Economic Moat……

The moat is the sustainable , competitive advantage that protects a company and allows it to earn high profits and shield its market share thus staying ahead of its rivals over a prolonged period.

The companies with wide economic moats are not only able to survive over long periods but also consistently earn high profits. It also offer better revenue visibility and ceratainity of future cash flows.

How moats are created

1)      Cost Advantage :  Successful companies often make products that are similar to those of competitors. What gives them the edge is lower cost of production that allows them to price their products better or enjoy better margins. These could be due to economies of scale , cheaper sourcing of raw material or backward integration and lower variable costs.

2)      Switching costs: Some companies make products that makes it difficult for customers to switch allegiance to a competitors products.

3)      Brand power : Sustainable moats are created when the company builds a strong brand and products with superior brand identity.

4)      Technological Advantage :  The tech edge can pave the way for competitive advantage.

5)      Entry Barriers : Sometimes companies operate in an environment with strong entry barrier for others. They can remove competition with exclusive licenses and patents or if they operate in a highly regulated arena.

Unravelling the mystery behind Tax Havens……..

 

Today once again Anna Hazare did what he does best. Sat on a fast for a national cause.  Just few days back  we had seen brouhaha over Baba Ramdev fast. They both are crusaders representing civil society fighting for a common cause “ FIGHT AGAINST CORRUPTION “ . Their movement also focuses on bringing black money back stashed away in Tax havens.  Today words like “Tax Havens” , “Hawala” , “Black money” are making the headlines everyday. People are inquisitive to know more about these words. This posts will try to clear some of their doubts.

India with a weak  legal structure and not very vigilant regulatory agencies people with unaccounted wealth find it easy to hoodwink the government and park their money in safer places or tax havens. These tax havens are Cayman , British virgin Islands , Bahamas or Jersey. The advantages these places offer  is that it offer nil or nominal taxes , lack of effective exchange of tax information with foreign tax authorities or lack of transparency in the operation of legislative, legal or administrative provisions.

Wealthy Indians normally take this route to stash their money in these tax havens behind an umbrella of trusts, shell companies and bank accounts. A trust is like a mother entity under which there is a company. In all tax havens there are professionals who lend their names as directors of the company. Indian laws do not allow citizens from setting up a trusts abroad , non residents who could be family members , friends or professionals are used to form the trust and act as trustees. But there is no restriction on Indians to become beneficiaries of trusts in faraway island. These beneficiaries are the main persons who control from behind. The law permits an Indian to act as a trust protector whose job is to advise the trustees. Mostly trusted chartered accountants involved in tax planning for years step in as protectors. They set up trusts , carry out the paperwork , visit tax havens , appoint the directors and govern the money flow. The company under the trust holds the money in its name in an account with the tax haven bank. The fund credited to company’s account may be a deal kick back or generated through fake trade transactions. The company and the trust are conduits through which this money reaches its beneficiaries. When a beneficiary needs money company announces a dividend to the trust. The trustee in consultation with protector decides the quantum to be passed on to the beneficiary. These trusts are called discretionary trusts and the money to be passed to beneficiary is left to the discretion of the trustee. A beneficiary in india receiving money from an offshore trust cannot be questioned from where and how he got the money as long as the tax is paid. But tax can be evaded if the trusts decides to hold the money back till the beneficiary becomes non resident. Then the person can bring the money back to india as capital. With changes in law trusts becomes less attractive. Whatever the money received by beneficiary tax will be applicable on it.

New ways are devised to transfer the money to beneficiary. One such method is to form a firm in dubai free trade zone and move the money from the tax haven bank account or a swiss bank to the account the new company opens with the dubai bank. When it comes to wealth management dubai banks don’t ask too many silly questions on the money source. It’s a way to legalise the money.

With different countries entering into treaties with different swiss banks tax evaders are wary of their names being disclosed hence swiss banks are losing their charm. But evaders have no other option but to accept the simple transferring mechanism of swiss banks which still makes swiss banks attractive. Swiss bank accounts are easy to handle. Hawala networks can be used to receive the money at the client’s doorstep. Bribe money and undisclosed cash can be remitted to a swiss bank account by getting in touch with the local hawala operator . All the account holder does is to make an international call to his relationship manager at the swiss bank and instructs the person to collect from the Mumbai hawala operator agent in zurich. The customer uses a PCO instead of home or office phones to make such calls while swiss banks use voice identification systems to make sure that the caller is indeed their customer.

Stock Split………

 

Stock split is a corporate action which increases the number of outstanding shares in the market  and thus reducing the price of shares.

Example : Stock is trading at $40 and no. of outstanding shares  is 10 million shares.

2 for 1 stock split : stock price will become $20 and no. of outstanding shares will become 20 million shares.

3 for 2 stock split : stock price will become (2/3)*40=$26.6 and outstanding shares will become 15 million.

Advantages : If the price of the share is increasing continuously then it shows that company is doing well but the stock itself became unaffordable to buy for ordinary investors. After stock split investors can easily purchase.

It also increases liquidity of the stock. No. of outstanding shares in the market will increase and more buy and sell will take place.

Quantitative Easing……..

 

Central banks cut rates to stimulate the growing economy so that spending increases once the borrowers starts borrowing . In developed world interest rates are almost zero hence in that scenario to stimulate the economy central bank pump up the money in the economy called quantitative easing.

HOW THIS IS DONE:

Central banks expand their balance sheets by buying government securities or other securities from the market and financial institutions. This increases money supply by flooding financial institutions with capital in an effort to increase lending and liquidity.

HOW DOES IT WORK:

At any time there is fixed amount of currency chasing products and services available in the economy. The objective is to bring more money into the system and increase consumption. The objective is to give more money in the hands of financial institutions to increase lending.

HOW DOES IT HELP:

The flood of cheap money causes asset( shares and real estate ) prices to rise. The notional high wealth together with cheap and easy credit encourages people to spend. It also helps devalue the currency encouraging exports further and increasing the level of economic activity. It also increased demand thus increasing production and creates  more jobs.

IMPACT OF ANOTHER QE:

As money flows from developed economies into emerging economies and fuel asset bubbles and inflation by perking up commodity prices.

Demystifying The Budget Process

 

 

Demystifying  Budget Process 

With the budget round the corner  and expectations seem to be very high from the Finance Minister to catapult the country again on the high growth trajectory. With the budget aiming to be focussing on fiscal consolidation I must try to simplify the process of budget preparation for my readers.

Through the budget , the government of the day seeks parliaments permission to collect funds  by way of taxes , duties , borrowings and so on. These funds are used with the approval of parliament to meet expenses.

How the Budget is passed ?

1)      Presentation

• By convention since 1999 budget is being presented at 11 a.m. on the last working day of February.
• Budget session begins with an address by the president . Finance minister presents the budget in the Lok Sabha.
• The budget speech of FM has two parts. Part A deals with the general economic survey  of the country and policy statements while Part B contains taxation proposals.
• The ‘Annual Financial Statements’ is laid on the table of Rajya Sabha after the FM’s speech. 

2)      Discussion

• No discussion follows immediately after the budget is presented. A few days later Lok Sabha discusses for 2-3 days.
• The FM makes a reply at the end of the discussion.
• A ‘vote on account’ for expenditure for the next two months of ensuing financial year is obtained from Parliament. The House is adjourned for fixed period.
• During this period , the demand for grants are considered by relevant standing committees.

3)      Vote

• The standing committee reports are presented in the house. The speaker puts all the outstanding demands to the vote of the house. This device is known as guillotine.
• The Lok Sabha has the power to approve or refuse any demand.
• After voting on demands for grants , govt. Introduces the Appropriation Bill which is intended to give authority to govt to incur expenditure.  

The Budget Process 

1)      Budget Circular

In September , the Budget division of the Department of Economic Affairs issues a budget circular to all the union ministries , states , UT’s, autonomous bodies and departments and the three arms of the defence forces for preparing budget estimates for the next financial year. 

2)      Prebudget Meetings 

All Union Administrative Ministries:

After ministries and departments send in their demands , extensive consultations takes place between union ministries and Department of Expenditure of the Finance Ministry are held to arrive at a final budget for each of them. 

Interest Groups :

The Department of Economic Affairs and Department of revenue meet with stakeholders such as farmers , labour unions , business , FIIs , economists  and civil society groups. 

State Governments:

Demands of the state governments are send to the concerned finance ministry departments for evaluation. 

3)      Once the prebudget meetings are over , a final call on the tax proposals is taken by the finance minister. The proposal is discussed with the Prime Minister before the budget is frozen. 

Constitutional Requirement : The President is constitutionally obliged under Article 112 to have the annual Financial Statement of the ensuing financial year laid before parliament. Finance Minister  is responsible for preparing it. 

Who is responsible for Budget : The Finance Minister prepares the Union Budget and budget for Union Territories. The Ministry Of Finance has the overall responsibility for framing the budget. 

State Organs Involved:

Planning commission sets overall target for the ministries. 

CAG keeps a check on the accounts. 

Administrative Ministries: State their plan priorities. 

 

Entrepreneur……Different stages of Funding

 

 

 

India is right now swept by entrepreneurship boom. With every student passing out from college wants to start a business of his  own. What drives him is his passion or opportunity in something. It’s easy to dream , it’s little bit difficult to plan but it’s difficult to start . Planning the finances at various stages of business seems to be biggest impediment for any entrepreneur to become successful.

Below i am discussing some of the funding options at different stages of business.

AT THE BEGINNING

(A)    SEED FUND : An entrepreneur has to put all his savings and debt from his family and friends.

(B)   ANGEL FUNDING : Angel funding plays the important role in funding your business and also provides an expert advice. It plays an important role in the first two years  once your business is running from the seed funding. They provides funding from 10 lakh to 5crore.

GROWTH STAGE

(A)   VENTURE CAPITAL FUND : A company needs venture capital when the company has generated revenue but there is still a lot of scope for growth. They will provide financing in return for equity. They provide funding from 1 crore to 200 crore in the initial stages and in the later stages upto 1200 crore.

(B)   PRIVATE EQUITY FUND:  It enters into a scene when the business is making profits and is looking for expansion. Private equity refers to a broad term that refers to non public ownership equity securities that are not listed on public exchanges. It encompasses both early stage (venture capital ) and later stage investing ( buyouts and expansion). The funding can range from 25 crore to 1200 crore.

EXIT ROUTE

IPO/SALE : When the promoters of a private company wants to sell shares to the public for the first time to raise capital the y have to come up with IPO. VC’s can exit the company at the profit making stage.