The Finance Blog

SEBI makes IPOs more transparent

2009-09-17T09:11:00.006+05:30

The Securities and Exchange Board of India, SEBI, issued a new investor protection guideline that prevents companies doing IPO from sharing information, which is not available for the outside world, with their IPO arrangers.

Previously, a company going for an IPO shared key financial information with the investment bank arranging the IPO; information which is available only to the bank and not to others. The investment bank would then prepare research reports which are based on this extra information. The reports are shared with institutional investors prior to the filing of the prospectus and are not available to retail or ordinary investors.

So, one could easily make out that the additional information would make IPO estimations by the investment bank dealing with the IPO more accurate and give institutional investors an unfair advantage against other investors. Given this situation, the tweak from SEBI which says,

“no selective or additional information or information extraneous to the offer document shall be made available by the issuer or any member of the issue management team/syndicate to any particular section of the investors or to any research analyst in any manner whatsoever including at road shows, presentations, in research or sales reports or at bidding centers”

shall provide a level playing ground for investors alike and would bridge problems associated with information asymmetry.

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Now Interest Rate Futures can be traded in National Stock Exchange

2009-09-15T18:44:00.001+05:30

After a gap of six years, the National Stock Exchange (NSE) of India re-launched trading in Interest Rate Futures. This will give the investor an opportunity to speculate and trade with these advanced financial instruments.

Interest Rate Futures allow institutions to hedge risk associated with interest rate fluctuations. They can reduce the risk associated with cash flows resulting from underlying assets such as home loans, long term fixed deposits etc.

However, in India, the underlying asset on which the interest rate future is based on is a 10 year notional coupon bearing government security. Have a look at this small series that came in ET, which talks about few things one has to consider before trading in interest rate futures.

Inflation rates of India (2009)

2009-08-09T09:00:00.000+05:30

This post tracks inflation rates of India for the year 2009, like Inflation rates of India (2008) did for 2008. Before that, a few facts about inflation rate calculation in India.

- Inflation in India is based on Wholesale Price Index
- A set of 435 commodities are used for the WPI based inflation calculation
- The base year for WPI calculation is 1993-94
- WPI is available at the end of every week (generally Saturday), for a period of 1 year ended that day
- It has a time lag of 2 weeks (WPI for the year ended two weeks back will be available this week)

Latest Inflation Rate
- 2009 Aug 22 - (-0.21)% (via)
(for 12 months ended on the given date)

Previous Inflation Rates (for 12 months ended on given date)
- 2009 Jun 27 - (-1.55)% (via)
- 2009 Apr 18 - 0.57% (via)
- 2009 Apr 11 - 0.26% (via)
- 2009 Apr 04 - 0.18% (via)
- 2009 Mar 28 - 0.26% (via)
- 2009 Mar 21 - 0.31% (via)
- 2009 Mar 14 - 0.27% (via)
- 2009 Mar 07 - 0.44% (via)
- 2009 Feb 28 - 2.43% (via)
- 2009 Feb 21 - 3.03% (via)
- 2009 Feb 14 - 3.36% (via)
- 2009 Feb 7 - 3.92% (via)
- 2009 Jan 31 - 4.39% (via)
- 2009 Jan 24 - 5.07% (via)
- 2009 Jan 17 - 5.64% (via)
- 2009 Jan 10 - 5.60% (via)
- 2009 Jan 3 - 5.24% (via)

Related Articles
- Inflation rates of India (2008)
- How is WPI inflation rate calculated in India?
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- Base year and number of commodities used for inflation calculation in India
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New Income Tax Slabs

2009-07-07T08:00:00.003+05:30

In the union budget for financial year 2009-10, the Finance Minister has announced new tax slabs.

General
Till 1,60,000 – 0%
1,60,001 – 3,00,000 – 10%
3,00,001 – 5,00,000 – 20%
Above 5,00,000 – 30%

Women
Till 1,90,000 – 0%
1,90,000 – 3,00,000 – 10%
Remaining tax rates are same as general

Senior Citizen
Till 2,40,000 – 0%
2,40,001 – 3,00,000 – 10%
Remaining tax rates are same as general

As you can see, compared to the last change, there is a 10,000 rupees increase in the first slab across all categories, while the remaining slabs remain unchanged. This would lead to a maximum savings of 1000 rupees for a tax payer whose income falls above Rs. 1,60,000. This may not be a significant saving for many.

However the interesting thing to note is that there is no 10% surcharge for incomes above 10 lakhs. This is a welcome move because I feel progressive taxation is counter productive to an aspiring population. Eventhough these tax sops would make holes in government's revenues, I guess the government is looking to increase the expendable surplus of the populace so as to boost up the economic downturn.

Indian Inflation turns negative

2009-06-18T17:19:00.002+05:30

For the first time since 1977, India's WPI Inflation rate fell to -1.61% for the week ended on June 6 2009!

SEBI mandates Rs. per share dividend declaration

2009-04-23T11:47:00.000+05:30

In a good move, the Securities and Exchange Board of India, SEBI, has asked listed companies to declare dividends on a per share basis rather than on a percentage basis. For example, a company having shares of face value Rs. 10, and declaring a dividend of Rs. 5, will have to say that it has declared a dividend of Rs. 5 per share and not a dividend of 50%.

This is meant to bring more clarity to an average investor who sometimes gets caught up in the jugglery of percentages and values when companies declare dividends. Thus, it will bring uniformity in the declaration of dividends by listed companies.

The move will clear the confusion among share holders whether the dividend declared was a percentage of the face value or the market price. It also becomes relevant when companies reduce the face value of shares over a period of time, which some investors might not be able to track.

Also, the calculation of actual returns in terms of Rupees becomes much easier, when the dividend information is available on a per share basis. Share holders will just have to multiply the number of shares they own by the dividend per share amount that the company declares. And for the mathematically inclined, they can just go ahead and calculate the dividend percentage if they want.

The change will be with immediate effect. More news here.

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The Stock Markets may be on Recovery

2009-04-19T11:42:00.003+05:30

The Indian Stock Markets have performed promisingly well in the last few weeks. Though the performance wasn’t an all-round one comprising many different stocks, few of them upped the ante of the markets and had set the mood.

While it can’t be said with certainty that the economic slowdown and the stock markets are on a recovery path, there are few factors which may make it happen.

1. The economic stimulus packages issued and to be issued by countries world-wide would have created confidence in investor minds that the markets may not go down further if they put their money in.

2. Monetary policies (reduction in CRR, prime lending rates etc.) by governments that result in more money in the hands of people there by increasing their spending and investments (or, increasing liquidity in the economy), improving the economic situation.

Meanwhile, here’s a list of 10 stocks, compiled by Economic Times, which rose by more than 100% in the current market recovery.

India’s new Bimetallic 10 Rupee Coin

2009-04-17T20:23:00.002+05:30

I might be a little late on this news, but here’s the picture of the new (and first ever) bimetallic coin of Rupees 10 denomination issued by the government of India. The outer ring of the coin is made up of Aluminum and Bronze alloy while the inner section is made up of Nickel and Copper alloy.

There are two themes for the coin.
1) Unity in Diversity and
2) Connectivity and Information Technology.

The coin in the picture has the first theme, Unity in Diversity.

What makes Swiss Bank Accounts safe and secure?

2009-04-15T18:42:00.000+05:30

Recently, discussions about Swiss Bank Accounts came into prominence in Indian media further to the revelation that Indian nationals have a whopping 1456 billion US dollars in Swiss Bank accounts. This means Indians have more money in Swiss Bank Accounts than the rest of the world combined. Leaving aside this story, let’s concentrate on Swiss Bank Accounts and what makes them safe and secure.

In many novels and films, we have seen intriguing stories associated with Swiss Bank Accounts, like in Bourne Identity, Da Vinci Code etc. Even though most of these actually don’t happen in a Swiss Bank Account, lots of people consider Switzerland to be a place where they can keep their money safe and secure. There are a few factors that make it so.

The Banking Act of 1934 was passed in Switzerland to prevent Swiss Banks from divulging depositor information to other countries during world war period, with which those countries tried to confiscate the assets owned by the customers of Swiss Banks, especially the Jews, in the name of “the good of state”. But then the Act stayed on and provided enough privacy to depositors of Swiss Bank Accounts.

Switzerland is a very stable country and it maintains a policy of neutrality with other countries. It maintained neutrality in both World Wars, is not a member of the European Union and was not even a member of the United Nations until 2002. That’s why many of the world organizations have their headquarters in Switzerland. Thus the country doesn’t have a need to succumb to pressures from international treaties and obligations. All these make its economy robust and the banking system highly stable.

Also, Switzerland is a tax haven for depositors of other countries. For nonresident depositors of Switzerland there are no taxes if they don’t reside in EU or don’t invest in Swiss companies, making it a promising place to put their money in.

Good Reads
- How Swiss Bank Accounts Work?

What is SWIFT?

2009-04-07T13:09:00.000+05:30

Being an NRI (Non Residential Indian), once in a while I sent money to India. Unlike before, nowadays it all happens online and is quite easy. Within the comforts of my home, I just need to login to my internet banking account, do some clicks and money will reach my bank account in India in a couple of days. My bank makes it possible through SWIFT!

SWIFT or the Society for Worldwide Interbank Financial Telecommunication is a worldwide network for financial messages through which its members (i.e. financial institutions such as banks) can exchange messages related to money transfer for their customers. The messages are sent securely and reliably to the target member financial institution of SWIFT.

By the way, SWIFT is just a messaging service and it doesn’t facilitate actual cash transfer between banks. For doing that, the banks that exchange authorization message for money transfer shall have an external banking relation between them and normally they settle the actual cash transfer in parallel.

But the point is, once the authorization for the release of funds are sent through SWIFT, the target bank can release the money to the end user’s account and the bank is assured of the money from the sending bank. Sometimes, the target bank will have a branch in the sending bank’s country or vice versa and they may settle it within the purview of a single country.

Thus, the end user will receive the money without needing to know the hassles of exchange rate conversion and various other formalities, which happen in parallel between the banks. Also, the user will receive money, irrespective of the time taken for all these.

Over 8,700 banking organizations, securities institutions and corporate customers in more than 209 countries use SWIFT for transferring financial messages, making it the most widely used network for international financial messaging. Each financial institution registered with SWIFT is identified by a bank identifier code popularly known as the ‘SWIFT Code’.

Through SWIFT, transfer of funds to various countries can be completely automated; where the core-banking solution of the bank can directly communicate with SWIFT to do the transfer. This makes the process of money transfer more efficient, secure and with lower cost. Thus, SWIFT makes the process of transferring funds across the globe a lot easier.

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New Symbol for Indian Rupee

2009-04-03T19:17:00.001+05:30

The Government of India has invited the public to suggest a symbol for the Indian Rupee. Just as the Dollar is universally denoted by $‚ the government thinks that the Rupee should also have its own unique symbol that captures a sense of India’s history and culture.

ToI has put up a list of symbols for Rupee on their website and would present the top voted ones before the government. They also have an option through which people can suggest a different symbol.

You could also vote for one of those symbols or can also send in your suggestions. Personally, I prefer ‘ru’ written in Sanskrit/Hindi without a bar on top. Long time our currency had a symbol of its own.

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Certified Financial Planner (CFP)

2009-04-01T15:46:00.002+05:30

The Certified Financial Planner (CFP) designation is a certification for financial planners granted by the Certified Financial Planner Board of Standards in the United States and several other organizations affiliated to Financial Planning Standards Board (FPSB), the international owner of the CFP designation outside of the US. The CFP designation helps a person to advance his career as a financial planner.

In order to gain the CFP designation, the candidate must meet certain requirements in the areas of Education, Examination, Experience and Ethics (known as "the four Es").

Education: To complete a set of financial planning courses. Other than completing courses in financial planning, applicants for the CFP certification must also have a bachelor's degree (or higher), or its equivalent, in any discipline, from an accredited college or university in order to obtain CFP certification.

Examination: The CFP exam is held three times a year, and is conducted over a day and half through three sessions having a total duration of 10 hours. The fee for CFP is USD 595 and there is an extra site fee if the exam is conducted outside US.

Experience: There is a three years full time or equivalent part time related experience required for the candidate. The details of experience requirements can be found here.

Ethics: The candidate has to agree to be bound by CFP Board's Code of Ethics and Practice Standards.

Once you have successfully met the requirements and completed the initial certification process, you will need to meet ongoing education and disclosure requirements to maintain the CFP certification.

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L, V and U Recessions

2009-03-28T07:15:00.003+05:30

These are the types of recessions according to economists worldwide; i.e. L-shaped, V-shaped and U-shaped ones.

L-shape recession is a recession that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan. A V-shape recession goes down pretty fast and recovers in very less time. A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It could last anywhere from 2-10 years, like in the 70s in US where it lasted for 8 years.

Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is; where wrongly calibrated economic policies leading to L-shape recessions, the worst of all.

Now, EMIs can be covered on Job Loss

2009-03-27T19:56:00.007+05:30

The global economic downturn has created uncertainty in employment in India as well. In such a situation, what if one has a couple of EMIs to pay, say home loan and auto loan, when the retrenchment strikes?

Like it exists in other developed countries, ICICI Lombard has introduced in India, a cover that will pay three equated monthly installments (EMIs) on any individual loan when the policy holder faces job loss. Considering the severity of the economic situation, ICICI Lombard is even reviewing the possibility of increasing the three month EMI cover.

The job loss cover is sold as an add-on cover with the company’s critical illness policy. However, one thing to be noted is that the policy does not cover retrenchment due to underperformance, voluntary resignation or early retirement. But then, it’s a great product that came at a crucial time.

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Indian Inflation Rate @ 0.44%

2009-03-19T20:54:00.005+05:30

India’s WPI inflation rate fell to an recent low of 0.44% for the year ended March 7, 2009. What is more comforting is the fall in prices of food articles, which greatly eluded the public in the previous declines.

Quoting ToI, the higher base effect along with low demand in the economy is expected to keep inflation in negative territory for 5 to 6 months. This, if happened, will make us witness deflation after a very long time.

One thing that I noticed in WPI is the fall in jet fuel prices by 8%. With this it’s high time that the flight operators reduce their fuel surcharge which currently stands at more than 2000 rupees. And, I guess it would require an intervention from the government to reduce the fuel surcharge amount, which masquerades as ‘taxes’ to the government in flight booking receipts.

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How do banks make money through credit cards?

2009-03-16T10:06:00.001+05:30

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.

2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.

3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

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Inflation dips further

2009-03-13T18:57:00.001+05:30

India's WPI based inflation rate fell to a 7 year low of 2.43 percent for the year ended on 28 Feb 2009. However, this fall in inflation for the sixth straight week was largely because of the fall in prices of manufactured items like metals, machinery and textiles. Food items are still 8% costlier than what it used to be one year ago.

The inflation rate is expected to fall further. It is likely to reduce below 1% mark next week and closer to zero by end of March. Thus, the new financial year 2009-10 is likely to begin with negative inflation.

Experts say that, the negative inflation that would come is due a steep surge in commodity and fuel prices in the corresponding months last year, which they call high base effect. Once this high base effect wanes in later months of 2009, inflation may enter into a positive territory.

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How does Short Term Capital Gain/Loss work?

2009-03-10T07:52:00.001+05:30

I found this interesting snippet circulated through email by ICICIDirect, which describes in simple anecdotes how Short Term Capital Gain/Loss works in India. I am posting it straight away, without any modifications.

1. Mr. Sharma purchased some securities on May 7, 2008 at a total cost of Rs. 100,000. On July 3, 2008, he sold these securities for Rs. 130,000. Here the Short Term Capital Gain, STCG (gain arising from sale of securities which is less than 12 months old) was Rs. 30,000 (a) and STCG tax (15% as per current laws) for this gain calculated to Rs. 4,500.

2. But Mr. Sharma had also purchased securities worth Rs. 90,000 on June 12, 2008 and had sold them at Rs. 40,000 on February 10, 2009. Hence there is a Short Term Capital Loss (loss arising from sale of securities which is less than 12 months old) and equal to Rs. 50,000 (b).

3. Now as per the tax laws, Mr. Sharma’s Short Term Capital Gain (a) is offset by Short Term Capital Loss (b). Hence there is no Short Term Capital Gains tax payable by Mr. Sharma for the financial year 2008-09. Also, he carried forward Rs. 20,000 loss for offsetting any Short Term Capital Gains he makes in the next 8 years.

Thus a person needs to pay STCG tax only for the difference between Short Term Capital Gain and Short Term Capital Loss if the difference is positive; no tax if the difference is zero or negative. Moreover, if the difference is negative, he can even carry forward and offset the loss to gains in the next 8 years, until the loss is completely used off to offset those gains.

Thanks to ICICIDirect.com

RBI cuts repo and reverse repo rates

2009-03-04T08:05:00.000+05:30

The Reserve Bank of India lowered its Repo Rate and Reverse Repo Rate by 50 basis points to 5% and 3.5% respectively, with immediate effect. The Repo Rate is the rate at which RBI lends money to banks and the Reverse Repo Rate is the rate at which banks park funds with RBI.

This move will help RBI to maintain enough money in the economy as it will allow banks to reduce their interest rates on various loans, thereby making credit available easily to the population, at lower interest rates.

The inflation rate, which is already low, would come down further with the rate cut. Meanwhile, the central bank has asked banks to monitor their loans and assets quality as concerns grow over non-performing assets in the banking system.

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Top 10 financial centers of Asia

2009-03-03T10:37:00.001+05:30

According to the six-monthly Global Financial Centers Index (GFCI) compiled by Z/Yen Group, the top 10 financial centers of Asia are,

1. Singapore
2. Hong Kong
3. Tokyo
4. Shanghai
5. Taipei
6. Kuala Lumpur
7. Mumbai
8. Bangkok
9. Beijing
10. Seoul

More details here.

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The Great Depression

2009-03-02T05:30:00.000+05:30

The Great Depression of the 1930s is the economic slow down that everyone often compares with other economic slumps.

ET has compiled this pictorial ride of The Great Depression. Have a look!

How is EMI calculated?

2009-02-28T06:22:00.003+05:30

The Equated Monthly Installment (EMI) of a loan is calculated according to the following formula.

EMI =
(P x i) (1+i)ⁿ
(1+i)ⁿ - 1

Where,
P is the loan amount
i is the monthly interest rate (i.e. the yearly interest rate divided by 12)
n is the loan tenure in months

For example, if you have a Personal Loan of 5 Lakhs (500,000) for an yearly interest rate of 13% and a tenure of 5 years, then,

P = 500,000
i = (13/100)/12 = 0.010833
n = 5 x 12 = 60

EMI =
(500,000 x 0.010833) (1+0.010833)⁶⁰
(1+0.010833)⁶⁰ – 1
= 11376.54

Thus the EMI of the loan is Rs. 11,377

Credit Card Dues

2009-02-27T19:55:00.001+05:30

With the interest rate on credit cards increased to 49%, paying credit card dues on time has become more important than ever.

This article that came on rediff explains the need of paying credit card dues on time. It's worth a read.

Is Average Quarterly Balance Fine ripping us off?

2009-02-26T08:46:00.007+05:30

In India, most of the private sector banks charge a hefty fine on their customers for not maintaining the required Average Quarterly Balance (AQB) amount in their savings accounts. When the AQB itself is quite high at 10,000 rupees for most of the private banks, the fine comes to more than 800 rupees (including surcharge) and is not a small amount by any means.

To have a comparison with other countries, in Singapore, the amount banks generally charge for not maintaining the monthly average balance is 2 Singapore Dollars, which comes to around 65 Indian Rupees. And that means the AQB fine banks charge in India is 12 times that of in Singapore!!

With the AQB amount made double that of what it was previously, the probability of a person defaulting on it also increases. And when the fine is levied on a huge number of customers, it results in tremendous income for the banks, probably what they are eying at.

I guess it’s high time that the Reserve Bank of India intervenes and put an end to this day time robbery, like it put a cap on ATM withdrawal fee a year back.

In the mean time, what we can do is,
1. Have less number of savings accounts as possible with private banks
2. Move your savings accounts to nationalized banks, that have lower AQB and charge less default fee

Meanwhile, this link shows how the average quarterly balance is calculated by banks.

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Investing in times of recession

2009-02-25T12:11:00.001+05:30

One of the reasons why the stock markets are taking time to comeback is the lack of ‘investible’ money in the hands of people. Most of the money is tied up in various investment options such as shares, mutual funds etc. and are not in a position to be liquefied through their sale and reinvested.

Adding to this, people are losing their jobs due the retrenchments that are happening these days, which significantly affect their income. But for those who have money, there is not a better time to invest. The markets are low, shares are trading low.

But then, there is one entity that seems to have enough money to invest in the times of recession; Life Insurance Corporation of India (LIC). The firm had increased its stakes in ICICI Bank, IOB, GAIL etc.

This might be due to the job insecurity that the people feel, which makes them insure themselves and their assets through insurance companies making the companies have enough money to invest. And not to forget the cash reserves they have.