Investment Gyaan from the Oracle of Omaha

Warren Buffet, also called “The Oracle of Omaha” is known world-wide for being super-rich. But more than his ascent to a luxurious life, his simple and sometimes whimsical gyaan on investment is what’s most sought after by aspiring investors. Here, we will see 10 of his time-tested investment wisdom and what they mean.


(Source: Entrepreneur)


“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”


The stock market is made up of people who want to sell stocks and those who want to buy stocks. Whatever price the buyer agrees to pay for a stock becomes the stock’s price. What Mr. Buffet is trying to say here is that, even if the market shut down for 10 years, provided you are holding the stocks of a very good company, it would still be profitable when the market re-opens, that is to say, people would be willing to pay a bomb for the share you bought at a considerably low price.


“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”


One very good long-term investment is better than several mediocre short-term investments.


“Price is what you pay. Value is what you get.”


This quote summarize the entire ‘value investing’ strategy of Mr. Buffet. The price that you pay to pick up a stock is the money you are willing to commit in order to obtain all the future cash flows of the business to the extent of your stake in it. Make sure that this additional ‘value’, or the returns in excess of your expectations, provided by the company is well worth the money you are committing to the business.


“Be fearful when others are greedy. Be greedy only when others are fearful.”


When people buy stocks just because everyone else is buying, the stock becomes overvalued and becomes a bad investment. On the flip side, panic selling of a stock opens up opportunities for the long-term investor to purchase good companies at a cheaper price, therefore increasing their returns. Look forward for these opportunities.


“Risk comes from not knowing what you’re doing.”


More than anything else, Mr. Buffet emphasizes on investing in businesses that the investor understands. Legend has it that once Bill Gates approached Buffet to convince him to invest in Microsoft, which had some operational issues at that time. Buffet politely declined, stating that he has no knowledge of computers. Imagine telling “no” to business of the richest man in the world! But as an iron rule, a good investor should only invest in businesses he knows in-and-out.


“It’s only when the tide goes out that you learn who has been swimming naked.”


When everyone is spending in the economy and every business seems to be doing well, it is hard to differentiate a good business from the bad. Only during times of crisis, you can figure out which businesses close shop and which survive. A good businesses always survives.


“Do not save what is left after spending. Instead, spend what is left after saving.”


The saving habit is the crucial difference between a good investor and a bad investor. You may create mountains of wealth, but if you do not have the habit of saving, there’s a good chance that the wealth will be eroded eventually.


“Forecasts tell you a great deal about the forecaster; they tell you nothing about the future.”


In investment, the ‘fundamentals’ (Qualitative factors) of a company have a much higher weightage in determining its value than the ‘technicals’ (Quantitative factors). In fact, good fundamentals automatically lead to good technicals.


“I try to buy stocks in businesses that are so wonderful that an idiot can run them because sooner or later, one will.”


Invest in a business because you believe in the core-competency of the business and you believe that they can maintain it for a long, long time. Don’t invest in the business because the current CEO is an inspirational person. The CEO can be and will be replaced. The core competency stays with the business.


“What we learn from history is that people don’t learn from history.”


Change is the order of the day. History may repeat itself, but it definitely does not repeat itself in the same manner. Reading the past information of a business is important, but the winning trick is in understanding what the past information means for the future of the business.


Albert Einstein once said “Everything should be as simple as possible, but no simpler.” How fitting it is to Warren Buffet’s case!


This article was written by Dinesh Sairam (PGDM, Batch 21, XIME-B)


Banking for a New Era

The Reserve Bank of India (RBI), in its attempt to give impetus to financial inclusion in the country, has announced a new category of ‘differentiated’ banks. Payment banks are among the primary of these differentiated banks.


(Source: IndianMoney)


What are Payment Banks?

They are the new stripped out type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. Payment banks will have a greater accessibility, especially in the rural areas. Financial inclusion not only assists a nation’s growth but also increases employment opportunities and empowers the poor. Thus, the licensing of payment banks is a welcome step.


How do Payment Banks work?

Their main focus is on the rural areas where people still make all the transactions in cash.  A virtual account will be opened on the basis of unique mobile no. Customer can make a transaction through web based mobile application or through IVR/USSD gateway to registered user. Payment Banks user can withdraw cash or top up their accounts from points (Vendor, ATM, Agent, etc.) recognized by their payment bank service provider.


Who can apply for becoming a Payment Bank?

  • Existing non-bank Pre-paid Payment Instrument (PPI) issuers
  • Individuals / professionals
  • Non-Banking Finance Companies Corporate Business Correspondents
  • Mobile telephone companies
  • Super-market chains and companies
  • Real sector cooperatives owned & controlled by residents
  • Public sector entities


How exactly does this work in the real life scenario?

Let us consider a situation where Surya a migrant laborer is working in some construction company in a metro city. Every month end he has to send Rs. 4000 to his home in a remote village. He got two options: Either he can send it through someone or he can go to the nearest post office and send the money through money order.

In the first case the man carrying out the job of delivering the money might pocket some amount and in the second case he has to pay 5% money order charge. Now when we consider the situation when the payment bank becomes the people then we see that Suryas wife will be a payment bank account holder and he will simply transfer the money to her through a simple SMS. All the transaction would cost around 1.5% which is cost effective. These banks are allowed to issue automated teller machines (ATM) or debit cards but are not allowed to issue credit cards. It can also distribute financial products like mutual fund units and insurance products.

The documentation required for account opening in these banks remains same as that of conventional banks. Payment banks will bring the ‘one-size-fits-all’ approach in commercial banking to an end. These banks will cater to the need of the lower income groups by introducing simple policies especially designed to help them.

The guidelines for licensing of payment banks were announced in November 2014 and the Reserve Bank of India (RBI) gave an “in-principle” approval to 11 of the 41 applicants. Some of which are:


  • Reliance industries
  • Vodafone
  • Aditya Birla Nuvo Ltd


The ‘in-principle’ approval granted will be valid for a period of 18 months. The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for anyone to get a bank account. That’s also why the cash limit in the accounts is set to just Rs. 1 lakh – it might seem like a very low limit to most people reading this, but if you’re typically outside the banking system, then it is a fairly comfortable amount. The real effect will come to remittances within the country, as it will become easier for people to send money home to smaller towns and villages while working in the city.


Why is it important?

Payment banks can accept deposits restricted to Rs. 1 lakh per customer, and are allowed to pay customers interest on the money that is being deposited. The payment banks are only allowed to invest the money customers deposit into government securities. They can issue ATM and debit cards.


So why these 11 companies?

The RBI guidelines say that payment bank licenses would be granted to mobile firms, supermarket chains, and others, to cater to individuals and small businesses. The goal is to provide small savings accounts and payments to a migrant labor workforce, low income households and small businesses. The companies that have been selected right now seem to largely fit the bill. The phone companies in particular have large distribution networks throughout India, even in rural locations, and this will help as people will be able to easily convert cash into virtual money and vice versa. The Reserve Bank expects payment banks to target India’s migrant laborers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost. It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.


The KYC Norm

The recent KYC norm started creating a lot of pressure for the payment banks.  Firms are concerned that the preference for “paper-based” KYC will be a cost-intensive and time-consuming exercise. Reserve Bank of India (RBI) asking all entities to adhere to the centralized KYC system instead of just relying on the Aadhaar-based eKYC for payment banks.  Payment banks don’t have the same manpower to collect paper-based KYC like traditional banks and given that they are capped at a balance Rs 1, 00, 000, they don’t share the same amount of risk. The idea is to streamline the KYC process and avoid duplication of KYC for customers at multiple agencies. But, for payment banks to be cast under the same net, it means that instead of just relying on the biometric based eKYC they will have to collect more details of their customers and upload them to the central registry. Digital KYC will help ease the “entry barrier” for such people along with being a more authentic means of KYC than a physical KYC.


This article was written by Paulami Paul (PGDM, Batch 22, XIME-B)


A Layman’s View of the Goods and Services Tax

(Source: FosterGem)


The Goods and Services Tax (GST) is the biggest reform in India’s indirect tax structure since the economy began to expand 25 years ago. At long last, a dream is set to become reality. The 122nd Constitution Amendment Bill came in Rajya Sabha with a broad political consensus (And the “good wishes” of the Congress Party), which holds the crucial cards on its passage.


GST is a single indirect tax for the whole nation, which will make India a unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.


In other words, the prices that we pay for goods and services have the taxes embedded in them. Mostly, the consumers are not even aware of or they ignore the tax they pay for things they buy. This is because there are plethora of indirect taxes such as sales tax, excise and VAT, which leads to increased complexity. The GST seeks to untangle this knot and subsume all in one single tax, thereby making India an economically unified market.


The Empowered Committee of State Finance Ministers, which deliberated on the tax and its implications, has recommended what taxes are to be subsumed in the GST:


In the Central Taxes:

1) Central Excise Duty;

2) Additional Excise Duties;

3) The Excise Duty levied under the Medicinal and Toiletries Preparation Act Service Tax;

4) Additional Customs Duty, commonly known as Countervailing Duty (CVD);

5) Special Additional Duty of Customs – 4% (SAD);

6) Surcharges, and

7) Cesses.


Among the State Taxes and Levies:

1) VAT / Sales tax;

2) Entertainment tax (unless it is levied by the local bodies);

3) Luxury tax;

4) Taxes on lottery, betting and gambling;

5) State Cesses and Surcharges in so far as they relate to supply of goods and services; and

6) Entry tax not in lieu of Octroi.


For Example :

Assume that the cost of raw material is Rs. 100.00. The tax rate is assumed to be 10% for all taxes.


Under the CENVAT System:

On the Rs. 100.00 raw material, the manufacturer pay Rs. 10.00 as tax. The manufacturer adds Rs. 20.00 value. To this the manufacturer adds Rs.2.00, which is the CENVAT or Central Value Added Tax. In the example, the CENVAT is assumed at 10% of the Rs. 20.00 value added by the manufacturer. So the cost for the retailer is Rs.132.00 [Rs. 100.00 (Raw Material) + Rs. 10.00 (Tax on Raw Material) + Rs. 20.00 (Manufacturer Value Addition) + Rs. 2.00 (Tax on the Value Addition)]. When the retailer sells it to the consumer, he adds his own margin at Rs. 20.00. This takes the price to Rs. 152.00. Add 10% Sales Tax to this, which increases the price to Rs. 167.20. Thus the final price the consumer pays will be Rs. 167.20. Of this final amount, the taxes paid by the consumer is Rs. 27.20.


Under GST:

In GST, a Value Addition Taxation system is followed. This means each person pays tax only on the Value Added at that point. In our example, when the retailer sells the tax is applied only on the margin of Rs. 20.00 and not on the Rs. 132.00 which is the cost paid to the manufacturer. So the tax the consumer pays is considerably (~48%) lower at Rs. 14.00 [Rs. 10.00 (The tax paid by manufacturer when the raw material was bought) + Rs. 2.00 (The tax on the manufacturer’s Value Addition) + Rs. 2.00 (The tax paid on the margin of the retailer)]. The ultimate effect is the reduction of the end consumer’s (The common public’s) tax burden.


In other words, under the current CENVAT system, there is a cascading effect or double taxation i.e. the consumer pays tax on the tax already paid by the manufacturer. The GST circumvents this problem completely. Below is another example of a fully worked-out difference between the CENVAT system and the GST system.


(Source: ICICI Bank Research)


Know your GST


The GST Council

The GST Council will consist of the union Finance Minister (chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state. Decisions will be made by three-fourths majority of votes cast; Centre shall have a third of votes cast, states shall together have two-thirds mechanism for resolving disputes arising out of its recommendations may be decided by the Council itself.



The Levy of GST

Both Parliament, state Houses will have the power to make laws on the taxation of goods and services. Parliament’s law will not override a state law on GST exclusive power of The Centre to levy, collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST). Central Law will prescribe manner of sharing of IGST between Center and states, based on GST Council’s views.


What’s Out of GST?

Alcoholic liquor for human consumption, Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel (The GST Council will decide until when).


And What’s In?

Tobacco and tobacco products (The Centre may impose excise duty on tobacco).


What has happened so far?

Budget 2006-07: GST by April 1, 2010, announced. Subsequently, Empowered Committee (EC) of state Finance Ministers tasked with drawing up road map and design.

April 2008: EC, headed by the then West Bengal Finance Minister Asim Dasgupta, submits report to the central government, which offers its views and comments in October and December of that year. Joint working groups are then set up to examine options on exemptions and thresholds, taxation of services and inter-state supplies etc.,

November 2009: EC releases its First Discussion Paper.

March 22, 2011: The Constitution (115th Amendment) Bill is introduced in the Lok Sabha; is referred to Parliamentary Standing Committee on Finance, which submitted its report on August 7, 2013. Bill lapsed as term of the Lok Sabha ended in 2014.

December 19, 2014: Constitution (122nd Amendment) Bill introduced in Lok Sabha.

May 6, 2015: Constitution Amendment Bill passed by Lok Sabha.

May 12, 2015: Bill referred to a 21-member Select Committee of Rajya Sabha headed by Bhupender Yadav.

July 22, 2015: The Committee submits its report.

Monsoon and Winter Sessions 2015, Budget Session 2016: Bill not tabled in the face of opposition led by the Congress and persistence of sticking points.


What’s Ahead?

The President shall constitute the GST Council. The GST Council shall make recommendations on:

1) Taxes to be subsumed
2) Exemptions
3) Model GST laws, Principles of Levy, etc.
4) Threshold for exemption
5) Rates, including floor and bands
6) Special rate/rates for specified period
7) Date from which GST to be levied on crude, high speed diesel, natural gas, aviation turbine fuel and petrol
8) Special provisions for the Northeast, J&K, etc.


Parliament will pass a legislation on Central GST (CGST) and Integrated GST (IGST). All the 29 states and 9 UTs will be asked to pass their state GST (SGST) Acts. Dates of implementation of CGST, SGST and IGST have to be negotiated and synchronized.


Some States will initially act up. The GST will give them short term losses. For instance, the aggregate tax amount collected by the Tamilnadu and Maharashtra governments under the current CENVAT and State Taxes system is much higher than what they would get out of GST once it is implemented. This is owing to the fact that these states are net manufacturers of goods and services. The Centre has promised to compensate such states with a higher percentage of the net tax proceeds. Hopefully, that will calm them down. Gradually, they too will be brought under the broad umbrella of GST.


This article was written by Varnita Deep (PGDM, Batch 22, XIME-B)