We have a huge unclaimed dividend corpus. Total unclaimed dividends in Indian public listed companies is a staggering Rs.9100 crores. If these dividends remain unpaid for over seven years they get transferred to Investors Education and Protection Fund (IEPF). There is a new guideline which mandates unclaimed shares to be transferred to IEPF. Guidelines are being framed. Unclaimed shares over seven years will soon be transferred to Government of India.

Total of such shares outstanding can only be estimated. If you apply dividend yield of NIFTY 500 to annual unclaimed dividend, you will get a value in excess of Rs.1,00,000 Crores. This figure is quite credible. Just four companies – Reliance, L&T, Asian Paints and ITC – together have unclaimed shares in excess of Rs.10,000 Crores.

The scam

Before dwelling deep into the dynamics of unclaimed shares, let’s have a quick look at the scam that’s unearthed by SEBI. Let me leave here and reproduce the summary given in the Times of India.

• Once share transfer agents get information about unclaimed securities of a deceased holder, they use fraudulent methods to obtain the name and the signature of the person through the company’s register when the shares were issued
• Using forged documents, they obtain a voter’s ID and a PAN card in the name of the deceased holder
• With these two proofs of identity and address, they open a bank and a demat account
• They apply to the company’s share transfer agent to obtain duplicate certificates, saying physical shares have been lost
• A few days after the shares are transferred into the demat account, they sell the same
• The money is credited into the bank account opened for this purpose
• They withdraw the money only through cash transactions, in several tranches, so that there is no trail

Dynamics of unclaimed shares

Traditionally, shares were issued in paper forms. Oldest stock exchange in Asia, Bombay Stock Exchange (established in 1875) was employing “Outcry” method for trading. That is, traders shouted the price of stocks in a hall to close the deals. Enactment of Depositories Act in August, 1996 and paperless trading started soon thereafter by National Stock Exchange, changed the topography for good. There was a period of concurrent trading in both paper and demat form and from 1999 Demat Account is compulsory for trading. However, owning shares in paper form is perfectly legal.

So, the older IPOs in the 20^th century issued paper shares. There were scores of public issues by companies from 1975 to 1995. Some of them turned up astronomical returns. For example, issue price of one share of ITC was Rs.15 in 1976. Today, its value is over Rs.92000/- after accounting for all bonuses and splits. That’s close to 6200x return in 40 years. Little wonder, then, when these shares turn up unclaimed, it is a fertile ground for scamsters.

Shares invested have remained unclaimed for various reasons. For starters, youngest of the older generation investors in 70s and eighties are octogenarians or older. Quite a few of them are dead and gone. Longevity was also low in 80s and 90s. Joint holders were allowed. But there is no nomination facility for paper shares.

Apart from this, there are scores of other reasons why paper shares fall out of horizon and become unclaimed shares. Some of the reasons are as follows.

• Change of house and address. Rented house to own house, change in place of work, migrating to other countries etc.
• Change of Marital status
• Shear human forgetfulness
• Loss of original share certificate
• Owner dies and legal heirs do not know about it
• Typos in shares of manual period
• Estate disputes and much of water has flown under the bridge
• Government Custody during special circumstance such as what is known as Harshad Mehta Scam
• Unable to cope with the complexity involved in transfer and transmission of share.

The perpetrated scam

Once the dividend does not reach the owner, it becomes unclaimed dividend. By law, unclaimed dividends have to be notified by the companies. Some companies provide the list of unclaimed shares and dividends in pdf or excel format. Some companies allow the shareholders to search them by providing search boxes. One needs to feed the Folio number to get the results.

Scamsters are armed with this data. This data is available in all grandeur to the Registrar and Share Transfer Agent (RTA) of the concerned company, replete with last available address and specimen signature. If the reports are to be believed, following is the modus operandi.

• The scamsters created pan number & voter id for the dead person,
• opened a demat account and bank account using these fake ids.
• Got debit card from the bank
• Filed a share missing report with the police station of appropriate jurisdiction and got the acknowledgement.
• Applied for duplicate certificate with forged signature of the dead man already available with Registrars and Transfer Agents.
• Since R&T Agents are already in connivance, duplicate shares get issued rather quickly.
• Immediately it will be sent for dematting.
• As soon as the shares are demated, they get sold and cash is withdrawn. God bless ATM Cards.

In our line of business, we deal with registrars and transfer agents day in and day out. Generally, they are nice people. If you follow the guidelines properly, things get done in the normal course. They have a turnaround time to follow. Generally, they are good people. Black sheep, however, cannot be ruled out. When there is so much of unregulated wealth out there with justifiably very complex procedures, human temptation takes over.

This is not a simple case of extending one on one favours in deserving cases and expecting quid pro quo. Look at the array of people involved. Employees of Registrars for documentation and specimen signatures, police for FIR formalities without proper enquiry, bank manager who opens bank account, depository participant for opening demat account, Government agencies that issue PAN cards and voter IDs, professionals who help with documentation all through. If I didn’t go through the report, I would not have believed, this is going on. Handful of rogues making Aadhar mandatory everywhere has justification, after all. In our line of business, we come across many deserving cases who are simply unable to enchase their entitlement due to complex procedures (Don’t get us wrong. Procedures are just fine) while there is organised loot on the other side. Disgusting. Hope SEBI gets to the bottom of this.

Transferring unclaimed shares to IEPF

This is the second news we woke up to. This is not well publicized and was known to mainly industry insiders.  Investors Education and Protection Fund (IEPF) was formed under the Companies Act and its procedural aspects are governed by IEPF rates. Hither to all dividends lying unclaimed with the company for more than seven years were transferred to IEPF fund. Vide it’s notification dated 13^th October, 2017, IEPF has amended “The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Second Amendment Rules, 2017 (“Second Amendment Rules”). It has become effective the same day. Without getting into the nitty-gritty, let’s see the highlights of the new regulation.

Date of Transfer to IEPF

From the date of transfer of dividend, it is required to be encashed within 30 days. Seven days from the day there after, it is required to be declared as unclaimed dividend. Seven years from the date it is declared as unclaimed dividend is the date on which dividend has to be transferred to IEPF account. Same rule is applicable to shares. So, for all practical purposes if dividends have not been claimed from 23^rd September 2010, those shares are liable to be transferred to IEPF Account.

Transfer is in fact Transmission

Original provision treated the migration of unclaimed shares as transfer. As per the new amendment it is deemed to be transmission.

Transfer of physical shares

Since the original owners have not claimed the shares and possibly are in possession of shares, new share certificates will have to be issued by the companies with the marking “Issued in lieu of share certificate No….. for purpose of transfer to IEPF”. These shares will be dematerialised and will be deemed to be transmission.

The Advantages

This scheme provides a few advantages

• Stamping and franking is dispensed with. This reduces cost and manual stamping by companies. Call it ease of doing business.
• Unclaimed shares for the past seven years will now be with the Government in DEMAT form. Scam as stated above may not be easy. It remains to be seen, however, how easy it is to get it back from the company.
• Since new shares are issued and dematerialised, we think, cumbersome formalities associated with getting the duplicate paper shares may be dispensed with. We need to wait.
• Possibly the legal owner can directly repatriate it to her demat account. This will reduce the cycle time by 15 days to one month

And there are a few questions

• Transfer to IEPF is deemed to be transmission. Will transferring back to the legal owner will also be treated as transmission? This is not clear.
• What about tax implication? Will it be treated as fresh acquisition? What about short term capital gain? Do they require amendments to income tax act? Requires more clarification here.
• Would it lead to quid pro quo on case to case basis as is being alleged when dealing with Government Agencies? How inconvenienced the investor or his legal heir would become?
• Paper shares will still be with the shareholder or legal heir. If the holder sells it, what is the ratification mechanism? Would it lead to new scam by ever enterprising Indian rogues?

Transfer to IEPF has been in the air for a year now and this has become a reality. If there are proper safeguards to the above questions and if there is ease of operation for conversion, this can actually be good for the holders of unclaimed shares. But, considering our experience in dealing with Governments, this is a big IF.

The post Unclaimed Dividends and Shares – Part II – Conmanship and IEPF appeared first on SMB.

The protagonist, Arun Jaitley says, “It throws up a challenge for the economy. In coming quarters we require—both in terms of policy and investments—to work more to improve upon this figure”. Chief Economists of banks, Arundhadhi Bhattacharya and may people who are ought to be taken seriously are of the opinion this points towards a fundamental loss of momentum and cannot be viewed as transitory slow down due to disruptions.

Given this scenario, GDP Growth or lack of it became a rallying point for disgruntled intelligentsia and middle class. Disgruntled due to lack of visibility in DeMo, GST implementation fiasco etc, GDP Growth rate is an armour for Modi bashing. Facebook and Whatsapp gyan providers are having a field day. For a change, bhakths are in the back foot. Not to be out done everyone I know of – friends, acquaintances, clients, my uncle who was dead and gone before Modi came to power – are worried about Indian economy and GDP growth rate.

All through this, there is no one who has anything constructive to offer. How to reverse the trend, if at all? That’s Arun Jaitley’s problem and Modi’s waterloo. Everyone is unanimous about one thing. Multiple disruptions of headstrong Modi Government have put the country backwards, though we don’t care how to take it forward! Let’s have a saner approach and look at it holistically. First the disruptions.

Demonetization

During the time of demonetization, we published a blog here. We hoped that following would be the benefits of demonetization. It’s more than nine months. Let’s take stock.

• Corruption – if some follow up actions are taken – can be substantially reduced if not eliminated – At lower levels, corruption is as it is. There are unsubstantiated charges of rampant corruption in states like Tamil Nadu. People say price for governmental contracts is upwards of 20% in illegal gratis.
• Indian psyche of disregard to rule of law will change for good. – Hope so. Except for increase in number of assesses, nothing else is visible.
• With terror finance crippled, Defence and Police will firmly act against terrorists and unlawful elements. – Nothing significant is visible.
• Wide spread use of digital payment platforms will be a distinct reality. – What a failure it is! Digital payment gateway usage has comeback to pre DeMo levels
• Unorganised financiers and loan sharks already have a real tough time. This has made life of many small debt laden businessmen easy. – They are back in business.
• Sheer amount of financial intelligence collected through big data analytics may well be worth all the pains. Imagine a situation where Government has absolute insight of financial behavioural pattern of drug peddlers, divisive anti nationals, criminals, gangsters, thugs and local political dadas. Government may well be collecting CC TV footage from known corridors of economic offence. – This is one is for real. Government is armed with data. Usual black money generators are worried lot and we hear lot of hair brain schemes to stash wads of notes. They are worried Rs.2000 notes will also be demonetised. This is good. But people want to see some big fish going to jail. Not Jan Dhan account holders getting tax notices.

All told, DeMo is not a great success, as on date. Unless the government collects at least Rs.1,00,000 crores in taxes from spurious deposits, it can be termed as utter failure. If it fails, it would be a poor way to repay the faith reposed by masses on Modi and the sufferings they have undergone for a better India.

One wonders why the DeMo implementation is that terribly botched up. Is corrupt Babus implementing schemes for clean governance is the reason? Modi government needs to introspect. All told, there is definitive impact in GDP Growth rate due to demonetisation, largely due to the sufferings of SME sector.

Afterword: I wrote this far and left it to be continued later. Times Now today came out with an exposé. Single company has 2000+ bank account opened by Bank of Baroda and exchanged Rs.4500+ Cr during DeMo period. 200000 shell companies were closed. Once banks provide more data, tax collection may well be over Rs.1,00,000 Crs. But it will take years to do that.

Goods and Services Tax

This government has taken botched up implementation to an art form. There are hardware problems, software problems, E-Way bill implementation problems, properly structured tax rate is a problem, goods and services classification is a problem. Everything around implementation is a problem. We can’t help wondering if Babus are indirectly not co-operating with the implementation. One wonders why no heads are rolling when there is this much of inefficiency in implementing a watershed legislation.

Implementation apart, there are a few real problems especially for SMEs.

• Making the companies GST compliant require professional help. It is not available in abundance.
• Shift from origin based taxation to destination based taxation requires mass scale reskilling of staff. Country doesn’t have sufficient reskilling infrastructure and SMEs do not have the wherewithal to afford expensive training for staff.
• Manufacturers did not have excise duty up to Rs.1.50 in the old regime. Now SMEs with turnover of Rs. 20 lacs are forced to register.
• Service industry is paying higher tax @18%
• GST puts pressure on working capital. Reverse charge mechanism and mismatch between input tax credit and output tax (Input is at 28% or 18% while output is at 5% or 12%). Already cash starved SME finds it difficult to take it.
• Various industries have come out with various problems.

All these have natural impact on GDP growth.

Despite all these, GST will have beneficial impact on the economy in the long run. Tax rates will eventually converge to 12% and 18%. Black money generation through business will be largely reduced. Economic buoyancy and tax collection will improve.

Today, some positive steps are taken in the right direction and much needed time is given for proper transition. GST Council is a truly federal body. They are equipped take decision and virtually every decision is on consensus. They even write their own law. Erstwhile planning commission or even NITI Aayog are Centre driven bodies and they are not truly federal. This is one important takeaway of GST. We have become a truly federal republic.

Some of the positive steps undertaken by GST Council today (6^th October’2017).

• Tax reduced to 5% from 12% on cloths. Now traders don’t have to cheat government by invoicing salwar separate, kameez separate and dupatta separate. Earlier apparels less than Rs.500 attracted lower tax.
• 27 items tax reduced to 5% from 12%. Yet to see the list and analyse. Quite a few of them will release working capital release by reverse tax structure between input and output taxes.
• Restaurant Tax reduced to 12% from 18% GST.
• Turnover for composition scheme raised from ₹75 Lakhs to₹ 1 crores. Great relief for SME. They have to register beyond Rs.20 lacs, though. Compsite tax should be allowed as tax credit. Major corporations insist their SME suppliers should register for full GST.
• E-way bill provisions deferred till April 2018. Government gave itself the necessary time to cover the implementation inefficiency. Still, it is good.
• Reverse charge to be abolished till 31.03.2018. Great relief on working capital.
• Quarterly returns for taxpayers with annual turnover less than ₹1.5 crores. Tax to be paid on monthly basis. Compliance cost gets reduce to 25% for majority of SMEs
• Exporters to get IGST relief for 6 months. Euphemism for “We are not ready with refund mechanism?”
• E-wallet gateway will be developed and introduced after six months
• PAN card will not be needed for jewellery purchases above Rs 50,000. What for? How is it combating black trade?

All told, these are good steps that will help trade and industry. Much needed, though it must have been done as a reaction to 5.7% GDP growth rate. In sum and substance, GST is not likely to be an impediment for the country’s growth. In fact, it will fuel growth

The SME Predicament and NPA issues

SMEs are proverbial backbones of Indian economy. DeMo and GST has made huge impact on this sector that has been great generators of employment. They need finance. Stung by NPA, banks are not willing to lend. CGTMSE Scheme (Collateral free loan for MSME up to Rs.100 lakhs) is just on paper. During the period of demonetisation, we made another blog post which is available here. We were hoping government will take some actions in the following lines.

• Tax paid on declaration of black money, should be provided as loan in soft terms. MSME should be encouraged to comply without fear. Even if 25% of such loans turn bad, Government would have collected the taxes and brought this money to books.
• Cash should reach MSMEs in rural area adequately.
• Now that unorganised funding is also absent, banks should be liberal in funding MSMEs. NPA shy commercial banks are unlikely to do this. Government should aggressively refinance lending by banks and NBFCs. Refinance, Credit Guarantee, Exemption from CRR/SLR … whatever is required needs to be done.
• Separate nodal agency for refinancing Micro Finance companies will go a long way. Unorganised MSME will be worst affected without adequatre cash supply.
• Additional security can be by way of lien on shares and personal guarantee wherever there is shortfall.
• Cash credit should be made flexible. If changed scenario so warrants, SME should be allowed to convert part of their Cash credit as Term loan and a portion of non-fund based limits can be converted as fund based limits.
• Onetime write-off of Stocks and Debtors (to the extent padded and unreal) and carry forward of losses should be allowed without questions or scrutiny which can be set off with future profits.
• Creating availability currency for this sector of economy on a war footing. Solutions should be thought of, beyond regular banking channels.

Nine months after demonetisation, not even lip service is being given. SME predicament has definitely affected GDP growth.

Corporate Credits

Big industry credit off take is also pathetic. NPA stung Bank Managers are concerned with CVC, CBI and their own pension. With the result, banks are not taking decisions to take haircuts on NPA and move on. They want to fund only companies with credit rating of A+ and these companies are not investing. Those who need loans are not getting because they are not A+. This has resulted in poor credit off take and fillip to growth. One of our clients is a BBB- NBFC who lends to SME and provide Gold loans. They are finding it difficult to raise funds purely on rating count.

Is our economy on a tailspin?

Despite all these problems, we don’t believe, our economy is in ICU.

Soon after GDP growth rate of 5.7% many respectable agencies revisited GDP growth forecast for FY18. Growth rate was announced on 1^st Sep, 2017 and Crisil on 4^th September, 2017, lowered its growth forecast to 7% from 7.4% for FY18. This is from Crisil report. “We scale down our GDP growth forecast for fiscal 2018 to 7%, from 7.4% earlier. We believe GST- related disruptions will limit the upsides to growth for a few more quarters because there are uncertainties around the possibility of changes to the given tax structure and as businesses adjust to this new regime.”

Asian Development Bank has made identical downgrade on 25^th Sep, 2017. “The Asian Development Bank (ADB) has slashed India’s GDP growth forecast for the current fiscal to 7 per cent from 7.4 per cent owing to weakness in private consumption, manufacturing output and business investment.” quotes Economic times dated 26^th September,2017.

Most other agencies have given similar ratings. Suffice it is to say, world expects a GDP growth of 7% for FY18 for India despite 5.7% growth in the first quarter. Funny, not many stopped to think what it means. What it really means is the country has to grow at an average of little over 7.4% for the balance three quarters. If we place this in arithmetic progression GDP growth rate will be 6.6% in Q2, 7.4% in Q3 and 8.2% in Q4. Does it sound anywhere like an economy in death bed?

I asked a friend of mine who works in a senior position for a piston manufacturer whether their production has come down. He said, they have huge backlog of orders. Auto is a bell weather industry and Maruti grew over 10% in September 2017, compared to September 2016. Similar figures for July was 20.6% and August was 23.8% Not just Maruti, entire industry grew. However, manufacturing SMEs need some serious help. DeMo and GST have put them in the backfoot. Serious remedies are being done with respect to GST. Funding aspect needs to be alleviated. However, Indian SME, like our society, is very resilient. That’s why you see every SME in your neighbourhood flourishing.

In Conclusion

Outlook of manufacturing is positive and agriculture is likely to buoyant. ADB, in the same report observed, “Despite the short-term hiccups as firms adapt to the national GST, we believe that continued reform progress will help India remain one of the world’s most dynamic emerging economies. It further observed, “Investment growth, however, is likely to remain muted in 2017-18 as budgetary constraints limit government expenditure. Growth will further pick up in 2018-19 as the new tax regime improves domestic competitiveness and government efforts to improve health of the banking sector aid private investment to yield results.”.

That’s it, really. DeMo is not the kind of failure, world is perceiving it to be. It will indeed collect huge amount of taxes in the foreseeable future, if not in the near future. Process for settling down with GST has firmly begun. This will increase tax collection. Agriculture is likely to provide huge bonanza. These are definite pluses.

NDA Government has already crossed 92% of its budgetary deficit for FY18. This means they have already front ended all planned investments. There is no further scope for additional investment. And credit off take is bad. SMEs require more help. Since income growth is not exponential, the government should curtail unplanned expenditure.  Banks should be empowered to take haircuts and move on. We can find money for all these. Our debt profile is pretty good at 71% of GDP. Sovereign rating worry might prevent the government from doing this.

In sum and substance, we don’t believe GDP growth is in ICU. We are stronger than that and we are likely to grow much faster than this.

We would love your comments and interactions.

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Value of unclaimed shares in India

Unclaimed dividends lying with companies as of June 2017 is staggering Rs.9100. IEPF (A separate post is required on IEPF) holds another Rs.1700 Crs. After seven years the companies should transfer the unclaimed dividends to IEPF. This means, average dividend accumulation is Rs.1300 Crores per annum. Based on Nifty 500 dividend yield as on 3^rd October, 2017 is 1.15. S & P BSE 500 dividend yield for 2016-17 is 1.27. Applying the higher number, value of unclaimed shares in Indian listed companies is at least Rs.1,00,000 Crores.

There are companies that do not declare dividend. There is Mutual Fund and there are unlisted companies like Cochin International Airport Limited which has good value. If we add all these, unclaimed investments in Indian corporate sector may well be double our estimate. Okay, what has it got to do with Succession Certificate? There is. We will come to it in a moment.

Major reason for unclaimed shares

Based on our experience in harnessing forgotten wealth, we can say that typical process of slippage is like this. Demat was introduced in 1996 and made compulsory for trading in 1999. Generally, shares become unclaimed in case of shares that came out with IPO or rights issue or FPO before 1996 or paper shares traded between 1996 and 1999. Also, quite some time was elapsed before Nomination facility came into being for Demat accounts. Many started getting interest in stock markets after Reliance’ success in late 1970s and Harshad Mehta boom in 1980s.

Back then economy was not like today and one needs to earn quite a bit to invest in markets. That is our investor is typically in his 40s in late seventies. Today’s octogenarian at the minimum. They typically kept their wealth in trunk box and stored in the loft. Family was blissfully ignorant of father’s investments. Demat account is compulsory only for trading. Paper is still valuable. Just that it lacks nomination facility and rendered useless for legal heir unless substantial work is done on them.

When a shareholder dies intestate (without leaving a will) legal heirs of the deceased become eligible to claim ownership. However, they need to prove the credentials. One of the basic requirements is death certificate of the deceased and legal heirs certificate issued by the local administration of the place of death. These are just a start. Then there is whole gamut of documentation such as transmission forms, indemnity bonds, no objection affidavits from legal heirs, banker’s certificates, notary signature etc. It is part of this series and transmission will have a separate post.

As per SEBI guidelines, in case of paper shares, if the value of a share held by the deceased is more than Rs.2,00,000/- we should obtain succession certificate. It is mandated by SEBI Guideline and District Judge is the judicial authority to issue succession certificate. If it is a Demat account, if the value of portfolio is over Rs.5,00,000/- Succession Certificate is mandatory.

How to apply for ”Succession Certificate”?

• Appropriate application should be made to The District Judge. Jurisdiction is decided by place of death or situation of property.
• the petitioner must sign and verify the petition;
• the residences of the relatives and family of the deceased must be mentioned;
• In case of The Hindu Succession Act (Act XXX OF 1956), the names of the heirs must be mentioned in the petition;
• the right of the petitioner should be mentioned;
• the debts and securities as to which the succession certificate is applied for should be mentioned;
• Enactments to the grant of succession certificate or to the validity of it in case of it was granted, must be mentioned. In this case, the SEBI guidelines should be mentioned.

There upon court will call for witnesses and agree to issue the certificate. Once this is done court fee needs to be paid depending on the value of the assets. Court fee in many states are quite reasonable. In Andhra Pradesh and Karnataka, maximum court fee payable does not exceed Rs.35,000/- Tamil Nadu has increased it to flat 3% on the market value of the asset mentioned. This is unreasonably high for high value inheritors.

Succession certificate is a scam committed on small value inheritors:

Let’s say someone left 1000 shares of ITC. Today the value is around Rs.2,65,000. To claim this one has to apply for Succession Certificate through an advocate paying Rs.30,000 to Rs.50,000 as fees, give newspaper advertisement for Rs.5000/- and pay about Rs.8000 in stamp duty. This means, someone will have to spend Rs.43,000 to Rs.63,000. Net claim is about Rs.2,00,000. In that, they have to pay to professionals like us. If there are three heirs, what incentives will they have to go to court five times before getting the certificate? No wonder, over Rs.1,00,000 crores in forgotten wealth is waiting to be unlocked.

On the other end of the spectrum, let’s say someone has a portfolio of five crore rupees. Tamil Nadu Government requires them to pay Rs.15,00,000/- just to tell that they are indeed owners of this tax paid money. This is greed at best and anarchy at worst. Tamil Nadu Government is clue less with their finances and are resorting to indiscreet taxation wherever possible. There has to be a more reasonable court fee structure for obtaining succession certificates.

SEBI increased the limits to Rs.2,00,000 as threshold for obtaining succession certificate. They have given power to individual companies to increase the limits if they so wish. Obviously, none of the companies seem to wish. Whose father, what goes? SEBI should seriously look into it. S & P BSE 500 was at 5800 points in 2012 and it is today at 11000 points. So, there is a case for at least doubling the limit.

In this scenario, no small portfolio holders are making any serious attempts to recover the wealth and one can’t blame them. Let’s assume for a moment all of them approach District Courts for a succession certificate, there would be over a million applications in the 600 District Courts. Do we have the bandwidth? This is an unfair bonanza to Government of India through IEPF route and there is an incentive to do nothing.

Our line of business is “Harnessing Forgotten Wealth”. We are seeing so many deserving cases where reclaiming these shares would go a long way in improving the finances of the family. There is a clear case of increasing the threshold for Succession Certificate to Rs.5,00,000/- in case of paper shares of a particular company or to Rs.15,00,000/- for Demat portfolio. Hope SEBI takes notice and does something real fast. Here, the Government’s fairness and equity is put to test. Hope it does justice.

Please write to us your views here. Contact us in case you have shares in paper forms that are gathering dust. We can be of professional help

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I listened to Krishna for the first time in 2003 or 2004. When I walked in to the auditorium, he just started the alapana in the raga Saveri. He went on to sing a Ragam Tanam Pallavi. What a Saveri it was! Music that creates profound impact are generally few and far in between. We listen to lot of music. It can be either good or bad or somewhere in between. They are objective analysis or even subjective opinion. But feeling ecstatic about a piece of music doesn’t always happen. He was able to create one. I think, I will take the memories of that Saveri to grave, God forbid, if I am not consumed by Alzheimer’s.

Between diamond ear stud, srichurnam clad Krishna and Magsaysay awardee neo left Krishna, whatever has happened? Has it impacted his music or listening public? He wants to challenge the status quo. Laudable as it is, why is he doing it? Is he challenging status quo to justify his position as a left leaning intellectual? This blog post is an attempt to understand.

A portion of what is written here is paraphrased from my posts in Facebook and Rasikas forum.

I have always thought Krishna to be a traditionalist. Post 2011 (?) Krishna has been vocal about many things and one of them is concert formats. Many hate Krishna’s concert format or lack of it. I am not a great fan of Ariyakkudi format, myself. In my view, it is this format that killed leisurely paced music (vishranthi) to templated fast pace. But, singing a niraval in Sankarabaranam Thillana makes one scratch his nose. Liberating or trying to change concert format is one thing while mutilating a sub-genre is another thing. Despite this, I have grown to just accept his music as it is. It used to be consistently good. Nowadays it oscillates between sublime and ridiculous, often in the same concert.

Even in the concert I attended, it was probably for the first time I heard Devamanohari and Suddha Saveri back to back. I half expected Aarabi next. All these are siblings with similar features of the same father Sankarabaranam. This may be good for a Lecture Demonstration, not for a concert.

Real maverick or living up to cultivated image?

Regardless of intentions, his musical experiment with the Jogappas music is something I personally like and congratulate him for. I can’t think of Sanjay Subrahmanyam or someone else doing it.

Jogappas are a subaltern society of transgenders in North Karnataka. They are fairly well respected compared to other societies of people with gender fluidity. They are chosen by Goddess, “Yellamma”. It’s not their choice. They are considered to have supernatural healing power and fortune telling capabilities. Yet they do not have too many economic option. Community takes care of them with offerings on Fridays and Tuesdays in temples. That’s a sorry state to be in.

They have their own distinct music with accent on words and simple mid to fast paced rhythms. The words are in Marathi as well as Kannada, true to their location. Krishna has conceptualised the concert very well. Brisk and lively introduction of the Jogappa music, delineating their societal position with a lovely metered thanam in Sindhu Bhairavi (video), Mixing and matching both styles leading to a wonderful “Renuka Devi Samrakshitoham”, singing to each other’s rhythm, a thani avarthanam of sorts and finally, unfortunately, a cliché ridden, Eashwar Allah Tere naam…

Thanks to T.M. Krishna I read about Jogappas, reflected on the music of a community that’s penalised by the society for no fault of theirs. His journey has use, after all.

Poromboke Song

A song on Ennore creek waste land. This is set to excellent classical tune in six ragas and composed by violinist R.K.Sriram Kumar. Good classical tune that compares with good thukkadas (songs sung towards the end of a Carnatic music concert). However, is it capable of getting sung in carnatic music concert? Answer is in the negative, in my opinion. Krishna himself says these songs can be sung in concerts. He might do it one day. Foundations of South Indian classical music is devotion and romance – Bhakthi and Shringaram. If you remove them will it be Carnatic music? Has he really thought through what he was talking about? One can only guess.

Moving art to temples

T.M.Krishna’s much touted initiative is moving Carnatic music to temples. Cynics comment that it is his anger with Madras music sabhas that made him take this step. Cynicism apart, is it new? Has nobody else done it? Is it not where the art belongs, anyway? Why then, this is accorded so much importance?

Carnatic Music or Karnatik Music?

T.M.Krishna wrote a book titled, “A Southern Music – The Karnatik Story”. I am absolutely okay with the present name, Carnatic music. He feels it sounds so colonial. His solution to decolonialise Carnatic music is to replace c with k. I get the same feeling when I read his articles in, where else, “The Hindu”. To me, he raises very valid questions. Very superficial and very loud. Stops there and goes no further. By the way, the right name could in fact, be Karnatic Music, in my opinion. Nothing colonial about it, though. Karnatakam means pazhamai, ancient. Karnataka Sangeetham means, ancient Music. Purely from transliteration perspective Carnatic music can be written as karnatic music. It is totally beside the point, but I couldn’t help myself. I will stick to ‘Carnatic Music’.

About the book itself, it sounded pedantic and philosophical gibberish to me.

Brahmin domination in carnatic music

Krishna’s pet peeve. Largely true and something needs to be done fast and done well. To do this one has to understand historical perspective and plan accordingly. Krishna wrote a book on south Indian classical music and he sure knows. Just that, he discounts everything that happened over centuries. Putting the gun in Sabha secretary’s temple or refusing to sing in Madras sabhas in December cannot bring in the solution. Let’s try to understand the progression.

Defining Characteristic of carnatic music is gamakam. To a question whether Carnatic music came from Karnataka, Seshagopalan, in a Lec-Dem once said to the effect carnatic music is indeed Tamil music. During later Pandya rule, when Thevaram pann was sung with gamakam for the first time, flute was able to follow it while yazh was unable to follow. This gave rise to invention of Veena in its present form, he said. This perspective is pretty reasonable since (according to Wikipedia) yazh was last mentioned in Periyapuranam (Circa 1250 CE).

This development gave rise to initial pithamagas of CM (circa 1550 CE) – Muthuthandavar and Purandaradasa. (Give or take five decades) Another two to three centuries passed before substantive development took place. It is not some coincidence major developments in the field of music world over have happened in the 18th century or late 17th century. Beethoven, Mozart, Bach, Marimutha Pillai, Arunachala Kavirayar, Gopalakrishna Barathi, Thyagaraja, Muthuswamy Dikshithar, Shyama Shastri, … Sitar and tabla got introduced in the 18th century.

Traditionally, custodians of South India music and dance have never been Brahmins. It is the community of Isai Vellarars who were the custodians of music. Prominent musicians and composers were never Brahmins. Majority of Azhwars and Nayanmars who sang Pann in pre gamakam era, touted Tamizh Moover  – Muththuthandavar, Mari muththapillai, Arunachala kavirayayar, Tanjavur Nalvar, Tiruvarur Ramaswamy Pillai, even Swati Tirunal Maharaja… the list goes on. Trinity centric compositions were meant for Bhajans and Namasankirthanam. Trinity compositions were not used in the concerts during their time or for about six or seven decades after their time. It is only after Namasakirthanam tradition merged with carnatic music, Brahmin composers started dominating because Bhajan style compositions started monopolising concerts. This is my take.

Thereafter, two major happenings affected CM and changed the topography of Indian Classical arts. (Devadasi Abolition Act and Zamindari Abolition Act) Social and economic compulsions made Zamindhars to reduce/abandon patronage to classical arts. This forced the migration of music from courts to sabhas and migration of musicians and dancers to cities. Second major happening was the upheaval against Devadasis and branding them as commercial sex workers. This was spearheaded by Muthulakshmi Reddy and supported by people like Sir C.P.Ramaswamy Iyer, as a precursor to Devadasi Abolition Act.

Prominent Devadasis such as Bangalore Nagarathnammal (the one who fought against male domination in Thiruvaiyaru and later commissioned the shrine where Thyagaraja aradhana is conducted every year) vehemently opposed the move since they considered themselves sophisticated, independent and artistic. They had a pretty good notion about the way they lived and had lot of self-respect. We tout the Scandinavian notion on social issues such as this today. That’s probably what we hand three centuries before.

Isai Vellalar men, the custodians of art, on the other hand wanted the system abolished. These five decades up to 1930 created existential crisis in the community which was mandated to be the torch bearers of classical art forms.

It is during this phase Padam and Javali centric south Indian art forms became Trinity Centric. Locational progression was from temple to courts to sabhas. Bhakthi and Sringaram used to be integral part of South Indian culture (even temples bear testimony to this) and Sringaram became a taboo. I am not competent to say whether it is right or wrong, but to me it is a tragedy.

“Civilised people learning music and dance” was a narative. This mean, the practitioners hither to were uncivilised. Dance was a bigger casualty.  Sadir became a bad word so much so it had to be rechristened as Bharathanatyam. It helped a lot for spreading the art thru sabhas and at the same time polarised it to be a Brahmin Art. Divided the integration between Music and Dance. In a way, they saved the art at the time of crisis, but failed to re-integrate it with the society to which it belongs. It is here, work needs to be done.

In the process, great art form that was enjoyed by the whole community even before 70-80 years became the monopoly of Brahmins. Got completely monopolised as late as 1975 or so. They were the saviors at the time of crisis. If anything, this is colonial impact. Not Carnatic music or karnatik music.

Krishna’s views in general

Post 2011 Krishna has a view on everything. On whether Sachin’s batting is art, that we don’t need Modi or Rahul (Don’t bother to find, who else), ideas don’t flow in conclaves conducted by main stream media, we sit in the back seat of a chauffer driven car because of the power we have, death penalty means death of the society… the list goes on.

A word of caution. Don’t search for these articles expecting something meaty or thought provoking. They are just the right questions, period. He has become a rallying point for some leftist groups. Why not, if this, the Hindu and his own high decibel questions can help him to get a Magsaysay and beyond.

Krishna wrote in one of his articles, “Artistes don’t stand for elections, don’t fight on the battlefield but we offer to everyone the very breath of life —happiness.”

We hope, he gives it to his fans for another thirty years.

The post Musings on a musician – T.M.Krishna’s views and music appeared first on SMB.

Two, Chief Economic Advisor Arvind Subramanian’s extension by a year kept us wondering if the Modi Government wants to bring in Universal Basic Income Scheme over the next one year. Arvind Subramanian’s term was to end on 16^th October 2017. Now it gets extended by one year. That is 16^th October 2018. About one month before model code of conduct kicks in for 2019 general elections. What a mileage it would be for Modi re-election if it is implemented! Re-election would be over before the economic ramifications, if any, kicks in. For this reason alone, would not the opposition try to torpedo the implementations?

Universal Basic Income (UBI, for short) as concept for India was pronounced by CEA Arvind Subramanian through Economic Survey report of 2016-17. From Feb through April there were some discussions and it died down. UBI in principle, gives cash to people below poverty line so that they are lifted above the poverty line.

It’s not new or unique to India. Elon Musk thinks artificial intelligence and industrial automation through robotics are going to render lot of people jobless and future governments cannot but resort to UBI. Bill Gates doesn’t agree with Elon Musk and thinks we shouldn’t panic about it. Multibillion dollar tech philanthropists’ speak apart, is it possible in India or even needed for India?

Economic Survey points out that the districts that need the most are the places in which States are incapable of delivering. Central Government is running about 950 inefficient schemes that keep close to 30 crores people below the poverty line of Rs.22 in income per day. Sad. So, there is a strong case for implementing UBI.

As per CEA’s estimate if we can spend 4.7% of GDP, 99.50% of the people can be pulled out of poverty line. Poverty line is little less than Rs.8000 per annum. It’s quite laudable, even if it is Rs.22 per day. We don’t plan to reel out statistics.

At high level, there are a few prerequisites for implementation.

For starters, all subsidies hither to given have to be stopped. This is easier said than done.

Secondly, from where will the required money come? This requires Centre-State co-ordination and sharing of expenses. This will be anathema for States. They will be deprived of power and possibility of corruption. However, reduction in petroleum subsidy has actually made it possible to allocate funds to a large extent. One major advantage of implementation would be reduced corruption. For this reason alone, it may be difficult to implement.

Finally, there is one area the country is almost ready. It requires Jan Dhan – Aadhar – Mobile infrastructure, that is largely in place.

So, in financial or infrastructure terms it is not impossible to implement. There are a few downsides though.

What about PDS, Electricity Subsidy and other subsidies offered by various Governments for middle class people? We can’t withdraw cheap rice to your servant maid. With rural electrification thrust, not all newcomers to world with electricity can be expected to pay commercial tariff. Can we retain PDS, Electricity subsidy and fertilizer subsidy and yet provide UBI? These are questions that cross our mind.

Victor Hugo said, “There is one thing stronger than all the armies in the world, and that is an idea whose time has come”. Has time for UBI come? We are not sure. But, as Arvind Subramanian concluded in Economic Survey, UBI is a powerful idea whose time has come for some serious discussions.

The post Universal Basic Income appeared first on SMB.

We are in the business of harnessing forgotten wealth. Shares or mutual funds predominantly. Insurance, PF and Bank Deposits off and on. Wealth in these forms is rendered useless for various reasons – Death of the holder, change in name, change in address, change in country of living, mere loss of original certificates… Reasons are endless, but the result is same. Legitimate wealth is not available to the legitimate owners or legal heirs.

We painstakingly, collect a database of these forgotten wealth. And try to reach out to them.

Coming back to our Salem lady, following conversation ensued with our manager.

“Yes. My husband”

“Is he in?” The Manager knew, the husband was no more. Quite difficult to say so.

“He is no more. Five years. Why are you asking? Any problem?” – No M’am. Actually, there is some solution in the form of forgotten wealth.

“No. Your husband left some shares. We can get it for you”.

“How much?” Thank God for small mercies. She knew what a share is.

“Thirty-Five Lakhs”.

“What?” End of story. She refused to believe in our manager. “Come on Sunday, when my son is at home”. She refused to even take our business card. I don’t blame the lady or anyone like that. In this age of scams and conmanship, I would be a worried man if someone comes in and offers silver bullet.

Our manager went back unannounced on the immediate Sunday. Here comes the conman trying to drown me and make me fall for it hook, line and sinker.

Initially, the son was also sceptical. It took two more visits and a respectable local reference before they opened out. Father invested in shares. They knew the father invested, but nothing more. He died leaving behind the wife and two sons. They have shares in two blue chips totalling Rs.35 lacs and another Rs.3.00 lacs in unclaimed dividends.

There is a spin to the tale. The other son left the house without telling anyone 20 years back. Nobody knows where he lives or God forbid, if he lives at all. Father died intestate. If someone dies without leaving a will, we need to obtain a legal heir certificate and succession certificate from court showing who are all the legal heirs. Process in normal case takes minimum eight months if the legal heirs can come and give witness to the court. Here situation is intriguing. The family does not know the whereabouts of one legal heir.

We took the contract and we established the facts at the time of obtaining the legal heirship certificate based on the affidavit of neighbours and their witness. We are in the process of getting the succession certificate and it should happen any time soon. There upon, we have to file FIR represent the client, get the duplicate shares, apply for transmission fulfilling the whole gamut formalities such as transmission forms, indemnity bonds, surety, affidavits, no objection certificates etc to get the shares in the name of the son, open a demat account and dematerialise the shares.

We do all these and we get our fees only upon success. We don’t charge the client before that.

Hook, line and sinker? Nah. A legitimate business that addresses an unsolved problem of vast majority and gives them their legitimate wealth. We get our share too.

Now on to customary marketing. At least Rs.50,000 Crores of unclaimed wealth is lying somewhere in the oblivion. If you think, you or anyone known to you may be a legitimate owner of such wealth, please contact us. We can be of professional help. goldenegg@smbenablers.com shares@smbenablers.com +91 90941 94445.

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Forgotten or Unutilised Wealth

There is staggering amount of unclaimed wealth is wasting out there in India. Unclaimed dividend alone runs into 1000s of crores of rupees. Translated, actual value of shares not available as disposable wealth to the rightful owners may well be over Rs.30,000 Crores! This is not all. Add Insurance, Fixed Deposits and Mutual funds. The figure you might arrive at is truly mind boggling.

We at Golden Egg, an initiative of  SMB Enablers Private Limited, Chennai, are determined to reach this unutilised or lost wealth to the rightful owners.

Why has it happened in the first place?

Companies need to be notified of changes. In the world of Demat Accounts with nomination it is automatic. In the world of paper shares there are scores of reasons why shares fall out of horizon.

This can be because the company may not have been notified or there are extraneous reasons:

• Change of house and address
• Change of Marital status
• Shear human forgetfulness
• Loss of original share certificate
• Owner dies and legal heirs do not know about it
• Typos in shares of manual period
• Estate disputes and much of water has flown under the bridge
• Government Custody during special circumstance such as what is known as Harshad Mehta Scam
• Unable to cope with the complexity involved in transfer and transmission of share.

There is more to it

Dividends are declared year after year. At the end of seven years the companies transfer the dividend to Investors Education and Protection Fund (IEPF) maintained by Ministry of Company Affairs, Government of India. Last seven years dividends still lie with the companies in a separate account. It is an ordeal to receive the dues from the companies for a common man. Things have just got worse. IEPF Amendment Rules 2017 has made transfer of shares to IEPF mandatory if dividends were not claimed for seven years. In other words, before you know it, your shares will belong to the Government and Dividend, Bonus and Splits on your share with obviously accrue to the Government. Now, one has to deal with two agencies – IEPF and Company. Already complicated procedure has complicated further.

Now is the time to act. May be, you need a professional agency. May be, you need the “Golden Egg – Harnessing Forgotten Wealth” by SMB Enablers.

So, what do you offer?

We will work towards collecting everything that is legally yours, whether it is with the company or IEPF

• Past Dividends
• Bonus shares issued in the intervening period
• Split shares made
• Transfer the joint ownership to single ownership
• Dematerialise your paper shares
• Of the joint holders if one is dead, deleting the name of the diseased and including name of legal heir.
• Legal assistance if the shares are in the custody of Government due to some extraneous situations such as securities scam.

We strive to achieve all these whether you have physical shares or not.

How do you do it?

We have an ever-growing database of unclaimed dividends and dividends transferred to IEPF. We then go about finding the shareholder or his/her legal heirs and inform them that they may be holding shares and we would be happy to retrieve the shares for them. We will then assess the work involved give a quote and go about executing the job after researching total share holdings and collecting necessary documents. We cover the whole nine yards dealing with Government, Company and Courts to help you recover the shares.

How much do you get paid?

Depending on value, complication of the case and availability or non availability of physical shares, we charge a success fee of 10-30% plus service tax. We charge the fee on both dividend and value of shares retrieved. This is a pure success fee and nothing upfront. Well, not really. We charge a token retainer fee of Rs.1000 plus service tax or GST.
However, there are a few expenses that will have to be met by the client upfront.

• If physical shares are not available, FIR needs to be obtained. This is a client responsibility. We will do the job and chare the client at actuals.
• Generally, in case of transmission of shares when the original owner is not alive, probate of will or succession certificate from District Court of jurisdiction is necessary. This involves fees for legal counsel and court fees. This will have to be paid by client.
• There are cases when surety of one or two individuals for the value of shares are needed. It will be client’s responsibility to provide the same.

… to be continued

The post Golden Egg – Reclaiming forgotten shares in listed companies appeared first on SMB.

1) Banking Transaction Tax – This is circulating in social media. The proposition is 2% tax on all credits to bank accounts and no other tax. This is attributed to an NGO by name Arthakranti from Pune. Social Media loves it and a few sections of media support it. There are lot of people who believe this can happen on 1st February, 2017. However romantic it sounds, we seriously doubt the implementation. There are a few strong reasons why this cannot be rolled out in 2017.

• BTT presupposes that no tax other than BTT can be levied. At the very least we need absolutely seamless implementation of GST and roll back of all other indirect taxes (other than customs duty) for BTT to be considered. We are far from it. Multiple disruption is not possible.
• Why should someone earning below the threshold limit of income tax pay BTT? This amounts to charging taxes to the lowest rungs of the society which is otherwise exempt, simultaneously subsidising the super rich. This is not equity. One may say, prices will come down 10-50% depending on products and even the lower strata will be benefited. Proof of the pudding is in eating. Has the bank lending rates come down because of the successive reduction in rates by RBI? Unless clarity emerges, it may be politically dangerous for the ruling party.
• What about FMCG distributors who have meager margins? Petrol or ITC distributor may have to shell out more than 50% of their gross revenue as taxes. These businesses will slip into losses.
• What about Escrow mechanism? Same transaction will be taxed twice. Let’s say A sells his company to B. Escrow receives money from B, receives shares from A and transfers both money and shares subject to conditions in the agreement between A, B and the Escrow agent. In this case, escrow agent is taxed twice. Same goes for multiple transactions within family while moving same income from one bank account to another.
• Just like GST, introduction of  BTT requires consensus of states since it curtails the power of states to collect taxes. Discussions have not even commenced.
• In the present scenario, traders may be inclined to hold cash without depositing and this will lead to cash crisis.
• This is a paradigm shift and highly disruptive. Country is not ready.

BTT may sound very attractive. But, it may not happen in the current budget.

2) Corporate and Business Taxation – Maximum marginal rate may drop down to 25% from 30% while surcharge and cess will remain as such. Reducing the taxes to 25% has been in the air for the Government for quite some time. Now is the right time to introduce it. Ruling party has a need to appease its constituency, the traders. Stung by the necessity to bank their unaccounted cash due to demonetisation, traders have lost some portion of their working capital. With the impending implementation of GST and lack of sufficient cash in circulation, the traders may return more income and more tax. This is in theory. If they do, they will be paying more taxes they were not used to. FM Arun Jaitley has also hinted something to this effect. They have been the backbone of the ruling party in the centre. They need to be appeased. So, we believe, taxes will come down to 25% from 30% if not more. More conservative estimates is 27% while industry demand is 18%

3) Personal Income Tax – There is widespread expectation that there would be huge increase in basic exemption level. There is expectation that level of threshold for taxable income would be raised to Rs.10,00,000/- from Rs.2,50,000/-. Though there is a likely hood of a concession, such a sharp increase is quite unlikely. Government wants more tax payers to the net, no lesser number of assesses than what we have today. So, threshold limit for taxable income is not likely to go up. Presently we have 3 slabs.Rs.2,50,000-Rs.5,00,000 @ 10%, Rs.5,00,001-Rs.10,00,000 @ 20% and Rs.10,00,000+ @30 plus education and higher education cess at 3% of the tax calculated. This may become four slabs. Rs.2,50,000-Rs.5,00,000 @ 10%, Rs.5,00,001-Rs.10,00,000 @ 15%, Rs.10,00,001-Rs.15,00,000/- @ 2o% and Rs.15,00,001+ @ 25% plus, of course education cess. Someone who has a taxable income of Rs.1,00,000/- per month will pay a tax of Rs.12,016 as against Rs.15879 presently. This is not likely to satisfy salaried class, though. In the present scenario, Government would want us to spend the money and hence, there is no likelihood of revision in savings oriented incentives.

4) Short Term Capital Gains Tax (STCG)  or Securities Transaction Tax (STT) – Presently STCG on sale of any asset is treated as any other income, except for STCG on shares, mutual funds and other securities listed on stock exchanges which is taxed at 15% where as maximum marginal rate of tax is 30% Long term capital gain on sale of listed securities and shares does not attract any tax. It is pertinent to note that any asset that is held for more than three years is termed as long term asset except for listed shares and securities which is only for one year. To off set these concessions STT was introduced. Cash based trading attracts 0.10% tax and 0.01% for Futures and Options.

Recently PM Modi stated that those who earn from stock market would have to pay more tax. This gave raise to the speculation that LTCG on specified securities will be taxed and STCG would go up. FM Arun Jaitley clarified that security trade will not be subjected to LTCG. Now media is rife with speculation that STCG will be increased. We do not think, it will give desired results. There are a few issues with FIIs and FPIs too. Revised DTAA with Mauritius and Singapore may put spokes in works of Foreign Investors into capital markets.

So, virtually increasing the present rate five folds to 0.05% for F&O and 0.50% for Cash sections will result in a tax collection of Rs.35,000 Crores from the present levels of Rs.7,000 Crores. Even doubling this to 0.10% and 1% is possible. There will be hue and cry in Dalal street, but markets will come round. FII invest if they believe in the country’s story and if they think, they will get their bench mark returns. India is, as Nani Palkhivala said, democracy plus fifteen percent.

Hence we think, STT will be steeply raised while removing STCG on listed shares and securities. What’s more, it is one of the taxes collected by the Government with no tax administration headache since exchanges and mutual funds pay to the Govt directly and the Govt need not go to individual assessees.  STT is here to stay and prosper.

5) Dividend Distribution Tax – Corporates pay Dividend Declaration Tax while dividend in the hands of individuals and other entities is tax free. It is immoral to collect taxes from “B” for the taxes due from “A”. But, the individual assessees are happy because they don’t pay taxes for the dividend they receive on their investment. Government is happy because it has to only scrutinise the DDT calculation if a corporate declares dividend. DDT is here to stay and we do not expect any change in tax rates. If due to possible reduction in Corporate Tax trate, more dividend is distributed, DDT can go up for the Government.

6) Taxing Agriculture – This is easier said than done. Agricultural income is totally tax free. Even capital gains on sale of agricultural land and assets is tax exempted. There are scores of research articles that think agricultural income needs to be taxed. There is substance to it. There is justification in exempting small farmers due to capricious nature of weather and its impact in agriculture. However, what is the justice in exempting an agriculture corporate that earns Rs.100+ crores in profits? Income tax department has given a memorandum to tax income from agriculture on assessees who hold more than 30 acres in land. Agricultural income is also being used as a tool for tax evasion. FM Jaitley recently said that unreasonable amount of income is being reported as agricultural income from farm houses and that these farm houses cannot provide the income that is being returned.

So, there is definitely a thinking in that direction. This is a good beginning. But, taxing agriculture in a cash economy is quite difficult. Cost of seed, cost of labour, manure and fertilisers, hiring of equipment… there is lot of scope to camouflage agricultural income. Taxing it properly requires lot of  thought. As first stage, passing income from other sources as farm income should be curbed. This can be done at IT scrutiny level and does not require changes in tax laws. At best, Commodity Transaction Tax (CTT) can be introduced at nominal levels in commodity exchanges. We doubt, though.

This is an election year with multiple state elections. States also can tax agricultural income. None of the states going to elections would do anything in that direction. Ruling party in centre is not likely to take chances on a vexed issue. Despite the strong reasons for taxing agricultural income, we will be very surprised if some action is taken in 2017 budget to be announced on 1st Feb, 2017. It would be an appreciable move, though.

With GST around the corner, we do not expect major tinkering with Central Excise and Service Tax. Customs Duty may have some element of protectionism

These are some of our thoughts. We will come to know on the budget day.

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As a society, we don’t care for rule of law and honesty. Even generally law abiding person skips his values the moment police stops his/her vehicle. This does not mean, we are bad, ab initio. A cursory look at the corruption perception index map of the world is revealing. Every country that is portrayed as corrupt is economically weak. Every country in yellow has at least five times the per capita of India. So, it is reasonable to assume, there is direct correlation between affluence and corruption at all levels. Corruption and cash are not problems unique for we Indians. However, it has gone beyond all reasonable levels in the past decade.

Total value of currency in circulation in 2005 was Rs.3.61 lakh crores. In 2012 it was Rs.10.26 lakh crores, in 2015 it was Rs.13.86 lakh crores and in 2016 it was Rs.15.94 lakh crores. All data are based on RBI report as at March of corresponding year. In 2015-16 alone over Rs. 2.08 lakh crores were introduced in circulation. Nobody could explain this expansion. Raghuram Rajan opined that this could be due to (2013-15) Election season in centre and various states. Election Season! How on earth the politicians are going to take demonetisation lying down? It is as though, considering the magnitude, the political opposition is largely muted and are using restraint.

What it perhaps means is percentage of bribe has gone up in the last decade and cash economy (as in outside the purview of taxation) is growing much faster than GDP. Bribery is not our concern in this post while cash economy is our interest. This post is predominantly MSME centric hence we are avoiding all cross references to bribery.

Cash based economy in itself, is not bad. Japan has about 18% of its GDP in circulating cash. What is bad is the cash generated by evading tax. SME has been doing it for ages with impunity. Moral or ethical questions have never come in the way. We wouldn’t fully blame SME entrepreneur for it. It is a direct byproduct of Democratic Socialism. We believe, the reason is excessive taxation by Democratic-Socialistic regime.  In 1970 maximum marginal tax was 82.5% On the balance if dividend was declared that was also taxed. Inheritance tax (Estate Duty) was so high that one had to sell properties to pay it and then pay some more as Capital Gains tax. So, people started hoarding cash and found some justification too. It is something society found it profitable to perpetuate even though our direct taxes are among the lowest in the world today. Plain human greed. This found further justification since out tax administration has always been quite intimidating.

Hence cash based economy has become an inseparable part of MSME existence. This is further complicated by organised and unorganised funding. Priority sector lending is both boon and bane for MSME. Many success stories were made possible by priority sector lending. However, we dare say, it is the single most important reason for MSME sickness and NPA.

MSME is born since the entrepreneur actually knows to do something. One partner knows to deliver a product or service and his partner knows to sell it and they start manufacturing or provide service. First casualty is capital adequacy and financial prudence. Banker wants margins, so they over invoice machinery and show the difference as margin. This doesn’t hurt MSME as much as cash credit (working capital loan).

Cash credit may well be the single important reason for MSME sickness. Business is allowed to draw to the extent of 75% of Current Assets less current liabilities. In other words, cash credit plus current liabilities cannot exceed 75% of Current Assets. Limit is fixed as an absolute number while drawing on a month to month basis is determined by this formula. There are a few unforeseen expenses which may need urgent access to funds. Let’s say a machinery broke down. There is urgent need for replacement. Or a land has come up cheap for expansion. The entrepreneur tends to use funds from Cash Credit with devastating effect.

Once the money is used for unauthorised purpose, in order to draw adequately, the tendency is to increase the value of receivables or stocks so that there is sufficient drawing power with the bank. This inflates profit and sales which in turn, requires more tax to be paid while there is scope for more loans. This vicious circle leads to a balance sheet with fictitious assets on the one side while it has real liabilities on the other side. If not diffused in time, MSME is subjected to perennial tension and the chord snaps at some point.

This problem aside, availability of adequate and timely finance for MSME is non-existent.  There is always a gap between the requirement and organised funding. Entrepreneur is forced to borrow from unorganised lenders who lend money in cash and the MSME conducts business outside the books.

Thus inadequacy of organised finance, obtaining unorganised finance and Indian psyche of evading tax for concentration of wealth has resulted in good chunk of MSME trade being conducted in cash and outside books. Most of the MSMEs keep their unaccounted wealth in Stocks, Receivables and Cash. This is pure working capital and not stash. Dealing this with overnight morality lessons will not do. So is paying 50% tax with 25% lock in. MSME will suffocate to death.

Despite its problems, disregard to compliance and cash, MSME’s contribution to Indian economy can hardly be over emphasised. MSME’s performance has been phenomenal. There are over 3.69 crore units out of which 2 crore units are in rural area. (2006-07 census) At peak, it used to be around 45% of GDP and it hovers around 37% Considering a GDP of $2.25 MSME Share is going to be around Rs.50 lakh crores. Estimated total employment (projected based on 2006-07 census) is around 12 Crores (approximately 10 times the jobs generated over last 10 years). Thanks to NPA problem of banks, outstanding Bank lending is Rs.929 lakh crores (2016) at a de-growth of 2.8% while the sector is growing around 12% . This left a gaping hole filled by unorganised money lenders.

This is the single most dangerous problem of demonetisation. It has deprived a vibrant cash laden economic sector and is starving for cash now – legal or otherwise. Nor do they have any clarity on the schemes announced by the Government. If they declare their working capital and pay 50% in tax and lock in another 25% for four years, they will be hurt badly. If they convert their old cash to new cash, they will still lose 30-40% by way of commission and continue the way they were working. Regular cash for running is also not available from the banking sector even if they had money or credit limits. Heads, the Government collects taxes. Tails, unscrupulous operator makes money. Either way, MSME loses. This is a huge, very huge, problem. Lakhs of jobs will be lost and NPA will further rise. Loan sharks are also in disarray due to demonetisation. Even high cost funding is not available to MSME.

It is more than three weeks after the demonetisation announcement. Political discourse has not moved beyond queues and lack of change for Rs.2000 bills. Government has not moved an inch beyond trying to fight black money by plugging holes. Not a single announcement has been made to address this most serious and adverse fall out of demonetisation. It is quite disheartening.

Government should consider a few positive measures.

• Tax paid on declaration of black money, should be provided as loan in soft terms. MSME should be encouraged to comply without fear. Even if 25% of such loans turn bad, Government would have collected the taxes and brought this money to books.
• Cash should reach MSMEs in rural area adequately.
• Now that unorganised funding is also absent, banks should be liberal in funding MSMEs. NPA shy commercial banks are unlikely to do this. Government should aggressively refinance lending by banks and NBFCs. Refinance, Credit Guarantee, Exemption from CRR/SLR … whatever is required needs to be done.
• Separate nodal agency for refinancing Micro Finance companies will go a long way. Unorganised MSME will be worst affected without adequatre cash supply.
• Additional security can be by way of lien on shares and personal guarantee wherever there is shortfall.
• Cash credit should be made flexible. If changed scenario so warrants, SME should be allowed to convert part of their Cash credit as Term loan and a portion of non-fund based limits can be converted as fund based limits.
• Onetime write-off of Stocks and Debtors (to the extent padded and unreal) and carry forward of losses should be allowed without questions or scrutiny which can be set off with future profits.
• Creating availability currency for this sector of economy on a war footing. Solutions should be thought of, beyond regular banking channels.

All the above are easier said than done. Herein lies the success or failure of demonetisation and our capacity to generate jobs.

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Before we try to discuss the impact for SME, it is necessary to try to understand this Demonetization exercise. Left wing intellectuals and Politicians cutting across party line trash the scheme. They are branded as black money holders. Right wingers think this is going to be the gate way of pure bliss. We believe, truth, as always, lies somewhere in between.

Typical “Short term pain, long term economic gain” cliché apart, if this exercise is successful, it will bring in some great advantages.

• Corruption – if some follow up actions are taken – can be substantially reduced if not eliminated.
• Indian psyche of disregard to rule of law will change for good.
• With terror finance crippled, Defence and Police will firmly act against terrorists and unlawful elements.
• Wide spread use of digital payment platforms will be a distinct reality.
• Unorganised financiers and loan sharks already have a real tough time. This has made life of many small debt laden businessmen easy.
• Sheer amount of financial intelligence collected through big data analytics may well be worth all the pains. Imagine a situation where Government has absolute insight of financial behavioural pattern of drug peddlers, divisive anti nationals, criminals, gangsters, thugs and local political dadas. Government may well be collecting CC TV footage from known corridors of economic offence.

This does not mean people’s sufferings can be wished away. People are sufferings. There is possibility of loss of jobs in semi-cash operated SMEs. In this high decibel altercation that is going on, distinction between ill-earned wealth that is obtained by unlawful means and well-earned commercial wealth without paying taxes has blurred. Blurred so much that, now defunct currency note is assumed to be an illegal tender all along. Legitimate cash economy is totally forgotten. For those who support demonetization, everyone holding cash or against demonetization is a black marketer.

Who doesn’t know of at least one otherwise trustworthy businessman who doesn’t pay adequate taxes? Entire rural economy revolves around cash. Bottom of pyramid is poverty stricken daily wage earners. Micro and very small units deal exclusively in cash. They all support the move since they love to see the rich getting poorer, politicians turning in bed worrying, power corridors not knowing what to do with their stash… It won’t take long before reality strikes and something must be done before that for demonetization scheme to be successful. What is that “something” is not very clear.

A few objections to demonetization have merit while others are ridiculous and are bids to safeguard political constituency.

• Cash as percentage of black money is minimal compared to gold, real estate, wealth stashed abroad – staring with the base of ill-earned wealth is a better idea than starting with gold or real estate or foreign accounts. There is sufficient evidence action on others are on the way.
• Do NPA recovery first – NPA recovery is very tardy and something will have to be done to quciken the process. Banks fear CVC and they don’t take decisions to cut losses in time through One time settlement. There is substance there. That is ₹.69,000 Crs (top NPAs that opposition is picking) while this is ₹.500,000 Crs. They can run parallel.
• People are suffering and there are deaths – True. They are grinning and bearing even after twelve days of demonetization. May not last long. This has got nothing to do with queues in banks. Actual suffering is crippled cash supply in cash laden economies which feeds daily wage earners and underemployed.
• Other allegations are wild and without empirical evidence. Let social media handle it.

This government is obsessively serious about black money eradication. Reactions from political parties has made it next to impossible to have a more lenient approach. Former Finance Minister calls it “Demonization”. Every left-wing intellectual is predicting doomsday in their articles in famous magazines. Most of the magazines controlled by regional parties are passing social media altercations and conspiracy theories as confirmed news. Irresponsible statements are spoken by otherwise responsible politicians. It has turned into a war from a very strong financial measure. Ruling party cannot afford to lose this war. This has become an unintended all or nothing bet for BJP.

Lot of ground work has already been made. Government is actually in a position to take advantage of covered ground.

• It is apparent, Modi Government has made enormous structural changes. Intelligence wing of Income Tax has its own organisation structure and they share the same building with the IT department. Financial Intelligence Unit is extremely vibrant now.
• This Government has made “Suspicious Transaction Reports” under section 12 of Prevention of Money Laundering Act into an art form. As of 15^th Nov, 2016, Banks have started reporting all cash transaction in real time. All details are available in https://incometaxindiaefiling.gov.in/ and registered users can view their cash transaction after logging in.
• PAN was made compulsory for purchase of gold and opening of bank accounts.
• Foreign assets by Indians were asked for declaration.
• Government has made the country almost Digital Payment ready. India is not far away from a billion savings bank accounts, billion irises activated Aadar Cards, billion PAN numbers and billion debit cards. Major Financial Services Disruption is already underway. Nandan Nilekani’s excellent presentation on this is available in Youtube.
• The Benami Transactions (prohibition) Amendment Act, 2016 was notified on 1^st November, 2016 and PM announced scrapping of currency bills one week later. Frightening.
• Government has already given notices to Gold and Real Estate industry. Jan Dhan Accounts over Rs.50,000/- are frozen for reporting and is ready to invoke Benami Transaction Act for accounts with deposits of Rs.2,00,000/-
• The country is ready to trace unaccounted money very easily with the help of big data analytics.

One can easily imagine a few follow up actions. We believe, there will be an IDS type scheme for real estate, gold and foreign assets. This will be followed by swift action under Benami Transactions Act and perhaps “Nationalisation of Foreign Assets”. This may be followed by easing out new high denomination bills with Rs.1000/- bills. Some tax sops are also likely.

Changing old currency to new currency illegally has become a national sport. Indiscretion prevails all over the place. Mules, Jan Dhan Accounts, Salary to staff and built in account balances (Fictitious Assets available in books inflated for the purpose of working capital loans) using salary accounts of employees etc are the methods used. With the amount of financial intelligence that will be gathered and with banks’ servers getting integrated with Income Tax real time, converting old unaccounted money to new unaccounted money at a deep discount of 30-40% is a bad idea. Why get back 60% of old money with risk of action from the departments, especially when the new currency is also likely to be phased out?

Politicians and bureaucrats may take this chance with stashed cash since they are also hit by Prevention of Corruption Act. At the very least they can use the cash if IDS on undeclared and benami property is introduced.

Cash held by SMEs is of different nature. This cash is actually unaccounted working capital. Risking it will hurt the entrepreneur, SME concerned, it’s employees and the nation. They should look at legal and/or less risky methods to salvage their working capital. Entire blog is to reiterate just this statement. This Government is very serious about unaccounted money and SME should not take undue risk which is neither in their interest nor in the interest of the nation. With reduced cash circulation and enhanced technology there is no way under the sun to stash cash. If it gets to bank it will be flagged in no time.

• Best is to show unaccounted income and pay tax. We believe banks will be lenient in filling the short fall. Over ₹.1,00,00,000/- tax will be about 36% Government does not want SMEs to get killed. Government, based on industry representations, might extend bank loans to the extent of tax paid, in the near future. Paying taxes is the best route available for SMEs and all those who are not hit by Prevention of Corruption Act.
• SMEs, if they have Cash Credit Account, are likely to have accounts receivables which in reality, are not receivable and are in books just to satisfy the bankers. Using this to deposit cash is inviting trouble. We hear, there are brokers and SMEs canvassing this route for a quick buck. This is again dangerous. We do not recommend this. Here again Industry should represent, get additional finance and go clean.
• Same is the case with inventory. If an SME can procure materials with old cash, they can bring it to book and feel safe. Not many are lucky.
• Using Cash Balances – SMEs want to use accumulated cash balance for recirculation. This may or may not fly. They may have a cash balance of Rs.20,00,000/- and they may be drawing from bank on a regular basis. This may raise eye brows. But, if the deposits are reasonable, they may escape.

Good luck to SMEs and we wish they go clean this time. We will come out with part two of this series soon.

Photo Courtesy New Indian Express and Money Control.

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