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  • Why Are PSU Stocks Falling? Key Insights and Considerations

    Why Are PSU Stocks Falling? Key Insights and Considerations

    The Indian infrastructure sector is the backbone of the nation’s economic growth. Financing these large-scale projects is crucial, and project finance has filled the gap. However, the RBI recently introduced draft guidelines aimed at revamping this system.

    In this blog, we will learn about these new RBI regulations and explore their impact on lenders and borrowers. Further, we will also understand whether they usher in a new era of prudence in project finance.

    PSU Stocks – An Overview

    PSU stocks refer to the shares of companies that are categorised as Public Sector Undertakings. These are businesses where the Indian government holds a majority stake, i.e., at least 51% ownership. Examples of PSUs include LIC, BHEL, Indian Oil, BSNL, NTPC, ONGC, SBI, etc.

    These companies operate across sectors like energy, oil & gas, power, banking, insurance, infrastructure, manufacturing, and telecommunications.

    PSUs have a profound impact on the economic growth of India through the provision of vital goods and services, the promotion of balanced development, as well as the effective implementation of government policies.

    Read Also: What is PSU Index? Performance, Comparison, Benefits, and Risks

    Why there was a fall in the PSU stocks?

    Fall in PSU Stocks

    The share of PSU stocks witnessed a sharp decline of up to 13% after the Reserve Bank of India’s implementation of more stringent regulations regarding project finance on 7 May 2024.

    But, what is Project Finance?

    Project Finance is a way to fund long-term infrastructure and industrial projects. It is distinct from conventional corporate loans, as it depends on the project’s cash flow for debt repayment rather than the creditworthiness of the sponsoring companies. In the event of default, lenders generally have limited recourse to the sponsor’s assets due to the project’s status as a distinct entity. The primary concern revolves around the security of the project’s assets and revenue.

    It is often used for large and complex projects that have high initial expenses, such as power plants, toll roads, bridges, tunnels, dams, etc.

    Let us have a quick overview of RBI’s new guidelines for project finance:

    As per the RBI letter dated 7 May 2024, Banks must increase their provisions for loan defaults during the project’s construction phase. The provisioning amount for this loan can be as high as 5% in contrast to the existing 0.4%. This may result in higher borrowing costs for developers and infrastructure companies.

    The proposed implementation of the 5% provisioning requirement is set to be carried out gradually until the fiscal year 2027.

    The provisioning requirements shall be alleviated as the project advances towards the operational phase. Once operational, banks may be required to only set aside 2.5% of the outstanding loan and this reduction can be further minimised to 1% if the project meets the specific financial performance benchmarks.

    The RBI has proposed minimum exposure requirements for projects that are financed by multiple lenders, also known as consortium lending. This means that each participating bank needs to have a minimum loan portion relative to the total project cost.

    Additionally, it is stipulated that when the participant lenders collectively have an exposure of up to INR 1,500 crore, no individual lender shall be permitted to have an exposure that is less than 10% of the aggregate exposure, and for projects where the aggregate exposure of lenders is more than INR 1,500 crore, the individual exposure floor will be 5% or INR 150 crore, whichever is greater.

    Objectives of RBI Guidelines

    Objectives of RBI Guidelines

    There are two main objectives behind RBI’s new guidelines on project finance:

    • The primary objective behind this is to prompt lenders, i.e., banks and financial institutions to exercise greater caution when providing financing for projects. The RBI has mandated banks to allocate higher provisions (up to 5% during construction) to ensure careful assessment of project risks before allocating funds. This can make project finance more stable in the future, with fewer loan defaults.
    • Implementing more rigorous loan approval procedures and emphasizing risk mitigation measures could catalyse project developers to enhance their project planning, feasibility, and overall execution. This will lead to higher quality projects with better chances of success and timely completion.

    Impact of the New RBI Guidelines

    The new draft guidelines for project finance by the RBI are anticipated to have a diverse influence on the myriad of stakeholders participating in this domain:

    • Lenders will need to set aside more money, which can go as high as 5%, for lending during construction. As a result, developers can expect borrowing rates to increase by 100-150 basis points. This means that loans will become more costly.
    • The implementation of more rigorous loan approval procedures and the presence of a cautious lending climate may result in setbacks in obtaining project finance.
    • New reporting requirements and consortium lending norms might add complexity to the loan approval process for banks.

    Read Also: RBI Retail Direct Platform

    Conclusion

    To sum it up, the RBI’s new guidelines for project finance aim to create a more balanced and risk-averse project financing environment. However, short-term challenges for borrowers and lenders may arise, but the long-term benefits of better project quality and stability could be substantial. The success of these guidelines will depend on effective implementation and open communication between lenders, borrowers and regulators.

    Frequently Asked Questions (FAQs)

    1. How will new RBI guidelines on project finance impact borrowing costs?

      With new guidelines, the Banks have to raise interest rates by 100-150 basis points because of increased provisioning needs, making project finance more expensive.

    2. Will new RBI guidelines on project finance affect borrowers?

      The Borrowers will face stricter loan approvals and higher borrowing costs, and there can be project delays.

    3. Can RBI’s new project finance guidelines slow down project financing?

      Tighter regulations and higher costs might cause a tentative slowdown, especially for smaller projects.

    4. Are project finance guidelines released by RBI the final one?

      No, these are draft guidelines. The final regulations may differ after considering the feedback of all stakeholders.

    5. When will RBI’s new guidelines for project finance come into effect?

      A phased implementation of new guidelines is expected, with full effect by March 2027.

  • RBI Action On Kotak Mahindra Bank: Should You Invest?

    RBI Action On Kotak Mahindra Bank: Should You Invest?

    You must have watched in the news that India’s central bank, the Reserve Bank of India (RBI), has taken action against Kotak Mahindra Bank. And if you have a Kotak Bank account, you must be concerned about what will happen to your savings.

    Don’t worry—we’ve answered all your questions; simply read the blog to clarify the uncertainties.

    Overview of Kotak Mahindra Bank

    Kotak Mahindra Bank’s origins date back to 1985, when Uday Kotak started Capital Management Finance as an investment and financial services company. Later, in 1986, Anand Mahindra and his father, Harish Mahindra, invested in the company and renamed it Kotak Mahindra Bank. The company initially offered lease and hire-purchase services, as well as bill discounting. In 2003, it was India’s first non-banking financial institution (NBFC) to receive a commercial banking license from the RBI.

    Further, in 2017, Kotak Mahindra Bank launched the Kotak 811 platform – India’s first full-service digital banking platform.

    Did you know?

    Kotak’s 811 draws its name from 8-11-2016, the day when the government announced demonetization in India. According to Uday Kotak, it was the day that changed India.

    The Problem with Kotak Bank

    Problem with kotak Bank

    The RBI audits all banks to ensure every bank maintains its online systems properly. The audit of Kotak Mahindra Bank has been ongoing for the past two years. In 2022 and 2023, the bank was found to have too many errors in its IT risk management and infrastructure, which could lead to data leakage. Despite many warnings from the RBI, the bank failed to address the matter promptly.

    Then, on April 15, 2024, there was a system outage caused by an issue with their IT system, which harmed customers by preventing them from using UPI payment, debit cards, and so on.

    The Reserve Bank of India imposed stern action on Kotak Mahindra Bank on April 24, 2024, by making a press release and prohibiting them from issuing new credit cards and onboarding new customers via digital channels. However, clients can open new accounts with the bank by visiting their branch, and there is no impact to the existing customers.

    Further, The RBI will appoint an independent firm to audit the Kotak Mahindra Bank’s IT systems. The limitations will be released only when the bank resolves the concerns discovered during the audit.

    Clarification by Kotak Mahindra Bank

    Kotak Mahindra Bank published a statement following the RBI’s limitations. The Bank’s management wants to reassure their existing customers of uninterrupted services, including credit card, mobile, and net banking. They also said that their branches continue to welcome and onboard new customers, providing them with all the bank’s services other than the issuance of new credit cards..

    Impact on the Stock Price

    The following day, on April 25, 2024, the stock price of Kotak Mahindra Bank fell by around 11% due to this news. The company’s market capitalization fell by INR 10,225 crore in one day. On April 25, 2024, the company’s share price reached a 52-week low of INR 1,602 per share. Following this descent, Axis Bank became the 4th largest bank in India in terms of market capitalization, and Kotak Bank slipped to 5th rank..

    According to the report issued by the National Payments Corporation of India (NPCI) in March 2024, Kotak Mahindra Bank is ranked 9th on the UPI remitter list, with a total volume of 703.56 million, of which 93.66% is approved.

    Should you worry if you have an account in Kotak Bank?

    Should you worry if you have account in Kotak Bank?

    If you have a bank account with Kotak Bank, then you don’t have to worry because you can continue using their bank account as usual. All services, including credit cards, will work uninterruptedly.

    However, to open a new bank account with Kotak Mahindra Bank online or apply for a new credit card, you must wait until the bank restores its IT infrastructure and receives RBI approval to re-launch those services. Meanwhile, one can open a new account with the bank by visiting a physical branch.

    Read Also: Elcid Investments – India’s Costliest Stock: From INR 3 to INR 2,36,250 – Share Price History

    Analyst’s view on Kotak Mahindra Bank

    According to S&P Global, Kotak Mahindra Bank’s credit card portfolio expanded 52% yearly as of December 2023, compared to 19% loan growth.

    This step may hamper the credit card business and cause the bank to rely more heavily on physical branches, harming credit growth and profitability. However, when it comes to the physical branches, as of March 2024, the bank has only 1,948 branches, which is significantly less than its competitors. In contrast, Axis Bank has 5,100+ branches, and HDFC Bank has 8,000+ branches.

    Limitations on accounts opening digitally coupled with a smaller number of physical branches will hamper growth for Kotak Bank at least in short run. Many analysts and brokerage houses anticipate that the bank will take around one year to address the RBI’s IT related concerns.

    Can RBI take action on any bank?

    According to Section 35A of the Financial Regulation Act guidelines, the RBI can intervene if a bank is not operating efficiently or is caught in wrongdoing. It can take action in the public’s best interests, such as keeping the financial system clean and digital transactions running smoothly.

    Conclusion

    The RBI’s action on Kotak Mahindra Bank is in the interest of account holders, as the RBI does not want the customers to suffer in any way, whether in terms of service or data security. However, from an investor’s perspective, you must assess the numerous parameters associated with the company’s business plan. It is recommended that you contact your financial advisor before making any investment decisions.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
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    Frequently Asked Questions (FAQs)

    1. What was the RBI’s action on Kotak Mahindra Bank?

      The RBI has observed severe deficiencies in its IT system, which can lead to data leaks and scams and make its customers suffer. Therefore, in view of the interests of customers, the RBI has taken action by stopping the bank from issuing new credit cards and opening new bank accounts through online mode.

    2. When was Kotak 811 launched?

      Kotak Mahindra Bank launched the Kotak 811 platform in 2017.

    3. Is it safe to keep my money in Kotak Mahindra Bank?

      Yes, it is safe to keep your money in Kotak Mahindra Bank just like any other Scheduled Commercial Bank in India. The RBI has observed IT infrastructure-related issues that are not related to the company’s liquidity or creditworthiness.

    4. Who is the founder of Kotak Mahindra Bank?

      Mr. Uday Kotak founded the Kotak Mahindra Bank in 1985.

    5. Should I invest in Kotak Mahindra Bank shares after the RBI action?

      The RBI’s action on Kotak Mahindra Bank will impact its profitability because it cannot onboard new customers digitally. Hence, an investor should consider all the risk parameters and future growth before making any investment decision.

  • Debt Mutual Funds: Meaning, Types and Features

    Debt Mutual Funds: Meaning, Types and Features

    Want to park your money for the short term, or are you looking for relatively safe investment options other than equities? In most cases, investors look for bank FDs or savings accounts, but there are different investment options known as Debt Mutual Funds that can provide relatively higher returns than bank savings accounts and fixed deposits.

    In this blog, we will learn about debt funds and their different types.

    Overview – Debt Mutual Funds

    Debt Mutual funds primarily invest in fixed-income assets such as treasury bills, bonds, government securities, and other debt instruments. All of these investments have a predetermined maturity date and coupon that an investor will receive upon maturity. These funds are professionally managed by asset management firms and are ideal for investors seeking a consistent return.

    Debt funds provide diversification across a variety of debt instruments, assisting investors in risk management. If you want to learn more about debt mutual funds, check out our blog on the same: What are Debt Mutual Funds?

    Features of a Debt Mutual Fund

    1. Debt funds generally offer lower returns than equity-oriented funds because their portfolios are invested in fixed-income securities.
    2. It diversifies your investment into numerous debt instruments, allowing you to obtain a consistent return, which is why they are popular among low-risk investors.
    3. Most debt mutual funds have high liquidity and no exit load, allowing investors to withdraw their cash at any moment, depending on the current net asset value.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    Types of Debt Funds

    Types of Debt Funds

    As per the Association of Mutual Funds in India (AMFI), there are 16 types of debt funds that cater to the needs of investors; let’s explore each one of them:

    • Liquid Funds—These funds invest in money market securities with a maximum maturity of 91 days. They could be a good alternative to a savings bank account.
    • Overnight Funds – The securities of overnight funds have a maturity of one day. These are regarded as the safest type of debt fund because credit and interest rate risk are minimal in such funds.
    • Ultrashort Duration Fund—This fund invests in money market instruments, with a Macaulay duration ranging from 3 to 6 months.
    • Short Duration Fund—This fund invests in debt instruments with maturities of 1 to 3 years. It generally earns higher returns than money market funds.
    • Money Market Funds – The portfolio of money market funds is invested into debt securities having maturity of up to 1 year.
    • Low Duration Funds- These funds invest in Debt & Money Market instruments with Macaulay duration ranging from 6 months to 12 months.
    • Medium Duration Fund – The medium duration fund invests in the maturity of debt securities, which ranges from 3 to 4 years.
    • Medium to Long Duration Fund—The portfolio of a medium to long duration fund holds securities maturing from 4 to 7 years.
    • Long Duration Fund – It invests in debt securities having a maturity of more than seven years.
    • Corporate Bonds Fund – This fund invests at least 80% of its total assets in AA+ or higher-rated corporate bonds. These bonds offer higher returns than government securities but also carry higher risk.
    • Banking & PSU Debt Fund – This fund’s portfolio consists of debt securities issued by public sector undertakings (PSUs) and banks, which constitute about 80% of its total portfolio.
    • Gilt Fund—It invests a minimum of 80% of its investible corpus in government securities across varying maturities. These funds have a very low credit risk; however, they carry interest rate risk.
    • Gilt Fund (10 Year) – These funds are similar to Gilt funds; the only difference is that they invest a minimum of 80% of corpus in government securities with a Macaulay duration of 10 years.
    • Dynamic Bond Fund – These funds don’t have any restrictions on the security type or maturity profile for the investment. They change their portfolio according to the market dynamics.
    • Floater Funds – This fund invests at least 65% of its total assets into floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures using swaps/ derivatives). These funds carry less mark-to-market risk because the coupon of these floating-rate bonds is reset periodically based on the market rates.
    • Credit Risk Fund—This fund invests a minimum of 65% of its total assets into corporate bonds with a rating below AA. It tries to generate high yields compared to corporate bond funds. However, this fund carries high default risk, so investors in credit risk funds need to be cautious.

    Read Also: Types of Mutual Funds in India

    Risks in Debt Mutual Fund

    Risk in Debt Mutual Fund

    Primarily, the credit risk and interest rate risk are two different types of risk associated with investing in debt mutual funds.

    Credit Risk

    Credit risk arises when the borrower fails to repay the principal and interest. An investor can analyze the bond ratings issued by credit rating organizations before investing. Generally, debt securities issued by the Government carry lower credit risk as compared to securities issued by Corporations.

    Interest Rate Risk

    There is an inverse relationship between Bond prices and interest rates. When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. It is because when interest rate rises, new bonds are issued at a higher interest rate, causing the value of existing bonds to fall, which negatively impacts the performance.

    Taxation of Debt Fund

    We have discussed multiple categories of Debt Mutual funds above. Taxation of debt mutual funds depends on the equity component of a fund, investment horizon, and individual tax slab.

    The income tax regulations governing capital gains generated by debt mutual funds have recently changed (removal of indexation benefit).

    If any debt mutual fund has less than 35% of the investments in equity, then gains from that will be taxed as per the income tax slab without any indexation benefit. Further, there will be no STCG and LTCG in this case..

    However, if a debt mutual fund has 35 – 65% in equity or equity-oriented securities, then STCG or LTCG will apply:

    Short-Term Capital Gain Tax (STCG): If you remain invested in a debt mutual fund for less than three years and have a capital gain, you will be taxed based on your income tax bracket, without any indexation benefit.
    Long-Term Capital Gain Tax (LTCG): If you sell your investment after three years, it will be categorized as long-term capital gain and taxed at a rate of 20% with an indexation benefit.

    If you’re curious to learn more about the taxation of mutual funds in India, check out our detailed blog on the same: Mutual Funds Taxation in India

    Who should invest in Debt Mutual Funds?

    Why should invest in Debt Mutual Funds?

    Debt funds are a suitable for investors who want to meet short-term financial goals and are looking for Bank FD alternatives, because they are less volatile than equity mutual funds and provide stable returns. They are also an alternative for investors seeking a higher return than traditional fixed-income products and ready to accept a moderate amount of risk.

    Did you know?

    Bank FDs are insured to the extent of INR 5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). There is no such protection in debt mutual funds.

    Read Also: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Conclusion

    There is a wide selection of debt mutual funds available in the market, and choosing one can be challenging for an investor because each category has its own set of features, risks, and returns. As a result, investors should assess their risk profile and align their investment objectives properly before making any investment in debt mutual funds. Furthermore, it is always recommended that investors seek advice from financial advisors before making investing decisions.

    Frequently Asked Questions (FAQs)

    1. How do debt mutual funds differ from Bank FDs?

      In bank FDs, the rate of interest offered by banks at the time of investment depends on the tenure of the FD and prevailing interest rates. Meanwhile, in debt funds, the fund managers use their expertise to invest in different papers or bonds according to the scheme objective, which can lead to variation in returns generated per year.However, both the debt mutual funds and FDs carry risks, such as credit risk and interest rate risk.

    2. Can I do SIP in the debt mutual funds?

      Yes, just like equity mutual funds, one can do SIP in debt mutual funds.

    3. How does a debt mutual fund work?

      A debt fund invests in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. It earns coupon income from these investments and also benefits from the price appreciation of the debt securities.

    4. How are debt funds taxed?

      The taxation of debt funds depends on multiple parameters such as equity component, duration of holding, income tax slab, etc.

  • Inheritance Tax: Past, Progression, And Controversy

    Inheritance Tax: Past, Progression, And Controversy

    Have you ever thought what happens to your money after you are gone? In India, inheritance has traditionally been a way to transfer wealth across generations. But what about the tax implications?

    In this blog, we will explore the history of inheritance tax, find out why it was eventually removed, and the ongoing debate about its potential return.

    What Is Inheritance Tax

    Inheritance Tax, also known as death duty in some regions, is a levy on assets or money that someone inherits after a person dies.

    However, there is a subtle difference between inheritance tax and estate tax. Inheritance Tax is a tax on the value of the inheritance received by the beneficiary. In contrast, the estate tax is a tax on the total value of a deceased person’s estate before it is given to their heirs.

    The objectives of the Inheritance Tax vary across countries, including generating government revenue, redistributing wealth, and preventing wealth concentration within families.

    The tax is paid by the person who inherits the assets, and the amount of tax depends on the value of the inheritance and the relationship between the beneficiary and the deceased. Close relatives often get tax exemptions that lower their tax burden. Tax rates differ depending on the country and can be as high as 40%.

    India does not currently have an inheritance tax. And if we talk about developed nations such as USA, there is no federal inheritance tax exists, although certain states impose their own. For example, states in USA such as Pennsylvania and New Jersey have inheritance taxes that apply to a broader range of wealth, irrespective of the federal threshold.

    Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax

    Did you Know?

    Japan has the highest inheritance tax rate, i.e., 40%.

    Evolution of Inheritance Tax

    Evolution of Inheritance Tax

    Inheritance taxes have roots in ancient civilizations such as Egypt and Rome. In the US, these taxes were introduced during the Civil War to raise revenue but were revoked soon after.

    The 19th and 20th centuries saw a sharp increase in inheritance taxes globally, and many countries, including the US, implemented them to address wealth concentration and raise revenue.

    However, inheritance taxes gradually lost favour among the government because some countries found them challenging to manage, while others considered them a barrier to investment and creating wealth.

    From 1953 to 1985, India had an inheritance tax called the Estate Duty, introduced under the Estate Duty Act of 1953. However, India abolished its inheritance tax in 1985.

    Why was the Inheritance Tax abolished in India?

    The estate duty in India was introduced to reduce wealth inequality. It functioned like a progressive tax. People inheriting smaller estates were not subject to taxation. In contrast, those inheriting substantial wealth were liable to pay a higher percentage, with rates reaching as high as 85% for the largest estates.

    For your reference, a progressive tax is a tax system in which the tax rate increases as the taxable income increases. In simpler terms, the more you earn, the higher the percentage of your income you pay in taxes, which is determined by the tax brackets.

    The tax rate you pay depends on which bracket you fall into. Suppose you have an income within the 22% bracket. You will only pay 22% tax on the portion of your income that falls within the bracket, and for any income exceeding that amount, you might pay a higher rate according to the next tax bracket.

    Despite its good intentions, the Estate Duty fell short for several reasons:

    • Many estates were not taxed because of a high threshold for consumption.
    • People started looking for methods to avoid paying taxes, such as concealing assets or engaging in benami property transactions.

    Furthermore, discussions about reintroducing have emerged in recent years, which is fuelled by the following reasons:

    • The gap between rich and poor is widening, and some argue that inheritance tax helps redistribute wealth.
    • Many developed countries have the concept of inheritance tax, and some consider it a standard wealth management tool.
    • Taxing inheritances can generate revenue for the government, which can be used to create social programs that help those in need.

    The Ongoing Debate

    Inheritance tax Ongoing Debate

    Sam Pitroda, the president of the India Overseas Congress, has caused trouble for the Congress party with his controversial comments about the inheritance tax. His remarks have been the subject of debates and intense criticism.

    He caused controversy by advocating for an inheritance tax as a means of wealth distribution, citing its implementation in America. He stated that there is an inheritance tax in America where 45% of a $100 million estate goes to the children and 55% goes to the government.

    Two national political parties in India, i.e., the Congress and the BJP, are arguing over the statement made by Sam Pitroda. However, the former clarified that the statements did not represent the party’s official stance and accused the BJP of trying to gain political advantage and divert attention during ongoing Lok Sabha elections.

    Read Also: Why Do We Pay Taxes to the Government?

    Conclusion

    To sum it up, India’s story with inheritance tax is one of a brief implementation, abolition, and a recent resurgence in debate. While there is no inheritance tax currently, the conversation surrounding its return highlights the complexities of managing wealth inequality and the government’s revenue. The future of this tax remains uncertain. We will have to wait and see how this exciting story plays out.

    Frequently Asked Questions (FAQs)

    1. Does India have an inheritance tax?

      As of April 2024, India does not have a national inheritance tax.

    2. Why is inheritance tax being discussed again?

      Growing wealth inequality and aligning it with global trends are common discussion topics.

    3. What are the arguments in favour of inheritance tax?

      Common arguments include reducing inequality, ensuring fairness, and aligning with global trends.

    4. Would I be liable to pay for the money I inherit?

      Not directly, but you might pay tax on any income the inherited asset generates.

    5. Should inheritance tax be brought back?

      That is a matter of debate. You can consider listening to both sides’ arguments and then shape your own perspective on this.

  • Explainer On REITs: Should You Invest?

    Explainer On REITs: Should You Invest?

    Have you ever dreamed of possessing a portion of that luxurious house? Buying real estate can be a good investment in the long run, but it usually requires a lot of money. And don’t forget about the illiquidity that comes with real estate.

    What if there existed a means of investing in real estate with a reduced amount of capital, allowing one to reap the associated advantages without encountering the additional inconvenience?

    In this blog, we will explore REITs, their types, how they operate, and the features they have.

    REITs Overview

    REITs stand for Real Estate Investment Trust. REITs own, operate, or finance income-producing real estate. Think of REITs as a mutual fund for real estate. REITs pool money from many investors to buy and manage several properties. Investors can participate in the growth of real estate market without buying or managing any property themselves.

    Features of REITs

    REITs come with some distinct features that make them attractive investment options. Some of their key characteristics are listed below:

    • They are generally listed on the stock exchanges, i.e., NSE and BSE for public trading. Also, they may operate as privately owned, known as non-traded real estate investment trusts.
    • REITs are allocated to various revenue-generating properties, such as apartments, offices, buildings, shopping centres, warehouses, and healthcare facilities.
    • These trusts are generally required by law to distribute a minimum of 90% of their taxable income in form of dividends, which translates into a consistent and regular source of income for prospective investors.

    Did you know?

    Real Estate Investment Trusts (REITs) in the USA have outperformed equities for over 50 years-time frame.

    Types of REITs

    Types of REIT's

    REITs offer various options based on the investor’s inclination toward property type and preferred risk-return profile.

    1. Equity REITs

    These are the most common types of REITs. They directly own and operate income-producing real estate properties. They invest in properties like apartments, office buildings, shopping malls, and hotels and generate income primarily through rent collected from tenants and appreciation of their property value.

    2. Mortgage REITs

    Unlike Equity REITs, mREITs do not own physical properties. Instead, they invest in mortgages or mortgage-backed securities. They earn income from the interest paid on the mortgages and securities they hold and are considered less volatile than equity REITs. However, their returns can be more sensitive to interest rate fluctuations.

    3. Hybrid REITs

    These REITs combine the characteristics of both equity and mREITs. They invest in a mix of real estate properties and mortgages and generate income from rent and interest payments. The risk-return profile of a Hybrid REIT depends on its specific mix of investments.

    4. Public & Private REITs

    Public REITs are the most common and trade on major stock exchanges like any other stock. On the contrary, private REITs are not publicly traded and are generally offered by investment firms to accredited investors with a higher net worth.

    Who should Invest in REITs?

    Why should Invest in REIT's

    REITs can be a good fit for a variety of investors. The following is an analysis of who may find them attractive.

    • Income-Oriented Investors – REITs are known for their steady stream of dividend income, making them ideal for retirees or investors seeking additional income generation within their portfolios.
    • Long-term Investors – REITs are designed for investors with long-term investment horizons. While short-term fluctuations may occur, they provide stable returns and capital appreciation over time.
    • Diversification Seekers—REITs introduce a new asset class to your investment portfolio, mitigating overall risk by not relying solely on equities or bonds. REITs’ performance exhibits a limited correlation with conventional investment options.
    • Investors with limited capital – Investing in REITs offers the opportunity to access the real estate market with a reduced initial capital outlay compared to buying real estate directly. This creates opportunities for individuals who may not have the funds for a conventional real estate acquisition.
    • Passive Investing—REIT ownership entails a lower need for management than direct real estate ownership. Investors benefit from collecting dividends without the burden of property maintenance or tenant management.

    How REITs operate

    REITs function similarly to companies that pool money from investors. This can be done through an IPO or subsequent share offerings. These companies use this pooled fund to acquire and manage income-producing real estate properties. Real Estate Investment Trusts generate income primarily through two ways, i.e., rent and property appreciation.

    Furthermore, comprehending how REITs function can help determine whether they are compatible with your investment objectives and risk tolerance.

    REITs in India

    The concept of REITs is relatively new in India compared to other developed countries such as the USA, UK, etc. The Securities and Exchange Board of India (SEBI) introduced REIT guidelines in 2007, which were later updated in 2014. As of now, there are only five REITs registered with SEBI in India, which are as follows

    • Embassy Office Parks REITs
    • Mindspace Business Parks REITs
    • Brookfield India Real Estate Trust
    • Nexus Select Trust
    • 360 ONE Real Estate Investment Trust

    These REITs primarily focus on income-generating commercial properties like office buildings and business parks.

    Points to consider before investing in REITs

    1. Vacancy Rate: This refers to how many floors, offices or houses are vacant. Always look for REITs that have lower vacancy rates.
    2. Portfolio Mix: Watch the properties owned by REITs and analyse them properly. What kind of properties does each REIT own, and in which location. There should not be any concentration.

      Further, also look for a concentration of top tenants. There can be a case that most of the properties in a REIT are owned by a select few tenants.
    3. Dividend History: Have a look at the track record of dividend and analyse the dividend yield before investing in REITs.

    Read Also: Types of Investment in the Stock Market

    Conclusion

    The realm of REITs is continuously developing. As the market matures and new players emerge, thrilling opportunities will unfold. Conduct additional research on specific Real Estate Investment Trusts that align with your investment objectives, and seek guidance from a financial expert to explore your investment options further.

    Frequently Asked Questions (FAQs)

    1. What are REITs?

      REITs are similar to companies that own, operate or finance income-producing real estate.

    2. Are REITs a good investment?

      It depends on your goals and risk tolerance. They offer several benefits but are also affected by the market fluctuations.

    3. How can I invest in REITs?

      You can buy shares of REITs (individual units) on a stock exchange or invest in REIT mutual funds or ETFs. Further, one can start investing in REITs from as low as INR 500.

    4. What are the drawbacks of REITs?

      There are a few drawbacks of REITs such as risk of broader real estate market, lack of control over investments, etc.

    5. Are REITs 100% safe?

      No investment is 100% safe. In case of REITs, they carry inherent risks, but diversification can help mitigate them.

  • MCX Exchange Case Study: Evolution, Products, And Financials

    MCX Exchange Case Study: Evolution, Products, And Financials

    Did you know an Indian exchange known as Multi Commodity Exchange, or MCX, allows you to trade in commodities such as gold, silver, crude, etc?

    Read the blog to learn about the company’s history and evolution, as well as the products currently trading on it.

    Company Overview

    Multi Commodity Exchange, or MCX, is India’s first and largest commodity derivative exchange, allowing online commodity trading. The company’s headquarters are located in Mumbai, Maharashtra. It was founded in 2002 and began operations in November 2003. Gradually, the company expanded its product portfolio to encompass various commodities, such as metals, energy, and agriculture. Throughout its journey, the company has spent time in its research department, ensuring technological advancements in its trading platform.

    The Securities Exchange Board of India regulates the MCX’s operations.

    MCX in Numbers

    1. MCX is the 5th largest commodity option exchange in the world.
    2. It is also the world’s 7th largest commodity future exchange.
    3. They account for about 96.7% of India’s market share in commodity trading.
    4. In 2022-23, the average daily turnover in options was about INR 33,998 crores, whereas the average daily turnover of futures contracts was INR 23,514 crores.
    5. As of 15 May 2024, the company has a market capitalization of app. INR 19,900 crores.
    6. As of June 2023, the MCX has 556 members and 47,573 authorized persons in 706 cities of India.

    Evolution of MCX Exchange

    1. 2002 – 2005 – The company began its operations and signed a licensing agreement with London Metal Exchange.
    2. 2006 – 2008 – The company established a product licensing agreement with New York Mercantile Exchange (NYMEX), and became a member of the International Organization of Securities Commissions (IOSCO).
    3. 2012 – 2015 – The company signed an MOU with Chicago Mercantile Exchange (CME) Group, and became India’s Listed exchange.
    4. 2017 – 2019 – MCXs launched its first-ever options on gold futures in India and launched a new series of iComdex commodities indices.
    5. 2020 – 2023 — The company launched its new trading software version, enabling investors to trade at hostile prices.

    Read Also : What is Commodity Market in India?

    Products Offered

    The company has positioned its products according to the growing demand for commodity trading in India and abroad. The products offered by MCX are as follows:

    1. Metals

      a) Gold – One can trade in gold futures and option contracts based on the price movement of gold.

      b) Silver – Through silver contracts, investors can take a position on the silver price.
    2. Energy Metals

      a) Crude Oil – MCX provides crude oil derivative contracts, available in different variants that track the price of Brent crude oil.

      b) Natural Gas – It allows investors to speculate on the price movement of natural gas.

      c) Base Metals – MCX also allows investors to trade in commodities like copper, nickel, aluminium, zinc, lead, steel rebar, etc.
    3. Agricultural Commodities

      a) Agri Futures – It offers contracts of various agricultural commodities such as palm oil, cotton, menthe oil, kapas, etc.

    Financial Highlights

    Let’s have a look at the financials of the MCX Exchange:

    Balance Sheet (INR crore)

    Particulars31st March 202331st March 202231st March 2021
    Non-Current Asset1,396.81978.061,374.18
    Current Asset1,625.941,822.481,128.33
    Total Asset3,022.752,800.542,502.51
    Equity1,479.301,418.111,418.23
    Long Term Liability56.0965.7857.27
    Current Liability897.6791.06557.78
    Balance Sheet of MCX Exchange

    Income Statement (INR crore)

    Particulars31st March 202331st March 202231st March 2021
    Revenue from operations513.51366.81390.56
    Total Income581.17433.31494.34
    Total Expenses385.62227.57227.68
    Profit before tax190.57184.05266.75
    Profit after tax148.97143.45225.22
    Profit and loss statement of MCX Exchange

    The company’s income for FY 2023 climbed by 34% compared to FY 2022, although its profit after tax increased by only 3% in FY 2023.

    Cash Flow Statement (INR crore)

    Particulars31st March 202331st March 202231st March 2021
    Net Cash flow from operating activities141.42391.3-184.43
    Cash flow from investing activities-8.08-142.22-38.78
    Cash flow from financing activities-89.48-141.65-153.89
    Cash flow statement of MCX Exchange

    The above graph illustrates that the company’s cash flow from operating operations has declined compared to FY 2022, but its cash flow from investment activities has improved in FY 2023, albeit with a negative value.

    Ratio Analysis

    Particulars31st March 202331st March 202231st March 2021
    Operating Profit Margin (%)38.1256.1568.32
    Net Profit Margin (%)29.9739.4557.64
    Return on Capital Employed (%)9.2110.2513.71
    Current Ratio1.812.32.02
    Return on Net Worth (%)10.0710.1115.88

    SWOT Analysis

    Strengths

    1. MCX is the largest commodity exchange in India and has a strong market presence across the industry.
    2. The company has a wide product portfolio consisting of metal, energy, agriculture commodities, currencies, etc.

    Weakness

    1. The performance of the company depends on various factors such as geopolitical situations, supply and demand, market sentiments, commodity prices, etc.
    2. MCX faces competition from various other players in the industry (NCDEX, IEX, etc.) which can limit its market share.

    Opportunities

    1. The company can collaborate with international exchanges, to help them with technical expertise and increase brand visibility.
    2. MCX can introduce more innovative products to attract a new set of traders.

    Threats

    1. Any changes made by the regulatory body, i.e., SEBI, could impact their operation and profit margins.
    2. Any economic turndown in the economy can decrease the trading activities, which significantly hampers the revenue of the company.

    Read Also : List of Stock Exchanges in India

    Conclusion

    In summation, the Multi Commodity Exchange provides investors with a diverse product range; as the population of traders grows, so will the trading volume and profit. The company nearly has a monopoly in the market when it comes to commodity trading. However, you need to examine your risk tolerance and undertake a thorough investigation of the company if you’re looking to invest in it.

    Frequently Asked Questions (FAQs)

    1. Can we trade currencies on MCX?

      No, as of May 2024, currency derivative contracts are not available on MCX.

    2. Who are the competitors of MCX?

      There are multiple competitors of MCX who facilitate trading in commodity derivatives, such as the National Commodity and Derivates Exchange (NCDEX), Indian Commodity Exchange (ICEX), etc.

    3. Who is the founder of Multi Commodity Exchange?

      The MCX was incorporated in the year 2002 and began its operation in 2003 under the leadership of Mr. Jignesh Shah.

    4. What is the trading time of MCX?

      Investors can trade in the commodities derivatives segment at MCX in two parts:⦁ Morning Session: 9:00 a.m. – 5:00 p.m.⦁ Evening Session: 5:00 p.m. – 11:30/11:55 p.m.Further, except for Saturdays and Sundays, trading occurs every day of the week.

    5. What is the difference between MCX, NSE, and BSE?

      The National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) allows participants to trade primarily in stocks of the publicly listed companies, whereas the Multi Commodity Exchange allows trading in commodities such as Gold, Silver, Copper, etc.

  • Delisting Of ICICI Securities : Reasons and Brief Explanation

    Delisting Of ICICI Securities : Reasons and Brief Explanation

    Ever heard of a company delisting itself from the stock market on purpose? That is precisely what is happening to the ICICI Securities. In March 2024, the minority shareholders showed their support by voting in favour of ICICI Securities’ delisting, and to merge with its parent company, ICICI Bank. But before you jump to conclusions, this was not bad news. It was a strategic move by ICICI Bank to simplify its structure and create a more robust financial force.

    In this blog, we will explore the reasons behind the proposed delisting of ICICI Securities, the process, and how this decision could benefit both ICICI Bank and its shareholders.

    ICICI Securities – Brief

    ICICI Securities is a listed company founded in 1995 as ICICI Brokerage Services Limited and is a subsidiary of ICICI Bank. The company embraced technology and launched a revolutionary online brokerage platform, ICICIdirect.com, in 2000 and pioneered online investment opportunities in mutual funds and government bonds. It expanded its reach through physical ICICI direct branches across India in 2005 and diversified services by offering health and life insurance products by 2006. The company name was officially changed to ICICI Securities in 2007.

    On November 9, 2023, the Reserve Bank of India approved ICICI Bank’s request to establish full ownership of ICICI securities. About 71.9% of the brokerage’s minority shareholders approved the delisting, which is higher than the regulatory requirement of a two-thirds majority.

    The ICICI Bank is offering 67 shares of ICICI Bank for every 100 shares of ICICI Securities held by the shareholders. However, there was some disagreement among investor groups. Institutional shareholders, who have a more significant stake, supported the delisting, while some retail investors opposed it.

    Additionally, the Quantum Asset Management Company (QAM), with a 0.21% stake in ICICI Securities, voted against the deal. According to QAM, ICICI’s offer for the stake is undervalued. It should be priced at approximately INR 940 per share, considering the lowest multiple among its comparable peers in the market. This valuation is significantly higher than the current offer on the table by the ICICI Bank.

    Why Retail Investors are not in favour of Delisting

    Why Retail Investors Not in favour of ICICI Delisting

    A few Retail Investors are opposing the delisting of ICICI Securities because of the Swap Ratio concern:

    Swap Ratio Concern – Retail investors felt that the exchange rate offered by ICICI Bank (67 shares of ICICI Bank for every 100 shares of ICICI Securities) undervalued the ICICI Securities. They believe that their holdings are worth more than the offered price, and the swap ratio would not translate to the same potential growth as holding separate stocks.

    If you’re not familiar with Swap Ratio, it refers to the exchange rate at which shares of the acquiring company (ICICI Bank in this case) are offered for shares of the target company (ICICI Securities). It establishes the percentage of ownership a target company shareholder will receive in the new or surviving company.

    Read Also: Delisting Of ICICI Securities : Reasons and Brief Explanation

    Reasons for Delisting of ICICI Securities

    Reasons for Delisting of ICICI Securities

    ICICI Securities is proposed to become a wholly-owned subsidiary of ICICI Bank, which would give ICICI Bank complete ownership and control over ICICI Securities.

    The Bank believed that merging the two entities would improve efficiency and allow it to offer a broader range of financial products and services under one roof. The Delisting would also allow for streamlining operations and decision-making processes within the bank.

    Delisting – An Overview

    The Delisting refers to removing a company’s stock from a stock exchange, i.e., NSE and BSE in India. This means the stock can no longer be traded on an exchange. The companies might delist their shares for several reasons, such as mergers and acquisitions, non-compliance with listing requirements, financial distress, etc. Generally, the delisting can be classified as voluntarily or involuntarily.

    • Voluntary Delisting
      A company might choose to go private or get acquired by another company. In this case, the company will generally offer shareholders a way to sell their shares before the delisting happens. ICICI securities is a case of voluntary delisting.
    • Involuntary Delisting
      This happens when a company does not follow the stock exchange listing requirements. There are different requirements a company needs to meet to stay listed, such as maintaining a specific price or filing several reports on time. The exchange can delist, if a company does not meet the listing requirements.

    You must wonder what happens to the shares after the company is delisted, particularly in case of Involuntary delisting. Even though delisting makes things trickier, you still own a stake in the company, as indicated by your shares. Let’s have a quick overview:

    • Once the company is delisted, you can no longer trade it on the stock exchange. This significantly reduces liquidity, meaning finding a buyer for your shares might be challenging.
    • You might be able to sell your shares on the Over the counter (OTC) market, which is essentially a network of dealers who trade securities outside of exchanges. However, OTC markets are less regulated and generally have wider bid-ask spreads than the stock exchange.
    • Shareholders might find it challenging to sell their shares as there may be limited buyers in the OTC market.
    • In case of voluntary delisting, the acquirer provides the buyback window. The shareholders can sell their holdings to the promoters before delisting.

    Read Also: ICICI Bank Case Study: Financials, KPIs, Growth Strategies, and SWOT Analysis

    Conclusion

    The delisting of ICICI Securities will mark a turning point for the company and ICICI Bank. While some retail investors expressed concerns, the goal is to create a more efficient financial institution. Only time will tell the impact of this strategic move. The company may be delisted, but the decision positions them for future growth as a part of a stronger financial entity.

    Additionally, the delisting will pave the way for a more streamlined and competitive financial giant. This could be a positive development for ICICI Bank and the Indian financial landscape. Also, SEBI is currently reviewing multiple complaints regarding the delisting. Upon the collection of substantiated evidence, the SEBI will initiate an investigation. The actions that SEBI may take remain uncertain.

    Frequently Asked Questions (FAQs)

    1. Why ICICI Securities is getting delisted?

      The purpose of delisting is to simplify ICICI Bank’s structure, and achieve better integration between the two entities.

    2. Did ICICI Bank take this decision because of the poor performance of ICICI Securities?

      No, it was a strategic decision to delist ICIC Securities, and not due to negative performance of the company.

    3. Did everyone agree with the delisting?

      The institutional investors favoured the delisting; however, a few retail investors opposed it.

    4. What will happen to the shareholders of ICICI Securities?

      The shareholders of ICICI securities will receive the ICICI Bank shares in exchange for their holdings.

    5. Will this delisting affect the stock price of ICICI Bank?

      The long-term impact remains to be seen, but the move overall aims to strengthen the banking operations.

  • Jio Financial Services: Business Model And SWOT Analysis

    Jio Financial Services: Business Model And SWOT Analysis

    Did you know there is a recently listed company that is the country’s third biggest NBFC after the Bajaj twins, i.e., Bajaj Finance and Bajaj Finserve? It is the new kid on the block with the backing of Reliance Industries Limited (RIL), as it is RIL’s newly carved out Entity. We are talking about Jio Financial Services Limited (JFSL).
    In this blog, we will talk about its Jio business model and SWOT analysis.

    Jio Financial Services – Introduction

    Reliance Industries Limited (RIL) demerged its financial services company, Reliance Strategic Investments Ltd (incorporated in 1999), and renamed it as Jio Financial Services Limited (JFSL). The Jio Financial Services aims to provide simple, affordable, and innovative digital-first solutions.

    JFSL is positioned uniquely to play a crucial role in transforming the landscape of digital finance in India.  It is a non-banking financial company. As of 13 May 2024, the market capitalization of Jio Financial is almost INR 2.2 lakh crores. It is one of the top 40 Indian companies by market capitalization, in a list headed by Reliance at INR 19 lakh crores. The company debuted on the stock exchanges on August 21, 2023. The company’s initial listing price was INR 265 per share on the BSE and INR 262 per share on the NSE, and currently trading at INR 341 (as of 13 May 24)..

    Jio Financial Services Business Model

    The company is a holding company that operates its Jio financial services business model through its consumer-facing subsidiaries, Jio Finance Limited (JFL), Jio Insurance Broking Limited (JIBL), and Jio Payment Solutions Limited (JPSL), and joint venture namely Jio Payments Bank Limited (JPBL).

    Products

    Lending: The company offers personal loans for salaried and self-employed individuals through MyJio app. Further, the company has also launched consumer durable loans across 300 stores in India.

    Insurance Broking: Established partnership with 24 insurance companies (Life – 5, General – 15, Health – 4) offering a wide range of products such as General, Life, Auto Insurance, Health Insurance, Embedded insurance, corporate solutions & employer-employee benefits.

    Payments Bank: It provides services such as bill payments, money transfers, etc. It has an on-ground network of over 2,400 business correspondents.

    Products in the pipeline: There are several products in the pipeline such as Business and merchant loans for self-employed individuals, sole proprietors, and small business entities; Auto loans, Home loans, and loans against shares.

    Competitive Landscape

    Non-Banking Financial Companies (NBFCs) in India are characterized by oligopoly competition. An oligopoly is an industry where a small group of large companies have a dominant position, giving them more market control and pricing power than the other companies.

    Read Also: Reliance Industries Case Study: Marketing Strategy and SWOT Analysis

    Jio Financial Services SWOT Analysis

    Strengths

    Jio Financial Services Limited (JFSL) has the potential to be a game changer in the Indian market for several reasons. It is a part of Reliance, which has a well-established brand presence that drives trust and recognition.
    1) JFSL has the backing of Reliance Industries, one of the largest conglomerates in India. This gives JFSL access to a vast pool of resources, including capital, talent, and technology.
    2) JFSL is focused on providing financial services to underserved segments of the population, such as small businesses and low-income households. This is a large and growing market that is ripe for disruption.
    3) A 50:50 joint venture between Jio and Blackrock will combine BlackRock’s scale and investment expertise with Jio Financial Services’ knowledge and resources to deliver affordable, innovative investment solutions to millions of investors in India.

    Weakness

    1. The company is relatively new; although they are backed by Reliance Industries Limited, it is still in the financial industry, so building trust can be challenging for them.
    2. Due to its extensive product portfolio, it may encounter difficulties in effectively managing and allocating resources to it.

    Opportunities

    Today’s India is adopting digital finance at a fast pace and the digitalization has penetrated every corner of the nation through Jan Dhan accounts, digital payments, usage of smartphones, and low-cost data. The growth opportunities presented by financial services are remarkable and provide strong directional support to the economy.

    1. Favorable demographics: 450 million working people and the 12th largest population of high-net-worth individuals (HNIs).
    2. Increasing user activity: Higher consumption and digitalization will fuel the growth. As per several estimates, India to become a USD 10 trillion economy by 2035.

    Threats

    1. The business operates in an Oligopoly market where few big players have the controlling power to dictate price and the competition.
    2. Their margins may be impacted by regulatory changes made by the Indian government as it is highly regulated.
    3. Economic growth may affect consumers’ spending and saving patterns, which in turn will affect the company’s profitability.

    Jio Financial Services Financials

    Let’s have a look at the financials of Jio Financial Services Limited.

    Profit and Loss Statement (INR crore)

    ParticularsMar-23Mar-24
    Sales 451,854
    Expenses 6296
    Operating Profit391,558
    OPM %88%84%
    Other Income 10429
    Interest–10
    Depreciation–22
    Profit before tax491,956
    Tax %37%18%
    Net Profit 311,605
    Jio Finance Services P&L Statement


    Balance Sheet.

    ParticularsMar-23Mar-24
    Equity Capital26,353
    Reserves114,118132,794
    Borrowings 743–
    Other Liabilities 665,715
    Total Liabilities114,930144,863
    Fixed Assets 158175
    CWIP38–
    Investments108,141133,292
    Other Assets 6,59311,396
    Total Assets114,930144,863
    Balance Sheet of Jio Financial Services

    Shareholding pattern

    ParticularsSep-23Dec-23Mar-24
    Promoters 46.77%47.12%47.12%
    FIIs 21.58%19.83%19.45%
    DIIs 13.64%12.99%12.50%
    Government 0.13%0.14%0.14%
    Public 17.86%19.92%20.77%

    From the above table, we can observe that FIIs and DIIs have reduced their shareholding over the last three quarters. In contrast, retailers have increased their shareholding.

    Read Also: Reliance Power Case Study: Business Model, Financial Statements, And SWOT Analysis

    Conclusion

    In summary, JFSL’s stock price performance has been impressive and has shown an upward trajectory in recent months, reaching new record highs. The stock hit INR 394.70 in April 2024, an all-time high. Further, the company also reported stellar performance in FY 2024.

    But it is important to note that the market and most of the stocks are at all-time highs, and there are major events lined up like Indian Elections, Budgets, and then US Elections. So, always consider your risk tolerance and time horizon before making any investing decision.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
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    3Nestle India Case Study: Business Model, Financial Statement, SWOT Analysis
    4BPCL Case Study: Business Model, Product Portfolio and SWOT Analysis
    5Apollo Hospitals Case Study : Business Model, Financial Statements, And SWOT Analysis

    Frequently Asked Questions (FAQs)

    1. What is the old name of Jio Financial Services Limited (JFSL)?

      JFSL was initially incorporated as Reliance Strategic Investments Private Limited in 1999.

    2. What products do Jio Financial Services offer?

      The company is a holding company that operates its financial services business through its consumer-facing subsidiaries, Jio Finance Limited (JFL), Jio Insurance Broking Limited (JIBL), and Jio Payment Solutions Limited (JPSL), and joint venture namely Jio Payments Bank Limited (JPBL). These subsidiaries offer services such as lending, insurance broking, payments bank, etc. Further, JFSL has multiple products in the pipeline.

    3. What are the challenges for Jio Financial Services in the coming future?

      JFS operates in a highly regulated sector; along with that, it will be affected by economic, interest rate fluctuations, repo rates, inflation rates, etc.

    4. Is Jio Financial Services (JFS) a NBFC?

      Yes, the JFS is a Non-Banking Financial Company (NBFC). NBFCs in India are highly regulated by the Reserve Bank of India (RBI). 

    5. Is Jio Financial Services a good investment?

      The company’s future looks promising, but it is crucial to do thorough research before investing.

  • Breakdown of CTC: A Detailed Analysis

    Breakdown of CTC: A Detailed Analysis

    Did you know your take-home pay is only part of the picture? In India, CTC can be up to 30% more than your net salary. In this blog, we will explain why CTC is important and what it entails.

    CTC – An Overview

    CTC stands for Cost to Company. It refers to the total amount a company spends on an employee in a year, which includes the employee’s salary and all the benefits they receive. Benefits can include health insurance, housing allowances, and more.

    To calculate CTC, you add the employee’s salary and benefits. For example, if an employee has a salary of INR 50,000 per month and the company pays INR 5,000 per month for his health insurance and other perks, then, the employee’s CTC would be INR 55,000 per month or INR 660,000 per year.

    CTC differs from an employee’s net salary (the amount they take home). Taxes and other deductions are reduced from salary.

    Breakdown of CTC

    Breakdown of CTC

    Basic Salary

    This is the fixed amount of money an employee receives before any allowances or deductions. It forms the core of your take-home pay and is subject to income tax.

    Allowances

    These are monetary benefits provided by the company to help cover employee expenses. There are numerous allowances; some of the key allowances are:

    1. House Rent Allowance (HRA)

    HRA is a part of your CTC that helps offset the cost of renting a house. It is a monetary benefit, and under certain conditions, it is partially exempt from income tax.

    Here is an explanation of HRA:

    • HRA helps employees manage their rental accommodation expenses. The lowest of the following is the tax-exempt amount-
      • HRA received from the employer.
      • 50% of your base salary if you live in a metro city or 40% if you live in a non-metro city.
      • Actual rent paid less than 10% of your base salary.
    • However, there are certain conditions for exemption, which are as follows-
      • You are required to be lodging in a rented space.
      • You must have rent receipts as evidence of the payment.
      • The landlord’s PAN card details might be needed (if rent exceeds INR 1 lakh annually).

    Furthermore, HRA is unavailable if you live in your own house or company-provided accommodation.

    2. Leave Travel Allowance (LTA)

    LTA is another component of your CTC that falls under the allowance category. It is designed to partially reimburse your travel expenses incurred during your leave from work. Let us take a closer look at LTA:

    • It aims to provide financial assistance for domestic travel during your vacation or leave period.
    • LTA is exempt from income tax under certain conditions, allowing you to save on taxes.
    • The exemption is available for two journeys in a block of four years. The lower of the following amount is exempted-
      • Actual travel expenses incurred.
      • LTA amount offered by your employer.
      • Deemed travel expenses, which are calculated based on your salary and travel class.
    • LTA covers your travel expenses for immediate family (spouse, dependent children, and sometimes dependent parents and siblings). The mode of travel can be bus, train, or economy airfare.

    Generally, you must submit bills and travel documents to your employer to claim the LTA exemption.

    Furthermore, LTA is meant for domestic travel within India. International travel expenses are not covered.

    3. Conveyance Allowance

    Conveyance Allowance, also known as transport allowance, is a part of your CTC that helps you cover the daily commuting expenses between your home and workplace and is partially exempt from income tax.

    Let us take a closer look at the Conveyance Allowance:

    • The main objective of conveyance allowance is to offset the cost of commuting to and from work.
    • The amount of conveyance allowance that is exempt from income tax is limited. In India, the exempt amount is INR 1,600 per month or INR 19,200 per year.
    • You do not need to submit any bills or receipts to claim the exemption for conveyance allowance.

    4. Dearness Allowance (DA)

    DA is a component of your CTC designed to address inflation. It is a monetary benefit provided by the government or some private sector employers to adjust your salary for rising living costs.

    Let us have a quick overview of the dearness allowance:

    • The purpose of DA is to compensate for inflation and help maintain purchasing power over time. As the cost of essential goods and services rises, DA helps bridge the gap and ensure your salary retains its value.
    • The calculation of DA can vary depending on the entity providing it.
    • In India, for government employees, DA is a percentage of their basic salary and is reviewed twice a year – January and July, depending on the Consumer Price Index (CPI).
    • Also, private companies might calculate DA using their internal procedures or guidelines.

    Read Also: Budget 2024: F&O Trading Gets More Expensive?

    Employer Contribution

    These are indirect benefits where the company pays on the employee’s behalf, which include:

    1. Provident Fund (PF)

    Provident Fund (PF) is a type of retirement savings plan that can be either optional or mandatory, depending on the structure and particular work circumstances. The purpose of PF is to provide financial security for employees after retirement.
    Both employers and employees contribute a fixed percentage of the employee’s salary towards the provident fund. The contribution rates can differ by country and employment type.
    An authorized financial institution or a government agency invests the contributions, and the employee can withdraw the collected funds under certain circumstances, such as medical emergencies. Additionally, the employee can withdraw the entire accumulated amount and the interest received upon retirement.

    There are two types of provident funds.

    • Employee Provident Fund (EPF) – A Provident Fund scheme for salaried individuals in India.
    • Public Provident Fund (PPF) – A voluntary PF scheme provided by the Government of India and is open to all citizens.

    2. Gratuity

    An employer makes a one-time payment to an employee as a token of appreciation for their service, specifically after completing a long tenure with the company. It is a compulsory benefit under India’s Payment of Gratuity Act, 1972.

    Individuals are eligible for gratuity if they have completed five or more years of continuous service with the same company.

    The gratuity amount is calculated using the following formula:

    Gratuity = Last drawn salary * (15/26) * number of completed years of service.

    • The last drawn salary is your basic salary and dearness allowance.
    • 15/26 is the factor that represents 15 days’ wages for each completed year of service.
    • Number of completed years of service include any portion of the year over six months, regarded as a full year.

    Additionally, there is a maximum limit on the gratuity payable. The cap is INR 20 lakh, which means you will earn a maximum of INR 20 Lakh even if the calculated gratuity amount is higher, and a part of the gratuity amount is taxable.

    3. Employee State Insurance (ESI)

    ESI is a social security program offered by the Indian government to a few employees and is managed by the ESIC (Employees’ State Insurance Corporation).

    The main objective of ESI is to provide medical and financial assistance to employees and their dependents in case of sickness, temporary, or permanent disability because of employment, maternity, or death due to employment injury.

    ESI applies to employees working in factories and other businesses registered under the ESI Act.
    There is a minimum salary threshold for coverage. As of April 2024, employees earning up to INR 21,000 per month are generally covered under ESI.

    Employers contribute 4.75%, and employees contribute 1.75% (for wages below INR 137 per day, employee contribution is nil.)

    Also, employers must register their company with ESIC if they meet the eligibility criteria.

    Read Also: Top Indicators Used By Intraday Traders In Scalping

    Conclusion

    To wrap up, a deep understanding of CTC is essential for anyone negotiating a job offer or evaluating a compensation package. Once you familiarise yourself with various components like allowances and employer contributions, you can get a clearer picture of the total value that you receive from your employer.

    Frequently Asked Questions (FAQs)

    1. What is a CTC?

      CTC stands for the cost to the company. It is the total amount a company spends on an employee annually.

    2. Why is understanding CTC important?

      Knowing your CTC helps you understand the total value of your compensation package, which ultimately allows you to compare job offers more efficiently and negotiate your salary confidently.

    3. What is the difference between CTC and take-home salary?

      CTC is the total cost to the company, while your take-home salary is what you receive after taxes and other deductions from your CTC.

    4. Does a higher CTC always mean a better job offer?

      Not necessarily. A high base salary with fewer benefits might be better for some, while a lower base salary with great benefits might suit others.

    5. Are there any taxes on CTC?

      Taxes are levied on your take-home salary- a portion of your CTC after deductions.

  • Old Regime Vs New Tax Regime: Which Is Right For You?

    Old Regime Vs New Tax Regime: Which Is Right For You?

    You have put in a lot of effort and made money, but you’re not sure which tax regime to choose, the new or the old one.

    Don’t worry; we’ve got you covered. Read the blog to get all the answers to your old and new regime related questions.

    Overview of Income Tax Slab

    A taxation system that applies to an individual based on their income and taxes them based on different slabs is referred to as an income tax slab. An individual’s tax slab rises in tandem with their income. This taxation system is regarded as fair and progressive because an individual’s tax liability rises with their income, and lower income groups are exempt from taxes.

    The Ministry of Finance modify / update the tax slabs annually, and they are announced at each budget speech.

    Tax Regimes in India

    In India currently, there are two types of tax regimes, i.e., Old Regime and New Regime.

    Old Tax Regime – Before 2020, India had just one tax system. Under the Old tax system, you could deduct a variety of expenses from your income, such as house rent, travel expenses, medical expenses, tuition fees for children, etc. This would help you minimize your income and lower your tax obligation.

    In the Old regime, the slab was determined by an individual’s age. Have a look at the below table:

    Income SlabTax Rate
    Individuals aged <60 yearsSenior Citizens aged above 60 but below 80 yearsSuper Senior Citizens aged >80 years
    Up to INR 250,000NilNilNil
    INR 250,001 to 300,0005%NilNil
    INR 300,001 to 500,0005%5%Nil
    INR 500,001 to 1,000,00020%20%20%
    Above INR 1,000,00030%30%30%

    New Tax Regime – The Ministry of Finance announced a new taxation system (optional) for individuals and Hindu Undivided Families (HUFs) in the budget of the financial year 2020–21. However, if a person chooses to use the new tax regime, they will not be eligible to deduct things like HRA, LTA, Section 80C deductions, and so on. In fact, no deductions are available in the new tax regime apart from the standard deduction of INR 50,000 for salaried individuals and pensioners. Because there aren’t many deductions available under the new regime, many don’t like it, and not many have chosen it after its implementation.

    Income Tax Slab as per new regime

    Income SlabTax Rate
    Up to 300,000 INRNil
    300,001 to 600,000 INR5%
    600,001 to 900,001 INR10%
    900,001 to 1,200,001 INR15%
    1,200,001 to 1,500,001 INR20%
    Above 1,500,000 INR30%

    Old Tax Regime Vs New Tax Regime

    There are a few major differences between the old and new tax regimes. Let’s analyze each one of them:

    Tax Rates

    1. Under the old tax regime, tax rates are higher, but an individual can avail of various tax deductions in sections such as 80C, 80D, 80TTA, etc.
    2. While the new tax system has reduced tax rates, it does not permit the use of the Income Tax Act’s deductions.

    Simplicity

    1. Although there are many ways to save taxes under the previous tax system, it could be challenging to engage in tax planning. Further, sometimes people end up spending / investing their savings only to avail certain deductions.
    2. The new tax system offers a simpler tax calculation; however, individuals may lose out on deductions offered in the old tax regime.

    Tax Implications

    1. The previous tax system levied taxes based on an individual’s income and allowed deductions, which favored higher-income earners.
      2.The new tax system mainly benefits those with lower incomes and those who don’t want to claim any deductions.

    Read Also: What Is The Difference Between TDS and TCS?

    Example of Calculation under different Tax Regime

    Let us clarify the differences between tax regimes using examples to help you better understand the difference.

    Suppose Mr. A is a salaried individual who is earning an annual income of INR 800,000 (salary). Let’s calculate the tax liabilities of Mr. A under different tax regimes:

    Old Tax Regime

    ParticularsTax under Old Regime (INR)
    Salary800,000
    Less: Standard Deduction-50,000
    Taxable Income750,000
    Tax up to 250,000Nil
    Tax from 250,001 to 500,000 @5%12,500
    Tax from 500,001 to 750,000 @20%50,000
    Total Tax62,500
    Cess @4% on Total Tax2,500
    Total Tax including cess65,000

    New Tax Regime

    ParticularsTax Under Old Tax Regime (INR)
    Salary800,000
    Less: Standard Deduction-50,000
    Taxable Income750,000
    Tax up to 300,000Nil
    Tax from 300,001 to 600,000 @5%15,000
    Tax from 600,001 to 750,000 @10%15,000
    Total Tax30,000
    Cess @4% on Total Tax1,200
    Total Tax including applicable cess31,200

    From the above tables, we can conclude that if Mr. A opts for the old tax regime, his tax liability will come to INR 65,000; while he opts for the new tax regime, he will save INR 33,800.

    Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax

    Conclusion

    In summation, it depends on individual-to-individual which tax system is better as each person’s net taxable income and amount of deductions is different. Both the new and old taxation system has advantages and disadvantages of its own. Choosing between the two will necessitate professional guidance from a tax adviser or a Chartered Accountant.

    Further, if you want to calculate your taxable amount, explore our calculator: Income
    Tax Calculator

    Frequently Asked Questions (FAQs)

    1. Is the section 80C deduction still relevant under the new tax regime?

      No, deduction under Section 80C (up to INR 150,000) is not allowed when you opt for a new tax regime. It is only available in the old tax regime.

    2. Can a salaried individual change the new regime to the old regime?

      Yes, any individual who has opted for a new tax regime can opt for an old tax regime in the next financial year.

    3. Is deduction u/a 80D applicable in the new tax regime?

      No, an individual cannot claim a deduction under section 80D as the insurance premium paid towards health insurance is not applicable in the new tax regime.

    4. When was the new tax regime introduced?

      The Finance Minister, Nirmala Sitharaman, announced a new tax regime (optional) for individuals and Hindu Undivided Families (HUFs) in the budget of 2020-21.

    5. Which tax regime is better for me if I have a home loan?

      If you have a home loan or are looking to take one, then you should opt for the old tax regime. However, it still depends on the interest amount of the loan and your taxable income.

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