Top institutions in fray for MF trading, distribution platform

Action is building up in the mutual fund distribution arena, with four large institutions submitting their bids for setting up the Sebi-proposed trading and distribution platform. Such a facility will enable investors to transact mutual fund units like the way they transact shares. The National Stock Exchange, National Securities Depository (NSDL), Central Depository Services (CDSL) and the CAMS-Karvy consortium (registrar and transfer agents) have submitted their proposals to build the Amfi platform, ET has learnt from an official familiar with the development.. Amfi will select the best bidder and forward the proposal to Sebi for final clearance. While it is quite natural for CAMS-Karvy to jointly bid for the platform because of their status as top registrars for Indian MFs, the decision of NSDL, CDSL and NSE to enter the fray is surprising, say industry watchers. It is not yet clear as to who will fund the project. "Amfi is yet to come clear on the funding part. In all likelihood, the institution that builds and operates the platform will be remunerated by charging transaction fees from platform users. This could be one aspect that is prompting institutions to bid for the trading The platform is being set up after Sebi directed Amfi to develop 'free and impartial' trading and distribution alternatives. The idea, according to sources, is to empanel all the 38 fund houses under one roof. The platform will allow investors to buy/redeem schemes, compare fund performance and receive portfolio statements (funds of different fund houses comprise a portfolio) through a single online window. "Amfi had asked us to give a proposal in this regard; only key market players (with good business network and non-alliance to mutual fund business) have been invited to bid for the project. We've been asked to submit a proposal on broad parameters such as cost of constructing the platform, technology, platform capacity, project completion time and chargeable fees (for using the platform)," said a senior official at one of the bidders. The need for an online platform has grown after Sebi scrapped the entry-load system and imposed restrictions on mutual fund houses reimbursing distributors through funds collected from investors. These steps are expected to affect the finances of MFs, as they will have to reimburse distributors from their own pockets. Against this backdrop, the industry been forced to take up initiatives to cut costs that are deemed high. A shift to online platform, which will be similar to that of stock trading account, will reduce overheads incurred on printing applications, performance statements and postage. platform," an industry source said. Source : ET

Big tax cut

The new direct taxes code, which is proposed to be implemented from April 2011, aims to moderate effective tax rates in the hope that this will encourage more people to pay up. SLABS TO BE DRASTICALLY CHANGED The Gains • Tax deduction on investments to be hiked from Rs 1 lakh to Rs 3 lakh • Wealth tax exemption up from Rs 30L to Rs 50cr • Base year for capital gains tax calculation shifted from 1981 to 2000 • Corporate tax rates to be cut to 25% from 30% And The Pains • Tax benefit of up to Rs 1.50L against home loan interest payment to go • EET (exempt, exempt, tax) to apply on savings under Section 80C (mainly PPF). Such savings will be taxed on withdrawal, but only on sums accruing on or after April 1, 2011 • Financial assets like stocks and FDs to be part of wealth and taxed Shares, fixed deposits will be included in tax calculation: FM New Delhi: The Centre on Wednesday unveiled a brand new code for direct taxes which offered many sops to the salaried class and senior citizens. The exemption limit at which taxes kick in will continue to be higher for women and senior citizens under the draft proposals. For women, their tax meter will start ticking when their income exceeds Rs 1.9 lakh per annum, whereas senior citizens will have to pay tax only if they earn more than Rs 2.4 lakh a year. A change that could be problematic for many individuals is in the treatment of post-retirement benefits like provident fund. The adoption of the EET (exempt-exempttax) method will mean that any withdrawal of money from you PF account, for whatever reason, will attract a tax since the amount withdrawn will be treated as part of your income for that year. This will, however, apply only to amounts that accrue from April 2011 onwards. Like personal taxes, the corporate tax rate too is to be cut from the existing 30% (excluding cesses and surcharges) for domestic firms to 25%. Also, companies can carry forward losses for as long as they like, while earlier a loss in one year could be set off against profits only in next eight years. In the case of foreign companies, however, in addition to this 25% tax there will be a 15% tax on “branch profits’’. Branch profits, the code explains, are defined as total income minus corporate tax. This seems to suggest that the effective tax rate for foreign firms could actually be slightly higher than the current 35%. Another big change is including financial assets—like shares and deposits— in the calculation of wealth tax. The whammy is sought to be offset by a reduction in the wealth tax rate from 1% to 0.25% and an increase in the threshold limit to Rs 50 crore. It’s also proposed to do away with the securities transaction tax, and change the manner in which tax holidays for infrastructure industries is given. Explaining the rationale behind these changes, finance minister Pranab Mukherjee said: “The aim ... is better compliance and realisation with likely expansion in the tax base.’’ He added, “All direct tax laws have been brought under one umbrella and laid down in a manner that it will eliminate the scope of litigation.’’ Former FM P Chidambaram who had began the process of rewriting the tax laws after Budget 2005-06 said: “It underlines the philosophy of the government, that is, a regulated free market system.’’ He also said, “The new direct tax code will promote economic activity and entrepreneurship.’’ The code was put up on the ministry’s website and the government has invited suggestions. Source: Times of India

A tale of many numbers

A tale of many numbers I have been on the road for some time now traveling across many parts of the US and Canada. The interest in India - and other emerging markets - has increased over the past few months. Rising markets have this strange ability to attract more money. If you really think about it, people should invest when prices are low - when markets have fallen. But human nature and investor psychology being what it is - the higher the share price, the more the interest in the stock! Everyone wants a ride on the gravy train. ---------- Until Tomorrow ----------- Just for another 24 hours... until 11.59 pm on August 19th to be exact... we'll be offering you a chance to sign up for our midcap stock recommendation service at a rock bottom price - 50% off. And that's not all...If you sign up now, you will also get access to a report we are releasing tomorrow on a midcap opportunity that could triple your investment in 3 years. For full details, click here. (Please note that you can always pay us by cheque or via net banking in case your credit card is still not ready for online payments.) ---------------------------------------------------- The good thing about my travels, though, was that my last name did not attract any attention from the immigration officials in USA. Though I did have my "please step aside" moment about 2 years ago at Miami airport. There were others ahead of me in a large waiting room. We were called in order by an officer armed with a computer and equipped with a gun. A few questions on why I was visiting, where I was staying, and then a few clicks of the mouse and a few stamps before I was told "Hope you enjoy your stay here". The entire process did take an hour, though, and I would rather have spent that time somewhere else. But we all have a job to do and the US Immigration was doing theirs. Just as money flows are doing to stock markets what money flows are supposed to do. When people buy with greed, markets rise. When people sell in fear, markets fall. Table 1: Foreign flows stayed positive in July Period Net Foreign Activity(US$ m) Net Local Fund Activity(US$ m) Total (US$ m) Change in BSE-30 TRI in that period (% ) ( USD) CY 2003 6,940 93 7,033 +86.3% CY 2004 8,958 -261 8,697 +23.1% CY 2005 10,896 3,089 13,985 +42.2% CY 2006 7,994 3,442 11,435 +53.3% CY 2007 17,235 3,121 20,357 +68.5% CY 2008 -13,136 2,037 -11,099 -60.7% Cumulative 38,888 11,520 50,407 +231.1% July 2009 2,283.8 376.7 +2,660.5 +7.8% YTD 2009 +7,310 +878 +8,188 +64.4% Source: Sebi.gov.in Egged on by these foreign inflows of USD 2.2 billion from FIIs (much of it short term money and some of it long term capital) and buy orders from local funds, the Indian stock markets gained ground in July (+7.8% in US Dollars). So far, the Indian stock markets have gained +64.4% in the year-to-date (YTD) through July 31st. Not bad for a 7-month return. Though the Indian stock markets underperformed the MSCI Emerging Markets Index in July (see Table 2 below), they are ahead for the 7 months of this year. Table 2: India trails Emerging Markets in July, but still ahead for the year. (all return figures in USD) 1-month for July YTD 2009 CY 2008 CY 2007 BSE - 30 TR Index +7.8% +64.4% -60.7% +68.5% MSCI Emerging Market Index +11.3% +51.1% -53.5% +39.5% MSCI Return number as per Bloomberg; * Annualized Numbers And how does India compare with its larger peers within the emerging markets: Brazil, Russia, and China? Well, based on the MSCI BRIC Index (see Graph 1 below), India managed to outperform only Russia. Graph 1: India lags MSCI Emerging Markets and MSCI BRIC in July (all in USD) Source: Bloomberg A good year - but can it end badly? But this is no time to calibrate where individual markets and asset classes are. While many went on their annual vacation in the western world - with anxious Blackberry a quick touch away - the markets gave everyone a warm fuzzy feeling. This is the first time in calendar year 2009 that all the Indices and asset classes tracked in Table 3 below have a plus sign ahead of them. Table 3: All in positive territory YTD, but India lags Brazil and China (all in USD) % change for month ended July, 2009 % change YTD in CY 2009 % Gain/Loss since July 31, 2007 (Bear Stearns funds in trouble) India - BSE-30 TRI +7.8% +64.4% -12.8% Brazil - Bovespa +11.8% +82.4% +0.8% China - SHCOMP +15.5% +89.6% -13.1% Russia - RTSI$ +3.1% +63.6% -47.8% MSCI EM Free +11.3% +51.1% -20.7% S&P 500 +7.6% +11.0% -28.8% MSCI World +8.8% +19.0% -28.5% Berkshire Hathaway +7.8% +0.4% -11.8% Gold +3.0% +8.2% +43.6% Oil -0.6% +55.7% -11.2% Source: Bloomberg This table has a lot of information in it, so spend some time on it. India is lagging Brazil and China in terms of returns in July and also for the year-to-date. But, since the world began to re-price and reassess risks (the extreme right column), India (-12.8%) has lagged Brazil (mostly due to currency movements - the Brazilian Real has gained ground against the US Dollar) and is a whisker ahead of China (-13.1%) and has done way better than Russia (-47.8%). Note that Gold is up +43.6% over the same time period. It should remain an essential part of any investment portfolio. In August 2007, two hedge funds belonging to Bear Stearns - a well established finance company - blew up. This was the first flapping of the wings of the butterfly. Eventually, Bear Stearns went bankrupt as did Lehman Brothers in September 2008. But August 2007 was when some fears over the extent of unknown risks taken to get unknown returns began to seep into the minds of global investors. While China and Brazil have - so far this year - benefited more than India from the perceived global economic recovery (in terms of share price movements) any change in perception could see a faster decline in those stock markets. But India is still hostage to foreign short term flows of speculative money and there is no doubt that the Indian markets will be hit by "FII selling". And India has its own set of problems: from the drought to a questionable policy making process. So, while swine flu dominates the press, the China Cold could be more of an irritant. Maybe it is time for some Indian academic to write a report on why China - broken up into 25 independent countries - would be less dangerous for our portfolio returns. J Till then, keep with the asset allocation; don't panic when others do; and let's keep praying for some rain.

India to soon return to 9 per cent growth path: PM Saturday

India to soon return to 9 per cent growth path: PM Saturday 'Going back to a 9 percent growth path is our greatest challenge. For this, we will take whatever steps that are required,' the prime minister said in his Independence Day address to the nation from the majestic Red Fort. 'By the end of the year, I am confident there will be a major change. But till then, we all have to cope with the situation,' he said in his sixth straight address laying down the agenda for the United Progressive Alliance (UPA) government in the coming year. 'I appeal to business leaders to work together in this endeavour and meet their social obligations and responsibilities.' According to Manmohan Singh, it was because of his government's policies that the country was able to grow at 6.7 percent in the last fiscal when the world was facing one of the worst downturns in eight decades. He said steps will be taken to ensure adequate spending on development projects to boost growth further and capital will be sought not only from domestic sources but from overseas as well. 'India can progress only when each Indian makes a contribution. Our endeavour has been to reach the fruits of development to every citizen. I know we have a long way to go.' The prime minister said he was also aware that high commodity prices were causing hardship to citizens, especially the poor. 'We have enough food stocks. Every possible step will be taken to bring down prices,' he said. At the same time, he appealed to all state governments to use all administrative and legislative measures at their disposal to ensure that prices of essential commodities like cereals an pulses are brought down.

Finally, a Tax Reform of Substance

Finally, a Tax Reform of Substance Recently, the Finance Minister proposed the new Direct Tax Code that is likely to be effective from 2011. This proposed Code will in effect replace the Income Tax Act, 1961. Broadly it proposes to: Raise the tax slabs for individuals substantially as per the table below: Tax Rate Existing (Rs) Proposed (Rs) Nil 160,000 160,000 10% 160,001-300,000 160,001-1,000,000 20% 300,001-500,000 1,000,001-2,500,000 30% Above 500,000 Above 2,500,000 (Source: Direct Tax Code Bill, 2009) Increase the Section 80C limit from Rs 1 lacs to Rs 3 lacs Make the investments in saving schemes like provident fund, life insurance, New Pension Schemes, EET (Exempt-Exempt-Tax). This will be applicable to all contributions made after the commencement of the Code Scrap the exemption on the interest on home loans of Rs 1.5 lacs Abolish Securities Transaction Tax (STT). This will bring down the transaction cost for investors Remove the distinction between short-term and long-term Capital Gains Tax. This means capital gains will be taxed irrespective of the investment horizon Raise the wealth tax limit to Rs 500 lacs and lower the rate to 0.25% The new Direct Tax Code has to be first passed by Parliament before it can be implemented. When implemented, it will boost savings of individuals.

How bad can it get?

How bad can it get? A lot has been talked about the unprecedented money supply growth and its eventual translation to inflation. In History, there have been episodes of currency crises in different parts of the globe on account of run away increase in money supply resulting from printing more money. A few of the occurrences turned really worse and were identified as era of "hyperinflation". To recall a few, Zimbabwe experienced hyperinflation for much of this decade and not to forget the well-known Germany’s Weimar Republic hyperinflationary period in the 1920s. Table 1: Highest Monthly Inflation Rates in History Country Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double Hungary July 1946 1.30 x 1016% 195% 15.6 hours Zimbabwe Mid-November 2008 (latest measurable) 79,600,000,000% 98.0% 24.7 hours Yugoslavia January 1994 313,000,000% 64.6% 1.4 days Germany October 1923 29,500% 20.9% 3.7 days Greece November 1944 11,300% 17.1% 4.5 days China May 1949 4,210% 13.4% 5.6 days Source: Prof. Steve H. Hanke, February 5, 2009. www.cato.org Hyperinflation is just inflation at an extremely high rate. Usually this also means the inflation is out of control and its level is not precisely predictable. There is no precedent for the current world money order. The magnitude of increase in money supply has been much higher this time around. However, history provides us some insights to how worse can it get. Hyperinflation - Germany’s Weimar Republic (1921-23) When it comes to Hyperinflation, Germany’s Weimar Republic era of 1921-23 serves as perhaps the best documented cases in modern history. While there is a lot of information in the public domain, this was recently described in a recent article by Peter Krauth. Many are unaware of the dire consequences of hyperinflation; a glimpse at what happened in Germany can be hair-raising. During the World War I in 1914, Germany opted to finance the war by borrowing rather than increasing taxes. The German policy makers chose borrowing because they expected to win the war and intended to force the losers to pay for the cost of the war. It was thus logical to the policy makers to use borrowing rather than taxation. But Germany lost the war and the victors imposed heavy reparation payments upon her. The reparation payments were perceived as unfair in Germany and the social democratic government was reluctant to impose the burden of their payment upon the German population. The government, strapped for funds, resorted to printing money. The value of the mark relative to other currencies fell thereby increasing the cost of imported goods. Prices rose increasing the cost of running the government. This necessitated the printing of even more money. Prices rose further and the exchange rates for the mark dropped even more. The result was hyperinflation. At first, Germans reacted to the higher prices by economizing and reducing their consumption. But when they realized that it was not just a matter of some things being more expensive but instead that the mark was losing value they reacted by spending their marks as fast as possible. This meant that there was little constraint on prices. There were winners as well as losers in this hyperinflation. Those on fixed incomes and who were owed a specific amount of money found that the real value of their hol dings reduced to zero. But those who owed money found their debt effectively wiped out. The German mark devalued significantly in terms of gold prices. The paper mark/gold mark ratio went from a one-to-one ratio in 1921, all the way to a one-to-1.0 trillion ratio in 1923. Just imagine what would happen to gold in any remotely comparable situation involving the U.S. Dollar. The dollar acts as a world reserve currency. There has been an unprecedented and explosive growth in money supply. The dollars are being created just by printing more of them without any asset backing it. They are nothing more than pieces of paper with black ink. The U.S has been accumulating deficits over years. The deficit is likely to increase over $2 trillion; worrying its creditors. The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less. As seen in the above example on Germany, currencies lost value as their quantity of the money in system increased considerably. In that case, it will take a lot more dollars today to buy the same thing one bought with fewer dollars earlier. There have been evidences of currency losing their entire value creating a hyper inflationary scenario. Like in Zimbabwe, people carried sacks full of notes to pay for their daily purchases. Also, during the Weimar mark inflation, people pushed wheelbarrows full of German marks to the bakery just to purchase a loaf of bread. Is the US a banana republic? A currency meltdown occurs when governments face overwhelming gaps between revenues and expenditures; foreign investors abandon the currencies as they race for the exit, leaving a trail of worthless paper. A decline in the value of dollar will affect the entire global economy. The US dollar acts as the world reserve currency and most of the world trade happens through exchange of dollar currency. China with USD 2 trillion* of US Dollar notes will be the worst affected. That is why the Chinese government is buying hard assets - including gold. (*Source: Bloomberg) Gold is the only time-tested currency that can act as a store of value during times of hyperinflation. Are we certain that the US dollar will collapse? Nothing is definite, and neither do we know when such an event could occur. But better to buy your "insurance" - in the form of owning gold. We recommend that you allocate at least 10-20% of your investments to gold and insure your wealth from being eroded from a possible inflationary threat.