Co-operative societies and stamp duty evasion issue

In the last 3 - 4 years, lot of co-operative societies in Tamil Nadu has promoted and marketed many housing plot lay-outs. The chief attraction of these lay-outs are the waiver of stamp duty of 9% at the registration of these housing plots. Using this effectively, many co-operative housing societies have sold plots to investors and end-users over the last so many years.

Whats the catch here?

As per the Government regulations, the waiver of stamp-duty is available only in respect of housing plots laid out on the land owned by the Co-operative society. The Co-operative Society is supposed to follow the following process:

• Pool resources from the members
  
• Purchase a piece of land and register it in their own name
  
• Sub-divide it into housing plots and get the necessary approvals
  
• Allot the sub-divided plots to its members
  
• Register the plots in the name of its members with the stamp duty waiver
  

What went wrong in this case?

Instead of Co-operative societies buying land and sub-dividing them into housing plots, they started marketing the land owned by other individuals/promoters for a commission. They offered the prospective buyer stamp-duty exemption in respect of the plots which are only marketed by them for a commission but not owned by them. The buyer of the plot enjoys stamp-duty waiver, owner of the land is able to sell fast and the co-operative societies were making their money through commissions from the land owners.

Who is the loser here?

The state Government. The Governmnet of Tamilnadu has now woken up and stopped all registrations of plots which are just marketed by Co-operative Societies by its order dated 05 Oct. The Government estimates that the revenue loss of close 400 crores over the last 5 years or so.

What would happen now?

The Government has found out that there are atleast 20 lay-outs near Chennai, another 5 layouts in Coimbatore are currently being sold under this route. The Government may order for an audit of the past registrations and issue a stamp-duty demand notice on the current and erstwhile property owners.

What we should be careful about?

If you are currently in the look out for a plot of land promoted by a co-operative society, be careful when somebody tells you there is a stamp-duty waiver in respect of the property. Ask and clarify from the co-operative society if the stamp-duty waiver is applicable to that particular lay-out which is being promoted by them and if possible, seek documentary evidence of the same. You can also check and ensure that the land is owned by the co-operative society and the registration is done with the co-operative society as the seller.

Caveat Emptor!!

PAN requirement for Mutual Fund investments through SIP may go off

The Finance Ministry is set to issue a new set of guidelines for SIP investments upto Rs50,000 in Mutual Funds relaxing the need to produce Permanent Account details. PAN was required under the Prevention of Anti-money Laundering Act (PMLA) to establish the identity of the person making the investment. As Systemtic Investment Plan transactions are routed thorugh the Banking channels, the identity of the investor can be easily established.

Dhirendra Kumar of Valueresearchonline.com feels that this is a positive development for the mutual fund industry particularly at a time when everybody is talking about extending financial services to the "bottom of pyramid" population and would also open up the Mutual fund avenue for more than 100 crore Indians who don't have a Permanent Account Number.

As more and more people are interested in investing in the stock markets using the Mutual Fund route and with the advent of products like Micro SIP's, where the monthly contribution can be as low as Rs50, this is definitely would give a fillip to the Mutual Fund industry in augumenting the funds under management.

As per Economic Times, KYC process would still be enforced for Mutual Fund Investments.

Please note that this relaxation is still not official as AMFI India, the umbrella organisation of Mutual Funds in India is yet to receive the Government order.

Nomination facility to your Demat account with NSDL

Recently National Securities Depository Limited through its Circular NSDL/POLICY/2009/0002 dt 3 January 2009, has asked all the depository participants to collect nominee details for all the current demat accounts held by them.  

For example, you may hold an Demat account with ICICI Bank or Kotak Securities.  They would contact you to update the nominee details in case you have not updated it earlier.  This is a step in the right direction as it provides hassle-free transfer of securities in the event of death of the demat account holder. 

You would have started receiving emails from the Depository Particpant.  Please take some time off and arrange to fill up the form and send it back to your DP where you hold your demat account. 

The last date for the submission of the form is April 30, 2009 as per ICICI Direct emailer.  Please check with your respective DP's to find out the last date for the submission of the form.   

EPF rate kept unchanged at 8.5 per cent for 2008-09

The Central Board of Trustees of the Employees Provident Fund met here on Sunday pegged the interest rate payable to subscribers for 2008-09 at the existing 8.5 per cent for the third successive week against the trade unions' demand for 9.5 per cent return per annum.
The decision was taken by the newly constituted board which met under the chairmanship of Oscar Fernandes, minister of state for labour and employment and chairman, central Board of Trustees of EPF in New Delhi.

The decision to keep the interest rate at 8.5 per cent for the current financial year has been opposed by almost all major trade union leaders, including the Centre of Indian Trade Union (CITU), All India Trade Union Congress (AITUC), Bhartiya Mazdoor Sangh (BMS), Hind Mazdoor Sabha (HMS) and All India United Trade Union Centre (AIUTUC). The Employees Provident Fund has more than 44 million subscribers.

The EPF trustees said the fund has been dipping often into the contingency fund to give subscribers a ''reasonable return'' for the past few years. The fund is reported to exhaust with the current pay-out.
EPF has already paid an 8.5 per cent on withdrawals and retiree payments in 2008-09, and that too for a higher amount than in earlier years.

The decision to retain the interest rate 8.5 per cent in the backdrop of the coming general elections is expected to be a severe drain on the economy at a time when the Reserve Bank of India is forcing a downward revision of interest rates – both lending and borrowing – in order to boost consumption.

Source: World Wide Web

Review of Bajaj Allianz Capital Shield Plan

Recently Bajaj Allianz Life Insurnace company has introduced a Insurance Linked Index Investment Plan called "Capital Shield". This product is being aggressively pushed by one of their Bancassurance partners, Standard Chartered Bank.

The salient features of the plan are as follows:

1. 5 times the initial amount as life cover, i.e., Rs5 lakhs for the next five years.
2. Investment allocation of 98% of the investment after deduction of the mortality charges.

The product works like this. You make the initial investment and after 5 years of the policy term, Bajaj Allianz guarantees that they would be able to return the money what you invest today. The minimum investment amount is Rs50,000/-. That is, they guarantee to return back the capital after the policy term. In this period of fast depreciating investmnets, the idea is to entice the investors with a capital protection guarantee. So what is the big thing about this product? The important thing is that portion of your investment is channeled towards buying NIFTY Call Options and the returns you would get is linked to the NIFTY returns over the next 5 years. The plan also guarantees a 15% return on investment at the end of 5 years subject to certain conditions.

Does it sound interesting to you? I have a capital protection and also at the same time I have an exposure to equity markets through NIFTY Index options. On this premise only this product is being aggressively sold. I think there are lot of questions which needs to be answered before you can invest in these structured products.

First one is the Participation ratio: This is the percentage of your investment which goes into NIFTY Index Linked Call Options in this product. Technically, this is the percentage which has been left after allocating investment towards the fixed income portion of your investment which guarantees your capital at the end of 5 years term.  It is not clear from the product brochure the percentage of your investment which will go into Index options.  

Unable to time the entry based on NIFTY Index  Levels: In this Capital Shield Product, the entry point for you would be the average of the first 3 months from the time you invested. Actually, this is a double edged sword. You may decide to invest today just because that the NIFTY has been hammered a lot and hovering around 2700 levels. But Bajaj Allianz would not take the investment at today's NIFTY Index Level but wait for the next 2 months level to decide on the average. In case, the NIFTY goes up in the next 2 months, your entry price is averaged out upwards. Though this averaging out helps to smoothen the volatility, it defeats the very concept of trying to time the market.

Poor guaranteed returns: The plan brochure talks about guaranteed 15% return on investment over the next 5 years if the NIFTY Index moves up by 100% over the next 5 years. On plain reading this return percentage looks attractive but the fact is the return of 15% is simple return after 5 years. That is, you invest Rs1 lakh today and the NIFTY level is at 2750 and at any point of time during the next 5 years it moves to 5550, then you are guaranteed 15% on Rs1 lakh after 5 years. It works out to a measly 3% simple interest.

What happens if the NIFTY fails to double within 5 years?: There is a possibility that NIFTY never manages to double from todays level over the next 5 years. Then Bajaj Allianz is not even compelled to pay this 3% simple interest per annum. In that worst case scenario, they would pay Rs1 lakh back to you with a big thank you. They would have used your investment for 5 years and return the capital only. The product doesnt have a feature of roll over the maturity period to take care of the prevailing market conditions.

Overall, investment in Bajaj Allianz's Capital Shield product should be avoided as there are better investment opportunities in the fixed income domain itself. Our suggestion would be go for plain vanilla products compared to these structured products where fixed income and equity index futures are combined.  It neither has the stability of the fixed income instruments nor gives the multi-fold returns of Equity products.  

Encashing the ESOP - another stark reminder from the recent Satyam episode.

We all know about the Satyam scandal and the various efforts made by the Government in salvaging whatever possible for the various stakeholders from this unprecedented fiasco. At this juncture, we have to remember the employee millionaires of Satyam who had made tremendous wealth (of course on paper) through ESOP's. The employees who were holding ESOP's were one of the worst affected of the lot due to steep correction in share values of Satyam. We cautioned in one of our earlier articles when Bear Stearns went down in March 2008 about the need to systematically encash ESOP's to avoid situations like this. You can read that article here.

The Satyam episode once again reinforces the need for encashing the ESOP's on a periodic basis. One of the most commonly faced phenomenon with regard to employee shareholders of the company is that they continue to hold on to their ESOP's thinking that their company is strong and nothing would happen to their company. We have past examples of Bear Stearns, Lehman Brothers, I2 Technologies from USA where employee shareholders held sizeable portion of the equity and finally they were the one who were left in the lurch. Bear Stearns shares were exchanged by JP Morgan at USD2 per share. Lehman Brothers is currently engaged in Bankruptcy proceedings and we dont know the fate of the share price. I2 Technologies had fabulous prices during the early years of 2000 and now quoting nowhere near its all time high prices.

None of the employee of Satyam would have imagined prior to 07 Jan 2009 that their top management is doing all sorts of corporate frauds. Leave alone the employees, the stock analysts who were following the Satyam stock for number of years had any clue on what is happening in the company. So how we can blame the novice employee shareholders. They in most cases neither have the time nor the skills to evaluate their own company financials and exit at the right price. But that should not mean that they should continue to hold all their ESOP's without doing anything.

What the employees can do to mitigate the "Black Swan" events?

They would have never thought that their share prices would plumment more than 80% of the value in the next 3 days or so.

The employees should practice systematic encashment of ESOP and convert them into different classes of assets. Instead of holding shares of their own company, they can spread the risk by investing in Fixed deposits, real estate or even shares of their competitors or in equity of other companies. This would help them to tide over this unexpected black swan events better rather than just lament about their loss of wealth.

We once again advise all employee shareholders who hold massive amounts of ESOP shares to convert at least partially into other asset classes or move into equities of other companies other than their own company. Lets be better prepared to meet these corporate events rather than react to them.