Category: Huffington Post India | Page 2

10 March, 2016

माल्या को पकड़ना मुश्किल ही नही…नामुम्किन भी है

A WhatsApp forward I received today morning went something like this: “Mallya ka intezar to 17 bank kar rahe hain…Mallya ko pakadna mushkil hi nahi namumkin bhi hai.” The forward was obviously a play on the dialogue that Amitabh Bachchan made famous in his 1978 movie Don.

Meanwhile Vijay Mallya who owes seventeen Indian banks Rs 9,000 crore(or Rs 7000 crore depending on which newsreport you want to believe) seems to have left the country. The attorney general Mukul Rohatgi told this to the Supreme Court today. Mallya left the country on March 2, 2016, the day the banks moved the Debt Recovery Tribunal(DRT) against him.

The banks had approached the DRT in order to stop the severance payment of $75 million (or a little over Rs 500 crore) that Diageo Plc was supposed to make to Mallya, in lieu of him stepping down as Chairman of United Spirits Ltd. Mallya has also entered into a five-year non-compete clause with Diageo. This payment is supposed to be made over a period of five years.

The DRT directed Diageo not to make any payments to Mallya until the case is disposed of. It has set the next hearing date for March 28, 2016. A report in The Times of India seems to suggest that Mallya may have already been paid $40 million out of the $75 million that he had been promised.

The newspaper quotes the fine print of the agreement that Mallia inked with Diageo on February 25, last month: “Diageo will pay $40 million of this amount immediately with the balance being payable in equal instalments over five years. Diageo’s payment obligations are subject to Mallya’s ongoing compliance with the terms of the agreement.”

The question is why are the banks going after Mallya? In India, the banks going after a corporate defaulter is something unheard of. But this time they seem to have the blessings of the RBI governor Raghuram Rajan.

Also, typically when banks lend a big amount, they lend it against a collateral. The idea is that if the borrower defaults, the banks can sell the collateral and recover their money.

So why are the banks going after Mallya instead of just selling the collateral and recovering their money? This is precisely the question that Justice Kurian asked the Attorney General in the Supreme Court today. “How did you give these loans. Was there no secured assets on these loans?” he asked.

It turns out that the banks had lent against the brand value of Kingfisher Airlines, which at that point of time was worth some thousand crores. After the airline shut down the value of the brand crashed, and the banks ended up with nothing. “We had some assets (as security) for the loans advanced,” Rohatgi said.

The Indian Express cites the 2012-2013 annual report of Kingfisher Airlines and writes that the Kingfisher Airlines brand was worth $550 million. The airline’s brand had been valued by the consultancy firm Grant Thorton. Further, it had been registered separately from the Kingfisher beer brand.

The newspaper further quotes CBI sources as saying: “Lending on the brand value of Kingfisher Airlines is a major concern. We have questioned the banks. It is basically an intangible asset. We are digging into the issue.”

A report in The Hindustan Times points out that IDBI Bank lent Rs 900 crore to Kingfisher Airlines against its brand in 2012-2013. By this time, the airline had already started making losses.

The question that crops up here is that do banks normally lend such a huge amount of money against the brand value of a company, which is clearly an intangible asset. Further, do banks lend money against an intangible asset, to a company which is making losses?

Another important point that needs to be made here is that an intangible asset like a brand normally tends to be overvalued. It is precisely because of this reason companies cannot have the value of their brands on their balance sheets unless they have bought it from someone else.

Given this, why lend so much money against a brand? Interestingly, the Kingfisher Airlines brand name was pledged to 14 lenders. As a report in The Indian Express points out: “The airlines brand name was pledged to 14 lenders, including State Bank of India (SBI), IDBI Bank, Punjab National Bank, Bank of India and Bank of Baroda under a debt recast agreement in which loans valuing Rs 6,500 crore were restructured and converted into equity.”

There is a lot of talk in the media about how could banks lend such a huge amount of money against the Kingfisher Airlines brand. The answer is very simple. The lending happened during the go go years of Indian banking when crony capitalists close to the government of the day, got loans way beyond their repayment capacity. Mallya is not the only such businessman, there are many more.

This explains why the Congress party which is quick to seize-in on any issue which would embarrass the government has been quiet on this issue, up until now. And how about the Bhartiya Janata Party, which is the governing party? The party had supported Mallya’s election to the Rajya Sabha in 2010.

Mallya in his defence wrote an open letter to the media a few days back. In this letter he said: “In fact, banks have NPAs of Rs 11 trillion and have borrowers who owe much more than the amount allegedly owed by Kingfisher Airlines to the banks—a fact never alluded to or widely reported by the media as in my case…None of these large borrowers (whose debt is significantly more than Kingfisher Airlines debt) have been declared wilful defaulters, but unfortunately, United Breweries Holdings and I have been declared wilful defaulters by certain banks on technical grounds. I have legally challenged these declarations.”

This is true. As of December 2015, the total gross non-performing assets(NPAs) of the Indian banking system stood at Rs 3.9 lakh crore. The loans Mallya and his companies have defaulted on form a small part of the total NPAs of the banking system. But that doesn’t mean Mallya should be allowed to get away with it.

In fact, if the government wants the other bid defaulters to pay up, it is very important that it ensures that Mallya is made to pay up. The way things go with Mallya will act as a benchmark for the other big defaulters.

The trouble with Mallya is that he has a very flashy lifestyle. And it is very evident that he continues to flaunt his money despite having defaulted on the loans. As Raghuram Rajan, governor of RBI recently, put it: “If you are in trouble you should show that you care by cutting down your expenses and not flaunting more spending in public.”

Further, the employees of Kingfisher Airlines continue to remain unpaid. Also, the fact that Mallya gobbled up their provident fund payments as well, did not do any good to his image.

The point being that if Mallya had had a less flashy lifestyle like some other big defaulters have, the banks would have probably not gone after him. There wouldn’t have been a public outcry and all the hungama in the media, either.

To conclude, Mallya’s fall is an excellent example of a businessmen going beyond his core area and ending up in huge trouble. Mallya ran a successful liquor business until he thought up of running an airline. And that is precisely where all his troubles started.

Airlines continue to remain a difficult business to run. Only if, Mallya had happened to read what legendary investor Warren Buffett had to say on airlines: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”

But then Mallya was busy…with his IPL team…with his Formula One team…with his Kingfisher models…with his calendar…

When making a calendar becomes as important as running multiple businesses…guess this is how it ends!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets at @kaul_vivek)

The column appeared originally on Huffington Post India on March 9, 2016

7 March, 2016

In The Public Sector Bank Crisis, Govt Needs To Do A Lot More Than Just Blame Bankers

The Times of India reported on Saturday that Jayant Sinha, the minister of state for finance, had indicated to public sector bank chiefs that they were wasting public funds. Sinha said this at an offsite for public sector bankers organised at Gurgaon.

The Economic Survey for 2015-2016 points out that between 2009 and September 30, 2015, the government had infused Rs 1.02 lakh crore of capital. It is this money that Sinha was perhaps referring to.

The government is the main owner of 27 public sector banks. If it has chosen to invest more than Rs 1 lakh crore in these banks over the last seven years, then as the owner of these banks, it has chosen to waste public money.

There is no point in trying to pass on the buck to the chiefs of public sector banks. Of course, it needs to be pointed out here that, the government in this case means both the Manmohan Singh government that governed until May 2014 and the Narendra Modi government which has been in power since then.

The current budget has made an allocation of Rs 25,000 crore for further capital infusion into these banks. As the finance minister Arun Jaitley said in the budget speech: “If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.” This was Jaitley’s way of saying that the government will do whatever it takes to keep these banks going.

This builds in a tremendous amount of moral hazard into the entire system. Economist Alan Blinder writing in After the Music Stopped says that the “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”

Hence, if the government keeps infusing capital into public sector banks and keeps rescuing them when they are in trouble, there is no real incentive on part of public sector banks to run a responsible, viable and a profitable business. This is moral hazard at play. It is not surprising that as of the end of December 2015, the gross non-performing assets of listed public sector banks stood at Rs 3.9 lakh crore.

The government is keen to hold on to these banks. As the Economic Survey pointed out: “The return on assets for most banks is currently less than one third of the norm of 1 per cent that is considered reasonable. Many, though not all, of the less profitable banks are those with smaller levels of employment.” Despite this, the government remains obsessed with the idea of owning 27 public sector banks.

There has been no effort made to sell out of these banks or even shut them down. The total employment in public sector banks currently stands at around 87,000 employees. Given this, shutting down some of the smaller banks which are in trouble, is not going to much of a difference, at least on the employment as well as the lending front. Further, no effort has been made to privatise them either.

The state that some of these banks are in right now, there is no way the government is going to get a decent valuation while selling them. Nevertheless, the chances of these banks being turned around by private management are higher than if they are continued to run as they currently are. In such a scenario the minority stake that the government will continue to hold in these banks will be worth much more than the current majority stake is. The point being that the government needs to stop looking at these banks as “family silver”.

Also, by trying to run 27 public sector banks, the government has spread itself too thin. As Kaushik Basu, current chief economist of World Bank and former chief economic adviser to the ministry of finance, writes in An Economist in the Real World: “One mistake early Indian policymakers made was to try to micromanage the economy. While it is true that the government needs to attend to a range of policies, from shipping to the quality of education in villages to managing the nation’s international economic relations, it is imperative to realize that it is not feasible for the government to attend all the varied and layered needs of society with equal diligence.”

As Basu further adds: “An intelligent government recognizes that no matter what kind of society it aims to build, it is hopeless to try to deliver it all by itself.” The point being it is a hopeless idea continuing to own and run 27 public sector banks. There are more important things that the government needs to be concentrating on.

The government’s big plan to solve the mess in public sector banks is to get banks to merge. As the finance minister Jaitley said over the weekend: “The bankers’ themselves have supported the proposal of consolidation of banks in order to have strong banks rather than having numerically large number of banks.”

In the past mergers have happened when a bank has been in trouble. In this scenario, a weak bank has been merged with a strong bank. The New Bank of India was merged with the Punjab National Bank. The Global Trust Bank was merged with Oriental Bank of Commerce. The strong banks had to go through several years of pain to accommodate the weak banks.

The trouble now is that almost all public sector banks are in trouble, though of varying degrees. Hence, any merger would be effective if excess employees are fired, unviable branches shutdown and assets sold. Is the government willing to do this?

The way the Modi government has gone up until now, the answer is no. In this scenario the government will essentially end up merging two banks with small problems and end up creating one bank with a bigger problem. And that will mean basically postponing the problem, not solving it.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column was originally published on Huffington Post India on March 7, 2016

2 March, 2016

Modi Government Wants To Tax Your Provident Fund And That’s Bad News

Arun Jaitley’s third budget had little to offer for the salaried middle class in particular and the middle class in general. But there was a huge negative point which perhaps no one saw coming.

The Employees Provident Fund(EPF) and other recognised provident funds are a huge mode of saving for the salaried middle class. Up until now the EPF worked on exempt-exempt-exempt or the EEE principle. The money invested in this investment is tax free, the interest earned is tax free and so is the corpus earned on maturity.

What does this mean? As Sandeep Shanbhag, Director, Wonderland Consultants, a tax and investment advisory explains: “In EEE tax saving effected is permanent in nature. This means that once the tax is saved for that particular year, it is saved, per se. When the invested amount matures, it is tax-free.”

Nevertheless, Jaitley has proposed to bring EPF and other recognised provident funds under the exempt-exempt-tax or the EET principle. As Jaitley said during his budget speech: “I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme.

In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.”

Before getting into the details of what Jaitley means by this, let’s first try and understand what EET means. As Shanbhag puts it: “When the EET system is put into place, permanent tax saving won’t be possible. This is because, by making an investment, you will reduce the same from your income thereby lowering the tax liability. However, when the amount matures, it would be taxable in that year.”

This essentially means that under the EET system, the money invested in EPF and other recognised provident will be tax-free, the interest earned will be tax-free, but the accumulated corpus will be taxed. Hence, as Shanbhag puts it: “Therefore, this is a deferment of tax and not saving of tax. In other words, you will defer (postpone) the payment of tax depending upon the lock-in of your tax saving investment. However, some time or the other, the investment will mature. At that time, tax will be levied.”

Let’s try and understand this through an example. Let’s say you invest Rs 50,000 every year into EPF, starting from April 1, 2016.

The amount invested can be deducted while calculating the taxable income. Every year the interest earned on this would be tax free. Let’s at the end of 20 years, you earn an average return of around 8.7% per year. This means you would have accumulated around Rs 24.73 lakh. Under the EEE principle this amount is totally tax-free.

Under the EET principle this amount will be taxable. How much tax will you have to pay? Jaitley said during his speech that 40% of the corpus will be tax free.

This means 40% of Rs 24.73 lakh or Rs 9.89 lakh will be tax free. Tax will have to be paid on the remaining Rs 14.84 lakh, if this amount is withdrawn. This amount will be taxed according to the prevailing income tax laws at that point of time.

The question everyone is asking is, why is Jaitley or actually the government doing this? A few years back, the government launched the new pension scheme (NPS). This scheme follows the EET principle.

Up until now, 40% of the maturity corpus of NPS had to be compulsorily used to buy immediate annuities. These are essentially insurance policies which help earn a regular income. The remaining 60% of the corpus could be withdrawn. Nevertheless, an income tax needs to be paid on it.

Jaitley in his budget essentially removed this prevailing discrepancy between NPS at one end and EPF and recognised provident funds, on the other. Now on, 40% of the maturity corpus of the investments made on or after April 1, 2016, can be withdrawn and no tax needs to be paid on it. The remaining 60% will be taxed if you withdraw the amount. The same principle applies for other recognised provident funds as well.

Further, if you use 60% of the money to buy immediate annuities, to generate a regular income, you don’t have to pay any tax on it. Even with this, this is a very anti-salaried/middle class move. This is primarily because of the fact that people use their provident funds to get their children educated as well as married.

They even use it to buy a home after retirement. If they want to do something along these lines, they will have to withdraw money and pay income tax on it.

Also, at the end of the day, it is also about letting the individual decide what he wants to do with her or her money. The immediate annuities currently available in the market do not generate returns which are comparable to other investment avenues like simply investing the money in a fixed deposit or buying tax free bonds, for that matter. Hence, to that extent this is a sub-optimal solution for those who know what to do with their money.

Further, why has Jaitley and indeed the government left out maturing amounts paid on insurance policies and tax saving mutual funds, is a question worth asking. These investment avenues continue to follow the EEE principle. Why is there this discrimination?

If Jaitley and the government do not withdraw this change, all it will do is empower the insurance agents of Life Insurance Corporation and private insurance companies to start another sound of mis-selling to the citizens of this country. And that is not a good thing.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on February 29, 2016

2 March, 2016

Mr Jaitley, You Just Made Every Honest Tax Payer Feel Like An Idiot

The finance minister Arun Jaitley presented his third budget today. It was expected that Jaitley would take steps towards improving the number of Indians who pay tax. But that doesn’t seem to have happened, instead he has proposed to launch an amnesty scheme for those who have black money within the country.

The point to increase the number of Indians who pay tax was an important part of the Economic Survey which was tabled before the Parliament on Friday i.e. February 26, 2016. As the Economic Survey points out: “Controlling for the level of democracy, India’s ratio of taxpayers to voting age population is significantly less than that of comparable countries. This implies that while at present about 4 per cent of citizens who vote pay taxes, the percentage should be about 23.”

The Survey further points out that around 85% of the country is outside the tax net. One clear impact of this is that the government is not able to raise enough taxes as it could. The other impact of not enough people paying tax to the government, is that a huge amount of black money builds up in the Indian financial system. The prime minister Narendra Modi had talked a lot about getting the black money that has left the Indian shores back to India, in the run up to the Lok Sabha elections of 2014.

After coming to power, the government did try and launch a scheme to get people to declare their overseas black money and pay a tax as well as a fine on it.

On this “declared” black money, the government planned to charge a tax of 30 per cent and a penalty of 30 per cent. During the compliance period offered by the government, 638 declarants declared assets and income amounting to Rs 4,147 crore. The amount collected was very low, given the huge amount of black money within the country. What this told us clearly is that the government’s plan to uncover black money was a complete damp squib.

The point is that it is next to impossible to get back black money that has left the shores of this country. It could have found its way into any of the around seventy tax havens, all across the world. Even the United States has not succeeded on this front.

Despite this, the Modi government continues to be obsessed with the idea of getting back black money from abroad. As Jaitley said during the course of his speech: “Our Government is fully committed to remove black money from the economy. Having given one opportunity for evaded income to be declared once, we would then like to focus all our resources for bringing people with black money to books.”

Further, Jaitley also proposed an amnesty scheme for people who have black money within the country. As he said: “I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income.”

Those who declare black money within this compliance window will not face any scrutiny or enquiry under the Income Tax Act or the Wealth Tax Act. They will also have immunity from any prosecution as well.

There are a few points that need to be raised here. First and foremost, the question is how will Jaitley and company get around the Supreme Court on this. The last time such a scheme was launched was in 1997, when P Chidambaram was the finance minister of India. This led to a declaration of Rs 33,000 crore of undisclosed income on which the government collected Rs 10,000 crore tax.

Nevertheless, this led to a lot of outrage and the government had to commit to the court (essentially Chidambaram and the then revenue secretary NK Singh) that there wouldn’t be any amnesty scheme in the future. The question is how will the government get around this?

Also, any amnesty scheme makes the people who honestly pay their taxes look like fools. It tells them they would have been better off not paying taxes. In fact, in his last budget speech in February 2015, the finance minister Jaitley had said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”

Doesn’t a black money amnesty scheme lead to greater inequity now, Mr Jaitley?

Further, in June 2015, the union cabinet launched the “Housing for All by 2022” scheme. If the government is serious about this, it needs to some better thinking on how to stop the generation of domestic black money. Jaitley’s budget clearly missed out on that front.

In the past, the Modi government has also opposed the idea of bringing political parties under the ambit of the Right to Information Act. This is not surprising given that it is black money that continues to finance the election costs of the political parties of this country. It needs to be said that any other political party in power would have possibly done the same.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on February 29, 2016

2 March, 2016

Why Budget Did Not Raise Income Tax Ceiling To Rs 5 Lakh Despite Jaitley’s Past Advocacy

The minister of finance, Arun Jaitley, did not make any changes in the tax slabs in the budget for 2016-2017 which was presented yesterday.

The basic exemption limit continued to be at Rs 2.5 lakh and other tax slabs also continued to remain the same. This is typically one section of the budget which excites the salaried middle class. But Jaitley had nothing to offer on this front.

Interestingly, when Jaitley was in the opposition he had demanded that the income tax ceiling be increased to Rs 5 lakh, from the Rs 2 lakh level that had prevailed, at that point of time. As he had said in April 2014 “Direct Tax should be reduced. If the Income-Tax limit is raised from Rs 2 lakh to Rs 5 lakh, 3 crore people will save Rs 24 crore which will lead to a small impact of 1 to 1.5 percent of National Tax Fund.”

On February 29, 2016, Jaitley presented his third budget as the finance minister. Nevertheless, even now the income tax limit is at Rs 2.5 lakh, half of the Rs 5 lakh limit that Jaitley had demanded when he was in opposition.

The question is why? The simple answer is—politicians in opposition behave very differently from those in power. But there is a better answer than this.
Take a look at the following chart reproduced from the Economic Survey for 2015-2016, which was released on February 26, 2016.

What does this tell us? It shows us very clearly that the income tax exemption limit has risen at a much faster rate in India than the per capita income.

As the Economic Survey points out: “We can calculate in some sense the “missing taxpayers” in India—not those who are evading taxes altogether or under-reporting taxes but those who have legitimately gone under the tax radar due to “generous” government policy.”

And who are these missing taxpayers? These are those taxpayers who got left out because the income tax threshold has been raised from the level of Rs 1.5 lakh in 2008-2009. As the Economic Survey points out: “If the threshold had been maintained at Rs. 1,50,000 (the threshold limit in 2008-2009)….we find that there would have been an additional 1.65 crore units incorporated within the taxation system (In 2012-2013 and an addition of about 39.5 percent) and tax revenues would have been about Rs 31,500 crores greater.” The tax to GDP ratio of the country would have gone up by 0.32% if the income tax exemption limit had not been raised.

The amount now, will be more than Rs 31,500 crore. And this is quite a lot of money for a government which is likely to see its expenses go up in 2016-2017, after the recommendations of the seventh pay commission increasing the salaries of central government employees and pensions of retired central government employees, are accepted.

What this also tells us is that Jaitley’s calculation of increasing the exemption limit to Rs 5 lakh, costing only Rs 24 crore, was basically wrong. When the tax-exemption limit went from Rs 1.5 lakh in 2008-2009 to Rs 2 lakh in 2012-2013, it cost the government Rs 31,500 crore. Increasing the limit to Rs 5 lakh would cost considerably more.

In fact, there is a lesson or two India can learn from China on this front, the Economic Survey points out: “Chinese success in bringing more citizens into the individual income tax net owes to setting a reasonable threshold for paying taxes and not changing it unduly. In contrast, in India, exemption thresholds for income taxes have been consistently raised.”

This has led to a situation where as many Indians are not paying income tax, as could have, if the exemption limit had not been raised at a much greater rate than the per-capita income.

Of course, Jaitley did not know all this when he was in the opposition. But now he is in the government and has access to the best possible economic brains in the country, as well as data, on which he can base his decisions on. Clearly his demand to increase the income tax exemption limit to Rs 5 lakh, when he was in the opposition, was just based on a whim and not any numbers.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huff Post India on March 2, 2016