FDI - Demystified

Bloomberg – “ India may order probe into Wal-Mart lobbying spend”

Wall Street Journal – “ On Wal-Mart, the BJP and Bribery”

These are the headlines that greet us on our television sets and our newspapers. Ever since ‘FDI’ has been mentioned there have been a lot of discussions, debates ,arguments and what not. There has always been a proposer and an opposer to this argument. The question is who stands to loose in this argument the Congress, the BJP or us the people. FDI or Foreign Direct Investment basically means investing money directly in a target country to take advantage of the present market scenarios in that country. This money can be beneficial to both the target country and the company. The country receives investment and foreign currency and also taxes from the investing company which can be used by the country for a variety of reasons. The investing company gains by getting access to that market which may provide substantial revenues to the company. FDI can be broadly classified as FDI in single brand retail and FDI in multi brand retail.

Single Brand basically means stores like Reebok, Nike, Puma etc

Multi Brand means stores like Wal-Mart, Carrefour, Metro etc.

Why is there such a hue and cry?

Well FDI in single brand retail was permitted to receive 100% funding provided that 30% of materials are sourced locally. Previously upto 51% FDI was allowed in single brand retail. However this was amended to allow 100% investment. This decision was taken after the government received severe flak for its policy paralysis. The biggest problem and the bone of contention is FDI in multi brand retail. The government argues that it will be a good source of foreign currencies and improve market practices and make the market more consumer friendly. The opposition argues that since foreign players will be allowed in the market this will badly affect local players who do not have the capacity to offer such deep discounts and will bleed them and eventually force them to shut shop. This is what the BJP and the left argue.

Ironically it is the BJP that promoted the FDI when  they were in power as they were for economic liberalization. The poster boy for BJP Narendra Modi is a leader who has been openly campaigning for foreign investment in his state.

The BJP claim that lobbyists in the US have spent close to Rs.125 crore on the FDI deal. Wal-Mart in its defence says that these were just administrative costs incurred and this was declared to the government.

What is lobbying?

Lobbying (also lobby) is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by many different types of people and organized groups, including individuals in the private sector, corporations, fellow legislators or government officials, or advocacy groups (interest groups).

Where this argument fails?

The BJP has failed to take into account that lobbying in the US is regulated by the government and also companies are required to make disclosures under Lobby Disclosure Act of 1995 and the Honest Leadership and Open Government Act of 2007.

Also what the BJP fails to remember is that there are lots of other companies — including some Indian ones – that are registered as lobbyists in the U.S. on issues like outsourcing, immigration, and pharmaceuticals. 

Rather than focus on such issues the BJP should push more strongly for the Lokpal Bill which will help  curb corruption closer to home, unless they are finally at loss if this bill is passed.

DABBA TRADING - NIGHTMARE FOR INVESTORS

DABBA TRADING - NIGHTMARE FOR INVESTORS

We often read about dabba trading, not being permitted by the regulators. Many do not know the mechanics, and also the risk associated with it, till now. A dabba traders office is like any other broker’s office having terminals linked to the stock exchange showing market rates of stocks. However, the difference is that the investor’s trades do not get executed on the stock exchange system but in the dabba operator’s books only. This kind of operation, where trade is kept within the books of the operator is called “dabba” in the popular market terms. A Dabba operator flouts rules and regulations relating to Client Protection, which includes registrations, margins, transaction, execution and settlements. Not only has he evaded the Income tax regulations, which prohibit dealings in cash, but also service tax rules and many other mandatory requirements. If we deeply research into this subject we can understand that a dabba trader do not have the periodical derivative FNO settlement dates being followed. A dabba operator allows the client to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily prescribed by the stock exchange..The settlement cycles are decided by the dabba operator, himself. There is no daily mark to market settlement if the trade is in client’s favour, whereas losses are extracted regularly from the clients.

To describe Dabba trading in lay man words , “You put money to get 100 shares, but the software will register only 10 shares officially in the market, and you will see 100 in your screen, which makes you believe that you really purchased 100 stocks, which is inaccurate”. It is not the investor who makes money, the broker who involves in trading on behalf of an investor makes the money, with 10% of cash put in their pockets illegally and unknown to the investor. Also these brokers don’t deal with successful investors, mostly targets the average and pity ones.

I believe it to be an offence, not much different from smuggling or black marketing. As a result, frequent raids are conducted on dabba trading operators in which their computers and records are seized. Those working in his office are also taken in the custody once they find such activities taking shape. If we run through the media, we can learn that the Gujarat police has conducted several raids in the past and alerted citizens. Media has also played its role in reducing the menace of dabba trading. Some dabba traders hedge their positions in the

market by partly executing the trade in the market, maybe in their own proprietary accounts or some benami names. Dabba traders disappear when the market goes against them, resulting in huge losses for their clients. The brokers who permit such activity in their branches or even sub-broker’s offices are the affected parties. Stock exchanges take

complaints against dabba trading very seriously and enforce strict penalties. Even suspension is levied, if stock exchange inspections confirm the complaint As Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the business. Hence constant vigilance is required.

IBN Live in one of their article revealed that Dabba trading, is still a thriving business in Mumbai, Ahmedabad, Rajkot, Jaipur and Ludhiana long after the SEBI had banned it. They claim that the dark side of this unauthorised stock trade is that it has undergone a technological makeover and paper notebooks have given way to hi-tech software. Available for Rs 2,000 to 8,000 in Mehsana, Gujarat, this software deletes one zero from the number of shares entered for trade. So, if a broker keys in hundred shares, only 10 will get fed into the official exchange terminal. However, the Dabba traders' screen will still show 100 shares. Many a times, it’s hard to understand the state of mind of the investors because some investors, for their profit, trade with these dabba traders knowing their illegal activities only because they facilitate trade with only 10 per cent margin instead of the 25 per cent as in a legal trabsaction in the Future and Option Segment (FNO). That means to buy shares worth Rs 1,000, an investor needs to deposit only Rs 100. However, it's not the investors who make money in this trade, but the brokers, who are quite often not even registered with a stock exchange.

 The clients patronizing such dabba traders may find some short-term benefits here. They do not follow ‘Know Your Client’ norms; fill cumbersome forms, sign long agreements and requirements like PAN card. Margins are bypassed and leveraging is freely available. Unaccounted cash is used for making payments rather than making payment by cheque. There are histories written in blood when Dabba shops close overnight, with traders disappearing from the locality once they see a killing in the market. They go to the extent of employing goons for the recovery of losses. In such a case, neither Stock Exchange Arbitration is available to the investor nor there is any access to customer protection funds which is of up to Rs. 100000.

Nobody has a clue about the dabba market size but it’s functioning on a large scale and it is certainly something which might beat any estimation made during research. However the figures of the Dabba Market turnover for the year 2005 was 5.72 lakh crores which then multiplied near to 24 times to 119.48 lakh crores in the year 2011 and after SEBI’s stringent action and trading policies saw this market shrinking 53.11 lakh crores till July 2012.

RESERVATION QUOTA - A NEW OUTLOOK

Many of us in the Open or General category wish that only if we could have belonged to Scheduled Caste/ Scheduled Tribe or Other Backward Class (SC/ST/OBC) in the current scenario. It’s true even if many may negate this fact; however truth always has a rough base. We need to apprehend the fact that just by rebuking the issue and criticizing the Government of India for the current state of this country and blaming them for not looking into the core issues that needs urgent consideration will not change how this country functions. Team Anna and Arvind Kejriwal along with Kiran Bedi and Prashant Bhushan are deserted individuals till the time we as citizens of this great nation bring some alteration in our thought process.

In the days of Dr. Ambedkar, MK Gandhi and Nehru, backward class citizens were of grave concern as then we were slaves to the mighty British Empire. Social status, caste discrimination, poverty, female foeticide, inequality have been a part of Indian culture since long. Thus, Dr. Ambedkar, humble enough to fight for the under privileged brought about a revolution to help the backward community to justice and to win them basic rights as human beings. Reservation took birth here, it was right then, in those times, but we need to learn that India has progressed a long way from those troubled days and today has become a nation that every country has an eye on. Reservation was introduced with a view to give the backward class an opportunity and means to progress socially as well as economically. Initially reservation was implemented for a short finite duration, but today it has become the trump card for Indian politicians.

History should be changed and it can happen only when there are alternative thoughts running in our minds and not by cursing the situation. Reservation for SC/ST/OBC for admission into top colleges, government Jobs, for promotion in state government jobs, concession in travelling etc. has handicapped our progress and has forced many talented, well deserving individuals to bow their knee for less and to be underemployed regardless of their potentiality.

Let’s not overlook the fact that majority of the Indian population still belongs to the poor community, irrespective of one belonging to Upper or Lower caste. ‘Adivasis’ still battle for basic social privileges and recognition, reservation will do no good to the country in today’s economic scenario but other measures needs to be found out to help such concerns to be eliminated from this nation.

FUTURE CHANGE TO THE EXISTING DEVELOPMENT

 

1)      Education is the main reason for poverty and more than half of the over billion population of India do not have access to education. Literacy will help gain knowledge to tackle social issues as these. Government should take stringent measures to provide platform for every individual born in this country to compulsorily gain education till 12^th standard. Schooling is an important phase of life as we learn basic values and much more in general at this level and a right and powerful education will help create great citizens tomorrow.

2)      For people below poverty line provide free education till their graduation phase. Many may argue on the funding for this free education, it’s a valid question; hence we have multi-billion enterprises to whom we can enforce law to spend for educational development of the country. Government has to ensure that it does not burden the enterprises and hence a 0.25% or 0.5% of their basic profits would be handsome contribution.

3)      For committed below poverty line parents who wish for their child’s development in better environment, provide clause for minimal fees in private institutions but on merit basis alone.

4)      Provide for required stationary and syllabus books for children born to parents below poverty line.

5)      Keep strict selection process for quality teachers willing to educate the new generation (quality of professors and their qualification is a matter of concern as on today.)

6)      Change education pattern for the students and constantly change the syllabus to meet existing economic status quo. (Education system authorities should put deep thoughts on this account.)

7)      All foreign companies earning from Indian consumers should be made to pay a part of their huge chunks of profits for improving the literacy status of the country and for the sum provided, government should ensure tax benefits to such companies which will encourage them in taking part in this initiative.

8)      Recent FDI approval will see billions of foreign funds flowing into the Indian Financial System which will help in easing inflation, providing quality products at low cost and increase employment opportunities for many. Government may lay conditions for contributions from these giants.

9)      An individual body of learned individuals to be appointed to manage funds for these initiatives and proper accountability of every penny inflow and utilisation to be made in books of accounts and also to be made available on demand as per RTI act. No ministers to be involved in this body selection and ensure no rights to any person of any political party to influence and practice their power.

10)   Tax levied on every individual falling in the 10%, 20% and 30% tax bracket, 2% to 3% of the total sum of the tax collected in a financial year to be utilised for infrastructure development of our education system (schools, universities, libraries, etc.)

11)   Remove the reservation legislation from the Indian constitution and ensure equal rights to every individual on merits and enforce a proper channel for tracking of avoidance of this social evil of caste discrimination.

12)   Removal of Reservation will increase competition and give rise to more worthy entrepreneurs and leaders than goons who survive on the Reservation benefits.

Reservation quotas were introduced to eliminate discrimination and inequality but let’s interrogate ourselves and ask has it really fulfilled the purpose. Today the benefits SC/ST/OBC gain has made the Open or General category look like the real under privileged sections of the society. Recently a bill was introduced in the Rajya Sabha to provide reservation for SC/ST for promotion in Government Jobs, is this really a concern for the citizens of India or is it the quality of life we need, medical facilities we seek, security we strive for from the security agencies of this country and a government who is for the citizens and not for itself. It’s time for reality check.

LET'S VOICE OUT FOR A BETTER TOMORROW.