Should you take that insurance policy?

A couple of weeks ago, an old friend of mine wanted help regarding his investments. While he was comfortable with a wide range of products, insurance was a strict no for him. His argument was “why should I make my widow richer than wife?”. It’s an argument I come across often particularly from those who have built wealth through aggressive stock picking or mutual funds. Their argument is: why bother about insurance when the same money can be used to earn 25-30% returns!
Much of the criticism against insurance is also due to the fact that it has been sold rather than the investor asking for it. The fact that every investor ends up getting at least one call a month from an agent doesn’t help matters much. As a result, most insurance policyholders have been sold a policy according to the selling techniques of the agent and needless to say, most policyholders are not aware of their policy details. However, the time has come for investors to change a few things about their thoughts on insurance and here is why.
To start with, most of us have been steadily increasing the balance on our liability account. Unlike our parents or grandparents who believed in spending out of their income, the current generation has been partly funding its spending. As a result, an average Indian middle class family will have a combination of loans in its portfolio ranging from home loans to car loans to personal loans. Even if some one manages to keep away from these loans, he is sure to carry a small liability on his credit card. While the individual may have the regular source of income to clear his dues over the long term, an unexpected event such as death could change the picture and the family could end up with a loan bag of a few lakhs of rupees.
Many argue that they have enough in the kitty to take care of the family over the long term in the form of property and bank balance and hence don’t need to set aside cash for an insurance policy. However, many don’t realize that a few thousands of rupees can help the individual’s family from using up long term assets. Take the case of a 45-year old individual who is sitting on a loan of Rs 30 lakhs borrowed to invest in a property which at present costs around Rs 45 lakhs. Let us assume that the individual has invested in the property only a couple of years ago and hence there is not much change in the loan figure. As you are aware, the principal amount comes down in a small way during the first few years of the loan tenure.
Now, let us assume that the individual has not made an effort to go in for the required insurance cover and on the other hand, is happy with the Rs 5 lakh cover (which was forced upon by him during the early part of his career by his insurance agent uncle). He had kept away from insurance on the pretext that there wasn’t much liquidity after paying home loan EMIs. Because of the property investment, even his investment portfolio was not impressive and he could manage to build a liquid asset portfolio of only a couple of lakhs.
Consider an event where the above individual meets up with an accident and suffers untimely death. Now the burden of loan repayment falls on the spouse who does not have a regular source of income. Property being the only asset, she is forced to sell it to cover up the dues. In addition, she has to worry about the future of two children who would take at least a decade to provide regular source of income to the family. From a situation of comfortable living with own property and a healthy bank balance, the family is forced to worry about debts and future living due to lack of planning.
The individual could have saved the trouble of sale of property for his family if he had set aside around Rs 25,000-30,000 towards a term insurance plan. If you break that into monthly component, the cost works out to around Rs 2,500 per month. Surely, it is not a big sum to protect a property which is worth Rs 45 lakhs and ensure a peaceful future for the dependants?

Telecom outsourcing deals under Trai lens

New Delhi: The Telecom Regulatory Authority of India (Trai) has started monitoring changes in the contractual agreements of operators to ensure that they do not adversely impact the annual licence fee earned by the government and follow licence conditions.
The government gets part of the revenue earned by operators as licence fee under the revenue-sharing agreement with operators.
The regulator is currently monitoring the restructuring deals of at least three key companies — Bharti Airtel's outsourcing agreements, Reliance Communications' dual company structure, and Tata Teleservices' contract with Virgin Mobile.
The regulator is also planning to closely look at the new trend of operators spinning off their tower businesses and assets into separate companies. Trai Chairman Nripendra Misra said: "These are not probes or investigations but we are definitely monitoring.
We are not distrusting companies but we must monitor changes." Misra added, "New companies for the tower business are being formed, the assets are being transferred to them, a sharing formulation will come up and we want to understand what is the relationship that will develop (between the parent company and the tower company).
We want to ensure that it does not affect the annual licence fee as various issues on transfer pricing come up." Taking the example of the structure of the Reliance Anil Dhirubhai Ambani Group telecom business, Misra said it has two companies, one that owns the network assets and the other that is responsible for all the recovery receipts and billing."We are looking at who owns the subscriber, whether the billing was going in the name of the parent company or the contracted company with whom they have a relationship, what is the compensation being paid by the parent company to the second company and is that compensation realistic," Misra explained. Misra said they have already had three preliminary meetings with the company and there is nothing that the regulator has been able to pinpoint.
Giving another example, Misra said that they are also looking into the structure of the Bharti Airtel outsourcing dealwith Ericsson, which maintains their networks. "Networks are being maintained by others now and we don't even know whether the import of the equipment has come through the outsourced company or come through the parent company. That is what we want to know," he said.

IPOs unpopular with firms

Mumbai: Infrastructure construction company Rithwik recently opted for a private equity investor (Baring Asia) as against an initial public offer (IPO) for its fund requirements.
Though the Hyderabad-based company had filed its draft red herring prospectus (DHRP) with the Securities and Exchange Board of India (Sebi), it changed its decision to go ahead with the process because of volatile stock markets and the resultant impact on its valuations.
Rithwik is not an isolated case. There are a host of companies that have filed the prospectus with the capital market regulator, but have chosen against it. According to the norms, a company has to come out with its public issue within 90 days of its prospectus being approved by Sebi. If it fails to launch the IPO within the stipulated time, the approval lapses and the company has to restart the exercise.
According to Delhi-based Prime Database, a company that tracks the developments in the primary capital market, Acme Tele Power (Rs 1,200 crore), Pride Hotels (Rs 250 crore), Vascon Engineers (Rs 350 crore), TCG Lifesciences (Rs 175 crore), Surya Foods & Agro (Rs 136 crore), Neel Metal Products (Rs 125 crore) and Prince Foundations (Rs 300 crore) have received the Sebi approval, but have not tapped the market.
When markets are topsy-turvy, everyone, including the companies' management, merchant bankers, retail and institutional investors, chickens out.
"It's the question of valuation and whether the market is willing to take it. It also depends on how keen the company is in raising funds through the IPO, the opportune time and the urgency to list it," said a senior executive of a leading investment bank, who is currently doing road shows for companies to assess the appetite of financial institutions for IPOs, which has dried up substantially in recent times.
The support of well-known institutional investors, to a large extent, boosts the success rate of an IPO.
Bankers opine that not only retail investors, but even institutional investors are very cautious about investing in this market condition.
However, there are exceptions too. Companies with smaller issue sizes were brave enough to come out with their issues and did meet with decent subscription.
For instance, Gokul Refoils and Solvent, Anu's Laboratories and Aishwarya Telecom sailed through the IPO market quite comfortably.
Consider this: 2007 saw 100 companies raising Rs 34,179 crore from the primary market, but during the four months of 2008, 18 companies have raised about Rs 14,908 crore.
"IPOs can be typically floated only in a stable or a buoyant secondary market. First the market crash in January this year and then huge volatility thereafter have made most issuers wary.
"The issuers expect higher value, but the market is in no mood to accept it, given the present depression. As many as 24 companies have currently got the Sebi approval and, in good times, they would have immediately rushed to the market. Given some stability in the market, the good news is that at least some of these, including UTI Asset Management, are now gearing up with their plans to hit the market," said Prime Database CMD Prithvi Haldea.

Bharti Airtel, SingTel plan funds for MTN buy

Mumbai: Billionaire Sunil Mittal, the founder of Bharti Airtel, plans to set up a separate company in partnership with Singapore Telecommunications (SingTel) that will be the vehicle for acquisition of the South Africa-based MTN Group, according to sources close to the deal.
The special purpose vehicle (SPV) will raise funds, including bridge loans. The company will later explore the option of selling American depository receipts (ADRs) or global depository receipts (GDRs) to repay the bridge loan, the sources said. Indian firms, including Tata Steel, in the past have formed SPVs to acquire foreign companies to protect local operations and also to avoid legal hindrances. The SPV may be registered in a tax-haven country, like Mauritius or Bahamas, the sources said.
The move to float an SPV will help Bharti Airtel to continue being listed on Indian stock exchanges, while MTN's promoters will be given a stake in the SPV. The quantum of the stake will depend on the cash-share ratio, which is yet to be finalised between Bharti and MTN. Bharti Airtel would raise funds by diluting the equity of the SPV and, if needed, the promoters' stake in Bharti and that of its partner SingTel to part-finance the deal.
Airtel may have to go for an open offer — merger or acquisition of over 35 per cent stake triggers an open offer in South Africa — and merge the companies' selected businesses into the SPV. As the effective foreign direct investment in Bharti Airtel is about 68 per cent (it should not exceed the 74 per cent limit set by the government), MTN would not be offered a stake in it. However, in Bharti Telecom, the foreign holding is only 42.8 per cent — SingTel holds 32.8 per cent, while Vodafone holds 10 per cent.
Thus, the SPV will be a subsidiary of Bharti Telecom and a stake in it will be offered to MTN promoters, said sources. Bharti Telecom owns a 45.31 per cent in Bharti Airtel, of which the Mittal family holds around 26 per cent. The MTN management holds over 13.3 per cent in MTN through Newshelf664. Lebanon's Mikati family owns 9.8 per cent stake.
"In return for the equity given to Bharti, the promoters of MTN will get cash and stake in the SPV. The Indian telecom major will pay the cash for the stake held by public and financial institutions. Bharti Airtel is looking at raising a bridge loan of around $15 billion for the cash portion of the deal. The remaining amount will be raised through internal accruals and fresh issue of Bharti's and the SPV's shares," banking sources said.
To initiate the merger move, Bharti Airtel executives are expected to hold talks with financial institutions and foreign institutional investors, who hold stakes in MTN. The move is to win the confidence of investors in the wake of counter-takeover offers from other players, like UAE-based Etisalat.
When contacted, a Bharti Airtel spokesperson said: "We have already issued a statement and have nothing further to add to our last statement." At this stage, MTN is not commenting further than the cautionary announcement released on May 5, 2008," an MTN spokesperson said.
Cost-sharing, co-branding, marketing, operations (existing and new), human resource sharing and employee relocation to other countries, among others, would also be conducted through the SPV. As equipment and software purchases are huge for telecom companies, the merger would give joint bargaining power to Bharti. "The SPV would also look at listing on the New York Stock Exchange, where valuations of telecom companies are relatively higher," said a source.The SPV would also be the vehicle for the Bharti Airtel-MTN combine's future acquisition plans in the US and Europe.

RIL offers largest employee stock option

Mumbai: Riding the construction of a new refinery and several retail outlets, Reliance Industries Ltd (RIL) is turning a new leaf in the area of people management. During the last fiscal, it rolled out the largest ever employee stock option scheme (ESOS).
All told, 14,000 employees, constituting roughly 29.1 per cent of the total employee strength, have become the company’s shareholders through this scheme.
The company granted 2.97 crore options to its employees in three tranches in 2007-08, according to the company’s annual report released last week.
This is one of a string of measures that the company has put in place to nurture talent in an organisation that’s facing a huge shortage of manpower to deal with its expansion plans.
The company, which is expanding in high-growth areas including retail and energy, is facing a job market where competition to retain people is becoming increasingly difficult. In early 2007, RIL subsidiary Reliance Retail had rolled out a series of measures to retain its top brass.Under the new plan, RIL is taking a complete re-look at its existing human resource (HR) processes.
Hewitt Associates, a US-based consultant, has been appointed to shape up the new HR strategies. Once Hewitt completes its work, new performance management guidelines and career opportunities will be put in place.“The main objective being to take a re-look at the existing processes and benchmark with the best in each area and work towards going beyond,” said the RIL annual report.
Another overseas consultant, The Hay Group has recently completed job evaluation exercise for employees at RIL’s petrochemicals business. This will shortly be extended to other divisions. The Hay Group’s mandate includes, among other things, restructuring of employee hierarchy.
Attempts are being made to create a talent pipeline. For the refinery, RIL has been training a total of 1,700 carpenters, fitters and plumbers in Jamnagar. “We recruit people for our construction team and train them on soft skills,” said a Reliance official familiar with the development, who requested anonymity as he is not authorised to speak to the press.
The company has also hired 1,500 engineering graduates to cater to demand for its expansion plans. For the first time, a business management trainee (BMT) scheme was launched in the last financial year. “This will be an on-going annual initiative,” the annual report stated.