Friday, July 30, 2010

Cleartrip- Caveat Emptor.. Caution NOTHING CLEAR ABOUT IT

Greed does not pay. Sadly, I found this to be true whilst attempting to book an airline ticket through an online portal called “”.
I had used this service in the past, but once had an experience of the money having been debited and then the ticket not coming through and since then I had discontinued their services.
Alas, I was lured by an offer of one free ticket for each ticket booked and had a go.
Late evening, around 715 pm or so, I filled out all the details for a Chennai to Pune flight by Kingfisher airlines. It showed a fare of around 3857/-. No sooner had I pressed ‘submit’ (or the equivalent of wanting to conclude the transaction) that I got an SMS saying that my bank account has been debited ( I had used netbanking facility of my banker) with the said amount. I started to smile on having successfully navigated yet another net based transaction (you see, the BSNL internet connectivity is such that it keeps going off, so to complete an online transaction, it is an achievement for me). Alas, my smile froze. A message flashed online that the transaction ‘failed’. I had no clue of what happened. I checked my bank account. Yes, the amount had been debited.
So, I presumed that there is some glitch and called a customer support number of Cleartrip. I was a bit disturbed since I did not have any reference number. The lady who attended to my call resolved that by checking with my email id. Luckily, I was a ‘registered’ user and hence I had logged in with that id. So, it was easy to trace and she gave me a Cleartrip ID number. She said that the ticket was not issued due to some ‘link’ not working!! I tried to probe further, but got no farther.
She told me that my money would be ‘reversed’ immediately and that I could call in half an hour to check about the fate of my ticket etc.,
Alas, after an hour I could not get through in spite of several tries and so I kept it for the next morning.
Next morning, I checked my Cleartrip account to see if any ticket had been issued. None. I checked my bank account to see if the amount was credited. No. Cleartrip was still holding on to the money for a ‘failed’ transaction!
I called them up and once again was given a spin as to why the bloody thing did not work out.
Now, I got on to the website of Kingfisher directly and booked the ticket. Surprise! The fare was lower though they did not give any buy one get one free.
Is Cleartrip justified in doing what it did to me? It is very clear that they did not give me service that they promised. And the fact that in spite of taking my money, they could not deliver is proof that they did not have any valid arrangement with the airline.
Cleartrip is clearly not my cup of tea. Henceforth, it is the airline website or a physical travel agent. Online travel brokers/agents are high risk and we have no control over the transaction. Take care, folks. Cleartrip is out. I have no clue about other such brokers and I have no intention of finding out either.

These kind of bucket shops should learn from the railways website called which I use very regularly for train tickets and in over two years of continuous use, I have no complaints.

Wednesday, July 28, 2010

Mutual Fund Industry- RIP


The regulator seems to be on a single minded mission to pull the shutters on the mutual fund industry, in its zeal to make things easier for the investor. Now, with no margins left to pay the seller, mutual funds will remain an anglicised urban product. Insurance (thanks to the timely action by IRDA) will be the product that will continue to be sold across the length and breadth of the country. Insurance industry will regain its place under the sun. In its battle with the mutual fund industry for a share of the wallet of the public, it found a great ally in the government of India.
The mutual fund industry, alas, missed its first decade by total dependence on the distributor fraternity and instead focusing on the AUM rat race. Of course, AMFI was effectively used to push through regulations that helped protect the big boys.
Most of the mutual fund sponsors also own insurance companies. This prevented the mutual fund industry from actively taking on the insurance industry. The sponsor was threatened when SEBI tried to put brakes on the ULIP sales. Fortunately, IRDA had enough clout with the government to ensure legislative protection and sanctity to push ULIP’s to people at large.
Some cosmetic changes will be made in the ULIP’s, but it is unlikely that the insurance industry will scale down the commissions significantly. The investor will continue to get opportunities to invest in ULIP’s as before. Most Advisors, who were selling both mutual funds and insurance, will focus only on insurance products. Those were not selling insurance before, will invent reasons to structure life savings around insurance.
The clout of the insurance industry can be seen in the fact that LIC has been permitted to issue bonds that would qualify as “Infrastructure Bonds”! Maybe it will also get extended to other private insurers. Why not? If you look at the fact that in 2009-10, ULIP collections amounted to over one lakh crore rupees, the insurance industry is extremely important to keep the financial markets going. The investors in insurance paying a little more commissions do not matter in the importance of things. Millions of insurance agents would not be able to feed their families if the government had not passed the legislation that kept SEBI away from the insurance companies. So, let us not complain about insurance being an inefficient way to invest. As opposed to it, the mutual fund industry collected less than ten thousand crore rupees in 2009-10.
It is the insurance industry that helps bail out stock markets and the governments use it to bail out PSU issues of stocks and debts. The mutual fund industry does not help out the government in times of need. Naturally, it is the insurance industry that needs to be given full protection as it is an important building block in the nation’s finances.
Now, AMFI is apparently getting rebirth as a Self Regulatory Organisation (SRO). Many years ago, this proposal was roundly put to bed by its members. Now, the players have no option but to seize this opportunity and use it to protect the industry. One hopes that it does not succumb to ridiculous proposals like insisting on minimum capital etc. I hope that the smaller mutual funds get to have their say in the new avatar of AMFI. Maybe we will see a change in the board composition, which has been dominated by a few large players on the basis that since they represent a larger AUM base, they represent more investors! I have never seen AMFI being anything other than a trade lobby, so the platform was more used to create entry barriers and nuisance to smaller players.
In this whole context, what about the investor? Well, who gives them a damn! They can buy what their friendly broker tells them. SEBI will try and make mutual funds more and more attractive for them, but will put it out of their reach as mutual funds will no longer be able to spend big money in reaching out to them. If I take the cost of servicing a SIP investor of one thousand rupees a month, the costs far outweigh the money that can be made out of them. The small investor is a drain on the mutual fund industry. Even in the days of entry loads, upfront commissions etc, the focus was on large ticket investors. Now, surely the fund houses have strong financial reasons to ensure that the small investor is kept away from their books.
Of course, for the small investor, the other door of insurance is open. It is being made more transparent and ‘better’. Instead of debiting the first year commission in one go, they will spread it over the ‘life’ of the instrument. And you had to save through ULIP’s only for three years as the minimum. Now it is five years.
Investor protection, RIP.

Monday, July 26, 2010

In Gold we trust...

(This was written for a personal finance magazine)

Gold has always fascinated Indians. India was an amalgam of many princely states, till the British united us finally in 1947. Perhaps, the absence of one currency and the instability as each ruler was overthrown by another is the reason why gold became the Indians’ store of value.
Classic investment reasons for investing in gold include:
i) To beat inflation’
ii) To protect against a weak dollar;
iii) Safe haven in times of economic and political turmoil;
iv) For portfolio diversification; etc
Investing in gold has been a painful journey. I will just give you some dates and prices:
1968 Jan $ 35.20
1969 Jan $ 42.30
1974 Jan $129.19
1979 Jan $227.27
1989 Jan $404.01
1999 Jan $287.07
2009 Jan $858.69
2010 Jan $1117.97
(Above are average prices in US dollars per ounce for the month).
The journey looks smooth, does it not? What I have not told you here is that there was a kind of rush in end 1979 and beginning 1980. In Jan 1980, the price of gold had shot to near $850 an ounce and then there was a painful decline to $280 or so by 1985. Then the price climbed to over $500 in early 1988! By end 1999 it had gone down again to near $260 or so! It is only after 1999, that there has been a steady uptick in gold prices. Of course, the steadily falling Indian rupee in the first six decades of Independent India bumped the returns for the early Indian investor.
So, all those who advocate gold investments will only give you data from 1999 or later. Before that, you could have lost a fortune betting on gold.
So, do not buy the argument that gold is a failsafe or fool proof investment. Timing is all. If you look at it dispassionately, gold as a metal has very limited use. It is only a ‘perceived’ value. The cost of mining gold varies from country to country, but is generally around US $ 300 or so per ounce. So, in today’s markets, the producers of gold are reaping a bumper bonanza. What keeps the price high? It is perhaps a beautifully managed (manipulated?) price by the World Gold Council. Demand and supply are both artificial. Demand in India (the largest private hoarder of gold) is around 700 tonnes or nearly one fifth of world demand.
Now, you do not have to buy physical gold. Buying physical gold is the worst way to invest in gold. If at all one has to buy gold, the best way is to go in through the Gold ETF (Exchange Traded Funds). These trade at real time prices and there is no opaqueness about them. You are saved the bother of worries on quality, storage etc., Never buy jewellery for investments. You lose a fortune in making charges and a high probability of getting cheated on purity.
Even though India is the largest consumer of gold, gold prices are still designated in US dollars. Hence, how our rupee will behave has a great bearing on gold prices. My belief is that over time, if our economy continues to grow at twice or thrice the pace at which the US is growing, there is no reason why the Indian rupee should not keep getting progressively stronger? In fact, this is the biggest risk that gold investment carries. In ten years, the Indian rupee should logically be closer to thirty rupees to the dollar than forty. In such a case, if the gold price stagnates at current levels, as an investment, we end up losing money.
To me, the basic call one has to take is whether you are bullish or bearish on India. If you are bullish on India, relative to the US of A, over the next ten years, then gold cannot be such a great investment. Equities will be a far superior bet. The counter argument to this is that if there is a crisis in US of A, the dollar will collapse and gold prices will shoot through the roof as the world looks to gold as a reserve currency. With the crisis in Europe, it is unlikely that the Euro will ever replace the US dollar, so there is a fair chance that some people will park some of their money in gold. The other factor is that the World Gold Council will at some point not be able to regulate supply and the high prices will lure miners to produce more gold and bring the prices down.
On balance, if there are uncertainties about the global situation, gold may turn out to be a decent investment. This also depends to a great deal on how the World Gold Council controls the supply. If some central bank decides to come and sell a few hundred tonnes of gold, that will create a drop in prices.
In short, whilst gold has given spectacular returns since 1999, there is no guarantee that it will continue to do so. However, in times of fear and uncertainty, gold has its proponents. The other thing is whether you look at investing in gold as just another investment. Most Indians never sell gold if they buy. In such a case, it hardly matters what price you pay and what returns you get. One decent way to go about would be to go ahead with a SIP in gold ETF. The only loss out of that would be the annual management fee and the expenses that the AMC will charge you. A small price to pay as compared to owning physical gold.

Tuesday, July 20, 2010

Insurance and the Art of Lying

Will you walk into my parlour?"
Said the spider to the fly;
"'Tis the prettiest little parlour
That ever you did spy.
The way into my parlour
Is up a winding stair;
And I have many curious things
To show you when you're there."
"Oh, no, no," said the little fly;
"To ask me is in vain;
For who goes up your winding stair
Can ne'er come down again

I keep getting text messages on my phone (I have registered in the “Do Not Call” Registry Long ago) offering me really tempting investment products. Two days ago, I got one, which reads as under:
Sender: +917667396014
“BAJAJ ALLIANZ: DEPOSIT 8800/Yr or 5000/ Half Yr for 3 Yr July 20, Get FREE SPOT 1gm GOLD COIN, Approximately 52800 at 5 Yr, FREE PENSION PLAN, SAVE TAX. CAL: 9840150809”
The arithmetic is very interesting. The return is close to 36% p.a.! Bajaj Allianz must be a fantastic money manager.
Of course, I am a born sceptic. So, I will pass this offer. Alas, no one in the mutual fund industry promises me this return. I do not get any text messages from any mutual fund agent promising me this kind of returns. Other than Bajaj Allianz, I also get similar messages with almost identical numbers citing LIC. The moment I can spare this amount, I am going to invest in a Bajaj Allianz product. In addition, I will get a gold coin! I wonder if I have to pay any tax on it or would I be asked to pay up on account of TDS?
I also wondered at the other fantastic thing. I could either pay 8800 every year or 5000 every half year, with the same end result! So, the investment option has to be fantastic.
With this kind of return assured by Bajaj Allianz, surely other insurance companies cannot be far behind. Then why are they protesting about offering a guarantee of a piddly four and a half percent annual return on pension products? Then a thought struck me. Maybe they want to have a guaranteed rate that is much higher, given that the offer to me was at a handsome thirty six odd percent.
I also think that in my younger days these insurance products were not around at all. Here I have HDFC Standard Life promising me that I can be an independent person in my old age, if they take care of my money. I wonder how they can do so, given that they have been around for less than ten years. But then, I think, it is only an advertisement and if there was anything funny, IRDA would not have permitted it. In my days, LIC would only give guaranteed returns of around eight to nine percent post tax. Now, all of them have moved to much higher numbers, though these kind of text messages (Insurance is the subject matter of solicitation) give me hope that they can give me great returns.
Each day, the phone brings forth text messages that promise me the riches. Stocks that will multiply in price, insurance products that give me usurious returns and many freebies like gold coins etc., I have resisted so far because of age, lack of surplus money to gamble and my innate scepticism. Wonder how many people respond to the messages and enjoy these returns.
It would be nice if any of our readers can tell me if I should give my money to the agent who sent me the text message. And wonder if either Bajaj Allianz or IRDA can confirm the numbers, so that I can also join the elite club that can make so much returns? In case the numbers are not okay, will IRDA step in and do something? I do not expect the insurance company to do anything, because their job is to sell.

Friday, July 16, 2010

Corporate Defaults- Hiding the truth

See this article ( in the Business Standard. It talks about Indian companies that had raised convertibles at fancy prices and are now looking down the barrel. In the first place, at the point of placement itself, the pricing for most did look ridiculous, casting doubts on the analytical abilities and/or integrity of the investing entities.
Now, the hour of reckoning is at hand. It is in the interests of both to keep the charade going. If the investor were to press for repayment, most companies would have to face liquidation proceedings. And in a liquidiation proceeding, India is notoriously slow. The courts and the legal authorities will tend to favour the domestic companies due to the promoters clout. The legal system will stand thoroughly exposed. In India, it is impossible to recover money. If you have to recover any money, you need cooperation of the promoter. Of course, there are other lenders too, but all can be ‘handled’ by the promoters in case of need. We have only to look at the convenient mechanism called “Asset Reconstruction Companies” which have been used as a conduit by the promoters to cheat on debt, legally. The opacity of these ARC’s will get bust soon.
Here, the role of rating agencies comes in to question. Why are they still keeping quiet? It is obvious even to a mathematically challenged person that most of these companies can never hope to repay. Conversion is also not on, given the huge gap between the market price and the strike price. And, a rating should only focus on the assumption that debt has to be repaid. Otherwise, the rating is only a speculation based on a random event of conversion. If there is restructuring of the instrument, it is akin to a default. In such a case, the rating needs to be pushed to the last slot, indicating that the company is in default. That is what honest credit rating is all about.
In fact, each and every company on the list is worth watching. Maybe about ten percent of the companies will be able to generate money to repay. But, if you have to reschedule, you are junk. Alas, the banking system in India will not look at them as such. Some of them are marquee names, with tremendous clout in the banking system. They will be ‘prime’ borrowers. The bankers simply have to keep pumping in more money in to these companies, in the interest of protecting their own balance sheets. In the event of a default, these companies can put the whole banking system in to danger. Perhaps, there lies the answer. These banks will leave no stone unturned to ensure that these companies health status remains unimpaired, even if they have to pump in more money by helping them to pay of the FCCB’s and pump in local loans. The leverage of most of these companies is alarming and they all look like big default candidates.
The credit rating agencies are smug. They know that the system will bail them out, so ratings will not be changed. After all, there is no difference between a BBB and a AAA unless there is a default! Statistically, they will be on par.

Monday, July 12, 2010

Public Speaking- Montek Singh, Karan Thapar etc

Mr Karan Thapar (A TV anchor) hosts a show cloned from "Hard Talk",the no holds barred BBC show.
The show manages to get famous and infamous names and in most cases, the anchor manages to rile the guest with his questioning style rather than the questions itself. Anywas, the show is either hated or liked, with no in betweens.

A recent one with Mr Montek Singh Ahluwalia was fun. Mr Thapar trying to catch the many utterances of the erudite gentleman (who is also a key functionary of the Planning Commission ). Mr Ahluwalia is adept at extricating himself. When questioned about the government's commitment to complete 7500 kms of roads in the current fiscal, Mr Ahluwalia said the commitment is " only to contract 7500 kms of roads".
So, someone is lying. The populace thinks it will get 7500 kms of roads. The planning commission gentleman (who will have no say in the road contracts, thanks to the not so friendly relations with Mr Kamal Nath, who is the minister who will try and lay roads)has made his comment on an area of which he has no clue or control on.
And the show went on with both gentlemen displaying their command of queen's english.
This is the stuff that the intellectual page three talk about in India and the planning commission gentleman lives to write another plan..

Mutual Fun- No longer fun

(This appears in the recent issue of Moneylife Magazine)

Everyone is hammer and tongs at the mutual fund industry. Going by the noise, one would think that the Asset Management Companies make a pile of money. A reading of the annual accounts of the AMC’s will tell you otherwise.
SEBI is akin to the religious zealot who is so focused on the rituals that the object of worship is forgotten. The regulator is on a zealous overdrive to bring ‘transparency’ in to the industry. What the regulator does not realise is that the mutual fund economics in India are pathetic and designed such that the AMC will end up chasing the bulk investor. The small investor has become the ‘holy cow’ for the regulator.
As per SEBI rules, a Fund (or the scheme) is permitted to charge a maximum of 2.50 percent of the Assets Under Management for any scheme. There is a sliding scale where the 2.50 percent drops down to 2 percent depending on the size. This is for equity assets. For debt assets, the scale is lower by one half of a percent.
Let us, keep the number at 2.50 percent for the sake of convenience. 2.50 percent is the maximum permitted. This is to cover the following expenses:
i) Selling commission to the distributor;
ii) Selling expenses;
iii) Expenses on R&T :
iv) Fees to Trustees;
v) Audit fees;
vi) Communication to investors;
vii) Fees to SEBI; and
viii) A management fee to the AMC.
The management fee is typically kept in a range between 0.50 to 1.00 percent of the AUM. From this management fee, the AMC has to meet its entire costs of managing the scheme (salaries, investment management costs, office costs, rents, branch expenses, communication costs, legal expenses etc). There is also a huge burden of ‘compliance’ costs that an AMC bears. All employees are on the payroll of the AMC. I leave it to you to do the numbers.
Do not fall in to the trap of calculating full fees on Liquid Funds and FMP assets. Here the total costs will be limited by competition to between 0.10 percent to 0.50 percent and are more like show piece numbers to display size.
In this context, let me take the case of this strange animal called the ‘small investor’. Let us say he puts in Rs.10,000/- in an equity fund. Out of this, the fund will deduct Rs.250 over a 12 month period as the maximum fees. Of this 250, anything from Rs.100 to Rs.150 will go to the distributor or seller who solicited the amount. So, there is a balance of 100 to 150 to cover expenses and pay management fee! For a 10,000 rupee investor, the mailing costs, transaction processing costs itself would take away anything up to Rs.50/-. These kinds of costs are the same irrespective of the size. Thus, an AMC has no business to actively chase kinds of investors. If they are doing this, I think it is in the hope that at some point there will be so many that they can break even. My feel is that on each incremental ‘small’ investor, an AMC can only lose money, unless he is a ‘direct’ acquisition with zero selling costs, opts for full electronic delivery of reports etc.
In the past, the AMC would charge an entry load of 2% (Rs.200 on the 10,000/-) and pass it to the distributor. Now SEBI has closed that. In addition, SEBI has prohibited AMC’s from paying upfront commissions. This is in fact a ‘restrictive’ trade practice. If the AMC is sticking to the legal limit of expenses, why should SEBI worry? AMC’s will have to fund the upfront from the AMC and when they get the management fees, they will hopefully recoup this. That is what will happen.
Is there a way out of this imbroglio? I think SEBI should stick to the following:
i) No entry loads on ‘direct’ investments by investors;
ii) Entry loads of up to 2 percent on those who come thru an intermediary.
This is the immediate need if the mutual fund industry has to achieve any kind of penetration. LIC was able to get in to small villages and towns only because the agents got their 40 percent commissions on the first year premium and a minimum of 5 percent of subsequent premiums. Mutual funds and Insurance products are things that have to be ‘SOLD” and are not needs for anyone. So, if something has to be sold, someone has to be paid. That is economics.

Saturday, July 10, 2010

Coaching Classes & the IIT's- A commercially convenient co-existence

The Business of IIT Education
July 07, 2010 05:08 PM |
R Balakrishnan

It’s time to push the ‘coaching-class’ industry out of existence

"It is important that students bring a certain ragamuffin, barefoot, irreverence to their studies; they are not here to worship what is known, but to question it."
- J Bronowski, The Ascent of Man

Our education system has been a source of endless debate. We point to a few successful Indians who came out of Indian Institutes of Technology (IITs) and proclaim that our IITs are the best in the world. However, based on personal experience, I can vouch that our education system is in bad shape. Those who hope to get into the hallowed portals of the IITs (a couple of them figure among the top 100 engineering colleges in the world) go through living hell. Around six lakh youngsters take the entrance test. Of these, around 12,000 can get in. This covers all seats, including those in the new additional colleges, caste-based seats, etc. Of course, if you want the course of your choice, you have to finish within the top few hundred! Heartbreak for 99% of the aspirants, as they end up in some lowly college; many cough up huge capitation fees for 'merit' seats!

The educational qualification needed to get into these colleges is passing the 12th standard. So, is it not logical to presume that, in any entrance test for these colleges, the questions should be based on what is taught up to the 12th standard? Instead, students are bombarded with literature, advertisements and hoardings from educational coaching factories which specialise in imparting the skills required to crack the entrance examinations. In fact, cities like Kota (in Rajasthan) have perfected it to a high level. A couple of coaching classes also run schools.

From standard 11 or earlier, aspiring engineers join the factory. School hours are truncated to ensure time availability for the IIT entrance exam coaching. Given that most of the students admitted to these coaching classes (most of them have 'entrance' tests!) have cleared an intellectual hurdle, they do well in the 11th and 12th standard without too much effort. Of course, the 11th standard examination is an 'internal' exam, so it is even easier.

But if one cannot afford to join a 'coaching class' for the IIT entrance exam, getting a seat in one of these institutes is only a remote possibility. What's more, the coaching fees far exceed the fees for the entire engineering course at any of the IITs! These 'factories' do not come cheap. The cost can be anywhere from fifty thousand rupees to a couple of lakhs for a two-year coaching stint. Long hours, stress from peers as well as from others is an integral part of life. Every year, these classes boast of how many students from their 'factory' cleared the entrance tests with high ranks. Many students do not join full-time, but participate in some event or mock competition organised by these classes.

The key to the success of these classes is their faculty. Since they charge high fees, they tend to poach on experienced hands from the IITs at salaries that are multiples of what IITs pay them. In the process, the IITs lose good-quality staff.

Of course, many of the coaching classes have managed to make impressive PowerPoint presentations of their 'business' and raise money at fancy pricing from (ad)venture capitalists. What they present is scalability of their business which, in real life, is not possible. Many classes run because of the individuals manning them. Hence, it is not possible to replicate them on a commercial scale.

Against this backdrop, I like what Kapil Sibal is doing. Hopefully, he is bringing sanctity into the system and doing away with the coaching classes. By giving weightage to the 12th standard exams, he is rightfully pushing the coaching-class industry out of existence. A combination of 12th standard marks combined with an aptitude test focused on basic science/mathematics should suffice as 'entrance' exams for engineering colleges. If Mr Sibal also focuses on improving the infrastructure and the teaching staff emoluments at the IITs, there is no reason for the existence of coaching classes.

Yet, it is debatable whether this will improve the quality of output produced by the IITs. I think it will not make it any worse. In any case, most IIT graduates seem to be taking up an MBA course and not doing anything that their IIT degree equipped them to do. If one looks at the global engineering scene, countries like China, Taiwan, Singapore and Korea are far ahead of us. And the best of the Indian students tend to land up in the USA.

The immediate fallout I can visualise is on the coaching-classes business, which seems headed down. I only hope that Mr Sibal does not leave deliberate room for their ilk to survive. In any case, with the advent of electronic teaching methods, the business of mass education cannot remain profitable for long. Dealing with government schools (which are the customers for many businesses) is neither easy nor straight. Also, accounting profits need not translate into surplus cash flow, looking at the way the education business companies keep raising money.