Modi Marches On

We live in an era of limited attention span, super short news cycles and the upcoming President of the US who uses Twitter and it’s 140 characters to talk. When PM Modi announced on November 8th that all Rs. 500 and Rs. 1000 notes would stop being legal tender as of midnight that day, it was like an earthquake and here we are almost 46 days later still talking about it.

The demonetization topic has come up at almost every party or business meeting I have attended and it’s been great to hear the pros and cons of PM Modi’s actions. First, I think we Indians can adapt to any damn thing and this exercise clearly shows that. People that had stacks and stacks of black money figured out ways to deposit their money into the banks. It remains to be seen if they will be able to get their money back or how much of a penalty they will have to pay. On the other hand, the middle class waited patiently to deposit their money and waited even more patiently to get the new currency notes.

The poor ended up being pawns in a political game where the opposition party said the poor were suffering the most. Actually, the poor have been suffering long before demonetization. The per capita income in India is about $1,500…not per week or month that’s per year. The Chief Minister (think Governor of a US State) of West Bengal, Mamta Banerjee, was one of the harshest critics of the policy and was on TV almost every night to highlight how much the poor are suffering. Because of the lines that people had to stand in line to get cash their own cash. Uhhh, we Indians are used to lines. Go to VT or Churchgate train station at 6:30pm and tell me what you see. Come to Nariman Point at 6pm to catch a bus and tell me what you see. I’ve seen these lines in Nariman Point for the past 10 years and that hasn’t changed.

The opposition party even played some of their classic hits like ex-PM Manmohan Singh. Manmohan Singh is like a one-hit wonder, he might have been the chief architect of India’s entry into the global economy in 1991 but he also was the PM during one of the most corrupt periods in recent times and was absolutely silent about it. (The joke is when he visited the dentist, the dentist said “at least open your mouth in my office”.)

I hope Modi doubles down on his drive to make the country a digital currency nation. When people say, how can you expect a poor man to buy a smart phone to take part in this new digital economy I just lose it. Have the politicians scammed this country for so many years that they have not been able to lift people out of poverty? That’s the real tragedy, not demonetization.

US and India Taxation

18949788.cmsDear e-commerce expat,

So you moved to India to join the e-commerce boom, you get to deliver packages during the day and tweet selfies all night. My only advice to you is get your financial house in order. In the weeks and months before you moved to India, I’m sure several people asked you “do you have to pay taxes in both countries?” The short is no, the long answer is – it’s complicated.

Why is it complicated? Because if you are a U.S. citizen and moving to India, you are essentially stuck between two countries that are absolutely obsessed with milking you for every dime that is owed to them. It’s justifiable, but let’s rewind and understand how we got here and go over the basics of each countries tax regime.

The U.S. national debt is at over $18 trillion dollars and many of the largest corporations like Apple, Microsoft and Cisco Systems have kept their profits offshore and refuse to repatriate (fancy word for bring) the funds to the US and pay taxes.

The Internal Revenue Service (IRS) is the government agency that collects the taxes. The tax year is based on the calendar year (January 1 to December 31, 2013) and for individuals, the taxes are due on April 15, 2014 based on the example. They refer to the different rates of taxation as “tax brackets”. The IRS is sometimes referred to as Uncle Sam. If you are a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax, regardless of where you reside.

In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA). This made it mandatory that all non-US financial institutions automatically report if they have accounts for US citizens and report that information back to the US authorities. But, why let the institutions have all the fun? Individuals still need to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). An FBAR filing is required if all foreign financial accounts exceed $10,000. In addition, a Form 8938 – Statement of Specified Foreign Financial Assets is required if you have assets over $200,000 during the year. The amounts vary, depending on whether you are single, married or filing seperately.

In India, the issue is with a cash based economy and corruption. When people pay for services in cash, the government has no way to track it and thus people avoid paying taxes. With corruption, much of the money that is meant for government programs for the poor gets siphoned off and put into off-shore bank accounts.

The Income Tax Authority is the government agency that collect the taxes, it’s part of the Ministry of Finance. The financial tax year is based on April 1, 2013 to March 31, 2014 for example. Individual taxes are due on July 31, 2014 based on the example. They refer to the different rates of taxation as “tax slabs”.

In 2015, the Indian government passed the Black Money (Undisclosed Foreign Income and Assets) Act. It’s commonly referred to as the “Black Money Act” and the intent and spirit of the law was to go after politicians and large businesses that for years had stashed their money in foreign countries. The deadline to declare ANY and ALL foreign assets was September 30, 2015 and the results were less than stellar. Many of the people that declared their assets were working professionals and not the intended target of politicians and large businesses.

It’s Complicated
The US and India do have a Double Tax Avoidance Agreement (DTAA) in place and for the most part works. So if you make the equivalent of USD 100,000 in India, then India will tax you at 30% and the US will not double tax you because of the DTAA that is in place. However, if you make the equivalent of USD 500,000 in India, then India will tax you at 34% (30% + an additional 10% surcharge on 30% + an education tax of 3% on the entire tax amount). In the US, since the highest tax bracket is 39.6% you will have to pay the delta of 5.6% to Uncle Sam.

Suppose you have a 401k retirement plan which allows you to generate income within the account tax free and pay taxes at the time of distribution. Unfortunately, according to the DTAA between India and the US, India does not recognize the account as a pension so you will have to pay taxes on the income generated in the account to the Indian government. 😦

Another example, suppose you buy an equity mutual fund in India and after 13 months you sell it. In India, there is no long-term capital gains on equity mutual funds – awesome right? Wrong, since you hold a US passport you will have to pay long-term capital gains in the US based on the US tax bracket you are in.

So technically, there is no double taxation but you will get taxed at the highest rate whether it’s in India or the US. DTAA should really stand for Double Trouble And Anguish.

An Example
Suppose you earn Rs. 78 lakhs for April 1, 2014 to March 31, 2015 for the work you have done in India. That is Rs. 6.5 lakhs a month and at the current exchange rate comes to USD 10,000 a month. In India you would fall under the 30% tax slab and in the US you would fall under the 28% tax bracket. You will first have to file your US taxes which are due on April 15, 2015. Since you earned USD 90,000 over the 9 months you fall under the Foreign Earned Income Exclusion which means the US government won’t tax you on anything. You will need to look at Form 2555 and Form 1116 for Tax Credits to see which makes more sense for you.

Then when you file your Indian taxes on July 31, 2015 you will report the Rs. 78 lakhs on your ITR (income tax return). You will have to show the long-term capital gains on your Indian taxes in Schedule TR which is for taxes paid outside India. And of course you will need to fill out the Schedule FA for foreign assets. If on February 10, 2015 you have a short-term capital gains of Rs. 5 lakhs, your tax will be Rs. 1.5 lakhs which is 30%. Then when you file your US taxes for calendar year 2015, you will have to show the gains and the credits will be listed on Form 1116.

Yeah, it’s almost better to be just a delivery person in India.

Dear Financial Advisor

keep-calm-and-call-a-financial-adviserDear Financial Advisor,

Because of MProfit, I’ve had a chance to interact with 100’s of financial advisors like you over the past 5 years. And frankly, there is a lot of room for improvement. To the outside world you talk about financial planning, long term goals and asset allocation. Yet when you talk to me, everything is short term in nature – commissions reports, daily portfolio updates via SMS, real-time price updates, etc… There is a real disconnect between what you portray and what you actually do.

Over the past 5 years the Indian financial advisory industry has been going through a very painful but needed cleansing. A combination of government policy errors, general economic slowdown and investors fleeing the markets has led to many financial advisors getting flushed out of the system. The policy change in August 2009 to restrict entry loads was to combat bad behavior by many “financial advisors” who were just churning a clients portfolio. But, what ended up happening is that many respectable advisors like yourself got caught in the cross fire and lost a respectable amount of commissions. It’s been tough but I do believe the good advisors have survived and will continue to thrive because you provide value.

One of my biggest pet peeves is when I hear advisors ask for a way to send an SMS on a clients birthday. I just laugh to myself and think this “advisor” will be out of business in no time. Calling people or sending an SMS on their birthday is probably how it used to work when selling insurance. Nowadays people are being bombarded with calls and SMS’s. Here is some advice, clients hire you not to remind them of their birthday, that’s what Facebook is all about. They hire you to provide them with sound financial advice and hopefully outperform the markets by selecting the right mix of investment products. Hell if you outperform the markets, I’ll call you on YOUR birthday.

Many advisors call and ask “how can we increase our business?” then they ask “will starting a blog like JagoInvestor get me business”.  My advice has always been the same, give clients valuable and timely information. Don’t blast them with a daily/weekly/monthly newsletter if it only contains junk. If it’s tax time, provide some specific tax advice to your clients. Having known Manish Chauhan and Nandish Desai of JagoInvestor for quite some time, I know they spend countless hours answering relevant questions and helping investors on a daily basis…that is what you should be doing. They just happen to have a blog to reach out to people, you could have seminars or start a newsletter…the delivery method is irrelevant however the quality of the content matters.

No Name Startup vs. Big Brand Company

startupsignIn real estate, it’s all about location, location, location… For a startup it’s all about people, people, people. Of course, for startups there are about 3.2 million other things to manage such as the idea, go-to-market strategy, margins, marketing, etc… However, without the right team in place all of those other things don’t mean sh**.

If people are the most important resource then recruiting is paramount and yet it’s also one of the most frustrating tasks for a startup in India because of the cultural issues. Recently, one of the companies that I’m advising was recruiting a junior technology person, he went through several rounds of interviews and we finally agreed to hire him. When he showed on his agreed start date, he starts to ask questions on why he should join a startup vs. working for a big information technology (IT) company. The type of questions he was asking were fine but the timing was wrong because those are the type of questions you want to ask BEFORE accepting an offer.

The sad truth is that for all the talk about Indian venture capital, startups, entrepreneurship, new economy, etc… There are some cultural biases that are just too tough to overcome. I’m sure the candidate got some “advice” over the weekend from his relatives and that was the end of it. I explained the pros and cons of working for a startup vs. a large company but I’m 110% sure he wasn’t listening because the decision was not in his hands – the decision was with the family elders. For many families its about the marketability of their children for getting married. It’s easy for a family to say their son/daughter works for Infosys, Volkswagen or Reliance but a tough sell when their child is working for ValiGo Technology Private Limited.

Of course, this not only happens to employees but also affects companies. If you are trying to strike a business development deal and have an opportunity to work with the biggest name you might jump at it, but usually when you look at the terms and conditions it’s not so great. When I came to India in 2004, I was looking to meet with commodity brokers that had the largest geographic reach. That came down to Refco, which at the time was the largest commodity broker in the world and Man Financial which was #2 globally.

During my meetings I kept on hearing about a new emerging broker/dealer that had several offices in Nariman Point and an office at the iconic Express Towers. I didn’t really followup with those guys because I had a chance to work with either #1 or #2 in the commodity space. (Also, in the back of my mind I kept on thinking that this emerging company’s name is a flower.) We finally partnered with #1 Refco and we launched our fund in August 2005. I landed into India on October 1, 2005 and by October 10th Refco had filed for bankrupty.

So what was the name of that small emerging broker everyone was mentioning back in late 2004…Edelweiss Capital. The name is very fitting because the edelweiss flower grows in rocky conditions which pretty much describes the working conditions in India, although not a household name it’s a powerhouse in the industry. It has grown from being a broker into a massive financial services firm with 1000’s of employees all over India. Once again, No Name Startup vs. Big Brand Company.

The Commodity Conundrum

nsel_logoAbout 2 months back someone asked me to invest in a new commodity product that was guaranteed to return 12-16% a year, I cut them off before they gave me more details and said “no thank you”. I told them I would not touch commodities with a 10 foot pole after being burned by the commodity markets in 2006…December 7, 2006 to be exact. I remember that day vividly because I woke up feeling like a million bucks because it was the day I was getting my marriage registered at the Bombay Courts. I grabbed the newspaper and immediately felt like someone punched me in the gut. The FMC (Forward Markets Commission) had announced they were banning hedge funds in the commodity markets.

The FMC is the regulatory authority for commodities like SEBI (Securities and Exchange Board of India) is for equities. I use the term “regulatory” very loosely, to say the commodity markets are politically controlled would be an understatement. In India the largest industry in terms of revenue and people employed is agriculture, which brings a whole host of political people trying to “help” the farmer.

In mid 2006, the Minister of Agriculture was getting intense heat from the rest of the government for the rise in essential commodity prices which saw onion prices go through the roof. The Minister of Agriculture is none other then political heavy-weight Sharad Pawar. The Minister of Agriculture decided to act via the FMC and ban all hedge funds from trading on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). The FMC was more concerned about NCDEX since that is where many of the Indian agro commodities trade. Our fund and about 10 others were out of business overnight – December 7, 2006. We had dealt with the FMC for many months prior and it was clear they were not calling the shots, they were being told what to do. In the crossfire the hedge funds were collateral damage.

Enough about my sob story, back to this new commodity product being pushed by many of the big brokerage houses. The product was traded on the National Spot Exchange Limited (NSEL) which was backed by Jignesh Shah of Financial Technologies. At MProfit we were increasingly getting requests to create an import template for these contracts so people could track their investments in our software. When people showed us the contract notes where the buy and sell prices had already been established, that should have been a red flag. However, like everyone else we figured it was legitimate because it had the stellar reputation of the Financial Technology group behind it. Not to mention the equity markets were dead so people must have moved to this new exchange to trade the markets…wrong.

When the NSEL issue came to light I had a chat with the head of a large commodity broker who had some exposure to the product, rather his clients has exposure to the product. He was very adamant that it was the government’s fault (not true) and that clients would get their full money back (pretty sure that ain’t happening). The minute I heard that the NSEL might not have the money to cover all the investors I knew right away the goods were probably never there, either fictitious warehouse receipts or sub-standard commodities were being warehoused.

I’ve heard from several people that some of the brokers were unofficially pushing it as a commodity PMS (Portfolio Management Service) which is ILLEGAL in India. Equity PMS products are legal since they come under the purview of SEBI, whereas the FMC banned PMS products in commodities on December 7, 2006 (yes, that date is etched in my forehead!). And just recently, someone forwarded me a product presentation slide deck for a commodity PMS being offered by Forefront (click for preso). It mentions the fund is registered under SEBI’s Alternative Investment Funds (AIF) rules, but commodities fall under the FMC lens. So who has jurisdiction over this fund if things get out of control? Everything looks great on paper until the shit hits the fan.

This type of jurisdictional conundrum is what caused the NSEL to spiral out of control. No one had regulation over the spot markets which is what the NSEL was all about – hence their name National Spot Exchange Limited.


The Motilal M50 ETF is a Bad Remix

motilal_M50-1Three years ago Motilal Oswal launched it’s asset management company (AMC) and decided to focus on exchange traded funds (ETFs) as opposed to mutual funds. An AMC is just a fancy description for a financial institution that is selling mutual funds. ETFs are similar to mutual funds but instead of buying them from a mutual fund company you buy them on an exchange such as the National Stock Exchange (NSE) hence the name exchange traded funds.

The first product out of the Motilal Oswal AMC stable was the Nifty M50 (my blog post from 3 years ago). It launched in July 2010 and was touted as taking the 50 stocks that make up the Nifty index and then “remixed according to Motilal’s predefined methodology based on fundamental performance and valuations” – their words not mine. In the marketing material for the M50 it showed how the M50 kicked the Nifty index to the curb in terms of performance.

So here we are three years later and how has the M50 done as compared to it’s main competitor the Goldman Sachs Nifty BeES? Since the M50 marketing material compared itself to the Nifty Index I add that to comparison as well.

After year 1 (July 30, 2010 to July 29, 2011)
Motilal M50 -5.90% (yes, negative 5.90%)
GS Nifty BeES +3.72%
Nifty Index +2.13%
The delta between the M50 and BeES was 9.62% (962 bps)

After year 2 (July 30, 2010 to July 30, 2012)
Motilal M50 -12.09%
GS Nifty BeES -3.51%
Nifty Index -3.13%
The delta between the M50 and BeES was 8.58% (858 bps)

After year 3 (July 30, 2010 to July 30, 2013)
Motilal M50 -5.40%
GS Nifty BeES +7.09%
Nifty Index +7.22%
The delta between the M50 and BeES was 12.49% (1249 bps)

The numbers speak for themselves, from the very beginning the M50 has underperformed as compared to the GS Nifty BeES and the Nifty Index. When it was launched it was marketed as India’s first actively managed ETF, which just means it’s a regular mutual fund that is traded on the exchanges. In the end it comes down to the fund manager and the stock selection methodology, which based on the M50 numbers has done horrible and definitely something I would not recommend investing in.

Brokers and wealth advisors hate me because my personal preference is toward index trackers such as the Nifty BeES which passively replicates the Nifty index at a lower cost. The expense ratio for the M50 is 1.25% (125 bps) whereas the Nifty BeES is 50 bps. As a comparison some Vanguard ETFs in the US have expense ratios as low as 5 bps, such as the Vanguard Total Stock Market Index Fund.

However, the news is not all gloomy for Motilal’s AMC, they do have one of the best performing ETFs on the market today – the Motilal Oswal MoST Nasdaq 100. Which as the name indicates tracks the Nasdaq index, it’s probably the best low cost instrument in India to get exposure to the US markets.

Epilogue – As I was gathering content for this blog post, I saw several articles (here and here) indicating that the fund manager Rajnish Rastogi for many of the Motilal ETFs including the Nifty M50 had recently passed away. RIP.

Personal Finance Mirage


MProfit competitive slide (click for a larger image)

It’s another day and another personal finance startup shuts down in India, this time it’s InvestoPresto. Several Indian focused technology blogs (NextBigWhat and TechCircle) have reported a couple other names of startups that have recently shut down – Moneysights and That’s only half the story, as part of a VC pitch deck from several years ago I listed all of MProfit’s competitors and honestly I think only half of them are still around.

It would be easy to blame the ecosystem, government regulations, the VC industry or the lack of consumer awareness but then you are just kidding yourself. Forget about India for a moment, I know its an emerging market with 1.3 billion people and the opportunity is so ripe but let’s focus on America.  Please tell me how many internet focused financial startups in the US have made it big either via a large user base or an exit? The answer would be simply one – which exited at USD 180 million to Intuit.

For all the talk about Americans having a do-it-yourself culture for financial services that assumption is just plain wrong. Most Americans like Indians have no clue where to invest and don’t have the long term disciple for personal finance. Americans love houses and cars. Indians love insurance and gold.

So back to India. In the 4 years we have run MProfit, there are 3 general buckets of potential consumers that visit our site or call us. 1. Looking for tips/signals 2. Technical analysis 3. Portfolio management tool. The first group has been misled thinking that tips or trading signals actually work, they work till they stop working. I could go on and on about them but I’ll spare you the rant. Group two are investors that are putting some thought into their trading/investing style and a group we don’t target as there are many tools already available.

Group three is where we spend the bulk of our time and really try to understand what customer wants. We do have a segment of our customers that use MProfit and crave it, but it’s a small segment. And, that’s the trap that many personal finance startups face – a revenue generating product with limited appeal. We are still trying to create a product that has mass market appeal which people need like oxygen and willing to pay for.

No doubt the market is brutal but I still think around the world, no one has cracked the product/market fit for a comprehensive personal finance tool. A startup’s sole purpose is to figure out the market and create a product for it. The question is whether the need for such a tool exists or is it just a mirage?