The regulator of auditors of listed and large companies in India has issued a consultation paper, the “Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs)”, which proposes to fix a threshold for MSMCs.

Companies below the INR 2.5bn (£24.85m; $32.88m; €29.15m) mark are proposed to be exempted from mandatory annual statutory audit currently stipulated under the Companies Act 2013.

The NFRA also proposed a separate set of auditing standards for MSMCs.

Though the intention behind the paper is of assisting MSMCs and ease of doing business, stakeholders say the proposals, if implemented, will lead to drying up of bank finance for small and medium companies, frauds and deter venture funds and angel investors from potentially profitable small ventures.

The white paper

A group of chartered accountants and consultants issued a white paper as a comprehensive study of the pros and cons of the suggestions made by the regulator and the impact they will have on various stakeholders.

The white paper said the recommendations  are not based on research-based evidence and therefore reject them as they will have serious impact on all stakeholders and the economy in general.

“Doing away with the established practice can remove the basic gatekeeping function and put all the stakeholders’ interests such as public exchequer, government, lenders, investors, suppliers, customers and employees at risk,” they said in the document.

Prompted by a set of incentives offered to entrepreneurs by the Indian government, many NRIs started small businesses in India and they welcome the audit exemption proposal which will save them the audit fee.

At the same time, lured by the statutory audit fees from thousands of small units, many qualified NRIs started consulting and auditing services firms in India. If implemented, the proposals will deprive them of a major revenue stream.

The Institute of Chartered Accountants in India (ICAI) has already rejected NFRA’s recommendations deeming them as views of a small section of stakeholders and not based on research-based evidence.

Serious hurdles for investors

Industry experts feel that the move could create serious barriers for investors, insolvency professionals, lenders, minority shareholders, venture capital funds, angel investors and will also create scope for fraud.

Bank finance will dry up for small units as banks usually lend to SMEs on the strength of audit reports.

“The consultation paper states that there is a mismatch between current payments being made to auditors as reported by the companies,” said Vivek Davanam, a chartered accountant and co-author of the White Paper.

“NFRA says that as the audit fee being charged in many companies is less than the estimated cost, there is a likely assumption that audits performed are not up to the mark. This is just an assumption and not supported by any evidence.

“There is no actual finding whether there are deficiencies in the audit performed in cases where low fee is charged. NFRA has not even made an attempt to suggest an alternative mechanism that it would introduce after removal of audits,” he added.

Status quo demanded

The white paper, which called for maintaining status quo as far as statutory audit of small units is concerned, argued that the NFRA’s proposals are an attempt to address a non-existent problem.

Chartered accountant Guruprasad Makam, another co-author of the white paper, added: “This is an attempt to create an issue rather than resolving one. NFRA’s proposed reforms are neither warranted nor their need is felt. A hypothetical issue shouldn’t be a matter of concern for NFRA.

“Audit by chartered accountants acts as a safety net. A right audit showcases to the business promoters the health of their business. If you remove audit for aspiring SMEs, there is no independent financial health checkup and it may put the business itself in danger if corrective actions are not taken based on the financial health checkup report, which is the audit report and the audited financial statements.”

Jayesh Sanghrajka, insolvency and bankruptcy expert, said: “The proposed threshold creates a new set of challenges for insolvency resolution professionals. Without audited financial statements, an insolvency resolution professional is at risk and has no data to function and resolve the insolvency. The unaudited financial statements will have no common process or policy and it will be chaotic to read them.”

For BS Shashi Kumar, vice president of finance at Autotec Defense and Aerospace Solutions, it’s a worrisome factor that the absence of statutory audits will open up opportunities for fraud and misstatement of financial statements.

“If statutory audit is not insisted, it will give more room to commit fraud. In the existing structure, there is little or no room for stakeholders to verify the intended use of assets. A fraud can masquerade as ‘ignorance’ in the absence of a statutory audit in SMEs. With statutory audits, scope for such fraud is less, and in case of a fraud, the auditor is also held responsible.”

The Global Indian Pulse is based on responses from more than 4,150 global Indians in nine different markets, making this one of the largest studies focusing on the global NRI diaspora.

The survey also reveals a strong intention to increase their investments in India and in their countries of domicile. It also looks into investment habits, feelings on sustainability and plans for the future.

A major part of the survey focused on NRIs in the UAE.

Despite pandemic-induced upheavals, Emirate-based NRIs feel optimistic about the future. Two thirds (68%) are planning to increase their investments in the UAE and India (66%). Around nine in 10 are already investing in the two countries.

“This kind of surveys and findings are roadmaps for investment advisers to structure their offerings according to the taste and risk appetite of potential clients. This also makes their job easy and useful while making their marketing strategies.  Just feel the pulse (the survey is aptly named Global Indian Pulse) and plan your strategy,” said Joseph Philip, managing partner, Stuart & Hamlyn, Chartered Accountants and Consultants, Dubai.

Investment habits

Most of the NRIs who participated in the survey are investing in both the UAE and India, and a majority have increased their investments over the past three years.

Two-thirds are planning to increase those investments in the next three years, more than their countrymen living in the US, Europe and elsewhere. This demonstrates a sense of optimism, despite the upheavals of the pandemic.

Almost nine in 10 NRIs feel a strong connection to India (84%) and are interested in its success. Nearly three quarters (73%) are likely to live in India in the future, although a majority (61%) are planning to retire in the UAE itself.

“Fund managers can target potential investors who plan to retire in the UAE or India and structure their offerings of retirement plans, pension funds, provident funds, mutual funds or other similar instruments, accordingly,” said Philip.

A sense of optimism is particularly marked among UAE global Indians over 30 years of age.

They are more likely to be planning to increase their investments in both India (74% vs 56% of 18-29 year olds) and the UAE (70% vs 57% of 18-29 year olds).

Men (72%) are more likely than women to be planning increases in their investments in India (61%). This may be linked to men being more likely than women to be planning to live in India.

UAE-based Indians are mostly planning to increase their investments in the UAE for financial reasons but over a third are motivated by wanting to promote positive change in the UAE. This illustrates the sense of commitment that many NRIs have to the UAE, the survey said.

Property most preferred

UAE-based Indians see property as the most important investment class in the UAE, followed by stocks and shares.

Local businesses are also significant, mentioned by a third. NRIs rate property (54%) and stocks and shares (40%) as the most important areas to invest in the UAE. In third place are local businesses (36%).

For affluent NRIs, local businesses are particularly important, chosen by 51%, the most popular answer among this segment. Property comes second on 45%.

This highlights the depth of the commitment many wealthier NRIs have to the UAE.

Sustainability matters

Motivations for increasing investments in India are similar, with returns (42%) and promoting positive change in India (39%) the second and third most important reasons.

But family and friends remaining in India comes top (48%) and planning to return to India is a factor for 39%. Both of these score higher among UAE NRIs compared with global NRIs overall (41% and 33% respectively).

Sustainability matters to UAE-based Indians, with four-fifths (78%) saying that environmental or social initiatives are a key part of their decision to invest.

“There is new found interest in [Environmental, Social and Governance] products these days. ESG assets are expected to represent more than a third of the $140 trillion in projected total assets under management by 2025, and advisers can target this segment of investors to market their investment products,” said Rajagopalan Ramesh, chief executive, Veracity Consulting.

Investment advisers suggest unit linked insurance plans (Ulips) meet all these objectives.

“For those investors who are looking for assured returns, the Indian market today is well poised to offer investment plans that offer excellent guaranteed returns where one can lock in their money for as long as 45 Years,” said Vivek Jain, head of investments at PolicyBazaar.com.

Many NRIs put their money in instruments in the expectation of good returns, but ignore the protection factor. The recent pandemic-induced uncertainty has led many NRIs to seek protection along with a decent return on their investments.

The search often ended in Ulips as the preferred investment choice, even though they have been in the market for decades.

Unique blend

Ulips are a unique blend of investment and insurance components. The premium paid by the investor is divided into life cover and equity investment. The plans generally carry a minimum of a five-year lock-in period and the policyholder can even switch between the funds during that time.

The mortality charges are returned to the investor upon maturity. Mortality charges are levied by the insurer to cover the risk of death in investment plans. For example, if one invests his/her money for 15-20 years, he/she stands to gain returns as high as 12-15%. He/she can also always avail tax benefits on the plans.

As far as savings are concerned, the preferred option for most households used to be fixed deposits. But falling interest rates have changed this trend. The average returns that FDs offer is a taxable 5%. When adjusted for the present inflation rate of 5.3% in India, the real returns are negative.

Better alternative

“Here is where investors look for better alternatives that guarantee positive returns. Savings cum investment plans offer a guaranteed returns on long term investments. Further, they guarantee a payout in case of the sudden death of the policyholder,” said J Jojo James, chief executive, Fosbury Wealth Managers, and partner of Tamim Chartered Accountants, Dubai.

“This not only secures your present but also your future. These plans can offer a tax-free return of 6-6.5%. The zero risk nature of these plans is their USP. Irrespective of market volatility, they offer the promised return to the policyholder. They also allow your money to be locked in for a period of 30-35 years, which guarantees higher returns,” he said.

Investors who look for less risky and guaranteed returns have the option of a hybrid of Ulip and guaranteed return plans called Capital Guarantee Solutions that offer the best of both.

These instruments provide security to the invested amount in the event of market volatility as the fund managers take advantage from the upside of the market.

Most plans split 40% into guaranteed return plan and 60% into Ulips. The added benefit is that the dependents receive the life cover in the event of the death of the policyholder, which is 10 times the annual premiums paid.

The plans also offer tax benefits on premiums, as well as on the maturity amount.

“These plans are ideal not just for you, but also for your dependents due to the insurance component. If you invest in Child Capital Guarantee Solution, their future is secured even if you are not around. In the event of the policyholder’s death, the life cover helps meet immediate expenses. The unique in-built feature of waiver of premium ensures that the future premiums are waived off. The child gets a regular monthly income and receives fund value upon maturity,” Jain said.

For retirement planning, NRIs have the option of choosing a prudent, risk-free annuity plans that secure their sunset years.

The flip side

The optimum potential of Ulips was less tapped by investors because of some myths spread by interested fund houses after the securities market regulator curbed upfront commissions.

Agents used to pocket up to 40%, with rampant misselling, in the initial years of the launch of many Ulips.

Later, this commission was limited to 6.4%, making it more transparent but less attractive for agents to sell them. Ulip benefits were less understood by investors which led to many investors surrendering their plans before they realised their optimum potential.

“Investors should know the advantages of Ulips such as high returns, systematic investment plans (Sip), top-ups, tax benefits, premium waivers, and the flexibility to switch between an asset mix comprising equity or debt using the same policy,” James said.

“Ulips offer a safe path to wealth creation with the added benefit of life cover, the two main concerns for most individuals. The insurance coverage offers a longer tenure which enhances peace of mind,” he said.

The scheme allows retail investors to open an account straight with the financial regulator RBI rather than with a bank. NRIs are allowed to buy government bonds through their NRO (non-resident ordinary) bank accounts.

NRIs are eligible to invest in government securities under Foreign Exchange Management Act 1999 and are now allowed to open account with the RBI and invest in government securities via the scheme.

The advantage of the scheme is that NRIs can open their accounts and buy bonds overseas.

No intermediaries

The scheme is free and does not involve any intermediaries, which helps reduce overall transaction charges for individual investors.

AS Elavarasan, chairman of ASPA Management Consultancy, Dubai, said: “These bonds are ideal for NRIs who are looking for a steady income from debt instruments to meet the cash flow of parents or to maintain their property in India.”

Under the current rules, NRIs are not allowed to invest in small savings schemes such as public provident fund, Kisan Vikas Patra and National Savings Certificate offered by the Department of Post. NRIs can invest in bank deposits and corporate deposits, but these are available for periods of five-to-10 years.

Long-term products give the investor an option to lock in investments at that rate, giving predictability of cash flows. Short-term products carry reinvestment risk, making it difficult to plan cash flows, as interest rates could change on maturity.

The returns are attractive as Government of India bonds offer 6.5-7% yield as against 1-2% interest in developed markets.

For example, a bond maturing in 2050 is currently available at a yield of 6.91%, while those maturing in 2058-2061 can give a yield of 7-7.1%.

The bonds pay interest every six months and there is no cumulative option.

Attractive returns

Elavarasan added: “The NRI attraction is that government securities give sovereign guarantee and are available with long tenures. NRIs can buy these long tenure government securities as part of their retirement planning to get regular annuity income in terms of interest to meet their post-retirement expenses.”

However, advisers have warned investors about rupee depreciation risk as the Indian currency has a history of depreciation.

Biju Radhakrishnan, director of FRG Consultants and Chartered Accountants, Dubai, added: “Investors should buy these securities with an objective of holding till maturity as there is risk of mark-to-market losses if interest rates rise and liquidity remains low.”

The scheme will attract NRI investors because it offers nil credit risk, easy application process through a digital platform, predictable cash flows and lower transaction charges.

Radhakrishnan added: “The bonds give a reasonably higher returns and therefore it is a desirable secure debt option for NRIs.”

The bonds have a defined maturity date, therefore if they are held till the bond matures, the returns will not be dependent on price movements in the market. This allows the investor to protect themselves from market volatility by holding till maturity.

A recent customer behaviour survey by Standard Chartered unveiled interesting findings that could provide lots of leads for financial advisers in the UAE.

The survey was conducted among 15,649 emerging affluent, affluent and high-net-worth individuals across 12 markets: including India, China, Singapore, the UAE and the UK, between June 30 and July 26.

In the UAE, it found that 88% have reset their life goals following the pandemic.

But, for 43% of the respondents, their financial confidence has been diminished, preventing them from taking the actions needed to achieve their goals.

Confidence gap

The emerging affluent have disproportionately suffered a loss of confidence, with almost half (46%) reporting a decrease compared with 30% of high net worth (HNW) individuals. New investors should seek financial advice from professionals. There are plenty of great people to learn from. For example, Motley Fool’s investment advice has helped millions of beginner investors in the stock market.

For the affluent across the wealth spectrum in the UAE, the three most common factors impacting their confidence were:

• volatility in financial markets (35%),
• fear of poor returns on investments (30%)
• the complexity of developing an investment strategy (26%)

That means those lower down the wealth spectrum, still establishing their finances, stand to lose out more if they do not have support to rebuild their confidence.

“This support and confidence can be given by professional advisers only, as experience shows that those who followed peer advice or took investment decisions on own market intelligence ended up in capital loss,” said Rajagopalan Ramesh, chief executive, Veracity Consulting FZE, Abu Dhabi.

“The pandemic impacted both the investment perception and risk profiles of UAE affluent. It prompted them to reset their financial priorities and encouraged them to seek new financial products, which increased their rate of savings for the future while being more engaged in tracking their financial performance,” said Owen Young, Standard Chartered’s regional head of wealth management, Europe, Middle East and Africa.

Future-focused

The pandemic prompted the affluent in the UAE to become more future-focused when resetting their priorities. Half (47%) have set the goal to improve their health, followed by 39% wanting to set aside more for their children’s future (education or financial support).

To meet these goals, the affluent need new strategies to grow their wealth, which often involves more proactive investment rather than just saving cash.

However, their current ‘confidence gap’ has made many increasingly risk averse, potentially stopping them from putting their money to work through investing or making use of digital tools that simplify wealth management.

“It was here that investment advisers had a field day. People who used to invest on peer advice or driven by own market knowledge, often half baked, suddenly realised the benefits of  professional advice started patronising investment advisers,” said Ramesh.

Risk-averse, but clueless

The UAE affluent have become more risk averse and are actively adapting their finances to the global economic situation with eyes on global market volatility and interest rate levels. A sizable percentage of the affluent sample in the UAE expect future returns to drop and are aligning their portfolios to this new normal.

“We, at Standard Chartered, acknowledge this trend and are working closely with our clients to grow, manage and most importantly protect their money,” Owen said.

The survey findings say that a late start to retirement planning, combined with the pandemic-induced confidence gap, leaves a significant proportion of affluent consumers at risk of a shortfall for their retirement.

The survey found that 31% of people do not currently save/invest for retirement.

Of those that do, investment income (50%) and cash savings / deposits (37%) are the most common expected sources of income in retirement.

At the same time, 53% plan to retire before the age of 65; and, in the last 18 months, 19% have set the new financial goal of retiring earlier. This shows a disconnect between current actions and future expectations, if a confidence gap is holding them back from investing.

Ramesh, who is a former banker, says this is where the role of financial advisers becomes crucial to allay fears of loss and instill confidence among skeptic investors.