The Economic Times - ET in The Classroom - Archives - 3 (Economics Concepts Explained) - INSIGHTS PDF

10/3/13
The Economic Times ET In The Classroom Archives 3 (Economics Concepts Explained) | INSIGHTS
INSIGHTS
JULY 1 8 , 2 0 1 3 6 :2 5 PM
The Economic Times ET In The Classroom Arch (Economics Concepts Explained)

Archiv es -1 Archiv es -2 archiv es 3 Archiv es 4 Archiv es 5 The Econom ic Tim es newspaper now and then publishes articles on current econom ic issues in a question and an the heading ET In The Classroom . They are sim ple to understand and rem em ber.
Many tough concepts are beautifully explained by the ET team in these articles. All these articles are freely av ai
They are the property of the Econom ic Tim es. I hav e just consolidated all of them here for the benefit of the reade
For an IAS aspirant preparing for the UPSC civ il serv ice exam ination, ET in t he Classroom is a one-stop solutio acquainted with m any econom ic jargon and concepts.
ET In the CLASSROOM: ESSENTIAL COMMODITIES ACT
The Prim e Minister will soon hold a m eeting of chief m inisters to discuss the alarm ing food price situation and rev articles. What are essent ial commodit ies?
im plem entation of Essential Com m odities Act (ECA). ET looks at the ECA and how it can help com bat the rising p
The gov ernm ent has powers under the Essential Com m odities Act, 1 9 55 (EC Act) to declare a com m odity as an e
to ensure its av ailability to people at fair price. The EC Act, 1 9 55 allows the gov ernm ent to control the productio act aim s to ensure easy av ailability of im portant com m odities to consum ers and check exploitation by traders. How many commodit ies are covered by t he Essent ial Commodit ies Act ? There are sev en broad categories of essential com m odities cov ered by the Act. These are (1 ) Drugs; (2 ) Fertilizer, products; (6 ) Raw jute and jute textile; (7 ) (i) seeds of food-crops and seeds of fruits and v egetables; (ii) seeds of ca jute seeds. Recently cotton seed was also included in the list. How does t he Act help check price rise?
distribution of these com m odities for m aintaining or increasing supplies and securing their equitable distribution
or m ixed; (3 ) Foodstuffs, including edible oilseeds and oils; (4 ) Hank y arn m ade wholly from cotton; (5) Petroleum
The Act is im plem ented by the state gov ernm ents and union territories, leav ing the central gov ernm ent to m ere
action taken by states in im plem enting the prov isions of the Act. State and UT adm inistrations use the powers of im posed in sev eral states for pulses, edible oil, edible oilseeds, rice, paddy and sugar. How effect ive is t he Act ?
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stock or turnov er lim its for v arious com m odities and penalise those who hold them in excess of the lim it. Stock lim
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Ov er the three y ears 2 006 -2 008 , state and union territory gov ernm ents prosecuted 1 4 ,54 1 persons under the p
1 9 55 and secured conv iction in 2 ,3 1 0 cases. In 2 009 as on 3 1 August 2 53 3 persons had been prosecuted and 3 7 c
doubts hav e been raised about effectiv eness of the Act tim e and again. Recently , Parliam ents estim ates com m itt wheat, pulses, edible oils, sugar, m ilk and v egetables. http://www.econom ictim es.indiatim es.com
gov ernm ent to com e out expeditiously with a new legislation for controlling the retail prices of essential com m od
ET in the classroom: What is underrecovery?

It is the gap between the local price of fuel and what would hav e been the price if the fuel were im ported. Is under-recovery t he same as loss?
It is a notional loss in rev enue to the extent the international price of the fuel is higher. It m ay or m ay not be a lo proposition to produce the fuel when there is an under-recov ery . In case of kerosene, oil com panies suffer an under-recov ery as well as a loss because the local retail price is m uch of a few rupees a litre. Does a rise in underrecov ery make an oil cos operat ion less profit able?
of crude oil. But sale of a product like petrol can still be v ery profitable at tim es, ev en if oil com panies are reportin
It m ay not. At tim es, international crude oil prices rem ain flat but petrol and diesel prices rise. In such a situatio cost of im porting the fuel would hav e risen. Has t he concept of underrecovery exaggerat ed t he problems of oil firms?
refinery s profitability will not change because crude oil costs hav e not gone up. But under-recov ery would hav e
This y ear it did. Prices of oil products in Asia rose earlier this y ear, when a fire shut down a large refinery in Taiw
the supply of refined oil products and the change in the dem andsupply situation m ade petrol and diesel m ore cost
The Tsunam i in Japan and a recent fire at a refinery in Singapore had the sam e im pact. The refining m argin for y ear, it was $1 0-1 5.
crack spread has been $2 0 a barrel m ost of this y ear. In April, diesel m argins jum ped to a three-y ear high of $2
So, under-recov ery on diesel looks higher this y ear. In other words, oil com panies want a higher price for diesel p addition to m arketing cost, to calculate underrecov ery . These are profits, not costs. Can oil companies be at a disadvant age by linking prices t o under-recovery ?
refineries in other countries were shut down. Apart from this, oil com panies also charge a custom s duty and a m a
Yes. This m ay happen next y ear. In 2 01 0, v ery little new refining capacity was added in Asia, while dem and wa y ear, China and the Middle East will add about 1 m illion barrels per day of refining capacity . This is expected to products and deflate refining m argins. As a result under-recov ery is expected to fall.
ET in the Classroom: Leave Travel Allowance

What is Leave Travel Allowance?
Leav e Trav el Allowance (LTA) is the part of the rem uneration granted to em ploy ees by the em ploy er to prov ide f expenses incurred during the y ear. Apart from the em ploy ee, it cov ers trav elling expenses of spouse, children as
parents and siblings. Further, the exem ption is restricted to two children born on or after October 1 , 1 9 9 8. There
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the num ber of children born before this date. How does LTA save on t ax out go?
Under section 1 0 (5) of the Incom e-Tax Act, if an em ploy ee who is in receipt of LTA undertakes a journey within t can claim the v alue of the allowance exem pt from incom e tax. For the purpose, the indiv idual should hav e been period during which the journey was undertaken. Can y ou claim it every y ear?
No. The exem ption can be claim ed only twice in a block of four calendar y ears. The current block has started from
and will last until Decem ber 3 1 , 2 01 3 . The prev ious one ended on Decem ber 3 1 , 2 009 . If y ou do not av ail of the c has to be utilised in the first y ear of the new block.
particular block or undertake just one journey , y ou becom e entitled to carry forward one journey to the next blo
For instance, if y ou av ailed of the concession just once instead of twice between January 1 , 2 006 and Decem ber 3
are allowed to carry forward the unused one into the subsequent block (2 01 0-2 01 3 ), prov ided y ou undertake the only one entitlem ent to the next block. Can t he ent ire amount be claimed as an exempt ion? The exem ption will depend on certain criteria specified. Firstly , it is the lower of the actual expenses incurred an
itself. A point to be noted here is that ev en if y ou dont av ail of the concession at all during a particular block, y ou
granted by y our em ploy er. Lets assum e y our LTA is Rs 1 0,000, but y ou end up spending Rs 1 5,000 on trav elling am ount to Rs 1 0,000, y ou will still be entitled to a deduction of only Rs 1 0,000. Ot her paramet ers t hat decide t he ext ent of exempt ion?
the exem ption will be allowed to the extent of Rs 1 0,000. Conv ersely , if y our LTA stands at Rs 1 5,000 and y our a
If y ou hav e opted to fly to the destination, an am ount not exceeding the econom y class airfare of the national car
route to that city would be adm issible as deduction. In case y ou are trav elling by road or rail, the cost of first clas
ticket to the destination by the shortest route would constitute the benchm ark. Besides, if y our trav el plan entail exem ption am ount. What if t he t ravel bills are not submit t ed before t he deadline?
places during the trip, the destination farthest from y our place of residence would be taken into account for deter
If y ou fail to subm it y our trav el bills pertaining to LTA claim with y our em ploy er within the tim e prescribed, y o exem ption at the tim e of filing y our incom e tax return.
consider the am ount of LTA paid as taxable and deduct incom e tax at the rate applicable to y ou. Howev er, y ou ca
ET in the classroom: Non-tax sources of income for the government

Non-t ax Revenues
Any loan giv en to state gov ernm ents, public institutions and PSUs earn interests and this form s the m ost im port prov ides. Of this, the railway s is a separate m inistry , though all its receipts and expenditure are routed through fund. Capit al Receipt s
head. The gov ernm ent also receiv es div idends and profits receiv ed from PSUs. It also earns incom e for the v ariou
Receipts in the capital account of the consolidated fund are div ided into three broad heads public debt, recov eri adv ances, and m iscellaneous receipts.
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Public Debt Since ev ery thing the gov ernm ent does is on behalf of the people, its borrowings ev entually are the burden of the
parlance, the difference between borrowings (public debt receipts) and repay m ents (public debt disbursals) durin
net accretion to the public debt. Public debt can be split into two heads, internal debt (m oney borrowed within th against sm all sav ings. Treasury Bills (T-Bills)
external debt. The internal debt com prises Treasury Bills, m arket stabilisation schem e, way s and m eans adv anc
These are bonds (debt securities) with m aturity of less than a y ear. These are issued to m eet short-term m ism atc expenditure. Bonds of longer m aturities are called dated securities. Market St abilisat ion Scheme (MSS)
The schem e was launched in April 2 004 to strengthen RBIs ability to conduct exchange rate and m onetary m an which it can interv ene in the m arket to m anage liquidity . Way s & Means Advances (WMA)
securities issued under MSS are not to m eet the gov ernm ents expenditure but to prov ide the RBI with a stock of s
RBI is the banker for both the central and state gov ernm ents. Therefore, it prov ides funds to m anage m ism atche tem porary needs. Securit ies Against Small Savings The gov ernm ent m eets a sm all part of its loan needs by appropriating sm all sav ings collection by issuing securit m anage such schem es.
gov ernm ents receipts and pay m ents in the form of WMAs. Now, RBI wants the gov ernm ent to issue short-term s
ET in the classroom: All about rate corridor
I n the monetary policy on Wednesday, the RBI raised the repo rate by 25 basis points to 5.75% and the reverse repo r
points to 4.5%. This has narrowed the rate corridor from 150 basis points to 125 basis points. ET demystifies the conc What are repo and reverse repo rat es?
Repo rate is the rate of interest charged by the central bank when banks borrow m oney from it. It is the tool thro in-fuses funds into the sy stem by lending to banks against pledging of securities.
The rev erse repo is the rate the RBI offers to banks when they deposit funds with it. The RBI drains out liquidity f sy stem through rev erse repo by releasing bonds to the banks. This is a daily operation by the central bank to m a a longer tim e, the RBI can also m anage liquidity through open m arket operations. What is an int erest rat e corridor?
Interest rate corridor refers to the window between the repo rate and the rev erse repo rate wherein the rev erse re
floor and the repo as the ceiling. Ideally , rates in the ov ernight interbank call m oney m arket, where lending and and abov e the repo rate, banks approach the RBI to borrow under the repo window.
unsecured, should m ov e within this corridor. Howev er, when banks are short of funds and the ov ernight call m o
Therefore, the repo rate becom es an effectiv e policy tool as it would help bring down the rates in the ov ernight m
hap-pens when m oney m arket rates fall below the rev erse repo rate. Banks then park surplus funds with the RBI
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repo trans-action. As a result, when there is excess liquidity in the sy stem , the rev erse repo is m ore effectiv e. Wh and banks need short-term funds from the RBI to m anage m ism atches, then the repo rate em erges as the effectiv the sy stem . Why is a narrow rat e corridor desirable?
liquidity returns to the sy stem the rev erse repo would becom e the operativ e policy rate as the RBI would be drain
A narrow rate corridor m eans that short-term interest rates in the call m oney m arket will m ov e within that ban will be less v olatility in short term rates. Do ot her cent ral banks also have rat e corridors? Many dev eloping countries hav e the rate corridors but central banks in dev eloped and deeper financial m arkets borrowers.
earlier 1 50 basis points, which has now been lowered to 1 2 5 basis points. Effectiv ely , the narrower rate corridor w
In the US, for instance, the Fed Fund rate is the key interest rate. Short term funds are av ailable at this rate to th
ET In the Classroom: Making a Case of Financial Inclusion

What is a business correspondent model?
In 2 006 , the Reserv e Bank of India allowed banks to use non-bank interm ediaries as business correspondents, or b
facilitators, to extend banking and other financial serv ices to areas where the banks did not hav e a brick and m o the country and m ake them bankable. What do t hese correspondent s do?
present. The objectiv e behind it was to aid the process of financial inclusion and consequently take banking to the
The business correspondent is nothing but a bank-in-person, who is authorised to collect deposits and extend cred pension products, receipt and deliv ery of sm all v alue rem ittances/other pay m ent instrum ents. Who is eligible t o be a banking correspondent ?
bank of sm all-ticket sizes. He also recov ers principal interest of sm all v alue deposits, sale of m icro insurance, m ut
RBI has allowed a host of entities to act as business correspondents (BCs) of banks. These include NGOs/MFIs set up
Societies/Trust Acts; societies registered under Mutually -Aided Co-operativ e Societies Acts, or the Co-operativ e So
States; Section 2 5 com panies, which are not-for-profit com panies; com panies in which NBFCs, banks, telecom com ex-serv icem en and retired gov ernm ent em ploy ees. How is a business facilit at or different from a business correspondent ? Very often the term business correspondents is used interchangeably with the term business facilitators (BFs).
corporate entities or their holding com panies do not hav e equity holdings in excess of 1 0%; post offices and retired
clear distinction between the two. BFs are allowed to undertake only facilitation serv ices like identification of bor
and prelim inary processing of loan applications, including v erification of prim ary inform ation, creating awaren
and other products, processing and subm ission of applications to banks and prom oting and nurturing SHGs and f the exclusiv e function of business correspondents.
recov ery and debt counselling. Howev er, facilitation of these serv ices does not include conduct of banking busine
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ET in the classroom: Saving private airlines

Why are Indian airlines in t he red despit e rising passenger t raffic?
Because of high taxes on fuel and rising operational costs. Moreov er, cutthroat com petition in the sector prev ents raising ticket prices. Taxes constitute 4 0% of an airlines total expenditure, far abov e the global av erage of 3 2 %. Airway s (-8.2 5%) and Spice Jet (-6 .7 %). Why cant airlines raise fares t o cover t hese cost s?
barely cov er operational costs. For instance, operating m argin for Kingfisher stands at 0.1 2 while it is negativ e f
Fierce com petition in the Indian skies prev ents them from doing so. In the case of Jet, cost per av ailable seat km ( has crawled up to Rs 3 .6 3 from Rs 3 .5. So if an airline goes bust , should t he government bail it out ?
3 .3 1 in the second quarter of this fiscal com pared with Rs 2 .7 4 in the prev ious quarter. In contrast, rev enue pass
The tem pting answer is that those responsible for corporate recklessness m ust bear the consequence, but in real w dam aging. But, a corporate bailout sends the wrong signal or creates a m oral hazard of encouraging m ore reckl which is borne by the taxpay er. What is moral hazard?
so sim ple. Many experts argue that had Lehm an Brothers not been allowed to go bust, the financial crisis could h
In econom ic theory , the concept of m oral hazard com es from the insurance industry where an indiv idual or a com less risk av erse, as he knows he is protected from the financial consequences of his actions. How does t he concept apply t o bailout s?
differently when he is protected from a risk than when he is exposed to the risk. The guarantee of insurance can m
If a com pany believ es its existence is crucial for the econom y or for public good, it m ay be tem pted into taking rec firm s m akes others believ e that they could also be sim ilarly helped out if things went wrong.
believ ing that the gov ernm ent will step in to bail it out if it were to land in trouble. Therefore, any rescue of trou
ET IN THE CLASSROOM Whats EPCG scheme?

gov ernm ent in the early 9 0s.
The Export Prom otion Capital Goods (EPCG) schem e was one of the sev eral export-prom otion initiativ es launched
The basic purpose of the schem e was to allow exporters to im port m achinery and equipm ent at affordable prices s produce quality products for the export m arket.
The im port duty on capital goods like all other item s was high during that period, inflating the cost of capital so the gov ernm ent allowed exporters to im port capital goods at only 2 5% im port duty .
For waiv er of the rem aining portion of im port duty , exporters were supposed to undertake an export obligation ( export) which was worked out on the basis of the duty concession obtained.
Exporters were giv en eight y ears to carry out their com m itm ent to export. Once the export obligation was fulfil the capital goods concerned could sell them or transfer them to another facility .
Till the prom ised export m aterialised, the owners of the m achinery or equipm ent were barred from ev en m ov ing concerned out of their m anufacturing unit. Did liberalisat ion of import s have an impact on EPCG?
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Gradual reduction in im port duties, particularly in the case of capital goods, has been rendering EPCG schem e less attractiv e. Howev er, till last y ear, EPCG was preferred by m any since the exem ption also included 4 % special additional duty of custom s (SAD) which has been abolished now. Textile m achinery , for exam ple, attracted an im port duty of only 5% but the 4 % SAD resulted in the duty burden going up to nearly 1 0%. This led m any textile units to prefer the EPCG, but the scenario m ay change now in v iew of the gov ernm ents decision to abolish SAD. The gov ernm ent has been m odify ing the EPCG schem e ov er the y ears in line with the dem ands of the dom estic industry . The first change was the introduction of two windows the first one attracting 1 5% duty while the second one attracted 2 5%. Those who preferred to pay higher duty under the second window had a lower export obligation. In 9 5, the gov ernm ent offered duty -free im ports under the first window while the duty under the second was 1 5%. This was the first tim e duty -free im ports were m ade av ailable under EPCG. Since the purpose of the schem e was to allow exporters com pete internationally , it was decided to allow them to buy m achinery at internationally -com petitiv e rates. The pent-up dem and for im ported m achinery had peaked at this point and the dom estic industry s initial trouble with com peting im ports had com e to an end. Thereafter, the gov ernm ent ev en reduced the im port duty on capital goods under the second window to 1 0% while the first rem ained duty -free. Subsequently , the policy was changed in 00 to m erge the two windows into one im port capital goods by pay ing 5% and undertake uniform export com m itm ent. Who were t he major beneficiaries of t he EPCG? The m anufacturing industries, especially those who had to im port their capital goods, were the m ain beneficiaries ov er the y ears. The serv ice sector was nowhere in the picture till last y ear. Now serv ice industries like hotels can also av ail of EPCG im ports and fulfil the export obligation through the foreign exchange earned by them .
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This is a m ajor concession for serv ice prov iders who were ignored ov er the y ears. Since serv ices now account for nearly 50% of the country s GDP, it is fair to allow serv ice prov iders to im ports goods at internationally -com petitiv e rates. The attraction of EPCG has, any way , dim inished ov er the y ears and it will be a question of tim e before the schem e becom es redundant. Im port duties will com e down ov er the y ears, especially in the case of capital goods. It will be curtains for the EPCG schem e once the duty on capital goods com es down to 5%. Going by the pace at which India is signing free trade agreem ents, this possibility seem s nearer. Like other outdated instrum ents like the cash com pensatory schem e (CCS) for exporters and the quantitativ e restrictions (QRs) on im ports, the once-popular EPCG will also exist only on records once the duty reduction m aterialises ov er a period of tim e.
ET in the classroom: The anatomy of layoffs

What are lay offs?
When com panies discharge em ploy ees either tem porarily or perm anently because they hav e no m oney to pay th redeploy m ent.
work for them . The term is also known v ariously as downsizing, redundancy , right-sizing, workforce optim isatio
Sev eral com panies, banks and financial institutions across the world resorted to lay offs during the slowdown afte
of Lehm an Brothers in Septem ber 2 008. In India, the term becam e m ore fam iliar during late 2 008 and early 2 0 Are t here any warning signs before jobs are shed? Lay offs are a function of business sentim ent. So job losses happen during slowdowns, which are usually preceded inflation.
During a slowdown, job m arkets tighten up as entities go on austerity driv es to lower their adm inistrativ e and ot Generally , the next phase of critical action deals with rightsizing initiativ es. Lay offs are im m inent at this stage. Is t here a way t o pre-empt and, t hus, avoid job loss? Som etim es organisations resort to lay offs as a natural reaction to slowdown. But instead of such knee-jerk m easu other prev entiv e steps they can take.
Proper work-force planning, continuous focus on cost control, m ultiskilling and creating a positiv ely enabling wo downturn. How can one cope?
som e of the way s in which organisations can plan ahead of tim e so that they do not hav e to downsize and lay off p
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Craft a nice resum e, circulate it in y our professional network and approach headhunters which deal in y our spec em otional support. How does one prepare for a new career?
y our target sectors. Do not hide the pink-slip fact from y our near fam ily . Share it with them so that they can pr
Em ploy ees should reflect on their skillset and be clear about their com petencies. Telecom and financial serv ices s
experienced lay offs and workforce deploy m ent in recent m onths. If certain sectors are not doing well, look for sim
Those in financial serv ices can explore sm all and m edium enterprises and retail. Those from telecom s can look at sy nergy with these profiles and start inform al discussions with potential em ploy ers or interested parties. Continuous skilling and learning is recom m ended. There is a need to be entrepreneurial so that in ev ery change opportunities and v alue propositions.
connect B2 C social network, e-com m erce, technology com panies. Approach the principals and entities who wou
ET in the classroom: No-claim Bonus (NCB)

What is a `No-claim bonus?
No-claim bonus (NCB) is a discount in prem ium offered by insurance com panies if a v ehicle-owner has not m ade v ehicle, can go as high as 50% for both 2 -wheelers as well as 4 -wheelers. How much NCB can y ou enjoy ?
during the term of the m otor insurance policy . The discount, which is on own dam age cov er, ie, cov er against d
This discount in the prem ium is usually 2 0% for the second y ear, 2 5% for the third y ear, 3 5% for the fourth y ear y ear and 50% for the sixth y ear. The v alue of the discount depends upon the insurance claim s y ou hav e m ade in prev ious policy . What if y ou sell y our car?
y ear. NCB can be carried forward and will be only allowed prov ided the policy is renewed within 9 0 day s of the e
The no-claim bonus is a reward to the v ehicle owner for prudent use of the v ehicle. If y ou sell a 1 0-y ear old hatch
a C-segm ent car, the no-claim bonus will pass on to the new v ehicle and y ou can sav e considerably on y our insur Can y ou get t he NCB t ransferred t o anot her insurance company ?
Yes, subject to ev idence in the form of a renewal notice or letter, confirm ing the NCB entitlem ent from the prev io What should y ou do if y ou renew t he policy online? You hav e to scan and send the cov er note to the insurance com pany online and it will do the needful. What if y ou hide y our claim hist ory and avail of a no-claim bonus from a new insurance company ?
Initially , y ou m ight succeed in getting a no-claim bonus by hiding y our claim s history . But insurers are sharing databases and any false declaration will surely be detected.
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ET in the classroom: New rules treat GDRs/ADRs on par with shares
Do Global Deposit ory Receipt s (GDRs) and American Deposit ary Receipt s (ADRs) current ly have vot
The GDRs and ADRs in them selv es do not hav e v oting rights, but the underly ing equity shares do. These shares a
depository , which then issues the corresponding receipts (GDRs/ADRs) to inv estors looking to buy such instrum e
depository that has the v oting rights. Whether the holders of the GDRs/ADRs can v ote or not depends on the depo
between the com pany issuing the GDRs/ADRs and the depository . During the initial y ears when GDRs and ADRs to allow the GDR/ADR holders to instruct the depository to v ote on their behalf. How do ADRs/GDRs work?
the agreem ent m andated depositories to v ote on behalf of the m anagem ent. But later, the depository agreem ents
ADRs/GDRs are issued by com panies looking to raise funds ov erseas. These instrum ents m ay represent one, m ult the underly ing shares. For instance, if an Indian com pany wants to issue ADRs, it will deliv er the corresponding
to the US depository bank. The depository will then issue receipts to inv estors who hav e subscribed to the issue. D
are transferable instrum ents, so they can be freely traded on the exchange on which they are listed. They are als (in this case India). What did Sebi say about GDRs/ADRs on Tuesday ?
m eans the holder of ADRs can instruct the depository to conv ert them into underly ing shares and offload them in
Till now, purchases m ade through GDRs/ADRs did not trigger an open offer by the acquirer ev en if the 1 5% thres
long as the depository receipts had not been conv erted into underly ing shares. But on Tuesday , the regulator am the 1 5% lim it. Why did t he regulat or have t o make t his amendment ?
Any one now holding ADRs/GDRs with v oting rights will hav e to m ake an open offer to m inority shareholders if h
Securities lawy ers and m erchant bankers say the Takeov er Regulations relating to ADRs/GDRs were drafted at a sense to keep ADR/GDR holdings outside the purv iew of the Takeov er Regulations. How does t his amendment affect t he Bhart i-MTN deal?
depositories alway s v oted on behalf of the m anagem ent. Now that depository receipt holders hav e the right to v o
Bhartis proposed takeov er of MTN inv olv ed issuing GDRs to the South African telecom firm and its shareholders,
up to 2 7 % of Bhartis equity base. In an inform al guidance to Bharti in July , the regulator had said that purchas
route would not trigger an open offer unless the GDRs were conv erted into shares. But under the new rule, MTN w around the new rule. Can Bhart i st ill go ahead wit h it s deal wit h MTN? It can. For instance, the depository agreem ent can stipulate that the GDRs will not hav e any v oting rights. This arrangem ent. The other option for Bharti is to cut down the issuance of GDRs to below 1 5% and pay m ore cash to could increase the cost significantly for Bharti.
an open offer for an additional 2 0% in Bharti. This would m ake the deal expensiv e for MTN and also for Bharti, if
inexpensiv e way of getting around the new rule. But the key question here is whether MTN shareholders will agr
ET Classroom: Top-up premiums in ULIPs
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A top-up prem ium is som ething that a policy holder can inv est into his ULIP ov er and abov e his existing prem ium
want to take adv antage of a well-perform ing ULIP, y ou can increase its inv estm ent com ponent by pay ing an extr Will t he sum assured increase in t andem wit h t op-ups? There is no com pulsion to increase the insurance com ponent of the ULIP. But som e ULIPs increase the sum assured in accordance with the top-up prem ium . For exam ple, in ICICI Pru Life custom er. Hence, prepare y our policy docum ent carefully . How can y ou t op up a ULIP?
recently -launched ULIP, the sum assured would be increased by either 1 2 5% or 500% of the top-up prem ium as c
You can top up a ULIP any tim e during the life of the policy until the total of top-up prem ium s does not exceed 2 5% Rs 2 ,000. But this option is av ailable only for disciplined custom ers who pay their prem ium s on tim e.
prem ium paid. Ev ery com pany clearly defines the m inim um top-up am ount in the policy docum ent itself. It is u
If y our regular prem ium is due and y ou pay a top-up prem ium , the insurance com pany will direct the additiona go up by as m uch as 1 2 5 tim es of the top-up, depending upon the underwriting requirem ents of the life insuranc What are t he charges?
regular prem ium am ount. If the total of top-up prem ium s exceeds 2 5% of the total prem ium s paid, the sum assur
The prem ium allocation charge of a top-up plan is any where between 1 % and 3 % and v aries from policy to policy How will I benefit from a t op-up premium?
You can sav e on the prem ium allocation charge by opting for a top-up prem ium . For instance, y ou can opt for a l
test the waters. You can then step up y our inv estm ent com ponent in a staggered m anner after m onitoring its pe
Secondly , y ou can benefit from lower prem ium allocation charges by adopting this approach. For exam ple, the lo charge of top-up prem ium s.
charge of any regular prem ium of a ULIP av ailable in the m arket today is 5%, which is still higher than the prem
Ideally , y ou should av ail y ourself of the low base effect benefit in the initial y ears of the policy and top up the poli But a word of caution: if y our top-ups exceed a lim it, the final sum m ay be subject to tax proceeds at m aturity . T v aries from policy to policy . Can y ou opt for partial withdrawal from top-up prem ium s?
Usually the lock-in-period for each top up prem ium is three y ears from the date of pay m ent of that top-up prem iu of partial withdrawals. In fact, som e ULIPs do not perm it partial withdrawals if top-up prem ium s are paid in the before m aturity date.
ET in the classroom: Mortality Charges

What are mort alit y charges?
Mortality charges are that part of life insurance prem ium that go towards prov iding a death benefit cov er. In oth the actual cost of insurance in a life policy . In m ost policies, the bulk of the prem ium goes towards inv esting in a is returned to the policy holder when the policy m atures or the policy holder dies. How are t hey calculat ed?
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Most com panies use a table of charges prepared by the Life Insurance Corporation (LIC) since this is the only com
fiv e decades of experience and consequently has historical data on life expectancy . Since priv ate insurers hav e be data from all com panies and prices are expected to fall as life expectancy has gone up. Will t he policy holder benefit from buy ing a policy at a y oung age?
decade, som e hav e m ade alterations to the rates based on their own experience. Work is on progress on a new m or
Yes. For instance, the life expectancy of a 2 5-y ear-old will be higher than that of a 55-y ear-old, and hence, the for benefit in term s of lower charges while buy ing insurance. How will t he updat ed mort alit y t able impact pension policies?
Since the life expectancy of the av erage Indian has gone up, it is likely that y ou will hav e to incur a higher cost w buy ing whole-life annuities. Those who inv est in pension plans will hav e to use at least two-thirds of the accum u under a pension plan hav e to be inv ested in annuities to av oid them being taxed. One-third of the pension fund v
annuities a product where the inv estor gets regular incom e for a specified period in return for a lum psum pay m
m ade av ailable to the insured for tax free. The balance has to be used for purchase of annuities from any insurer.
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10/3/13
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13/13

The Economic Times - ET in The Classroom - Archives - 3 (Economics Concepts Explained) - INSIGHTS PDF

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10/3/13

The Economic Times ET In The Classroom Arch (Economics Concepts Explained)

ET In the CLASSROOM: ESSENTIAL COMMODITIES ACT

ET in the classroom: What is underrecovery?

ET in the Classroom: Leave Travel Allowance

ET in the classroom: Non-tax sources of income for the government

ET in the classroom: All about rate corridor

ET In the Classroom: Making a Case of Financial Inclusion

ET in the classroom: Saving private airlines

ET IN THE CLASSROOM Whats EPCG scheme?

ET in the classroom: The anatomy of layoffs

ET in the classroom: No-claim Bonus (NCB)

ET in the classroom: New rules treat GDRs/ADRs on par with shares

ET Classroom: Top-up premiums in ULIPs

ET in the classroom: Mortality Charges

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