Jan 14

Daily Market Commentary – 14 Jan 2015

Witnessing the wide movement Indian equity market ended the day in negative territory led by declines in ITC on worries the government may ban sale of loose cigarettes, while metal stocks slumped, tracking falls in commodities on global growth concerns. The broad-based index Nifty slumped by 21.85 points and closed at 8,277.55 down 0.26%, while Sensex, loosing 78 points wrapped up the session at 27,346.82 mark down 0.29%.

Jet Airways shares tanked after the carrier said its promoter chairman Naresh Goyal has pledged his entire (51 per cent) shareholding, valued at over Rs 2,600 crore.with state-run Punjab National Bank.

The government reported Wholesale Price Index (WPI) inflation data for the month of December which rose marginally to 0.11% versus 0% in November.

Infosys CEO Vishal Sikka met Prime Minister Narendra Modi and disclosed that his company will spend $250 million (over Rs 1,500 crore) to fund innovations in software and services in India.

Among the sectoral indices CNX Metal was the worst performer plunging -3.49% while CNX IT surged almost 1% after the PM MOdi and Infy chief Vishal Sikka Meeting.

Meanwhile USDINR Pair gained after 5 days downward momentum and ended the day at 62.18 surged by 1.15% or 0.035 paisa.

Market Breath remained negative for the day with 730 shares ended in red, 441 in green and 12 remain unchanged.

Out of 50 stocks of Nifty 20 stocks advanced, 29 declined and 1 remained same as previous close.

Top 5 Nifty Gainers: BHEL (5.17%), HUL (5.16%), ULTRA CEMENT (3.21%), ACC (2.93%) and INFOSYS (1.92%)

Top 5 Nifty Losers: SESA STERLITE (-8.63%), HINDALCO (-6.36%), TATA STEEL (-3.97%), ITC (-3.24%), and BPCL (-2.53%)

Now you can try our mini full length practice test question bank containing 300 questions for NISM Series – VIII Equity Derivatives and IRDA IC-33 Life Insurance Advisor Examination. All these tests are framed as per the specified rules of NISM and IRDA and provide real-time test environment. For more information call +91-9582000102.

Apr 09

Union Budget Review 2013-14

The budget is an annual statement of accounts. But within it lie stated and unstated intentions. The FM has been focused on balancing the need for spending more (eying the general election) and worrying about a possible downgrade from the international credit rating agencies. That was his balancing act: tight-rope walking.

Precursor

The FM confined the fiscal deficit to 5.2% in FY13 and as expected, this arithmetic achievement is in line with his topmost agenda of averting a country rating downgrade. This transient appeasement of rating agencies, however, is the result of substantial Plan expenditure cuts across ministries in the last few months, a by‐product of which is slower GDP growth in second half of FY13. No wonder, the Q3 FY13 GDP growth figure just released stands at a dismal 4.5%.

Whether justified or not, Union Budgets have always generated excitement in India and ahead of the 2014 general elections, Union Budget 2013-14 was one of the most anticipated budgets. Not just taxpayers, but analysts and economists were expecting a bonanza from the FM ahead of the general election. Excitement was more than usual as it was presented by a man with a reputation for big bang budgets. And thus people were keen to know how populist it could possibly be? Especially against the backdrop of stubbornly high inflation and bloated Govt. finances.

Pandora Box Opened Up

And when the verdict came out, our FM appeared to have played very safe. There certainly wasn’t any big bang announcements and only minor tweaking here and there. The Budget could be termed prudent as it has not turned out to be outright populist. But the threat of bigger demons, including the YoY unchecked expenditure upsurge, continues to thwart us.

Like always, customary concerns over double-edged sword of deficit were expressed followed by an apt customary resolution to put the same under check. The Fiscal deficit for the current year has been contained at 5.2% of GDP and for the year 2013-14 is estimated at 4.8%. By 2016-17 fiscal deficit is targeted to be brought down to 3%.

However, committing to fiscal prudence is one thing; and sticking to the target entirely another. Thus, questions have been raised about how exactly the FM and his team would manage to bring down the deficit to below 5% in the next fiscal? For, while the expenditure has been raised substantially, very little has been done by way of increasing revenues. And the budget failed to provide any answer to the question.

In what ways the government planned to earn the pennies?

When activity on the equity market was taxed, eyeballs and capital moved to commodities trading. Commodity futures trading has grown by 3.5 times after 2008, while equities activity has stagnated. For long, lobbying market stakeholders were divided in two different sections; one demanded the removal of STT and the other demanded the equivalent taxation of transactions in equity as well as commodity market.

  1. The FM proposed to levy Commodities Transaction Tax (CTT), a tax levied on exchange-traded commodity derivatives in India, of 0.01% on all non-agri commodity trades such as gold, silver, non-ferrous metals and crude oil. However, agricultural commodities will be exempted from this tax.
  2. Partly meeting the demands of a vast section of market participants, the FM reduced STT on equity futures from 0.017% to 0.01% and for mutual funds and exchange-traded funds (ETFs), the STT component has been cut from 0.25% to 0.001%. Finally, for the sale or purchase of Mutual Fund units or ETFs on the stock exchange platform, the levy has been reduced from 0.1% to 0.001% and will be borne only by the seller.

The dividend distribution tax (DDT), a tax levied by the Indian Government on companies according to the dividend paid to a company’s investors, has been raised from 12.5% to 25% (plus surcharge and cess) across the board for debt funds.

The FM has also decided to tap the ‘super rich’ category in the country to collect more taxes. This category, classified as those with taxable income above Rs. 10 mn, would be contributing more this year in order to fund the necessary expenditures. However, the relief for them is that the surcharge of 10% would be valid only for a year.

A Tax Deducted at Source (TDS) of 1% has been introduced for land deals of more than Rs. 50 Lakhs. This is however not applicable on agricultural land deals.

Import duty on set top boxes, raw silk and mobile phones has been increased. Excise duty on cigarettes, Sports Utility Vehicles (SUV) and marble has been increased. Service tax would be applicable on all AC restaurants at the rate of 12%.

While the Disinvestment target hinges on stock market sentiment, the high and mighty Rs. 400 bn expectation from Communication Services is likely to be way off‐target. On the direct tax front, Income tax and Wealth tax estimates appear reasonable but corporate taxation growth pegged at 16.9% appears a tad on the higher side, given the slackening GDP growth and subdued corporate earnings.

Talking of indirect tax, excise and customs duty figures look achievable, but service tax projections seem heavily overstated at 35.8% YoY growth. Last year, this level of growth was possible only through increase in rates (from 10% to 12%) and inclusion of most services in the net. The same growth in FY14 on a high FY13 base is a difficult proposition.

And where the government would distribute these pennies?

The interesting aspect in the Union Budget was the increase in overall expenditure. Despite the need to curb the growing fiscal deficit, the FM has increased the overall expenditure to Rs. 16.65 trillion in 2013-14 (higher by 11.7% YoY).

A large part of this expenditure would continue to be made towards populist measures like increasing allocation to the NREGS scheme, PMGSY scheme for rural development, increasing allocation for minorities and scheduled castes etc. it was estimated that under these schemes total spending would be Rs. 55,000 crore before the end of the current year and it was proposed to allocate Rs 80,194 crore in 2013-14, marking an increase of 46%. MGNREGS will get Rs. 33,000 crore.

It is also interesting to note that the non‐plan expenditure is most likely to balloon on account of underreported subsidies. The target of a 10.3% YoY fall in subsidies looks far‐fetched in a pre‐election year. The assumed drop in petroleum subsidy depends on wishful eventualities – crude oil price levels remain unchanged, INR doesn’t depreciate and gradual diesel prices deregulation continues.

Despite the imminent implementation of the food security bill, the government has budgeted for Rs. 100 bn increase in food subsidy. Furthermore, rise in diesel will inflate food costs, procurement will be higher in the election year and minimum support prices can go up as well.

What’s in the store for AAM AADMI?

All the expectations of some new measures to boost savings, especially in the context of channeling long-term savings into equity have come pretty much to naught. In times of falling savings rate, the need was a substantial increase to Section 80C. This would have also made gold relatively unattractive. Instead, the budget only offered an additional interest deduction up to Rs. 1 lac for those first‐time home loan takers up to Rs. 25 lacs, besides Rs. 2,000 tax credit to income brackets up to Rs. 5 lacs.

Under RGESS, one of the most anticipated topics of this season, it was announced that a first-time investor can now invest in mutual funds as well as listed shares for three successive years, from earlier one year. Also the income limit for RGESS investor has been raised from Rs. 10 lakh to Rs. 12 lakh.

To increase the reach of the mutual fund industry, the FM allowed mutual fund distributors to leverage the stock exchange network. Therefore, MF distributors can now get access to the MF segment of stock exchanges. Though MFs have been available on stock exchange platforms since December 2009, now it’s going to be easier for both investor and the MF distributor.

The one glimmer of something new in the budget was the promise of some kind of inflation-linked savings instrument. The FM said, “In consultation with RBI, I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates.”

  • Globally, wherever inflation-linked bonds are issued, there are certain standard practices, but the key issue in India is which inflation rate is used. Since these new instruments are supposed to be specially targeted at low and medium-income savers, one could justifiably assume that consumer inflation would be the measure.
  • ·         In recent months, there’s been a lot of noise about declining wholesale inflation and the pundits have generally opined that consumer inflation will inevitably follow. Unfortunately, there is little evidence of this happening yet. Real inflation suffered by low and medium-income savers is even higher than the stated consumer inflation and it will be a travesty if these new bonds will be linked to wholesale price inflation.

Concluding thoughts

The Budget was largely silent on measures to attract FDI and increase exports so as to curtail deficits. The measures to boost investments in capital markets too were non committal. Overall the Budget was a lackluster one. All eyes were on the FM in the hope that Budget measures would look at reducing the fiscal deficit. Though he has pegged the fiscal deficit at 4.8% of GDP this year, he has also increased the expenditures. However, ratings agencies have already stated that there is not much impact of this budget on the sovereign ratings.

Given the constraints of limited resources, the Budget promises to kick‐start the investment cycle but the key lies in execution, which is still suspect. All in all, we feel that the FM has made his arithmetic work in the Budget. Whether the economy responds or not, remains to be seen.

In the end, however, it turned out to be short on facts, leaving everyone confused as to how the FM will add up the giveaways while creating growth. A confused stock market, unable to add up the contradictory facts highlighted by the FM, did the best thing it could under the available circumstance – sell.

May 29

Insurance in India

India’s rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. This growth has its roots in the introduction of economic liberalization in the early 1990s, which has allowed India to exploit its economic potential and raise the population’s standard of living.

Insurance has played very important role in this growth process. Life insurance, health insurance and pension systems are fundamental to protecting individuals against the hazards of life; and India, as the second most populous nation in the world, offers huge potential for that type of cover.

The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire, flood & loss of life and were willing to make some sort of sacrifice in order to achieve security. Though the concept of insurance is largely a development of the recent past, particularly after the industrial era – past few centuries – yet its beginnings date back almost 6000 years.

History of Insurance

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.

History of Insurance in India can be broadly bifurcated into three eras: a) Pre-Nationalization b) Nationalization and c) Post-Nationalization.

Pre-Nationalization

The business of life insurance in India in its existing form started in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. However, later these companies started insuring Indian lives; but Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them.

1870 saw the enactment of the British Insurance Act and in the last three decades of the 19th century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.

Prior to 1912 India had no legislation to regulate insurance business. In the year 1912, the Indian Life Assurance Companies Act, 1912 and the Provident Fund Act were passed. The Indian Life Assurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.

In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.

The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. There were large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.

Nationalization

However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident funds were operating in India at the time of nationalization. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

In 1972, the General Insurance Business (Nationalization) Act was passed by the Indian Parliament, and consequently, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973.

Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India’s life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance business. In spite of all the growth, nearly 70% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India.

From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy and against the background of these Economic Reforms insurance sector was also decided to be opened up. For this purpose Malhotra Committee was formed during 1993 which submitted its report in 1994.

Post-Nationalization

Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%.

Today India insurance is a flourishing industry, with several national and international players competing and growing at rapid rates. There are 24 general insurance companies and 24 life insurance companies apart from one national re-insurer (GIC) are operating in the country.

Indian insurance companies offer a comprehensive range of insurance plans and the most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance.

With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20% annually. Together with banking services, insurance services add about 7% to the country’s GDP. At present, India stands 12th among the top global markets for life insurance.

The Road Ahead

The market size> of Indian life insurance industry is expected to touch US$ 111.9 billion in 2015 from US$ 66.5 billion in 2011, at a compounded annual growth rate (CAGR) of 14.1%, according to a report by BRIC data. The report estimates that India would be the third-largest market for life insurance in the world by 2015. Also, the number of policies sold is expected to increase to 85.21 million in 2015 from 53.23 million in 2010.

By nature of its business, insurance is closely related to saving and investing. Life insurance, funded pension systems and non-life insurance, will accumulate huge amounts of capital over time which can be invested productively in the economy. In developed countries (re)insurers often own more than 25% of the capital markets. The mutual dependence of insurance and capital markets can play a powerful role in channeling funds and investment expertise to support the development of the Indian economy.