Wednesday, July 30, 2014

Greed, Fear, infinite loop & Real Estate



The stock market prices are ruled by Greed and Fear. Prices go up when the market sentiment is predominantly that of GREED while it falls when the market sentiment is predominantly that of FEAR. CNN has FEAR and GREED barometer on its website http://money.cnn.com/data/fear-and-greed/ to gauge the emotion that is ruling the market at a particular given point.

However, there is an asset class where both the emotions leads to increase in prices and due to this it is only going up and up for the last decade. The asset class is Real estate.

There is a class of investors who believe this is the best asset class due to following reasons:

1.       Leveraging opportunities are very high in this sector as government and banks provide incentives to people to borrow 5-6 times of their annual income
2.       This is one of the only asset class (distant second might be gold) where parking of black money is very easy and considering the size of India’s black economy, there is substantial amount available to be deployed
3.       There is tax incentive on investment in real estate and also on capital gains (with a requirement of further investment into property)
4.       Real estate is one of the best bet against inflation and devaluation of currency
5.       The sector provides opportunity to make big ticket investments

There are equally compelling logic which suggests real estate is not a good investment:

1.       Rent realization to property prices ratio is as low as around 2%. Additional 0.5% is spent on property taxes, security, insurance etc. Comparing this with around 10.5% interest rate, there is a net loss of 9% which need to be earned by increase in property prices before any actual gain can be made. Considering tax saving of 3% (generally actual tax saving is much lower), still 6% year on year growth is required to ensure break even. For a 3bhk of carpet area 1250 sqft being sold in Mumbai suburbs at Rs. 5 crore, to give a 9% return it need to be worth Rs. 43 crores post tax in 2039 when your 25 year loan would be completely paid off. Which mean per sqft carpet area cost need to increase from Rs. 40,000 per sqft to Rs. 3,45,000 per sqft!!!
2.       There is a transaction cost of around 8% every time you buy or sell property in form of government taxes, brokerage etc.
3.       Property is generally illiquid and when you actually want to sell it takes 6 to 12 months to actually do the deal
4.       Property prices in secondary market are at a discount of around 20% then what a builder is quoting. (If you don’t believe me get a quote from builder and then compare the price on websites like magic bricks, 99 acres etc.)
5.       Property depreciates over time. People end up taking 25 year loans on property; however nobody wants to buy a property more than 15 year old. Over time apart from depreciation in form of water leakages etc., the technology and trends also change. 15 years back very few properties used to have club house, swimming pool and similar facilities. 15 years back power cuts were so prevalent that very few people would go for higher floor. 15 years back people used to prefer individual units over apartments. Today we can find in the same locality old property selling at Rs. 7000 per sqft (carpet) while new property selling at Rs. 15,000 per sqft (carpet).

That was the calculated analysis of pros and cons of real estate investments. But as we all know investments are made on animal instincts, based on emotions of Greed and Fear and not based on such calculations alone.

So what is the current mood of market – Greed or fear?

Well, in real estate market unlike stock market Greed means buy at the same time fear means buy. There is a class of investors who believe that post tax return offered by real estate would beat all other form of investments including equity and hence are investing in real estate. There is another class of investor who has need or perceived need of property in form of place to stay for the family today or in future. He is scared that if they didn’t buy today the prices would keep multiplying while his income would not keep pace and it would become impossible for him to buy property in future. Hence he is willing to leverage himself to the hilt to make sure that he buys it now rather than at a much higher price later. Of course, once he has met his requirement he need a bigger house, then a second home and then a home for his kids and one for his parents…..

In the real estate market there is a faith that property prices never fall. It going through a phase of self-fulfilling prophecy and today if there is one person desperate to sell there are enough buyers who would lap it up for fear or greed. The market has 70% pure investor, 20% investors who have perceived future use, and 10% real user demand. And there is enough cash being printed in the world to fund these investors. These investors have holding power, but how long. Unlike other asset class, real estate is a depreciating asset.

One day people would be more fearful that prices may fall than being fearful that it would become unaffordable. Till the day Bull and bear are dancing in a tango music would continue to play for real estate. The day bear starts fighting with bull the scene would become really interesting.

The faith/bubble that property prices never fall has seeds of its own destruction. Till the time people have this faith people will keep on buying real estate at higher and higher price. Longer this last the stronger faith people will have that prices can never fall and that would drive the prices higher even faster. It’s like a driver who would keep on increasing his speed because he knows that he will never crash. He would be right most of the time and which will give him more confidence to keep increase the speed. Can a driver endlessly increase speed of the car? How will this infinite loop end?

1.       The car would reach its maximum speed and then it will have to run at a constant speed
2.       The car would break down and it would need some time for repair
3.       The car would hit a bad patch, slow down for a while and hit the purple patch again
4.       The car would crash

Your guess is as good as mineJ. The fourth option looks scary at the same time 1 to 3 are not that bad. Isn’t it? But is he aware that the vehicle he is driving is similar to the bus Keanu Reeves was driving in the movie Speed. If he lets the car go down below a particular speed it will blew off!

Real estate is funded by 4 different sources:

1.       The banks funding the property buyer: The rate of interest is around 10.5%. Banks fund only 75% of the cost of the property and maximum up to 6 times of the annual salary. As there is enough margins and in India people rarely loose job, chances of default in these loans are very low. In worst case scenario if the prices increase too much very few property buyers’ salary would be high enough to meet the criteria of banks and hence the number of transactions would substantially come down.
2.       Banks fund the real estate companies: The real estate companies are funded by banks at the rate of interest ranging from 13% to 18% for meeting the cost of construction. Banks get land as security and if the projects keep getting completed in time and buyers keep buying at higher and higher prices the sector can afford this rate of interest. Only issue is when the sale quantity falls substantially and banks and real estate companies are stuck with illiquid assets.
3.       Private equity funds the real estate companies: The private equity guys investing in real estate expect a return of 18% to 24%. They do a structured deal with the promoters where it looks like equity contribution, however actually it is a high cost debt. Generally investors of this class have a time horizon of 5 to 7 years. As this Bull Run started around 2004, since 2009 onwards few exits have happen, mostly at loss. To continue to attract this kind of money, the sector needs to live up to its promise.
4.       Debt from unorganized market: Builders also raise debt from unorganized market at the rate of 18% to 36% and then put into the business as equity. This money is raised as a desperate measure and is done only on faith without any security or against the security of promoter’s shares.

Now the driver has to ensure that he is continuously increasing speed at a rate higher than the debtors car speed. If the average cost of fund is 15%, his property price increase should be more than 15% to ensure he does not default. Which means maintaining constant speed is also not an option. Can a car keep on increasing speed indefinitely? When & how will this infinite loop stop?


Monday, March 10, 2014

Obituary to Arvind Kejriwal: The hero who promised to change the system and then became part of the system



I am ashamed at the speed at which my opinion has changed about Arvind Kejriwal. But then this man has changed at such a speed if I do not change my opinion it would be my ego what would be stopping me from seeing the truth.

When Arvind Kejriwal emerged from the national outrage against corruption, we thought our hero has emerged who would lead to change the system itself. We were scared that the political system is very strong and would never let a clean person win an election. We used to believe that politics is the last resort for criminals and crooks and a clean person would never make it. When AAP almost won the Delhi elections and AK went on to become the CM, it was like a miracle moment. That moment we thought: a good person can stand up, fight and change the system. A man can stand up and win against this system. It was the best moment in our AAP journey. That moment a Kanjoos like me also went on their website and donated my hard earned money so that from now on elections would be fought with clean money, without vote bank politics, in a transparent manner.

But we were wrong. The system was much more powerful than we thought; it had Aces up it sleeves. The speed at which the system managed to convert the man fighting against the system to man part of the system is mind boggling. He became part of the system and started doing everything what other politicians have been doing all the while. Overnight he became what we were rooting against. We have not seen a bigger Paltu in our lifetime. His U-turn list is endless:
  1. Government cars
  2. Taking Government housing and not vacating it
  3. Personal Security
  4.  Charter Planes
  5. Support of Parties like Congress when he has pledged in his children name against it
  6. Asking for proof against Shiela Dixit when he himself has been before elections claiming to have enough proof against her
  7. Vote bank politics
    1.  Power bill relief to select few who supported him and break the law by now paying the bill
    2. Talk about reservation in Delhi University
    3. Painting private sector in bad light
    4. Using the communal card against BJP, using Jhadoo symbol to appease lower class etc
  8. False propaganda against good work done by Gujarat government when his own party members have   previously praised that
  9. Selling of tickets or giving out tickets to the ‘Khas Aadmi’
  10. Defending his law minister even when enough proof against him was provided by people
  11. High command system against internal party democracy
  12. Funding by Ford foundation & corporates
He became a habitual liar. (Now I think he was always a liar, we are able to see through him only now). The ultimate was his deal with media where the leaked video clearly shows him admitting that he is creating a bad image of private sector for getting votes. The success got into his head and he got blinded by the ambition to become PM, rather than making good of the opportunity provided to him in Delhi to make the change he has promised. From a leader of a revolution he became a Nautanki using the people’s hunger for change to fulfill his own ambition. From a revolutionary who promised a totally new system, he became a leftist*2, a Mamta Banerjee who know only two words “cholbe na…cholbe na”. Rather than changing the system, he started painting everybody else corrupts except himself. From Businessman to Police to courts to media to Aam Aadmi , now everybody is corrupt. Neither he refrained from generalization nor did he tried to find root cause or solution for the same. Just “cholbe na…cholbe na”.

He forgot that the middle class and lower class has contributed their hard earned money to make him win the elections. He forgot that people have left their high paying international jobs to become part of the revolution with the hope to change the system. He left the opportunity given by people to create a model for change in Delhi and jumped into national elections asking people for more donation and more sacrifice of their livelihood.

What is he dreaming? Does he believe that he can get 272+ seats all by himself? Or this time he is not swearing in his children name that he will not take support of Congress or BJP? Whose support then he will take – Lalu Prasad Yadav? Karunanidhi? Mayawati? Mulayam Singh? He justified his resignation in 49 days in India Today Conclave by saying that “itna seat mein itna hi milta hai”. What is he expecting in Lok Sabha? I am sure 75% of the people in India have not even heard about AAP leave alone voting for them. He at best might get 10 seats. What he aims to do with that. Horse trading? Buy a plump portfolio? AK I want to ask Lok Sabha me kitna seat mein kitna milta hai. 5 seat mein kya milega and 10 seat mein kya milega? Tell us what you will deliver rather than finding faults with everybody.

One good thing of this ‘hope of revolution’ is that we have come out of our lethargy. Many of us at least put in the effort of getting ourselves registered as voters. Lot more like us are now actively taking part in political debate on at least social media. This itself is a change. Change cannot happen overnight. It is not a 20-20 match which we would have preferred and what AK was making us believe. It’s important that disappoint with AK & AAP does not make us go back to our earlier belief that everybody in the system is dirty and good people should have nothing to do with politics. Politicians thrive on that. Let’s not wait for the ideal candidate and let’s vote for the best among them. If we do not vote, we will have to live with whatever others choose for us. Let’s vote for somebody who is at least of sound mind, has shown decent performance in the past. Politicians appease the voter who is willing to come to vote and have the ability to get together and demand something. Let’s become the largest vote bank demanding change. Let’s list down the change we want and demand that as a vote bank:
  1. Criminals not allowed to contest elections
  2. Right to directly elect our PM rather than through 543 MPs who change after we have voted
  3. Investment in infrastructure (roads, electricity, education, medical, sanitation, transportation etc.) and better quality of living
  4. Judiciary system that work within defined time lines
  5. E-governance & answerable government
  6. Development, Growth and jobs
  7. Women safety
  8. ……….
Modi is symbol of change while continuing in the system; AK was a symbol of changing the system itself. We will have to do with Modi, till we find a new hero who is willing to fight the system and change the system. Our democracy rule books of multiple party etc won’t change overnight and it will have to be changed from inside. We will have to give clear majority for Modi to effectively deliver. We cannot afford another five years of Congress rule supported by crooks like Lalu, Mayawati, Karunanidhi and Mulayam Singh. We have to change last 10 years of mis-governance. Let’s not forget that we wanted this revolution because we are fed up with Congress.

 Modi has one black spot but we need to understand the situation. Riot was result of an equally wrong incident. We all get blinded when revenge blinds us. Country like USA drops bombs on civilians in Afghanistan because of wrong deads of select few. We never boycotted USA. Yes, he should have found out the exact people who burnt the train and should not have let everybody in the community suffer due to misdeed of few. At the same time we should not let Congress win, because they not only do not take any action against terrorists but also shift blame on others for vote bank politics. Congress is thriving on the fact that we vote against one unfair action rather than 1000 no action. We have to give Modi the credit that after that incident no riot has happed in that state. On the other hand places like UP we end up having riot every day because everybody is playing politics of appeasing certain vote bank. Unlike them Modi has been following a policy of ‘Development for all, appeasement for none’. All communities have benefited from the development of Gujarat and he has not been selective in development. 

We will have to select a not so perfect candidate, with a good track record of development and governance and then we will have to demand the changes we want by becoming the biggest vote bank. We will have to force him and incentivize him to make the changes we demand. If we don’t give his clear majority he will have to partner with likes of Mayawati and Jayalalita. They will take their pound of flesh. If we want him to be effective we have to be unanimous what the best option in front of us is and go all out to make him win. In real life we will never get a ‘perfect’ candidate, if we keep waiting for him another 5 years of Congress rule we will have to suffer.


Saturday, February 22, 2014

Gas Pricing - Reply to Kejriwal


Yesterday Mr. Kejriwal asked Mr. Modi "Would you bring down the gas price from 8 dollar per unit to 4 dollar?" 

As I belong to Natural Gas sector, I have drafted a reply on behalf of Mr. Modi. This should clarify all the myths relating to Gas Pricing issue being created by Nautanki Party. Mr. Kejriwal, I hope you have the guts to reply to this one. (please note this is my reply and not the official reply from BJP/Modi)


Mr. Kejriwal, our party believes, as you mentioned in the CII meet that “government has no business to be in business”. We do not want to be into the business of determining gas price. The Gas price should be determined by transparent bidding system and precious natural resource like gas should be sold at the highest price possible. Your ‘Nautanki party’ might interpret the answer simply to say that the gas price might be higher than even $8.4. Yes, it might be as high as $14, the price Indian customers are paying for imported and regassified natural gas in the country.

But you have to go beyond headline sound bites and understand basic economic principles. I know you have mentioned that you people do not know and want to learn by making mistakes in the next 5 years. Indian economy is not a toy car where you can learn from playing. One bad move can be fatal for the whole country. We have more than 15 years of experience of running government in Gujarat and we know what we are saying. Ask any expert they will tell you that when it comes to using Gas as source of energy, Gujarat state performs better than all Indian states put together. So we do not only have good intentions but our good intentions are backed by sound knowledge and extensive experience of execution.

Point 1: Scarce natural resources should be sold to the highest bidder at the maximum possible price through a transparent bidding mechanism like Telecom spectrum.

When the spectrum was allocated by government and not auctioned you complained (and rightly so) that there is corruption. Why the same logic does not apply to gas. Gas is also scarce natural resource like spectrum. Due to high spectrum prices, telecom service prices also increases for end customers. As the latest round of spectrum auction has proved, transparent action is the best method of allocation natural resources and this leads to higher revenue for the government to meet its social objectives.

Point 2: Government allocation leads to corruption

If scarce resources like natural gas are sold at below the market price, there would be more demand than supply and then government would have to step into the role of allocation of resources which would lead to corruption. Government nominees would bend rules to favour people they want. Why should we sell these scarce resources at below market prices to private parties who would make super profits at the cost of government revenues?

Point 3: Increasing prices does not means that all goes into Mukesh Ambani’s pocket. In fact government earns more.

 One needs to understand how a Production Sharing Contract (PSC) works. (These are complicated things and I suggest you get some expert to help you understand this. For your maturity, it might be difficult. But still I would give it a try).

When Gas blocks are bid out, the bidder bids for the percentage share of the produce. The bidder who agrees to give highest share to government wins the bid. RIL has won the bid on this basis. In RIL contract the structure is as follows:

a.     Till the time RIL finds any oil or gas in the fields all expenses incurred is risk capital and if they do not find any Oil or gas the whole investment is lost. RIL gets no recovery of the same. Generally exploration cost billions of dollars and chances of success is as low as 10%. You need to appreciate that companies who have technical know-how to handle such projects would take such risks only if there is sufficient incentive built in on success. Otherwise our natural resources would never reach the hands of people

b.    Once the company finds Oil & Gas, they have to submit a budget for development and production from the field. Once the budget is approved, that budget acts as a basis of cost recovery. So suppose, RIL spends $10 billion on total exploration, development and production then cost recovery is allowed upto 2.5 times. The ratio of produce sharing would be as follows:

Till cost recovery reaches 2.5 times of $ 10 billion i.e. $25 billion, RIL’s share is 85% and Government share is 15% of the production.
Once the cost recovery crosses 2.5 times of investment, RIL share becomes 15% and government share becomes 85%.

So suppose earlier price was $4.2 and total sales was $50 billion. RIL was getting $28 billion and government was getting $22 billion. When the price is doubled to $8.4 total sales would double to $100 billion. In that case RIL would get $35.5 billion and government will get $64.5 billion. Hence RIL revenue would increase by only 26%, while government royalty income would increase by 193%. And this 26% is before income tax. After income tax, income increase would be only around 18%.

Now you should be able to appreciate that when price of gas is increased it’s the government who gains more in form of royalty. This is apart from the increased revenue in terms of income tax, sales tax etc. Please note that this 2.5 times ratio is does not takes into account time value of money. So if somebody invests $10 billion today and gets $25 billion after 10 years, and that also after so much skilled efforts and risk, he is not reaping super natural profits. And that is obvious from limited interest shown by International Oil and gas majors in taking up such projects in India. And you would appreciate that we need to invest to be able to get our unutilized natural gas up on the ground and we need to attract best oil and gas companies to do that. Resource is of value only if reached the ground. Your Nautanki can’t get this gas to the ground.

Point 4: Government should take its share of gas produce in kind and allocate it to industries as per the social priorities. 

Alternatively, Royalty, income tax and other taxes collected from Gas sales can be kept in a separate fund to fund the subsidies to meet the social objectives. This would be more transparent, corrupt free and efficient method of distributing subsidies. We do not want to act like congress government who are black marketing the gas at subsidized price to private companies for their personal gains.

Point 5: Indian should end this system of “retrospective regulatory changes” started by Congress government. 

That does not only effect the foreign investment into the country but also affect adversely Indian Banks, domestic investors and overall investment climate. It leads to uncertainties which are not good for long gestation projects like Infra projects. And I believe you would agree that India needs to invest heavily in infrastructure over the next 10-15 years to provide better life to our citizens.

The PSC was signed long time back through a bidding system. We should always try to improve contracts going forward and make the bidding more transparent and competitive. But let’s not put into question agreed commercial philosophy of such contracts. You are giving a wrong picture of your mental health when you compare an Oil & Gas company entering into Production Sharing Contract (PSC) with a servant. Kindly appreciate; the relationship is that of a partnership and not that of a servant. We need to partners Oil & Gas companies because these are complex projects requiring great technical and management skills. Without these skill the resource will never reach the ground and will go waste.

Point 6: Why should we force Government-RIL partnership to sell the gas at below market price and let countries like Qatar to sell us gas at $14. Why don’t you use your Nautanki to force Qatar to sell gas to us at $4.2?

Point 7: We also believe there is fraud on the nation done by RIL and Congress combine. But the fraud is not in terms of lower pricing, but in terms of gold plating of investments.

Assuming, RIL has shown the cost of development of these fields as $ 10 billion while actually it is only $ 5 billion. In that case, they should be getting revenue share of only $15.5 billion rather than $28 billion. When we form the government, we will get the accounts audited by CAG to make sure that there is no gold plating and would disallow RIL any excess cost they have built in. Automatically their revenue share would fall and government share would increase. The increased government revenues can be deployed to meet social objectives.

Mr. Kejriwal, we request you to kindly detest from making comments without basic knowledge on things. Everybody loves to get things cheap and when you say you will reduce power prices or gas prices everybody claps. But then people clap during Nautanki also. Let’s not mislead the nation. What you are not telling them is actually you will not reduce prices but you would reduce power supply and gas supply itself. You would send India back to license raj days when we used to stand in queue for years for basic things like telephone connection, power connection etc. And then your team intends to black market the limited supply to fill in your pockets. India’s inflation problem is due to supply side problems and not due to pricing problem. For a developing country like India the government needs to focus on increasing supply and let price be determined by competitive forces. Increased prices would take care of pricing issues. But you would not understand that. You want to use Indian Economy as a toy car. Indian voters are intelligent enough and would not handover the wheels of this great nation into hand of novices like you. Spend time in the system, read & learn more rather that doing Nuatanki, once you have matured enough then ask for the wheels of the country.


Link to model Production Sharing Contract (PSC) on petroleum ministry website: http://petroleum.nic.in/nelp3.pdf

Friday, December 13, 2013

It is still advantage BJP: Let Congress worry about AAP

Everybody is talking about AAP and Arvind Kejeriwal. It’s like Bangladesh beating India in the 2007 Cricket World Cup and few Bangladeshi fans & media start believing that Bangladesh would go on to win the World Cup. Winning a tournament requires much more than flashes of brilliance. It is more about stamina and mental strength, which come only after being in the game for decently long time. I believe if AAP invests few years in building the team at grass root level, getting the chemistry between the team members right, understanding the fine line between right and practical, holding on to the standards it is preaching, it can one day become of the leading parties in India. But that will not and cannot happen by May 2014. Real contender for May 2014 world cup is still BJP under the leadership of Modi. In fact, the second rank team after the beating by AAP is looking very weak and that only increases chances for BJP.

National elections in a country as big as India cannot be won only on basis of sentiments. It requires years of work at grass root level before a party can really stake claim at the national level. I am coming across article where people are taking that AAP can win the Lok Sabha Election. According to me AAP will not be able to field 272 candidates leave alone winning 272 seats which is required to form a government at Centre. And as AAP has made it clear in Delhi that it would not form a government without clear majority, it would be really difficult for them to compromise with the high standards they have set for themselves in May 2014. And I am sure AAP also know that people likes of Mayawati, Laloo, Mulayam Singh, Sharad Pawar, Jayalalita, Karunanidhi are much more corrupt than BJP and maybe even Congress. In best of dreams, AAP can win 50 seats in the 2014 Lok Sabha elections and with that number of seats and a vow to not participate in government without clear majority they are irrelevant for the purpose of deciding the next government at Centre. At best they can force the country for yet another election at Centre like Delhi. That would only frustrate the voters, donors and workers of AAP and make them more irrelevant in the repeat elections.

Modi and BJP should avoid giving too much attention to AAP at this stage. They should be mindful of their presence but nothing more than that. Modi and BJP should continue with the strategy they were working with for the last few months and should not look to change the strategy suddenly. Modi should avoid speaking anything about AAP, both negative and positive, at this stage. He should continue his attacks on ‘Shejada’ and Congress. During Lok Sabha elections 2014 AAP is not a real threat and by giving them importance BJP should not lose their own plot. Their strategy is working really fine and giving them great result. Of course BJP should be mindful that there is a major Anti-corruption wave in the country and they should not be seen in the same group as Congress, which AAP will try hard to portray.

AAP is getting lot of airtime in media right now because everybody is interested to know about the fate of Delhi elections and who would form the government. Once President Rule is declared and couple of day passes, media would get something else to focus on and AAP will have to fend for themselves. They would have to go back to strategy room to decide what resources they have in terms of time, money, dedicated workers, top leadership team’s bandwidth and what they can focus on in the next 4 months. They will have to take a call whether they would like to focus on Delhi and try for a clear majority or spread their resources thin between state elections in Delhi, Haryana and Lok Sabha elections. Considering they focused on only Delhi state elections in November when they could have fought elections in Rajasthan, MP, Chhattisgarh, and Mizoram also, I believe they would be practical about their resource limitations.


 If BJP is able to get the Lokayukta bill passed in the parliament which is acceptable to Anna and Kiran Bedi it would be a good opportunity to disclose the real intentions of AAP party. AAP party would not like Lokayukta bill to be passed right now as they will lose the main election plank. AAP would try to claim that the version of Lokayukta bill that is being passed it watered down version and something unacceptable. Most of the supporters of AAP are not very clear of the details of the bill and if the bill receives the acceptance of Anna, AAP would come across as just any other political party crying foul for vote bank politics. Both BJP and Congress will fight to take credit of the bill and AAP would fight to discredit the bill. That would be advantage BJP. 

Right now BJP should let Congress worry about AAP. BJP should just maintain its focus on its own game and stick to its original strategy.

Monday, December 09, 2013

Anti-Congress and Anti-corruption is the theme for 2014 elections


No doubt the 4 state elections is a game changer specially Delhi with Aam Adami Party (AAP) super debut. AAP is claiming it is wave against the established parties. BJP is claiming it as Modi wave. Everybody is laughing when Congress claims that this is not Modi wave. I believe it’s more of ANTI-CONGRESS and ANTI-CORRUPTION wave. People have given a decisive vote against corruption and congress. People are looking for change at centre.

In all the four states the anti-congress wave was very clear. Although Chhattisgarh tally of Congress was not very bad, results in Rajasthan, Delhi and Madhya Pradesh is nothing short of disaster. Looking at these numbers one can be forgiven to believe Modi’s jingoism that the oldest political party of the country will be wiped out (Modi would not like the term swept away now after AAP success) after the national elections in 2014. 21 seats in Rajasthan out of 199 and 8 seats in Delhi out of 70 shows how big is this Anti-congress wave that is sweeping the nation. Privately even the congress party is agreeing to it ask Sheila Dixit and Ashok Gehlot. Even before the elections they were aware that Congress performance at Centre can cost them dearly in state elections. However, their party’s Gandhi worshipping culture does not allow them to do openly communicate that.

Many people do not realize that success is generally stepping stone to defeat and Congress is doing the same mistake. Congress managed to unexpectedly win 2009 Lok Sabha elections due to last moment populist measures like farm loan waiver, National Rural Employment Guarantee Act, sixth pay commission etc. They have been under the impression for the last 5 years that they can get away with any crime by doling out similar populist measures before the elections. Ashok Gehlot has realized the hard way that you cannot fool people with the same trick every time. Sonia Gandhi got the full credit for Congress party’s success during last Lok Sabha elections and hence she is looking to blindly repeat the old tricks. This time they have added National Food Security Bill, Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, early announcement of seventh Pay commission and many others. In her speech yesterday she mentioned price rise as one of the reason for Congress party’s bad performance in the state elections. This shows that she has not taken off her populist goggles and is not willing to wake up and smell the coffee. Rahul Gandhi as usual was on a different plane. Although some bright mind in his team has managed to educate him that Congress party needs a transformation, the word he was able to catch on to. I really doubt that he understands the meaning of transformation or has given a thought on ‘what transformation’. However, he sounded very confident of being able transform congress in next 6 month!!

The problem is that the Congress is structured in such a fashion around Gandhi Family, that the think tank can’t give a true and fair advice. I don’t see Sonia giving up on her populist goggles or Rahul Gandhi being able to decide on direction for transformation. Even between mother and son there is no agreement on which direction they want to take the party and I doubt they are even discussion that. Congress would fight the 2014 Lok Sabha elections with only ‘non-communal’ and ‘subsidy’ card and hope against hope that it gives Congress the same result like the last time.

One big difference these State elections would make it that Congress would become untouchable. Unlike Congress think tank, rest of the parties’ think tank must have realized by now that there is a massive wave against Congress and corruption and nobody would like to be seen with Congress. Nitish Kumar must be regretting his decision to break away from BJP. There would be considerable pressure on him from his own party to realign with BJP and that would be a good development to watch. Unlike in past when BJP was made untouchable by these parties based on communal plank this time they would not succeed. Congress has been trying to use the communal card specifically against Modi but voters still want to give him a chance. The new generation of voters who are coming out in big numbers do not care about Mandir or Masjid. They care about toilets, schools, hospitals and jobs. Modi understands this very well. After these state election results BJP would be able to get many more allies.

BJP needs to go all out and form alliances especially in states where they have negligible presence like North east and Southern India. BJP ends up fielding less than 400 candidates in a Lok Sabha where 572 seats are there to contest.  The Hindi heartland he can more or less conquer on his own but in south and north east he needs good partners.  Partners would also gain as they would be able to ride on the anti-Congress, anti-corruption and pro-Modi wave. BJP just need to be sure that they have clean partners and should avoid likes of Mayawati, Mulayam, Laloo etc. In Hindi heartland partners need Modi more than Modi needs partners and BJP should not worry going into elections without partners in UP and Bihar. In south and north east it would pay to have alliances upfront. They have to ensure that anti-Congress and anti-corruption votes are not divided like it happened in Delhi. In Hindi heartland it is less likely as parties of Mayawati, Mulayam, Laloo etc are all seen as almost as corrupt as Congress if not more. If BJP top team went about making right alliances, I believe before the Lok Sabha voting day itself it would be clear that BJP is forming the government at Centre.  

One thing BJP needs to guard against is diluting its image when it comes to corruption. They would be temptation to do ‘horse trading’ to form government at Delhi but they should resist it. Anti-congress vote in Delhi got divided just because AAP was seen as a much cleaner party then BJP (and rightly so). If BJP manages to break AAP or Congress candidates they might be able to form government in Delhi State but lose out on making government in the Centre. If they do that they would be seen as a party very similar to Congress which AAP is all the while trying to project with the objective to monopolize on ‘anti-corruption’ & ‘anti-congress’ wave.

AAP had a dream debut but it is just the beginning. People have given them a chance to prove what they are claiming – the new generation of clean & transparent politicians. Right now there is anger against corruption which they have encased, but at the same time people want to see results. Anybody can stand outside and say “cholbena cholbena” like Mamta Banerjee, the challenge it to produce results without getting involved in corruption. People do not want politicians who are so scared of doing the wrong things that they do not do anything. People are equally fed up with ‘policy paralysis’ and everybody is looking forward to the next elections hoping that government will start taking actions then. People are rooting for Modi because he is seen as result oriented person.

AAP might choose to take a high moral stand that they would not get involved in forming government in Delhi because they have not received majority. I feel it would only disillusion their voters. People have not only supported them with votes but also with effort, time and hard earned money. Nobody would like to see that going down the drain and state forced into another election. That’s why developments in Delhi would be interesting and can have a big impact on national elections. If BJP tries to make government using all good and bad tricks they would be seen as a party similar to Congress which they cannot afford to. On the other hand if BJP offers to support AAP and Lokayukta Bill in Delhi and implement the same in other BJP states, BJP can score points with voters. AAP would not like to take BJP’s support as they would not like to share the ‘anti-corruption’ plank with BJP. The challenge in front of AAP is that they might lose their differentiating factor if they allied with BJP. On the other hand if they force the state into re-election then also people might see them as waste of votes, time and money. People will believe that their experiment with AAP has failed and will vote for stability next time. People would be very vary of voting for them in Lok Sabha elections as there they do not have any chances of getting a majority and they do not believe in issue based alignment. The best route for AAP is to form an issue based government at Delhi with BJP, make sure that all major promises like Lokayukta is implemented in first three months itself so that when they stand for Lok Sabha election they are not only seen as an idealistic party but also a result oriented party. This would also give them much needed experience of governance.

 One of the politicians made a very good remark: in couple of months, school admissions would start in Delhi and voters of AAP would be approaching AAP candidates for school admissions and reference. All votes believe what happened in 2G, coal scam, CWG etc. was corruption, but how many of these voters consider taking help of politicians for school admission, gas connection etc. as corruption is for AAP to find out.

One more  evident fact is that people want to know whom they are voting for. In fact it is in Indian DNA that we worship Sachin Tendulkar and his centuries more than India team and its performance. We worship Rajnikanth and his antics more than the quality of the overall movie. All these years India has been voting for ‘Gandhi’ more than the congress party. We like hero worshipping. BJP’s appointment of Modi as Prime Ministerial candidate has helped BJP. It helped BJP in all state where they had clear leader. In Delhi they lost votes to AAP because they took too much time to come up with the Chief Ministerial candidate and there also they had a light weight candidate. On the other hand AAP also had a clear candidate from day 1. Even Sonia Gandhi has realized that and she mentioned that they would announce their Prime Ministerial candidate at ‘appropriate’ time. The problem with congress is that they have nobody who can fill those shoes. Two candidates have ‘Gandhi’ surname but more and more people are not able to see then in the same light as earlier ‘Gandhis’ at the same time they themselves are not willing to commit to a full time job of a PM candidate. Others like Digvijay Singh, Sibal etc do not have any self-respect, which is evident from the senseless comments they make and hence expecting public to respect them is a tall ask. Everybody in Congress is seen as sycophant without their own identity including our PM. Until unless somebody has a spine to stand up and make Gandhi family to smell the coffee it is very difficult for them to come up with a candidate whom they can project as PM candidate for 2014 elections. Rahul Gandhi is the other option after Manmohan Singh but he does not even have spine to take responsibility of failure leave away the leadership responsibility of a party that is facing a big anti-incumbency wave. I am just not able to think whom Sonia Gandhi would select at the ‘appropriate’ time.


Friday, November 29, 2013

How to buy a Life Insurance Policy / Best life insurance policy



Before starting you need to understand your need and how Life Insurance is useful for you.

What is Life Insurance? Life insurance is a cover to provide financial security against your untimely death to people who are dependent on your income.

Please note:
1.       Financial security: Insurance can provide only financial security and cannot save your life or fill the void created in life of your dependents due to your death.

2.       Dependent on your income: The person getting the benefit of insurance should be someone who is dependent on your income (note "dependent on your income" and not "dependent on you") . Your kids and wife who are financially dependent on your income for education, food, housing and other necessities and comforts of life. You will come across idiots who take insurance on life of their minor children or dependent wife, do not ape them.

3.       Untimely death: Insurance is required when sudden unexpected event can impact the normal life of the dependents. In early years of your life when you have limited savings and lot of responsibilities like education of kids etc., life insurance is more important although chances of your death is also remote. When you start approaching your retirement you has enough savings and most of your responsibilities like child education etc. are taken care off and hence there is limited utility of life insurance then, although chances of your death increases substantially. Around your retirement or post retirement you need medical insurance more and not life insurance.

I know everybody knows this but as they say common sense is uncommon. Even when everybody knows this you will come across the following follies by the best of people:

1.       Life insurance saves life: Everybody know that life insurance only compensate in terms of money in case of death but deep down people believe that life insurance cover saves life. And if you see most advertisements would also project that to you. Remember ICICI using ‘sindoor’. Frankly if you die you wife might get enough money to remarry but not your ‘sindoor’.

2.       Life insurance of kids: I know you are laughing that how can someone believe that life insurance policy saves life. Then tell me why people buy life insurance of their kids? God forbid if your kid dies your financial responsibility will only go down. Ask yourself what you would like to do with the money you receive on death of your kid, you will get the answer.

3.       Life insurance of wife: Are you dependent on your wife’s income? If yes, then it makes sense to buy insurance on her life otherwise not. There might be few cases where couple have stretched themselves to buy a house and contracted big EMI which can be paid only if both incomes are intact. In most cases it is not required. Remember if your wife is not there your monthly expenditure might also go down. (Please don’t give an argument that you will have to then hire maids, cook, crèche facility etc. if your wife is not there that would only display your mindset). Again ask yourself what you would like to do with money you receive from life insurance in case of your wife’s death. Of course, there might be ladies who might say why no insurance on my life, is my life not important. Well, tell her insurance cover won’t save her life.

4.       Life insurance for tax benefit: Life insurance premium is money down the drain (at least you hope it’s down the drain). People fool you when they tell you that by taking life insurance you are saving 30% tax. Infact you are putting 100% down the drain. Section 80C provides tax exemption of maximum Rs. 1 lakh and various investments including PF, PPF, child education etc is covered under this limit. Hence, in most cases you would be investing more than 1 lakh in PF, PPF and child education to cover this limit of Rs. 1 Lakh. If you have cash surplus and can afford you should maximize investment in PPF irrespective of tax benefit (I will cover this in separate blog later in details). Investment upto Rs. 100,000 is allowed in PPF and that is enough to take care of Section 80C exemption.
 If you donot have cash surplus to invest in PPF, PF, child education then think whether you can afford life insurance. And in that case either you are not earning enough to be paying taxes or you are spending way beyond your means. Bottom-line: Never take a life insurance for tax planning.

5.       Life insurance is investment: As I mentioned earlier, Life insurance premium is money down the drain (at least you hope it’s down the drain). Do not mix insurance and life insurance. Pure term policy provides the maximum cover at the lowest cost and one should go for that. Tax free bonds, FDs, PPF, VPF etc. all provide better rate of return & security than any ‘life insurance investment scheme’ can ever provide. So if you are paying say Rs. 50,000 per annum under some ‘life insurance cum investment scheme’. I would suggest close that policy, but a term insurance with a premium of around Rs. 12,000 and invest 38,000 in PPF / tax free bonds. I can assure you will get higher cover and higher rate of return in this combination.

Now that concept of what is life insurance and why you need life insurance is clear lets discuss which policy, where, When, how and how much.

WHEN?
When you have dependants: Life insurance is required only when you have dependents. So if you are a bachelor and your parents are not dependent on you it does not make sense to buy a life insurance cover. People will tell you that it makes sense to start insurance policy early as you lock in at lower premium. You will end up sending money down the drain for many more years without any utility. In those years it’s better to invest and full advantage of power of compounding. Anyway due to increased life expectancy, better records, cheaper channels etc. life insurance premium have fallen substantially and if you are having an old policy it might make sense to buy a new policy and surrender the old policy.

WHAT?
Pure term insurance: First of all, as I mentioned earlier go for only “pure term insurance”. Do not mix investment and insurance. If you keep that separate you would not only get better cover but also higher return.
Term of Life insurance: Generally life insurance term should be limited to your working life or till people are dependent on you. Generally people retire at 60 and hence beyond 60 there is no need of life insurance. Beyond 60 your dependent kids should be independent enough. For your dependent wife and yourself you should have enough savings to take care of the retirement years. In fact after retirement, when you are not earning, the premium payment, however small, is a total waste. So do not get lured by insurance companies that offer life insurance up to age of 90. If you are having such a policy, you would be forcing your now independent kids to look forward to your death.
Fine print check: Check for exclusions like terrorist activity, nuclear activity etc. Ensure such exclusions are not there. Considering the neighbors we have and their activity like 26/11 you never know.  Suicide exclusion upto 2 years is a fair clause (Anyway I hope this is not a consideration for you).

HOW?
Online term insurance policy: Buy online term insurance policy as generally it’s cheaper because the insurance company is saving cost on agent commission, channel cost etc. An insurance agent might tell you that claim payment record in these policies is bad, but do not believe them. Anyway unlike medical insurance, car insurance etc., denying life insurance payment is difficult for an insurance company as it’s a definitive event and is not open to interpretations of so called experts. One should go to sites like policy bazaar to compare policies and select one for oneself. Then go to company website to apply. Stick to bigger companies which have been in operations for a while like Bajaj Allianz, HDFC, ICICI, SBI etc. I would advise not to go for aggressive newcomers like Religare, Reliance etc. just to save 200-300 rupee in premium. State run insurance companies are good but generally for online term insurance policy they are not competitive enough. Generally for a Rs. 1 crore policy for a 32 year old male, the premium would be around Rs. 12,000 inclusive of taxes.
Medical test is good: Many insurance companies advertise that ‘medical test not required’. I would suggest it’s better to undergo medical test. If you have anything to hide I would suggest that you spend more on doctors, physicians and gyms. Medical test not only give information to insurance company but also to you and would help you improve your life style. Also when you undergo medical test it becomes very difficult for insurance company to later claim that you have hidden something from them while taking policy. Most of the policy donot provide for this excuse beyond 2 years. It’s important you check that in your policy.

HOW MUCH?
Insured value: You are insuring against loss of income due to your death and you hope by this insurance your dependents won’t have to compromise on their current lifestyle. Hence it’s important for you to know what is your current annual expenditure (cost to maintaining the current lifestyle). As today rate of return on tax free bonds and FDs are around 9%, I would suggest that your cover should be enough to provide annual interest equivalent of your annual lifestyle cost @9%. So if your annual expenditure is say Rs. 12 lakhs, then your term policy should be around Rs. 1.35 crores. If you do not know your annual expenditure (which shows how irresponsible you are in your personal financial management, and I would suggest you calculate it today) and do not even have the will power to calculate it, you can use the thumb rule that your insured value should be around 10 times of your net annual income. So if your net annual income is Rs. 15 lakhs then your insurance cover should be around Rs. 1.50 crores.  In most cases both methods would give similar results, but method 1 is a better method. We have presuming 20% savings on income. If you are doing better than that, good job, keep it up. If you are doing less than that, you need to tighten your belt and seek help of professional financial planner. Remember it’s important that you are not under covered. However, it’s equally important that you are not over covered. If you are over covered not only you are putting extra money down the drain every year, you are also creating threat to your life!

Last but not the least you should properly inform your dependents the life insurance cover you have, where the policy document is kept, what is the process of claiming it etc. You won’t be there to claim it and insurance company would not pay on its own. Do you want your family to live a miserable life after you just because you forgot to tell them where you have kept the policy document?

I hope this was helpful. Feel free to write your comments and ask for clarifications, if required.


Saturday, June 12, 2010

RIL's broadband Bet: Broadband subscriber base in India to increase 8 times in 3 years


In my blog dated 6th June 2005 NEXT REVOLUTION IS BROADBAND, I predicted that Reliance would lead a broadband revolution. In my OPEN LETTER TO MR. ANIL AMBANI dated May 27, 2005, I predicted that data revenue would surpass voice revenue and Reliance Infocomm’s optic fibre infrastructure is a potential gold mine. Mukesh Ambani’s big bang entry into broadband reconfirms – Broadband is the next revolution and RIL will lead that. Fight between Ambani brothers delayed it by 5 years but now the time has come!!
RIL has bid around Rs. 13000 crores for all India broadband spectrum. My back of the envelop calculation suggest that India’s broadband penetration needs to increase 8 fold in the next 3 years for RIL to break even.


Sr. Ambani would again try to create a “Monsoon Hungama” kind of Hungama and this time wireless broadband launch would be a ‘big bang’ launch. It might take him 12 months to source the equipment etc. They might leverage Reliance Retail network to reach the maximum number of customers.
RIL would expect atleast 30% of its revenue to come from corporate clients and RIL is really good at this. For the first 12-18 months they might focus only on corporate clients and high pay capacity circles like Mumbai and Delhi.
The real challenge is to launch broadband in the interiors of India. The wireless technology is a big enabler, however RIL need to get the decentralized customer focused mindset for that, which till date have proved illusive for RIL.
If RIL is able to get it right this time, it would be no less than a revolution. Interiors of India although today connected by mobile phones are still not great in terms of connectivity of roads, rails etc. Unlike many other developed country, India has the advantage of high density of population which brings down the per capita capital cost of broadband and makes the operation very economical. Secondly, like in mobile revolution India again has the opportunity of skipping 2-3 stages of development in broadband infrastructure and directly moves to the latest technology.
India suffers from grave disparity in land prices, salaries, opportunities due to lack of connectivity infrastructure (like rail, air transport, roads etc). Broadband revolution can change all that. It can improve governance, education, information flow. It can also cure some of ‘constrains to growth’ created by lack of transport and other infrastructure. IT/BPO revolution which is limited to cities till today can move to town and villages. The possibilities are endless. Online shopping, gaming, education, services….. Size of the market will increase and it would be easier to target ‘able to pay’ customers in the hinderland who are today uneconomical to reach due to small size.
Sunil Mittal once mentioned that telecom is like packman. It keeps eating various businesses and growing. Broadband is one such packman it will eat many businesses like retail, banking, transportation, entertainment etc. Broadband revolution, if implemented well, has the capability of pushing India into high growth trajectory which will help it bridge the gap between developed and developing nations. All the best Mukeshbhai! We wish you all the success!!

Friday, May 21, 2010

"Double Dip" coming

Alcoholism can't be treated with alcohol similarly the problem of excess debt can't be treated with more sovereign debt. World should prepare to spend couple of painful years in rehab.

All these bailouts can only defer the problem, it can't cure the problem.

Monday, June 01, 2009

Reliance: Staying sane during insane times (excess liquidity times)


The economic slowdown had hit everybody hard and RIL is no exception. Many of its projects like Reliance Retail, SEZ etc have been affected. But if one looks around RIL has managed to control itself really well during the Insane Years of 2005-2009. Not only it managed to focus and complete its major Greenfield projects – KG D6 oil & gas project, Jamnagar 2nd Refinery project, East west pipeline project in time, but it also managed to stay sane and avoid the lure of mega international acquisition unlike its peers. And staying sane in such insane times is no mean achievement. If you don't agree, ask Tata, Birla or Mittal.

Last few years had been really mad years. Factor of production (land, labor & capital) prices had hit the roof and most businesses were unviable at market value of factor of production (not to be confused with historic value). The only way people could make money was by selling out stake or the business to public through IPOs, to private equity firms, to strategic investors or to competitors. The best and the biggest company in India fell for the lure of international acquisition including Tata group, Birla group and also the Mittal group. Ratan Tata had been bold enough to admit in public that they ended up buying Corus, Jaguar & Land Rover at peak prices and it had been a big mistake.

Others like Birla, Suzlon and Mittal had been equally foolhardy and now realize that they made a mistake although they might never admit in public. On the other end of the spectrum had been players like Ranbaxy who managed to exit the business at a very good price. We may keep arguing that selling out completely made sense or not but we all will agree that timing was amazing.

So why did it happen? Do these companies don't have smart people who can advise the management properly? I don't think it's a skill set problem (Finance Problem). I believe it's an individual's interest Vs Company's interest problem (HR Problem). I see a systemic problem here. The system has a built-in bias towards occurrence of the deal. The system incentivizes people who vote for the deal and penalizes who vote against the deal.

Today corporate world is designed in a fashion where you are paid incentives and bonuses for making deals and not for voting against it. Investment bankers make money when deal is done; consultants make money when deal is done. Even the company's in-house managers reap benefits in form of bonus, recognition in the organization, additional responsibility when the deal is done and a sane advisor who advises the management against it is a looser both ways. If the management goes ahead with the deal the one who advised in favor of the deal get the recognition, responsibility of the new company and all associated benefit. In case management decides against it for any reason, nobody gets anything. Hence, advising against the deal is a lose – lose strategy.

From Investment bankers to Media, for everybody occurrence of the deal is beneficial and hence in most cases the deal happens. Again, higher the value of the deal, higher is the commission (for I-bankers, consultants and experts), higher is the interest of the public (for media), and higher is the recognition & responsibility (for in-house managers). And to top it all the excess liquidity in the system, thanks to Mr. Alan Greenspan & company made sure arranging funding for it was never a problem.

So what helped RIL stay sane when others could not resist the temptation? This is despite Mukesh Ambani declaring in two consecutive AGM, the company's ambition for international acquisition and change of strategy towards inorganic growth. It seems there were few in RIL who were ready to take lose-lose strategy for self in the interest of the company. I hope RIL if not rewarded, at least recognized these selfless employees.