Income Tax - Basics

The government of India imposes an income tax on taxable income of individuals, HUFs (Hindu Undivided Families), Companies, Firms, Co-operative societies, trusts, etc. Levy of tax on different people depends on his/her taxable income. In India levy of Income Tax is governed by the Indian Income Tax Act, 1961.
Generally people are not interested in understanding the complicated process & techniques of Tax calculation; they always like to have a short cut for everything. After understanding your requirements we have prepared this article to make you equipped to face the uncertainties in Tax related issues.

1. Who has to pay Income tax?
Any individual, corporate, firm, society or any judicial legal entity having income earned & received in India will be liable to pay Income tax to the Income tax Department of India.

2. Who is an assessee in Income Tax?
Assessee is a person by whom Income tax is payable under Income Tax Act, 1961 of India.

3. What is Assessment year in Income Tax?Let's say Financial Year is from 1st April-2010 to 31st March-2011, then Assessment year for Income Tax purpose is year 1st April 2011 to 31st March 2012). In this case Financial Year would be called previous year.

4. What is a PAN (Permanent Account Number)?The permanent account number is allotted by the assessing officer to any person for the purpose of identification. It's a Unique 10 digits number for e.g. KKJMN6994P.

5. Do I have to apply for a permanent account number (PAN)? How do I apply?If you fall under any of the below mentioned categories, you have to apply for PAN in Form 49A:

• If your total income in the previous year exceeds maximum amount not chargeable to tax. (i.e.; Rs.160000, 190000 & 240000 for general, ladies & senior citizens respectively.)
• If you are carrying any business or profession, whose total sales, turnover or gross receipts, are or is likely to exceed Rs 500,000.
• If you are assessable as charitable trust.

When do you need a PAN

• Income tax return
• Any correspondence with Income Tax Authority
• Challans for payment of direct taxes
• Application for installation of a telephone connection (including a cellular telephone)
• Application for opening a bank account
• Application for opening DMAT account
• Documents pertaining to sale or purchase of a motor vehicle (other than two wheelers) & immovable property valued at Rs 500,000 or more
• Documents pertaining to a time deposit/fixed deposits exceeding Rs 50,000 with a bank
• Documents pertaining to deposits exceeding Rs 50,000 in any account with a Post-Office Savings Bank
• Documents pertaining to a contract of a value exceeding Rs 1 million (Rs 10 lakhs) for sale or purchase of securities (shares, debentures)
• At the time of purchase of Mutual fund units.
• Payment to hotels and restaurants against their bills for an amount exceeding Rs. 25,000 at any one time

However following people may not apply for PAN

• Who have agricultural income and are not in receipt of any other income 
• NRIs
• Central Government, State Government and Consular Officers, in transactions where they are the payers.

6. What are the types of income chargeable to Income tax?

• Salary Income
• House Property Income
• Income from business or profession
• Income from sale of capital assets
• Other income

7. What is residential status under Income Tax Act?
In India, as in many other countries, the charge of income tax and the scope of taxable income vary with residential status of the assessee.

There are three categories of taxable entities viz.

• Resident and ordinarily resident (ROR)
• Resident but not ordinary resident (RNOR)
• Non-residents (NR)

 

The law prescribes two alternative criterions to decide the residential status of an assessee. Both criterions relate to the physical presence of the taxpayer in India in the course of the previous year which would be the twelve months from April 1 to March 31.

A person is said to be "resident" in India in any previous year if he -
a) Is in India in that year for an aggregate period of 182 days or more; or

b) having within the four years preceding that year been in India for a period of 365 days or more, is in India in that year for an aggregate period of 60 days or more.


The above provisions are applicable to all individuals irrespective of their nationality. However, as a special concession for Indian citizens and foreign citizens of Indian origin, the period of 60 days referred to in Clause (b) above, will be extended to 182 days in two cases:

(i) Where an Indian citizen leaves India in any year for employment outside India; and
(ii) Where an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India.

 

In the above context, an individual visiting India several times during the relevant "previous year" should note that judicial authorities in India have held that both the days of entry and exit are counted while calculating the number of days stay in India, irrespective of however short the time spent in India on those two days may be.

A "non-resident" is merely defined as a person who is not a "resident" i.e. one who does not satisfy either of the two prescribed tests of residence.

An individual, who is defined as Resident in a given financial year is said to be "not ordinarily resident" in any previous year if he has been a non-resident in India 9 out of the 10 preceding previous years or he has during the 7 preceding previous years been in India for a period of, or periods amounting in all to, 729 days or less.

 

Conditions	ROR	RNOR	NR
In India >= 182 days in FY	Yes	Yes	No
NR in India in 9 out of 10 preceding FYs	No	Yes	NA
In India for <=729 days in preceding 7 FYs	No	Yes	NA
In India >= 60 days in FY and >= 365 days in preceding 4 FYs	NA	NA	No
(FY = Current Financial Year)

 

8. Is it compulsory to maintain books of accounts?
Yes, IF you are carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other notified profession. And Yes, IF you are carrying on business or profession (other than professions mentioned earlier) and IF the income from business or profession exceeds Rs.1,20,000/- or the total sales, turnover or gross receipts in the business or profession exceeds Rs. 10 lakhs in any one of the three years immediately preceding the previous year.

9. Is it compulsory to get the books audited?
(i) Every person carrying on business shall get his accounts audited if the total sales, turnover or gross receipts in business exceed Rs. 40 lakhs in the previous year.

(ii) Every person carrying on profession shall get his accounts audited if his gross receipts exceed Rs. 10 lakhs in the previous year.

The bigger and bigger picture: The developing world’s banks are flourishing

THERE is only one thing that is still small about banks in emerging economies: their bosses’ pay packets. The head of China’s ICBC, the world’s biggest bank by market value, received just under $134,000 in 2009, a couple of decimal places shy of his Western counterparts. On all other measures these firms are big enough to make a Wall Street banker reconsider his status in the universe. In terms of market value they now account for almost half the industry’s total worldwide, nearly twice as much as in 2005. That might reflect an excess of optimism, but emerging-market banks are big by other measures too. According to Tab Bowers, a consultant at McKinsey, they account for about a third of the industry’s global revenues, matching the emerging countries’ share of world GDP. By the most solid measures of all, profits, dividends and Tier-1 capital, listed banks domiciled in emerging markets now account for between 27% and 53% of the global industry (see chart 1). China is responsible for about half of this share. Big Western banks’ profits from developing countries add up to perhaps a quarter of the local firms’.

Despite their large size, most emerging-market banks are not household names in the West. Most rich-world investors are aware of China’s “big three” banks, at or near the top of the global rankings (see table 2), but know little about them. Aside from the Chinese banks, the global top 25 include a handful of big Russian and Brazilian firms, and lower down there is a long list of smaller banks that together add up to quite a lot. The average listed rich-country bank in the top 150 has a market value of about $36 billion, against $24 billion for emerging-market firms and just $15 billion if China is excluded. Many are state-controlled and most were handsomely profitable through the crisis and have good capital and funding profiles. Few have much business overseas.

The numbers game

League tables in banking are dangerous things. In 1990 all ten of the world’s largest banks by assets were either Japanese or French. Such things can change quickly. The big emerging-market banks should therefore view their rise with a mixture of pride and nervousness. China’s biggest banks are all still state-controlled.ICBC, spun out of the People’s Bank of China in 1984, is run by Jiang Jianqing, a career banker. It has been making a flurry of investments in Asia and Africa. China Construction Bank (CCB) has its roots in development banking. Its boss is Guo Shuqing, who ran China’s foreign-exchange fund before taking CCB public in 2005 in the first big bank flotation. Bank of China has a grand pedigree dating back to 1912. Traditionally China’s foreign-exchange and trade bank, it still has the largest presence abroad. Bank of Communications is the only Shanghai-based big firm, in which HSBC holds a 19% share.

Brazil’s two big private banks are widely admired. Itaú Unibanco was formed through a merger in 2008 which saw it overtake Bradesco by size. Both firms are battle-hardened survivors and have big insurance, credit-card and investment-banking operations. Listed but state-controlled, Banco do Brazil is the country’s biggest financial firm, with a fifth of total assets. It has increased its market share since 2007 and is looking abroad.

Russia’s banking system is fragmented, with only two giant firms, both state-controlled.Sberbank controls almost a third of the country’s deposits and has a mixed loan book. Its newish management is trying to cut costs and spruce up its business at home. VTB Bank started as a merchant bank but has gradually built up its branch presence. About a quarter of its profits now come from retail banking.

India’s banking system is small but growing fast. About three-quarters of the industry is in government hands, with the listed but state-controlled State Bank of India commanding about a quarter of the market. It has been revived under the watch of O.P. Bhatt, who became chairman in 2006. ICICI Bank, for a long time the pin-up of the private banks, paused for breath in 2009, rejigging its strategy to target industry as well as India’s burgeoning middle classes. Its veteran boss, K.V. Kamath, became chairman in 2009, with Chanda Kochhar taking over as chief executive. HDFC Bank is still a tiddler by assets but its market value has shot up, reflecting confidence in its domestic strategy and its combative chief executive, Aditya Puri.

Singapore, Turkey and South Korea also have banks with market values in the $20 billion range. But perhaps the most notable firm outside the BRIC group of countries is Standard Bank of South Africa, run by Jacko Maree since 1999. Almost a quarter of its profits come from outside its domestic market, mainly the rest of Africa. It got a big boost in 2007 when ICBC bought a 20% stake. A takeover, both parties say, is not on the cards, but Mr Maree’s business cards are now in both English and Chinese.

Just how big could such emerging-market banks get? Any self-respecting bank bull likes to whip out a chart comparing the ratio of bank loans with GDP in poor and rich countries. The poor countries generally have much lower ratios. The hope is that emerging-market banks will enjoy a double benefit. Not only will their economies grow fast but financial activity will become more intense, allowing banks to grow faster than GDP. Today quite a few banks in Asia, Africa and Latin America forecast that their loan books will rise by 20-30% annually over the next few years. Assuming that Western banks stagnate, that would mean China’s biggest bank would take about two years to reach the size of, say, JPMorgan Chase, measured by risk-adjusted assets. The biggest banks in Brazil, Russia and India will take seven to ten years.

The idea that banks are “GDP-plus” businesses has obvious pitfalls. In 2008 and 2009 the loan books of emerging-market banks outside China grew relatively slowly, at about 10%, although in China they expanded by about 30%, and the pace elsewhere will pick up this year. And if credit grows too quickly for too long the system tends to explode, as America and some other Western countries have found.

In central and eastern Europe too, where loans rose at twice the rate of nominal GDP between 2000 and 2007, they hit a brick wall in 2008 as overextended banks ran out of funding and bad debts mounted. In much poorer Nigeria, talked up in 2006 by Mayfair hedge-fund managers as the next great “frontier” banking market, credit as a share of GDP doubled in about three years to around 30%. With small branch networks and relatively few people in the formal economy, this was too much. About a third of the system by assets is now distressed. The lesson from the Asian crisis of the late 1990s is that systems generally shrink after a blow-up.

Credit relative to GDP, then, does not grow in a straight line, thanks to the economic cycle. But even in the longer term a rising trend is not inevitable. According to Credit Suisse, domestic credit to the private sector credit relative to the economy has been flat or falling between 2002 and 2008 in China, Mexico, Malaysia, Thailand and the Philippines. And even if borrowing levels are rising in the longer term, banks’ role in supplying that credit is not assured. In America much of the work of financing companies is done through capital markets. Emerging-market banks may face a similar trend. Except in Brazil, most of their business consists of loans to industry. Fast-growing local capital markets could take some of this away. If so, the biggest part of the banks’ balance-sheets would actually shrink relative to GDP.

Penetrating arguments

Yet for all the caveats, emerging-market banks can count on vast untapped demand. McKinsey estimates that most people in Latin America, Asia and Africa lack access to formal banking services. Slowly the supply is catching up. Bradesco in Brazil has recently opened the world’s first floating bank branch (which sails down the Solimões River in Amazonas) and the first branch in Heliópolis, a big favela (slum) in São Paulo. State Bank of India has more than doubled its number of ATMs since March 2008 without seeing a decline in transactions per machine per day, currently about 300. Most banks are trying to reach the “unbanked”. This is partly a question of technology—for example, providing biometric identity cards for illiterate people without papers. It is also a question of organisation. Mr Kamath, the chairman of ICICI, India’s biggest private bank, is thinking about appointing an agent in each village who would be given the kit to link up with the bank’s system. Indian government schemes to guarantee work for rural workers for 100 days a year and to introduce identification cards for all could be a catalyst for the spread of such schemes. Like most bank executives, Mr Kamath accepts that these will not make the industry money “for quite some time” but reckons that “no bank can afford not to be there.” Mr Puri, the boss of rival HDFC Bank, says that on a “five-year horizon it can absolutely move the needle”.

But the real boon for many emerging-market banks has been the rise of a credit culture among the middle classes. Well-off people behave in a way their parents would find unimaginable, buying homes and cars not by saving up but by borrowing. The ratio of household borrowing to GDP points to this in all big developing countries (see chart 3). If the world economy rebalances so that surplus countries save less and consume more, mortgages and consumer loans will become the banks’ biggest source of profits.

Although competition may put pressure on emerging-market banks’ high margins, there are offsetting factors. People will shift their savings from deposits to investment products with better yields that banks can charge fees for. Low-cost technology too could boost profits. India’s banks say they have leapfrogged the expensive mainframe computers of their Western peers and expect a rapid move towards mobile-phone banking among the young. In China people do not use cheques but can get text-message confirmations when they have used their credit cards, reducing the risk of fraud. Noel Gordon, a consultant at Accenture, jokes that when Western banks were fiddling with rocket-science finance, emerging-market banks were innovating more productively by opening up entire new markets that will make sustainable profits.

Emerging-market companies also promise to give the banks lots of new business. This year there will be a boom in loans as they shrug off the downturn. In the longer term banks will have to adapt as local capital markets develop and businesses expand abroad. Most lenders are building up investment-banking skills and a presence overseas that will generate income as more local businesses turn to issuing bonds and shares for finance.

And even though all these opportunities still lie ahead, emerging-market banks have already taken a giant leap in size and profits in the past decade. They have also maintained adequate capital ratios and ample deposit funding. The combination of growth and strength would appear to give them enormous advantages, heralding a rebalancing of power in global finance. Yet are those rock-solid balance-sheets quite what they seem?

Why do Stock Prices move Up & Down…..???

Stock market investment is a game. Successful investing requires more than just a little bit of knowhow and a dash of luck. It requires a cool head, an analytical mind, and the ability to make quick money decisions. This is especially true when investing in the Stock Market. Investing naturally comes with a level of risk. The market’s activity fluctuates on a daily basis during the opening and closing bells.

Factors Affecting Stock Prices

There are two basic factors that affect the movements of stock prices.

• Fundamental Factors
• Technical Factors

Fundamental Factors
Following are the major Fundamental Factors which are affecting the price of stocks.

• Demand and supply
• Market Cap
• Earnings per share (EPS)
• Price/Earning Ratio (P/E Ratio)

Demand and Supply
Demand and Supply is the fundamental factors of economics, which holds good for the equity market as well. The price of stock is directly affected by the trend of stock market trading. When more and more people buy a same stock, the price of that stock increases and when more people are selling the same, the price of that particular stock falls.

News
News is an important factor which affects the stock price. Positive news about a company can increase people’s interest in buying the shares. At the same time a negative press release can ruin the interest of people in buying that same. After all it is the overall performance of the company that matters more than news.

Market Cap
How will you determine the worth of a company…..??? If you think it can be determined from the stock prices, then you are making a huge mistake. It is the market capitalization of the company that is more important when it comes to determining the worth of the company. Market Cap can be calculated by multiplying the stock price with the total number of outstanding stocks in the market and that is the worth of the company.

Earning Per Share (EPS)
Earning per share is the profit that the company made per share on the last quarter. This is the most important factor for deciding the health of a company. Every public company has to publish the quarterly report that shows the earning per share of the company. High EPS influence the buying tendency in the market resulting in the increase in price of that particular stock.

Price/Earning Ratio
Price/Earning ratio also known as P/E ratio helps you to get a fair idea of how a company's share price compares to its earnings. If the price of the share is very less than the earning of the company, the stock is undervalued and it has the potential to rise in the near future. On the other hand, if the price is higher than the actual earning of the company and then the stock is said to be overvalued and the price can fall at any point.

Technical Factors
Things would be easier if only fundamental factors determine stock prices. Technical factors are the mix of external conditions that modify the demand and supply of a company's stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth). Following are the major Technical factors affecting stock price:

• Inflation
• Economic Strength of Market and Peers
• Substitutes
• Incidental Transactions
• Trends
• Liquidity

Inflation
Inflation is a huge driver from a technical perspective of stock market. Historically, low inflation had a strong inverse correlation with valuations. On the other hand deflation is generally bad for stocks because it indicates a loss in pricing power for companies.

Economic Strength of Market and Peers
Generally company stocks tend to follow the track of market and with their industry peers. Stock Market specialists say that the combination of overall market and sector movements determines a majority of a stock's movement.

For example, a sudden negative outlook for one oil stock often hurts other oil stocks and drags down the demand for the whole sector as "guilt by association"

Substitutes
Substitutes influence the price of stocks to a great extent. These include corporate bonds, government bonds, commodities, real estate and foreign equities. In any point of time if the investors are finding that the alternatives are giving more returns than equities, probably they will withdraw all the investments from the stock and go for alternatives, this will affect the stock price very badly.

Incidental Transactions
Incidental Transactions include executive insider transactions, which are often driven by portfolio objectives. These are purchases or sales of a stock that are forced by something other than the intrinsic value of the stock. They do impact supply and demand and therefore can move the price.

Trends
A stock always moves according to a short-term trend in the market. On the other hand, a stock that is moving up can gather momentum. Sometimes stocks behave in the opposite way in a trend and do exactly opposite to the market.

Liquidity
Liquidity is a very important factor in determining the price of stocks. Liquidity refers to how much investor interest and attention a specific stock has. Some company’s stocks are highly liquid and therefore highly responsive to material news. Trading volume indicates both liquidity and a function of corporate communications.

Other factors affecting stock prices
Apart from those discussed above, there are many reasons for increase or decrease in price of the share. There are several stock factors affecting share prices. Stock Price does not depend upon one or two factors, but some factors directly influence the share prices. Major factors affecting stock prices can be broadly divided under following categories

1. Economic Factor
2. Company Related Factors
3. Industry Related Factors
4. Political Factors
5. Social Factors
6. International Factor
7. Other Factors
8. Short term factor

Factors	Components
Economic Factor	GDP Growth rate (Industrial Production, retail sales) Inflation Rate RBI Policy (including money supply) Confidence Index Risk Appetite Employment / Unemployment rate
Company Related Factors	Profitability Sales Growth Return on Investment Management
Industry Related Factors	Government Policy Growth Rate
Political Factors	Any political change in the country
Social Factors	Culture and habit of the society Attitude
International Factor	War International economics Policy of OPEC countries International Stock Exchanges
Other Factors	New Invention
Short term factor	Rumors

There are hundred other reasons behind the rise or fall of the share price. Especially there are stock specific factors that also play its part in the price of the stock. So, it is always important that you do your research well and trade on the basis of your research.

To FASB or not to FASB? A transatlantic divide over the treatment of financial instruments

HEARD the joke about a businessman who asks his accountant what two plus two is? The accountant draws the blinds, leans over the desk and whispers: “What would you like it to be?” The crafting of accounting rules is more art than science, thanks to the need to balance the interests of companies, their investors and—especially in banking—their regulators. No great surprise, then, that the world’s two big standard-setting bodies—America’s Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which covers most other countries—are on very different tracks in their treatment of financial instruments.

Investors are still digesting the 214 pages of proposals released by FASB on May 26th. But if adopted, these would shake up banking by greatly expanding the impact of fair-value (or mark-to-market) accounting, in which assets are valued at market prices rather than on an historic-cost basis that reflects the price banks paid for them.

In both America and Europe, instruments held for sale are marked to market, whereas loans intended to be kept on the books are held at cost. Although fair-value adjustments for the latter are already disclosed in banks’ accounts, FASB now wants them to be reflected in income. By contrast, IASB, which unveiled its own proposals last November, wants to spare loans held to maturity by banks from the vagaries of the market. The two also differ on how banks should reserve for deteriorating credit, with FASB again putting forward the more radical proposals.

Though FASB’s board was split, passing its proposals by three votes to two, opponents portray it as a bastion of mark-to-market zealotry. Fair value, fine for capital markets, is inappropriate for bog-standard banking, say industry groups. Banks want to avoid a repeat of the recent crisis, when fair-value losses forced a scramble for equity in dislocated markets. They warn darkly of bigger swings in bank earnings and capital, complicating efforts by governments and regulators to dampen “procyclical” forces, and of a lack of long-term credit as banks shy away from the loans likely to have the most volatile values.

The counter-argument is that higher volatility reflects market reality. It is there whether you measure it or not, so why brush it under the carpet? The problems of Spain’s savings banks suggest that pain can be delayed but not avoided. In a survey by the CFA Institute last November, 52% of investors supported fair-value accounting for all loans. Robert Herz, FASB’s chairman, has argued that by presenting loans under both approaches, it is bridging a divide, not veering to extremes.

The effect on some banks would be dramatic (see table). But the median American bank values its loans at only slightly below fair value, so the overall impact would be modest. And there could be benefits on the liability side of the ledger: under FASB’s proposals, the three largest American banks could write up the value of their core deposits by anywhere between $38 billion and three times that, says Mike Mayo of CLSA, a brokerage.

It is hard to see how FASB and IASB will reconcile their differences. FASB could soften its stance during the four-month comment period, but it can hardly have been unaware of outsiders’ arguments when it drew up its proposals. It may be forced to bend by politicians—who mostly dislike the brutal honesty of fair value—just as it did last year when criticised over its stance on toxic securities. European politicians applied intense pressure to IASB when it was drawing up its proposals.

If the two cannot meet in the middle, remaining differences could probably be dealt with through disclosure. Each would essentially require banks to show how their holdings would be treated under the other method, though only their own would affect income. Although supervisors can adjust accounting standards to assess regulatory capital, such divergence sits awkwardly with hopes for a global capital standard. Some experts, including Mr Herz, support decoupling accounting standards from bank regulation so that bank assets are presented in two formats to meet investors’ desire for transparency and regulators’ craving for stability. Either way the current mess is a joke.

How Promoters Cheat Shareholders

Siphoning off cash, dumping expenses, selling scrap for cash...dozens of live examples of the ways companies cheat. 

Indian promoters manipulate accounts and market prices for two (opposite) reasons. The first is a traditional game, which the majority of them play - siphoning money from the coffers of a listed company for personal gains.

However, in a bull market, a reverse trend starts. Many of them are not interested in suppressing profits. They want to overstate revenues and profits because this boosts their market-cap in a rising market; it helps them to raise 'free' money. In the past three years, I have repeatedly expressed doubts about the genuineness of the financial figures of many companies, although foreign institutional investors (FIIs) and many renowned domestic institutional investors (DIIs) were shareholders of precisely such shady companies, even as many brokerage houses, print and electronic media were flashing 'buy' recommendations on them. I mainly track mid-cap and small-cap companies. Large companies are smart enough to camouflage their figures. It is much easier to find flaws in the accounting of small- and mid-cap companies. What is the arsenal of tricks employed by promoters to siphon off money or fudge their accounts? How do they pump up their share prices and dump them on the public?

Here are few examples of how promoters do it. These are actual examples, but we have opted to change their names because the idea is to educate investors about management tricks.

Suppress Income:Consider textile companies. All of us believe that they don't make money. This is not true. It is only that the promoters are adept at hiding margins. Some listed companies have at least 15-20 private limited companies, two or three proprietary firms, five or six partnership firms in the promoter's wife's name, in his in-law's name, in the married daughter's name or even in the names of trusted employees who have been working with the promoter for 20-30 years. It sells finished products to private firms that are directly or indirectly owned by the promoters at cost price or even a small loss. Those private firms, in turn, sell the products to the dealer, wholesaler or distributor and make huge profits. 

I can definitely say that listed companies like Ramdiya Mills and Karma Fabrics or Synth Fabrics - have adopted this practice since inception and continue to do so even now. If you look at their cost structure, it will become very clear. Ramdiya Mills and Karma Fabrics have large reputed brands. Since they buy hundreds of crores worth of yarn every year, they get it at the lowest possible price. They get an additional price benefit by making cash payments to suppliers. Since the product they sell is a premium product, these companies ought to have a net profit margin of at least 12%-15% whereas they hardly show a margin of 2%-3%. Text100 Mills is one of the oldest and reputed cotton textile mills with significant exports. But if you look at the segment-wise results, the cotton division always shows losses. Where is the money going? Most promoters either invest it in real estate or benami accounts in India or transfer the money abroad. Of course, each promoter has a different way of looting the company and siphoning off money. The promoter of Ramdiya Mills is a hands-on guy who looks after practically everything. They do not have senior professionals in purchase, marketing or branding. Since the promoter takes all decisions, overheads are also not large. In this category fall companies, like Gofar and other powerloom companies, whose expenses are those of a powerloom, but selling price is akin to the organised sector. 


In some cases, shareholders' money goes to support the promoter's lifestyle. Look at a famous textile company like Monde Fabrics. It has a higher cost structure - the bigger the brand name, the higher is the number of employees. Monde's production cost is slightly higher but not high enough to show losses. Also, they should be able to show very decent profits because
they have the latest technology, wastage is low and the quality is very good. Their polywool fabric is the most expensive in India but their profit is negligible. Where is the money going? The promoter's daily expense is in lakhs of rupees which is all debited to Monde's corporate account. So, although the selling price of Daygod Mills is 20% lower than Monde's, its margin is higher.

Under-reporting of revenues is also rampant in the steel industry. Each listed company has at least six or seven unlisted companies through which they do a lot of adjustments, depending on the opportunity. They decide where to show profits and when to disguise them. In this category are companies like Prism Steel and Modern Metals. Look at Modern Metals and compare it with River Electricity, a company with a similar profile. River Electricity did not have captive mines and neither did Modern. But profit margins of Modern have been very low. Their profits are vanishing through their unlisted group companies.Dealing in cash is very common in the steel industry. Cash sales take place and are not reflected in the books. That is why you will find that raw material costs rise disproportionately. I knew a person who used to be with a sponge-iron company near Mumbai. He told me that every year they sell Rs500 crore worth of sponge-iron from their plant, in cash. But all purchases and expenses are being fully accounted in the books along with the promoter's personal expenses. 

Take the example of Kanaka Leaf. Why did that company become sick? I know a manager of one of its factories. He tells me that he used to take out 90% of the stock in cash and pay excise duty only on 10% of the goods. That is one reason why this firm got into legal trouble and that factory had to be closed. He was no longer on the payroll; but the owner was still paying him Rs25,000 per month. You always know which companies are selling in cash by sniffing around at the commodity markets. Look at the textile company ABC. If you go to the textile market any time, you can buy ABC products in cash. 


There used to be a company called Garvi Fils which closed down. It used to sell most of its production in cash. In any textile market, you can get a list of companies which will sell yarn in cash. All of them book expenses fully; sell in cash and claim that costs have gone up. This is how they fool investors.

One major way in which promoters enrich themselves is by selling waste (or passing off even quality material as waste) in cash and pocket the money. This is rampant in the metals and cable industry. Jewel Steel is the king of this. It sells waste as well as fresh material as waste. It even sells zinc which is used for galvanising. You can go to any metal merchant in Delhi and enquire how much zinc Jewel Steel is selling and how much copper Melton Cable is selling in the open market. This is a common feature of the metal traders in Delhi where almost 80% of the business is done in cash.

Companies sell to wholesalers; wholesalers sell to small converters and so on. There is an active cash market and promoters are able to sell as much of quality finished goods, raw materials, by-products or waste.

Fake Bills:The most common practice among corporates is to buy fake bills for a small price, make the payment against these bills by cheque and instead of receiving goods, ask for the money back in cash. This is a common practice among the marwari business houses of Kolkata. They buy bills of Rs10 crore or Rs20 crore ostensibly for raw material purchase and pay for it by cheque. The material never comes to the warehouse; instead they get the money back in cash, minus a tiny commission for the fake bill. Naturally, the companies show losses or meagre profits. They are not inefficient companies, neither are the promoters fools. They simply siphon off cash by buying the bills and under-report sales. This leads to losses. 

When Laltane Solutions made its IPO, some Delhi-based operators regularly contacted me to say that the stock would list at Rs500 against an issue price of Rs250. They offered me shares at Rs400 and openly admitted that they belonged to the promoter. That is how they made money in the stock market. When you think of operators, don't think of shadowy individuals. They could well be institutions with a big name and shining public image.

Visher Agro buys wheat from the market, converts it into flour and sells it to a food company selling branded atta. It is also into rice milling. It is not selling anything under its own brand name. It is just a converter. The promoter entered into an agreement with an operator and his share price rose to Rs200+ from just Rs15; it has now dropped 70% from the highs. He claims to have set up an unlisted company which will set up a 20MW co-generation power plant for which he is in talks with Blackstone. He was making up this story but he could not succeed in raising the money as the operator quit the counter.

Another trick by Indian promoters is to announce a joint venture (JV) for a new project. After a while, there are reports about differences between the JV partners. The money invested in the JV is never recovered. It is written off over five or seven years. All this is well-planned. The JV is floated precisely to siphon off money by taking away money invested in the JV. For instance, Albert Hotels of Bengaluru paid Rs15 crore as its share in a JV with a Pune-based company to set up a five-star hotel in Pune. It later pulled out of the venture due to differences over management control and said it would file a lawsuit to recover its investment. But industry sources told me that the promoter has already taken back the money in cash and written off the investment in its books. This is a popular trick among marwari companies. They lend money to unlisted companies owned by the promoters either directly or indirectly and the money is never recovered.

As all these examples show, Indian promoters are not stupid or less intelligent or don't know how to run their businesses. They are actually a step ahead of other professionally managed companies. They are much more intelligent, savvy and street smart. They know how to negotiate with suppliers for the lowest possible price, how to cut costs and how to siphon off money. Most of them have trusted people or relatives in key strategic posts to prevent pilferage. Even while selling, they know how to negotiate hard to get the highest price. They work hard and make a lot of money but they don't want to share it with you.