USING LIFE INSURANCE TO LIVE

Life insurance is a much debated and discussed topic. Most people get pushed in to buying investment products (like endowment or money-back or some such name) as the agent tries to maximise his commission from the annual premium he can extract out of you. In my last column, we had discussed about an insurance company offering a “whole life” policy for a crore of rupees, at an annual premium of just Rs.8600/- for a 25 year old male (be sure to read the fine print for exclusions, inclusions etc).

This is insurance as it ought to be. We want someone to be provided should something happen to the bread winner. When a non-earning spouse or a child passes away, sure there is grief, but there is no financial distress or loss of income. So, the key thing is to ensure that the earning member has a cover that will provide for the dependants in the event of demise (of the earning member).

The policies that provide for payouts only in the event of death can be used in several ways. One is to provide an estate for your dependants. In which case, assuming you have taken the policy at a young age, you will keep changing the names of nominee a couple of times, or leave a will which clearly states that the proceeds of the policy will accrue to the person chosen by you. Remember that a nomination is a mere appointment of a kind of a trustee to collect the proceeds and hand it over to the legal heirs.

There is another fantastic thing that can be done with the whole life policies. Most such policies have payouts either on death or after a particular age (say, eighty).  Today, people may give up having to work for a living, at age sixty or thereabouts. This means that we have to survive for a couple of decades or more, on the basis of our savings and investments made in our working period. Of course, people argue that they will live off their children. This is becoming less and less possible due to changing lifestyles and changes in attitudes. Hence, all of us would like to have our financial freedom.

Here, we have a whole life policy with a payout after eighty or after death. Is there a way where we can enjoy it earlier during our lifetime? Worldwide, it is possible to do so. What we have to do is to “sell” or “assign” the policy to an investor or a lender. He buys it and takes the risk on the longevity of the insured. Let us assume that there is a whole life policy with a payout of a crore of rupees when the insured turns eighty. And let us assume that the annual premium is Rs.40,000/-. Now, the insured, who is seventy, can go and ‘sell’ the policy to the investor at a price. The person who buys the policy, will get the sum of one crore rupees, when the insured turns eighty (ten years to go) or on the death of the insured, should it happen before he turns eighty. So, the investor is betting on a sure fire crore of rupees at the end of the tenth year and his annual outgo will be the premium amount (since he has bought the policy, he will pay the premium to ensure its continuance). Assuming an interest rate of around eight or nine percent per annum, the investor might offer to buy off the policy at an amount of anything between forty and fifty lakh which he will pay the insured, ten years before his eightieth birthday.

This is fantastic for the seventy year old guy, who now has a corpus of money to help him live a better life. At the same time, the investor has virtually got a triple” A” investment. Of course, the investor returns would vary depending on when the event forcing payout happens. For example, if the insured dies at 75 and the payout was at death or 80 (whichever comes first), the investor makes a bumper return.  Here I will banish the morbid thought that the investor will be praying for the early death of the insured.

These are called “TRADED LIFE POLICIES” and are popular in the west. This is also a great investment instrument. We may need to tweek some rules here and there, but there is nothing wrong with this. Such an instrument would give a lot of relief to the insured also.

Such an instrument or a facility is absolutely required in a changing society, where parents do not want be financially dependent on their kids. This is also a great investment instrument.  Of course, today the banks can lend against insurance policies and some bank could actually launch this product. With banks like HDFC associated with life insurance companies, they can easily launch this kind of a product. To start with, they can give loans against policies that have guaranteed payouts when the insured reaches a ‘fixed age’ rather than death. The death part can be left to private enterprise. For the banks, it is risk free lending (the sole risk being the claims paying ability of the insurance company) and for the insured, a way to improve their life.

Amara Raja Batteries- Doing unto investors, what promoters normally do

Amara Raja Batteries Ltd is a listed company, making and selling automotive batteries. It is an Andhra  Pradesh based company (home to Satyam) and the Indian promoters, over time have diluted their holdings to around 20 % and there is a ‘foreign’ promoter who holds 30 %. And the FIIs hold around 17%. The general public seem to hold under 12%. So who holds the balance is anyone’s guess. In the foreign shareholding, there is “Johnson Controls” and American battery manufacturer and who is perhaps a strategic investor. 

Now, the Indian promoter is doing what every other promoter does.

As per this press report (http://www.business-standard.com/article/markets/amara-raja-wants-to-pay-promoter-entity-upfront-for-99-yr-lease-114091800925_1.html ) the promoter seems to first have bought some land adjacent to the factory at some point in time in the past ( visionary ) and is now palming it off to the company for a chunk of cash, with a one sided agreement. No one seems to care a damn. The share price has barely reacted and life goes on.

This stock has been in more than one scandal in the past. I recall something during Ketan Parekh scam days also   (http://www.thehindubusinessline.com/iw/2002/07/21/stories/2002072100010800.htm ).

A company with so much of issues still finds investors. It certainly speaks volumes for the importance an institutional investor gives to governance. They talk about it. Beyond that, they actually seem to love companies that live dangerously. And no one of course gives a damn.

This company, even after being named in a scandal as early as 2001, is finding favour with analysts, investors and the media!. Tells you on your face what they think about corporate governance or integrity.

Amara Raja Batteries Ltd is one of the examples.  Some fund managers I talked to said that if we use such ‘strict’ yardsticks, there will be no stock left to invest in India! So this forms the excuse to put the criteria of ‘corporate governance’ in to the dust bin.

In my career, I have seen more talks and writings on corporate governance than instances of a fund manager rejecting an investment on this ground.

It is really surprising that the stock of this company has barely moved after publication of this news!

 (p.s. I have no long or short or any other interest in this stock. This stock is amongst my ‘not to invest’ bucket list based on its geography)

The wheels of Life in India - Greasing the palms that turn the wheels

Every Indian should read this article.

http://www.moneylife.in/article/ranjit-sinha-is-the-symptom/38759.html

Not because it is a breaking news story. Not because it is a scam that stands exposed. This is a mirror to each one of us. From birth to death, we cannot escape the web of graft that has been laid out for us. Whether this web is broken and totally dismantled, is up to each and every one of us. No one can fight our battles except ourselves.

Caught up in the rat race, we find it convenient to pay tips to ensure that we do not wait and that our things get done. Depending on what we can afford, the tip soon degenerates in to ‘negotiated’ bribes. It becomes far more convenient to buy our way through life than to struggle at each stage. So we ourselves use this. Not one of us can plead ignorance to this. Right from giving a Diwali ‘baksheesh’ to large bribes for school or college admissions, bribes have entered our lives.

Any act of ours that involves interaction with a government servant seems to yield results only when there is a ‘give and take’. Rare are those government servants who do their work for which they are already paid for by the taxpayers (good salaries, unreasonably high holidays, lack of accountability, regular salaries with guaranteed increments, pensions etc etc). In fact I have become so sceptical that when I see a rare honest public servant, I immediately wonder whether my work will get done. The typical government servant’s attitude was explained to me very nicely by one of the persons in a government owned financial institution in New Delhi, in 1978.

“Sirjee, the government pays me salary to come to office. However, the work I do benefits you/your company. Hence you have to remunerate me”.

And there is no shame or guilt in saying this. There is a breed of people who love these jobs that are auctioned by the politicians in power. And they have absolute harassment powers that can threaten our material livelihood. So we use the convenient option.

Legal deterrent in the form of meaningful punishment (minimum jail for ten years plus confiscation of wealth of the person plus his immediate family at the bare minimum) will not happen since the legislators will not cut their own feet.

Can we fight them? Yes and No. Yes, if you do not have a family to feed. Yes if you have so much money that you can wage a legal war. Yes if are not bothered about any of the consequences. Yes if you do not care about your safety and well being.

Is it then a NO for all of us? I think there is a mid way available. Social media is a route available to each one of us. Using that to blow our whistles is good. Let us make enough noise and shame the powers that be in to some action.

Our PM, Modi says that he won’t take bribes and won’t let anyone also take. So bring it to his attention.

Hats off to Sucheta Dalal and Debashish Basu for the fight they are engaged in and the personal sacrifices they have made along the way, to ensure that nothing will compromise their battle for good. 

REIT - Why stocks are BETTER than Real Estate

(This article appeared in Deccan Chronicle, but with a misleading heading- Alas, those are things that a writer cannot have a say in)

Real Estate Investing

Investing money is not easy.  Apart from safety of the money, the other key reason to invest money is to manage inflation. Thus, if we expect inflation to be ten percent per annum, we need to earn at least that much to preserve our buying power.  Every investment idea is an attempt to try and improve on that. And in every investment, one has to also worry about taxation. Taxation is takes a bite out of future buying power. Alas, inflation does not recognise taxation. It is absolute and moral, unlike the immoral taxation which penalises you. And taxation is cruel. You pay taxes and save the tax paid money, which can be again taxed for earning something on it.

In stocks one could do a SIP to overcome the pitfalls of wrong selection and/or timing. Unfortunately, we cannot do this in real estate. REIT, the yet to be born animal, promises a way out, but it is too early to comment on its liquidity and efficacy.  So, in real estate, one is committed to a choice. Once you have plonked your down payment and signed the agreement, you either pay up the entire sum or risk forfeiting all or part of what you have paid.

For most Indians, if you include the house you live in; real estate is very likely to form the chunk of your assets. With our economy in a growth phase for many more years to come, it is unlikely that inflation and rentals will settle down to any predictable levels. One could perhaps take a ten percent call on inflation, but on rentals, I will hesitate to take a call. Hence, owning one home to live kind of becomes an imperative.

If we take the value of houses across time periods, most cities would have given returns in excess of inflation.  Of course, it also depends on what quality of house, precise location, city etc. Variances would be huge. Of course, there were also several ‘hot’ periods in recent memory (1994, 2008-09 etc) where if you had bought a house, the returns would be perhaps lower than inflation. Similarly, in a city like Chennai, you would have got better returns if you bought in the heart of the old city as opposed to the extended city. Each city and each property is unique and there is no single measure of what appreciation the house went through.

However, it is my belief that if you compare stocks to houses, as a universe (if I take the index like the Sensex) of stocks is likely to have given a better return than the house, over long periods. Of course, one can choose specific time periods to prove either way, but as a class, I would rather bet on equities.  Of course, it all depends on the extent of wealth one has and the attitude to life one has. For instance, I may be the kind of person who will buy a second home, so that the rental income becomes a pension for my non-earning years. I may also have a large portion invested in shares. Here, it is not a question of my trying to maximise returns, but of having to give in to my likes and dislikes. Everything in life cannot be measured with numbers.

Whilst measuring our success on real estate investing, we generally forget the time lapse. We like to talk about houses bought ‘long’ ago which have multiplied in value, but when it comes to shares, we say things like “in five years the stock has done nothing”. The problem is most people do not hold stocks long enough. Since it is possible to invest a few hundreds of rupees in stocks and try our hand, we give up easily. If a stock does nothing for five years, we can sell it off. However, if you bought a house and then the value falls, you cannot bring yourself to sell it. You always tend to wait for a better time to sell. Often, we forget that when we buy a house, it comes with associated costs of maintenance and upkeep. For a stock, the only thing could be a demat charges that your service provider will debit you with.

REIT s will soon be hitting the market. By investing in a REIT, you are becoming a ‘landlord’- own property, get tenants, collect rents, maintain property etc. And of course, the rental that comes your way by whatever route is taxable. So do your maths on the returns. And of course you will be promised ‘indicative’ returns on property appreciation, that should be taken with a generous pinch of salt.

PSU Banks- How to steal billions, year after year

The PSU Banks are a great place to deposit one's money and not worry about losing anything. The owner makes sure that frauds happen, capital is depleted and then replenished without fail. And I have faith in the ability of the government of India's printing presses.
I started my formal working life with a nationalised bank. I survived three years there. A couple of years more and I would have been part of the system. Happy to not work and happy with mediocrity. And perhaps a witness ( I do not think I had it in me to be a party to it) to rogue activity around me.
Unions have killed the banks. One year, one increment. What work you do, whether you do or not, is not relevant. Ambition and merit are snuffed out. Ambition to reach the top only if you enjoy the fruits of corruption and the trappings of power.
Have you spotted any IIMs or IIT passed guys spend their life in a PSU Bank? Would love to meet such people.
So there is no point in ranting at their NPAs. They are a poor lot, with no clue about analysis. Forms are filled by the brokers or agents who fix things. For larger well known names, the CEO is just wined and dined or is simply a source to meet targets. And having worked in industry, we have treated PSU banks just as sources for fund based borrowing and nothing more. Inflexibility and their poor decision making ensures that every client with good credentials simply goes to the private sector. Why? Simply because the private sector is more flexible and fast.
PSU Banks are by and large unregulated. If they were, we would not have bad lending. RBI has no clue about banking except issue circulars one after the other on operational issues that they do not understand. Just look at the ATM charges circulars and you will understand. RBI is a wasted entity as far as regulation of banks are concerned.

Bhushan Steel and the friendly bankers

Bhushan Steels is in the news for not so nice reasons. Here is a summary of their quarterly numbers

http://www.moneycontrol.com/financials/bhushansteel/results/quarterly-results/BS14#BS14

Is it not amazing that for a company with a annual turnover of around 10,000 crs, the bankers think it prudent to give loans of the size of Rs.40,000 crores? The company's reported networth is under Rs.10,000 crores. This kind of leverage is normal only for a well managed non banking finance company or a bank. Our PSU Bankers seem to be very generous in lending this magnitude of money! And assuming that the total loans are around Rs.40,000 crores ( the March 2013) balance sheet shows total loans of around Rs.35,000 crores), the quarterly interest numbers are very low, showing that the company is capitalising its interest costs and that the cash losses are far higher than what the last few quarters have shown.
The company has been in the news for various accidents at its main 3 million-tonne-per-year steel plant in Odisha. At least 72 people have died in accidents since the commissioning of the plant in August 2006, according to a state regulator. (http://in.reuters.com/article/2014/08/12/india-bhushan-steel-idINKBN0GC0ZL20140812
The company has been a frequent diluter of its equity through private placements (presumably) and whatever it is planning to build or is under construction is unlikely to generate enough to service the debt.
Below is from the directors' report of FY 2012-13

 Your company is under implementation of 0.35 MTPA capacity Colled
 Rolling cum Electrical Steel (CRNGO) Complex at estimated project cost
 of Rs.1563 crores at Meramandali, Orissa.
 
 In addition to the above, the company shall also be completing the Coke
 oven plant (1.3 MTPA), Coal Washery (2.5 MTPA) and 2 DRI Kilns
 (aggregate capacity of 0.34 MTPA) and 197 MW Power Plant at the
 existing site of Integrated steel plant at Orissa in the current
 financial year i.e. 2013-14.
 
 In order to maintain its leadership position in downstream segment of
 steel industry and to maximize the margins, the company is setting up
 the downstream capacity of 1.8 MTPA, where the company shall come up
 with PLTCM of 1.8 MTPA and CAL of 1 MTPA with the estimated capex of
 Rs.5995 crores at Meramandali, Orissa to fully utilize its additional
 HR capacity. With this the company''s total downstream production
 capacity shall be increased to about 4 MTPA by FY 2017.

The arithmetic of spending close to 30,000 crores seems a bit fuzzy to me, though I am sure that the able PSU bank credit committees and the Boards of their banks would have done a thorough evaluation and that they know everything. 

One more extract from the annual report: 

The Working Capital facilities for Sahibabad, Khopoli and Orissa Plants have been appraised by PNB, the lead Bank, for Rs.11390 crore (Fund  Based limit of Rs.5390 crore and Non Fund Based limit of Rs.6000 crore) for the Financial year 2013-14. 

Clearly, these total up to a full year's sales numbers!! Some evaluation this!!

CREDIT RATING 

I have nothing to say on this, except that the credit ratings are by CARE, a rating agency that was promoted by IDBI. I just note that neither CRISIL nor ICRA have any outstanding credit ratings on this company and to me that says a lot. With half a dozen 'recognised' credit agencies, the bankers happily accept any two rating agency tags. And if neither CRISIL nor ICRA is one of them, I ignore the ratings. 

For the First Time Investor in Equities

This was the Q & A with ET- What is quoted is as per his convenience!

Dear Mr Balakrishnan,

I am an Assistant Editor with ET Wealth (part of ET group), a personal finance newspaper that appears on Mondays. I am based in Delhi. We had earlier exchanged emails when I was doing a story on the malpractices of brokers. I am now working on a do's and don'ts story for first-time stock investors.

 The story

With the markets in a buoyant mood; the euphoria surrounding the formation of a stable government at the centre; the FM coming out with a reasonably reformist Budget; the economy on the cusp of a turnaround; and so on, many first-time investors are currently entering the markets. Some are not taking the mutual fund route but venturing directly into stocks. This story is aimed at them. It will advise that they should first prepare and then invest. It will also advise them against committing some of the common errors that novices tend to do. I have listed a few points. I shall be grateful if you would give me your views on some of them, and add some of your own.

The first time investor always comes at a time when prospective returns from investment are near their lowest. However, I do not believe in timing the markets. The key is to buy a stock at a reasonable value. The first time investor has to come with a clear goal in his mind about his duration, his patience and temperament. Investment is about attitude. Greed or the need for speed are the worst enemies in investing.

At the outset, come in with money that you can afford to lose or will not miss if lost in its entirety. Investing in stocks is a route to wealth creation and not a route to attaining specific goals in a definite time frame. The markets may not cooperate with you when you need the exit.

Of course, many will get lucky with their first punt- make quick money, sell out. Then buy something which keeps sinking and becomes a very long term investment.

The story will be written favouring a long-term, buy-and-hold approach.

1. What should you do by way of preparation before you decide to invest in stocks?

 Understand and realise that you are buying a business. So understand what you are buying. Spend more time in buying stocks than you do spend on buying a shirt or a mobile phone. Learn some basic financials if possible. If you do not invest time in education, then direct investment is not for you. One nice way to start off ANY TIME is to choose some four or five companies you understand or think will last twenty plus years and have a history of over twenty years. Sell something that you understand and which people will need increasingly- This will direct you to companies like HUL, Nestle, Colgate, Glaxo, ITC, HDFC, Gillette etc.

Do a SIP in these stocks for five to ten years.

Or if you can spend time, then take one or more of the following

a. Join an investment club.- discuss, ASK, invite specialists, experts, company executives etc to talk to the group

b. Join a short-term course on stock investing. (not much use- )

c. Read a few classics on stock investing.  (Absolute must- Also on business analysis- for instance, a MUST is to read Competitive Strategy by Michael Porter)

d. Invest in a database (expensive proposition for individuals, but possible for groups). (nos become less important on a daily basis)

e. Read reports from brokerage houses.  (AVOID AT ALL COSTS) do your own homework-

 f- DO NOT WATCH ANY BUSINESS CHANNEL

2. Points to remember when investing

a. Pay attention to company fundamentals.

b. Don't ignore valuations.

c. Have a long-term investment horizon.

d. Know when to exit.

e.  Work out price points where you are happy to buy- Wait for the prices-

3. What are some of the things you should definitely not do when you are still a novice in the stock markets? Some of the common errors that first-timers commit.

a. Avoid IPOs.

b. Avoid F&O trading.

c. Avoid buying and selling on tips.  

d. Don't engage in day trading. 

e.  AVOID margin trading-

f- buy small cap or mid cap companies which you do not understand

g- DO Not buy stocks of companies whose business you cannot understand

h- Find out about the owners, auditors and ask around

i-                    Use google- websites like www.watchoutinvestors.com ; SEBI website etc for bad news on promoters

i)                    DO NOT BUY WHERE PROMOTER HOLDING IS LESS THAN 30%, OR HE HAS PLEDGED HIS SHARES

ii)