Video: How the Economic Machine Works, by Ray Dalio

2 comments Written on July 25th, 2014 by
Categories: Video

An awesome Video by Ray Dalio (HT Srikanth Thunga) that speaks about what the economy is based on: Credit, short term debt cycles and long term debt cycles. Ray Dalio is the founder of Bridgewater Associates, a mammoth hedge fund.

Every Indian should watch this, especially the “deleveraging” section. Japan went through this in the 1990s. The US saw it in 1930s and then 2008 onwards. When will India see it?

My guess: within the next five years. Hopefully it will be a “beautiful” deleveraging.

Jaitley Removes Retrospectivity in Debt Mutual Funds, But FMPs Will Still See Tears

7 comments Written on July 25th, 2014 by
Categories: Budget2014, MutualFunds

NDTV reports that the higher tax on debt mutual funds will apply only from July 10 onwards, and not “retrospectively”, from a statement given by Arun Jailtley (Finance Minister) to Parliament.

Which needs a change in the finance bill, to state that units of non-equity mutual funds that have been sold between April 1 2014 and July 10, 2014 and held for more than one year from purchase will be attract long term capital gains. This means a “proviso” needs to be added stating this intention.

However for investors in FMPs who bought for a year’s holding for the tax exemption, their exit will be classified as a short-term gain, and it’ll be added to their income. For them it’s retrospective by implication, since they had no idea about this when they invested.

Read: The Murder of the Debt Mutual Fund in this budget.

But the concept of retrospective taxation is only that a rule should apply on after the rule has been announced. In this case, the only reason that the rule was retrospective was that the budget came in July (usually in February). The difference? A Feb announcement allows a month to be able to do things since the tax changes apply from April onwards. A July announcement - because the budget was postponed due to the elections - is applicable, from the same April, so technically, it will apply to transactions made from April to July as well. This aspect has been addressed by Jaitley’s statement.

Lesson: Don’t invest in things because of tax benefits alone. The fact remains that short term funds, even today, give way better returns than fixed deposits, and even if the two were equally taxed (as they are now) I would choose the short term mutual fund.

Portfolio Additions: Two Stocks that Rush To Upper Circuits! [Premium]

No Comments » Written on July 24th, 2014 by
Categories: Premium

We’ve bought two more stocks for the portfolio, based on their stellar performance in Q1. This is where things get a little tricky; we bought them today, but since then they’ve hit the upper circuit.

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!

Budget 2014: Effective Corporate Taxes Lowest in 4 Years, Large Companies Take Most Advantage of Tax Exemptions

No Comments » Written on July 24th, 2014 by
Categories: Budget2014

Each year, the Ministry of Finance, along with its annual Budget, releases a Statement of Revenue Foregone. This year, being the NDA’s first tenure in 10 years, would be an interesting one from a financial stand-point: it gives us some insight into the direction that the policy-makers could be headed towards. These are only estimates that are put forth by the Government based on a few simplifying assumptions, and have been arrived at using the statutory tax rates applicable during that financial year.

Note: We use the Statement of Foregone Revenue for FY 2011-2012 which contains data from corporate filings received on or before November 30, 2012. This document also contains projections that were made for FY2011-2012 (hereon referred to as the previous year), and can be used in comparison with the Statement of Revenue Foregone that was released this year. The data presented in the above link, refers to corporate filings received on and before 31st March 2014, for FY 2012-2013 (hereon referred to as the current year). It also contains projections for FY2013-2014.

What does ‘Revenue Foregone’ mean?

For the government of any nation, taxes (both Direct and Indirect), are the major source of revenue. These taxes are imposed upon companies, individuals, HUFs, charitable entities, Association of Persons (AOPs), Body of Individuals (BOIs) and local authorities.

The rate at which each of these entities are taxed, along with definitions of various tax-related metrics (tax-base, taxable income-slabs, exemptions and so on) are governed by the Income Tax Act, 1961. This Act allows several measures that companies and non-corporates (including you and I) can undertake in order to reduce their Taxable Income. These measures could be tax exemptions, deductibles, rebates, tax deferrals and credits and special tax-rates. These measures can apply to either the tax base (the amount that is taxable) or to tax rates (the percentage that is to be paid out as taxes).

As a result of such measures, the statutory tax-rate (the tax-rate specified by the country’s laws) can be effectively reduced by those that come under the gambit of said laws. This in turn, means potential revenues that are lost by the government. These, are termed as ‘Foregone Revenues’.

Taxes levied on income and profits, are termed ‘Direct Taxes’. These are paid to the government directly by the tax-payer who is also the tax-bearer.

There are also ‘Indirect Taxes’ which include customs duty, excise duty and other taxes. These are levied on goods and services (e.g. VAT, Goods & Services tax). Why are they called ‘Indirect’? Because they are initially paid by the producers and manufactures (tax-payers), while the burden is passed on to the consumer through increased prices (and hence, the consumer is the tax-bearer).

The Statement of Foregone Revenues for FY2012-2013 that was released (as well as its precedents), analysed the potential foregone revenues under 2 main brackets, Direct and Indirect Taxes. We will dissect the Direct Taxes paid by Corporates in this post.

Lowest Effective Tax Rate in Four Years

Before we delve deeper into the numbers behind taxes, let’s first look at what the general trends are for statutory tax rates specified by the Income Tax Act.

Statutory & Effective Tax Rates

For this year and the last, the Statutory Tax Rate was set at 32.445%, which was higher in the preceding years (33.21% in FY2010-2011 and 33.99% in the year before that). The corporate taxes levied on companies as per law has been seeing steady policy cuts. As a result, the Effective Tax Rate (ETR), which is the proportion of PBT that is actually paid out as taxes has been declining, although there are other factors that affect ETR. It saw a decline to 22.44% for the current year, down from 22.85% in the previous year and 24.1% in FY2010-2011.

Companies reported Corporate Tax Payable of Rs. 2.44 lakh cr in FY2012-2013, an increase of 7.89% from the previous year;

Dividend Distribution tax of Rs. 19,996 cr, an increase of 6.45% from the previous year.

As we see below, the general trend for taxes payable has been upwards (thankfully so, otherwise that would mean that our companies aren’t making increasing profits!). The slight dip in FY2011-2012 is probably due to the drop in the statutory tax rate to 32.445% for FY2011-2012. At the same rate, the current year has shown an increase in taxes payable.



We see a similar trend in Dividend Distribution Taxes payable as well.

There was a 25% increase in the number of corporate filings to 6,18,806 for FY 2012-2013 as of 31st March, 2014 from 4,94,545 filings for the previous year.


A higher proportion of companies, 40.54%, reported Profit Before Taxes (PBT) < 0 (losses) this year, up from 37.34% last year. This proportion is showing an upward trend; it was at 35.19% for FY 2010-2011, amounting to a year-on-year 7.33% rate of increase.


If we look closely at how many companies belong to each of the slabs, it throws up an intriguing number: 48.9% of the companies report profits between 0 and Rs. 1 crore. That’s nearly half of the entire list!

Add to this, the 46.01% that makes either zero profits, or losses. A combined 94.91% that makes below Rs. 1 cr as profits before taxes, an increase from 94.05% last year. Terming this quite bottom-heavy, would be an understatement.


But look at things another way: While 94% of companies earned less than Rs. 1 cr. in profit, they only pay about 6% of the total corporate tax collected. Nearly 94% of all corporate taxes are paid by companies that make more than Rs. 1 cr. in pre-tax profits.

Larger Companies Get More Exemptions

There are evidences that larger companies (those with PBT > Rs. 500 cr) have taken more advantage of the various tax exemptions and concessions proffered by the government.


48.91% of the companies reported PBT between 0 and Rs. 1 cr this year. These companies had an Effective Tax Rate (ETR) of 26.73%, while the tax-rate of the entire sample was lower, at 22.85%. This implies that there is one or more of the PBT slabs that enjoyed a relatively much lower tax-rate than these guys.

And that was the slab with companies having PBT > Rs. 500 cr, which had an ETR of 20.97%. An indication of how larger companies avail higher tax concessions. In fact, the ETR for these companies has been reducing over the years.


Another interesting number here: firms in the highest PBT slab accounted for a cool 61.28% of PBT, while their share in total corporate IT payable was lower, at 57.27%.  Their share of PBT has also been increasing over the years. Again, another indicator of them being in a better position to make use of the tax exemptions provided.

Look at the ratio of Taxable Income to PBT. The ratio is at 87.88% for companies that have PBT up to Rs. 1 cr, meaning that they have to pay taxes on 87.88% of their PBT.

Whereas companies with PBT > Rs. 500 cr, have to pay taxes on only 66.36% of their PBT. Meaning, they're more geared to take advantage of exemptions.

Based on these figures that were obtained from corporate returns, revenue foregone can be estimated by using the corporate tax-rate of 32.445%, and then arriving at a final figure to represent the “Revenue Foregone”.

Considering that the statutory tax rates have been changing over the years, the figures aren’t exactly comparable. However, with the rates being constant since the previous year, we can see that revenue foregone has been showing an upward trend.


Our View

The key takeway is that exemptions seem to work better for larger companies. Some exemptions, like a tax benefit for investing Rs. 100 cr. in a manufacturing setup, will only be usable by large companies. But even others, like accelerated depreciation, production of natural gas, or SEZ export sops work better when you have scale. The small company has little to play with, while the big boys pay lower and lower effective tax rates every year.

We'll have much more on this topic, including details of how tax sops have been used, at the personal and corporate levels. 

Note from Deepak: Please welcome Gautam Jagannathan to Capital Mind as he contributes to our research desk and as you can see, has hit the ground running! 


RBI Opens 25,000 cr. for Debt Hungry FPIs

No Comments » Written on July 24th, 2014 by
Categories: RBI

RBI has finally moved to helping foreigners buy some more debt, as the debt limit for G-Secs has been rejigged. Foreigners (actually, Foreign Portfolio Investors or FPIs) can only buy Indian debt upto a limit.

For Government Securities: From the earlier limits of $20 bn (for FPIs) the limit has been raised to $25 bn. The extra $5bn can only be used to buy securities of residual maturity of 3 years or more. It’s likely that they use the conversion rate of Rs. 50 to a dollar (as is used for the rest) which means an additional 25,000 cr. can be invested in G-Secs.

Since the overall limit of $30 bn hasn’t been changed, there is a reduction by $5bn in limits for investments by FPIs of a specific sort (Sovereign Wealth Funds and the like) which had an earlier limit of $10bn (now cut to $5bn).

Update: RBI has also mandated that any new purchases by FPIs, even within the original $20bn limit, will have to be of 3 year residual maturity or more. This is something I overlooked. (Thanks alert reader BK!) Basically this means that FIIs can’t even buy debt that matures in 2015 or 2016 - there has to be at least the years left. If they already hold such debt, they needn’t sell it - just that when that is redeemed, they have to buy longer term-to-maturity debt.

There is no “lock-in” - meaning, even if they buy debt maturing in 2017, they can turn around and sell it tomorrow.

The new limits will be:

  • $25 bn (3 year residual maturity or more)
  • $5 bn (only specified types of FPIs, in certain types of g-secs).
  • They can’t buy any T-Bills anyhow.

Isn’t this unnecessary? We should just have one overall limit. I don’t even like the concept of a limit. I think we should free our currency. But I digress.

Look at the FPI investments today (23 July 2014):


They are full up on Govt Debt (FPIs) which are available regularly. The specific FPI limit is for about Rs. 50,000 cr. which will fall to about Rs. 25,000 cr., and current investments are about half of that, so there won’t be a problem.

Overall Bond Holdings have gone above 200,000 cr. (by FPIs).


There’s a lot of interest in Indian debt, especially since the rupee has stabilized at 60. Bond yields of the 10 year (8.83% Nov 2023 bond) are at 8.66%. However there is a new 10 year bond starting this Friday, and that in the “when issued” market trades around 8.38%, which is ludicrously low, considering even short term T-Bills are at 8.6%.

For the near term, this news will help bond prices.

The increase in the debt limit will increase interest in the bonds, and yields are likely to fall a little from here (i.e. prices go up). But this is quite likely to be short-lived, because the drought fear hasn’t gone away yet, and we are still at 27% below normal. Vegetable prices are still sky high.

RBI meets on August 5, to tell us about policy going forward. Rates should, in general, be reduced as inflation has come down. The risk, however, is of a bad monsoon, and veggie prices are already up. I would say there’s a 70% chance of a rate cut and 30% chance he’ll postpone to two months later. (Note: I plucked the percentages from the air, but it’s kinda sorta what it feels like)

Results: The Story So Far, for Q1 2015 (Freemium)

No Comments » Written on July 23rd, 2014 by
Categories: Premium


It’s results season and we thought we’d give you a quick peek into how results have been going so far. The results being announced are for the quarter ending Jun 2014 and we've seen some big surprises and some major misses.

We have tables of all results so far. The tables are organized as YoY comparisons, with:

• Rev = Revenue

• NP = Net Profit

• EPS = Earnings Per Share

All figures are in Rs. Cr. (except for EPS, which is rupees per share). We have filtered out companies less than Rs. 100 cr. in Market Cap.

Nifty Stocks

Only 11 of the 50 Nifty stocks have announced results, and things look pretty good for the banks and IT companies. Infy and TCS showed good growth (YoY) on their EPS. HDFC Bank and Indusind Bank have done recorded about 20% EPS growth, but Kotak Bank was slow at 9.6%.


The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!

Payment Banks: What They Are, and What We Think They Should Be

No Comments » Written on July 23rd, 2014 by
Categories: Banks, RBI

RBI has draft guidelines out for Payments Banks.

Payments Banks: The Concept

RBI wants to create a lower-end concept called payment banks, which are restricted to:

  • opening savings and current accounts for customers, limited to Rs. 100,000 balance per customer
  • Allow customers to withdraw cash through ATMs, or at branches
  • Put all the money they get into government securities (only T-Bills)
  • Become a Business Correspondent for other banks to offer credit etc.

Who Can Create?

This is meant for payment systems (like PayTM or other “wallet” systems), or issuers of pre-paid instruments. Even super market chains can apply.

They have to put Rs. 100 cr. of capital, and maintain a net worth of Rs. 100 cr. all the time. Promoters must own at least 40%, but that must be brought down to 26% or lesser eventually. FDI is allowed - upto 49% initially.

The idea is to allow for easy remittances between cities, or for banking for the poor.

Our View

Right now, the draft guidelines leave much to desire. There are no mentions of lower regulatory requirements, or reporting needs. If a bank like this needs compliance rules of the kind that big banks have, then there will be very little interest.

The 100,000 rupee limit is a pain. Can’t poor people have more? After all, the RBI in its glorious knowledge calls Rs. 50 lakh worth of loans for a house as “affordable” housing. Why can’t the poor have Rs. 100,000 or more in their savings accounts? The restriction is unnecessary and should be dispensed with entirely. There should be NO limit to the amount in there.

(Yes, if you want KYC, banks should do KYC according to the rules, which anyhow exempts lower balance accounts from major level KYC)

A payment bank should be used to help SMEs and Startups as well. The 100,000 limit there too is unnecessary. These banks should be used to pay for online goods by companies through online-only-cards, for instance, for company purchases. They can be used for payment of utility bills, which will require the utility provider to own an account (and they won’t accept the Rs. 100,000 restriction).

And then, we should allow Payment Banks to provide higher interest rates to customers, even companies. With no fixed deposits, Payment Banks are at a disadvantage. We should allow them to offer constantly changing rates for accounts, so that it can be calibrated with the T-Bill yields. If you get 8% in T-Bills right now, there’s no reason to tell a bank it can’t offer 6% today, which falls or rises according to the T-Bill rate, even on a weekly basis.

The promoter minimum is too high. The promoter should be limited by rules, but there is no reason why the promoter can’t bring in only 10% right now! This can help new companies backed by VCs to set up payment banks (where the promoters might not own more than 20% given the Rs. 100 cr. requirement)

And then, the 100 cr. net worth requirement is a tad high. It should be Rs. 50 cr. with a Rs. 100 cr. paid up capital. If you invest in technology your capital will depreciate very fast, and the need is to invest in technology big time. At the current levels, payment banks will need to bring in more than 200 cr. (100 cr. for capital assets, 100 cr. for opex)  just to get a bank running.

I think the bank should be allowed to collect float. Companies like mutual funds or insurers should be able to open accounts and have customers pay them “instantly” - after all, that is what a payment bank is, to allow for instant payment. Let that happen within the bank and the tech system can instantly provide transfer.

In that context, the objective of such banks needs to be modified. It can’t be to provide payment solutions to the poor. It should be to help make payments better, and faster. Given the low credit risk of such banks, they will be attractive as a “safe alternative” to the behemoth banks we have.

The bank will have very low regulatory capital requirements (since there is no credit). Given current credit spreads, a bank can be phenomenally profitable at 2% spread (difference between interest paid out and received from the government). Also, it should be able to use other revenue sources, such as selling mutual funds,

Branch licensing should be eased substantially. A supermarket chain can’t be expected to get an RBI license each time it opens a store!

What do we think?

We expected a lot more, but payment banks can be huge. For remittances, to transfer money between cities (even countries!) using technology.

For payments, bringing invoicing, requests, credit (through another bank) and deposits under one (technological) roof. This can be issuer generated invoices that can be paid with just a few clicks, or payer generated payments for services (like salaries, pension investments etc.).

In general, this would be a brilliant idea if executed well. (I have so many ideas I’m bubbling with them, but I’ll hold off until we have better regulations).

Please post your comments. In the end I will write to the RBI about how I think the guidelines can be made more effective.

Optionalysis: Earning Money From The Stocks You Own

No Comments » Written on July 22nd, 2014 by
Categories: Options, Premium

What if you have a bunch of stocks that you own, and you want to earn money from them? One way, of course, is to wait for dividends, but those will come anyway and probably just once a year. How about the rest of the time?

You have two other methods to earn cash from your stocks. Let’s take a look:

The rest of this content is only available to premium members.

Register for a premium membership today! Apart from this content you will get our proprietary research and weekly newsletter too!


Already a subscriber? Log in now!