October 2013 – OneMint

RBI’s Monetary Policy Review – October 2013

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Infosys did it a few days back, now it was the turn of Dr. Raghuram Rajan. I mean both had made people to have low expectations and then delivered somewhat better for markets to cheer the outcomes on both the occasions. In his second review of monetary policy, the Reserve Bank of India Governor, Dr. Raghuram Rajan, did not do anything unexpected to annoy the markets.

In fact, markets cheered the fact that most of his policy related decisions were along expected lines and there were a few announcements with which he intends to further streamline India’s financial sector.

Before we take a look at what he has in store for us, let us first check what he has done in the current policy itself.

0.25% hike in the Repo Rate to 7.75% – RBI has increased the Repo Rate by 25 basis points from 7.50% to 7.75%. This is the rate at which the commercial banks borrow money from the RBI for a short period of time. RBI has hiked this rate second time in a row to discourage banks to borrow and further lend money in the market, as the inflation has again started moving up with a steep fall in the value of rupee due to fears of QE3 tapering by the US Federal Reserve.

Though I had a minor hope from him to leave the Repo Rate unchanged, but then it was too much to ask for in a highly inflationary environment.

0.25% hike in the Reverse Repo Rate to 6.75% – As always, the Reverse Repo Rate also got increased in line with the Repo Rate by 25 basis points from 6.50% to 6.75%. This is the rate at which the banks deposit their excess money with the RBI for a short period of time.

0.25% reduction in the MSF Rate to 8.75% – RBI has cut the Marginal Standing Facility (MSF) Rate by 25 basis points from 9% to 8.75%. This is the rate which the RBI charges to the scheduled commercial banks for the money borrowed for their overnight liquidity requirements.

After this cut, Dr. Rajan has restored the corridor between the Repo Rate and the MSF Rate back to its normal level of 1%.

No change in Cash Reserve Ratio (CRR) – Along expected lines, RBI left the CRR unchanged at 4%. RBI felt that there was no requirement for such a change and market participants feel it was again the right decision.

Doubled bank’s borrowing limit to 0.50% under longer tenor repo – Dr. Rajan also doubled the borrowing limit of banks against their cash positions or NDTL (Net Demand and Time Liabilities) with immediate effect from 0.25% earlier to 0.50%, for both 7-day and 14-day repos, in order to increase the required liquidity in the system.

As widely expected, the central bank also reduced India’s GDP growth forecast for the current fiscal to 5% from 5.50% it projected earlier.

Note: If you want to know more about RBI’s monetary policy tools & their intended impact in detail, please visit this post – RBI’s Monetary Policy – Tools & Expected Outcomes

Impact of the Monetary Policy

There were no surprises in the monetary policy this time as the policy actions taken by the RBI were widely expected. Most people had expected Dr. Rajan to hike Repo Rate, reduce MSF Rate & leave the CRR unchanged and he did exactly that. So, zero negative surprises actually turned it into some positive surprises for the investors.

Impact on stock markets – Around 11 a.m. in the morning, markets were trading marginally in the red. As the policy announcements were made, markets jumped initially, then came down a little, but then moved steadily up as there were no incremental negative moves by the RBI. BSE Sensex closed up 358.73 points (or 1.74%) at 20,929 and NSE Nifty closed up 119.80 points (or 1.96%) at 6,221.

Impact on debt markets – 10-year benchmark 7.16% G-Sec yield closed at 8.54%, 12 basis points lower than Monday’s close of 8.66%. It was a good news for the debt fund investors as most of these schemes ended the day on a positive note.

Impact on currency – Strong buying in the stock market as well as the debt market boosted the value of Indian rupee and it closed at 61.31 against yesterday’s close of 61.52, a rise of 21 paise in the value of Indian currency.

So, after RBI’s policy decisions and market closing, this is where we stand as of today:

New Initiatives in the Monetary Policy

1. Introduction of inflation-indexed NSS – RBI plans to introduce inflation-indexed National Saving Securities (NSS) for the retail investors in November or December after consultation with the government. Nobody knows its structure as of now but it will definitely open a new investment avenue for us.

2. Introduction of 10-year IRFs – RBI also plans to introduce cash-settled 10-year interest rate futures (IRFs) from December end. The guidelines for the same would be issued by the RBI by mid-November. I think, if introduced with the correct framework, it would be one of the most useful instruments for the market participants.

3. “Near-National Treatment” to foreign banks – RBI announced today that foreign banks, which set up wholly-owned subsidiaries here in India, will get some special treatments, closer to what nationalised banks get, including the freedom to increase their branches here. I think some serious foreign banks would take this move as a very positive step by the RBI and it could result in some M&A activity also in the banking space.

4. Interest on bank deposits at shorter intervals – RBI has given the banks an option to pay interest on savings bank deposits and term deposits at intervals shorter than quarterly intervals. Though banks are reluctant to do that, but, if implemented, it would raise returns on our bank deposits.

5. Charges on actual basis for SMS Alerts – RBI has asked banks to charge for SMS Alerts on actual basis. So, if your number of banking transactions is quite low, it is a good news for you, given your bank follows this RBI direction.

During Dr. Subbarao’s tenure as the RBI Chairman, the Finance Ministry was desperate to bring back growth to the government’s targeted levels of 6.1% to 6.7%. It was leaving no scope to make Dr. Subbarao reduce interest rates even when he was not fully convinced about the government’s seriousness to take policy actions.

I think Dr. Rajan has been taking the same policy actions what Dr. Subbarao would have taken. But, I think increasing the Repo Rate may not be a great idea to bring down food inflation or to make US Federal Reserve to postpone its QE3 tapering indefinitely. Higher interest rates at this stage may only worsen India’s growth prospects with no or minimal impact on inflation which is rooted more in supply-side constraints.

Again, it is the government which is required to manage its finances in an efficient manner and take some policy initiatives for us to have lower inflationary numbers, lower fiscal deficit and to augment India’s economic growth. But, I think it is too late for this government to take such bold policy initiatives. What do you think?

Use Balanced Funds to Start Out Investing

Chethan tweeted out to me asking about ETFs versus mutual funds sometime last week, and I said that I preferred ETFs but if he is just starting out building a portfolio then he should take a look at balanced mutual funds as well.

Balanced mutual funds have a little more than 65% in equity and the rest in debt and cash. The benefit of these type of funds is that they don’t fall as much during market crashes which unfortunately occur quite often in India, and then they benefit reasonably well from rallies, and have performed rather well in India in the past few years. In watching these funds over the years I have felt that they offer the best of both worlds and there are some really good ones out there too so if are starting out then I’d recommend you own some in your portfolio.

Here is the conversation for a little context, and I’ll lay down my thoughts and some good balanced funds after that.

@gischethans Yes, I agree. In India, active MFs have done better than index funds so you should have some of those in your portfolio as well

— Manshu (@Manshu) October 14, 2013

You will notice that my emphasis was on balanced funds and not so much on his original question because I know that he is starting out and I feel that balanced funds are a good way to start out.

They don’t have the same kind of volatility that pure equity funds have and they do tend to rise as much as their pure equity counterparts when the going is good, so they are a good thing to own.

If you are just starting out and see the value of your equity mutual fund down by 30% in a year, that might just turn you away from equity completely. This is not to say that balanced funds won’t fall as much, in fact they do fall quite a lot when the markets are down because there is just no way to escape that but since they have a debt component, there is some cushion.

You may notice how I’m implying that there will be a big fall, and given the nature of markets, I very much believe this to be true. This has been the nature of the Indian markets for very long, and nothing has changed recently to make this go away.

You have to be prepared to deal with declines and balanced funds help with that to some extent without compromising on gains too much.

Here is a graphic illustration of what I’m saying.

I chose BNP Paribas as that came up as CRISIL’s number 1 ranked large cap mutual fund on Moneycontrol, and then I chose the other two balanced funds on random from my earlier post on best balanced mutual funds.

Looking at these graphs you couldn’t tell which ones were equity funds and which ones were balanced funds, and I have included the 5 year annualized returns from these funds at the end to compare the annualized returns and that’s also quite comparable.

I would say there is a definitely a case to own balanced funds before you go into buying any other funds.

As to which funds to buy, the list I did earlier (best balanced mutual funds) has some good names that you can pick from. Hemant also did a great post about balanced funds last year, and he has some names in there that you can look at. I’d highly recommend reading that post as well – Balanced Funds – Best of Both Worlds.

On doing nothing

The US government shutdown has finally ended and it was interesting to see that the S&P 500 was actually up by about 3% in October which roughly overlaps the time this circus lasted.

I was watching these events closely from an investment perspective because I have a lot more money invested in the American markets right now than I have in India. That these events didn’t affect the stock market isn’t that big a deal, but I was surprised to see that the market actually went up by 3%.

Ignoring this event and doing nothing would have been the best bet as far as I am concerned, and this is what I did. However, this made me wonder what would have happened if I hadn’t done anything at all this year?

My portfolio is down 1.5% for the year, and the S&P is up about 20% for the year so I have obviously done quite badly. It is just a small consolation that I was up 60% last year when the S&P was up about 13%.

All of my losses stem from Put options, and a simple calculation showed that I would have been up about 20% had I not traded in any Options at all.

Next, I looked at the three sales I made during the year, and found that had I continued to hold on to those shares, they would have added two percentage points to my gains. So, in all, if I hadn’t done anything I would have been up about 22% for the year.

Now, hindsight is a wonderful thing, but what lessons can I learn from this that can be practically applied.

Since I do use some sort of valuation when I buy a share – I only sell them when they seem overpriced, and in these cases it did feel that the shares were overpriced. The market says I’m wrong, but only by a little and I can live with that.

The Put Options are more interesting to me because of the allure they hold. It is easy to make money when the market is up, and everyone is doing it anyway, but making money when the market is down is far more sexier and holds a lot more appeal than going long.

It is as if the money you make by going short is more valuable than the money you make by being long and I would say that the good feeling that comes along with it certainly makes it feel like it.

The great difficulty in this is that not only do you have to be right about price, you have to be right about timing, and it is entirely useless if you get just one out of the two.

Now, the other aspect of doing nothing is not buying. I have not been buying as much as I did when there is panic in the markets and I think by and large time will show that it is the right strategy. However not doing anything is much harder than it actually sounds.

I get tempted by a new share every other week but I just bite my lip and wait. I have not completely stopped buying to hedge against the scenario where I am wrong and the markets rise a lot more before they fall.

This past year has taught me to not seek the excitement of shorts and continue to restrain myself when shares present them to me in seemingly comfortable markets because I’m sure deals will present themselves later. There is a lot of value in doing nothing, the hard part is to recognize this and then being patient about it.

Comparative Analysis – PFC 8.92% vs. NHPC 8.92% – which tax-free bonds issue is better to invest?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Two power sector companies are inviting your applications for their tax-free bonds – PFC 8.92% bond issue is already open, the issue size is Rs. 3,875.90 crore and has received an extremely good response from the investors by getting subscribed to the tune of Rs. 2,639.30 crore in just two days time. NHPC is entering the field for a competitive fight from October 18th with a smaller issue size of Rs. 1,000 crore.

As far as the features of these two issues are concerned, the fight is so close that it has become extremely difficult for retail investors to make a decision. There are so many features which are absolutely same in both the issues and there are other features which are similar, but do not have much relevance to be considered. Just have a look at the features which are same and which are mildly different:

With interest rates exactly the same, both being PSUs and with features so similar, it becomes extremely difficult to make a choice based on just the features of these two issues. So, I thought of doing a fundamental comparative analysis between the two companies.

Profile of PFC & NHPC

PFC got incorporated in 1986 as a financial institution to finance, facilitate and promote India’s power sector development. It is a Central Public Sector Enterprise (CPSE) and got declared a Mini-Ratna enterprise in 1988 and entitled Navratna status in 2007.

PFC provides loans for various power-sector activities, including power generation, power distribution, power transmission and plant renovation and maintenance. PFC finances state electricity boards (SEBs), power generating companies of states and independent power producers (IPPs).

NHPC got established in 1975 to execute all aspects of hydroelectric power project development, from concept to commissioning. It was declared a Mini-Ratna Category-I CPSE in 2008 and has recently sought Navratna status from the government.

To be eligible for ‘Navratna’ status, a company needs to have a score of 60 out of 100, based on certain parameters which include net profit, net worth, total manpower cost, total cost of production, cost of services, Profit Before Depreciation, Interest and Taxes (PBDIT), capital employed etc.

As a Mini-Ratna Category-I entity, NHPC has been granted autonomy to undertake new projects. NHPC has developed and constructed 17 hydroelectric power stations and has current total generating capacity of 5,676.2 MW which is approximately 14.4% of the total hydel generating capacity in India.

It has power stations and hydroelectric projects located predominantly in the North and North East of India, in the states of Jammu & Kashmir, Himachal Pradesh, Uttrakhand, Arunachal Pradesh, Assam, Manipur, Sikkim. and West Bengal.

Credit Ratings of PFC & NHPC

International credit rating agencies Moody’s, Fitch and Standard & Poor’s (S&P) have granted PFC long-term foreign currency issuer ratings of “Baa3”, “BBB-” and “BBB-“, respectively, which are at par with the sovereign ratings for India.

NHPC has also been assigned “BBB-” rating by Fitch. S&P had also given “BBB-” rating to NHPC and removed it from ‘CreditWatch’ in September 2009, based on its assessment of NHPC’s “very strong” link with the government. S&P expressed its opinion that “there is a high likelihood that the government of India would provide extraordinary support for the company in the event of any financial distress”.

S&P also said that the ongoing support from the government is reflected in a tripartite agreement between NHPC, state electricity boards and the government, which largely mitigates the risk of any delay in payments from NHPC’s customers – the state electricity boards (SEBs) that have weak credit profiles.

Financials & other factors to consider

NHPC is a bigger company with a market cap of Rs. 22,203 crore based on its 15th October’s closing share price of Rs. 18.05. On the other hand, market cap of PFC is Rs. 17,306 crore with its share price being Rs. 131.10.

NHPC is also a less riskier company and it gets reflected in its PE ratio. The market is ready to pay NHPC a higher price for buying its shares based on its earnings, as compared to PFC. NHPC is trading at a P/E Ratio of 8.48 times as compared to PFC which is trading at 3.90 times.

PFC’s P/E Ratio of 3.90X is too low and it makes me feel that the market either believes PFC’s earnings to decline considerably at some point in future or some of the borrowers to default on their loan/interest payments.

Final Opinion

I am not a power sector expert. But, as a retail investor, I think NHPC is a better company to invest your money in the power sector. As a common consumer of electricity, this is what I understand – I buy electricity from a private power distribution company in Delhi, which in turn buys it from a power generation company like NHPC etc. Power generation business is a capital intensive business, for which companies like NHPC get capital infusion from the governments, loans from the power financiers like PFC, REC etc. and carry internal accruals by generating profits.

For NHPC, it is better to take money directly from us, the retail investors, rather than we giving money to PFC and then PFC lending it to NHPC at a higher rate. PFC’s fortunes hinge on the power producers like NHPC. If power producers are doing well, PFC would do better, but, if they are not doing good, PFC cannot do anything about it. This relationship is somewhat similar to real estate developers and project finance companies.

The fortunes of these power producers also depend on its cost of the factors of production, like labour, raw materials, technology, machinery etc. Most power plants here in India are coal-based, for whom it becomes a problem if coal supply gets interrupted or they have to import expensive coal due to its scarcity or falling value of rupee. For NHPC, the raw material cost is minimal.

My views might reflect very basic understanding because I don’t know how exactly things get carried out. I could have done some deep research on the functionalities & technicalities of the power sector companies, but then it would have become too complicated for me as well you to understand. So, personally & marginally, I prefer NHPC tax-free bonds over PFC tax-free bonds. Which one is your preference? Please share it share.

NHPC 8.92% Tax-Free Bonds – October 2013 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

NHPC Limited (formerly National Hydroelectric Power Corporation) will launch its issue of tax-free bonds from October 18th, the coming Friday. Coupon rates of NHPC are absolutely same as they are offered by PFC in its issue which is getting open for subscription from today i.e 8.92% per annum for 20 years, 8.79% per annum for 15 years and 8.43% per annum for 10 years.

NHPC has decided to run this issue till November 11th, the same date on which the PFC issue is also slated to get closed. But, in case of oversubscription or undersubscription, the company has the authority to preclose the issue or extend the issue closing date.

Size of the Issue – The base size of the issue is Rs. 500 crore and there is a green-shoe option with the company to retain oversubscription of an additional Rs. 500 crore, thus making this issue of Rs. 1,000 crore the smallest of all the tax-free bond issues launched this financial year so far.

Rs. 1,000 crore is the total amount NHPC has been authorised to raise from tax-free bonds this financial year. I think NHPC will not be required to do any private placement to raise money from tax-free bonds as there is enough appetite for its high yielding bonds in the market.

Red Signal again for NRIs – Like IIFCL did that first, NHPC has also decided not to offer these bonds to the non-resident Indians (NRIs) and qualified foreign investors (QFIs). So, if any of the NRIs wants to invest in the tax-free bonds yielding as high as 8.92%, then he/she will have to opt for the PFC issue.

Rating of the Issue – Like PFC issue, NHPC issue is also ‘AAA’ rated. ICRA, CARE and India Ratings have assigned ‘AAA’ rating to this issue, which is their highest rating to any debt issue. Also, the bonds will be ‘Secured’ by a pari passu first charge on specific assets of the company, with an asset cover of one time of the total outstanding amount of bonds.

Listing – NHPC has become the first company to propose and obtain the necessary approval to get its tax-free bonds listed on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE) this financial year.

Investors can apply for these bonds either in demat form or in physical form, as per their choice. The company will get the bonds allotted and listed within 12 working days from the issue closing date.

No Lock-in Period – As these bonds get traded on the stock exchanges and do not provide any tax deduction u/s 80CCF or 54EC, there is no lock-in period with these bonds. The investors are allowed to sell these bonds at the prevailing market rate whenever they want to do so. There are no charges involved with premature encashment and there will not be any tax penalty payable to the tax authorities.

No TDS – As these are tax-free bonds, there is no question of TDS getting deducted, whether you take them in physical form or demat form.

Interest Payment Date & Record Date – NHPC has decided to fix April 1, 2014 as the first interest payment date. For subsequent years also, interest will be paid on April 1st every year. The record date for payment of interest or the maturity amount will be 15 days prior to the date on which such amount is payable.

Categories of Investors & Allocation Ratio – The investors again have been classified in the following four categories and each category has certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 15% of the issue is reserved
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved
Category III – High Networth Individuals (HNIs) including HUFs – 25% of the issue is reserved
Category IV – Resident Indian Individuals (RIIs) including HUFs – 40% of the issue is reserved

Allotment on FCFS Basis – Subject to the allocation ratio, allotment will be made on a first come first serve (FCFS) basis in each of the investor categories, based on the date of upload of each application into the electronic system of the stock exchanges.

Minimum & Maximum Investment – Investors are required to apply for a minimum of five bonds of Rs. 1,000 face value each, thus making Rs. 5,000 as the minimum investment to be made. An applicant may choose to apply for these bonds of the same series or across different series also.

Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest on Application Money & Refund – NHPC will pay interest to the successful allottees on their application money at the applicable coupon rates, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Though the issue is getting launched four days after the PFC issue, I think it is very important for the investors, who are planning to invest in PFC and NHPC both or only in NHPC, to first go for the NHPC issue as soon as possible because the issue size in itself is relatively much smaller. Retail investors will have only Rs. 400 crore to be invested in this issue as compared to Rs. 1,550.36 crore to be invested in the PFC issue.

Also, I think the spillover portion of the non-retail investors is unlikely to fall into retail investors’ kitty this time around. As compared to the PFC issue, I think there is a high probability that this issue will get a better response from the non-retail investors also, as they would like to diversify their investments across different companies and this is the first time NHPC has been issuing these tax-free bonds through a public issue.

That is why, I think this issue will get preclosed much earlier than its official closing date of November 11th. I am expecting this issue to get oversubscribed very soon and get closed in October itself.

Application Form of NHPC Tax Free Bonds

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in NHPC tax-free bonds, you can contact me at +919811797407

Cost of a car in Singapore which costs Rs. 775,000 here in India – Shockingly Very High at Rs. 7,000,000

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Wish you all a Happy Dussehra! Festive season has started here in India and though somewhat muted, usual festival activities are up and running now. People have started shopping for the festival stuffs and winter clothing here in North India.

These days are considered auspicious for various kind of consumer durable purchases also, like TVs, refrigerators, washing machines, furniture, cars etc. I am sure many people in India wait for these festive offers to finalize their buying decisions.

But, due to slowdown and high interest rates, people are trying to postpone their discretionary spending for quite some time now. Auto industry has also suffered one such blow here in India. On one hand, auto manufacturers are raising their product prices to maintain their margins and on the other hand, to attract the customers & beat this slowdown, they are trying different kind of things and showering various offers on the prospective buyers.

But, will you be interested in buying a car if the government today hikes the excise duty or import duty and imposes some kind of additional tax to make its price nearly 5-10 times its current market price? Yes, it is not 5-10%, it is correctly written as 5-10 times.

To be precise, I mean, will you be interested in buying a Honda City for Rs. 65,78,550 against its current on-road price of Rs. 10,58,196 for the same model?

Background to this Post

Last weekend, I, along with a friend of mine, went to Select CityWalk Mall in Saket, New Delhi. We had nothing lined-up in our agenda to shop for but to kill time and to quickly check if anything is there on the shelves for the coming winter season to match our spending budgets. If you are familiar with this area of Delhi, you must be knowing that Select CityWalk has two more malls besides it, one is MGF Metropolitan Mall and the other is DLF Place.

After we got exhausted with Select CityWalk, we decided to quickly roam around MGF Metropolitan Mall which is relatively smaller in size and not fully occupied also. While passing by the Volkswagen showroom, our eyes fell on a stunningly looking black Volkswagen CrossPolo. It is not that we saw Polo for the first time, but this recently launched sporty version of Polo, in the form of CrossPolo, was looking amazingly super hot.

Price of Volkswagen CrossPolo in Delhi

Just to satisfy our curiosity of knowing its price, we asked the sales guy for its price. He handed the price list to us, which was reading its ex-showroom price as Rs. 7,75,000 and the on-road price of Rs. 8,71,875, including RTO/registration charges & Road Tax of Rs. 69,750 and insurance of Rs. 27,125.

Though its looks were simply amazing, we felt it was much overpriced. We discussed with each other that one would rather buy a bigger sedan like Honda City or Hyundai Verna or an entry level SUV like Renault Duster or Ford EcoSport with such a price tag.

After wasting 3-4 hours there, I came back to my place and started checking my regular mails. While deleting my spam mails, a mail from one of the car blogging websites striked me. I decided to visit the site and started to research more about CrossPolo. Then somehow I searched about it on Google and saw a link which had its Singapore price.

I clicked on the link and what I saw was this:

Submodel Price Fuel Economy Power Transmission Detailed Info

1.2 TSI DSG (A) $138,800 18.1 km/L 105bhp 7-speed(A) DSG Specs/Features

Note: ‘$’ is Singapore Dollar or SGD here.

As I had an idea about the exchange rate of Singapore dollar vis-a-vis Indian Rupee, I quickly opened the calculator on my desktop and started pressing the keys of my keyboard. I was stunned to see the figure. At Rs. 49.50 to a Singapore dollar, it was Rs. 68,70,600.

I thought I was making some kind of mistake somewhere or I was missing something which should be there in the details of its price. To cross-check, I decided to check it on Volkswagen Singapore website. The price its “Price List” carried was quoted even higher at $1,54,300. So, probably there was nothing which I was missing. At $1,53,300, the price tag in Indian Rupee stands at Rs. 75,88,350.

Break-up of Volkswagen CrossPolo Price

Some other cars with huge price differences

So, why the cars in Singapore are so expensive?

Though the cost of car ownership is shockingly very high in Singapore, it has all the noble reasons behind it. Singapore is a relatively smaller country with a land area of only 710 square km, which is less than half of Delhi’s land area of 1,484 square km and just more than Mumbai’s land area of 603 square km.

It is the policy of the Singapore government to discourage individual car ownership, make its people use public transport to the maximum extent possible and thereby prevent congestion on its limited road space.

The government there does not raise taxes to discourage vehicle buyers, rather it has Vehicle Quota System (VQS) in place, which helps its authorities in controlling the number of cars out there at any point of time. Thereafter, the demand and supply factors determine the price of Certificate of Entitlement (COE) via fortnightly auctions.

Land Transport Authority of Singapore (LTA) has set 0.50% as the annual growth rate of its vehicle population between February 2013 and January 2015. In India, we don’t even have a system of scrapping old cars, how can we think of controlling our vehicle population growth and set a target for the same. Our automobile industry gets disappointed if the import duty or excise duty on vehicles gets raised by the finance ministry.

Some other interesting facts about Singapore Car Market

* Average Life of a car is 10 years – As per the policy of Singapore government, you will be given a Certificate of Entitlement (COE) which remains valid only for 10 years, after which it gets expired and you are not allowed to run your car on its roads. After 10 years, you may choose to de-register your car or get your COE revalidated for another 5 or 10-year period by paying the prevailing Quota Premium.

We buy a Maruti 800 here in India for Rs. 52,500 (on-road price Delhi, 1983), make it run for 25 years and celebrate its Silver Jubilee. That ways the average cost of owning a Maruti 800 works out to be Rs. 2,100 per year. Now, if you buy a Honda City in Singapore at SGD 132,900 with a cap of 10 years running life, your average yearly cost would work out to be Rs. 657,855. I think this is more than what an average urban youth would earn in an entire year here in India.

* Average Interest Rate < 2% – Singapore is a developed country and the risks, which make loans costlier in a country, are in control there. So, the interest rate charged there on a new car loan is below 2% p.a. for 1-5 year tenors. I think it must be more than 12% average here in India.

* Maximum Loan Tenure of 5 Years – Even though the life of a car in Singapore is considered to be 10 years, the maximum tenure you can ask for a loan is 5 years.

* Maximum 60% loan, Rest Down Payment – If you are in Singapore seeking to buy a car, the maximum loan you will be able to get from a car financier is 60% and that too if the Open Market Value (OMV) of the car of your choice is less than SGD 20,000. Rest you will have to manage from your own pocket. For cars with OMV of more than SGD 20,000, the percentage of loan you can avail is even lower at 50% of the price. So, the higher the market value of your car, the lower loan is available at your disposal.

Let’s quickly take an example:

Honda City 1.5 AT Price – SGD 132,900 i.e. Rs. 65,78,550
Open Market Value (OMV) – SGD 16,120
60% Loan Availed – SGD 79,740 i.e. Rs. 39,47,130
Tenure of the Loan – 5 years
Interest Rate – 1.88% p.a.
EMI works out to be SGD 969 i.e. Rs. 47,966 per month

* Yearly Road Tax – A car owner in Singapore is required to pay road tax on a yearly basis. For the same model of Honda City, it is SGD 684 i.e. Rs. 33,858.

* Petrol costs SGD 2.20 a litre – No, this will not cost you 5-10 times its price here in India, but it is still costly. It is SGD 2.20 a litre i.e. Rs. 108.90. I have taken this price from Caltex Singapore website and Shell Singapore website.

What makes up “Pump Price” there in Singapore? Here is the chart having the break-up of SGD 2.20 a litre. High quality and premium service standards come at a cost. Here in India, we keep playing politics in the name of poverty and providing subsidies to the poor Indians. Unlike India, oil marketing companies (OMCs) in Singapore are allowed to earn reasonable profits.

So, now you must be thinking that it is really very costly to own a car in Singapore and probably the government is crazy there to do that. But, then I think if these crazy policies of the government there have been successful enough to make that country such a beautiful place to live, work and enjoy your holidays, then these policies are perfectly superior to the policies of the Indian government here.

Finally, I am no expert of Singapore car market, so whatever I have mentioned here is just a small research work. So, if you find any major discrepancy in any of the information here, please let me know, I’ll correct it immediately.

PFC 8.92% Tax-Free Bonds – October 2013 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

‘AAA’ rated REC issue offered 8.71% to its investors, ‘AA+’ rated HUDCO issue fixed it at 8.76% and then ‘AAA’ rated IIFCL issue managed to cross REC’s peak rate of interest with 8.75%, but now it is the turn of Power Finance Corporation (PFC) to surpass all previous rates to set this year’s highest interest rate on its tax-free bonds by offering 8.92% for a 20-year duration.

PFC would be the fourth company to launch its public issue of tax free bonds this year from Monday i.e. October 14th. The issue would run till fifth Monday i.e. November 11th. But, the company may extend it or preclose it, depending on the investors’ response to the issue.

Interest rates offered by PFC are the highest rates for all three tenors. PFC has set its coupon rates at 8.92% per annum for 20 years, 8.79% per annum for 15 years and 8.43% per annum for 10 years. This jump is due to a rise in the benchmark G-Sec rates in the last 10-15 trading days, after the Repo Rate hike by the RBI.

Size of the Issue – PFC has been authorised to raise Rs. 5,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 1,124.10 crore through a private placement on August 30th. The company plans to raise the remaining 3,875.90 crore from this issue, with the base issue size of Rs. 750 crore and the green-shoe option of Rs. 3,125.90 crore.

Like REC, if this issue gets subscribed to the tune of Rs. 3,875.90 crore, it will be the last issue of PFC this financial year.

Green Signal for NRIs – After IIFCL not allowing NRIs and QFIs to invest in its issue, PFC has decided not to do that. NRIs, on repatriation basis and on non-repatriation basis, are eligible to invest in this issue. Qualified Foreign Investors (QFIs) are also eligible to participate in this issue.

No Lock-in Period – Many people have been asking me about the lock-in period of these tax-free bond issues, but I don’t know how I missed to mention it here in all my previous posts that there is no lock-in period with these tax-free bonds. If you subscribe to these bonds in demat form, you can sell them anytime you want after their listing on the stock exchange.

These are not tax saving bonds, like 80CCF Infrastructure Bonds or 54EC Capital Gain Tax Saving Bonds, which carry a lock-in period of five years and three years respectively.

Listing – PFC will get these bonds listed only on the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in demat form or in physical form, as per their choice. The company will get the bonds allotted and listed within 12 working days from the issue closing date.

Rating of the issue – Three credit rating agencies, CRISIL, ICRA and CARE have rated this issue and all of them have rated it as ‘AAA’, which is their highest rating to any debt issue. Also, these bonds are ‘Secured’ in nature against certain assets of the company.

Category I – Qualified Institutional Bidders – 15% of the issue is reserved
Category II – Non-Institutional Investors – 20% of the issue is reserved
Category III – High Networth Individuals including HUFs, NRIs & QFIs – 25% of the issue reserved
Category IV – Resident Indian Individuals including HUFs, NRIs & QFIs – 40% of the issue reserved

Minimum & Maximum Investment – There is no change in the minimum investment requirement of Rs. 5,000 i.e. at least 5 bonds of Rs. 1,000 face value each. Retail Investors’ investment limit stands at Rs. 10 lakhs, beyond which they will be considered as HNIs and will get a lower rate of interest.

Interest on Application Money & Refund – PFC will pay interest to the successful allottees on their application money at the applicable coupon rates, from the date of realization of application money up to one day prior to the deemed date of allotment. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Factors favouring investment in this PFC Issue…

* Highest Coupon Rates – Thanks to a sudden spike in the G-Sec yields in the last 10-12 trading days since the RBI raised the Repo Rate in its monetary policy of September 20th, PFC has been to offer the highest interest rates of the current financial year. I think with 8.92% or 8.79% tax-free rates, investors in the 30% or 20% tax brackets would not even think of going for a bank FD @ 9%.

* RBI cutting the MSF Rate – RBI has cut the MSF Rate by 50 basis points to 9% a couple of days back. The idea was to reduce liquidity crunch in the banking system and help banks in reducing their cost of overnight (very short-term) borrowings and also normalize the yield curve. This move makes market participants believe that the RBI will try to cap the rise in overall interest rates as much as possible.

* Fall in G-Sec Yield – As a result of the RBI’s move to cut the MSF Rate, the 10-year G-Sec yield has fallen from 8.68% to 8.46% in the last couple of days. If this fall is not temporary and continues for a little longer time, you would see a fall in the coupon rates of the upcoming tax-free bond issues.

* Postponement of QE3 Tapering & US Shutdown – US Federal Reserve’s decision to postpone QE3 tapering and a partial shutdown in the US have resulted in a fall in the 10-year bond yield there from 3%+ to 2.64% today. This should also keep the sentiment somewhat healthy here in the Indian bond market.

* Steep fall in September Trade Deficit – With a fall in gold & oil imports and a surge in exports, the Ministry of Commerce today announced a steep fall in our September trade deficit. The problem, which was becoming too burdensome for our economy, is finally getting controlled. This should strengthen the value of Indian rupee against the US dollar in the coming days and the bond yield should also move lower.

Factors against this PFC Issue – Though there are not many factors which come to my mind against this issue, but overall things are not very bright for the power financing sector here in India. PFC, REC and PTC India Financial Services are some of the companies which have been struggling to get their money back which they have been lending to the state electricity boards (SEBs) over the years.

These kind of events have resulted in its share price falling from Rs. 350+ during 2010-11 to below Rs. 100 this year and I think stock price performance is a good barometer to check a company’s current financial health and future prospects. So, this is one thing which you should consider before investing your money in this issue.

With PFC offering relatively higher interest rates and NHPC issue hitting the market only in the third week, I would prefer to invest my money in this issue as compared to HUDCO and IIFCL issues. With so many positives and a possible fall in inflation & interest rates, I think PFC’s rates would be the highest coupon rates offered by any ‘AAA’ rated issuer this financial year.

Application Form of PFC Tax Free Bonds

As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in PFC tax-free bonds, you can contact me at +919811797407

Weekend links – 10/4/2013

Let’s start this week with a great article in the Economist about America’s shutdown, and how that’s no way to run a country. Washington Post on how Australia once had a shutdown similar to the US, and the surprising consequences of that.

Abheek Barua has a highly instructive, if somewhat technical op-ed on India’s monetary policy, and what Dr. Rajan has been doing and needs to watch out for.

John Elliott has an excellent blog post on Rahul Gandhi’s outburst, Laloo’s jailing and what opportunities this could potentially open up for Rahul Gandhi, and what he needs to do to build on this.

The Aam Aadmi Party doesn’t quite have the momentum it once had, but good people are working on the ground to achieve results in the Delhi assembly elections, and I hope something good comes out of it. BS on how AAP breaks the hitherto set election mold.

Maharashtra is planning to start another city 80 kms from Mumbai, and I know it can be easy to discouraged about any new project like this but if and when this were to come into fruition, it will be a great thing.

Finally, the question that has been on your mind all week long, why do these lizards have green blood?

Primer on US Government Shutdown

The American government shutdown will probably cover the next few news cycles unless something very big happens, or it gets resolved very quickly, and in this post I’m going to give a quick primer on what this shutdown actually means.

What does the government shut down Mean?

The US federal government employs more than 2 million people, and out of these 2 million people, 800,000 are deemed to be non – essential, and they will be asked to take a temporary unpaid leave which is called a furlough. The other 1 million plus employees who continue to work will get paid late.

The federal government has departments and employees who take care of airport traffic control, national parks, food safety, border security, zoos, post office and several others like this, and each department has their own list of who is essential and who is non – essential and based on this classification, it is has been decided who takes a temporary leave and who shows up for work.

Why is the US government shutting down?

The United States Congress has two houses – House of Representatives and the Senate. The US government runs from a fiscal year of October 1st to September 30th. The Congress passes the budget that allows appropriation of funds for the government to function, and this budget should pass both the houses.

Currently, the House is controlled by the Republicans and the Senate is controlled by the Democrats, and while the spending bill passes one house, the other house rejects it and sends it back with their conditions.

Since the spending bill couldn’t pass, the government couldn’t authorize payments, and had to partially shut down.

What is causing the impasse?

In simple words, the Democrat led Senate passes the spending bill and sends it to the Republican led House. The House attaches some provisions related to what is commonly known as Obamacare, and sends it back to the Senate for their approval. These are unacceptable to the Senate who then remove these provisions, and send the bill back to the Senate who add back the provisions. This back and forth happened seven times before they ran out of time, and the NYT has a good graphic to explain this easily and quickly.

Obamacare is the Patient Protection and Affordable Care Act and has perhaps been the biggest fighting point between the Republicans and the Democrats. It was signed into law about three years ago but its legality was challenged, and the Supreme Court passed a ruling saying that it was constitutionally valid in June of last year. Its provisions are going to come into effect only now and that’s where the negotiations (or lack thereof) have been.

Is this the same as the debt ceiling?

Sadly, no. I say sadly because that drama is also coming upon us very soon. So first Congress needs to pass the budget so that it can appropriate funds, and then it needs to raise the government’s borrowing limit so it can borrow the money it needs to spend.

What are the effects of the government shut down?

This is not the first time the government is partially shutting down and there have been a total of 17 times that this has happened. But this is still significant enough to affect people’s lives and that’s why it is frustrating for all Americans that the two parties could not reach a compromise.

The big problem is of course the very huge number of people who will not get paid for what is petty politics. Two parties mandated with running a country should be able to work out a compromise when it affects the livelihood of close to a million people. Sadly, politics seems to the same every where.

For the larger economy, the problem that the government employees who are not getting paid will not spend, and then there is a possibility that some of them are forced to default on their mortgage payments, and either of these of course is not good for an economy.

In my opinion, this isn’t good news for the international economy either, and money will not flow into other markets of the world because of the antics of the US Congress. I say this because it is expected that a resolution on this is reached soon, and both parties reach a compromise quickly, and also because no other country presents a good investing alternative anyway, which is what we saw during the 2008 crisis.

Please leave a comment if you have any questions, and I’ll try to answer them to the best of my knowledge.

IIFCL 8.75% Tax-Free Bonds – October 2013 Tranche-I Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

After REC 8.71% issue and HUDCO 8.76% issue, India Infrastructure Finance Company Limited (IIFCL) would be the third such company to come up with its public issue of tax free bonds this financial year from the coming Thursday i.e. October 3rd.

IIFCL has fixed its coupon rates at 8.75% per annum for 20 years, 8.63% per annum for 15 years and 8.26% per annum for 10 years. As compared to the HUDCO issue, the rates are lower for the 10 year and 15 year options, but higher for the 20 year option. This is probably due to a rise in the longer duration rates in the last 10-odd days, after the Repo Rate hike by the RBI.

The issue has been rated ‘AAA’ as against the currently running ‘AA+’ rated issue of HUDCO. So, I think the investors, who were not subscribing to the HUDCO issue due to its lower rating of ‘AA+’, should definitely lap it up to enjoy higher tax free rate of interest.

The official closing date of the issue is October 31, but the company may extend it or preclose it, depending on the investors’ response to the issue.

Size of the Issue – IIFCL is allowed to raise Rs. 10,000 crore from tax-free bonds this financial year, out of which it has already raised Rs. 2,963.20 crore through three of its private placements. The company plans to raise Rs. 2,500 crore from this issue, including the green-shoe option of Rs. 2,000 crore, and that is why the company is calling it to be “Tranche-I Issue”.

The issue size is smaller in comparison to the issue size of REC bonds of Rs. 3,500 crore and also of HUDCO bonds of Rs. 4,809.20 crore. I was expecting IIFCL to raise Rs. 7,000 crore from this issue itself, but probably the company sees lesser investor appetite at this point in time, as the market is already flooded with other bond or NCD issues.

NRIs not allowed – This was quite surprising to me. Contrary to what was appearing in the newspapers a few days back to attract foreign investors or non-resident Indians (NRIs) to invest in some kind of infra bonds issued by IIFCL, the company has not allowed them to invest in this Tranche-I issue at least. Probably they have their own reasons behind it.

Listing – IIFCL will get these bonds listed only on the Bombay Stock Exchange (BSE). Investors can apply for these bonds either in demat form or in physical form, as per their comfort and requirement. The company will get the bonds allotted and listed within 12 working days from the issue closing date.

Interest on Application Money & Refund – IIFCL will pay interest to the successful allottees on their application money, from the date of realization of application money up to one day prior to the deemed date of allotment, at the applicable coupon rates. Unsuccessful allottees will get interest @ 5% per annum on their refund money.

Rating of the issue – Four companies have rated this issue, ICRA, Brickwork Ratings, CARE and India Ratings, and all of them have rated this issue at ‘AAA’, which is their highest rating to any debt issue. Also, these bonds are ‘Secured’ in nature against certain assets of the company.

Categories of Investors & Allocation Ratio – The investors again have been classified in the following four categories and each category will have certain percentage of the issue reserved for the allotment:

Category I – Qualified Institutional Bidders (QIBs) – 15% of the issue is reserved
Category II – Non-Institutional Investors (NIIs) – 20% of the issue is reserved
Category III – High Networth Individuals (HNIs) including HUFs – 25% of the issue is reserved
Category IV – Resident Indian Individuals (RIIs) including HUFs – 40% of the issue is reserved

Profile of the company – IIFCL, which started its operations in 2006, is 100% owned by the Government of India. IIFCL has been a key institution in the infrastructure financing space and serves the strategic role in financing economically viable infrastructure projects in the country.

IIFCL is a favoured institution with the Government of India. Its board of directors includes representatives from the Ministry of Finance and the Planning Commission. Also, India Infrastructure Finance Company UK (IIFC-UK), IIFCL’s wholly-owned subsidiary, has a government-guaranteed $5 billion credit line from the Reserve Bank of India (RBI) against India’s foreign exchange reserves.

The government has supported IIFCL by way of regular equity infusions and this figure stood at Rs. 400 crore last financial year. IIFCL has total borrowings of Rs. 29,493 crore as on March 31, 2013, out of which 72% borrowings carry sovereign guarantee by the government.

With the interest rates still ruling higher, IIFCL’s interest rates look quite attractive to me. IIFCL is a special company in the infrastructure finance space and I think the support extended to it by the government will continue in the near future as well. With so many positives, I think this issue definitely merits some consideration by the investors.

Download the Application Forms of IIFCL Tax Free Bonds

As per SEBI guideline, ‘Bidding’ is mandatory before banking the application form. For bidding of your application, any further info or to invest in IIFCL tax-free bonds, you can contact me at +919811797407