Monday, August 20, 2001, Chandigarh, India



Y O U R  M O N E Y

Is there future without ‘futures’?
ommenting on the performance of the $ 6 billion plus quantum fund managed by the legendary George Soros, the man with a Midas touch said: “We do not have real or scientific way to measures risk. People who are in the derivatives business have very elaborate risk calculations. We are amateurs; when taking risks.”

How to plan retirement
an one build one’s own pension plan by exercising investment choices that ensure not only good returns, but lesser risks? It is also important that the return is relatively assured despite falling interest rates all around. Is this possible? Perhaps!


Q:- In the past two months, pharma scrips like Ranbaxy and Dr Reddy’s labs have appreciated whereas Wockhardt has seen no activity. Will you recommend an investment in Wockhardt with a two perspective? If so what is your target price at the end of the year 2003?


  • Personal loans
  • House loan
  • Tax liability
  • Rebate on rent paid
  • Instalment of plot




Report theft or damage immediately to insurer
henever you buy a motor vehicle, you get it insured. But do you read the fine print in the insurance policy document?


Is there future without ‘futures’?
C. M. Kulshreshtha

Commenting on the performance of the $ 6 billion plus quantum fund managed by the legendary George Soros, the man with a Midas touch said: “We do not have real or scientific way to measures risk. People who are in the derivatives business have very elaborate risk calculations. We are amateurs; when taking risks.”

Unfortunately, the wisdom seems to the lost on the Indian stock market regulator, the SEBI which, woke up after half a decade of somnolence and taking full advantage of the public outcry and probe in the recent capital market scam by the Joint Parliamentary Committee (JPC), has suddenly embarked headlong on the voyage of uncharted seas.

The rolling settlement has already been introduced in all the bourses from July 2 this year with a ban on Badla. The move in itself has merit and none would question its desirability. Consequently, the volumes have sharply declined and predictably so. The turnover has been reduced to a bare 10 to 15 per cent of the total transactions that were hitherto taking place.

Lack of finances for leveraging and tending and borrowing systems has hit the brokers hard who should have been prepared for the move, which again could perhaps be achieved in phases so as to effect a smooth transition. To voice their grievance, some 4500 odd brokers went on a nationwide strike on July 23 — significantly on the opening day of the monsoon session of Parliament.

While the SEBI is reported to be requesting the RBI for funding, certain basic issues can be raised.

At the outset, the euphoria raised for adopting options and further as a step forward in the direction of following falling international norms appears to have eclipsed the fundamental. Have the bourses in India attained this degree of maturity?” Then derivatives are no substitute for deferred products. Stock options have been introduced in a limited manner for 31 stocks but both the volumes and liquidity are missing a measly Rs 10 crore a day in BSE and Rs 20 crore in the NSE.

Coming to trading in futures and options, there were introduced in New York Stock Exchange (NYSE) in 1975. Realising the changes of unscrupulous trading in these instruments, a total freeze was imposed by the Security and Exchange Commission (SEC) for two and a half years, to enable it to evolve an affective monitoring mechanism. It is not known if SEBI has even attempted it. Needless to remind that the fall of Barings Bank was brought about by the rogue trader Nick Leeson’s mis-adventures in derivatives trading in Singapore.

The post-Budget stock market scam, with Ketan Parekh as the principal player, was not confined to BSE alone; it spread its tentacles to the regional exchanges at Kolkata (CSE) and Ahmedabad, too, leaving a scar on the entire Indian capital market.

The Delhi Stock Exchange has had an uninterrupted record of clean transactions, having started screen based trading in 1996 much ahead of Calcutta. There has been no major irregularity, let alone a scam. No inadequancy in the investor protection machinery has surfaced, nor any adverse SEBI report. Having acquired a ‘workaholic’ image, with longer trading hours and fewer holidays as compared to BSE, the exchange has had the potential of emerging as the Nasdaq of India. And DSE is already corporatised.

The sharp drop in the turnover is reflected in the membership ticket which as DSE had touched in high of Rs 1.5 crore. Now it goes abegging for Rs 15 lakh, but there are no takers. This in turn has given rise to apprehensions regarding the future of regional exchanges.

The present state of lacklustre trading has triggered off the pet theory that all regional exchange including CSE and DSE should merge with BSE. But that is not the answer. Even in the United States, there are three exchanges — NYSE, Chicago (CSE) and Nasdaq. A lesson has to be drawn from the recent merger of bourses of Frankfurt with London: divorce was sought before the matrimonial rites were over. The myth of Bombay being the axis round which all financial activity should revolve, has long been exploded. IPA


How to plan retirement
Ashok Kumar

Can one build one’s own pension plan by exercising investment choices that ensure not only good returns, but lesser risks? It is also important that the return is relatively assured despite falling interest rates all around. Is this possible? Perhaps!

In this, the second part of this three part series, let us zoom in on some more investment schemes that could help one earn a comfortable monthly income, post-retirement.

Mind you, do exercise caution and you own judgement as the endeavour here is to take a closer look at some of the better-known pension plans available in the market.

Systematic withdrawal plan of income funds

Systematic Withdrawal Plans is offered by income funds. For investors seeking regular returns from their investment “Systematic Withdrawal Plan” (SWP) offers the facility of withdrawing fixed amounts from their Income Fund Account. SWP can be used as supplementary pension as it provides income by means of investment in income fund account. Withdrawals can be done for any amount provided the balances does not fall below the minimum requirement to be maintained in the account.

Systematic Investment Plan
June 1,2000 Amount Invested: Rs. 1,00,000




June 30, 2000



July 31, 2000



Aug 31, 2000



Sept. 30, 2000



Oct. 31, 2000



Nov. 30, 2000



Dec. 31, 2000



Jan. 29, 2001



Feb. 26, 2001



Mar. 31, 2001



Apr. 30, 2001



May 31, 2001



Jun 30, 2001



We take an example to see how SWP works. Consider an investment of Rs. 1,00,000 in the Growth Plan of a mutual fund invested on June 1, 1999 with a monthly withdrawal of the capital appreciation in the Net Asset Value during the period of the month. As we can see from the chart, the capital appreciation can vary each month, but the principal remains intact. The investor is also able to maintain a monthly income without eating into the principal investment, which could be used as a safety net for any unforeseen expenses.

Since SWP involves the redemption of units, the issue of capital gain or loss comes into the picture. If the withdrawal starts immediately after opening of the account, the gains are short term is nature and clubbed with the income, therefore attracting tax accordingly. However, withdrawals taking place one year after the date of investment will attract long-term capital gains.

The effective rate of tax here, post indexation, is pretty low. Therefore, in an era where dividends were not tax free, it was advisable for investors to use SWP with the first withdrawal after an year. However, now it is perhaps better to opt for monthly dividend plans. Nevertheless, there is one category of investors who can still opt for SWP. These are investors who do not have to pay any taxes.

Besides their tax efficiency, these funds are also suited for the convenience and ease of investment they provide being available throughout the year. With a choice of monthly, bi-monthly and quarterly withdrawal options, no dividend tax, and easy liquidity of principle, as there is no-lock-in period they are suitable investment option for retired persons.

Fixed deposits

Company Fixed Deposits (CFDs) offer an excellent source of additional pension. CFDs call for one time investment which can made out of retirement money and it provides income in form of monthly interest. CFDs can be taken into consideration for investment as they offer improved interest rates, — and definitely better than the bank deposits. Company fixed deposits offer a variety of options in terms of rates of interest and the tenure of investment. An investor also has a host of alternatives like corporates, public sector undertakings, non-banking finance companies and financial institutions, with each category having a large number of entities to choose from.

Company fixed deposits are very flexible too, which can be gauged from the fact that they are available in the minimum maturity period of six months and go up to a maximum of seven years or so! Companies do not deduct tax at source up to an interest income of Rs. 2,500 per annum.

However, in case one’s interest payment exceeds Rs. 2,500 per annum, all you have to do is fill in and submit Form 15H to the Company and no tax will be deducted! However, a point to remember here is that interest on company deposits is fully taxable, unlike interest on bank deposits and some other investments covered under Section 80L. Moreover, the probability that some companies may default on payments is a real one.

To be concluded


by Lalit Batra

Q:- In the past two months, pharma scrips like Ranbaxy and Dr Reddy’s labs have appreciated whereas Wockhardt has seen no activity. Will you recommend an investment in Wockhardt with a two perspective? If so what is your target price at the end of the year 2003?

— Rohit Chawla, Panchkula.

Wockhardt is ranked as India’s fifth largest pharmaceutical company with a market share of 2.37 per cent. The company has a strong presence in a number of therapeutic segments like pain and inflammation, cough, psychiatry and medical nutrition. The three top brands contribute around 50 per cent to the annual revenue of the company and have been growing at over 25 per cent for the last three years. The company has six brands in ORG’s list of top 300 brands. It is also the only pharma company to launch two successful biotechnology products Biovac-B, the Hepatitis-B vaccine which is now the leader and Epox (taken in Cancer and Kidney failure).

Financially the company has been churning good numbers year after year. In the latest quarter ended on June 30, 2001 the company reported a 14 per cent increase in sales to Rs 168.8 crore and its net profit polevaulted by 71 per cent to Rs 22.7 crore over the same quarter last year. The return on capital employed (RoCE) stands at a healthy 26 per cent. The company commands much lower discounting (14.9) as compared to its peers such as Ranbaxy (31.1), Dr Reddy’s (38.5) and Cipla (36). This could be due to the concerns in the market regarding the difficult merger that the company had with Merind.

It may be clarified here that in the last calendar year the company demerged its diversified business. The agro, speciality hospital and intra-venous fluids businesses were hived off into separate companies.

In the nutshell Wockhardt is now a pure pharma company and it should enjoy much better discounting in the future than that it is commanding right now. Given the above factors, I will strongly recommend buying Wockhardt at the current price of Rs 340. It is difficult to put any specific price target but the stock can return you a healthy 20-25 per cent per annum over the two-year period.

Q:- I have been following Reliance Petroleum for over a year. The stock has moved in the Rs 40-75 range. Currently it is quoting at a low price of Rs 44. I hold 200 shares of the company. Do you recommended that I should add more of this company’s shares to my portfolio?

— Naveen Puri, Panipat.

Reliance Petroleum (RPL) is one of the world’s largest and best refineries. The refinery located in Jamnagar (Gujarat) has an annual capacity to produce 27 million meteric tonnes of petroleum products. The refinery was completed in a record time and the operations of the company stabilised in three months flat. The company commands a 25 per cent market share in the country’s oil refining sector. The company in its very first year (1999-2000) operated at over 100 per cent capacity utilisation.

The company has been reporting excellent results from day one. In the quarter ended June 2001 RPL reported a net profit of Rs 456 crore on a sale of Rs 8,865 crore. This translates into an earning per share (not annualised) of Rs 1.07.

In the post-deregulated scenario RPL will face a lot of challenges and its refinery margins will come under pressure due to the oversupply of the several products. Its marketing margins will drive its profitability. Though it is as yet early to predict how the market will shape up after deregulation, one can trust the Reliance group to turn any challenges into opportunities. The company has plans of enhancing the capacity of refinery from the current 27 million to 50 million tonnes per annum.

The stock price of RPL, which stood at Rs 70 in the month of March 2001 has steadily come down to Rs 44. The stock, the price of which may fall a little more in tandem with the market, can be picked at about Rs 40. But do not expect multi-bagger returns from it. The profits from this Rs 22,000 crore company will come gradually and steadily.


by  R. N. Lakhotia

Personal loans

Q: Banks are granting personal loans to their employees upto Rs 1,00,000 for any kind of purpose. If a person avails personal loan and uses it for house construction/ repairs, will it qualify for interest rebate under house building loan. (Housing building loan has already been availed upto full extent and getting rebate on interest). Please clarify.

— Rajinder Singh, Ludhiana

The interest on loan taken for house construction or for house repair will be eligible for tax deduction u/s 24 of the Income-tax Act, 1961.

House loan

Q: I am Central Govt employee. I had taken H.L. of Rs 1,50,000 in October 1999. Now I am residing in my own house which I built with this loan.

I have paid repayment of loan Rs 20,600 and interest Rs 16,859 as the bank certificate.

My taxable amount is Rs 62,000. Please clarify whether I am eligible to get benefit of Rs 16,859 as a bank interest for the house loan.

— Vinod Sharma, Vishnu Nagar

From your taxable income interest payment of loan will be allowed as a deduction.

Tax liability

Q: I am an ex-serviceman of 70 years of age. My annual income from pension is 86,400 and from MIS 14820 (total 1,01,220). I am residing in a rented house in Gurdaspur and have a telephone in my name.

Am I to apply for PAN and pay tax if any? What is meant by “RBI gave interest rate sops for senior citizens”.

— Raj Kumar, Gopal Nagar

Even though there will be no liability to income-tax on you after granting you tax rebate u/s 88B, yet you will have to file your income-tax return because the net taxable income exceeds Rs 50,000 p.a. You should also apply for permanent Account No. by submitting Form No 49A. The meaning of RBI giving interest rate higher for senior citizens means that senior citizens will be eligible for slightly higher rate of interest say ½ per cent on the Bank fixed deposit. Most of the banks have already announced the increase in the rate of interest for senior citizens. Please enquire about the new rates from the bank and then make your investment and get the benefit.

Rebate on rent paid

Q: In your column in Tribune date 24.4.2000 you had stated that a pensioner is also eligible to claim rebate on rent paid by him for hired accommodation. Please confirm that this is applicable to Defence Pensioners also.

2. Form 10BA to be submitted along with the return is not available anywhere and even the I.T. Deptt. does not seem to be in the know of it. I shall be obliged if you could give me the source from where I can obtain this or give the format along with you answer in your column.

— Lt. Col. D.S. Verma (Retd.), If a person does not own a residential property and does not receive any house rent allowance or accommodation from his employer, he is eligible to claim tax deduction u/s 80GG of the Income-Tax Act, 1961 in respect of rent payment by him. This deduction is equal to 25 per cent of the income subject to maximum of Rs 2,000 per month. Defence pensioners are also eligible for this tax deduction. Form 10BA can be easily available either in Income-Tax office or in a book shop. In case you do not get it easily, you may copy it from the Income-Tax rules.

Instalment of plot

Q: I am serving as a Government Doctor in Haryana Government Service. I have a plot from HUDA in Panchkula. Kindly make me clear whether the annual instalments being paid towards the cost of plot can get me any sort of Income Tax rebate. I have heard, it is to the tune of max. of Rs 10,000. Is it tune. If, for the above said plot, I take loan for the payment of my instalments, what sort of tax rebate I can have. Is there any tax relief from the interest on the loan which I have to pay.

— Dr Vijaya Kumar

As per Section 88 of the Income-Tax Act, 1961 you can claim tax rebate for payment of purchase or construction of residential house. The maximum amount on which this tax rebate is permissible is Rs 20,000. Similarly, if you take loan for the house property the interest on loan will be allowed as a deduction. If the loan is taken after 1st April, 1999, the maximum interest on loan which can be allowed for the financial year 2001-2002 is Rs 1,50,000.



by Pushpa Girimaji

Report theft or damage immediately to insurer

Whenever you buy a motor vehicle, you get it insured. But do you read the fine print in the insurance policy document?

Two recent cases where the Insurance Ombudsman has upheld the insurance company’s decision to reject the claim give consumers some idea of the kind of complications that might arise if one does not follow the conditions stipulated in the policy. In the case of Classic Selections vs United India Insurance, for example (March 20, 2001), the car, Opel Astra, hit a road divider while being driven one night. Bright headlights of an oncoming truck apparently blinded the driver momentarily resulting in the accident and damage to the car. While the insured claimed Rs 4,15,300 on the basis of the estimate given by the workshop, the insurer, on the basis of the surveyor’s report offered only Rs 25,000 as the cost of repairing the damage caused by the accident.

According to the insurance company, following the accident and the damage to the oil chamber and leakage of engine oil, the car should have been towed to the workshop. Instead the car had been driven in that condition to the workshop which was about 8 km from the accident spot, resulting in extensive damage to the engine as a result of friction and heat caused in the absence of oil. Since the policy clearly said that the insurer was not liable for consequential loss, the company was liable to pay only for the damage caused on account of the accident, the insurance company said.

The insured argued that the car was not driven but towed, but could not prove it. Two other factors also went against the insured. First, the accident was reported after a delay of a day. While the accident took place on the night of April 23, 2000, the insurer was informed about it only on April 25. Second, the engine was opened at the workshop before the arrival of the surveyor to assess the damage.

They should have waited for the surveyor to examine the damage and authorise the repair work, the insurer argued. The Ombudsman before whom the insured had filed a complaint, eventually held that the insurance company was justified in saying that it would pay only Rs 25,000.

In the second case (Tara Consultants, May 31, 2001) too, the claim was repudiated on two grounds: while one was negligence on the part of insured, the other was his failure to furnish notice of the theft to the insurer immediately after the loss. The insurance company’s contention was that as per policy conditions, reasonable and proper care should have been taken to ensure the safety of the vehicle. But in this case, the car was left unlocked on a main thoroughfare along with the key. And even after realising that the car was missing, a police complaint was not immediately lodged.

If the police had been duly informed, they would have probably traced it. Instead, the FIR was lodged only the next day around 4.45 p.m. while the theft had occurred at about 2 p.m. the previous day. The insurer too was not immediately informed of the theft, as required under the policy contract and the intimation was sent only after three months, the insurance company said.

If you look at a vehicle insurance police, one of the first conditions is that “notice shall be given in writing to the company immediately upon the occurrence of any accident or loss or damage....” Another condition is that “the insured shall take all reasonable steps to safeguard the motor car from loss or damage..... In the event of any accident or breakdown the motor car shall not be left unattended without proper precaution being taken to prevent further damage or loss and if the car is driven before the necessary repairs are effected any extension of the damage or any further damage to the car shall be entirely at the insured’s own risk”.

Printed in simple language, this should be given to the insured along with the cover note. This is particularly important because the cover note does not carry the conditions governing the contract and the policy document containing these is only issued much later by the insurer.

I must also say here that just as the insurance company expects the insured to report theft or damage immediately without any loss of time, the insured would also expect the insurer to process the claim form and indemnify the loss with alacrity so that the purpose of taking the insurance is actually served.


Inflation up
New Delhi, August 19
The annual inflation rate rose by 0.26 percentage points to 5.22 per cent in the week ended August 4 on account of a near 2 per cent increase in the price of fuel items due to a whopping 5 per cent increase in electricity price.

PNB branch
Chandigarh, August 19
Punjab National Bank has started seven-day working here in its Sector 26, branch effective from today. Simultaneously, a coin-dispensing machine for customers was installed and an express draft issue counter inaugurated at the branch. Mr U.S. Bhargava, General Manager, Northern Zone of Punjab National Bank said the starting of seven-day working in this branch is aimed at meeting the banking needs of the customers of neighbouring areas, which form the trading and industrial nerve centre of the city, even on Sundays. TNS


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