Risk Hai Toh Ishq Hai: 20 Things You Can Learn About 1990s By Watching Scam 1992

Over the last weekend I saw Scam 1992—The Harshad Mehta Story. The OTT series is based on a book titled The Scam—From Harshad Mehta to Ketan Parekh written by Debashis Basu and Sucheta Dalal.

The 10-episode series is set around the Harshad Mehta scam where Mehta used banking funds illegally to drive up stock prices. Dalal, a journalist with The Times of India broke the story about Mehta’s shenanigans.

Basu who used to work for Business Today magazine at that point of time (not mentioned in the series) is shown to be helping her all along. The story is told from the point of view both Mehta’s and Dalal’s characters.

I enjoyed watching the series immensely and even tweeted saying that the brief Indian OTT era now needs to be divided into before and after Scam 1992.

Watching the series has also inspired me to write this fun piece where I highlight stuff which was very different in the 1990s vis a vis how things are now.

There might be some spoilers here as well (though very few). So, if you haven’t watched the series and plan to watch it, it’s best you stop reading this piece now. You have been warned 

Let’s take a look at this pointwise.

1) The word scam itself wasn’t very popular with the Indian media until Dalal broke the Harshad Mehta scam and weaved the word into the story she wrote for The Times of India (as shown in the series). The phrase used before this was the rather dull financial fraud.

2) A major part of the series is set in 1992, which was a pre-mobile phone era. Hence, all the action happens through landline phones (thankfully pushbutton landline phones had made an appearance by then and so had big cordless phones).

3) It was also the pre-internet era. You had to remember facts or have access to libraries or research departments. This also meant that if you had to verify a company’s address you had to go there physically and do it and couldn’t simply log onto the internet and do so.

4) Cable TV had just started making an appearance in late 1991. Hence, the government owned Doordarshan was the dominant TV channel. It was also the major source of news, which wasn’t a 24/7 business at that point of time. The newspapers came in the morning. All India Radio had news bulletins at fixed points of time during the day. Doordarshan had news in the evenings (and later even in the mornings).

5) You could just walk into the Bombay Stock Exchange, unlike now where you have to go through multiple levels of security and tell the security guys exactly who you are going to meet. So, for journalists to meet sources was easy. Also, unlike today, the sources could be more easily protected simply because there were no electronic /digital footprints being left anywhere.

6) The Bombay Stock Exchange had a trading ring where jobbers representing stockbrokers made the market by actually buying and selling stocks. This matching of the seller and the buyer happens electronically now. The circular trading ring still exists and is used as a hall for hire for events. The events of BSE as the Bombay Stock Exchange is now known as, also happen in what used to be the trading ring.

7) Unlike now, if you wanted to buy or sell a stock you had to call up your broker and ask him to buy or sell on your behalf. You couldn’t just simply login into your demat account and buy or sell whatever you wanted to.

8) India had 23 stock exchanges at that point of time. Bombay and Kolkata were the most important exchanges. Even Patna had one.

9) The drink offered to everyone visiting the Bombay Stock Exchange was masala tea and not machine coffee, as it is now.

10) The Securities and Exchange Board of India (Sebi), the stock market regulator, did exist, but it did not have statutory powers. Hence, even if they knew that financial shenanigans were happening, they weren’t in a position to do anything. That only happened once the Sebi Act came into being in April 1992.

11) The media newsrooms did not have many computers. The stories were still typed on a typewriter, which meant that one had to have the entire story written in one’s mind before one started typing it out on a typewriter. The way a story can be rewritten now on a computer was rather difficult at that point of time.

12) You could smoke inside a media office. (How journalists would love this).

13) You could smoke on an airplane.

14) You could smoke in restaurants and cafes.

15) The RBI Governor leaked news to the media directly.

16) Even short sellers were popular investors at that point of time. The short-seller Manu Manek was called the Black Cobra of the stock market. (In my two decades of following the stock market, I am yet to come across a short seller the market loves). Interestingly, the stock market’s current darling was also a short seller at that point of time. Short selling involves borrowing and selling stocks in the hope that the price will fall and the stock can then be bought later at a lower price, returned to whom it had been borrowed from, and a profit can be made in the process.

17) The BSE was controlled totally by the brokers in the 1990s. It could even open at midnight to change prices at which trades had happened to help certain brokers.

18) The cars on the road were primarily Premier Padmini, Ambassador and the Maruti. India hadn’t seen an explosion in a choice in car models.

19) Levis Jeans hadn’t made an appearance in India until then, though Debashis’s character is shown wearing them in the series. It was launched in India in 1995.

20) There is a scene in the second episode of the Scam 1992, in which a newsreader is seen saying that this year’s budget has a deficit of Rs 3,650 crore for which no arrangements have been made (or as the newsreader in the series said, jiske liye koi vyawastha nahi ki gayi hai). The reference was to the financial year 1986-87.

Given that the makers of the series have stuck to details of that era as closely as possible, I was left wondering if the Rs 3,650 crore number was correct or made up. I went looking for the budget speech of 1986-87 made by the then finance minister Vishwanath Pratap Singh, and found it.

This is what Singh said on page 32 (and point 168) of the speech: “The proposed tax measures, taken together with reliefs, are estimated to yield net additional revenue of Rs 445 crores to the Centre. This will leave an uncovered deficit of Rs 3650 crores. In relation to the size of our economy and the stock of money, [the deficit is reasonable and non-inflationary.”

The number used in the series is absolutely correct. Hence, the makers of the Scam 1992, have gone into this level of detailing.

But the point here being that back then, the government monetised the fiscal deficit. It simply asked the Reserve Bank of India (RBI) to print money and hand it over to the government to spend. This was stopped in 1997.

To conclude, the key dialogue in the series, which keeps getting made over and over again is, risk hai to ishq hai. The inference being only if you take high risk in the stock market do you earn a high return. The trouble, as was the case in 1992 and as is now, just because you take high risk in the stock market (or anywhere else in life) doesn’t mean you will end up with a high return. Investors who hero worshipped Mehta in the 1990s learnt that the hard way.

Investors still continue to learn this basic principle of the stock market, the hard way.

Not everything has changed.

Why EPF Tax is a Bad Idea

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The finance minister Arun Jaitley wants to tax the corpus accumulated through investments made in the Employees’ Provident Fund(EPF).

As per what he proposed in his third budget speech last week, only 40% of the corpus accumulated by contributions made into the EPF after April 1, 2016, will be tax free. The remaining 60%, if withdrawn, will be taxable. If the remaining 60% is invested in annuities, the entire accumulate corpus will be tax free. The income from annuities will be taxable.

This is a bad idea at multiple levels.

a) The change applies only to those in the private sector earning more than Rs 15,000 per month. As the ministry of finance clarified on this: “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.” So this doesn’t apply to those earning less than Rs 15,000 per month. Why are these people not being encouraged to invest in annuities and not squander away what they have saved for their years in retirement?

Also, if you are working for the government, the entire corpus you accumulate through the General Provident Fund (GPF) or any other recognised provident fund, remains tax free. If you are working for a government owned company like Coal India and investing in the Coal Mines Provident Fund, the entire corpus on maturity remains tax free.

The question is why is a distinction being made on the basis of the employer and not the total amount of corpus that has been accumulated? This is basically an inequitable decision, where those in government are simply trying to protect their retirement savings from being taxed.

b) 100% of the accumulated corpus can be tax free, if the private sector employee uses 60% of the accumulated corpus to buy annuities. This is nothing but a conspiracy to benefit insurance companies. Annuities remain one of the worst forms of investing in India. The returns typically are in the range of 5-7% before tax. Savings accounts, of a few banks pay as well, if not more than that.

As Debashis Basu writes in the Business Standard: “Annuities are a simple information and access arbitrage enjoyed by insurance companies to rip off senior citizens. Insurers buy long-dated governments securities at eight plus per cent and hand down five-seven per cent pretax return to the annuity buyers, keeping the profits.”

So why are we forcing people to buy annuities, if there are better forms of investment available? As I said earlier, it’s nothing but a conspiracy to benefit insurance companies. At the same time all the money going into annuities will ultimately end up in government bonds, which will benefit the government.

c) The idea is to move EPF and other recognised provident funds from EEE (Exempt, Exempt, Exempt) to EET (Exempt, Exempt, Tax). Up until now, many tax saving investments like EPF have come under the EEE regime. The investment made can be deducted from taxable income and hence is exempt from tax, the interest earned on the investment is exempt from tax and the final corpus is also exempt from tax.

Under EET (Exempt, Exempt, Tax), the investment made can be deducted from taxable income and hence is exempt from tax, the interest earned on the investment is exempt from tax, but the final corpus is taxed. Hence, under EET, the payment of tax is only postponed.

The idea to move from EEE to EET was a part of the Direct Taxes Code(DTC) when it was first introduced in August 2009. The DTC was supposed to replace the current Income Tax Act (1961). The DTC came with other changes as well. Take the case of the tax slabs. The tax slabs were as follows:

The current tax slabs are nowhere these slabs that had been proposed. The tax rate of 10% applies for taxable income between Rs 2.5 lakh and Rs 5 lakh. The tax rate of 20% applies for taxable income between Rs 5 lakh and Rs 10 lakh. And a tax rate of 30% applies for taxable income greater than that.

Given the fact that the entire idea behind the DTC was to simplify the income tax system, it was never implemented. It would have hit people who make a living out of complicated tax laws, very hard.

d) The other big problem with the proposal to tax EPF is that it will tax the entire corpus including the principal. Further, it will not take into inflation into account. Let’s understand this in a little more detail.

Let’s say you invested in real estate in 2005 and you sold it ten years later in 2015. You need to pay a tax on the capital gains at the rate of 20%. While calculating the gains inflation is taken into account. This means that if you had bought real estate, for let’s say Rs 20 lakh, while calculating the gains this amount of Rs 20 lakh will be adjusted for inflation.

If the inflation during the period was 7% per year, then the inflation indexed amount will be Rs 39.34 lakh (Rs 20 lakh x (1.07)^10). This will be the inflation indexed purchase price. If the real estate was sold for Rs 80 lakh, then the capital gains on which tax will have to be paid will amount to Rs 40.56 lakh (Rs 80 lakh minus Rs 39.34 lakh, the inflation indexed amount). On this a 20% tax, which amounts to Rs 8.13 lakh will have to be paid. This is referred to as indexation benefit.
Other deductions which take into account the cost of maintenance of the real estate are also allowed. Further, as mentioned earlier, the principal amount is also not taxed.

As Dhirendra Kumar writes on valueresearchonline.com: “EPF returns are barely above inflation rates. To disallow indexation for inflation is a grave injustice. This is morally and principally wrong. Moreover, because this tax will be on bulk withdrawals, it will push even low-income savers into the 30 per cent tax bracket for that year. This is unconscionable.”

Also, it needs to be pointed out that long-term capital gain on stocks (i.e. stocks sold after one year of purchase) continues to remain zero. So is true for long term capital gains on equity mutual funds. The corpus accumulated through insurance policies also continues to remain tax free.

But the government in its wisdom has decided to tax the total amount of money accumulated through investing in EPF. This proposal is wrong at multiple levels and its time, the government got rid of it.

The column originally appeared on Vivek Kaul’s Diary on March 8, 2016