Friday, 28 March 2014

Advisor, Cat and I

By Uppai Mappla

Cartoon source: Economic Times

FINANCIAL ADVISOR enters. He is in his mid-twenties, smartly dressed in black pants a pinstriped shirt. He arrives in a motorcycle with a junior advisor, similarly turned out. They have between them a black leatherette briefcase stuffed with papers.
We chat and make each other comfortable. I learn that both are MBA (Finance).  Six months ago the senior advisor left a multinational company since “India is growing Sir.” The senior advisor appraises me, my living space and my family. Finally he admires my cat, and I realize he is ready to talk business.
Advisor: Sir, I have a great investment product for you Sir, a ULIP, guaranteed to double in two years and with insurance protection. (He gives me a printed brochure.)
I am instantly hooked. The brochure that glides of its cover is a beauty. And the typography! Indian publishing industry has indeed arrived.
UppaiMappla: (my fingers running all over the pages) Amazing!
Observing my capitulation the Advisor moves in for instant kill. He yanks the brochure open at the last page to reveal an application form. 
Advisor: Sign here Sir with a cheque for Rs. Xxxxxx/- and let me take care of it for you.
Uppai: Don’t you want to know my age, medical status . . . ?
Advisor: No sir, nothing at this stage. Just sign and let me take care of the matter sir. And Sir, please make the cheque payable to XYZ insurance company Sir.
Uppai: I need to think a bit. You see I have already term insurances on life and health.
The Advisor deprecates my financial folly of insuring my life as if it were an automobile. He explains how the entire insurance money will go waste if “nothing happens to you Sir.”
Advisor: (finally backing off) While you rethink the ULIP Sir, here is a wonderful NFO that closed yesterday.  
Uppai: NFO?
Advisor: (recites) NFO means “New Fund Offer.” Each unit is available to you at Rs.10 whereas existing mutual funds are ten times costly. All these mutual funds invest in the same market. All investors are moving from old mutual funds to NFOs to maximize their returns. Imagine the return you will make with this NFO Sir!
Uppai: Amazing. Um, do you by any chance recommend an index fund?
Advisor: What?
Uppai: You know the Nifty, Sensex fund.
Advisor: (after the briefest hesitation) Sensex 22,000 Sir. NFO is only Rs.10 Sir, No comparison! And we don’t know where Sensex will go next year, do we Sir?
 Uppai: So I can look forward to this Rs. 10/- NFO to become 22,000 soon? How brilliant. Anything else?
Advisor: Here's an exquisite close-ended Real Estate Scheme fund Sir. After three years your money triples. See the way the real estate is going up, up Sir!
(I glance out of my window at the tall flat complex right in front of my house where some 25 flats from a total of 116 are occupied. The developer’s desperate banner flaps in the wind “Grab the Last Chance! Only TWO flats to go!”)
Uppai: (pointing) See those flats seem empty.
Advisor: (realizing I am chicken) Sir, you are wise and risk averse. I have the right product for thoughtful people like you Sir.
Uppai: Do you now?
Advisor:  (fishes out another brochure, much used and faded. Possibly that is his only copy. Must be very exclusive.) Our portfolio management scheme. Very must an in-house thing, only for HNIs. Minimum investment is Rupees One Crore but if you opt for our ULIP I can get it for you for Rs. 5 lakhs. PMS is an amazing product, Sir. It can go 100% into equity when the market is down and 100% debt when the market is up – just like that. (punches an imaginary keyboard miming how the fund manager goes in a trice from 100% stocks to 100% debt.)
Junior Advisor (interrupting shrilly): And our Peeyemmes fund manager is an Ayyeyyem product, Sir!
Uppai: Ayyeyyem product?
Senior Advisor:  Sir, IIM, Indian Institute of Management.
Uppai (disappointed): Oh, that means you two are not from IIM?
Advisor:  No Sir. Annamalai. Same syllabus.
Uppai: But of course! Ayyeyyem, Annamalai, the same thing! May I ask, if your PMS is going to zoom up like you said, won’t I have to pay capital gains tax?  And what about tax in real estate fund?
Advisor:  (shocked at my ignorance) Both the funds three years lock-in Sir!
Uppai:  No LTCGT even for your PMS and real estate funds?

Junior Advisor pipes up again: No Sir! India has no long term capital gains taxPalaniyappan Sirfrom my village. (modestly studies his fingernails).
Uppai: (slapping my head): Palaniyappan of course! Fancy your hailing from Finance Minister’s village. Your funds must have personal protection from him. That settles things. By the way, could I get back to you? I need to discuss this with my partner.
My partner Mr Divakaran is is at my heels mewing for fish.
Advisor:  (fatally ignoring my partner) Shall I come today evening Sir?
Uppai: I have your card. I will call you when I am ready. OK?
Advisor:  I wait for your call Sir. Thank you Sir. You are making the right decision, I know. (gets up to leave.)
Uppai: Oh, you said you worked for a multinational company six months ago before joining Indian financial sector? Which one?
Advisor:  Canon Sir. I was in charge of entire Tamil Nadu and Kerala.
Uppai: (indicating the Junior Advisor) What about him?
Advisor: Sir, he was in a multinational.
Uppai: Oh. Which one?
Junior Advisor: Nestle Sir. Maggi Noodles. (Senior Advisor flinches.)  
Uppai: Canon and Nestle! Great companies.
Both Advisors: Thank you Sir. See you tomorrow! (Waves patronizingly to Divakaran.)



Partner Divakaran bidding goodbye to financial advisors.
Moral: Never underestimate the cat.

Out of the more than hundred financial advisors I have met in the last ten years, I have found only  TWO -- yes, just two -- who really understood finance, and most importantly, were willing to teach me the basics of economics and finance without caring for their commissions : (1) Vinu Mammen, ten years ago with ICICI Bank, and (2)  Vinson Victor, five years ago with JRG Securities. This note is not a personal recommendation for them, but a spontaneous expression of hope for a minuscule minority  of young, honest high-flyers in financial advising profession in India.  
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This work (text only) by Sajjeev Antony is licensed under a Creative Commons Attribution 4.0 International License.

Saturday, 22 March 2014

The Tax Amnesty That Never Came

(March 22, 2014)

I posted this  in's MMB  the day before the Union Budget of 2011. Alas, just like his previous two budgets this was a populist disaster. But the UPA II government still had support from their allies and could have pulled it through. I believed then that India's main problem was lack of cashflow and I still believe so.

Why Tax Amnesty is
the Only Way Out

By Uppai Mappla
27th February 2011

Tax amnesty has rightly been slammed as immoral. However, under the current financial circumstances, it could be even more immoral not to take advantage of this ready and certain source of capital.
As recently as November 2010, India was the darling of investors. But yesterday, Maplecroft’s much-followed World Risk Map showed India as the 16th riskiest country for investors!
      What a fall that was, my countrymen!
      We all know how Commonwealth Games and other scams made India seen suddenly as the dog with the most fleas. But investors had sort of agreed that the affliction could easily be shampooed away. Even persistent inflation, prospects of stagflation in Europe and inflation in the US were being downplayed by FIIs, as long as the promised 8-10% GDP growth could be delivered.
      What has suddenly rendered them truly fearful is the unexpected Arab crisis. No one—even visionaries like Marc Faber—anticipated the speed with which the revolutionary fire would spread among the entire Arab world. In anticipation of that, for the first time in history, Brent crude is at a significant premium to WTI crude.
      Now that the enslaved Arabs have awakened, oil prices might keep spiking up, this time not because of mere contango, but due to fears of decline in production and transportation. (In 2008 the case was different, it was due to the expected growth in the developing world.) Speculation could magnify this even higher.
      India could be hit right in the belly. Fertilizers, irrigation, food distribution, power production—everything essential will suffer. Large swathes of the country may face famine and mafia protectionism. Trucks and trains moving essential supplies from one state to another might be stopped and looted. Sons-of-the-soil could flare up. Maoism will look tame then!
       Gulf returnee NRIs could not only dry up forex inflow, but also exert unsustainable pressure on the labour market, especially in consuming states like Kerala, where there will be immediate reaction on migrant labourers, triggering a bloody backlash on Keralites employed in these states.
      This horror story may become a reality if oil prices spike to $150+ and if India doesn’t have financial cushion. Then the government’s projected deficit of 5%-5.5% for FY-12 will be laughable. Foreign institutional investors (FIIs) are sure to smell the disaster early and they will just unload their holdings all at once, in a carnage worse than 2008. The rupee will slump to all-time lows, making imports even costlier. God forbid, if monsoons too fail this year, with another bout of global crop failure, then goodbye growth, welcome recession—no, stagflation!
      The Government and its economists are currently in a dream world (as shown by the sickly sweet Economic Survey) of a growth-utopia. FM will most likely feed this to us tomorrow in his budget speech.
      There is only sure savior for India now—a robust and no-nonsense tax amnesty. Indians are said to have an illicit $1.5 trillion abroad, probably more. Add to this the bundles of currency notes (partly printed in Pakistan, I agree) plus the 15,000-20,000 tons of gold held within the country, all unaccounted, unused, un-leveraged. Compared to previous tax amnesty schemes, the present haul (even if it dislodges only 5% of the stash) will be spectacular, and turn us into an instant surplus economy.
     Money begets money. Foreign investors will suddenly return, wide-eyed about India story, and don’t be surprised if Fitch upgrades India two notches up to BBB+ with a positive outlook! (Currently our credit rating is BBB- with an unprintable outlook.)
That makes it NOW [Feb 2011] is the right time for a tax amnesty. Why so?
(1)             It will capitalize on the rising panic amongst tax evaders that their escape routes are being choked by new tax agreements, revelations by conscience-bitten bankers (which could spread like an epidemic, suicide-bomber-like), increasing efficiency of surveillance, core banking, integration of global financial flows, etc.
(2)             Increasing business opportunities in India for newly whitened money (which were not available in previous amnesties), lower taxation slabs and the possibility that the whitened money could be great investment opportunity could prompt hefty disclosures of black money and foreign money.
(3)             Most black money is being held by Congress politicians and their protégées. They fear that the next party in power will victimize them easily and effectively. They are sure to lobby the high command to twist finance minister’s arm.
(4)             If the government waits too late to declare a tax amnesty, say, the middle of the year, as a knee-jerk response to an increasingly violent Arab uprising, soaring deficits, and inflation, response will be tepid because by that time tax evaders would have lost some faith in Indian financial system. 

Due these reasons I believe that the Finance Minister cannot escape declaring a tax amnesty very shortly, either during the Budget Speech or thereafter. And I hope he takes this opportunity boldly with both hands and acts TOMORROW itself. 
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This work (text only) by Sajjeev Antony is licensed under a Creative Commons Attribution 4.0 International License.