Social Media Buzz on Life Insurance versus Equities

This article was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-10-11; Co-author: Anish Jain, Quadrisk Advisors
https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q1%202014-15.pdf

As Thomas H. Davenport and Jeanne G. Harris put it in their book “Competing on Analytics”, Analytics is the new science of winning. Harping on the virtues of Analytics would be a wasteful exercise. People are sold on the idea.

Heavy duty analytics was deployed to locate the MH370. Big data analytics was at play to effectively devise disaster management plan when hurricane Sandy hit America. Application of Analytics to retain and reward customers, design products and market them is widely in use. Banks and financial services firms use fraud analytics, social media analysis and text analytics effectively to reduce costs and improve efficiency.

The advent of Facebook, Twitter and LinkedIn has revolutionized the  the behavior of people in many spheres of lives Barrack Obama won the Presidential elections for the second term in 2012 and social media campaigning was an integral part of his overall campaign strategy. He is even called the “first social media president”! Indian political parties have been deploying social media effectively to campaign for the ongoing elections.

The impact of social media has been more significant in the field of marketing. Before buying a mobile phone, most people do research and read reviews on the internet. Similar behavior extends to other kinds of purchases including a house, car, electronics goods, books and even financial products like stocks and insurance.

Due to changes in behavior of a customer, companies have changed their marketing strategies with increase focus on social media. There is a focus to increase presence on the web, engage directly with end customers through social media and manage any adverse feedback quickly and effectively.  Social media can be used as a powerful tool to marketing, customer servicing and maintaining public relations

The significance of social media prompted us to carry out a study on the visibility of ‘Life Insurance’ on social media.

Life Insurance forms 16% of the total financial savings of Indian households. Only 3% of the savings are invested in the capital markets.

Compositing of Savings in Financial Assets of Indian Households

Source: Reserve Bank of India, 2012-13          

The Life Insurance industry has seen a gradual decline in various key parameters over the last three years.

Key parameters in relation to the Life Insurance Industry in India

Indian Life Insurance Industry	2010-11	2011-12	2012-13	Trend
Share in Global Life Insurance Market	2.69%	2.30%	2.03%	Decreasing
Life Insurance Penetration	4.40%	3.40%	3.17%	Decreasing
Life Insurance Density	55.7 USD	49 USD	42.7 USD	Decreasing
Life Insurance Premium (in Rs.)	2.92 lakh crores	2.87 lakh crores	2.87 lakh crores	Decreasing
New Life Insurance Policies Issued	481.52 lakhs	441.93 lakhs	441.87 lakhs	Decreasing

Source : IRDA Annual Report 2011-12, 2012-13; Swiss Re, Sigma No. 3/2013

While there are numerous reasons which have contributed the decline, how does life insurance perform in terms of their presence on social media?

For the purpose of this study, social media monitoring tool Opinion Tracker was used. We tracked Web News, Social Networks (excluding Twitter) and Blogs. We compare the presence of life insurance on social media, with the stock market, for a 3-month period (29/12/2013 to 29/03/2014). Is the flow of savings into Life Insurance and stock markets proportional to their presence on the social media?

The key words used for the study were Insurance, Life Insurance, IRDA, Indemnity, Life coverage, Tax savings 80c Life Insurance, and names of various Life Insurance companies in India, to get the count for the ‘Life Insurance’ presence. Words like Nifty, Sensex, Equity, Stock, BSE, NSE and SEBI were used for finding the presence of ‘Stock Market’ on social media.

While the results can be influenced by the period of study, the use of different key words from what we have used, and other industry related reasons, the results that we got were quite astonishing, even accounting for all the different scenarios which could result in different numbers from what we have.

	Life Insurance	Stock Market
Total Posts	6562	211966
Web News	6514	210456
Blogs	46	1373
Social Network	2	137
Maximum Posts in a day	139 (on 14/03/14)	3648 (on 20/02/14)
Minimum Posts in a day	16 (on 23/03/14)	599 (on 26/01/14)

The results shows despite so much of social media buzz for Stock Market, people prefer to invest their savings in Life Insurance. It clearly shows the tendency of Indian people to save and their risk-averse attitude. But, we would like to implore the readers to think for a moment, the kind of funds that can flow into Life Insurance market, if they upped their presence on social media!

Life insurance companies do not make much use of social media. The Life Insurance companies still rely on their agency force to spread awareness about the products. This claim is also supported by a recent survey published by Max Life Insurance-Nielsen, where 58% respondents said that Insurance awareness is generated by agents, while only 8% respondents believed that the awareness is generated by internet. They need to realize that Social Media has rapidly turned into a vital part of the modern marketing mix as well as the lives of at least the urban customers (existing or potential). A few benefits of using social media would be:

  Ø  Incomparable reach. Would help the companies explore untouched markets and reach potential customers directly without middlemen

Ø  Interact with numerous people, making them their potential customer and eventually resulting in sales.

Ø  Opportunity to showcase brand and products.

Ø  Develop a loyal community of prospects.

Ø  Enhance company trustworthiness.

Ø  Cut marketing costs.

Ø  Directly interact with customers to know their grievances and preferences

A dedicated team to spread awareness about the need for life insurance, the right cover, the products, and to engage consistently with customers would help the Life Insurance Companies to achieve growth in their business.

Research Summary: Moral, Social, and Economic Dimensions of Insurance Claims Fraud

This research summary was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-8-9; Co-author: Vishnu Vardhan Pallreddy

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q1%202014-15.pdf

Professor Sharon Tennyson of the Department of Policy Analysis and Management at the Cornell University, is an active researcher in the area of Insurance Laws and Economics, is a widely acclaimed authority on matters pertaining to Insurance, on the editorial board of several Insurance related journals and has received various best paper awards for her work in the field of Insurance.

In her research paper titled “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, published in 2008, by the Social Research Quarterly, she writes that “Customer dishonesty stems from a complex interplay of motivations and circumstances, moderated by morality, opportunity, social norms, and institutional context”.

Her research deserves mention, as the Indian insurance industry is reeling due to the pressures of various types of fraudulent claims.

Tennyson succinctly reminds us that the Insurance frauds are different from other types of frauds [shoplifting or tax avoidance] as actions of a few [fraudulent claims] result in increased premiums for everyone going forward. Also, attempts to prevent fraud by the insurance companies, lead to less protection from risks than would occur in a market without fraud. It also adds to the costs of the insurers. However, policing could lead to more fraud because it erodes the trust factor and results in more costs. Most analysts believe that the costs and prevalence of opportunistic soft fraud – particularly buildup – is much higher than those of more systematic, planned or criminal claims fraud

Therefore, prevention of fraud may be a less costly alternative. However, it requires a better understanding of the different dimensions of fraud, the determinants of consumer behaviour, and the relationship between consumer behaviour and institutional rules.

Tennyson writes that much of the Insurance claims go undetected and it is difficult to estimate the number of fraudulent activities or the amount of excessive claims.

Moral hazard is an important psychological aspect of Insurance. Having Insurance reduces the insured’s incentives to prevent losses, and exaggerated or fictitious claims. Also, customers who feel that insurance companies treat customers unfairly / make too much money / charge unfair premiums, are more accepting of fraud. Evidence also suggests that consumers will be more willing to commit fraud if they perceive that the harm to others would be small.

Probability of detection, risk aversion, sensitivity to reputation penalties, social stigma, psychic costs of engaging in fraud, social norms in the form of peer group or network influences etc. are some of the deterrents to committing fraud.

Efforts to reduce prevalence and acceptability of fraud improve image of insurance industry and enhance trust between insurers and customers. General insurance education improves the knowledge of insurance as well as results in more positive attitudes toward insurance institutions. Also, fraud public awareness campaigns may also be effective.

Evidence suggests that:

a.       Extent of fraudulent claiming is very positively related to the percentage of consumers who find claims fraud to be acceptable

b.      Attitudes vary from urban to rural, women to men, elderly to young. Women, highly educated and the elderly are likely to be less accepting of fraud

c.       Consumers with more insurance experience (more policies and more claims) are less accepting of insurance fraud

d.      Moral-psychological factors in the form of ethical thinking etc impact the fraud acceptance among the survey respondents             

Trend over the years

a.       Increased attention, more empirical studies, antifraud watchdog and advocacy groups, awareness campaigns, stronger laws

b.      Much of the focus has been directed toward detecting and criminalizing fraud

c.       Fraud awareness campaigns often emphasize the criminal nature of fraud and the likelihood of being caught and penalized

d.      Success in fighting fraud is often measured by number of cases brought or convictions obtained

e.      Increasing willingness on the part of insurers to litigate fraud and refer cases to law enforcement agencies

Opportunistic soft fraud

a.       Widely believed to be much more prevalent than criminal fraud

b.      Improving fraud detection and advertising this fact may provide an effective deterrent

c.       Many consumers do not view some forms of claims exaggeration as fraudulent

d.      A criminal focus applied to these cases may reinforce negative perceptions of insurance institutions and their fairness to customers

When internal monitors are primed, most customers state that insurance fraud (even minor claims exaggeration) is unacceptable. Consumers with more insurance experience and those with recent claims experience are less likely to believe that claims exaggeration is acceptable. Greater focus on social and psychological dimensions of insurance claims fraud may increase the success of soft fraud prevention without impairing insurance relationships.

Reference:

Tennyson, Sharon., “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, Social Research, Vol. 75, No. 4, Fraud (WINTER 2008), pp. 1181-1204

Best investment options in the real estate sector

This article was first published in the business section of www.rediff.com on July 18, 2014; Co-Author: Pooja Bajaj

http://www.rediff.com/business/slide-show/slide-show-1-column-best-investment-options-in-the-real-estate-sector/20140718.htm

This rise in urbanisation and economic affluence supported with significant infrastructure developments, government initiatives and demand-supply gap has triggered development across real estate spectrum says Pooja Bajaj and Nupur Pavan Bang.

India, the world’s fourth largest economy with 1.2 billion people, has steadily emerged as one of the most preferred destinations for global business. 

Consequently, this has fuelled demand for real estate across verticals viz residential, commercial and hospitality.

On account of globalisation, favourable socio-economic profile, natural features, demographics and government initiatives, the Indian realty sector is being viewed as one of the most favourable destinations for investors and developers globally. 

Increase in the natural and migrant populace in cities in search of jobs and business opportunity who are keen to invest in real estate, coupled with rising per capita income, have given a major demand boost in the sector. 

According to the United Nations estimates, India leads in the rate of change of urban population amongst all the BRIC nations (Brazil, Russia, India and China). 

It is estimated that 843 million people will reside in cities by 2050 in India, which is equal to combined population of the US, Brazil, Russia, Japan and Germany. 

Favourable government reforms and policies such as repealing of Urban Land Ceiling Act, altering FSI rules, allowing 100 per cent FDI in the construction development through automatic route, approving the recent Real Estate (Regulation and Development) Bill, 2013, have further strengthened confidence of investors in the sector. 

This rise in urbanisation and economic affluence supported with significant infrastructure developments, government initiatives and demand-supply gap has triggered development across real estate spectrum. 

Apart from residential, commercial and hospitality, development of educational and healthcare institutions has further widened the scope of opportunities for the sector. This development is now not restricted only to metropolitan cities but is quickly gaining momentum even in Tier II and III cities as well.

As per an IBEF report on the sector, “the second largest employment generation sector after agriculture, real estate contributes about 6.3 per cent to India's gross domestic product (GDP). The real estate sector of India is projected to post annual revenues of $180 billion by 2020 against $66.8 billion in 2010-11, a compound annual growth rate (CAGR) of 11.6 per cent.  The foreign direct investment (FDI) in the sector is expected to touch $25 billion in the next 10 years from its current $4 billion”. 

The construction development sector, including townships, housing and built-up infrastructure garnered total FDI worth $22,671.95 million in the period April 2000-August 2013. Construction (infrastructure) activities during the period received FDI worth $2,280.95 million, according to the Department of Industrial Policy and Promotion (DIPP).

The real estate prices over the past decade has increased manifold across cities. During the period Q2-2009 to Q3 -2013, India has witnessed an increase in residential apartment prices by over 50% on an average.

As per Knight Frank Research, since 2009, IT/ITeS driven markets of Bengaluru, Pune and Chennai have witnessed a minimum of 38 per cent increase in weighted average price.

However, currently it’s mainly the affluent investors who are able to reap the benefits of high return in the sector. 

Despite the desire to invest in realty, the mid-income-segment populace of the country is not getting the right opportunities primarily on account of large ticket size, transaction costs coupled with high home loan interest rates.

For example, the overall ticket size of an apartment may vary from about Rs 3.6-3.8 mn (considering an average 2 Bedroom, Hall and Kitchen apartment of 1200 sq.ft.) in business districts such as Madhapur, Kondapur and Gachibowli situated at a distance of about 8-12 kms from prime residential areas in Hyderabad.

From investment perspective, an amount of about Rs 4 mn for direct purchase of property is not only a large ticket size for a small investor, but this option involves several risks related to title of the property and furthermore benefits of diversification are also not available. 

While housing loans are available, the high interest rate regime in India, makes taking loans against property a less attractive option. 

Investment Vehicles

Real Estate Fund is a vehicle that can bridge the gap between properties and investors.

A real estate fund is a professionally managed portfolio of diversified real estate holdings which invests pooled funds in residential, commercial, corporate or rental properties. 

Globally, in the recent years, different types of fund vehicles available to, and chosen by, sponsors and managers of real estate funds have proliferated. 

HDFC, Birla Sun Life, Kotak, ICICI Prudential, ASK, Piramal Group, Milestone etc have introduced real estate funds through the Portfolio Management Services (PMS) route or the Venture Capital route or the Private Equity route which primarily raise funds from Indian HNIs. 

However, most of these funds came into existence before the Alternate Investment Fund (AIF) guidelines were implemented by Securities and Exchange Board of India (SEBI).

AIF, notified by SEBI in May 2012 in India, allows pooling of funds from Indian and foreign investors for investments in areas like real estate, private equity and hedge funds.  

As per the guidelines, AIFs shall be close-ended funds and have tenure of atleast three years with a maximum number of 1000 investors. Further, the minimum investment to be accepted by AIFs from a single investor is Rs 1 crore (Rs 10 million), thereby differentiating retail investors and long-term high-net-worth individual (HNI) investors.

Another popular vehicle for investment is Real Estate Investment Trust (REIT). To enable real estate investors reach capital markets, in 2008, SEBI had issued certain draft regulations for introducing REITs and later in October 2013, SEBI announced the draft consultation paper on REIT Regulations. 

As per the regulations, REITs in India would issue securities, which would be listed on stock exchanges and will invest 90 per cent of the net asset value in completed rent generating properties in India and remaining in developmental properties, listed/unlisted debt of companies, mortgage backed securities etc.

They may raise funds from any investors, resident or foreign. It is proposed that initially the units of the REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size shall be Rs 2 lakh.

REIT shall provide investors a real estate investment vehicle which has characteristics similar to mutual fund and Exchange Traded Fund structures for stocks, bonds and other securities. 

REITs offer several benefits as they will be listed, will provide regular and stable source of income for investors with least project execution risk. However, the proposed initial investment requirement of INR 2 lakhs may be high for some retail investors, though they are much lower than the minimum required investments in AIFs.

In 2008, SEBI issued guidelines for Real Estate Mutual Fund (REMF) in India. Similar to a Mutual Fund, a REMF is a scheme of a trust fund set up to manage pooled money of unit holders by investing in real estate projects, mortgage-backed securities as well as equity/debt/debentures of real estate companies.

These funds are close-ended and listed on stock exchanges. In addition to earning returns from properties by way of rents and capital appreciation, these funds also get interests, dividends and share price appreciation from securities of real estate companies.

Issues related to valuation, lack of clarity and uncertainties have deterred players from launching REMFs till now in India. However, with strong fundamentals and improving transparency in property market, REMFs are expected to make it easier for an average investor to invest in real estate. 

With such funds, even by investing an amount of say INR 10,000 - 20,000, investors may be able to own a small portion in a high value property.

It will also provide significant benefits of diversification as investors may be able to invest in different types of properties across different cities without getting into cumbersome paperwork.

There are certain critical differences between a REIT and REMF. REITs have to invest 90 per cent of the net asset value in finished real estate projects and not more than 10 per cent in developmental properties.

However, REMFs have to invest at least 35 per cent in finished projects and at least 75 per cent of the corpus in real estate or related securities, and therefore they can invest in under-development properties to a large extent. 

While REITs offer investors a regular income, REMFs gives capital appreciation too on account of investment in under-construction projects.

Conclusion

Indian real estate is one of the most sought after investment destinations for both HNI investors and retail/small investors. 

However, currently most of the investment vehicles – direct purchase or AIF available are primarily targeting or can attract only HNIs on account of huge ticket size for investment. 

REITs have also been proposed to target HNIs initially. For an average investor, investments can be routed through REMF or Real Estate ETF. Both these options are currently either not available or not successful.

The government should consider the need of these investors who wants to participate in the sector. This will provide further impetus to the sector by supplying additional source of capital via retail investors' money.

This might also reduce black money in the sector significantly by making operations of various stakeholders involved more transparent and accountable.

Why India can't do away with taxes

This article was first published in www.rediff.com on June 10, 2014

http://www.rediff.com/business/slide-show/slide-show-1-perfin-why-india-cant-do-away-with-taxes/20140610.htm

The idea of no taxes certainly brought a spark in the eyes of middle class Indians in the last couple of months as Prime Minister Narendra Modi mulled reforming the tax system by abolishing direct taxes (income, excise and sales) during his election campaign. The very prospect of spending the spring doing better things than worrying about the optimal amount of savings to save income tax is thrilling. Particularly, after a year of high inflation that put many holes in the pocket of middle class, the idea of doing away with taxes seems to be a magnificent idea.

The Bhartiya Janta Party (BJP) later clarified that they did not mean abolition of direct taxes. They are really pitching for major reforms in the ‘taxation regime’ in its current form in India. The statements however have opened up a Pandora’s Box over the merits and demerits of a no-direct taxes regime for India.

Half of the Indian government revenues in a year come by way of tax collection. Of this half, one third comes as corporate taxes and remaining two third by way of indirect taxes and taxes on personal incomes (Figure 1).

Figure 1: Break up of Tax Revenue to Government of India (Assessment Year 2013-14)

Source: Income Tax Department, Government of India

This is a huge chunk of government revenue. So there has to be a recovery plan for this forgone revenue. As an alternate to the present taxation system, ‘Banking Transaction Tax’ (BTT) is being proposed under which a flat percent will be charged whenever an amount is credited to a bank account. Under this system, it is argued, the government will generate more revenue than the present taxation system, the problem of tax evasion and black money will be solved, and an easier way to collect taxes will be devised.

This already attracted opposition from within for BJP earlier. Senior party leaders like Arun Jaitley and Yashwant Sinha had opposed the proposal as it shifts the tax base to the entire population which has a Bank account. In addition to middle and high income class, low income class would also be subject to BTT. Also, the implementation of BTT would essentially mean that all transactions be done electronically. Let us not forget the level of financial inclusion in India. India has 10 commercial bank branches per 100,000 adults and 7.29 ATMs per 100,000 adults. Less than 60% of total households in India have access to banking services. Implementing BTT would mean leaving out the balance 40% of the households which need not necessarily comprise of poor people.

Even if we take the case of only personal income tax being abolished, it will lead to giving up 10% of the total government revenue. If no income tax were collected in the current fiscal year 2013-14, the fiscal deficit will widen from an estimated figure of 4.8% to 6.9%. This will have to be sourced from somewhere else, mainly by increasing indirect taxes and excise duty of some goods. Therefore, the common man is going to pay taxes on way or the other.

Now, let us also take a look at the countries which do not have taxes. According to a survey of 114 countries by KPMG in 2012, ten countries didn’t charge any income tax (does not include corporate income) and indirect tax (Table 1).

Table 1: Countries with no tax on personal income and indirect taxes

Source: CIA World Factbook, Various articles

Most of these countries belong to the Middle East and are rich in oil and gas resources, while remaining depend on tourism and international business. Another common feature of these countries is that most of them have monarchy as a system of governance. As regard taxes, Bahamas, Bahrain, Bermuda, and Cayman Islands do not even have taxes for corporate income. While these countries do not charge tax on personal income of individuals, all of them mandate a social security tax ranging between 4-9%. Employers are also made to contribute in certain proportion towards a pension scheme for the employees.

However, none of these countries is comparable to India. Nine out of these ten countries have population less than 1% of that of India (Saudi Arabia excluded). Seven of these countries have land area less than 1% of that of India (Saudi Arabia, Oman and UAE excluded).

Not only demographics, but India differs from these countries on major economic indicators (Figure 2).Due to their smaller population base and rich natural resources, these countries have per capita GDP which is manifold of that of India. On the other hand, India, being the fourth largest economy in the world in terms of GDP and second largest in term of population, has to deal with high inflation and budget deficit which are at convenient levels in most of these countries.

Figure 2: Economic Indicators of Zero Tax countries and India (2012)

Source: CIA World Factbook

With a large economy, very low per capita income, high inflation and budget deficit, India can’t possibly copy the taxation system of these small countries that rely on natural resources for government revenue and are among richest countries in the world.

Among these countries, many are facing problem of sourcing funds already. Qatar was considering introducing a Value Added Tax system to increase the government earnings. Kuwait was warned by International Monetary Fund in 2012 for possible shortage of public finances and had suggested introduction of direct and indirect taxation system. Bahrain was also facing problems with public finances in 2012 as increase in wages and public spending during the year had led to shortage in available funds.

It seems that the spark in the eyes of common man has to fade as of now for abolition of taxes in India will need a lot more thinking before it can be sustainably implemented. Till then, all eyes are on Mr. Arun Jaitley!

Top Reasons Indian Election Is Important to Global Investors

An article by Savita Iyer-Ahrestani, for the Investment Advisor magazine of Franklin Templeton Investments.I have been quoted in the article.

http://www.thinkadvisor.com/2014/05/05/top-reasons-indian-election-is-important-to-global?page_all=1

Be smart with your money and you will see best results

This interview was first published by www.rediff.com on May 03, 2014
http://www.rediff.com/business/report/interview-be-smart-with-your-money-and-you-will-see-best-results/20140503.htm

To set up any business in India may be little time consuming, but it is not so difficult as it is conceived to be. Raamdeo Agrawal, joint managing director of Motilal Oswal Securities also not had it easy when he co-founded the firm in 1987. Agrawal follows some simple but very important fundamentals that have helped him steer his business through thick and thin.

Along with handling prime responsibilities at Motilal Oswal, Agrawal is an Associate of Institute of Chartered Accountants of India and also a member of the National Committee on Capital Markets of the Confederation of Indian Industry. He is the recipient of several accolades for his contribution to the capital markets.  

In a free wheeling conversation with Nupur Pavan Bang of the Insurance Information Bureau of India and Vikram Kuriyan of the Indian School of Business, Agrawal talks about his journey, investment process that he adopts and his faith in the Indian economy.  

You have built Motilal Oswal from the scratch. It is not easy to build a financial advisory firm in India as people do not want to pay for such services. Tell us about your journey, about the challenges.

In1987, Motilal Oswal and I started a sub-broking firm. The initial few years were a struggle. But we always insisted on research. The Harshad Mehta scam happened in 1992. The scam resulted in the Sensex touching 4,500 but it was a fantastic business opportunity. Volumes exploded and we made a lot of money and re-invested them into the market which further appreciated multiple times. Then the market crashed around 50 per cent. By 1993-94 we made a few crore.

We kept on building our research team and ventured into Institutional broking. Morgan Stanley became our first client. By 2002 we were the best Indian local brokerage house and since then we have maintained the number one or may be second position in research.

In 2003, Motilal Oswal had a topline of Rs 10 crore (Rs 100 million) and a bottomline of Rs 2 crore. The bull phase from 2003 to 2008 saw the firm growing 90 times to Rs 900 crore (Rs 90 billion) and pre-tax profit of Rs 300 crore (Rs 3 billion) respectively. We paid Rs 100 crore ( Rs one billion) in taxes in 2008.

When we got listed on NSE and BSE in 2007, our market capitalization on the day of listing was close to Rs 2000 crore (Rs 20 billion). In three months it crossed Rest 6000 crore (Rs 60 billion) indicating the confidence of the investors in the company. Complete client satisfaction and research are the basis of our business.

Focus on research must have been difficult way back in late eighties, as the World Wide Web and internet were not available then. How did you manage to research?

The absence of or limited access to resources had both advantages and demerits. I went to the US and walked into a Barnes and Noble book store and found many good books. But I could not buy them as I did not have the money. Up until 1994, there was a scarcity of resources. So what we did was that we physically went and collected almost 200 to 300 balance sheets each year. The biggest disadvantage then was that we did not have historic data.  

We examined ratios like the EBITDA margin, cost margin, etc. Very few other competitors had the kind of edge (competitive advantage) that we built in understanding corporate India. I had a good feel for numbers. I would remember everything for every company because my brain was empty. Today everyone’s mind is full of all irrelevant things due information flowing in from all corners. The biggest challenge is to focus your mind on getting what is important.

Where does one begin to look, in order to invest in the stock markets?

Before one starts investing, always look at the business of the company. Invest in a business you understand. 99 per cent of the job is in understanding the business. If someone tells me about VSNL, I leave. It’s a complex business and I don’t understand it. You cannot evaluate a company unless you understand it. For most people, a company is just a number. Most people don’t know what Reliance actually does.

Once you understand the business, see if the business is good or bad. Is the long term economics of the company favorable? Is management trustworthy and able? Figure out if the company actually makes money or not. Making an investment comes later.

You must also look at what the company does with the money that they make. Do they distribute [dividends], re-invest or destroy? Lots of companies do not allocate capital. Even Infosys is sitting with crore of cash. We saw a leading telecom company mis-allocating funds and buying businesses that did not add value. The stock has not done well for a few years.

When QGL : Quality, Growth and Longevity, all three come together, the company will make money. Invest in such companies and let compounding do its job.

How does one acquire the skills to evaluate the business? Stock markets are risky and people can lose money.

Start investing in the market with small amounts. When you lose, you will realise your mistakes. Value derived from small mistakes is huge. Those lessons will not be forgotten. So it is necessary to start investing in small amounts.

Invest time in reading. If you don’t have the reading habit then you are out. That habit cannot be cultivated. The urge to learn more should be there. It’s about understanding and not information. Investing skill is a global skill, same in any market, same across time series. You have to learn and acquire those frameworks. A beginning has to be made by actually entering the markets.

You are a proponent of equities. But in India, people prefer to invest in fixed deposits or gold. Retail investors mostly lose money inequities.

Warren Buffet defines Investing as foregoing current purchasing power now for a greater purchasing power in future. The first big anomaly is inflation. In the last 34 years, India has recorded consumer price inflation of about 8.4 per cent. You have to earn at least post tax 8-8.5 per cent to stay where you are and fixed income [deposits] delivers that. So basically you are running very fast to stay where you are standing.  

Till 2005, gold was as good or bad as fixed income. But in recent times it has done better. In India, it also has to do with the culture rather than the notion of investing.  

Equities are one asset class where you can beat inflation and by a large margin if you make the right decisions. There are two emotions in the market: greed and fear.

People come only out of greed. Greed is highest when market is at the peak of the bull phase. That is the time when 80-90 per cent of the investors enter the market, when actually no one should come close to it. They sell when fear is the dominating emotion, that’s when the market is at the bottom. So they buy at the top and sell at the bottom. It will keep happening. You have to master these emotions. Buy when everyone is selling and sell when everyone is buying. If you do that, you will not lose money.

How do you see the next 25 years unfolding for India?

When we became independent in 1947, our population was 330 million and our GDP was $10 billion. It took 60 years (2007) for the country to become a trillion dollar economy. When a country becomes a trillion dollar economy, it starts getting noticed. In 2013 or 2014, it will be a 2 trillion dollar economy, despite the rupee depreciation. The time taken to achieve the 3rd trillion mark will be even shorter.

Magic is in the $1000 per capita figure. $900 is non-discretionary. It is needed for food, shelter, etc. Anything beyond that is discretionary. As of now, we have only about $100 as discretionary. The journey has just started. In 1987 this journey was blank. The market capitalisation of Cipla was Rs 5 crore ( Rs 50 million). Today it is a Rs 30,000-40,00 crore (Rs 300-400 billion) company. Reliance would be a few 100 crores at that time. Scale has changed in the last 25 years and will be bigger in the next 25 years.

Doubling of GDP means exponential opportunity for various businesses. One must prepare for it and participate in it. Foreign Investors are already investing in India. We are looking at the present but they are seeing the future. Why does Walmart want to come? Because India will be one of the largest market in the next 25 to 40 years for brands or logistics.

Why Etihad? Why P&G? In the future, entry barriers will be much higher than it is now. Lots of businesses will become almost monopolistic and that’s where the opportunity for investing lies.

In 1991, we had a billion dollar reserve. The country did not have a credit rating. We are in different times now. We have $280 billion of foreign currency reserves. The next 25 years will be very exciting.

You mentioned about the $280 billion of foreign exchange reserves that we have. Since the Federal Reserve in the US is tapering off quantitative easing, we have a widening current account deficit, dwindling foreign portfolio investments and a currency that has depreciated more than 25 per cent in a year, would you say it would be prudent for the Reserve Bank of India (RBI) to fire fight and sell dollars in the open market to bring the exchange rate to 2011 levels?  

We now have Raghuram Rajan at the helm of affairs at RBI. He is a much acclaimed person and he will do his job. He understands what is required locally and also how to meet the global challenges.

The fear for the worse has resulted in the Rupee depreciating to Rs 65 against the dollar. Before opening up the capital accounts, he is using the challenge to get ample liquidity.

Lots of weapons are available. There is no crisis. There was bad currency pricing. For 10 years, we had inflation differential of 5-6 percent but the currency did not depreciate. So what happened is that existing companies kept on losing their competitiveness and it became difficult for manufacturing companies to conquer the Chinese threat. It is good that the currency has depreciated now and people have understood the implications.

Which other factors will have an impact on the Indian markets and its performance?

Governance is a key factor. A period of five years of good governance will change everything. Today, investment in India forms just less than 1percent of global equity portfolio. That figure can double if governance is good. The amount of money which the world can send to India is humongous. The question is, do we deserve it or not? We area capital scarce nation. So we must play the game and attract capital.  

Moves by the Chinese is something that we should be aware of. Till 1998china was like India, after which it emerged. From 1997-98 it is a trillion dollar economy. Since 2009 it is growing by trillion dollars every year with little appreciation of currency. The world economy including India, will be far more impacted by what China does in comparison to the US.

India is far behind in development than China. GDP has slowed down to sub 5percent levels. Why would capital flow to India? Is there any source for optimism?

Well, we can talk about the negatives in the economy. But let there be balance. It should not be that we overlook all good that has happened. There have been major improvements in road networks, telecom networks, infrastructure, in the last 10-15 years. Public-private partnerships have evolved. iPhones are launched in India at the same time as in the US. We may not be happy with the pace of it. But there has been development.

The strengths of this country are very different. I am not undermining the difficulties but let’s not be bogged down by them. I have seen the Mumbai riots, the balance of payments crisis, and the sanctions that followed the nuclear tests in Pokharan. This generation takes the internet as a given. I did not have electricity when I went to school.  

We are impatient. We want all our cities to be like Shanghai. What we should realise is that we don’t have capital. If we see it as a challenge, we will overcome the problem. The challenges have kept changing over time, but as a country, we have always emerged triumphant.

How deleveraging affects economy

This article was first published in the business section of www.rediff.com on April 23, 2014; Co-Author: Khemchand H. Sakaldeepi

http://www.rediff.com/business/report/special-all-about-deleveraging-and-fiscal-deficits/20140423.htm

In the first article in the series of understanding how the economic machinery works, we introduced transactions, credit, interest rates and inflation (the article can be read here). In the second article, we dealt with the importance of credit and introduced deleveraging (the article can be read here).  In this part (third), we will delve into the impact of deleveraging and introduce fiscal deficit and quantitative easing. The concluding part would weave all the different parts of the economic machinery together to help the readers take a view on the current economic scenario in India.

Impact of deleveraging

In the previous articles we saw that deleveraging happens when the rate of increase in debt outpaces the rate of growth of income. Incomes fall, people and organizations cut spending or austerity measures are taken up, such as projects halt, pay cuts for employees, bonuses come down and unemployment increases.

Asset prices drop, credit disappears, stock market falls, the banks try to reduce debt – restructuring of debt, writing off defaults, deposits into banks fall and default rate goes up.

Then the government tries to redistribute wealth by increasing its spending for generating employment. The spending of the government more often is larger than the income in such scenarios. This creates fiscal deficits.

During deleveraging the income falls more than reduction in debt due to the austerity measures. This is deflationary and painful. It may even lead to an extreme case of recession, also known as depression. This is a classic case that has repeated many times in history. For example, even Hitler came to power because of the social disharmony created by depression.

In such scenarios, many economies resort to printing more money. The central bank buys financial assets from the government, who in turn engages in spending to generate employment and lift demand. This is called quantitative easing.

Printing money has an impact on the exchange rate as the supply of currency being printed increases in the market.

The central bank must play very safe and must strike a balance such that the income growth is larger than the rate of growth of debt. Once deleveraging begins, going back to the boom periods usually takes 7-10 years. Hence, it is called “the lost decade”.

Source: http://planningcommission.nic.in/data/datatable/1612/table_23.pdf

The debt to GDP ratio of India stood at around 68 percent in 2013. While this ratio is much lower than in countries like US and many European nations, the interest payments and principal repayments make India very vulnerable. The fiscal deficit of India has been on the rise since 2008 and reached alarming levels in 2011-12.

This also had an impact on the exchange rate. The Indian rupee started to depreciate again the dollar as the fiscal deficit widened, the GDP growth rate started to come down, and inflation was at an all time high. The flight to a safer currency (US Dollar) meant that the Indian currency depreciated. This caused great deal of concern to importers as their imports, which are often priced in US Dollars, became more expensive in terms of Indian rupees.

In fact, The Indian economy has an underground economy, with an alleged 2006 report by the Swiss Bankers Association suggesting India topped the worldwide list for black money with almost $1,456 billion stashed in Swiss banks. We are not only a rich country, but we can actually take on more debt if we had that money in India and really wipe the tears off every citizen and more. 

The above is a pretty complex but easy to understand story of how the economic machine works. We as citizens often get lost because we look at things at the microcosmic level and hence react emotionally. But if we were to see the big picture then we can play really smart in more ways than one. 

In the next piece we shall delve deeper into the state of the Indian economy currently and the uphill task the next occupants of the North Block face.

What do a PhD scholar and an entrepreneur have in common?

This article was first published in www.yourstory.com on April 11, 2014

http://yourstory.com/2014/04/phd-scholar-entrepreneur/

I am a PhD in finance with a stable job and the assurance of a fixed expected salary every month. My husband is an entrepreneur, and worries daily about weather, inventory and changing prices. To use a cliché, we are as different as chalk and cheese.

Yet, there is something that binds us. Our journeys. His journey comprised of leaving a comfortable job and creating something of his own. Mine comprised of devoting about six years of my life to doing a PhD, after having already spent 19-20 years studying.

While doing a PhD is not often compared to being an entrepreneur, there are more comparisons than meets the eyes.

The investment in terms of time and the opportunity cost of not taking up (or leaving) a job is huge as the stipend paid to a PhD student is far below what he or she would earn by working in the industry, just as the first few years of an entrepreneur is spent thinking about every penny. On top of it, the horror tales of endless hours one has to put in, the ever shifting finishing line, and the failures dissuade many from taking up a PhD program, just as the same reasons prevent many from leaving their jobs.

There are many who take up a PhD program but abandon it midways. Excessive reading, long hours, low pay, when other batch mates from graduation and post graduation days go for long foreign holidays and eat at expensive places, wear expensive clothes, it keeps reminding you of the life that you could have had! Sure enough, I keep reminding my husband of all the foreign vacations that we could have had!

Then there are others who take it up and stick to it till they finish. Once they decide to stick to the program, it does not take long for them to realize that they have made an investment which would change the way they think forever. The key is of course to get into a good PhD program which gives you rigorous training. A startup’s story is pretty much the same. Once it survives a few years, the chances of its success are high.

The coursework in a PhD program intellectually stimulates, teaches one to learn beyond the superficial and to dig below the surface. An entrepreneur goes beyond the theory and thinks out of the box to reach its customers. He must always innovate and improvise.

Next comes the periods of independent study. Most of the PhD programs have long periods of independent study, where the candidate is given time to read, formulate the hypothesis, review the literature etc. It is easy to keep postponing all this as there may not be anyone watching or asking for progress at frequent intervals. Discipline and self-motivation is the key here. Without discipline, one may take eight to nine or may be more years to complete their thesis.

When I complain about the long hours that my husband spends in the office, his reply is usually, “if I don’t do it, who will?” Since an entrepreneur is his own boss, spending that extra hour in the office takes a lot of motivation.

An important milestone is getting the proposal ready. Curiosity to find something, to discover something new, or to fill an important gap in the existing body of literature results in a good defendable proposal. Some people are born curious but others acquire the curiosity when they repeatedly read about a single topic and related work. Similarly, for the entrepreneur, that first product or the first order is the most important milestone. It can be the defining moment for the venture.

The process of writing a thesis is actually a process of self discovery. The journey itself seems like the destination. The quest for accuracy, for measurement and deduction, the single minded pursuit of data collection, learning to write and run codes (which have become an integral part of doing a PhD now a days) which one earlier thought one was never capable of doing, are all activities which stretch the boundaries of learning.

An entrepreneur also discovers that while his core competency might be marketing or finance, he is an office boy to a CEO, an accountant to a strategist, all rolled into one.

Then comes the stage where the comments of the supervisors, advisors and friends start coming in. Incorporating changes and going through the drafts of the thesis numerous times needs patience. There is no choice. If one does not have this trait, they simply have to acquire it, just like an entrepreneur keeps revising his product and strategies as the business progresses.

When the thesis is submitted after all the years of hard work, the feeling is unbeatable. The defense of the thesis and the award of the degree is the stepping stone to a career in academics and lifelong learning. Similarly, when a venture succeeds, it brings immense joy and wealth to the entrepreneur.

So, if you are passionate about something, either do a PhD in it or become an entrepreneur with a venture revolving around your passion!