rating on a scale of 5. While Coal India indeed is a monopoly, it is also in the government sector thus becoming susceptible to political and other pressures.
Moreover its claim that it has the largest coal reserves in the world is at best a guesstimate. In the event, the rating agency does seem to have gone overboard.
S. MURLIDHARAN

The Chinese yuan

2010-10-26T02:03:00.000-07:00

Is China right in keeping its currency yuan weak?
Madhu Parashar, Delhi
Well, this is not an easy question to answer. The IMF and the US are angry with China as it results in the US market being flooded with Chinese goods thus accentuating recessionary conditions and increasing the unemployment rate.
But China seems to believe that every country follows its own policies that are uniquely suited to it which in China's case is giving employment to its masses by becoming a global manufacturing hub.
S. MURLIDHARAN

Financial closure

2010-10-19T02:27:00.001-07:00

Tenure of independent directors

Why does the Companies Bill, 2009 seek to limit independent directors' tenure to six years?
Raman Deep Kaur, Patiala
For very valid reasons. A self-perpetuating director becomes slack and complacent besides becoming the handmaiden of the hands-on management. Indeed the risks are the same as with having a permanent auditor who too tends to become smug and indifferent and a willing ally to window-dressing and other frauds. The Bill however allows one to return after a cooling off period of three years as an independent director.

Seizure of exports

2010-10-14T01:44:00.000-07:00

Devaluation of currencies on the rise

Why is the world suddenly witnessing a competitive devaluation of currencies?
Rama T., Mumbai
Countries which are export-driven have always been worried about the appreciation of the domestic currency because that gives lesser units of domestic currency for every unit of foreign currency earned.
China had scripted its export success story mainly on the back of a weak yuan. The US especially is peeved with this strategy and is putting pressure on it to revalue its currency upwards, but China has refused to budge.

Issues in transition to GST regime

2010-10-04T03:10:00.000-07:00

Issues in transition to GST regime

The convergence from the present VAT (Value Added Tax) regime to the GST (Goods and Services Tax) regime seems to be postponed to fiscal 2011-12 as a result of differences in the proposals and perspectives among States on the constitutional amendment for the smooth transition. A few States have also suggested taxing of services by the Centre and passing a certain portion to the States. Does it seem to be the only alternative for obviating the need for a constitutional amendment as opined by a few States?
N. Asokan. Chennai
The proposal, if any, to view service tax as separate would strike at the very roots of GST. For, GST is an integrated taxation that does not discriminate between goods and services. In other words, its centrepiece is all value additions, whether by way of goods or services, must be captured into the tax net. Implementation of GST requires a strong Centre which is why the US has not attempted VAT. The 50 States there guard their turfs assiduously which is also substantially the case in India. States want a greater share of action and revenue than what the Centre is prepared to concede. Naturally in this war of attrition, the BJP-ruled States are holding out for more than the Congress-ruled States.

Will women assessees be on a par with men?

2010-09-27T01:45:00.000-07:00

Will women assessees be on a par with men?

What happens to women? Are they going to be treated on a par with men as far as taxation is concerned?
The Cabinet-cleared Direct Taxes Code (DTC) is silent on the issue.
Yuvarani Bhaskar, Chennai
While the Finance Minister was indeed silent on the issue even while deferring to senior citizens with a small increase by Rs 10,000 in the tax-free limit for them, there are reports doing the rounds that non-senior women who have been getting a tax-free income of Rs 1,90,000 as opposed to Rs 1,60,000 enjoyed by their male counterparts are likely to be placed at the same reverential pedestal as senior citizens. Let us keep our fingers crossed.

LLP concept

2010-09-20T01:43:00.000-07:00

Exemption limit for working women

Why working women have not been given extra tax exemption by DTC, 2010?
Renuka Bist, Dehradun
Yes, now there are only two separate exemption limits — one for senior citizens and another for others. The third category for non-senior ladies is sought to be abolished. While non-senior males would get a heightened exemption of Rs 2 lakh as against Rs 1.60 lakh now, ladies are also going to get exemption of Rs 2 lakh from the extant Rs 1.90 lakh. I am sure ultimately the feminists' voice would be heard and some extra exemption allowed to working ladies.

Escrow account

2010-09-13T02:16:00.001-07:00

What is escrow account?
Pratima Poddar, Kota
It is an account to which amounts are credited so that they are available for use only for specified purposes. For example, it may be agreed that electricity charges due from high-end customers must be deposited in a specified bank account which cannot be used by the power utility for any purpose other than paying the instalments due to the financier. In other words, an escrow account is designed to safeguard a specified person(s) interest.
S. MURLIDHARAN

Applicability of CSR

2010-09-13T02:15:00.001-07:00

Can the Government make it mandatory for companies, both public and private, to adopt villages as CSR activity provided the companies make profit up to a minimum specified level? Will it benefit the companies concerned in any form?
HLK Joshi, Chennai
The Government already has a scheme enshrined in Section 35AC of the Income-Tax Act on the lines suggested by you which begets a tax break but it is not anything to write home about with response being lukewarm. On the other hand, there have been instances of corporate social awareness even without tax bait which only shows there must be a wellspring of social consciousness oozing directly from corporates. Tatas' exemplary work in Jamshedpur begetting the city the byname Tatanagar is quite well known.
S. MURLIDHARAN

Post of chairman

2010-09-13T02:14:00.000-07:00

Barring a small segment, many listed companies in India have ‘Chairman and Managing Director' as the head of the company. In many advanced countries in Europe the position of chairman is held by an outsider as it has emerged as a good corporate governance practice and also advocated by certain corporate philosophers. It will be a better corporate governance practice in case these positions are manned by different persons (especially an outsider as chairman) in listed corporate entities. Will the regulatory authorities mandate this?
N. Asokan. Chennai
Well, SEBI is already seized of this matter. It will certainly make for a better management if the offices of chairman and managing director are separated and vested in two different individuals with the former being held by an independent director.
S. MURLIDHARAN

Code of ethics

2010-09-07T03:48:00.001-07:00

Many professional bodies of accountants around the globe have framed their own standards of Code of Conduct or ethics to be followed by the members whether they are in practice or employment. Is there a need for International Standards for Professional Ethics or Code of Conduct for Chartered or Certified Accountants or Professional Accountants with whatever nomenclature spread over various nations?
N. Ashokan, Chennai
No, I don't think so. While there may be compelling reasons for uniformity or standardisation in accounting standards like the need for uniformity in global accounting practices to facilitate comparison as well as consolidation of group accounts where entities are strewn across the globe, there is no compelling reason for common ethics for professionals.
Professional ethics varies from country to country. We in India have barred CAs from advertising, that is, soliciting clients, whereas Australia permits solicitation through advertisements. Professional standards are also shaped by the moral values a nation adheres to. In any case, an Indian CA is not a global CA, as it were. When he migrates to the US, he has to pass the CPA exam. Therefore, when an Indian CA's writ runs only in India, why should he subject himself to global standards whether for good or bad?
S. MURLIDHARAN

Compensation taxable?

2010-09-07T03:41:00.001-07:00

A builder, a closely-held company, engaged in building a commercial complex, has had to give it up because of non-saleability of units. Under such circumstances, he is now obliged to refund monies collected from a few prospective buyers couple of years ago, along with appropriate compensation because of non-delivery.
On cancellation of agreement to sell, the following questions arise: Is the ‘ compensation' taxable in the hands of the prospective buyers? Is the same subject to deduction of tax at source and, if yes, under which section of the Income-Tax Act? Also, how is this compensation treated in the books of the builder for tax purposes?
R. Harish, email
No, such compensation is not taxable inasmuch as for being liable to capital gains tax, the sine qua non is transfer of a capital asset. Since the compensation does not emanate out of ‘transfer' of a capital asset, it cannot be exigible to capital gains tax.
Being a capital receipt, it cannot fall into income from other sources either. The compensation is not subject to TDS because TDS applies only on compensation arising out of compulsory acquisition under any law. The builder can claim the compensation as loss incidental to his business while calculating his income from business.
S. MURLIDHARAN

Credit Default Swap

2010-08-31T03:03:00.001-07:00

Where is the need for Credit Default Swap (CDS) as contemplated by the RBI vide its draft guidelines issued on August 4, 2010, when corporate bonds have to be mandatorily credit rated?
Divya Shanker, Chennai
Well, a credit rating agency is not cast in the role of an insurer. All that it does is to rate an instrument as to its investment worthiness.
In the event of default on either interest or principal, it only stands morally condemned for its wrong rating if it had misled the investors with a higher rating than warranted or it had been remiss in not revising its rating when things changed for the worse.
In CDS, on the other hand, the one taking premium has to pay up. CDS therefore affords greater protection to a bond holder than a credit rating. The US financial crisis of 2008 bears ample testimony to off-handed rating awarded, thus contributing to investors being led up the garden path.
S. MURLIDHARAN

Registration of flat

2010-08-31T03:02:00.002-07:00

I bought a flat from a builder. The flat is one of among several constructed on a land which was owned by a bungalow owner, who is refusing to cooperate with me in getting the flat registered in my name. What shall I do?
Sasirababu Krottapalli, email
I take it that your contract was with the builder and not with the erstwhile landowner. Therefore you can proceed against the builder. It is for the builder to deal with the erstwhile landowner.
S. MURLIDHARAN

Accounting standards

2010-08-31T03:02:00.001-07:00

Two accounting standards, Accounting Standard AS 30 (Financial Instruments - Recognition and Measurement) and Accounting Standard AS 31 (Financial Instruments: Presentation) have been issued by the Institute of Chartered Accountants of India, both of them dealing with the same subject matter, that is, financial instruments. Why couldn't these standards be combined and set as one standard for the sake of simplicity?
N. Asokan, Chennai
The two could have been combined but the ICAI has obviously taken a cue from IAS which too has issued two standards — one for recognition and measurement and another for presentation. A compendious and comprehensive standard on a subject is any day preferable than strewing an issue over more than one standard.
S. MURLIDHARAN

Bonus shares

2010-08-24T23:29:00.001-07:00

I have not got the bonus shares issued by the company as well as dividend declared over the years. What shall I do?
Sanjay Korde, email
A company is required to open a special unpaid dividend account with a bank to which must be transferred all the unclaimed and unpaid dividends after 30 days of the declaration.
This must be done within a week of the end of 30 days reckoned from the date of declaration of dividend.
If it remains unclaimed for seven years, the company has to transfer the amount to investor protection fund maintained by the government and the shareholder concerned can make a claim thereon.
You can always take up with the company the issue of non-receipt of bonus shares.
If your shares are held in demat account, check your demat account which is digitalised and can be accessed on the internet.
S. MURLIDHARAN

Allow FDI in retail?

2010-08-24T23:25:00.000-07:00

Lots of arguments are trotted out in favour of allowing FDI (foreign direct investment) in retail, and many of them make eminent sense. Are there any arguments against?
Preety, email
Well, there are, and because of these FDI in retail has been stalled. First of all, as per the opponents, the ubiquitous mom and pop shops that dot our retail landscape both in urban and rural areas would be a casualty.
There is some truth in this, though it is countered by saying that the loss of self-employment to such people would be more than made up by the employment opportunities given to blue-collar workers who are required in large numbers in cold chains as well as in retail chains.
Second, retail chains require huge pieces of real estate and obviously can be located only away from the main thoroughfares.
Once again this argument is weak because in those places where they are not located, mom and pop shops would continue to fill the void. In short, arguments against FDI in retail are weak in relation to the advantages it promises to bring.
S. MURLIDHARAN

Foreign brands

2010-08-16T02:45:00.001-07:00

Can an Indian company owned up to 70 per cent by a foreign company manufacture products in India using a brand of its parent company. If so, whether this company can sell these manufactured branded products to end-consumers.
Shruti, email
There is no bar on a manufacturer using its brands in the marketplace, be it a pure Indian company or a foreign controlled Indian company.
Maruti Suzuki, for example, uses the Suzuki brand name in the Indian market. Ditto for the products of the FMCG major Hindustan Unilever Ltd, which is a 51 per cent subsidiary of Unilever of the UK.
In other words, if you set up shop in India as per the FDI norms in the given sector, there is no bar on using foreign brand names. What is now prohibited is foreign retail chains opening retail chains in India selling multiple foreign branded products.
Thus Wal-Mart, which sells everything from vegetables to travel bags under one roof procured economically and efficiently from other brand owners in several countries including China, is not allowed to cater to the retail consumers in India.
But it is allowed to do business in the cash-and-carry segment, that is, if it is selling to bulk purchasers such as airlines, hotels and hospitals. The Government is having a re-look at this policy.
S. MURLIDHARAN

Mobile banking

2010-08-16T02:44:00.000-07:00

Please explain mobile banking briefly.
Alka Nangia, New Delhi
Briefly, it is all about combining telecom and banking services to the benefit of the common man. In mobile banking, when one buys a recharge coupon and his account is recharged, the balance to his credit is available for a twin use — telecom operation and funds transfer.
Thus mobile banking could cater to areas where banking has not left its mark.
In Kenya, mobile banking has been extremely successful in a milieu where banking penetration is very low but mobile penetration is very high. India is similarly placed but there is an incipient turf war between telecom companies and banks on who would call the shots.
In other words, would it be telco led as in Kenya or bank led?
S. MURLIDHARAN

Sovereign wealth fund

2010-08-09T03:43:00.003-07:00

What do you feel about the proposal to float a sovereign wealth fund by the Indian government?
Rajeshwari Mahadevan, Chennai
Frankly, I am not greatly enthused by the idea. We should not be a me-too.
India has not accumulated its foreign exchange reserves through export surplus like China. Our balance of payment (BoP) is current account deficit and capital account surplus. Let us not delude ourselves.
Besides, a modest corpus of $10 billion makes us a pygmy. Seasoned, sovereign wealth funds such as Abu Dhabi Investment Corporation have already burnt their fingers badly. We should not rush where angels fear to tread. Yes, let us by all means encourage overseas acquisition of assets such as oilfields and coal mines.
S. MURLIDHARAN

Why have TPAs?

2010-08-09T03:43:00.001-07:00

Why do insurance companies require the services of TPAs (Third Party Administrators)? Cannot they deal with the hospitals themselves?
Kanchana Sampath, Chennai
Well, this precisely is what the four state-owned insurers have decided vis-à-viswhat they perceive as recalcitrant hospitals. They have a genuine grouse that a TPA tends to be blasé about hospital demands and does not negotiate hard, as his money is not involved.
After all, it is the insurer who ultimately picks up the tab. But then the insured are not likely to take kindly to this development. Over the years they have got accustomed to the comfort of cashless settlement which is what the TPA offers by acting as a buffer between the insurer and the insured, on the one hand, and between the insurer and the hospital, on the other.
Small wonder, the insured often times do not yield to the temptation of a small discount on non-cashless policies. It is therefore a classic case of clash of interests — the insurer is comfortable if he has an opportunity to examine the insured's claim with a fine toothcomb, whereas the latter obviously breathes easy if he is not called upon to pay at all with the TPA taking up this burden.
S. MURLIDHARAN

Rupee symbol

2010-08-09T03:42:00.001-07:00

What is the significance of the Indian rupee symbol?
R. Vedantadesikan, Srivilliputtur
As of now, perhaps to distinguish from Nepali and Pakistani currencies which are also rupees and, therefore, the cryptic prefix Rs used by all the three of us may confuse many. But then it could also herald the arrival of the Indian rupee in the international scene as Minister Ambika Soni proudly proclaimed. This could well mean Indian rupee becoming convertible on capital account and becoming a floating currency a lathe dollar, pound, yen and euro. This of course is pure speculation. Floating a currency is not such an easy affair. Anyway, Mr Uday Kumar has indeed designed a symbol that is at once evocative and simple.
S. MURLIDHARAN

Capital gains on property

2010-08-03T03:08:00.001-07:00

I booked a flat by paying a token amount and registering the ‘Agreement for Sale' on June 13, 2007. I paid the balance amount to the builder by taking loan on November 11, 2007, and took possession of the flat. But I registered the ‘Deed of Sale' on May 5, 2009. Now I want to sell the flat. If I sell it in December 2010, will the capital gain be considered as long-term capital gain? Please inform which date will be considered as the ‘date of purchase' for capital gain calculation? Is it final payment date?
Tushar, email
Under the income-tax law, both for calculating income from house property and capital gains, what is material is the beneficial ownership of the property and not its nominal/registered ownership. You took possession of the property on November 11, 2007, in terms of the agreement to sell. This precisely is the date of acquisition of property in this case and the period of three years must be reckoned accordingly. Therefore, when you sell the property in December 2010, it would have come of age and qualify as a long-term asset.
S. MURLIDHARAN

Contingent capital

2010-08-03T03:07:00.002-07:00

What is contingent capital? I know what a contingent liability is.
Jai Mangharam Mukhi, New Delhi
Contingent capital aka Coco is, as you would have guessed, a western innovation.
A bank, for example, may rope in a private equity firm or anybody else for that matter to infuse funds if the debt:equity ratio slips below the agreed norm or the capital adequacy ratio slips beyond the Basle norms.
The contingency can be anything. The point is infusion of capital is contingent upon happening of an event or non-happening of an event. It should not be confused with option to subscribe to capital because unlike in an option, in a Coco the person agreeing to infuse funds is duty bound to do so and cannot renege on his promise.
S. MURLIDHARAN

SME exchange

2010-08-03T03:07:00.001-07:00

Setting up of a separate ‘SME Stock Exchange' is under contemplation. What would be the advantages in terms of reduction of compliance cost apart from non-applicability of listing clauses to such exchange and other SEBI rules and regulations like such as the takeover code and so forth without dilution of mandatory provisions of corporate governance to companies listed with the ‘SME Stock Exchange'?
N. Asokan, Chennai
Presumably the compliance cost would be less and formalities fewer. Indeed that is the reason why a separate forum is being carved out for SME (small and medium enterprises). This is being done perhaps due to the failure of OTC exchange. But it seems for SMEs a market-maker would be required. A market-maker is a person who gives a two-way quote transparently showing his interest to buy as well as sell.
S. MURLIDHARAN

Rupee symbol

2010-07-27T01:44:00.001-07:00

What is the significance of the Indian rupee's symbol?
R. Vedantadesikan, Srivilliputtur
As of now, it is perhaps to distinguish our currency from that of Nepal and Pakistan, which are also rupees, using the same ‘Rs' prefix, that may confuse many. But this could also herald the arrival of the rupee on the international scene as Minister Ambika Soni proudly proclaimed. This could well mean the Indian rupee becoming convertible on capital account and becoming a floating currency a la the dollar, pound, yen and euro. But floating a currency is not such an easy affair. Anyway, the design is at once evocative and simple.
S.MURLIDHARAN

FDI in retail

2010-07-27T01:43:00.003-07:00

What is cash and carry business in the context of FDI in retail?
Kanupriya Jog, New Delhi
The extant FDI policy of the government does not permit multiple brand retail chains. To wit, Wal-Mart which sells everything from pin to plane, so to speak, is not allowed to set up shop in India targeting retail customers but is allowed to set up shop in the cash-and-carry segment, targeting such big ticket purchasers as hotels and hospitals. In short, the cash-and-carry business can be likened to what happens in many of our mandis — you have to buy a minimum of 5 kg, for instance.
S.MURLIDHARAN

Growth of SEZs

2010-07-27T01:43:00.001-07:00

The Revised Direct Taxes Code has provided for investment-linked tax benefits for SEZ developers instead of profit linked tax benefits. Will this hamper the growth of SEZs in India?
N. Asokan, Chennai
I think it is a good move and consistent with the Government's stand that investments should be prodded with investment-based incentives, rather than with profit-based ones, as hitherto. Steps have already been taken in this regard. To wit, with a view to encouraging oil/gas pipeline companies, they have been given a 100 per cent depreciation of their capital expenditure in the very first year instead of having to wait for depreciation in trickles. Such accelerated depreciation would reduce the tax bill and allow carry forward of losses in case the profits are not sufficient to absorb the generous depreciation entitlement. The same has been provided for the cold storage industry as well.
S.MURLIDHARAN

BPLR vs BLR

2010-07-21T01:39:00.002-07:00

What exactly is the difference between benchmark prime lending rate and base lending rate?
Hasmukh Lal Hathi, email

Yes, the RBI has shifted from BPLR to BLR. Benchmark prime lending rate was a signal to the public that the bank will not lend below that rate. In reality however banks were only too eager to bag big ticket corporate loans, and they stooped to conquer. Thus, while the BPLR was 11.5 per cent, a bank lent at 8 per cent to a top-notch corporate with impeccable credentials. Thus BPLR turned out to be more a signal for the retail, small borrowers. The RBI now wants the banks to change tack and disclose to the public what their base lending rate is. In other words, they should tell the public the lowest rate at which they are prepared to lend to their best borrowers. The BLR will have to takeinto account the cost of funds, overheads and profit. Critics say that the change is not substantive, just playing with words. But there are a few who aver that the change will be for the good of small borrowers who will see in its wake a fall in interest rates for them with a concomitant increase for the big-ticket borrowers. Time will vindicate either of them.
S. MURLIDHARAN

Calculating NPAs

2010-07-21T01:39:00.001-07:00

How do banks compute their non-performing assets?
Rajni Ghosh, email
Normally, as per the RBI norms, if an instalment of principal or interest is overdue for more than 90 days, the loan must be classified as non-performing. As a special concession for restructuring non-standard loans due to worldwide recession, the RBI had permitted banks to restructure loans provided they were standard as on September 1, 2008. In that case, in deference to such restructuring the loans were not classified as NPA even if in the meanwhile the borrower had shown proclivities of default on the above touchstone.
S. MURLIDHARAN

Shares in defunct co.

2010-07-21T01:38:00.001-07:00

My friend is a doctor, whose grandfather bought some shares in Nava Jeevan Press in 1948. Though an incorporated entity, it is not in existence now and hence not listed. Can he sell the shares now? If so, please let me know the procedure.
Muniappan Chennai
You say that it does not exists now, which implies that the company has been wound up. Did the liquidator ever contact you? You can enquire with the Registrar of Companies (ROC) concerned as to the true status of the company. But you cannot obviously sell the shares in the market as it is not a listed company. Maybe if the company is still in existence, its management may evince interest in the shares held.
S. MURLIDHARAN

IFRS convergence

2010-07-15T01:12:00.000-07:00

The roadmap as well as the time lines for ‘Convergence of IFRS' has been laid already. Will the regulatory authorities, more particularly the income-tax department, come out with appropriate provisions in the final Direct Taxes Code (DTC) or through some guidelines to permit companies for large-scale write-off of any thing viz. loss or amortisation in the statement of income as a consequence of either making some restatement or fair valuation?
N. Asokan, Chennai
I don't think the income-tax authorities would fall in line with the dictates of even the desi version of IFRS nor would it be feasible because it may spell a considerable loss of revenue for it.
Fair value of assets may be an accounting necessity but tax authorities are not as much concerned with accounting niceties and nuances as they are with computation of true profits and capital gains in the event of sale of assets. In other words, proper disclosure of fair value is a sine qua non for accounting but not so for tax purposes.
Rental value
Why do the taxmen target market rent? Can't one be sympathetic and rent one's property at less than the market rent?
Pushpalatha Nagarajan, Srivilliputtur
This has always been a hotly debated issue but you should also see the Government's side. Given housing shortage in this country, transactions in the real estate segment have not been above board.
A small or big part of the rent is taken on the sly in cash without receipt and this evades tax. To neutralise this, the Government had to introduce the concept of market rent just as it had to introduce the concept of stamp duty value to neutralise the tendency to take a substantial part of the consideration in cash when an immovable property was sold. I however concede that genuine charity is the casualty in such cases.
It is also true that in vast majority of cases, the taxmen do not question the returns and people do get away with under-disclosures.
S. MURLIDHARAN

Mandatory disclosure

2010-07-07T23:04:00.001-07:00

How does the proposal of mandatory disclosure of listed companies increase investor awareness and transparency of creditworthiness of listed companies?
A. Vishnu, Chennai
I am afraid your question is not very clear. I believe you are referring the disclosure norms applicable to listed companies made mandatory by clause 49 of the Listing Agreement popularly known as corporate governance code. In any case, greater disclosure of relevant information endears a company to its investors. Creditworthiness of a company however is a function of its debt-equity ratio, current ratio and liquidity ratio.
S. MURLIDHARAN

GDR issue

2010-07-07T23:03:00.001-07:00

What are the advantages and disadvantages of issuing Global Depository Receipts (GDRs)?
Vikash Sheel, email
For an Indian company, there are several advantages with practically no disadvantage in sight. Accessing equity in foreign exchange, prestige of listing in a foreign stock exchange, diffused ownership of the resultant shares as opposed to concentrated holding in the hands of a single foreign collaborator are the main advantages. But it is not an option for every company. The Government allows only well managed companies with track record of profits to raise capital from investors abroad. Foreign investors are also a fussy lot in the sense their financial literacy is much higher than in India.
S. MURLIDHARAN

Erring auditors

2010-07-07T23:02:00.000-07:00

Does the Securities and Exchange Board of India (SEBI) have the jurisdiction to take action against the erring auditors of a listed company (for certifying the financial statements) caught in a scam which either directly or indirectly impact the stock market?
A.V., Chennai
No, that right vests with the Ministry of Corporate Affairs. However, chartered accountants being professionals are bound by professional ethics. The Code of Conduct framed allows the council of the ICAI to proceed against a CA for professional negligence resulting, in extreme cases, in termination of membership. The criticism against professionals though is they are a closely-knit club and hardly punish each other.
That is why there is a general grouse that the Medical Council of India (MCI) hardly ever bestirs to cancel the licence to practice of even the most grossly negligent doctors. The medical profession has been brought under the purview of consumer forums and doctors in India like their American counterparts have started playing it very safe often resorting to defensive procedures like CT scan at the drop of the hat to save their skin. As far as CAs are concerned it is by and large self-regulation whether one likes it or not.
S. MURLIDHARAN

Status quo for salaried?

2010-06-30T01:32:00.000-07:00

Is it back to square one for the salaried class following the revised Direct Taxes Code (DTC)?
Dhritiman Tagore, Midnapore
Not quite because while perks would be taxed concessionally, as hitherto there is going to be a huge saving potential what with a deduction of Rs 3 lakh being on offer. In addition, the salaried class would continue to utilise the set off of loss from interest payable for acquiring a self-occupied house property up to Rs 1.5 lakh as hitherto.
And with the Government agreeing not to rock the boat with tax on PPF, PF, etc., at the point of withdrawal insofar as such amounts are attributable to the post April 2011 contributions, the smile is truly back on the salaried taxpayers.
A hike in the initial slab that attracts a 10 per cent tax from the present Rs 5 lakh would be the icing on the cake.

Revised DTC
How would you rate the revised DTC?
Damayanti Rathore, Jaipur
Well, it is like a curate's egg — good in patches. For the middle class, the fear of tax on savings on withdrawal has lifted.
In other words, for bulk of the important savings instruments, the extant EEE (Exempt, Exempt, Exempt) model would continue.
This is as it should be given the lack of social security measures in the country. But there is going to be a bit of uncertainty on the tax rates and slabs. The DTC promised the moon — only 10 per cent tax up to Rs 10 lakh and 30 per cent tax would be on income in excess of Rs 25 lakh.
These are most certainly likely to be revisited perhaps in realisation of the fact that the Government perhaps went overboard in making extravagant promises and also in realisation of the fact that the tax yields are likely to dwindle in an EEE regime of taxing savings for many of the important avenues.
The corporate sector is heaving a sigh of relief that the weight of having to pay a 2 per cent tax on assets in case its actual income-tax turns out to be less has been lifted.
The share market operators should be happy because from capital gains earned after a year of lock-in period, there is going to be a sumptuous deduction allowed before the net gain is taxed.
S. MURLIDHARAN

Demat explained

2010-06-22T01:29:00.001-07:00

I am a BBA student, raring to go. Please explain what demat is.
Aniket Anand, Bangalore
Demat is a shortened expression for a security held in dematerialised form. You can also call it holding of securities in a digitalised form. In a demat regime, there is no need for holding shares and other securities physically.
This not only makes for convenience but also eschews the possibilities of forgery, mutilation, and so on, common in the earlier regime when securities perforce had to be in paper form. The paper shares are lodged with the depository, a key player and a link between a company and its shareholders.
Shareholders are the beneficial holders of shares and enjoy all economic rights such as dividend, bonus, rights, etc., as also the right to vote even though the depository has the physical custody of the shares and is the nominal shareholder.
S. MURLIDHARAN

Shares of deceased

2010-06-22T01:18:00.000-07:00

My father had shares in about eight companies purchased long time back. The market value was about Rs 2 lakh in 2000. He expired in 2004. The shares were not converted to demat form.
He has not left any WILL either. We are four brothers and a sister. In principle, the five of us have agreed to nominate one among us to sell the shares and divide the proceeds among ourselves. Kindly guide us on the procedures to be followed to sell the shares.
P. R. Subramaniam, email
Had your father used the nomination facility, you would not be faced with the problem of smooth transition in ownership though nomination does not prevail over the law of inheritance. Your father has died intestate and all the five of you get equal shares in the property.
You can by all means, for the sake of convenience, produce to the company renunciation letters given by the four in favour of the fifth whereupon the shares would be registered in his name and thereafter can either be dematerialised for eventual sale or sold straightaway. Shares held in dematerialised form by a company are sold at a discount normally if they are insisted on being sold in a physical form.
S. MURLIDHARAN

Price escalation clause

2010-06-16T03:08:00.000-07:00

What is a price escalation clause?
Abishek Mahendru, New Delhi
It is normally to be found in most of the long-term contracts. Cost of raw materials and labour could go up in the interregnum between the signing of a contract and its execution. Left uncovered by a price escalation clause, the profits could be steeply impacted and non-fulfilment of the contract could lead to litigation. This puts the seller in a bind. The price escalation clause provides for suitable inflation of the contract price based on an agreed formula that tracks the major raw material prices and cost of labour. Quite a few Indian companies with an eye on the export market have blithely in the recent past entered into contracts sans a price escalation clause. They have only themselves to blame for the plight they are in.
S. MURLIDHARAN