Financials

The RBI has defined Capital Account Convertibility (CAC) as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange without any sort of intermediation and regulation. So, what is its use? It is intended for local merchants to easily conduct trans-national business freely without any regulation or control. In case a currency is fully capital account convertible, then anybody from anywhere in the world can invest in any asset in that currency. Thus, a US citizen could buy a flat in India, allow it to appreciate and sell the same and take his contribution as well as the profits out of India to the US freely. Since this is not allowed in India and the government has its own rules and policies to regulate foreign investments, we say that India does not have full CAC. However, a word of warning… CAC also allows the people and companies not only to convert one currency to another, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned. Thus, Indians could convert their rupees into dollars and park it in the US if there was capital account convertibility here. Imagine if a large number of Indians were to do this out of an irrational fear that India might go to war with Pakistan! What would happen then? This would lead to an irrational demand for dollar and would cause a free fall in the value of the Indian Rupee, thereby detrimentally affecting the economy. Something like this happened in the Asian crisis in Thailand where the citizens lost confidence in the Thai Baht leading to a mass sale of the currency and subsequent collapse of the same. This happened because their currency was fully capital account convertible. So, when can India expect to have full Capital Account Convertibility? For full CAC, the economy should be extremely stable so that its citizens are never made to feel insecure about their economy and drive them into irrationally converting their currencies and investing them abroad. Under the Tarapore Committee recommendations, this was possible only when the following conditions were satisfied: The average rate of inflation should vary between 3% to 5% during the debt-servicing time. Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000. Convertible Account Convertibility in India is regulated as follows… All types of liquid capital assets must be able to be feely exchanged, between any two nations, with standardized exchange rates. The amounts must be a significant amount (in excess of $500,000). Capital inflows should be invested in semi-liquid assets, to prevent churning and excessive outflow. Institutional investors should not use CAC to manipulate fiscal policy or exchange rates. Excessive inflows and outflows should be buffered by national banks to provide collateral. In India… According to the RBI, as the Indian rupee is not fully convertible, it is not possible to go in for dual listing of shares which allows people to buy shares in the stock exchanges of one country and sell in the bourses of another country. Why? Because under dual listing, an African citizen could buy the stock in Africa and sell it in India, collect the rupees, convert it into ‘Rand’ and take them into the African economy – all this without any controls, permissions and regulations. This unhindered capital flow is not currently favored by the Indian Govt. To Sum Up What: Capital Account Convertibility is concerned about the ownership changes in domestic or foreign financial assets and liabilities. Why: This is so that local merchants can easily conduct trans-national business without falling short of foreign currency exchanges to handle small transactions. How: It allows people and companies not only to convert one currency to the other, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned.

The government of India has launched a new app known as Mera Bin Mera Adhikaar, an app which can be used on both Android as well as iOS-based devices. This scheme is to get towards creating awareness about the importance of receiving invoices for B to C transactions Fostering a more transparent economy. Under this scheme, consumers are offered incentive to demand bills for their purchases. This price varies from 10,000 Rs to one crore rupees. These prices will be awarded through monthly and quarterly draws, encouraging the individuals to win substantial cash rewards by simply requesting legitimate invoices during the transactions. The minimum purchase value for an invoice to be considered for lucky draw is rupees 200 and a person can upload maximum 25 invoices in a month. The invoice uploaded on the app should have GSTIN of the seller, invoice number, amount paid and tax amount. Only B to C invoices is acceptable, which are issued or received by an end user B2B bills are not acceptable. This game is open to all the invoices issued by the suppliers registered under the goods and service tax. Consumers from the initial batch of six states and Union territories like Assam, Gujarat, Haryana Puducherry Daman & Diu and Dadra and Nagar Haveli are the first beneficiaries for this innovative program.

Suraj and Vipin travel together to work by train every day. As a usual morning practice, Vipin was reading a business paper when he came across the term \’Current Account Deficit\’. He wondered what it meant and asked Suraj to explain. Suraj tells him that if he answers a few questions, the meaning of the term Current Account Deficit will get clear. Suraj asks Vipin to name the sources of his income. Vipin identifies sources of income as Salary, Interest income from Fixed Deposits and Dividends from Mutual Funds. On hearing this, Suraj says, “Ok. But how about festival grants and birthday gifts received in cash?” Vipin agrees “Yes, sometimes”. Suraj then asks Vipin to list his expenses? On hearing this Vipin promptly responds, “Monthly house expenses, Children\’s school fees, Birthdays & Anniversary, occasional shopping and medical expenses.” Suraj then explains, “Now assume your expenses exceed your income this month. Then what will you do?” Vipin after a pause says, “Oh… then I will have to borrow money from someone.” Suraj continues to say, “Exactly. When your expenses exceed income, it is known as \’Deficit\’. And then you become indebted to the lender who lends you money.” “Ok. That is easy to understand.” says Vipin. Suraj continues explaining, “Similarly, Current Account for a country is expressed as the difference between the value of EXPORT of goods and services and the value of IMPORT of goods and services. In this context exports are “earnings” while imports are like “expenses”. A deficit then means that the “expenses” of the country are more than the income. In other words, the country is importing more goods and services than it is exporting. Current account also includes net income (such as interest and dividends from Capital Inflows or Outflows) and transfers from abroad (such as Workers\’ Remittances, Foreign Donations, Aids & Grants and Official Assistance), which are usually a small fraction of the total. A deficit implies that India is a net debtor to the world. The formula of the Current Account Balance (CAB) CAB = X – M + NI + NCT X          =          Exports of goods and services M         =          Imports of goods and services NI        =          Net income abroad    [Salaries paid or received, credit / debit of income from FII & FDI etc.] NCT     =          Net current transfers [Workers\’ Remittances(unilateral), Donations,Aids & Grants, Official Assistance and Pensions etc.]

Recession is the best time for some people to go on a vacation. They assume that by the time they come back, things will be back to normal. But for the saviors of the world economy, recession is the time to work overtime. They test various methods to get the economy back on its feet. One of the methods used is that of providing a fiscal stimulus package. Fiscal stimulus package? How can it stop recession? Well, you may have heard the name of John Maynard Keynes, the well-known British economist of the 20th century. The whole idea of fiscal stimulus is based on his analysis of factors that cause recession. During the Great US Depression of the 1930s, he wrote his most important work, The General Theory of Employment, Interest, and Money. What was it all about? Keynes focused his analysis on factors affecting output and growth in an economy. He asked, what decides the output in an economy? He said that output in any economy is decided by people who spend money. People like you and me who earn money with one hand and spend it with the other ultimately decide how much goods and services are going to be produced in our economy. If the demand of a product is less, then by the simple logic of demand and supply, the price of that product should fall. But it is difficult for firms to vary the price of their products frequently. For example, your baker may have to change the price of his bread every day if he goes strictly by demand and supply. Changing the price of goods every day is not a very happy way of doing business. Neither the baker nor his customers would be happy if prices just kept on changing forever. What options, then, does the baker have? He can let the price of the bread remain the same and reduce his production in response to lower demand. He can then meet the demand at the preset price by matching his supply with the demand. This is how demand affects output and growth in an economy. How can we use this understanding to fight recession? As per Keynesian analysis, the problem of recession is not due to lack of productive capacity in the economy. The factories have not lost their ability to produce goods, the real problem is due to insufficient spending to support the normal level of production. So, the solution is obvious. If the fall in demand leads to a fall in production, then we need to do something that can push up demand. What can one do about that? We have two options. The first option, as recommended by Keynes, is to increase Government spending, which works as the most effective way of increasing the aggregate demand of goods and services. The second option is to increase the disposable income in the hands of people by cutting taxes. Put money in the hands of people and even the most pessimistic person starts making new plans. It is believed that people will use part of their extra income on consuming extra goods and services. This creates what is known as a multiplier effect. You buy the bread of the baker, your baker in turn buys milk, and the milkman buys something else — in this manner, the game of passing the penny keeps going. Fiscal stimulus works as an instant source of energy. However, the timing of a fiscal stimulus and its size is most crucial for its success. To Sum Up What: Fiscal stimulus can be used as a tool for fighting recession. How: Increase in government spending coupled with tax cuts can lead to increase in aggregate demand and growth in the economy. Who: John Maynard Keynes, the well-known British economist, was a prominent advocate of the use of fiscal stimulus.

Let us imagine there is a “bhelpuri Wala” who has a stall in a famous marketplace. He has been in this business for a long time and has quite a reputation. He sells “Bhel” under the brand “Crispy Snacks.” With time his business starts growing. He soon has money to stock other products. So, he introduces Sev Puri, Dahi Puri, Chaat etc. under the “Crispy Snacks” banner. The addition of new products gives further impetus to his business. This kind of growth is what we typically call, “Organic” growth. It is growth that comes from within the same business. As time goes by and his business grows further, he starts accumulating a lot of money. With all the money at his disposal, he gets more ambitious and wants to invest the money in his business to make it grow even faster. But he realizes that even if he invests the money, it would not be possible to grow the business within a short span. So, he starts to think of another approach to attain quick growth. He hits upon another idea. He purchases four new snack shops in the same area lock stock and barrel and brings them all under the “Crispy Snacks” banner. Such growth which can be purchased, and which is essentially from the outside is known as “inorganic” growth.

Two friends A and B were sitting under a tree and engrossed in some discussion. They had a problem on hand. A’s father had agreed to pay him Rs 1 Cr. to help him settle in life But B’s father had made another arrangement. Not sure of B’s maturity, he was promised Rs 1.2 Cr after 3 years. B was showing off his offer to A saying that his father had given a much better deal. However, A not ready to give up argued that his deal was better because he was getting paid immediately. Now this argument went on for several hours till it was evening. However, this problem was just not getting resolved. This argument was taking place just in front of my office. Seeing these guys’ argument stretch across the entire day, I got curious and walked up to them to understand their problem. When they explained their positions, I offered to intervene provided they stopped their argument. I told them that in order to compare their situations it would be necessary to find out the net present value of the Rs 1.2 Cr that B had been promised after 3 years. Here, it is important to understand that the purchasing power of money reduces almost every day due to the rise in price of goods and services due to inflation. Therefore, the value of Rs 1.2 Crores after 3 years needs to be discounted by an assumed rate of inflation. Let us say the rate of inflation we assume is 8%per annum! The formula for calculating the net present value or NPV = Amount / (1+R) ^n where Amount is the Rs 1.2 Cr that B would get after 3 years. “R” is the rate of assumed inflation and “n” stands for a 3-year period. So, using the formula we get NPV = 1.2/ (1+.08) ^3 =  1.2/ (1.08) ^3 = Rs 95 lakhs Thus, I told B that the net present value of the money promised to him is Rs. 95 lakhs and hence it less than what A is receiving. I thus told them that one should simply not get blindly excited by the amount being offered in the future. Inflation is our constant companion and hence, it is imperative to calculate the present value of all future cash flows for comparison.

Quality at Reasonable Price, is investing in well-managed businesses that exhibit superior returns, generate strong cash flow and are available at attractive valuations. QARP investors, think in terms of economic value, which a business can create by delivering growth with superior returns. Quality at Reasonable Price ensures you invest in quality companies. Buying quality stocks at a reasonable price reduces the chances and extent of a fall in your net worth and thereby dramatically increase your chances of staying invested. Wealth is the natural outcome of staying invested and compounding growth of your investment. QARP can be based on the careful consideration of both investment risk (quality) and expected returns (price). This produce a portfolio that is style unaware and can include both value and growth, depending on the risk / return. Generally, investment is done in high quality companies, particularly those with suitable dividends which are available at reasonable price. This leads to improve long-term investor returns, while also providing downside protection in adverse markets.

Growth at a reasonable price (GARP) is an equity investment strategy that combines growth and value investing attributes. It is a fundamental driven investment strategy that balances pure growth and pure valuation, as the former tends to invest in high-growth, yet expensive stocks, while the latter may take a long-term investment to pay off. GARP investors are looking for a stock that is trading for slightly less than its estimated value that also has earnings growth potential. GARP investors do not necessarily stick to specific ratios or valuation metrics to help them select stocks. GARP investors usually do follow price/earnings (P/E = current share price/earnings per share) valuations in order to find investments that have been slightly discounted by the market. For instance, if XYZ Co., is currently trading at Rs.200 and its forecast earnings per share is Rs.12.5, the stock is trading at 16x its earnings. Depending on the industry, this P/E ratio could be high or low. A GARP investor would compare XYZ’s multiple to the multiples of other companies operating in the same industry. Typically, a P/E ratio in the 10x-20x range is reasonable for a GARP investor. Higher P/E multiples tend to indicate that the business is overvalued. GARP investors also look for low price/book ratios (P/B = current share price/book value per share) and a PEG ratio of less than 1 (PEG = P/E ratio/projected growth in earnings). While the criteria used to identify a quality company can differ, some shared attributes typically include Sustainable business model Sustainable business model and a strong competitive advantage are better positioned to maintain their market position and generate consistent profits over time. Consistent earnings growth Investors are typically more attracted to companies that have a track record of consistent earnings growth, as this is indicative of the company’s ability to sustain its growth in the future. Strong financials Companies that possess a robust financial position, characterised by a low level of debt, a healthy balance sheet, and strong cash flow, are typically regarded as being of higher quality when compared to those with weak financials. Management quality Companies with competent management team that have a proven track record of making sound business decisions are generally considered to be of higher quality. Since, GARP strategy is a hybrid solution for growth and value stock-picking, a GARP investor will experience a combination of returns.  For instance, a value investor will do better when markets are falling, while a growth investor will do best as markets rise. A GARP investor will be somewhere in the middle.

Simply speaking, the Price-to-book ratio (i.e., P/B ratio) is the ratio of Price of a stock to that of the value of its tangible assets and is used to compare a stock\’s market value to its book value. Book value is an accounting term denoting the tangible value of the company. It is the total tangible value made up of the assets of the company. Intangibles like “brand” name and “goodwill” are not a part of the book value. It is calculated as: P/B Ratio        =                                  Stock Price                                     Total Assets – Intangible Assets and Liabilities Therefore… What this means is that the lower the P/B, the better the value. A lower P/B ratio could mean the price that the market is quoting does not justify the current value of the assets of the company that it presently holds. One must remember that people pay a price of a stock not only based on its current assets but also based on future prospects of the company or industry in which it operates. Secondly… The value of intangibles such as goodwill, brand name, management team etc. can be considerable and stock buyers pay quite a premium for such intangibles. Hence, if the intangibles are valuable or if people believe that the company has good prospects in the future, they normally would be willing to pay a much higher price as compared with the value of its current assets. Hence… Despite positive outlook for the industry, if the P/B of the company is quoting low, it calls for more introspection about the company. Something could be fundamentally wrong in the company for the market to be quoting a low price. Perhaps the management is unstable or there is a leadership problem or there could be underlying labour problems in the company or any other factor that perhaps cannot be easily determined. But how is it useful to you & me? This ratio guards you against paying a very high price for a company because it compares the price to what you could recover if the company were to suddenly close down. Hence, while paying a price for a stock one should keep in mind its tangible and intangible assets on one hand and the prospects of both the company as well as the industry on the other hand. As with most ratios, it varies a fair amount by industry. For example… In the telecom sector, this ratio can be expected to be high in keeping with the bright prospects of the industry. Further to this, if the company is a leader in the industry, like Reliance Jio, the market will be able to sustain a high P/B ratio. This is one reason why the stock price of companies like Reliance Jio is high as compared to its book value. Therefore… A higher P/B ratio implies that investors expect management to create more value from a given set of assets, all else being equal. P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.  To Sum Up What: The Price-to-book ratio (i.e., P/B ratio) is used to compare a stock\’s market value to its book value. How: It is calculated by dividing the current closing price of the stock by the latest quarter\’s book value per share. Why: This ratio guards you against paying a very high price for a company because it compares the price to what you could recover if the company were to suddenly close down.

The history of automated payments in India started with Electronic Clearing Service (ECS). ECS was a revolution when it was introduced, and it was able to replace a lot of manual work, especially in salary and pension disbursements. As demand increased, ECS became inadequate to meet the needs. So, then NACH (National Automated Clearing House) was introduced. NACH payment refers to the automatic debit of funds from one bank account and credit to another bank account without manual intervention. You can avail the service by filling in the NACH mandate form. NACH is faster, easier, and entirely online. NPCI National Payments corporation of India created NACH to make periodic payments easier. Banks, corporates, companies, governments, and even mutual fund houses and brokers can make use of NACH to make handling payments easier. Once you sign the NACH mandate and the same is presented to the bank, payments will be automatically deducted from your account every month. For example, if you start an SIP with any Mutual Fund, you will have fixed monthly instalments on a fixed date, so the amount will be automatically debited every month on a fixed date. Your effort is limited to keeping the fixed amount so that the bank can remit in time. As far as the bank is concerned, the process is automatic until the end of the NACH period. NACH payment mandate gives an entity the right to withdraw a certain amount of money from your account till the date it\’s cancelled. This enables the automatic payments that were mentioned above. You can cancel or modify the NACH mandate. It has to be noted that the bank take time to honour your request. Charges related to NACH may vary for different Banks. If a NACH mandate or a payment request is failed due to insufficient funds, the bank may charge a penalty for the same. NACH is one of the most helpful payment tools that save corporates and individuals time and money. Ensure you read your NACH mandate carefully before signing to ensure the details are correct.