GST aims to reduce multiplicity of taxes

Interesting post with practical example. It is queer that states treat their borders as their own fiefdom (with due disregard to the spirit of one nation) to ensure that their revenues are secured, irrespective of what is borne by the customer (ignore all the talks by the politicians for the common man).

GST aims to do away with the power of the states to impose indirect taxes and replaces them with a single uniform tax which would be administered and collected by the centre with the states getting their due share from the centre (and not directly).

Imagine the situation: There is an incentive to buy raw materials, manufacture and sell them in the same state, irrespective of what the natural / economic conditions state. A cross border transaction would imply existence of CST (central sales tax), which is not deductible. Multiply this with the large number of products, and you end up having the customer pay for the state fiefdoms. Add the concept of entry tax and octroi, and costs shoot up significantly.

http://businesstoday.intoday.in/story/gst-holds-positive-surprises-for-the-indian-economy/1/190710.html

GST FAQs

The article below describes the basics of Goods and Services Tax as envisaged by the experts. The final structure would depend on the outcome of the negotiations between the centre and the states.

http://www.moneycontrol.com/news/business/why-india-inc-wants-gst-so-badly-faq_818078.html

The Goods and Services Tax (GST) is being looked upon as one the most important reform for the country owing to its simplicity and revenue-worthiness. However, the wait for GST has been long and hard.

Below are some frequently asked questions about GST

Q: What is the Goods and Service Tax or GST?

A: The Goods and Service Tax or GST as it is more commonly referred to is a system of taxation where there is a single tax in the economy for goods as well as services. This is meant to bring together the state economies and create a single taxation system in the entire country for all goods and services.

Q: What are the stages covered in the GST?

A: All the stages related to a good or a service is covered under the GST. This means that it is a levy that will cover the manufacture, consumption and sale of various goods and services. This will be undertaken at a national level, so it is comprehensive in nature.

Q: What is the main change that will be witnessed with the introduction of the GST?

A: The biggest benefit that will be witnessed with the introduction of the GST is that multiple taxes that currently exist will no longer remain in the picture. This means that taxes like octroi, CENVAT, central sales tax, state sales tax, entry tax, license fees, turnover tax etc will no longer be present and all that will be brought under the GST. Businesses thus will not have to deal with multiple taxes but will be able to undertake the tax compliance in an easy manner.

Q: What is the main feature of the GST?

A:  The main feature of the GST is that there is a tax credit available at each stage of the value chain. There is a value added at each stage right from manufacture to each additional stage of sale but the tax to be paid is only on the value added instead of the whole amount. So for example if there is a tax paid on Rs 2 lakhs at 15 per cent at the first stage then the tax here will be Rs 30,000. At the next stage when the same goods are sold at Rs 2.5 lakh then the tax would be Rs 37,500 but there is a set off of Rs 30,000 available so the actual tax at that stage will come to just Rs 7,500.

Q: Who bears the final tax in the process?

A: The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who bears the tax. This is the case even today for all indirect taxes but the difference under the GST is that with streamlining of the multiple taxes the final cost to the customer will come out to be lower on the elimination of double charging in the system.

Q: Where is the GST going to be collected?

A: The GST is collected at the point of sale so there is no confusion about when this has to be paid. Currently different taxes are collected at different stages of the process so there is a tax on manufacturing, one at the time of sale and even another one when goods move from one place to the other. Under the GST all of these will be eliminated making it easier to implement and follow.

Q: Will the rate rise in case of GST making it costlier?

A: There will be a standard rate present under the GST. This will make the impact different for various goods and services across the country depending upon the current or existing rate. If the existing rate is higher then the GST will lead to a lower rate but if the rate is lower than the rate will be higher.  However it is expected that with multiple taxes eliminated it will ultimately lead to savings for the consumer.

Q: Will all goods and services be covered under the GST?

A: Except for a specific list of exempted items all the other goods and services will be covered under the GST making this a comprehensive tax in the Indian Economy. In fact this will be the main tax on the indirect tax side in the economy.

Q: Will the GST impact other taxes like income tax or corporate tax?

A:  Income tax and Corporation taxes are direct taxes which means that they have to be paid by the person or entity on whom they are levied and cannot be passed on to someone else. They will remain as they exist currently but the change will occur in all indirect taxes present in the country.

Q: Is this an accepted system of taxation across the world?

A: Most of the countries across the world have a GST in place. In fact by some estimates more than 140 countries have implemented the GST in their economies.

Q: Why are states unhappy with the GST?

A: The replacement of the existing taxes with the GST will lead to a revenue loss for the states. The states want compensation for this and the matter is how they will be compensated. So there are efforts to arrive at a formula that is acceptable to the states.

Q: What are some of the benefits of GST?

A: Among the benefits that the GST will present for the Indian economy is that the entire structure of taxation will be simplified. This is likely to lead to more compliance and this will raise the total level of taxes in the economy. It will also lead to a fall in costs in many cases making several products competitive leading to benefits for the manufacturers and also making some of them competitive on the world stage. Over a period of time the consumer will reap the benefits of the process through lower costs.

Reverse book building

Several companies are following the reverse book building route for price discovery after SEBI's mandate of 25% non promoter holding didn't go well with the promoters.

 

Check the article I found on hindu business line.

 

http://www.businessline.in/cgi-bin/print.pl?file=2010062751271200.htm&date=2010/06/27/&prd=iw&

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Several ‘delisting' related news articles were seen in business papers the past few weeks. This was mainly due to the recent 25 per cent public shareholding norm in listed companies stipulated by the government which raised speculation that many listed MNCs in India that do not meet the shareholding requirement would prefer to delist.

Consequently, many such MNC firms gained smartly on the bourses in the hopes of investors getting a neat premium on current prices, in the event of the delisting process going through. In fact, speciality gas maker BOC India's delisting proposal on June 15 — the first after the new shareholding norms — saw the scrip jump 20 per cent that day.

So, what is delisting and why do shares react the way they do on delisting rumours and announcements?

As the name suggests, delisting involves removing a company from the list of entities traded on the stock exchange.

Post this, a public company becomes a private one. Delisting can either be voluntary (where the company chooses to go private on its own accord), or compulsory (where the stock exchange removes a company from its list for violation of rules and regulations or trading parameters).

It is the generally the former which sees significant market interest and a rapid run-up in the prices of the concerned stock.

While voluntary delisting may help shareholders of companies whose stocks have suffered unwarranted sharp declines, critics point out that delisting prevents shareholders from participating in the future growth of companies.

Key rules

Delisting in India is governed by regulations issued by SEBI in 2009, which replaced the earlier delisting guidelines of 2003, and tightened the norms in favour of public shareholders. Under the new regulations, companies seeking voluntary delisting need to obtain prior approval (by postal ballot) of at least two-thirds of the public shareholders, for the board resolution seeking delisting.

Also, the base offer price (the minimum price) has to be computed taking into account the average of weekly high and low closing prices for the last 26 weeks or the last two weeks, whichever is higher, preceding date of notification to the stock exchange.

For the offer to be successful, the promoter stake, post the completion of the process, should become more than 90 per cent, or more than the aggregate of pre-offer promoter holding and 50 per cent of the offer size, whichever is higher.

Translated, this means that companies with pre-offer promoter stake of less than 80 per cent need to take the promoter stake to more than 90 per cent.

On the other hand, companies with pre-offer promoter stake of more than 80 per cent need to be successful in at least 50 per cent of the offer to the public shareholders.

The regulations also provide that promoters should not use the company's funds for the delisting process. This implies that the funds for delisting would have to be arranged by the promoters.

Reverse book-building

One of the key processes involved in voluntary delisting is ‘reverse book- building'. This is quite similar to the book-building process employed by companies at the time of public issues.

The key difference is that, in reverse book-building, instead of placing bids for buying the stock, shareholders place bids (at or above the base offer price) for selling the stock.

The price at which the maximum number of shares is offered by the public shareholders is known as the discovered price, which becomes the basis for determining the final offer price.

It is important to note that promoters are not bound to accept the equity shares at the offer price determined by the reverse book building process. This could happen if the promoters find the final offer price unrealistic.

In such cases, the delisting process falls through. In fact, the regulations laid out in 2009 are said to be quite onerous and have made delisting easier said than done. As a result, several delisting proposals have been unsuccessful.

Instances in the recent past include Goodyear India and Suashish Diamonds. Reasons for delisting offers falling through include promoters rejecting the ‘discovered price' or failure to raise the promoter shareholding to levels specified in the delisting regulations.

Taking positions in shares on the basis of delisting rumours and proposals can be fraught with risk. This is because although the run-up in share price can be quite steep in anticipation of a high discovered price, the slide can be equally furious in case the proposal falls through.

The sharp price fluctuations in Goodyear India and Suashish Diamonds on announcement of the delisting proposal and its subsequent withdrawal bear this out.

The subprime crisis

I found a very comprehensive and simplfied view of the subprime crisis...it deserves to be in a blog.

What is a sub-prime loan?

In the US, borrowers are rated either as 'prime' - indicating that they have a good credit rating based on their track record - or as 'sub-prime', meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorised as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.

Why loans were given?

In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.

With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.

What was the interest rate on sub-prime loans?

Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default.

Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised , they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.

How did this turn into a crisis?

The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value.

Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.

How did this become a systemic crisis?

One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.

As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses — $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.

The forced retreat of these two mortgage giants from the market, of course, only adds to every other player's woes.

What has been the impact of the crisis?

Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world's largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.

The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalised to prevent them from going under.

Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.

How is the rest of the world affected?

Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.

Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

Credit default swaps

It is a derivative instrument whereby the holder of a bond buys the instrument to cover the risk of credit default by the bond issuer. As per investopedia, speculation has grown to be the most common function for a CDS contract. CDS provide a very efficient way to take a view on the credit of a reference entity. An investor with a positive view on the credit quality of a company can sell protection and collect the payments that go along with it rather than spend a lot of money to load up on the company's bonds. An investor with a negative view of the company's credit can buy protection for a relatively small periodic fee and receive a big payoff if the company defaults on its bonds or has some other credit event. A CDS can also serve as a way to access maturity exposures that would otherwise be unavailable, access credit risk when the supply of bonds is limited, or invest in foreign credits without currency risk.

Now this means that with the CDS acting as speculative instruments, things can go really bad…and that’s what caused the failure of Lehman brothers.

More research on this in some time..

links: http://www.investopedia.com/articles/optioninvestor/08/cds.asp

 

US government to buy out AIG

http://online.wsj.com/article/SB122156561931242905.html

Thought leadership

I was reading Kumaramangalam Birla’s Viewpoint on Thought leadership in the Economic times this morning, and have come up with my viewpoints on the same. 

Thought leadership comes from those who endeavor to think. It is not just one of the numerous management jargons that echo the class rooms of a B school. We have seen so many concepts coming into foray, but how many of them have come from India? We Indians are busy trying to survive or making money as if there is no tomorrow. Forty years since the IIMs opened their doors, we have come a long way. There is a rising demand for B schools with the prime objective to live a better life, because our government cannot take care of our basic necessities. In our quest for more money, we use management degree as a passport to a better life, not to hone our skills. Undoubtedly this education teaches a lot that can be potentially used in all aspects of life; but how many of us use it? I have seen B school grads doing menial tasks, which even a barely literate person can do. Thoughts (and the capability to think) go down the drain.

Parental and societal pressures have a huge impact on the young minds that are ready to do whatever pays. Why this attitude? That’s because we live in a country sans opportunities. 

I was reading an article that mentioned that a passing out IIM graduate makes more than the director himself. Where can one find serious academicians? There are many capable individuals in this country, but it has to be seen what inspires them! There is hardly anything except prestige, which takes a backseat in this era of double digit inflation. 

That does not mean to convey that only academicians can have fruitful thoughts. Anyone with the right frame of mind can have it. Things will change, but it needs time. What is important for the professionals is to think about what they do and how better it can be done, rather than working like a robot day in and day out.

Taking on the slowdown

We are edging towards stagflation, an unwanted situation of high inflation with stagnation. It had occurred in 1929, and we do not want to see it again. But what is the finance minister doing about it?

“India’s fiscal consolidation has been interrupted by a sharp increase in subsidies, populist budget ahead of elections and an increase in public wage bill. If past reductions in government debt ratios – still well above rating peer group medians – are definitively reversed the sovereign’s local currency would likely be downgraded from the current stable outlook”

- Fitch ratings (July 15, 2008)

The above statement has only brought India’s country rating down to BBB-, the lowest one in the investment grade. A far cry from the desired safe bet, India is moving towards a situation that the hedge funds may not come back to India. The UPA government has acted strongly following its populist sentiments. They have increased salaries of babus, subsidized petroleum products and are now even found to buy MPs to keep their position in the parliament. Clearly we have come to a situation where politics has come to survival, the country’s welfare gets a secondary importance.

What can happen in the times to come? In the space of funds from overseas drying up, capital investments will suffer. India’s borrowing capacity will also be affected with the rising risk of investing in the country. Even terror situation doesn’t help. India seems to be a newfound target of the militants. In this juncture, it may not be good news for the India shining story.

But India will remain an attractive growing market. Corporations will spend heavily on marketing, and will take away the Indian money abroad. ADRs and GDRs will also suffer.

The finance minister and the politicians need to wake up to the fact that petty politics will do more harm than good for the country.

The new IPO norms

As per the new IPO norms laid down by SEBI, retail investors would not
pay the applied amount to an IPO until the shares are allotment. This
is a welcome move, since with maturing markets and expectation of high
listing premiums, a lot of investors tend to put in 1 lakh (limit set
for retail investors); but can expect to be allotted only about 1-10%
of the invested amount, depending on the popularity of the IPO (which
further depends on the marketing strength of the company). Now these
investors have to wait a long time to get their refunds. Further, the
linked accounts are not directly credited, they are paid by cheque
leading to further delays are risk on the part of the investors.

With these norms, the amount would be locked at the bank account of
the investors, and would be available only after refunds are declared.

This process has a lot of operational issues. First, a lot of retail
investors not having a demat account are allowed to invest in the
primary market. This creates problem of traceability. Second, the book
runner will have to coordinate with all the possible banks and their
branches (RTGS affiliated or not) in order to pass on the information
seamlessly. In the event of the inability of the banks to accept such
information, a section of the investor populace will be at a
disadvantage. Third, this process increases the role of the banks as
IPO investment partners. Banks may charge (the book runner or the
customer) for providing such a service. It remains unclear who will
bear the brunt. Fourth, it might be a step for SEBI to move to a
situation of uniform demat account linked savings account. This would
put most of the DPs at a disadvantage.

The online version of demat accounts has not gained enough popularity
due to lack of Internet penetration and lack of working knowledge of
computers among the general population. The above move might make IPO
investment less popular (added the fact, that markets are no longer
performing as before).

The oil crisis

The black gold has once again crept up as the world's greatest crisis of 2008. The rising crude oil prices silently contributing to the higher inflation in most of the developed and the developing world. Its no secret that we are in a situation where the US has shun signs of growth and it is coming mainly from the EMs coupled with rising demand.

Whats the cause? And whats the reason? The economist article gives an interesting view of the politicking around the world, and how politicians are trying to find scapegoats. Menial interests apart, I feel that there is something much more fundamental to the petroleum consumption.

With development comes dependency. The world today is so dependent on petroleum product as its primary source of power that absence of it can actually cause a worldwide standstill. And it is this dependency that the OPEC is taking advantage of. And even if they didnt, it would get increasing difficult to supply oil to the ever increasing world populace. After all, its a natural resource, and is not infinite (though it might seem so).

As rightly mentioned in the article, it is imperative that new oil basins need to be looked for. But they will dry up too. But they will dry up too. It takes so many years for nature to create petroleum..and we humans deplete the resources much faster.

What is needed is are practical alternate energy sources, perhaps coupled with scientific discovery of artificial fuel. It may not be long when we have to get back to bicycles, horses, camels, elephants et al.

Aroop wants to tell you about an article from Harvard Business Review

Hello Aroops Blog,

Aroop wants to share this article from Harvard Business Review with you. Simply click on the link below to be taken directly to the full text of the article.

The Contradictions That Drive Toyota's Success
Hirotaka Takeuchi, Emi Osono, Norihiko Shimizu
Reprint #R0806F

Access this article now by clicking on the link below:

http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?ml_action=get-article&ml_issueid=BR0806&articleID=R0806F&pageNumber=1&ml_subscriber=true&uid=24485505&aid=R0806F&rid=24567727&eom=1

Division of labor

The main focus of Adam Smith's The Wealth of Nations lies in the concept of economic growth. Growth, according to Smith, is rooted in the increasing division of labor. This idea relates primarily to the specialization of the labor force, essentially the breaking down of large jobs into many tiny components. Under this regime each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that laborers do not have to switch tasks during the day further saves time and money. Of course, this is exactly what allowed Victorian factories to grow throughout the nineteenth century. Assembly line technology made it necessary for a worker to focus his or her attention on one small part of the production process.

During my economics classes in school, I remember that one of the disadvantages of such a labor specialization is the inability to look at or gain expertise in anything else. Being a jack of all trades may not be the best thing to happen, but being unemployable does no good either. This article focuses on how the concept is prevalent in today’s corporate world.

When a project is in an initial stage with just a few members, it becomes imperative for each to know the integration points of the other. That’s because there are unknown regions that everyone has to explore, and drive the project to its completion. The organization may face such a situation when it is starting up, it has labor shortages or just that it wants to save cost. In such a scenario, an individual is expected to take up multiple roles. The downside is that this model is not scaleable. With the increase of complexity and size, it becomes important to develop expertise by restricting individuals into their own regions of expertise. And the organization as a whole benefits since they can produce outputs more efficiently and by using lesser overall resources.

For the individual, things might get different. If she takes up multiple roles, the experience widens, and so does her value in the market. It is definitely much more difficult jugging multiple tasks at the same time; but the scope of learning is immense. On the other hand, in a large setup, the individual is lost, has limited expertise; and she might even find herself being unemployable in the market (since the limited experience is not valued enough). Diversifying one’s experience always makes sense for those who want to grow.

One needs to have an insight of the larger picture and the future prospects. Decisions are dependent on the individual’s priorities. If one wants to be valuable, it makes sense to get others do the repetitive tasks, while she learns something new..Call it politics?

I have learnt it the hard way.


Inputs form: http://www.victorianweb.org/economics/division.html

Bol India bol

The TV ad of reliance infocom takes us through the history of telecom in india. There was a time when trunk calls were the order of the day, it was followed by STD, booths, queues and then to expensive calling rates of the cellular phones. Even the constant reduction of the calling rates to 1 Re / min doesn’t seem to be good enough. And so Reliance came out with free unlimited STD to another reliance mobile in the country.

What does this mean to us? I don’t know many people who use 93 numbers, and I don’t think I will benefit by taking the scheme. But who will? Cant discount the long lost lovers who cant get with more of talking. I can even suggest it to some of my friends. Perhaps reliance is trying to woo some GSM customers as well, since Tata Indicom has been offering it for quite some time now.

Why this sudden surge of low margin propositions? This is an indicator that the industry has matured, and can be treated as an FMCG. There is a clear lack of innovation or differentiation in the services offered by the many operators. This morning I read that around 25% of the Indian population is already connected. The growth from here is not expected to be exponential anyway. The original high costs were fallout of initial investments in towers and other infrastructure (which are capital intensive). Now that the golden years are over, the multitude of players can only compete on costs.

3G has not taken off very well in India, primarily due to high costs of usage. Till wireless broadband gains popularity, people will have to make do with GPRS data packets only.

For the heavy talkers, there is good news. Falling rates implies they can talk even more. Bol India bol!!

Business standard article

What does the global delivery model have for the low cost worker?

IT projects have traditionally been priced based on labor hours. Availability of skilled and comparatively labor in a far fetched country has driven IT work offshore. Clients definitely love the presence of the employees at their site, if costs are good enough. This is because it gives them feel more comfortable about the kind of work they are getting.

Hence India and Indians have enjoyed the incoming cash flows over the past decade or so. There are so many who passed out of their engineering colleges, to be lured with the huge opportunities abroad. Many of them, by virtue of being acclimatized with the alien environment, chose to stick on. Going forward they have applied for dual citizenship and a green card.

Water flows from a region of higher pressure to a region where it is low. The flow of money can also be compared to this model. But there comes a time when the speed of flow gets reduced, as the pressures try to reach equilibrium. The real world is much more complicated. But it would not be wrong to use this model to understand what opportunities offshoring can give us.

Undoubtedly, the speed has reduced and the opportunities are not so many. The US growth rate is stalled at 1-2%, while the Indian economy is growing at 9%. There are various sectors contributing to this, and software does not feature at the top. If one looks at the price chart of the various stocks in the BSE sensex in the past 6 months, it is evident that IT does not remain in the top 10.

So does that mean it marks the end of IT? It seems unlikely. Its time IT developed itself into a mature industry. Companies are being forced to be more innovative in their solutions & services. In this effort to make them more wanted, IBM has developed and is strongly focusing on the global delivery model.

The GD model simply means more offshore, minimum onsite. Clients are being made to believe that India has emerged as a favorable destination, and reducing their data privacy and quality concerns.

What does that mean to the employee in the GD era? It simply means lesser onsite, implying lesser good experience, and more offshore. The organizers of the GD party (ie the management) will definitely have a lot to add to their CV, for they are bringing in a new way of doing business.

But for the employee it is bad news. Lesser travel means interacting with the client only on chat, telephone and (where practical), video conferencing. They do not get to know their client, nor do they get to understand their working. More importantly, the ground level workers are shielded from the strategic initiatives, and one often gets to hear rumors (usually bad).

What will happen in the future? If we say that the GD era has arrived, it will translate to cost savings for the client, more revenues for the forerunner of the model, and lack of learning opportunities for the workers.

What must someone in this rut do? They must enhance their skills that will make themselves more valuable. They must make sure they get to meet a client and not take an impersonal view. They must be more innovative to look for things that sell…

For one’s value is determined by what the Market is ready to pay.

Links:
What is global delivery? http://www.offshore-softwaredevelopment.com/global-delivery-model.asp

Global delivery implies stronger partnership: http://www.itbusinessedge.com/item/?ci=16239

Comparison of global delivery models: http://www.forrester.com/Research/Document/Excerpt/0,7211,34317,00.html

Wall Street: Is It Just The Chill Or Convulsions Are Round The Corner?

Received from Tips 4 Trade.com

---------- Forwarded message ----------
From: Tips4 Trade <tips4trade@gmail.com>
Date: Sat, Mar 1, 2008 at 9:50 PM
Subject: Wall Street: Is It Just The Chill Or Convulsions Are Round The Corner?
To: Tips4Trade <Tips4Trade@googlegroups.com>

New York Sank Last Night, Will Bombay Sink On Monday?

Manmohan Singh re-capitalised PSU Banks 15 years ago, and will end his career the same way after the disastorous Budget presented by Chidambaram.

Indian's need to change their lives now-sell all assets, buy agricultural land and liberally borrow from PSU Banks. There is no tax on agricultural income, so income goes tax free. Then after years of making partial bad debt provisions, you will not have to pay-off the Bank Debt.

The Bank bail-out will be funded by taxing Stock market transactions...simple.

In a painful year for Wall Street, even the shortest month couldn't end soon enough.

Stock markets sank on Friday -- Leap Day -- after a new round of credit woes and a painful dose of weak economic reports reignited fears that a recession may be imminent.

The Dow Jones industrials plunged 315 points, and every major index shed more than 2.5 percent. The Standard & Poor's 500-stock index is off to its worst start to a year since 1941.

"The drumbeat of economic news has been unrelentingly bad," said Edward Yardeni, an investment strategist. "The recession scenario is looking more and more credible."

The market was poised for a poor opening after American International Group, the world's largest insurer, posted the worst quarterly loss in company history Thursday night. The Dow was off 100 points shortly after the opening bell.

The sell-off accelerated from there. A bellwether report on Midwestern business activity unexpectedly fell to its lowest level in more than six years. A survey showed consumer confidence at a 16-year low. And analysts predicted that banks stand to lose an additional $350 billion from the subprime mortgage collapse.

The bad news added up, and so did the losses. At the closing bell, the Dow had given up 315.79 points, or 2.5 percent, to 12,266.39. All 30 of its components closed down.

The S.& P. lost 2.7 percent, to finish at 1,330.63. The technology-heavy Nasdaq composite index dropped 2.6 percent, to 2,271.48.

"Fridays have become very difficult days for the markets," said Ryan Larson, a trader at Voyageur Asset Management in Chicago. "Given the uncertain environment, nobody wants to buy into a weekend unless they have good reason."

Shares of financial services firms, an albatross on the market for months, led the losses on Friday. A.I.G. stock tumbled 6.5 percent. Shares of MF Global shed 18 percent after the brokerage firm was hit with downgrades from ratings agencies stemming from an unauthorized trading incident earlier this week.

Treasury yields plummeted as investors flocked to the safe havens of government bonds. The dollar, already at a record low, ran flat against the euro but fell against the yen. Crude oil futures fell back slightly after flirting with their all-time high earlier in the week.

The losses followed declines in overseas markets. The Nikkei 225 index in Tokyo lost more than 2.3 percent, and the major European indexes were down around 1.5 percent at the close.

"Investors try to ignore the underlying trends -- credit conditions and economic indicators -- and jump on anything that says this will go away soon," Mr. Yardeni said. "And then you get hit on the head with the more serious underlying issues in the credit markets and the economy and you realize that the bullish news just isn't enough."

Indeed, the Midwestern business report was only one piece of a host of poor economic news that rattled investors on Friday, underscoring anxieties that the nation is facing one of the worst economic landscapes in decades.

Consumer confidence plunged in February to a 16-year low, according to a survey by Reuters and the University of Michigan, as rising inflation forced Americans to spend more and save less.

Income growth slowed in January and consumer spending was flat when adjusted for inflation, the Commerce Department said. For the first time in at least 50 years, Americans spent more than they earned for the third consecutive month.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.


What does it mean for us? The Indian Budget coupled with slowing US economy has been construed as a recipe for disaster. The please all budget intends to fund its Rs 60000 crore to the farmers by adding to the capital gains tax, thereby discouraging trading. Long term investors (like me) are spared. No doubt, it would reduce volatility and encourage people to delve into the stock market only for investment purposes. But it would also reduce the responsiveness the Indian bourses have to the world conditions. In the event of FIIs making an exit due to (subprime) crisis, it will not enable retail investors to book profits (or losses) easily.

It has been seen in the past that when US sneezes, the the world catches cold. In the recent past, there have been instances when the bellwether index has kept up in the face of the impending storm, thereby implying that India is no longer a volatile Market, it is an economy of opportunities where funds can be parked (subject to stringent regulations,though). But my opinion is that with the budget proposals on the capital gains tax and the falling US indexes, India may also feel the brunt.

Old Boy Alan Talks Up Recession

---------- Forwarded message ----------
From: Tips4 Trade <tips4trade@gmail.com>
Date: Thu, Feb 28, 2008 at 11:11 AM
Subject: Old Boy Alan Talks Up Recession
To: Tips4Trade <Tips4Trade@googlegroups.com>


The former chairman of the US central bank Alan Greenspan has warned that US economic growth has stalled and a quick recovery is not likely.

"As of right now US economic growth is at zero," he said, adding the longer it stayed this way the greater the risk of a deep recession.

Wall Street giants Goldman Sachs and Merrill Lynch have both forecast that the US economy will contract in 2008. The US Federal Reserve has said 2008 growth will be between 1.3% and 2%.

The forecast, made last week, was half a percent lower than the Fed's previous estimation.

The gloomy outlook was blamed on falling house prices, reduced bank lending, turmoil in the financial markets and higher oil prices.

More gloom?

Mr Greenspan also predicted that booming oil prices, which reached a record of more than $101 last week would keep rising and that the US housing market would see more misery before the tide turned.

On Monday, figures from the National Association of Realtors showed US house prices fell 4.6% to $201,100 (£106,691), while inventories rose.

This adds to the drumbeat of bad news for consumers, including higher unemployment, more expensive fuel costs and higher credit card repayment costs and raises worries about their ability to spend and prop up the world's largest economy.

Increased globalisation of trade could offset a sharp downturn in consumer spending and "facilitate the absorption of shocks in the US," Mr Greenspan said.

Foreign investors

In a separate speech at an investment conference in the Gulf state of Abu Dhabi, he said US resistance to Gulf or Asian government-backed investors would be "counter-productive" and will result in all parties being "losers".

Lehman Brothers has predicted that these funds have assets of about $3 trillion at the moment, including large stakes in many banks, which have turned to them for capital after sustaining heavy losses on investments centred on soured US sub-prime debt.

Often secretive, they have come under fire for their investment motives, which some interpret to be political rather than commercial.

"The negative response is protectionism and that is counter-productive," Mr Greenspan said.

"The US has gained much in post-World War II globalisation and for us to be pulling back makes me sad and is not in the best interest of the US," he added.

Mr Greenspan left the Federal Reserve in 2006 after 20 years at the helm.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.

Thanks

Tips4Trade

www.tips4trade.com

Reliance Power bonus issues?

http://economictimes.indiatimes.com/R-Power_plans_bonus_to_win_back_investors/articleshow/2790920.cms

The financial acumen of ADAG is truly brilliant. They have carefully crafted a way to increase the valuation of the REPL by offering the bonus. The scrip has already risen some 10% after the news of a possible bonus issue.

Looking at the numbers, the existing shareholding report on the REPL website mentions a promoter share of 89.92% while institutional and retail investors have 10.08%

At 1:1 bonus issue, the share of the external investors will be 10.08 x2 / (10.08 + 100) = 18.31%, or a rise of 8.23%

At 1:2 bonus, it will be 10.08 x 1.5 / (5.04 + 100) = 14.39%, or a rise of 4.31%.

This implies that even in the bearish market, REPL has found more takers than the numbers suggest. A rise in price directly translates into higher networth of the promoters, who are laughing all the way to the stock exchange :D

Is it the end of the telecom era?

Today I read an article on business standard, which reported Indian Telecom minister A Raja mentioning that local call rates may drop to something like 10p / min. I was wondering if it would do me any good. That’s because I enjoy free local calls to airtel already; to other operators its about 40p, and 1 Re to landlines (which I call rarely). If it were a few years ago, I probably would have been delighted by this news. But not today. My line of thought has moved to a different direction. While in italy, local calls costed me some 35 cents (Rs 20) on my Vodafone prepaid; and I couldn’t imagine using my mobile to make a call back home (2 Euros or Rs 114 / min).

I remember reading a report mentioning that local call rates are the lowest in India. That was some years back, when local calls were charged at Rs 2.40 or more. With increased penetration, it is evident that costs would reduce, adding to the revenues and falling ARPUs.

Bharti Airtel has an ARPU of Rs 359, and RCOM is close on its heels with Rs 339. These figures coupled with a national average hovering around Rs 300, the figures amongst the lowest in the world.

The industry has grown at 30-40% CAGR over the last 5 years; and investing in telecom companies was a sureshot win.

But it may not be so for long. With a wave new licences being issued to newer (and little known) operators, the market will only get more competitive. In my recent visits to some of the rural areas of West Bengal, I was amazed to find the Airtel signal strength at the remotest of the regions, though getting through was difficult during the evening (peak) hours. These new players can be expected to target such far flung areas, but this may not justify the massive investments required.

The value added services do not find so many takers as the voice services do. It is a niche segment, and applications on GPRS are only being explored by the early adopters. These services are expensive, and contribute significantly to the revenues. With competition coming, the operational margin may only demonstrate commoditization.

In spite of the growing concerns of commoditization; the vastness of the country can only serve as an opportunity. The teledensity in India stands only at 18%, as opposed to much higher numbers for some of the developed economies.

India still has a lot of catching up to do. Yet the astonishing numbers and jumping scrips may be a thing of the past, as Sunil Bharti Mittal mentioned.

IPOs losing their sheen?

A few months ago, any investor worth his name would jump at the mention of an IPO, in order to pocket, if nothing else, the listing gains. Even non sophisticated investors, sans any working knowledge of the capital markets, knew that IPOs guaranteed gains, even though they did not assure allotment.

This was the scene at the time of high demand and low supply of shares. IPOs have always been over hyped for their listing gains, even though not for investment. It allowed companies to conveniently price their issues high, making good money in the market. And everybody was happy.

But the party did not last long. With the exodus of FIIs it appears that capital markets are not that interesting any more. Caution is the name of the game. Everyone is trying to sell or is stuck because they had bought at higher levels.

Who would believe that an infra IPO could not get fully subscribed? But it has happened to Emaar MGF, they have resorted to private placement for funding. At least this capital budgeting technique does not work on volatile sentiments, but on fundamentals.

http://economictimes.indiatimes.com/Emaar_MGF_withdraws_IPO/articleshow/2767016.cms

The biggest IPO (already devoted two articles in my blog) does not seem to find many takers. Banks are already bombed with stop payment orders. The IPOs suddenly appear overpriced.

How to expect next? The IPOs listed in this bear market will surely have a hard time. And listing gains may be a thing of the past.

I am not technical analyst, but I believe in the India story. Over the long term, the fundamentals look intact. Hence I will take every opportunity to buy…the FIIs wont knock before joining the party!!!

The jumbo offer

Last Friday’s big news was the offer of Microsoft to buy out Yahoo Inc for $ 44.6 bn; I heard somebody shouting it out in my office. I had no idea whats and whys of the breaking news, but it was big nevertheless.

So I decided to do some investigation. The news was probably big because of the amount involved..it was probably larger than the valuations the current price levels reflected. And yes, I was right! The scrip rose from $19.15 to $ 28.38 on Friday, giving it a jump of a whopping 48%!. In the volatile and sentiment stricken economy like ours, a 20% would have touched the upper circuit. But at 48%, it had to be something!!

The valuation at the end of Thursday was $26.45 bn, while it rose to $ 39.58 by the end of the week, still lower thMicrosoft’s valuations. Whats there in yahoo that Microsoft is after?

One of the apparent objectives appears to be to take on google, the fastest growing name in the industry. With its unique offerings and revenue models, google is leading the way; and is strongly challenging Microsoft’s dominance in the desktop market. With concepts of SaaS getting more prevalence, buying getting-obsolete-soon software may not find many takers, if google comes up with their offerings in a big way. This would seriously affect Microsoft that has held the PC market with its software for decades now.

Some changes are happing in the Microsoft’s front as well. Applications like CRM are finding their way on the Microsoft network on the web. Windows live is an initiative in that front. An interesting article on this move can be found here

The dealbook on New York Times gives an interesting perspective of what the deal can be. It can be read here

Interestingly, google founders Larry Page and Sergey Brin had offered Yahoo to buy it out, while the former was a startup, it was refused. The cyber world today would have been so different, had the deal got through. This is a juncture where the history of the Internet will be rewritten, and whatever happens, the Internet will not be the same again.