AuthorSwami Sharma

Look Beyond Tax Savings In A Health Insurance Plan

The major aspects other than tax saving, that you need to remember while buying a health insurance plan. Why you need look much beyond just saving tax when it comes to medical insurance.

Best Ways To Invest A Lump Sum In Tax Saving Investments

How do you invest a lump sum amount in tax saving investments at the fag end of a financial year? Here are some answers in this video

 

Cash Pile at Infosys

Although there is a lot of noise about corporate governance, the poor utilisation of assets is a bigger issue

Sometime in the early 1990s, I read an interview of the then CFO of Disney, Gary Wilson, where he said that he considered it his function to implement the company’s overall strategy to maximise shareholders value. As a young chartered accountant then his statement had left a very strong impression on me. I have my own practice and have advised several companies, but the foundation of the advice rests on shareholders’ value. So, when last week I read about former Infosys CFOs bicker over corporate governance issues and voice their concerns over shareholders values, I was intrigued.

                        Swami Saran Sharma

With a key on reading balance sheets, I have been vocal about the poor money management at Infosys. Yes, the IT behemoth which has for long been the bellwether IT Company in India has not been as good at managing its finances as it would like several people to believe. A   detailed insight into their annual report a couple of years back indicated that they had about Rs 6,500 crore as balance in bank accounts alone! This meant that this much amount was not even parked in mutual funds.  Their last balance sheet shows that they have close to Rs 24,000 crore in the bank in the form of FDRs and deposits, which is again a very inefficient way of handling cash, especially when there are safe and more tax efficient ways to manage cash.

What Corporate Governance?For a company that takes pride in having introduced several best practices, such as declaring forward looking statement and earnings guidance, not handling cash efficiently does not bode well. The recent imbroglio over the founders raising their concerns over the quantum of severance package to a former CFO looks a trivial matter when I see the quantum of opportunity loss for the investors in the company who could have otherwise earned better returns.

It surprises me that even institutional investors are quiet about the cash pile, which has only been growing each year and not being deployed for acquisition or growth. In fact, the company could very well pay dividends to investors than former CFOs harping about buybacks.

If the argument is that auditors have not raised questions on the way the cash is being managed, I would like to remind people about how the same level of auditors had signed on the Satyam balance sheets, which had grossly inflated revenues and profits, which boosted the company’s valuations and share prices. At Infosys, the promoters, despite staying away from the day-to-day management from time-to-time step in with some allegation or concern, which mars their interests in the company.

Opportunity loss

Yes, the promoters of Infosys also created several millionaire workers in their company, but they have not been that magnanimous when it comes to distributing money by way of dividends to shareholders and sit on cash reserves with no clear plans on how this will be used in the future. They could take a leaf out of the PSUs, which tend to pay dividends and share the wealth than just sit on cash.

Assuming the interest on FDRs and money in the bank earns about 4.8 per cent after tax annually, it pales in comparison to the Earning Per Share (EPS) of over 11 times on the face value of shares. Even if I were to look into the severance package of former CFO Rajiv Bansal, it does not seem to be much. In fact, the two former visible CFOs Mohandas Pai and V Balakrishnan were party to this high cash being kept in banks and have no moral rights to raise concerns over governance issues at this moment, when they themselves did not work towards the maximization of shareholders wealth.

To me, keeping idle cash is the biggest financial crime being committed at Infosys, and it is not being addressed. It would be in the interest of investors if the board looks into transparency issues with its cash deployment than spend time over a board decision on a severance package and reacting concerns aired in the media by the promoters. Going back to Gary Wilson he took Disney from a $2 billion to $20 billion company and continues to preach that the role of the CFO is to create value for shareholders aside from crunching numbers and analysing cash flow.

To borrow from Wilson a good CFO brings intangible assets to his company. Company image and customer satisfaction are all intangible factors that eventually impact the bottom line. When CFOs understand this, they can play a much more pivotal role in their organisation. I wish the current CFO of Infosys takes Wilson’s advice and puts it to practice.

Source : OutLookMoney

How Can The Government Rest The Advantage Gained By Demonetization?

With the announcement of demonetization of high denominated currency notes by the Prime Minister on 8th November, 2016, the banned currency had just one way to go which was deposit in banks.

With the progress of deposit of money in the banks, it is evident that most of the demonetized currency is likely to find its way back to the bank. Although, let there be no mistake in understanding that money deposited is not equal to white money but it is also clear that the hoarders of black money have taken the route of depositing small money in a number of accounts belonging to the poor. The intention is to force the account holder to withdraw the new currency and thus the hoarders will get their cash back. The outcome of various raids carried out by tax authorities has revealed that the big time defaulters have managed to convert their cash. If the hoarders are able to have their way, Government will not be able to achieve their objective of eradicating the black money.
Then what can the government do?? In my opinion they should do the following:
Put a restriction on holding cash in hand by households and the business entities like the limits they have introduced on personal gold.
Fixing a lower limit on the cash transactions.
After implementing the above two provisions, Government should once again demonetize the high denominated currency recently introduced and can even gradually change the lower denominated notes.

DECODING THE DEMONETIZATION

A couple of months back when decks were cleared by the law makers for introduction of GST, I thought that the event will go down in the history as one of the biggest reforms in the Indian economy. But the demonetization of 87% of Indian currency at a four hour notice made the historic GST reform look pale.

Successive Indian governments were always faced with the arduous task of dealing with black money. For want of collection of adequate taxes, budgets had to be balanced by invoking deficit financing. The existence of parallel black economy was openly acknowledged by one and all. Corruption was one of the major contributors to the black economy. Governments after governments meekly surrendered to this phenomenon so much so that even some of the past Prime Ministers admitted that only 10 to 20% of the total spend on government welfare schemes, actually reached real beneficiaries and the remaining was making its way to the corrupt system. A large majority of say 95% honest citizens were extremely unhappy with the situation but could not do anything against the might of say 5% corrupt. Situation was hopeless.

To overcome this menace, demonetization of currency was suggested by experts in the past also. UPA Government made a feeble attempt to demonetize one series of Rupees five hundred notes. Enough time was given to public for exchange. Government kept extending the dead line dates but ultimately nothing happened. Even one series of notes could not be demonetized. Taking the cue from past experience, the present government went ahead with demonetization without any notice whatsoever.

Now since the government has bitten the bullet, I feel that this step has the potential to put Indian economy on a very strong growth path. We can expect the budget deficit to go down. The government may net close to Rs. 4 lac crore out of this exercise either in terms of cancellation of currency or recovery of taxes. In addition to this, lacs of crores will be available for investments. To make best use of this opportunity, post 30thDecember, the onus will be on the government to give proper direction to the economy so that the money is gainfully deployed to generate employment, develop infrastructure and bring tax reforms so that the tax base thus created is not lost.

By far there were two major blocks in the progress of Indian economy, one the collection of taxes was very low and the other was that the availability of credit was very limited. With lots of funds flowing into the system, hopefully, India will do better on both counts in future.

Interest rates are bound to come down which is a good news for the enterprises. From my experience as a practicing chartered accountant, I can say that Indian businesses on an average operate on a debt to equity ratio of 2.5 : 1 which means that if an enterprise has an owned capital of Rs. One crore, it is likely to have a debt of Rs. 2.5 crore. Because of this reason, even one percent drop in interest rates will favorably impact the equity by two and a half times. If the business gets an advantage of this kind, they will be willing to expand leading to increased employment. Increased employment will lead to more demand and hence will give further boost to the production. A white economy will also encourage the foreign investment into the country.

All in all theoretically, demonetization at this stage in India especially before the implementation of Good and Services Tax looks like a great move. For its complete success, reaching out to the poorest of the poor will be the key otherwise it may become anti financial inclusion drive of the government.

 

Curbing Mis-selling

The way companies pay commission to agents needs to change for

a complete overhaul of how they impart advice.

I have been associated with the insurance industry for over three decades and have witnessed both the pre- and post-liberalisation phase of the industry. Yes, the opening of the sector about 15 years ago was a welcome step, but inadvertently it also opened the doors to practices by insurance companies that have left a rather poor image of all insurers. The issue of mis-selling policies tops the list.

It is common for people to complain on how they were sold a policy, which either does not match their needs or better still, does not suit their needs. Broadly, the problem they face can be categorised into three areas—policies that they do not understand, policies that they feel are not doing what they want them to and lastly, polices where they feel the cost is higher than what they had envisaged. The answer to ensuring that you buy the right policy rests within these three buckets—look for a policy that you need, understand what it does and figure what it would cost you and for how long.

The buyer-beware has always been the case when it comes to financial instruments, which is slowly changing towards a seller beware format thanks to changing regulations. Given the fact that insurance is sold and not bought, the tendency of the seller is to push the product at all costs. Add to it, the incentive that is there for taking on sale of insurance policies is a significant reason to push a policy.

For instance, the first year commission on policies varies from 10 per cent to 40 per cent. This alone is a big driver for agents to complete a sale. Moreover, there are intermediaries at banks and other institutions who have ample details on people and their finance to smartly suggest policies, where the incentive on sale is to their advantage.

Every insurer knows that there is a huge loss if a policy is not continued through its tenure and I disagree that they intentionally encourage sales knowing very well that the policy will not continue beyond the lock-in or in many cases before it reaches the lock-in.

The best way to check on such mis-selling is to make sure that the incentives are paid only towards the end of the policy tenure or after the mandatory lock-in. This way, the onus will be equally on the agent to ensure that not only does he sell right, he should also ensure that the policy is serviced in such a manner that the policyholder will continue the policy till maturity.

As for the regulator, they can introduce surrender charges, however small it may be on policies that are discontinued after a year. This way, the first year commission will automatically go down as well. Such an approach will also benefit the agents as they will be well-rewarded in the future for a good deed done today.

Instead of focusing on impractical ways to curb on misselling, here is a model which works in favour of the policyholder, agent as well as the insurer. Wonder why the regulator is not looking for simple ways to curb mis-selling.

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Income Tax Filing: NRI Income From NRE, NRO and FCNR Accounts 

How are earnings from NRE, NRO and FCNR accounts to be treated during income tax filing for the NRIs (non resident Indians)? Here’s what you need to know.

 
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© 2017 Swami Sharma