An IPO wave in India

What is an IPO?

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded

Why IPO?

An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up. The financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.

The Risk of Investing in an IPO

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data to use to analyze the company. Also, most IPOs are for companies that are going through a transitory growth period, which means that they are subject to additional uncertainty regarding their future values.

List of companies in India which successfully issued shares through IPO in India (2016) 

Source: investopedia.com, chittorgarh.com

Reporting F&O trading in your income tax return

(F&O: Future and Options)

As per Indian tax laws, incomes are reported under five heads—salary, house property, capital gains, business and profession and other sources (any residual income that cannot be classified in other heads).

Many people get confused when they have more than one type of dealing in the stock market. Some do intra-day stock transactions along with F&O trades. Some may hold stocks as long-term investments and also invest in mutual funds. In such a situation, you should calculate your business income from all of these separately.

Income from F&O deals is almost always treated as business income. That may come as a surprise if you are salaried and have never run a business. Taxpayers who have business income have to file ITR-4

Businesses may be speculative or non-speculative, and the tax treatment is different. The income tax Act says that F&O trade is considered as a non-speculative business. Intra-day stock trades are treated as a speculative business. Since F&O trades are considered a business, tax rules of capital gains rules do not apply

Reporting F&O trade as a business means:

*You can claim expenses from your business income

*As a result you may earn a profit or incur a loss

*Losses must be reported and losses have tax benefits

*Your total income (from all five heads) continues to be taxed at slab rates.

The first hurdle is to prepare your business’s profit and loss details. To calculate gross income from F&O trades, take your transaction statement for the whole year. Look at your receipts; these may be a positive or a negative value. Sum these up for the whole year. Expenses can be deducted from your gross income. Some expenses that you can deduct include rent or maintenance expenses of premises used for the business; mobile or telephone; internet charges; demat account charges; broker commission; depreciation on laptop used for trading; and any other expense directly related to your work.

Business income is calculated for the financial year for which you are filing your return. You will also have to prepare a balance sheet which is reported in ITR-4. It is basically a statement of your assets and liabilities.

Some may hold stocks as long-term investments and also invest in mutual funds. In such a situation, you should calculate your business income from all of these separately. F&O trade income and intra-day stock trading will have separate expenses. Don’t worry if you have consolidated expenses; for example, you use the same premises to trade in both, or use a single phone. Simply bifurcate these expenses on a reasonable basis. You can allocate them using a ratio based on time spent.

 Losses from F&O can be set off from income from other heads (except salary income). Say, your loss from F&O business is Rs.1 lakh, salary income is Rs.5 lakh, income from rent is Rs.2 lakh, and interest income is Rs.50,000. Your total taxable income shall be Rs.6.5 lakh.

If you have F&O loss, you must get your accounts audited. Audit is also mandatory if your turnover exceeds Rs.1 crore. If accounts are not audited, a minimum penalty of 0.5% of turnover may be levied (maximum Rs.1.5 lakh). The due date of filing of tax returns for financial year 2015-16, where audit is mandatory, is 30 September 2016.

Source: Cleartax founder Mr. Archit Gupta

Masala Bonds: Yes you heard it right !!

Masala Bonds: Yes you heard it right !!

Housing Development Finance Corp (HDFC) has raised INR 3000 crore by issuing masala bonds; the first company to do so since the RBI green-flagged it in September last year.

Here is all you need to know about it:

What exactly are masala bonds?

These are rupee-denominated borrowings by Indian entities in overseas markets. Usually, while borrowing in overseas markets, the currency is a globally accepted one like dollar, euro or yen.

What is the advantage of borrowing abroad in rupees?

Companies issuing masala bonds do not have to worry about rupee depreciation, which is usually a big worry while raising money in overseas markets. If the rupee weakens by the time the bonds come up for redemption, the borrower (company) will need to shell out more rupees to repay the dollars.

Is that a big enough advantage?

Surely yes as quite a few Indian companies that had raised money abroad in 2007 by issuing Foreign Currency Convertible Bonds (FCCBs) found themselves in a soup when the rupee depreciated sharply following the global financial crisis. Didn’t understand how??

Suppose a company raised 100 USD through FCCBs in 2007 when foreign exchange was INR 55/ USD (assume). Total money raised in INR terms is 5500. Now, at time of maturity which was post 2008 financial crises, the rupee had weakened, let’s say, foreign exchange at time of maturity is INR 60/ USD. So, the company has to arrange for INR 6000 to repay 100 USD at time of maturity. Therefore, an adverse impact of INR 500 due to domestic currency depreciation.

If you raise money in INR you have to repay in INR. No risk of currency depreciation!!

What is in it for the buyer of the bond?

The buyer will earn a higher yield (coupon rate) to compensate for the risk of currency depreciation.

What is the tenor and coupon rate on the HDFC Masala bonds?

The bond bears a fixed semi-annual coupon of 7.875 percent per annum and has a tenor of 3 years and 1 month. The bonds have been issued at a price of 99.24% of the par value and will be redeemed at par. The all-in annualised yield to the investors is 8.33 percent per annum.

Is it first a first attempt to sell masala bonds?

This is not the first time that an attempt is being made to sell masala bonds. In 2015, both HDFC and state-owned power generator NTPC scrapped their plans after international road shows where investors were demanding higher premium to buy these bonds due to the inherent currency risk. Bankers were lobbying for the removal of the withholding tax of 5 per cent on the interest payment and to permit Indian institutions to buy these bonds in the overseas market to lessen the fear of liquidity. However, they failed to get it done!!

Will the bonds be traded?

Yes, but on the London Stock Exchange, not in India. But any global turmoil in financial markets may upset its plans.

Will there be more such bond issuances by other companies?

According to few industry experts and the bankers to the HDFC issue — post Brexit, both Asian and European investors are hunting for yield and masala bonds seem to be offering them an attractive yield pickup.

Underwriters and lead arrangers for these bonds- Axis Bank, Credit Suisse and Nomura

Fat Tax: A good beginning or a misfire?

Fat Tax: A good beginning or a misfire?

A study published in the medical journal Lancet in 2014 says that India is only behind the United States of America and China in the global hazard list of top ten countries with the highest number of obese people.

I think this study caught attention of the Kerala government a few days back!! And we almost have a first "fat tax" in India!!

Kerala’s finance minister TM Thomas Issac proposed a "fat tax" of 14.5 % on food articles like burgers, pizzas, pasta, doughnuts and sandwiches sold at quick delivery chains and other branded restaurants in the maiden Budget.

It seems like an attempt to regulate the junk food habits of the younger generation in the state. But the fact that there are few such outlets in Kerala, despite being the second most urbanized state in the country, makes one wonder if it would really make much of a difference.

In layman’s terms, the "fat tax" would raise the cost of a medium chicken pizza from rupees 350 to 400. It may not affect more than 90 % of Keralites as people in the state are spoilt for choice when it comes to eating out.

Kerala happens to be home to the second largest population of obese people in India behind Punjab, and just ahead of Delhi with 17.8 % of men and 28.1 % of women reporting a Body Mass Index (BMI) above 25 and this would have to be checked sooner than later.

Industry viewpoint and affected brands

"The move is business-unfriendly. It calls out the organised, eating out sector. We cannot pass the burden entirely to consumers," Pizza Hut managing director Unnat Varma said. 

Industry estimates suggest there are 50-60 outlets of organised fast-food restaurant chains in Kerala, including global brands McDonald's, Burger King, Pizza Hut, Domino's Pizza and Subway. 

Shares of Jubilant Food Works, which has the master franchise rights for US chain Domino's Pizza and Dunkin' Donuts, and Westlife Development, the operator of McDonald's restaurants in the south and west, lost more than 2 % each on the BSE after the news was out.

Who bears the burden?

Depends !!

It's a tax on multinationals, and not one that is genuinely aimed at curtailing the intake of fat.

The tax clearly singles out multinational brands. What about local Indian brands — some of their products are that much unhealthier and many do not follow basic hygiene standards.

Executives at Yum Restaurants, which has franchise rights for Pizza Hut and KFC, said the tax burden would be passed on to consumers selectively though the firm would try to mitigate the impact. However, G Gopinath, president of the Approved and Classified Hotels of Kerala which has 900 hotel members said “We cannot pass it on to the consumers; we have to accept it as another regular expense.”

Benefit to government

The government expects to raise Rs. 10 crore annually through the new cess.

So what's your take on this new "Fat Tax"??

Ease and Unease of Brexit

Ease and Unease of Brexit

Brexit is widely used term across the world today meaning a possible exit of the United Kingdom from the European Union. The UK electorate will address the question again on 23 June 2016 in a referendum on the country's membership, following the passage of the European Union Referendum Act 2015.

What could be the possible financial and social impact of Brexit on UK, EU and rest of the world?

I would start with a funny yet practical impact on Brits

• Cheaper flights will become a history: David Cameron warns that family holidays could be an average of £230 more expensive if UK leaves the EU
• Food Inflation: Brexit would add £220 a year to the Brit’s family's food, clothes and shoe shopping David Cameron claims
• Better Control over laws: UK will have total control on her laws as currently 60% comes from Brussels. UK can tailor her own legislation to protect the human rights
• Social Chapter: The treasury warns that the GDP will fall by 6% and house prices by 18% if UK leaves EU
• Threat to British trade: At present, The UK can sell tariff-free to Europe, the home market, accounting for 44% of the total exports. Leaving would put that at risk and potentially leave thousands of jobs at risk
• Trade Benefits: Leaving means UK is free to trade with the whole world and can strike better deals with China, India and Australia
• Freedom of movement will be gone: Staying in the EU means UK can live, work and move through Europe with ease which soon may be gone and trouble UK. The 1.4 million Brits living abroad in the EU could find movement around the continent more difficult if UK leave. For example, UK driving licences are currently valid across Europe
• Safer border protection: The EU rather than UK has control over who enters the UK meaning UK can't stop dangerous individuals entering the country
• Loss of Jobs: Unemployment could rise by 820,000 and average wages fall by 4% in two years if UK wants to leave
• Savings in money: UK sends over £250 million to the EU every week. Leaving means UK can choose to spend this money on things such as the NHS. Also, not having to contribute to the EU budget will mean an immediate cost reduction of around €180 per person in the UK, raising the prospect of tax reductions that could benefit businesses(The NHS is a rare example of truly socialized medicine)
• A second Scottish referendum: Nicola Sturgeon warns Brexit could trigger a second independence referendum forcing Scotland to leave the EU against its will
• The domino effect: Justice Secretary Michael Gove said that if UK leaves the EU others will follow leading to 'the democratic liberation of a whole continent'
• A Brexit result would also send shockwaves through the global economy and is likely to lead to a further drop in the value of the pound. UK’s currency has already weakened ahead of the referendum. (Another viewpoint: Nigel Farage said: “Even if sterling is to fall a few percentage points after Brexit, so what? The point is UK has a floating currency and it will be good for exports.")
• The vast majority of small and medium sized firms do not trade with the EU and British farmers would lose billions in EU subsidies
• If the door shuts to immigration, rents are likely to fall, not so good for landlords
• For Brits, holidays could become pricier, as sterling has fallen and for rest of world pound depreciation means cheaper holidays at UK
• Legislation: UK wouldn't be bound by the European Parliament, which is considered by many to be undemocratic. This is because its Commission which proposes legislation is not directly elected

What could be the after effects of Brexit?

It would be really tough and uncertain to judge what would follow after Brexit as rest of the world’s reaction is yet to be seen. However, few expected short term action plans could be that UK would start lengthy talks to renegotiate EU agreements and build new trade links with Europe and the rest of the world. There are concerns these negotiations could be made more difficult because EU bosses would want to discourage other countries from following suit by also leaving the EU. Cuurent PM, David Cameron may be asked to resign as he would have failed to save Project Fear

Secondary research based upon facts mentioned on http://www.express.co.uk/ and other prominent sources

Designing Standard Operating Procedures (SOP)

Designing Standard Operating Procedures (SOP)

SOPs are basically set of data flow diagrams combined with templates and guidelines for a business process. Different types of business processes could be:

• Procure to Pay (P2P) (material and production planning, procurement, production, and payment to vendors)
  
  
• Order to Cash (O2C) (receiving customer orders, processing orders, customer invoicing, sales returns and payment receipts from customers/ follow up on outstanding payments)
  
  
• Inventory Management (IM) (inbound logistics, warehousing, distribution, and outbound logistics

Each business process (say P2P) will have many sub processes (like material and production planning, procurement, production, and payment to vendors). For each sub process which has a significant impact on business should have a SOP.

Why SOP should be made?

1) Streamlining of Processes

2) Tasks performed correctly and consistently

3) Tasks performed in accordance to company policies

4) Preventive, Detective and Corrective controls

5) Benchmarking is possible

6) Knowledge Transition to a new employee

7) Training of new employee

8) Company bible for reference

Now that we understand, SOPs are essential part for a company, let's see how to draft and finalize a SOP.

Any SOP is about designing a data flow diagram for a process i.e. chronological process steps defined in an organized manner to understand what should follow once an activity has been completed. For eg, in case of vendor payment the process should be: Vendor invoices are received, invoices are verified by user department, validated invoices are sent to finance team, finance team reviews and further validates the invoices w.r.t. completeness of invoices (3 way matching: Purchase Order  vs. Goods Receipt Note  vs.  Invoice details), accounts the invoice in books, makes the payment on due date. These steps are to be defined in a flow chart show casing activities under departments involved in this process (like in the discussed example, departments involved are: User Department, Finance Department (Accounting) and Finance Department (Payments/ Treasury)) and putting control activities/ decision boxes after each required step. Every SOP contains some symbols- activity boxes, decision boxes, process inter-linkages, and control actions. 

(Refer snapshot of an SOP and symbol chart below for better clarity)

 

Following approach can be used to make an SOP:

• Conduct process discussion in detail with Process Owners. Draft some questions before the discussion which can be asked in initial meeting
• Basis process discussion, draft an SOP (as is process)
• Discuss the draft SOP with process owner, understand the changes required and identify gaps in current process and controls required
• Work on controls required and build up a detailed framework for the process. Prepare a final draft of SOP (to be process)
• Discuss the final SOP draft with Head of Department, Internal Controls Team/ Finance Controller. Make changes, if any.

An SOP has input column, department column, output column and few notes attached to it.

P.S.: Mail the final SOP to all stakeholders at each stage of discussion for documenting the understanding acquired in order to avoid confusions at later stage. “As is” is the process followed in the business at present. It may lack basic controls and have design issues. “To be” is a desired stage of process. It contains all controls built in and no design gaps

Tools for making SOPs:  draw.io (online), Microsoft visio (offline) etc.

Understanding Options and Call Options Chain (NSE)

What is an option and types of options? How options are traded?

Many people get confused when it comes to the topic of OPTIONS. Isn’t it?

An option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Most confusing about options understanding is that which party has a right and which party has an obligation? Who can be at larger loss and for whom losses are limited? For getting some clarity let’s begin with basic definitions of call and put option.

Call Option: A Call is a right, not an obligation to buy an underlying asset at a predetermined date at a predetermined price by paying a certain amount upfront

Put Option: A Put is a right, not an obligation to sell an underlying asset at a predetermined date at a predetermined price by paying a certain price upfront.

You buy Call Options when you think a share is going to go up in value and you buy Put options when you think a share is going to go down in value. This means that the value of your Calls go up as the stock rises, while the value of your Puts go up when your share falls.

Let us take example of NSE Options Chain to better understand how options really work!

The above screenshot has been taken from the Options chain sectionof the NSE website, and this shows the Call Option and the Put Option details for NIFTY which expires on 30th June 2016 (nearest future). Every Option has an expiry date and the Option becomes worthless on that expiry date. The expiry date is the predetermined date in the definition.

Refer to Calls Side (left)

The Strike Price which is the right most column shows at what price you will be buying Nifty. This is a Call option to buy components of the Nifty, so the Nifty is the underlying asset from the definition.

Now, if you look at the sixth column from the left of this picture – that’s “LTP” which stands for “Last Traded Price” and this shows you at what cost per unit the last transaction happened for this contract.

The Nifty closed at 8,170 this week, and let’s look at the last highlighted (light yellow) row in this picture which is for the strike price of 8,150 (closest strike price of table) and see how that fits our definition.

This Call is a right, not an obligation to buy Nifty at a predetermined date of June 30th 2016 at a predetermined price of Rs. 8,150 by paying Rs. 135 (LTP) per unit upfront.

So if you bought this contract today, you will have to pay Rs. 135 and in return you will have the right to buy a Nifty contract at Rs. 8,150 on June 30th 2016. If Nifty is at say 8,500 on that date, then your Call option will be worth a lot more than Rs. 135 because you can buy it at 8,150 and then sell it at 8,500 (gross margin of Rs. 350). That’s also why in the image above you see that the price of the Options keep increasing as the Strike Price keeps going down. Chances of achieving higher nifty price (8,500; 8,600; 9,000) is less likely to occur in near future.

If the Nifty closes below 8,150; the Option will expire worthless because why would you buy Nifty, say at 8,000 when you can buy it for lower in the market. The part of the definition where it says that the Option is a “right but not an obligation” comes into play here because if Nifty closes below what you paid for it then you don’t have to do anything at all as it is your right to buy, but you aren’t obligated to buy.

This means that when you buy a Call Option your loss is defined to what you paid for it (which is called margin). You can’t lose more than that on the transaction.

The seller of the Call however who is known as the person who writes the option doesn’t have a cap on how much he loses and can lose an unlimited amount (theoretically) in the transaction. This is because the person who writes the option has an obligation to sell you the underlying asset at the price decided in the contract.

Details about how put options work (right side of picture) will be covered in next article.