Wednesday, December 18, 2013

Government elected in May 2014 will have just 90 days to get its act right.

With politics in election mode, there is uncertainty over short-term economic performance. But there is no guarantee we will have policy clarity even after the elections in April-May 2014. 

Even assuming we have a pro-growth, pro-reform government, the window of opportunity available to it will be open for a very short time: just 90 days. This is because governments in India have to be in election mode almost every other year. Remember UPA-2, which was re-elected with a better mandate in 2009? Within one year, it had lost its footing, and has never recovered from that. 

The government elected in May 2014 will have just 90 days to get its act right because the rating agencies will be holding a gun to its head. And it will have to act fast despite knowing that the outgoing UPA has booby-trapped the economy by legislating all kinds of bad laws. 

Both Moody’s and Standard & Poors (S&P) have warned of a rating downgrade once the next government comes to power. 

Moody's gave India a warning two weeks ago that if growth does not revive, inflation does not come down, and the fiscal deficit is not contained, India's sovereign credit rating will be downgraded. More specifically, it warned that the government should not be adopting policies that harm fiscal prospects or make banks run up more bad loans. 

Earlier, S&P said that it was holding back on a likely downgrade to see if the next government was able to come to grips with the country's economic problems. If it does not, India’s rating will move below BBB- the lowest investment-grade rating, below which Indian borrowings will be treated as junk. 

When a country's investment rating falls below BBB-, large foreign pension and mutual funds cannot invest in these markets, and lenders will start charging more from Indian borrowers. This will raise borrowing costs for everyone, and slow down growth further. What this boils down to is this: the next government will have to behave as though it is 1991 and act very fast. In its very first budget it will have to signal major economic liberalisation and big policy changes. This could mean freeing oil, gas and coal prices, opening up foreign investment in more areas, selling off majority stakes in government companies, and reducing government rules and regulations, among other things. If this is not done, a rating downgrade will be like a noose around the next government’s neck. 

Any government, whether it is one led by the BJP, the Congress or even a regional party, has to do everything in its first budget - which can be expected around July 2014. Otherwise, it will miss the bus. This is because even before it settles down, it will be up against the state assembly election cycle, making unpopular decisions impossible to implement. 

For example, soon after the Lok Sabha elections will come the Maharashtra assembly elections in October, where the BJP will find it difficult to win if the Thackeray cousins – Raj and Uddhav – are going to be fighting one another. The Jharkhand elections are also due in December 2014. In 2015, there will be the Bihar elections, where the BJP will be trying to oust Nitish Kumar. And so on. If the next government does not signal a dramatic enough change in economic policies in its first 90 days, the window of opportunity will close. 

No government today can hope to have a honeymoon period of more than six months to one year when the electorate will forgive tough decisions. This is why UPA-2 faced enormous problems after wasting its entire first year (2009-10) doing nothing. After that one scam after another was unearthed, and soon the government lost control of the economic agenda. 

Even in the 1990s, when PV Narasimha Rao and Manmohan Singh earned their reputations as reformers, the 1992 budget signalled the slowing of reforms. And after the Congress party faced state-level electoral reverses in 1993, reforms were brushed under the carpet. The moral of the story is simple: given India’s regular appointment with state-level elections, new governments at the centre have very little time to perform. If the big decisions are not taken in 90 days after a new government is formed, it will face the same troubles as UPA-2. Speed is the only way to reform and economic rejuvenation. With every passing year, public patience is shortening. Honeymoon periods for governments are shortening. 


Sunday, December 15, 2013

Circling back to silver fundamentals.

Beyond the typical underlying changes in money supply there are very important elements of demand that continue to push the price of physical silver higher and higher. This is despite the fact that silver has been money for much longer then gold.

One element is the elasticity of demand for silver, particularly in the manufacturing of electronics. Silver is the best conductor of electricity known to man and even at a current prices, it is very inexpensive for use in consumer electronics.

Silver Inelasticity

Silver cannot and will not be replaced by the industrial sector as a conductor of electricity for two reasons: 1) it is relatively inexpensive, and 2) it is the best product for the job.

When a computer manufacturer begins to source components to build its consumer products, the company buys tons of glass, pounds of silicon, and tiny amounts of silver.

When you buy a computer that costs $500-$1,000, it contains, at most, 1 gram of silver. Most computers contain fractions of that amount, for a maximum cost of $.60.

Even if silver were to explode in price from $18 per ounce to $180 per ounce (which is a dramatic change) the price of the silver component in a computer would grow from $.60 to $6.

Thus, even after silver explodes in price, the computer manufacturers will still be very much willing to use silver since $6 on a $500 computer is just 1.2% of the price.

Technological Improvements

Silver's demand can easily be contrasted with the emphasis on technology during the past half century.

Prior to World War II, very few homes owned electronic devices and silver's industrial use was limited to only photograph development.

In contrast, the post-war family owned microwaves, TVs, toasters and other appliances including washer and dryers – which all contain silver.

And even in the past decade, the average consumption of silver by the average person has grown.

Today, each person owns a cellular phone, TV, computer, monitor, printer, router and a myriad of computing peripherals that all contain silver.

It is without question that demand for silver as an industrial metal has exploded with technological achievements - but the biggest use for silver is just now being uncovered.

Government Stockpiling

Many argue that gold is held by government and central banks by proxy, as the line between the two becomes evermore foggy. Therefore, gold is the better monetary asset. Central banks and governments don't stockpile silver - mainly because there is not enough to accumulate. More importantly, silver isn’t stockpiled because the resulting price adjustment could break the financial system.

What is fascinating is that, even in the realm of vast money creation and decades of dangerous policy that threaten the world financial system and underlying economy, central banks are still held to such a high standard. In effect, they are deemed immutable. The fact is that central banks fail right alongside the currencies they create from nothing.

Today's biggest technological feats are all painting a pretty picture for silver. They also serve to aid in the establishment of a much higher market price in the future - with or without monetary inflation or the stockpiling of central banking gone awry.


Saturday, December 14, 2013

Bungalows versus flats.

Assuming that one has the financial wherewithal for this to be an option at all, the question of whether to invest in a bungalow or a flat is indeed pertinent. As always, location plays an important role. 

In an established area of a large city like Pune, a bungalow costs a lot more than a flat. This means that the rental market for such a property shrinks proportionately. However, the income segment that remains can definitely afford to rent such a unit, so demand would remain more or less consistent. Moreover, bungalows in established locations have a high chance of attracting long-term corporate leases. 

Bungalows Established Vs. Upcoming Locations 

Investing in a bungalow in an upcoming location usually involves a lower (though still sizeable) capital investment. The rental yield is lower, but the size of the rental market for such a property increases proportionately. 

Investment in a bungalow in such a location can make a lot of sense if the area, despite being non-prime, is still well-connected to some of the city’s major economic drivers, such the airport or employment hubs such as IT parks and manufacturing zones. One major advantage of investing in a bungalow in an upcoming location is that it will gain steadily in value as the area’s profiling in terms of social and civic infrastructure improves. However, regardless of location, the maintenance costs and property taxes involved in a bungalow are a lot higher than those of flats. This long-term financial implication must necessarily be factored while investment in a bungalow is considered. 

Share Of Land 

If we set the considerations of location, ticket size and potential rental yield aside, the primary advantage of investing in a bungalow rather than a flat is that one secures more land. In any location, it is the value of land which determines the value of built-up property. Unlike a flat, a bungalow and its compound lock in a significant piece of tangible land. This fact gives a bungalow a higher value in real estate terms. Also, the investor must have a suitably long investment horizon and not be looking for short-term returns. 

Investing in flats 

Flats offer a slightly different value proposition than stand-alone units such as bungalows. In the first place, the share of land that is legally allotted to each flat in a project is much lower than that of a bungalow. The primary value of a flat lies in the space that it occupies, which is why larger configurations such as 3 and 4 BHK attract higher rents. As before, location will dictate the ticket size as well as rental income. The rental market for flats is much larger than that of bungalows, so finding tenants is easier even if one factors in a certain degree of tenant churn. However, one must ensure that one is investing in a flat whose size dovetails with the median income profile of the location. The highest demand will always be from the locality itself, and from people working in offices and industries close to the area. Buying a flat whose size puts it out of the largest local demand profile can be a self-defeating and costly mistake. Generally, the 1, 2 and 2.5 BHK configurations are the safest investment bet in any area, since the rental demand for them is always the highest. With ultra-premium flats as a logical exception, maintenance and property tax for apartments is significantly lower than for bungalows. 

Flats Established Vs. Upcoming Locations 

In terms of location, investors into flats must consider all the pertinent factors carefully. Flats in established locations are costlier and involve a higher capital expense. They will attract rental interest from a segment of higher economic profile. However, it must be borne in mind that capital appreciation of flats in centrally located projects is slower than in many upcoming areas. This is because high-end locations tend to hit an appreciation plateau, which can persist for long periods. Upcoming locations appreciate faster because their market viability is being enhanced with increasing accessibility as well as social and civic infrastructure. They attract more people, since any city’s growing population tends to move into areas which are affordable. For that reason, emerging locations also tend to attract a lot of commercial establishments which further boosts the residential segment. To ensure that growth factors such as assured infrastructure and social amenities are indeed locked into place, investors into apartments should ensure that they choose projects that fall within the local municipal limits. If a project falls outside the city's corporation limits, there is no guarantee that the location will receive proper infrastructure such as roads and regular water and electricity supply. Without such infrastructure, a location does not appreciate thereby rendering it unsuitable for smart property investment.


Saturday, November 23, 2013

China may do a lot Better.

There is one news which appeared today - Brokerage house UBS has cut its rating on India to "neutral" from "overweight and while India rating went down, it upgraded China to "overweight" on the bet that the dragon country is due for a re-rating.

And therein lay the entire story for India. Today, the Indian markets are celebrating China"s reforms but little heed is being paid to the direct repercussion to India or this downgrade by UBS, which could be a harbinger of things to come. A little background first…

Well, in 1980"s China unleashed the biggest economic reform, changing the entire economy of the world and the perception of China in the entire world. It's party had then chalked out reforms to make China the factory floor of the globe, which is what China is essentially today. And with things slowing down , China is working out a slew of new reforms, just like in 1980, which many say could once again change the entire dynamics of world economics.  In 1980, the theme of the reform was investment led and this time around, it is consumption led. 

The Communist Party plenum, known as the Third plenum, even before it could officially release the data, news was "leaked" out, a "first of sorts" for China too. 

The news leak was about the one-child policy, which now stands relaxed - couples can have two children if one the parents is an only child. This relaxation is not because China has got a grip on its population but because it now has an aging population and if needs to sustain this growth momentum, it needs to have a much younger or productive population. 

The Third plenum also relaxed the hukou system or the household registration system which in turn in expected to increase mobility of labor and encourage further urbanization. Under the hokou system, those migrating to cities for work, had to give up their various welfare schemes and that prevented many from migrating. Thus relaxation will mean more movement of labor. 

Being a communist country, all land in China is owned by the Govt and the farmer has the right to only work on the soil but there is news that this has been changed wherein farmers will now be allowed to own, use, transfer and also use their contracted land as collateral or guarantee. This is a landmark reform as it will indeed mean more cash now in the hands of farmers and this will lead to a consumption led growth story. Housing prices are also expected to get affected as demand for homes will now go up as urbanization takes wings. Yes, land reform will be the biggest and most significant reform, which will change the country from being merely a factory to users too. 

In the financial sector, Chinese Govt plays the main leading role but the Third Plenum hopes to relax that too. It has announced sweeping changes in the financial sector, like a deposit insurance system by early 2014, privatizing the banking sector, reduce controls on pricing of water, electricity and natural resources. Most important and which could change the entire capital markets there - revamping the system for Initial Public Offerings (IPOs), which has drawn a lot of flak from foreign investors and has been dead for over a year now. 

Now all these are ideal and wonderful reforms, taking China towards a more market driven economy. This is not going to happen overnight, it will be long drawn plan but nevertheless, it"s great news for the Chinese. 

And that is where India needs to watch out. In the emerging markets, foreign brokerage houses will now flock to China as the country is getting more organized and opened up. Most of the reforms have come in areas where foreign investors have always complained about and citied as one of the reasons why they are queasy about going all out into China. But with these reforms, China playing as per the rules of the world, we could see a lot of money now going to China. On the other hand, India and its economy will stay paralyzed for almost 8-10 months, till elections do and appointment of a new Govt. So when the choice is between one country which is improving and promises more growth and the other which is in a limbo, with dirty politics and bad economic taking center stage, do the foreign investors really have any debate over choice here? 

Yes, we could say that FIIs will now start looking anew at emerging markets and when money gets allocated to China, some will come to India too. But is that what we will get – leftover crumbs? Indeed emerging markets will look anew post these Chinese reforms and India continues the way it is presently, the "I" in BRIC might very soon get replaced.  Thus India now needs to worry more when QE easing happens. 

FIIs are not faithful husbands; "till death do us apart" types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today? 

Saturday, November 2, 2013

Indian Consumers - Packing Matters!!

Nivedita Jayaram Pawar
"My family was flabbergasted when I told them I wanted to sell vada paav with my MBA degree," laughs Dheeraj Gupta. But his dream paid off and it's the young entrepreneur who is laughing all the way to the bank. Gupta is the owner of the Jumboking brand of vada paav in India and is now on the verge of opening his 54th outlet.
But becoming the 'king' of vada paav wasn't a cake walk. Hailing from a business family, it was a foregone conclusion that Gupta would become a businessman. Soon after he acquired an MBA degree from a Pune institute, he decided to brand Indian mithai overseas. Unfortunately, the idea didn't catch on and Gupta learnt an expensive lesson.
Big Bite
Then, he ran into a franchisee of Burger King while on a trip to London and he figured he would take another bite out of the food business. "I was reading up on entrepreneurship and was particularly inspired by a book on the founder of McDonald's," recalls Mumbai-based Gupta.
So he decided to promote the vada paav as the Indian equivalent of the burger and set about researching the market. "Mumbai and Thane consume over 2 million vada paavs every day. At a market price of Rs 10 apiece, that's a market of over Rs 700 crore per annum in these two cities alone. It is a very large but unorganised market, and this is where branding the vada paav as 'Jumboking' came in," Gupta reveals. He figured that branding the product and serving it in a hygienic setting, with a transparent kitchen and stainless steel equipment would do the trick. It didn't.
With Rs 2 lakh borrowed from his father and a spot near Malad railway station which belonged to the family, Gupta took the plunge in 2001. He operated the outlet with his wife and four employees, but in the first six months, experienced a turnover of only Rs 3,000-4,000 a day. "It was very frustrating as we were unable to convince customers that we were hygienic and different," remembers Gupta.
Second Time Lucky
Not one to give up, he decided to have a second go at the vada paav -- this time serving it in a wrapper just like the McDonald's burger it was modelled after. Sales doubled, and Gupta launched his second store in Malad after 18 months and the third one in Andheri. The fourth store became Jumboking's first franchised store and, ever since, the brand has followed the franchise model. Next, Gupta infused further innovations, with automation, wrapping, using round bread, a bigger and flatter vada instead of the traditional round one, and a variety of flavours.
Revenue Model
Jumboking has 53 stores in eight cities including some metros and smaller cities. The company runs a 100-per cent franchise system. Products across all outlets are standardised as as they are manufactured in a central kitchen and transported to the outlets, where the vada paav is assembled using standardised equipment.
Jumboking is essentially a vada paav brand and the product and its variations contribute 80 per cent to the total sales. The balance comes from beverages like colas and lassi. The average spend at a Jumboking store is Rs 25-30 per customer.

Saturday, October 12, 2013

State govt. ignores MPNG on oil rules.

Not withstanding the directive of the Ministry of Petroleum and Natural Gas (MPNG) to the government of Nagaland, to rescind/withdraw the Nagaland Petroleum and Natural Gas Rules 2012; the NPF-led DAN government has decided to proceed with signing Memorandum of Understanding (MoU) with five firms short listed.

It may be recalled that the Union Ministry of Petroleum and Natural Gas, had on June 8,2013 written to the state government to rescind the NPNG Rules 2012 as Article 371(A) did not provide powers to the state assembly to frame its own laws “ to regular and develop mineral oil”.

It may be noted that on March 10, 2010 union minister of state for petroleum and natural gas R.P.N. Singh asserted in the Lok Sabha that Nagaland government has the power to frame its own laws on the matter under Article 371(A).

The state assembly passed a resolution  on July 26, 2010  to Article 371(A), Clause VII-(iv) wherein “ownership of land and its resources” would include minerals, petroleum and natural gas etc.

(According to sources, the resolutions  of the state assembly on Article 371(A) required the nod or assent of the President of India to become constitutionally valid.) 

Subsequently, following the cabinet resolution on September 13,2012, the state government introduced The Nagaland Petroleum and Natural Gas Regulations,2012 which was passed by the state assembly on September 22,2012.

The state then floated tender for Expression of Interest (EoI) for oil operations in Nagaland under the Nagaland Petroleum and Natural Gas Regulations 2012. 

However following the directive of the union ministry of petroleum and natural gas on June 8,2013, the process for finalization of firms and signing of MoUs for oil exploration came to a halt.

In response, the state government organized a consultative meeting with a wide spectrum of present and former legislators and MPs, public leaders and tribal organizations over Article 371(A) on July 12,2013. 

The tone of the resolution later echoed in the state assembly on July 22,2013, wherein it resolved to protect the rights of the Nagas as enshrined under Article 371(A). 

After the assembly resolution on July 22,2013, the state government decided to go ahead with the oil operations under NPNG Rules 2012.

It was learnt that there were 23 bidder for the Expression of Interest (EoI) floated in national dailies  after which the Gas Board (the second in the three-tier structure) opened the bids on January 10,2013 ahead of the February 23,2013 assembly election. The list was then narrowed it down to seven and finally to five.

According to sources, the five that were short listed included-- Assam Company India Ltd (which bid for Wokha and Mon); Prize Petroleum Ltd (no specific zone); Deep Industries Ltd. (for Wokha, Mokokchung and Mon) and Shivani Oil & Gas Exploration Ltd. (no zones specified ) and Jubilant Oil & Gas Exploration Pvt. Ltd (made conditional offer that if Wokha was not given, then its offer for Peren and Dimapur would be invalid). 

Interestingly, according to one report, M/s Metropolitan Oil & Gas Pvt.Ltd (MOGPL) which did not figure among the last-five selected firms, was tipped to get Peren and Wokha zones. MOGPL was not among the short listed firms. 

The report claimed that MOGPL was found to be “ a very newly constituted company and does not have any presence in the Oil & Gas sector in India, particularly in exploration and production activities.” 

Interestingly, the report claimed that shareholders of MOGPL were SRM Exploration Pvt. Ltd.,( which was under liquidation) and Spice Energy. Another firm was tipped to get Mokokchung and Dimapur though it was not among those short listed. 

The selected companies have been invited to submit permit fee and Corporate Social Responsibility reports and given 21 days from the date of issue of offer letters for negotiations. 

After that, the firms will sign MoUs with the Ministerial Group, headed by the Chief Minister for issue of permits. 

The landowners of oil bearing lands in Peren district have objected to issuance of  by the Zeliangrong Baudi. 

While Kyong Hoho is under crisis, the Ao Senden has rejected any oil activities in Mokokchung district. On Dimapur, the interesting point is which hoho, if at all, will issue NoC?


Saturday, August 24, 2013

Understanding BOE.

Integrated oil companies and independent exploration and production companies both essentially live and die by their reserve base. If reserves aren't replaced quickly enough, a company can't hope to maintain, let alone grow, production. That's why investors want to keep an eye on reserves for companies in this space.
The tricky thing is, reserves take many forms. There's crude oil, which is measured in barrels. Then you have natural gas, whose base unit is 1,000 cubic feet. Many companies have a mixed reserve base, and they need a way to represent to investors the total energy content of that base. They do that typically by converting all of the reserves to a barrel of oil equivalent, or BOE, basis.
The conversion is pretty straightforward, but the abbreviations can be confusing. A thousand cubic feet of natural gas -- notated as 1 mcf -- contains about one-sixth of the energy content of a barrel of oil. So 6 mcf of gas equals 1 BOE. You'll also see barrels of oil equivalent sometimes represented as "bboe," where the double-b represents the plural, "barrels."
Now, large companies don't have total gas reserves in the mere thousands of cubic feet -- that wouldn't be much of a reserve base. Rather, they tend to have reserves in the millions (mmcf), billions (bcf), and trillions (tcf).
Now that we have the abbreviations down, here's an example. For year-end 2006,ExxonMobil (NYSE: XOM  ) reported liquid reserves of 8.19 billion barrels, and gas reserves of 32.48 tcf. On an oil-equivalent basis, the gas reserves equal 5.41 billion barrels, yielding total reserves of 13.6 billion BOE. And that's how it works.

Sunday, August 18, 2013

Cramer Rules.

Timing is Everything.

"Investing is a lot like comedy. Timing is everything," Jim Cramer says. That's why he dedicated his entire show to going over the frequent errors that investors make when buying and selling stocks.

Cramer said that knowing when to buy and when to sell is one of the most important, and most frustrating, parts of managing your own money. That is likely the reason why there is an entire cottage industry of financial advisers telling investors that it simply cannot be done, that they should just put their money into index funds and leave it there forever. Cramer said that while index funds have their place, telling investors that they're the only way to make money is totally bogus.

Timing makes all the difference, Cramer explained. He said there's a big difference between buying stocks at the market peak in October 2007 and buying them at the generational bottom in March 2009. There's a difference between buying stocks before the European financial crisis began to rule the world's markets and after.

Cramer explained that one reason timing the markets is so hard is some of the best moments to buy are during the moments of greatest terror. He said that it's almost never the right time to sell when the markets are panicking. History has proven that whether it was the crash of 1987, the flash crash of 2010 or the attacks on Sept. 11, 2001, what worked best was to be prudent and not to panic.

Perhaps the only exception was the financial crisis of 2008. Cramer said he was widely criticized for telling investors to sell their stocks in October 2008 -- but with the entire financial world as we knew it on the brink of collapse, the call to sell proved to be the right one, and investors were able to side-step the additional 35% decline in the averages.

But other than that one special case, Cramer said dumping stocks into a selloff is always the wrong move. "Keep your head, because you will get a better moment to sell," he concluded.

Its Not the End of the World

Continuing with his tips for investors, Cramer said not every big decline in the markets signals the end of the world. That's why no matter what the crisis of the day, it's never a good idea to sell everything because not all stocks are equally good or equally bad.

When bad news hits, Cramer told investors to look at the stocks in their portfolios and rate them on a simple scale. 

Stocks you rate No. 1, for example, could be the ones you believe in and are worth buying more as they head lower. 

Stocks in the No. 2 camp could be those that could be sold if you needed to raise cash. 

Meanwhile, the No. 3s could be those that are expendable and should be sold now.

Cramer said that, as a general rule, if investors have big gains they should give them back. Ring the register, he said. If the fundamentals of a company have changed, sell. If you think a stock is headed lower, sell some and buy it back lower. But no matter what happens, never sell it all and hide in low-yielding bond or bank CDs.

Cramer recounted how he learned his lesson about not selling everything. He said in the 1990s he held shares of American Stores, the old Acme supermarket chain, hoping the company would be taken over. After years of losses, he finally gave up and sold all his shares, all at once. Just two weeks later, American Stores was taken over. Cramer said his mistake was selling it all.

Know What You Own

Cramer's next tip for investors is to know what you own. He said in today's media-driven world, investors simply should not own a stock unless they know why they own that stock. Why? Because the media has never met a negative story it didn't like.

Whether it's the tsunami in Japan or the European financial crisis, Cramer said investors should just assume that every story they see on TV or read in the papers has been exaggerated in some way. So unless investors know why they own a stock in the first place, it will be far too easy for them to bail out on their stocks at the first sign of trouble.

Cramer recounted what he used to call his "Bristol-Myers Theorem," derived from Bristol-Myers Squibb (BMY_), a drug company with the most consistent earnings imaginable. He explained that back at his hedge fund, anytime an associate would run in panicking about a negative story, he would always ask, "How does that affect the earnings of Bristol-Myers?" In just about every case, it didn't.

That's why Cramer often recommends reliable, consistent earning stocks with great dividends, stocks such as Kinder Morgan Energy Partners (KMP_), or Verizon (VZ_), or utilities such as Southern Company (SO_). Cramer said no matter what the negativity of the day, companies like these will allow investors to put those stories into perspective.

The Dangers of IPOs

Next up on Cramer's tips for investors: the dangers of initial public offerings. Cramer said he's often asked about the next hot IPO coming down the pike, but his answer is always the same: "What price are they offering and how many shares are there?"

When it comes to IPOs, Cramer said it's all about valuation, the number of shares offered and price. He said what starts out as a great offer at $20 a share can easily get hyped up to $25 a share right before it comes public. The IPO business also has a habit of limiting the number of shares offered to ensure a big first-day pop in the share price, a pop that will only hurt investors later on.

Cramer gave his usual advise: If you can get in on one of these "sliver" offerings (described above), do so, but never buy them in the aftermarket.

Case in point, the Groupon (GRPN_) IPO. Cramer said he never liked Groupon the company, but Groupon the IPO was a buy, buy, buy. Why? He explained that while Groupon had 640 million shares of stock outstanding, the IPO only offered a scant 40 million of them to the public.

The result was huge demand, which sent shares of the $20 IPO to $28 and then $30 a share on its first day. This was a great return for those in on the IPO at $20, but those who bought at $28 and $30 were crushed as shares slid to under $15 a share in the days that followed.

Few Are Forever

Cramer's final tip for investors was that only a few stocks should be held forever. He said it's not OK to own a stock unless investors know exactly what would make them sell it in the future.

Too often investors end up selling a stock at the wrong time because they never anticipated selling it in the first place, Cramer explained. Similar to the "Bristol-Myers theorem," if investors don't know what they own and why they own it, it's easy to panic at the first sign of trouble.

In particular, Cramer said high-flying tech stocks cannot be owned forever because technology changes too rapidly. What's red-hot this year likely won't be next year. Likewise with cyclical stocks, said Cramer. Just because the economy is great today doesn't mean the same will be true tomorrow.

"Tech stocks are not the same as staple stocks," Cramer explained. There are tech cycles and there are economic cycles, he said, but there aren't cycles for Cheerios or Hershey bars. Learn from the bust of 2001 -- investors need to be ready to sell when the time comes, Cramer reminded viewers.

When it comes to high-flying stocks, "take profits on the way up, get out on the way down and be ready to jump ship when the time comes," Cramer concluded.


Sunday, August 11, 2013

How to save income-tax after selling a house (Immovable Property).


It is really possible to save substantial amount of income-tax on your long-term capital gains arising out of selling your immovable property, if you take advantage of the cost inflation index concept. However, it is applicable only in long-term capital gains.

Only when you hold your property for more than 36 months and sell it, the profit is known as long-term capital gain. You can save by resorting to the theme of cost inflation index.

The long term capital gains for all types of assets including long-term property gains for all assesses would be computed in the following manner:

1. Cost of acquisition of the asset, whether movable or immovable, is to be multiplied by the cost inflation index of that year in which the asset is transferred. The resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired.

If, the asset was purchased before April 1, 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on April 1, 1981.

2. Any cost incurred on the improvement of an asset is to be similarly adjusted with the help of the cost inflation index, i.e. by multiplying the cost of improvement by the cost inflation index of the year in which the asset is transferred.

It has to be then divided by the cost inflation index for the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the improvement to the asset was done.

The Government has notified the cost inflation index for various financial years from 1981-82 to 2013-2014, the table of cost inflation index for the different financial years is given on next page:

For the financial year, 2013-2014 relevant to AY 2014-2015 the net capital gain tax payable by an assessee in respect of long-term capital gains is calculated on the basis of the above cost inflation index.  It may also be remembered that the benefit of cost inflation index is not available for short-term capital gains or losses. 

Thus, selling property (land, house, flat, etc.) within a period of less than three years from the date of its purchases  is treated as a short-term capital gain or loss in respect of gain from property.  Thus, the above cost inflation index will be of no use to a person deriving  either a short-term  capital gain or loss.  
So, too, the benefit of the cost inflation index is not available to non-resident Indians.

Apart  from the adjustments arising from the cost inflation index the various expenses incurred on improvements to the asset, and on transfer of the asset for example  stamp duty, legal fees payment of brokerage, etc. are deductible from the full value of the sale consideration. 

It is the net resultant figure which will be treated as a long-term capital gain or loss chargeable to income-tax in terms of Section 112 of the Income-tax Act.

For the actual year 2014-2015 the tax on long-term capital gains payable is 20 percent.  Thus, tax payment in respect of long-term capital gains is much lower than what has been prescribed by the Income-tax Act, if we take into account the impact of the cost inflation index. 

This is explained by the following illustrations:

Illustration No.1

Shyam purchased property for Rs 10,00,000 in the year 1981. He sold this in the financial year 2013-2014 for Rs 38,00,000.  The long-term capital gain would be calculated as under :

Cost of acquisition for the purpose of capital gains
= {Cost of acquisition x Cost inflation index of the year of transfer}
÷ {Cost of inflation Index of the year in which purchased} 
= {10,00,000 X939/100 Rs.93,90,000}
In this case, the selling price is lower than the cost of acquisition as computed with reference to the cost inflation index [Rs 93, 90,000]

Hence, there will be no capital gains tax payable, rather, there will be a long-term capital loss to the tune Rs 55,90,000 which can be carried forward for adjustment against Shyam’s  total  long-term capital gains.

Illustration No.2

Anurag purchased flat for Rs 20 lakh during the financial year 1991-92 and sold it for Rs.96  Lakhs on 25-7-2013.

Normally, the capital gains should have been Rs.70 lakh  but in view  of the adjustments on account of the cost inflation index, the capital gains  would be calculated as under :

{ 20,00,000 x 939/199 = Rs.94,37,185}
[Cost  inflation index for 1991-92 = 199]

Thus, in this case, the long-term capital gains  would be calculated as under :
Sale Price                                                                         = Rs 96,00,000

Less: Adjusted cost price taking into                                    =  Rs 94,37,185
account the impact  of cost inflation index

Long-term capital gains.                                                      =  Rs 1,62,815

Illustration No.3

Neelam purchased a piece of land during the financial year 1989-90 for Rs. 6 lakh.  She sold  it for Rs.40 lakh in Financial Year 2013-2014  (A.Y : 2014-2015).  Normally, the capital gains would have been Rs.36 lakh but in view of cost inflation index, the capital  gains would be calculated in the following manner :

6,00,000 X 939 (cost inflation index for 2013-2014)

172 (Cost inflation index for 1989-90)                 =   Rs. 32,75,581

The long-term capital gains as a result of cost inflation index adjustment would be as under :

Sale Price                                              =  Rs. 40,00,000

Less: Adjusted cost price as per              =  Rs. 32,75,581

Cost Inflation Index    ______________
Long-term capital gain                             =  Rs.  7,24,419   

Illustration No. 4 :

Pranab Kumar purchased property on 1st February, 2013 and sold the same on 16-8-2013.  The cost price was Rs.22 lakh and the sale price Rs.26 lakh, thus  the profit  is Rs.4 lakh.

As this is  a short-term capital gain, the benefit of cost inflation index is not available and Mr. Kumar is liable  to pay tax at the normal rate.

As shown by the above calculations and illustrations, in most cases the assessee will benefit to a very large extent as a result of cost inflation index.

Financial YearCost inflation index