Theme - Insurance / MSMEicmai-wirc.in/bulletins/06-2020.pdf · I am hopeful that you are able to...

WESTERN INDIA REGIONAL COUNCILTHE INSTITUTE OF COST ACCOUNTANTS OF INDIA

(Statutory Body under an Act of Parliament)Rohit Chambers, Janmabhoomi Marg, Fort, Mumbai 400 001.

Tel.: 2204 3406 / 2204 3416 / 2284 1138 • E-mail : [email protected] • Website : www.icmai-wirc.in

Vol. 48 No. 6 June 2020 Pages 38 Price: Rs. 5/- RNI No. 22703/72

Inside Bulletin PagesCover Stories : • IntroductiontoIRDAIandHistoryofinsuranceinIndia CMA Jayesh S. More 4 • FundamentalsofInsurance CMA Mihir Vyas 5 • SynopsisOfGeneralInsuranceinIndia CMA U. C. Nahar 7 • BusinessInterruption(BI)Insurance CMA Kashmira A. Tata 9 • ParametricInsurance–FillingInTheGaps CMA Manohar V. Dansingani 11 • EfficiencyNormsof3PSUNon-LifeInsuranceCompanies..... CMA Subir Kumar Banerjee 15 • CMA–CareerInsuranceSurveyor CMA Koushlya V. Melwani 18 • Dwarfto‘Champions’ABoosterDose CMA Pradnya Chandorkar 21 • KeyPerformanceIndicators(KPI)forMSME CMA A. Hariharan 23CFO Speaks : CMA G. Srinivasan 25Other Articles • CombatCovid-19:GSTCompliancRefliefMeasures CMA Vinod Shete 27 • FinancingthefuturethroughResponsibleBanking CMA (Dr.) S. K. Gupta, Sumit Mishra 29 • PayTax&GetRichForBusinessEnterprises CMA Kartik Vasavada 32 • ConstructionIndustries,MigrantWorkforcesandCOVID-19:..... CMA Subhasish Paul 34 • RepairsExpensesandEmployeeCost–WhetherToClassify..... CMA Rajesh Kapadia 37Chapter News .... 31

EDITORIAL BOARDChief Editor:

CMA Ashishkumar BhavsarEditorial Team:

CMA Chaitanya MohrirCMA Arindam GoswamiCMA Sujata BudhkarCMA H. C. ShahCMA Rahul JainCMA Amit Shantaram ShahaneCMA Aparna Arvind Bhai BhondeCMA Dr. Niranjan ShastriISSN 2456-4982

Theme - Insurance / MSME

WIRC BULLETIN – JUNE 2020

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DearCMAProfessionalColleagues,

AfteraseriesofLockdowns,itismyimmensepleasuretogreetyouinUnlock1.0.Iamsurethatyourlifeisnowreturningtonewnormalandyouarefollowingallthesafetymeasuresindoingso.

TheICAI-WIRCaswellastheInstitutearecontinuingintheirendeavourofprovidingqualityknowledgeusingE-platform.IamhappytoinformyouthatWIRCjustcelebratedits100thCEPintheterm2019-20.ItwasajoyousoccasionforusandwewerehonouredtohaveourPresidentCMABalwinderSinghsir,VicePresidentCMABiswarupBasusir,CCM CMAH.Padmanabhansir&CCMCMAVijenderSharmasirwithusontheoccasion.IputonrecordmyappreciationbyCMAVinayakKulkarnisir,ChairmanPDCommitteeofICAI-WIRCinachievingthisfeat.IamalsothankfultotheentireteamofWIRCandespeciallyourStafffortheireffortstowardsPDActivity.

Iamhopefulthatyouareabletoresumeyourprofessionalactivities.IamgladtoinformyouthattheCAASBofICAIhasissued“AdvisoryonAuditingandAssuranceassignmentsduringthePeriodofLockdownandRestrictionsontraveling”.Iamsurethattheadvisorywillprovehelpfultotheprofessionalsinhandlingtherelevantassignments.

ThesituationofCOVID19hasposedmanychallengesfortheprofessionals,butithasalsocreatedalotofopportunitiesforprofessionalsspeciallyCMAs.IthinkitisthemostapttimefortheCMAstoshowcasetheirskillsinthedomainofCost&ManagementAccountingandhelptheIndustryovercomethiseconomicslowdown.Ifwecanachievethisasaprofessionalcommunity,itwillbeagreatboosttotheprofessionforyearstocome.Iamsurethatweallwilldoourbittoachievethisfeat.IampleasedtoinformyouthatWIRChasresumedoperationsfollowingthenormsandrulesassetoutbytheGovernment.AtthesametimeIlikeyoutonotethatAGMofWIRCforthecurrentyearwillgetalittledelayed.OncethesituationisnormalisedandweareinapositiontoconductAGM,Iwillinformyouaboutthesame.

On21stJunewecelebrateInternationalYogaDay.TomarkthisoccasiontheInstituteisorganisingaYogaSessionfrom6.30amto7.30am.ThesessionwillfocusonYogaExercisesforSedentaryLifestyle.Iunderstandthatthetimingisofearlymorning,butlet’sparticipateinthisinitiativeoftheInstituteandrejuvenateourmind,soul&body.

IampleasedtoinformyouthatthePre-CampusTrainingfortherecentlypassedoutstudents,whichwashaltedduetoCOVID19Lockdown,willnowresumethroughtheE-LearningMode.ItwillbehandledcentrallythroughtheHQ.Iappealallthemembers,especiallyintheIndustrytohelptheseyoungprofessionalsingettingrecruitment.WIRC&InstitutecanarrangeforOnlineInterviewProcess,Irequestthememberstopleasehelpusinthisregardsbyprovidingleadsontherecruitmentrequirements.ItisourresponsibilityasprofessionalstosupportthenewCMAstohelpthemstarttheircareer.Let’ssupporttheFutureofourProfession.

“Help others achieve their dreams and you will achieve yours — Les Brown”Ionceagainrequestyoutofollowallthesafetynormsandencourageothertodoso.StayHealthy&StaySafe!

SincerelyYours,

CMA Neeraj Dhananjay JoshiChairman, ICAI-WIRC

Please Follow the Norms of Social Distancing. Be Safe.

From the Desk of Chairman . . . . . .-


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From Desk of Chief Editor . . . . . .-

DearCMAProfessionalColleagues,

Hopeyouaredoingwellandtakingcareofyourselfandyour family.Underunlock-1,youhavestartedyourprofessionalworkinfullfledge.Practiceprofessionalsnowgettingbusyinauditandcompliancework.WIRCduringthislockdownperiodcontinuetoservingmembersandstudentinallrespect.Aspartofthesame,WIRCbringoutEversionofWIRCbulletinforthemonthofJune,2020forprofessionalupdateandknowledgesharing.

Theme for themonthofJune2020decided is “Insurance”.During this lockdownperiodMSMEsareverybadlyaffectedandgovernmenthadalsoannouncedvariousschemes forupliftMSMEs.So,wehavealsodecidedtoincludeMSMEinourtheme.Hence,thismonthwehavedualtheme– “Insurance” and “MSMEs”.Due toCOVID -19,wholeworld is facinghealth crises.Hence theimportanceofInsurancesectorincreasedmuchmore.ForInsurancesector,costingof itsvariousproductisveryimportanttosustaininthemarket.MSMEsectorisbackboneofIndianeconomy.GovernmentofIndiahadtakenvariousstepstoreviewMSMEsectorduringthispandemicsituation.OneofthemajorchangesisthedefinitionofMSMEs.Wehavereceivedaround9articlesonthethemes.Articlesonthethemearepublishedascoverstory.Wearealsopublishingarticlesonotherprofessionalmatters.IamthankfultoallauthorsforprovidingarticlesandmakingWIRCbulletinaKnowledgePack.

WehavealsostartpublishinginterviewofCMAswhohadreachedarespectablepositionlikeCFO,VP,Directoretc.ObjectiveofthesametosharetheirexperiencewithCMAfraternity.ItwillinspireyoungCMAsformakingfuturebrighter.Inthisbulletin,wehavepublishedinterviewofCMAG.SrinivasnDirectoroftheNationalInsuranceAcademy,Pune.IthankCMAChaitanyaMohrir,RCMfor conducting the interview. I request our proudCMAswho reach this highest position duringtheircareertosharetheirexperiencewithCMAfraternity.Placereachussothatwecanconductinterview.

Womenempowermentisalsooneoftheneedsofthehour.WehavealsodecidedtopublishatleastonearticlefromladyCMA.Inresponsetoourappealwehavereceived3articlesfromladyCMA.IhopethatwewillgetsuchexcellentresponsefromladyCMAsinfuturealso.

IurgememberstoshareknowledgebywayofarticletomakeWIRCBulletinsKnowledgePack.

WewelcomesuggestionandfeedbackforbettermentofWIRCBulletin.

StaySafe

HappyReading!!!

WithWardRegards

CMA Ashish BhavsarChairman, Editorial Board


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Introduction to IRDAI and History of insurance in India

CMA Jayesh S. More Mob.:9404516193•E-mail:[email protected]

DearProfessionalcolleagues,Introduction: A dictionary meaning of insurance is, “an agreement with acompany (insurer) in which you (Insured) pay them regularamountsofmoneyandtheyagreetopaycostofit,forexample,youdieorill,orifyouloseordamagesomething.Butinlaymanlanguage insurance is nothing but, pay certain calculatedpremiumamount to insurermakegood losswhichwill arise inuncertainfuture.Toprovide for the establishment of anAuthority toprotect theinterestsofholdersofinsurancepolicies,toregulate,promoteandensureorderlygrowthoftheinsuranceindustryandformattersconnected therewith and further to amend the Insurance Act,1938,theLifeInsuranceCorporationAct,1956andtheGeneralInsuranceBusiness(Nationalization)Act,1972.

History of insurance in India:In India insurance was mentioned in the writings of Manu(Manusmrithi), Yagnavalkya (Dharmasastra and Kautilya(Arthashastra), which examined the pooling of resources forredistribution after fire, floods, epidemics and famine. the life-insurance business began in 1818 with the establishment oftheOrientalLife InsuranceCompany inCalcutta. thecompanyfailed in 1834. In 1829, Madras Equitable began conductinglife-insurance business in the Madras Presidency. The BritishInsuranceActwasenactedin1870,andBombayMutual(1871),Oriental(1874)andEmpireofIndia(1897)werefoundedintheBombayPresidency.TheerawasdominatedbyBritishcompanies.

• TheIndianLifeAssuranceCompaniesAct,1912wasthefirststatuteregulatinglifeinsurance.

• In 1928 the Indian Insurance Companies Act was enactedto collect the information about life and non-life insurancebusinessconductedbytheIndianandforeigncompanies.

• OnJanuary19,1956,lifeinsurancesectorwasnationalizedandLifeInsuranceCorporationwasestablished.

• TheLICabsorbed154Indianand16non-Indianinsurersand75providentsocieties.

• Untillate1990LIChadmonopolybefore.• GeneralinsuranceinIndiabeganduringthe17thcentury.• In1907theIndianMercantileInsurancewasestablished,the

firstcompanytounderwriteallclassesofgeneralinsurance.• In 1957 the General Insurance Council (a wing of the

InsuranceAssociationofIndia)wasformed,framingacodeofconductforfairnessandsoundbusinesspractice.

• In1972,withthepassageoftheGeneralInsuranceBusiness(Nationalization)Act,theinsuranceindustrywasnationalizedon1January1973.

• 170insurerwereamalgamatedandwasgroupintoNationalInsuranceCompany,NewIndiaAssuranceCompany,OrientalInsuranceCompanyandUnitedIndiaInsuranceCompany.

• In 1993, the central government has set up a committeechaired by the RBI governor R. N. Malhotra to proposerecommendation to reform finance sector. Committee hasrecommend to permit private sector in insurance industry.And foreign company with the joint venture of indiancompanies.

• On the recommendation of the Malhotra committeegovernment has set up IRDAI (Insurance Regulatory anddevelopmentAuthorityofIndia)inApril2000.

• Objectives of the IRDA include promoting competition toenhancecustomersatisfactionwithincreasedconsumerchoiceandlowerpremiumswhileensuringthefinancialsecurityoftheinsurancemarket.

• The IRDA opened up the market in August 2000 with aninvitation for registration applications; foreign companieswereallowedownershipupto26percent.

• In 2013 the IRDAI attempted to raise the foreign directinvestment(FDI)limitintheinsurancesectorto49percentfromitscurrent26percent.TheFDI limit inthe insurancesectorwasraisedto100percentaccordingtothebudget2019.

Insurance Regulatory Development Authority of India: Composition and Authority:• Allabovepersonareappointedbythecentralgovernment.• Person having ability, integrity and having knowledge in

financeaccounts,generalinsurance,lifeinsurance,actuarialscience,economics,law,accountancy,administration,oranyother disciplinewhichwould, in the opinion of theCentralGovernment,beusefultotheauthority.

Tenure of the chairperson and member:• Thechairpersonandwholetimemembershallholdofficefor

fiveyearandshallreappointed.• Nochairmanshallholdofficeafterattainmentofhisagesixty

fiveyear.• Nomembershallholdofficeafterattainmentofhisagesixty

twoyear.• Apart-timemembershallholdofficeforatermnotexceeding

fiveyears.Removal from OfficeCentralgovernmentmayremovememberinthefollowingcases:thememberwho,• Hasatanytimehasbeen,adjudgedasaninsolvent;or• Hasbecomephysically ormentally incapable ofactingasa

member;or• Hasbeenconvictedofanyoffencewhich,intheopinionofthe

CentralGovernment,involvesmoralturpitude;or• Hasacquired suchfinancial or other interestas is likely to

affectprejudiciallyhisfunctionsasamember;or• Hassoabusedhispositionas to renderhis continuation in

officedetrimentaltothepublicinterest.


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Fundamentals of InsuranceCMA Mihir Vyas

Mob.:9714029062•E-mail:[email protected]

IntroductionInoneformoranother,weallown/buyinsurance.Whetherit’s auto, medical, liability, disability or life, insuranceserves as an excellent risk-management and wealth-preservationtool.Havingtherightkindof insuranceisacriticalcomponentofanygoodfinancialplan.Whilemostofusowninsurance,manyofusdon’tunderstandwhatitisorhowitworks.Inthistutorial,we’llreviewthebasicsofinsuranceandhowitworks,thentakeyouthroughthemaintypesofinsuranceoutthere.

What Is Insurance?Insurance is a form of risk management in which theinsured transfers the cost of potential loss to anotherentity in exchange formonetary compensation known asthe premium. Insurance allows individuals, businessesandotherentitiestoprotectthemselvesagainstsignificantpotential losses and financial hardship at a reasonablyaffordablerate.Wesay“significant”becauseifthepotentiallossissmall,thenitdoesn’tmakesensetopayapremiumtoprotectagainsttheloss.Afterall,youwouldnotpayamonthly premium to protect against a $50 loss becausethiswouldnotbeconsideredafinancialhardshipformost.Insuranceisappropriatewhenyouwanttoprotectagainsta significant monetary loss. Take life insurance as anexample.Ifyouaretheprimarybreadwinnerinyourhome,thelossofincomethatyourfamilywouldexperienceasaresult of our premature death is considered a significantloss and hardship that you should protect them against.Itwould be very difficult for your family to replace yourincome, so themonthlypremiumsensure that ifyoudie,your incomewillbereplacedbythe insuredamount.Thesameprincipleapplies tomanyother formsof insurance.If thepotential losswillhaveadetrimentaleffecton thepersonorentity,insurancemakessense.(Formoreinsight,see 15 Insurance Policies You Don’t Need.) Everyonethatwantstoprotectthemselvesorsomeoneelseagainstfinancial hardship should consider insurance. This mayinclude:

• Protectingfamilyafterone’sdeathfromlossofincome

• Ensuringdebtrepaymentafterdeath

• Coveringcontingentliabilities

• Protectingagainstthedeathofakeyemployeeorpersoninyourbusiness

• Buyingoutapartnerorco-shareholderafterhisorherdeath

• Protecting your business from business interruptionandlossofincome

• Protecting yourself against unforeseeable healthexpenses

• Protectingyourhomeagainsttheft,fire,floodandotherhazards

• Protectingyourselfagainstlawsuit

• Protectingyourselfintheeventofdisability

• Protecting your car against theft or losses incurredbecauseofaccidents

Fundamentals Of InsuranceHowdoesinsurancework?Insuranceworksbypoolingrisk.Whatdoesthismean?Itsimplymeansthatalargegroupofpeoplewhowanttoinsureagainstaparticularlosspaytheirpremiumsintowhatwewillcalltheinsurancebucket,or pool. Because the number of insured individuals is solarge, insurancecompaniescanusestatisticalanalysistoproject what their actual losses will be within the givenclass.Theyknowthatnotallinsuredindividualswillsufferlossesatthesametimeoratall.Thisallowstheinsurancecompaniestooperateprofitablyandatthesametimepayforclaimsthatmayarise.Forinstance,mostpeoplehaveautoinsurancebutonlyafewactuallygetintoanaccident.Youpayfortheprobabilityofthelossandfortheprotectionthatyouwillbepaidforlossesintheeventtheyoccur.

RisksLife is full of risks-somearepreventableorcanatleastbeminimized,someareavoidableandsomearecompletelyunforeseeable.What’simportanttoknowaboutriskwhenthinking about insurance is the type of risk, the effectof that risk, the cost of the risk andwhat you can do tomitigatetherisk.Let’staketheexampleofdrivingacar.Type of risk: Bodilyinjury,totallossofvehicle,havingtofixyourcarThe effect:Spendingtimeinthehospital,havingtorentacarandhavingtomakecarpaymentsforacarthatnolongerexists

The costs:CanrangefromsmalltoverylargeMitigating risk: Not driving at all (risk avoidance),becomingasafedriver(youstillhavetocontendwithotherdrivers),ortransferringtherisktosomeoneelse(insurance)Let’sexplorethisconceptofriskmanagement(ormitigation)principlesa littledeeperand lookathowyoumayapplythem.Thebasicriskmanagementtoolsindicatethatrisksthatcouldbringfinanciallossesandwhoseseveritycannotbereducedshouldbetransferred.Youshouldalsoconsidertherelationshipbetweenthecostofrisktransferandthevalueoftransferringthatrisk.


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Risk Control : There are two ways that risks can becontrolled.You can avoid the risk altogether, or you canchoosetoreduceyourrisk.Risk Financing :Ifyoudecidetoretainyourriskexposures,thenyoucaneithertransferthatrisk(ie.toaninsurancecompany),oryouretainthatriskeithervoluntarily(ie.youidentifyandaccepttherisk)orinvoluntarily(youidentifytherisk,butnoinsuranceisavailable).Risk Sharing :Finally,youmayalsodecidetosharerisk.Forexample,abusinessownermaydecidethatwhileheiswillingtoassumetheriskofanewventure,hemaywantto share the riskwith other owners by incorporating hisbusiness.So,backtoourdrivingexample.Ifyoucouldgetridoftheriskaltogether,therewouldbenoneedforinsurance.Theonlywaythismighthappeninthiscasewouldbetoavoiddrivingaltogether.Also,ifthecostofthelossortheeffectof the loss is reasonable to you, then youmay not needinsurance.For risks that involve a high severity of loss and a lowfrequency of loss, then risk transference (ie. insurance)is probably the most appropriate protection technique.Insuranceisappropriateifthelosswillcauseyouoryourlovedonesasignificantfinanciallossorinconvenience.Dokeep inmindthat insomeinstances,youarerequiredtopurchaseinsurance(i.e.ifoperatingamotorvehicle).Forrisksthatareoflowlossseveritybuthighlossfrequency,themostsuitablemethod iseitherretentionorreductionbecause thecost to transfer (or insure) theriskmightbecostly. In otherwords, some damages are so inexpensivethat it’sworth taking the risk of having to pay for themyourself, rather than forking extra money over to theinsurancecompanyeachmonth.

The Risk Management Process After youhavedetermined that youwould like to insureagainstaloss,thenextstepistoseekoutinsurancecoverage.Hereyouhavemanyoptionsavailabletoyoubutit’salwaysbest to shop around. You can go directly to the insurerthrough an agent, who can bind the policy. The processof binding a policy is simply awritten acknowledgementidentifyingthemaincomponentsofyourinsurancecontract.Itisintendedtoprovidetemporaryinsuranceprotectiontotheconsumerpendingaformalpolicybeingissuedbytheinsurance company. It should be noted that agentsworkexclusivelyfortheinsurancecompany.Therearetwotypesofagents:1. Captive Agents: Captive agents represent a single

insurancecompanyandarerequiredtoonlydobusinesswiththatonecompany.

2. Independent Agent: Independent agents representmultiplecompaniesandworkonbehalfoftheclient(notthe insurance company) to find themost appropriatepolicy.

UnderwritingUnderwriting is the process of evaluating the risk to beinsured.Thisisdonebytheinsurerwhendetermininghowlikelyitisthatthelosswilloccur,howmuchthelosscould

beandthenusingthisinformationtodeterminehowmuchyoushouldpaytoinsureagainsttherisk.Theunderwritingprocesswillenabletheinsurertodeterminewhatapplicantsmeettheirapprovalstandards.Forexample,aninsurancecompanymightonlyacceptapplicantsthattheyestimatewill have actual loss experiences that are comparable tothe expected loss experience factored into the company’spremiumfees.Dependingonthetypeofinsuranceproductyou are buying, the underwriting process may examineyourhealthrecords,drivinghistory,insurableinterestetc.Theconceptof“insurableinterest”stemsfromtheideathatinsuranceismeanttoprotectandcompensateforlossesforanindividualorindividualswhomaybeadverselyaffectedbyaspecificloss.Insuranceisnotmeanttobeaprofitcenterfor thepolicy’sbeneficiary.Peopleareconsideredtohaveaninsurableinterestontheirlives,thelifeoftheirspouses(possibly domestic partners) and dependents. Businesspartnersmayalsohaveaninsurableinterestoneachotherandbusinessescanhaveaninsurableinterestinthelivesoftheiremployees,especiallyanykeyemployees.

Insurance Contract Theinsurancecontractisalegaldocumentthatspellsoutthe coverage, features, conditions and limitations of aninsurance policy. It is critical that you read the contractand ask questions if you don’t understand the coverage.Youdon’twanttopayfortheinsuranceandthenfindoutthatwhatyouthoughtwascoveredisn’tincluded.

Insurance terminology : Bound: Once the insurance has been accepted and is inplace, it is called “bound”. The process of being bound iscalled thebindingprocess. Insurer:Apersonor companythatacceptstheriskoflossandcompensatestheinsuredintheeventoflossinexchangeforapremiumorpayment.Thisisusuallyaninsurancecompany.Insured: The person or company transferring the riskof loss to a third party through a contractual agreement(insurancepolicy).Thisisthepersonorentitywhowillbecompensatedforlossbyaninsurerunderthetermsoftheinsurancecontract.Insurance Rider / Endorsement:Anattachmenttoaninsurancepolicythataltersthepolicy’scoverageorterms.policymaybepurchasedtocoverlossesabovethelimitofanunderlyingpolicyorpolicies,suchashomeownersandauto insurance.While it applies to losses over the dollaramount in the underlying policies, terms of coverage aresometimesbroaderthanthoseofunderlyingpolicies.Insurable Interest: In order to insure something orsomeone,theinsuredmustprovideproofthatthelosswillhaveagenuineeconomicimpactintheeventthelossoccurs.Withoutaninsurableinterest, insurerswillnotcovertheloss.Itisworthnotingthatforpropertyinsurancepolicies,an insurable interestmustexistduring theunderwritingprocess and at the time of loss. However, unlike withproperty insurance, with life insurance, an insurableinterestmustexistatthetimeofpurchaseonly.Nowthatyouhavethebasicsofinsurance,let’sdiscussspecifictypesofpolicies.


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Synopsis of General Insurance in IndiaCMA U. C. Nahar

Mob.:98253 24316•E-mail:[email protected]

HISTORY : In India, Insurance has a deep-rooted history. ItwasnotedmentionedinManu(Manusmurthi)Dharmasastra&kautilya (Arthsastra) pooling of resources for re-distribution intimeofcalamitiesSuchasFire,Floods,Epidemics&Famineetc.Moderninsuranceintheworldstartedintheyear1686byLyod’sLondonUK,startedformarineinsurance.

ModernGeneralInsurancebusinessinIndiadatesbackasoldas1850. In 1907, the IndianMercantile InsuranceCompanyLtd.,was set up. This was the first company to transact all classesof general insurance business in India. In 1938,with a view toprotecttheinterestoftheinsurancepublic,theearlierlegislationwas consolidatedandamendedby the InsuranceAct,1938withcomprehensiveprovisionsforeffectivecontrolovertheactivitiesofinsurers.

In 1972, theGeneral InsuranceBusiness (Nationalisation)Act,generalinsurancebusinesswasnationalisedwitheffectfrom1stJanuary1973.107,General insurerswerenationalisedtobringthemunder4CompanieshavingtheirHeadOffices,TheOrientalInsuranceCompanyLtd.,atDelhi,NationalInsuranceCompanyLtd.,atCalcutta,UnitedIndiaInsuranceCompanyLtd.,atMadras&TheNewIndiaAssuranceCompanyLtd.,atMumbai.

Following the recommendations of the Malhotra CommitteeReport in 1994, in the year 1999, Insurance Regulatoryand Development Authority (IRDA) was constituted as anautonomousbodytoregulateanddeveloptheinsuranceindustry.MalhotraCommitteealsorecommendedthattheprivatesectorbe permitted to enter in the insurance industry& accordinglyprivate insurancecompaniesarealsoworking in the country&publicisgettingcompetitiveservicesingeneralinsurance.

General Insurance Corporation of India was parent companyof 4 subsidiaries but in December 2000, all the 4 nationalisedcompanies were allowed to work independently in competitionwith private sector insurance companies. General InsuranceCompanywasconvertedintoanationalre-insurer.

Threemainsectorsofinsuranceareprevailinginourcountryatpresent:

LIFEINSURANCE

GENERALINSURANCE

RE-INSURANCE

There are number of hazards in practical life causing losses toBuilding,Machinery,Stock,Property &Manpowerworkingforthebusiness&industry.Motoraccidentsareseeningeneral&eyecatchingofgeneralpublic.Tocover therisk forsuch lossessuchInsurancepoliciesaredesignedtocatertheneedofthepublicconcernedtoindemnifythemincaseoflossesduetoinsuredperils.

Therearenumberofbranchesofinsurancetocovervarioustypesofriskssuitabletovarioustypesofbusiness,industry&propertyforsafetyoftheinsuredpublicnamely:-

A. FIREINSURANCE,

B. MOTORINSURANCE,

C. MARINEINSURANCE,

D. MISCELLANEOUSINSURANCE,

E. ENGINEERINGINSURANCE,

F. NON-TRADITIONALINSURANCE,

G. CONSEQENTIALLOSSINSURANCE,

A. FIRE INSURANCE: From 2001, FIRE POLCIY coveringalmost all the perils earlier coveredwasnow renamedasTHESTANDARDFIRE&SPECIALPERILSPOLICY& is effectivetoday,coveringfollowingperils(causeofloss)inbuiltinthepolicy.

1.FIRE,2.LIGHTNING,3.EXPLOSION/IMPLOSION,4.RIOT& STRIKE &MALICIOUS DAMAGE, 5. STORM, CYCLONE,TYPHOON, TEMPEST, HURRICANE, TORNADO, FLOOD &INDUDATION(ACTOFGODPERIL),6.IMPACTDAMAGE,7.SUBSIDENCE AND LANDSLIDE INCLUDING ROCKSLIDE,8. BURSTING AND OVERFLOWING OF WATER TANKS,APPARATUS&PIPES,9.AIRCRAFTDAMAGE,10.MISSILETESTINGOPERATIONS, 11. LEAKAGE FROMAUTOMATICSPINKLERINSTALLATION,12.BUSHFIRE.

Theremay be further risks attached to the property due to itsinherent nature/circumstances, can be covered as ADD ONCOVERS on payment of additional premium, according to therequirementoftheinsured.

1. ARCHITECTS,ETC.FEEINEXCESSOF3%,2. DEBRISREMOVALINEXCESSOF1%,3. DETERIORATIONOFSTOCKSINCOLDSTORAGEDUE

TO POWER FAILURE, CAUSED DUE TO AN INSUREDPERIL.

4. EARTHQUAKE,5. FORESTFIRE,6. IMPACTDAMAGEDUETOINSURED’SOWNVEHICLE,7. LEAKAGE&CONTAMINATION,8. RENTFORALTERNATEACCOMODATION,9. SPOILAGEMATERIALDAMAGE,10. SPONTANEOUSCOMBUSTION,11. STARTUPEXPENSES,12. TEMPORAYREMOVALOFSTOCK.

B. MOTOR INSURANCE:

Motor insurance is well known by public at large since thirdparty insurance of any vehicle on road is compulsory as perMotor Vehicle Act in India. At the time of anymotor accidentinsurance formalities are required to be completed to get theindemnificationof loss.Thereare, twotypesofcoversgenerallyissuedbyunderwriters:-

1. PackagePolicycoversownvehicedamage,thirdpartyrisk,losstopassengers,drivercoverageetc.asperrequirementoftheinsured.

2. Third party insurance, covers the risk for damage to thirdpartybytheinsuredvehiclewhichismustforavehicleasperMotorVehicleAct.


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C. MARINE INSURANCE:

Dictionary meaning of MARINE denotes, of sea, whereas ininsurancemarinemean in transit either by sea/ rail/road etc.ModerninsuranceoriginallystartedasMarineinsuranceintheworldtocovertheriskoftransportationofmerchandisebysea.InstancesareavailablethattradersfromBharuch&Suratusedtosendmerchandisto

Lanka,Egypt&Greeceusingsuchtypeofmarinecontracts fortheirsafetylongback.

Marineinsurancecoversintwoparts:

1. MARINE CARGO: Itcoverstheriskintransitofthemerchandise(cargo)bysea/

rail/roadetcfromoneplace/countrytootherplace.Lossduetoanyoftheperilscoveredwhileintransitisindemnifiedbytheunderwriters(insurer)

2. MARINE HULL: This covers the risk of ship/vessel. Loss to the ship/vessel

insured is payable to the extent damaged, covered in theinsurancepolicy.

D. MISCELLANEOUS INSURANCE: Underwriters provide various types of insurance policies to

suittherequirementofpublicatlargeaccordingtotime,place&circumstancesprevailinginthecountry.Basicpurposeoftheunderwritersistosafeguardthepublicatlargefromthehazards,proximityofwhichisseeninthepublic.

Followinginsurancecoversbroadlyareavailableinthemarket:

1. ALLRISKINSURANCEFORJEWELLERY,

2. BANKERSINDEMNITYINSURANCE,

3. BURGLARY&HOUSEBREAKINGINSURANCE,

4. CARRIERSLIABILITYINSURANCE,

5. FIDELITYGUARANTEEINSURANCE,

6. HOUSEHOLDERSINSURANCE,

7. JEWELLERSBLOCKINSURANCE(FORTRADERS),

8. MEDICALAIMINSURANCE,

9. MONEYINSURANCE,

10. MULTIPERILSINSURANCEFORLPGDEALERS,

11. OVERSEASTRAVELMEDICALINSURANCE,

12. PERSONALACCIDENTINSURANCE,

13. PUBLICLIABILITYINSURANCE,

14. PLATEGLASSINSURANCE,

15. PROFESSIONALINDEMNITYINSURANCE,

16. SHOPKEEPER’SINSURANCE,

17. WORKMEN’SCOMPENSATIONINSURANCE,

E. ENGINEERING INSURANCE:Thisinsuranceismeantforindustryatlargefordamagestotheplant&machinery.Underwriterswillindemnifytheinsuredforthelossoccurredbyaninsuredperil.

Followinginsurancepoliciesaregenerallyissuedtothepublicasrequiredfromtimetotimetosafeguardthemfromthelossifanyto takeplacewhile running the industry or settingupplant&machinery.Compositepoliciesarebeingissuedcoveringvariousproperty involved in setting up a new project or expansion/renovationintheindustry:

1. BOILERINSURANCE,

2. ELECTRONICEQUIPMENTINSURANCE,

3. LOSSOFPROFITMACHINERYINSURANCE,

4. ERECTIONINSURANCE,

5. MARINECUMERECTIONINSURANCE,

6. STORAGECUMERECTIONINSURANCE,

7. MACHINERYBREAKDOWNINSURANCE,

8. REFERIGERATIONPLANTINSURANCE,

9. SOLARINSURANCE.

F. NON TRADITIONAL INSURANCE:Tocatertheneedofthesocialsecurity,variousinsurancepoliciesare designed to indemnify the losses suffered by insured fromtimetotime,e.g.Cattleinsurance,HoneyBeeinsurance,Fishinginsurance,etcoranyotherinsurancewhichmaybenotifiedbytheCentralGovernmentfromtimetotime.

G. CONEQENTIAL LOSS INSURANCE: Asthenamedenotesitself,duetooperationofanyoftheperilsofthepolicy,losscausestotheinsured&payableinthepolicy,thentheresultantlossduetononworkingoftheindustry/businessoftheinsured,causingdirectmonetarylosstotheinsuredispayableundersuchtypeofpolicy.

Suchpoliciesareissuedforbrokingoffire,breakdownofmachinery,the production is stopped whereas regular expenses are to beincurredbytheinsured,canbeindemnifiedundersuchpolicies.However,properaccountingrecords&detailsarerequiredtobemaintainedbytheinsuredtoarriveattheindemnification.

Generalinsuranceisgovernedbyspecialprinciplesnamely:

1. UTMOST GOOD FAITH: Facts & figures given in theproposal formare takenas correct ingood faith& theygotbearingontheclaimiffounduntoward.

2. INSURABLE INTEREST: Insuredmusthave the insurableinterestinthesubjectmatteroftheclaimatthetimeofloss.

3. INDEMNITY: Underwriters will make good the losssubject to policy conditions so that the insured get properindemnificationofthelosssuffered.

4. SUBROGATION:If anyculpritisfoundcausingtheloss&responsible for the same after making the payment of theclaim,underwritersareentitledtogetsubrogationfromtheinsuredtorecoversuchlossfromtheresponsibleparty.

5. CONTRIBUTION: Due to some reason or other, if morethan one insurance has been taken on the same subjectmatter of loss, main underwriters got the right to recoverfrom other underwriters, their prorata contribution fromsuchunderwriters,detailsofwhicharetobedeclaredbytheinsuredbeforetheclaimispaid.

Generalinsuranceissubjecttomainly:-

* Therearecertainexclusionsunderthepolicy.

* Terms conditions & warranties are part of the insurance,specifiedinthepolicyissuedtotheinsured.

General insurance is meant for great safety of the public inbusiness/industry&forsocialsecurity.Premiumgenerallypaidisveryminoramount,comparingtotheindemnificationoflosstotheinsured.Publicawarenessisrequiredinmodernworldwherehazardsaremuchmore,totakeproperinsurancelookingtotheneed/hazardsprevailinginthepracticallife.


9

Business Interruption (BI) InsuranceCMA Kashmira A. Tata


ThisarticlefocussesonBusinessInterruption(BI)insurance(also known as Business Income Insurance) which is arelatively less popular insurance coverage as compared toothercoverages.However,thisarticlehighlightsitsmeaningandimportanceindepth.ItalsoexploreshowtheBIcoveragehas been perceived globally for business loss claims arisingduetoCOVID19.

1. What is a Business interruption insurance?

BIInsuranceisaninsurancethatprovidescoverageagainstloss of income when your business is shut down due to acoveredperil.

Coveredperilsusuallyinclude:• Fire • Theft • Earthquakes• Floods • Wind

The following illustrations will help us understand BIInsurance:

a. Yourshopcatchesafire,asaresultofwhichyourbusinessneedstoshutdownwhileyourepairthedamages.InthiscaseifyouhaveaBIinsurance,itcanhelppayyourlostincomeduringthistime.

b. Thievesbreakinandstealvaluable inventoryfromyourelectronics store, due towhich, you have to temporarilyshut down while you replace your inventory. Your BIinsurancecanhelpcoveryourlostincomeduringthistime.

c. Youownafactoryandanearthquakehitsinyourareaandyourbuildingsuffersfromextensivedamage.Asaresult,youmustshutdownyouroperationstorepairthedamages.YourBIinsurancecanhelpcoveryourlostincomeduringthistimeofrestoration.

2. Is Business Interruption insurance different from a Commercial Property Insurance?

BI insurance is one of the most overlooked businessinsurancepolicies.Manybusinessownersmisunderstandthedifferencebetweenacommercialproperty insuranceandBI.A commercial property insurance policy only covers againstthe physical damages to property caused due to the eventandnottheresultantfinanciallossofbusinessincomeduetointerruptionofbusiness.ABI insurance coverage isusuallyanaddonpolicytothecommercialpropertyinsurancepolicy.

Example: Aheavy rainfall causes seriouswaterdamageatarestaurant.Theexpectedrepair&renovationtimeisover6months.Whilecommercialpropertyinsurancecoversthecostofrepairs,theownercan’tmakemoneywhiletherestaurantis under repairs. In such a scenario theBI insurance helpsrecoupthelostrevenue.

3. What does a Business Interruption Insurance cover?MostBIinsurancecoverthefollowingitems:• Lostrevenue

Based on previous financial records and performance of the business, a policy will provide reimbursement forprofits that would have been earned had the event notoccurred.

• Fixedcosts

Thesecanincludeoperatingexpensesandotherincurredcosts of doing business.E.g. The businessesmight havetocontinuepayingrentorleasepaymentsevenwhilethebusinessisnotmakingmoney,suchfixedcostwouldgetcovered.

• Relocationtotemporarylocation

Some policies cover the costs involved with moving toand operating from a temporary business location. E.g.An intruder breaks into an office, vandalizing the officeandbreakingseveralwindows.Thebusiness is forcedtorelocatetoanewofficespaceuntilthewindowsandlocksarereplaced.BIinsurancepaysformovingcostsandrentatthenewlocation.

• Commissionandtrainingcost: Incaseacompanyneedstoreplacemachineryandretrain

personneltousethenewmachineryduetotheevent,thepolicywouldcoverthesecosts.

• Employeewages Coverageofwagesisessentialifabusinessdoesnotwant

toloseemployeeswhileshuttingdown.Thiscoveragecanhelpabusinessownercontinuepayingsalarieswhentheycannotoperate.E.g.Apipeburstsoutsideashop,floodingtheshopanddestroyingwalls,carpeting,andfurnishings.Theshopisforcedtocloseforamonthforrenovationandreplacing inventories. BI insurance helps the firmmeetpayrollobligationswhiletherepairsareunderway.

• Taxes Evenwhendisasterhits,businesseswillhavetocontinue

payingthetaxes.BIcoveragewillensureabusinesscanpaytaxesontimeandtherebyavoidpenalties.

• Loanpayments

Loan payments are often duemonthly. BI coverage canhelpabusinessmakethosepaymentsevenwhentheyarenot generating income. E.g. An electronics showroom isforced to suspend business after amassive fire destroysthe premises. While the business isn’t functioning andbringinginrevenue,itwouldstillneedtomakemonthlypaymentsonabusinessloantakenpriortotheevent.

4. What does a Business interruption insurance not cover?

• Propertydamage

BI insurance covers the financial but notmaterial costsofatemporaryshutdown.Propertydamagecauseddueto


10

theeventiscoveredbycommercialpropertyinsurance.

Example: A fire is caused at a factory, that destroysmachinery and inventory and causes need for majorrepairs.Commercialpropertyinsurancepaystoreplacethemachineryandinventoryandforrepairstothebuilding.However,aBIinsurancecompensatesthebusinessfortherevenue it lost while recovering from the disaster i.e. atemporaryclosureofthefactoryinthisexample.

• Extraexpenses

Extraexpensemeansexpensesoverandabovetheregularexpensespaidforrunningbusiness.e.g.Costofleasinganequipment, hiring temporary staff that canhelp get thebusiness up and running. BI insurance usually coversonlyforfixedcostsduringatemporaryshutdownandnotfor theextraexpense.Extraexpenses canbe coveredbytakinganextraexpensecoverageasanaddonpolicy.

Example: A earthquake leaves a small town withoutpowerandelectricity,forcingalocalnursinghometoclose.The nursing home provides essential medical services,which it needs to resume as soon as possible. Extraexpense coveragewould help the nursing home to leasenewequipmentandpayitsstaffovertimesoitcanrespondeffectivelytothecrisis.

• Contingentbusinessinterruption

BI insurance only covers losses caused directly by yourown businesses closure, however at times your businesscan suffer indirectly when another company that you’redependentonshutsdowntemporarilyorpermanentlyduetopropertydamage.AbasicBIpolicywouldnotcoversuchaloss.AcontingentBIinsurancepolicycanbeconsideredin such cases which covers you for the loss caused bylossofaprimarysupplier,partner,orcustomeraffectingyour ability to do business. This add on policy is highlyadvisable when your business is dependent on a singlesupplier/manufactureroronafewmajorcustomersetc.

5. Does business interruption insurance cover loss of business income due to lockdown caused by COVID 19?ThequestionwhetherBIinsurancecoversbusinesslosscausedduetolockdownasaresultofCOVID19istrendingglobally.Theanswerhereisusually‘No’.InIndia,BIInsuranceissoldasacoveragealongwithcommercialpropertyinsuranceandnotasastandalonepolicy.HenceBIcovercanbetakenonlyalongwithanunderlyinginsurancepolicyforthecoveredperile.g. fire insurance or as industrial all-risk insurance whichcoversbothpropertydamageandBI.HencefortheBIcoverto trigger, it is necessary for the property insured to sufferphysicaldamageduetoacoveredperilsuchasfire,floodorearthquake.Sincethetemporaryclosureofbusinessiscauseddue to lockdownandnotdue toanyphysicaldamage to theproperty, the physical damage trigger does not get evoked.Apublic advisory regardingexclusionofCOVID19 fromBIcoveragewasissuedbyGeneralInsuranceCouncil(GIC)1 Re ofIndiaon21stApril2020.ThisadvisoryisbeingopposedbytheeffectedclassofbusinessesinIndia.

Globally too, businesses are claiming COVID 19 businesslosses underNotifiable disease/infectious disease extensionsavailableinfewcountriesundertheambitofBIpolicy.This

extensionwillapply ifadisease is foundonthepremisesorwithin the vicinity. It will cover situations where premiseshavebeeninfectedbyahighlycontagiousdiseaseandneedsto be closed for deep cleaning and disinfection. Dependingon the wordings of the contract, businessesmay be able toclaimCOVID19businesslossesifthepolicyextensioncovers“notifiable diseases” instead of a “specified list” of diseases.Alsothereneedstobeareportedcoronacaseinyourpremisesor nearby vicinity to be able to claim.Hence this extensionalsoprovideslimitedrespitetothebusinessesasmostpolicieshave a “specified list” of diseases and since COVID 19 is anewdiseaseitisunlikelytobespecifiedinexistinginsurancecovers.Alsoanownerdecidingtoshutdownasaprecautionarymeasurewithoutanyreportedcase,willnotbecoveredunderthepolicy.BusinessesarealsotakingrespiteforCOVID19businesslossesunderthe“Denialofaccess”extensionundertheBIpolicy.Adenialofaccessextensionwillapplyifyouarerequiredtocloseyourbusinessundertheordersofanappropriateauthorityinthe context of an emergency. It will cover situations whereaccesstoabusinessispreventedorrestrictedduetoanearbyincident,forexampleagasleak.Againitisinterestingtonotethat voluntary suspension of operations, to avoid spreadingthevirusbeforetheofficialnotificationhasbeenannouncedbytheappropriateauthority,wouldnotbeabletoclaimontheirpolicies.ThereisuncertaintywhetherpoliciesprovidecoverforlossesarisingfromCOVID-19.Infutureitremainstobeseenwhetherinsurers will develop tailor made policies providing specificcover byway of an extension to the traditionalBI policy orwhetherBIpolicieswillcontinuetobenarrowlydraftedandexcludecoverageforinfectiousdiseasesandpandemics.

6. Should businesses consider taking a Business Interruption Insurance Coverage?

There is no standard reply to this answer, itwould dependand vary from business to business. No one can predict aneventlikefire,flood,earthquakeetc.Norcanonepredicttheextentofdestructionthatitshallcausetoyourbusiness.Somebusinessesmayhaveawell-definedbusinesscontinuityplanwhichmighthelpthemtotakeafasterresponsetosucheventsandtherebynotaffectingtheirbusiness’sabilitytocontinueitsoperations.e.g.afirmaffectedbyafirecouldmoveintoacoworkingspaceandcontinueitsoperations.

However, if your business is such that it maintains hugequantities of stock, orhas state of theart technologywhichcannotberestored inashortspanthenyoushouldconsiderlookingataBIpolicy tohelpyougetbackonyour feet.Wemustalsoconsiderothernon-economicfactorslikelosingoutcustomers if the business remains shut for a short span, asthesecouldimpactyourrevenuesinthelongterm.

Businessesmustcarefullyunderstandthefeatures,inclusionsand exclusions of aBI Policy and assess their need to takeaBIcoverage.Specialattentionmustbepaidtoensurethatappropriate add on policies are taken to suit the businessneedsandprovidemaximumrequiredcoverage.

1The advisory is available at: https://www.gicouncil.in/media/3878/gi-council_public-advisory.pdf


11

Parametric Insurance – Filling In The Gaps

CMA Manohar V. Dansingani

E-mail:[email protected]

(This article was first published in Treasury Management, an IUP Publication, in April 2019. Reprinted with permission)

“Justiceistheinsurancewhichwehaveonourlivesandproperty.Obedienceisthepremiumwhichwepayforit.”

William Penn

AbstractOn7thSeptember2004,HurricaneIvanhitGrenadawithwind speeds of 125 mph (200 kmph). It wreaked havocwith infrastructure, economy& lives. This tiny island intheCaribbeanregion,alsocalled“SpiceIsle”, (population100,000),wasdevastatedwith90%ofhomesdestroyed.&total losses estimated at over 200% ofGDP! (GDPUS$1billion)

Traditional insurancedoesnotalwayshaveananswertosuch calamities. By July 2005, insurance companies hadsettledover5,000claims&paidoutoverUS$154million.Thisseemsratherinadequatedoesitnot?

EnterParametric,orIndex-basedinsurance.Itseekstofillinthegapsleftoverbytraditionalinsurance.Itisimperativetounderstandattheveryoutset,thatparametricinsuranceis complementary to,&NOT a substitute for traditionalinsurance.

Introduction“Dear Jelly & Co.,

We have observed that an earthquake of magnitude 7 on the Richter’s scale has occurred on ______, with its epicentre within a 10 mile radius from your factory at ___________.

As per the terms of your insurance policy with us, you are entitled to a 40% pay-out, or $4 million, on the sum assured of $10 million.

This amount will shortly be credited to your bank account.

The discharge documents are appended for your signature & return.

Thank you for trusting us at Bell-weather Insurance. We hope to have your continued patronage.”

Respected Reader, if you’re thinking, “That’s not howinsuranceworks.” “Hah! If only itwere so easy.”…pleasethinkagain.

With a few tweaks & some caveats this is indeed, howParametric Insurance works. In effect, it can fill in thegapsleftoverbyconventionalinsurance&itcanbevitalin supporting entire countries& communities, especiallywhennaturalcalamitiesstrike.

Quick Primer on RiskRiskistheprobabilitythattheactualoutcomewilldiffer (+or-)fromtheoneplanned.Forthisdiscussionhowever,itwillbeunderstoodsimplyastheprobabilityofaloss.Peril is the cause of the loss (in the Grenada exampleabove,theperilwasHurricaneIvan)Hazard is a condition that increases the chances of theloss.Hazardsincreasetheriskofaspecificperil.1

Pure riskconsistsofonlytwopossibleoutcomes;loss,ornoloss.Speculative risk includes profit, break-even & loss (alldeviationsfromtheexpectedvalue(s)).Asimpleexampleispurchaseofastock(share).

Methods of Managing Risk2

Thefoundationofgoodriskmanagementisidentifyingallformsofrisk&loss.3

Risk Absorption: Accept the entire risk and fund ityourselfRisk Mitigation: e.g. fire prevention & fire-fightingequipmentRisk Avoidance:IcanavoidtheriskofdrowningatseabynotgoingneartheseaRisk Transfer:e.g.insuranceUsually, a combination of these methods is used. It is

1 Smoking is both, a peril (causes ailments),&ahazard (increases thechancesofcontractingthesediseases)2ExtractfromHandbookofPerformanceManagement,bytheauthor.3Ofcourse,wedonotknoweverypossibleoutcome.Thisisa“best-efforts”endeavour.


12

apparent from the above that Risk Management is abroaderconceptthanInsuranceManagement.”

Weshallfocusoureffortsonpureriskalone.Risktransfercanbedoneusingtraditionalinsurance,oralternativerisktransfer.

How Does It Work?Figure1outlineshowatypicalparametricinsurancecoverworks.

Figure1: Howdoesparametricinsurancework?

Parametric insurance isbasedonan indexorparameter,identifiedinadvance(rainfall,temperature,magnitudeofearthquake),whichiscorrelatedtotheloss(cropdamage,lossofbusiness,large-scaledestructioncausedbyanaturalcalamity).

Thequantumofclaimpayoutsarespecifiedup-frontintheinsurance document, once the contract is triggered (theevent being protected against happens,& it breaches anagreed-uponleveloftheindex.)

Fore.g.,inthecaseofprotectionagainstfloods,(Figure2)thetriggeristhefloodheightinmeters.Oncethisthresholdistriggered,theinsurancemoneybecomespayable,basedontwoparameters:viz.

a) Thefloodheight,&

b) Theproximity(inner&outerradius)

Figure 2: Parametric insurance model – flood protectiontriggered

It is obvious that thedamagewill bemore severe in theinnerradius(closertotheperil),thanitwillbe,intheouterradius.

In this case, the contract excludes all properties & alldamageoccurringoutsidetheoutsideradius.

Ifthefloodheightis40meters&abovetheclaimbecomespayableasfollows:

• 40to70meters

Innerradius,40%ofinsuredamount

Outerradius,20%ofinsuredamount

• 70to100meters



• Over100meters



Thediscerningreaderwillhavenoticedthatnoreferenceismadetotheactuallossincurred.Bravo!Isnotinsuranceacontractofindemnity?4

Traditional insurance reimburses the insured for actualloss(netofdeductibles,co-pay,exclusionsetc.)

Parametricinsuranceusesamodeltocalculatethepayout,irrespectiveofactualloss.

Thatispreciselyhowitfillsinthegaps.Supposeahealthinsurancepolicyhasadeductibleof$1,000&aco-payof$250. Besides, some ailments are excluded & there arereimbursement limits for room charges, physician’s feesetc. Anyone who has ever claimed for health insuranceknowsthattheamountactuallypaidoutbytheinsurancecompanyislessthantheactualexpensesbilled&expended.(Nocheating,justthetermsofthecontract).

Supposetherewasalsoaparametricinsurancepolicywhichgot triggered& paid out say, $2,500 in case of a seriousdiseaseoroperation.Noquestionsasked.

This would be a welcome saving/help at a time of graveneed.

Three StepsAnalysis ofthevulnerability

Cover bespoke(customized)

Payment istriggeredwithindaysoftheinsuredeventofagreeduponmagnitude/intensity

Figure3illustratestheprocess

4Atypicalexample(ofindemnity)isaninsurancecontract,wherebyoneparty (the insurer or the indemnitor) agrees to compensate the other(theinsuredortheindemnitee)foranydamagesorlosses, inreturnforpremiumspaidbytheinsuredtotheinsurer.(https://www.investopedia.com/terms/i/indemnity.asp)


13

Figure3:Parametricinsurance–bespoke&relevant

Thiscustomization,relevance,speed&low-coststructureis ideal for individuals, companies, & countries. Lossadjusters & lengthy procedures are avoided since thepayoutisentirelydeterminedbyanindependentvariable.Claim handling costs are thus extremely low: making itevenmoreaffordable.

Liketraditionalpolicies,parametricinsurancedoeshaveadeductible(pleaserecallthatinthefloodexample,nopayoutwastriggeredifthewaterlevelwasbelow40meters),&alimit5(sumassured)

However, unlike the former, it can be structured as aninsurancepolicy,orasafinancialinstrument.6

Pureparametriccoverwherepayoutistriggeredirrespectiveoftheactuallossislikeaderivativeinstrument.

Hybridparametriccoverwhereproofoflossisalsocalledfor,aftertheclaimistriggeredbasedontheindex,islikeaninsurancecontract.

Figure4showsthepotentialuseofparametricinsurance,basedonweather-sensitivitybyindustry.

5Themaximumpay-outorsumassuredisalsocalledthestop-loss.6Theinterestedreaderisrequestedtoreadaboutanotherindex-triggered,AlternativeRiskTransferInstrument,theCATBond,inanarticlebytheauthor, “CATBonds,When ItRainsCats&Dogs”, PortfolioOrganizer(IUPPublications),October2016.

(Source: Parametric InsuranceOverview andPerspectiveintheGulf;GulfActuarialSociety,November14th,2016,ThameurZghal&ViolaineRaybaud)

Figure4:Weathersensitivitybyindustry

Basis RiskAclear&presentdangerinparametricinsuranceistheriskthattheremaybealoss,butthepayoutisnottriggered.For example, it is entirely possible that an earthquakecausedsubstantialdamage,butsinceitwaslessthanthepre-definedthresholdof“x”magnitude,theinsurancewasnottriggered!

Thereverseisalsopossible,namelythatapayoutismadewhentherewasnoloss.

(Inbothcases,therecouldalsobeadifferencebetweentheactualloss&thepayout)

Basisriskcanbeminimized,nevereliminated.

More Than Just Property Cover“PandemicEmergencyFacility(PEF)7

• FollowingtheEbolacrisisin2014,theG7,WorldBankandWHOcommitted todevelopamore robustglobalpandemicriskmanagementframeworkincluding:

• (a) pre-outbreak preparedness; (b) immediateinvestigation, assessment, and response; (c) earlyresponse;(d)containment;and(e)recovery

• An important element to this framework is a public-private financing mechanism that could cover thecritical response costs, items (C) & (D), beyond thepublicfundsessentialto(A),(C)and(D)

• The World Bank contracted the leading reinsuranceand catastrophe modelling companies to create aninsurance/investmentproduct to address this fundinggapanddeviseasolutionthatenablesthetransferofthisrisktotheprivatemarkets

• Value Proposition• Responsiveness–ThePEFistimedtocomplementthe

WHO’sContingencyFundforEmergencies(CFE)andwillbetriggeredatorneartheonsetofaneventwithpandemicpotential.

• Speed of delivery: The PEF is designed to deliverresourcesquicklyandeffectivelytowheretheyaremostneeded

• EngagementwithPrivateSector-Theprivatesector’sinvolvement will bring the contractual rigor that’sneededtorespondquickly.

• Marketdevelopment–PEFcontributestothelongtermdesignandimprovementofdataaroundpandemics,andcreatesamarkettohelpsovereignsmanagepandemicrisk.

7 This summary of PEF is from an excellent presentation by MiguelNavarro-Martin,HeadofBankingProducts,TheWorldBankTreasury,February2017:“ParametricRiskInsurance-Applicationsinagriculture,climateanddisasterriskandpandemics”


14

Parametric TriggerParametric trigger based on confirmed cases and deathsover a prescribed period of time in at least a specifiednumber of covered countries as reported publicly by theWHO(insomecaseswithgraduatedpayoutfunctions).

Theexactnumberofcasesdiffersbydiseasefamily.

As a purely hypothetical example, 1000 cases in a onemonthperiod(withcasesoccurringinatleastthreecoveredcountries)will trigger foradisease–with250confirmeddeathstriggeringa25%payoutand2000deathstriggeringa100%payout.”

Figure5showsthebondstructureofthePEF,issuedbytheIBRD(WorldBank)

8AlsoquotedbyBenParker,Spiderman’suncle,somecenturieslater!

Figure5:PEFbondstructure

ConclusionParametric Insurance is here to make a difference.With better analytics, greater information sharing &homogeneity of customer baskets, it can certainly makeapositivedifferencenotjustforthosewhohavefacedthewrathofnature,butalsoineasingthepain&distressofpandemics.Beingflexible,itcaninvolveprivateinvestors&spreadtherisk.

It is worth repeating, that parametric insurance is acomplementtotraditionalinsurance,notasubstitute.

The industrymust be ever vigilant however, about basisrisk,qualityofdata,&blindfaithinnumbers.Parametricinsurance has the power to mitigate the cruel, cripplingaftermath of catastrophic perils. All the more reason towritethisinstone:

“With great power comes great responsibility.”8

François-Marie Arouet (known by his nom de plume, Voltaire)

E&OE.Withoutprejudice,withoutrecourse.

(The author expresses his sincere gratitude to Mr. Roshan M. Dansingani, FIII, for his invaluable guidance & keen insight on insurance principles & practice.)


15

Efficiency Norms of 3 PSU Non-Life Insurance Companies & Pros and Cons of Their Merger

CMA (Dr.) Subir Kumar BanerjeeMob.:9820113419•E-mail:[email protected]

Government of India decided to themerger of the threepublicsectorgeneralinsurancecompaniesnamelyOrientalInsurance Company, United Insurance Company andNational Insurance Company. They are all in Non-lifeInsuranceCategory. Thismergerwill come into effect in2020-21FinancialYear.

ThereasonofsuchmergerasperGovernmentamongothersare that their bottom lines are in negative continuouslyand notmaintaining the efficiency norms. They are alsostifledbyruthlesscompetitionfromprivateinsurers.Whilemergedcompanywillbebiggerwiththereductionofextraexistingworkforce and efficiency norms ofmerged entitywillimprove.

Therearefourefficiencyratiosinrespectoftheinsurancecompanieswhicharethebenchmarkstogradethestrength,financial stability and trust worthiness of the insurancecompany.

1. Claim settlement ratio It is the ratio of the number of claims disbursed to thecustomersbytheinsurancecompanyandthetotalclaimsreceivedby the insurer.Hence, the resultant formula fortheClaimSettlementRatiois: Claim Settlement Ratio = Total claims paid off by

the insurer/ Total number of claims received by the insurer*100

ClaimSettlementRatioiscrucialandonemaindeciderinchoosingainsurancecompanybytheinsured.Highertheratio,highertheconfidencebuildingsentimentinthemindsofpolicyholdersabouttheinsurancecompany.Thisratiofixesastowhichinsurancecompanyhasagoodtrackrecordofclaimsettlements.Non-lifeinsurancecompaniesbothinprivateandpublicsectorsareinruthlesscompetitionwithrespecttothesettlementofclaims.Table1-ClaimSettlementRatioofPSUGeneralInsuranceCo.-2018&2019

Posi-tion

NameofInsurers-PublicSectorUndertakings

Claim Settlement

Ratio–on31stMarch,2018

(%)

Claim Settlement

Ratio–on1stMarch,2019

(%)

Number of

Claims

1 NewIndiaAssurance

93.06 92.44 5459068

2 OrientalIndiaInsurance

87.65 90.13 5633511

3 NationalIndiaInsurance

72.57 85.43 2531045

4 UnitedIndiaAssurance

75.69 84.45 6652619

Source – The Insurance Brokers Association of India or IBAI.

2. Persistency ratio - In insurance parameter, policycontinuation without disruption or uninterrupted iscalledas“persistency”.This“persistencyratio”calculatescustomers’ continuity or loyalty with their policies, byobserving at the number of policy continuation withoutlapseovertheyears.

Persistency ratio is arrived at thus: Number of insureddisbursing the premium divided by Net active insured,multipliedby100.

It is crucial for insurancecompanies tokeepapersistentbookofaccountsasitaddstobottomlineandalsodiminishescostsviaeconomiesofscale.

3. Solvency ratio-Asolvencyratiocalculatesthedegreetowhichassetspositivelyoutdoliabilities(forforthcomingsettlementofclaims)ofrisksithascommitedtocomply.Insurance, however, is perilous business and unexpectedincidentmay happen sometimes, whichmay causemoreclaims not thought of previously. For example, floods,earthquake, cyclone, fire, accidentsmay cause amassivefinancial liabilities on the Insurance Company. In suchcases,ifthereisnostrongsolvencyratiooftheinsurer,theCompanymaybecomebankrupt.

AsperIrdaiguidelineallinsurancecompaniesmusthaveat least solvency ratio of 1.50. FromTable 2 below, it isclearthatin2019SolvencyRatiosofNationalInsurance,OrientalInsuranceandUnitedInsurancearerespectively1.04, 1.57 and 1.52. which are around bareminimum of1.50asperIRDAguideline.

Table 2 - Solvency Ratio of PSUGeneral Insurance Co.-2018&2019

Posi- tion

NameofInsurers-

SolvencyRatio2018

Solvency Ratio2019

IRDAMinimumSolvencyRatio

1 NewIndiaIns 2.58 2.13 1.50

2 OrientalIndia 1.66 1.57 1.50

3 NationalIndia 1.55 1.04 1.50

4 UnitedIndia 1.54 1.52 1.50

Source- Complied by Author

4. Incurred Claim Ratio–Incurredclaimratiomeansnetclaimsdisbursedbyinsurerversusnetpremiumreceived.Inotherwords,itisaratioofthetotalamountofclaimpaiddivided by total premium received in the correspondingtime.Thus,IncurredClaimRatio=NetClaimsdisbursed/NetPremiumreceived.


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Table3–IncurredClaimRatioofPSUGeneralInsuranceCo.-2018&2019

Sl. No.

NameofInsuranceCompanies

IncurredClaimRatioYear2018-19

IncurredClaimRatioYear2017-18

1. NationalInsuranceCompany

109.94 114.24

2. OrientalInsuranceCompany

106.10 85.39

3. UnitedIndiaAssurance

109.40 94.38

4. PrivateInsuranceCo.(Average)

72.30 75.46

Source - https://cafemutual.com/news/insurance/18248-govt-insurers-score-better-in-claims-settlement

Pros of Merger –

1. Economies of ScaleThese 3 PSU have already expanded throughout thenookandcornerofthecountry.Withalmost25%marketshare, this will be Largest General Insurance Company.Thismergerwill boost advantages of economies of scale.After IPO, itwill be listed inStockExchange andhencecapitalraisingwillbeeasierwhichwillmakethemmorefinanciallysolid.

2. Enhancing Solvency Ratio MandatorySolvencyRatioofIRDAis1.5.WhileNationalInsurance failed tocomplySolvencyRatiowhichon2019is1.04,OrientalInsuranceandUnitedInsuranceinsameperiod could barely reached 1.57 and 1.52. As decided.infusionofRs.2500croresinthesecompaniesbyFinanceMinistrywillboostSolvencyRatioofmergedcompanyandwillpavewayforaggresivelyundertakingmorebusiness.

3. Cost Cutting Merging the companies will reduce the unnecessary andcommon costs of three individual companies which havecommercialestablishmentseachinthesamelocationwhichwill avoid expenses on rent and other fixed expenses. Inaddition, extra commercial infrastructure left over aftermergerintegrationwillbeclosedandcanbesoldatjuicyprices at commercial market value. These sale proceedswhen received will help partly recapitalization of themergedcompany.Moreover,aftermerger,insteadofthreefragmentedonlineinsuranceproductsaleandmarketing,a single online transaction may be initiated which willnotonlyreducecostbutalsowillboostbrandvalueofthemerged company. In addition, common services may beoptimizedandextraemployeesmaybereducedwhichwillfurthercutincostofthemergedentity.

4. Strike a better IPO priceNow, three companies which will be merged are in stiffcompetitionwitheachother.Whenmergerwillcomeintoeffect,allthreecompanieswillbeoneandhence,therewillno competition. Accordingly, cost of fighting one againstotherwillbeeliminatedandsuchearlierefforts,energiesand skills which were employed earlier can be fruitfullydeployedinonegoalofgrabbingmoremarketshareforthemerged company.Havingalready25%market shareand

beingsinglebiggestentityinNon-lifeinsurancesector,itsvaluationwillbeboostedsubstantially.OnceitgoesforIPOimmediatelyaftermerger,themarketpriceoflistedsharewillbelucrative.

5. Portfolio optimizationEveryinsurancecompanyhasamixedportfolioofcreamyproductandnotsocreamyone.Combinationofsuchjuicyproductsofthreecompanieswillbeaformidableportfolioforthemergedcompany.ItiswellknownthatGovernmentsocialsecurityschemeslikePradhanMantriJeevanJyotiBima Yojana, Pradhan Mantri Suraksha Bima Yojana,PradhanMantriFasalBimaYojna,PradhanMantri JanArogyaYojana,aremostlylossmaking.Withmoremixofcommerciallyviableandprofitableschemesintheportfolioof the three companies, the loss making social securityschemescanbehandledbettersincebettermixofprofitableproductswilloutweighincomparisontolossmakingsocialsecurityproductsofgovernment.

Cons of Merger –

1. Huge underwriting lossThecauseforthepatheticperformanceofthePSUInsurersistheirmassiveunderwritingloss,whichistheextraclaimsoverpremiumreceived.InIndia,mostinsurancecompaniesincur underwriting losses but it gets compensated byinvestmentincome.Sincepremiumisreceivedinadvanceofthecoverageperiod,theyinvestthispre-receiptpremiumimmediately which fetch trading income and interest onsuchinvestment.Suchtradingincomeandinterestdonotalwaysmore thancompensatesuchunderwriting loss. InFY19,thePSUinsurancecompaniesfacedanunderwritinglossofRs18,490crore—whichwasjumpof47%overtheRs.12,507-crorelossinFinancialYear2018.

2. Fall in Growth and Market ShareAll three PSUGeneral Insurance companieswho are onmergerpathhavelostshareofmarketin2018-19against2017-18.In case ofNational Insurance, themarket sharereduced to 7.57% in 2018-19 versus 9.50% in 2017-18.Corresponding market share of United India Insurancedwarfed to 8.98% in 2018-19 from 9.67% in 2017-18.Onthe other hand, Oriental Insurance Company’s marketsharereducedto8.30%in2018-19from8.65%in2017-18.Overall, compared to 2017-18, in 2018-19, total marketshare of these three companies reduced to 24.85% from27.82%.

During last 13 years between 2007 to 2019, in total non-life insurance business, in premium collection, theshareofPSU(includingNewIndiaAssurance)InsuranceCompaniesreducedfrom68percentinFY07to46percentinFY19,againsttheshareoftheprivatesectorInsuranceCompanies went up from 32 % in 2016-17 to 54% in 2018-19.

Hence,ifthismergerhappens,de-growthwillcontinueasseenduringlastdecadeandmergerwillbeunviable.


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3. Social Security Measures being imposedMany insurance policies have been introduced in thelast 6 years to boost social welfare. Some of them arePradhan Mantri Jeevan Jyoti Bima Yojana, PradhanMantri Suraksha Bima Yojana, Pradhan Mantri FasalBima Yojna, Pradhan Mantri Jan Arogya Yojana. TheirpremiumiseitherNIL for thepolicyholdersorhasbeencalculatedlymadebareminimum..Fortheseschemes,itismademandatorytobeexecutedbothbyprivateandpublicsectorinsurancecompanies.Generally,privatecompanieshardly implement such schemes or implement these in “PickandChoose”basiswhicharenotnegativelyaffecttheirbottomline.Hencepublicsectorinsurancecompaniesareto take the brunt of such lossmaking schemesundernooption situation.Moreover, private sector companies payamountofclaimdisproportionatelylowcomparedtopublicsectorinsurancecompanies.Asaresult,lossesrecordedbyPSU companies because of these Government’s schemeswas around rupees Rs.7000 crores between 2016-17 and2018-19.

4. Problem of IntegrationIntegrationofanymergerisvital.Suchintegrationiseasiersaid thandone in this case. Integration of IT systems orshiftingtoatailormadesystemwillbeadisaster.Businessactivities of these companies will come to a halt duringphasesofsuchintegrationbecauseeachofthesecompanieshavevariedculturesandmodeofoperationsandintegrationwillbeverycomplicatedandtimeconsuming.Duringsuchtime,ifatall,integrationmaterializes,thesethreemergedcompanieswillfurtherlosemarketshareandwillmissthecompetitiveedge.Itwillturnintoanirrelevantentity.TheverypurposeofMERGERwillbedefeated.

5. Market is very competitiveTherealityisthatalreadyatleastthirtyprivateplayersareinthefrayinthissector.Thismarketisovercrowdedandruthlesslycompetitive.Itwillnotallowanywhiteelephantlikethismergedcompanytooperateinaviableway.Itislikely to be another AIR INDIAwhichwasmergedwithIndianAirlinesfewdecadesbackwithmuchfanfare.Itis

evidentfromhistoryinIndia,Governmentisincompetentto run any business. Thismerger is going to be anothermoneyloserforgovernment.

ConclusionFromthediscussionsabove,itappearsthatCONSoutweighsthePROS.Apparently,Governmentshouldnotgoforthismerger for the prospective long term disaster unless themerged company ismanaged efficiently .However, sincegovernment is hell bent on the merger, as an abundantprecaution, it should go for perfectly implementation offollowingstrictlymeasuresinmergedcompanyimmediatelyaftermerger.Onlythenrespiteispossiable.

• Portfoliooptimization

• Cateringworldclasscustomerservice

• MaturingInsurTechmarket

• ZerodefectPost[-mergerIntegration

• Boostinginsuranceinnovation

References1. https://www.thehindubusinessline.com/economy/

budget/analysis-insurance-companies-merger-to-bring-operational-efficiency/article22621225.ece

2. https://www.mintpro.in/articles/most-important-insurance-ratios-that-you-must-know-of/

3. https://cafemutual.com/news/insurance/18248-govt-insurers-score-better-in-claims-settlement

4. https://www.policybazaar.com/general-insurance/art ic lese/govt - to -merge-3-general - insurance-companies/

5. https://www.bimabazaar.com/psu-general-insurers-lose-market-share-to-private-insurers

6. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/gx-ma-insurance-outlook-2020.pdf

Table4-


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CMA – Career Insurance SurveyorCMA Koushlya V. Melwani

Mob.:+91-9376161612•E-mail:[email protected]

Surveyorsareprofessionalswhoassessthelossordamageandserveasa linkbetweenthe insurerandthe insured.They usually function only in the non-life business andarehiredbyinsurancecompaniestoassesstheactuallossarisingontheoccurrenceoffortuitouseventssuchasfire,burglary and so on for settlement of claims. Surveyorscouldoperate inmultiple lines ofbusiness, for example -afireinsurancesurveyorcanalsofunctionsimultaneouslyasamarinesurveyor.Keyresponsibilitiesofthesurveyorsincludecarryingoutsurveysforbuildings,machinery,portsandotheritemsthatarecoveredbyinsurancecompanies.On conclusion of their assessment, the surveyors arerequiredtopreparereportsthatdeterminetheactuallosssuffered and also verify the correctness of the amountclaimedbytheinsured.ThereportsinturnbecomeprimaryinformationfortheInsurancecompanies,enablingthemtosettleclaims.

How can a CMA become a General Insurance Surveyor?To be eligible the candidates must possess either of thefollowing:

- At least one year of experience in claims settlementor working for a firm of independent Surveyor&LossAssessors

- Andcleartheexamsconductedeitherbyauthorityofbyaninstitutionauthorizedbyitsbehalf

Aftertheabove,thecandidateisfurtherrequiredtoobtainalicensetoactasSurveyorandLossAssessor.TheIRDAI(Insurance Surveyors and Loss Assessors) Regulations(2015), The Enactment of IRDA Act (1999), authorizeIRDAI to licence eligible persons to act as Surveyor andLoss Assessors (SLA). IRDAI has framed the (InsuranceSurveyors & Loss Assessors) Regulations, 2015 underpowersvestedunderSection42D,42E,64UMand114AoftheInsuranceAct(1938)andsection14and26ofIRDAAct(1999).Thesaidregulationsspecifytheeligibilitycriteria,trainingandexaminationrequirementsforgrantoflicencetoapplicantstoactasSurveyorandLossAssessors.ThesaidregulationsalsospecifytheDutiesandResponsibilities&CodeofConductforsurveyorslicensedbyIRDAI.Licensesare issuedtoboth individualsandfirms/companiestoactas Surveyor and Loss Assessors. There are eight areasinwhich surveyors could be licensed towork, dependingon theirqualifications.These includeFire,Marine cargo,Marine Hull, Engineering, Motor, Loss of Profit, CropInsuranceandMiscellaneous.

Qualification Criteria for Enrolment and Licensing of Surveyors and Loss Assessors as Per IRDAI

(Insurance Surveyors and Loss Assessors) Regulations, 2015 (Regulation 3):

S. No.

Department/ Area

Academic / technical /Profess ional /InsuranceQualifications

1 Fire B.E. / B. Tech. / B.Sc. (Engineering) /A.I.M.I.E.oritsequivalent,C.A./.C.M.A.,A.I.I.I./F.I.I.I./PostGraduateDiplomainInsurancefromIIRM

2 Marine Cargo

B.E. / B. Tech. / B.Sc. (Engineering)/ A.I.M.I.E. or its equivalent thereof(MarineEngineering/NavalArchitecture)/ certificate of competency asMaster ofShip or asFirst ClassMarine Engineerissuedbyarecognizedauthority,Degreeor diploma inNaval Architecture of arecognized University or Institute./A.I.I.I./F.I.I.I./PostGraduateDiplomainInsurancefromIIRM

3 MarineHull B.E. / B. Tech. / B.Sc. (Engineering)/A.I.M.I.E. or its equivalent thereof(MarineEngineering/NavalArchitecture)/ certificate of competency asMaster ofShip or asFirst ClassMarine Engineerissuedbyarecognizedauthority,

4 Engineering B.E./ B. Tech./ B.Sc. (Engineering)/A.I.M.I.E. or its equivalent , Diplomaof 3 yearsduration from a recognisedinstitutionoritsequivalentthereof

5 Motor B.E./ B. Tech./ B.Sc. (Engineering)/A.I.M.I.E. or its equivalent thereof(Mechanical/Automobile); Diploma inMechanical Engineering/ AutomobileEngineering of 3years duration from arecognised institution or its equivalentthereof

6 LossofProfit C.A./C.M.A;A.I.I.I./F.I.I.I

7 CropInsurance

B. Sc. in Agricultural Science from arecognisedUniversity.

8 Miscellaneous B.E./ B. Tech./ B.Sc. (Engineering)/A.I.M.I.E. or its equivalent; Diplomaof 3 years durationfrom a recognisedinstitutionoritsequivalent;C.A./.C.M.A.;A.I.I.I./F.I.I.I./PostGraduateDiplomainInsurancefromIIRM

How to apply to become a Surveyor?IRDAI (Insurance Surveyors and Loss Assessors)regulations2015prescribetheprocedureforobtainingthelicenseofInsuranceSurveyor&LossAssessors.

Anapplicantneeds tosubmithisapplication forgrantofsurveyorlicencethroughanonlineportali.e.www.irdabap.


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org.in(linkavailablefromwww.irda.gov.in)anduploadallrequireddocumentsontheportal.Thesaidportalprovidesanendtoendsolutionandenablestheapplicanttoknowthestatusofapplicationfromsubmissiontillitsapprovalandgrantof licencebyIRDAI.FAQ’s,Demoetc.areprovidedontheportal.ThelistoflicensedandcategorizedsurveyorsandlossassessorsisplacedontheIRDAwebsite(i.e.www.irda.gov.in)fromtimetotimewhichallowsauthenticatingtheeligibilityofSurveyor.Asurveyor&LossAssessorshallassesslossesofonlythosedepartmentswhicharespecifiedin his/her license and can work with any number ofinsurancecompanies.TheIRDAissueslicencesforaperiodof5yearsundervariouscategories(A,BandC)basedonexperienceofthecandidates.

Appointing a Surveyor:It is notmandatory for an insurer to appoint a surveyorfor each and every loss reported by a policy of generalinsurance. Only where the estimated loss exceeds Rs. 50,000/- in case of Motor Insurance and loss exceeds Rs.1,00,000/- in case of other than Motor Insurance business, it is mandated to appoint a licensed surveyor to assess and settle the loss.Further the IRDA (Protection of Policyholders’ Interests)Regulations, 2002 also stipulates the time limit forappointmentofsurveyors,whichis72hoursfromdateofintimation of claim to insurers/ occurrence of the eventresulting in loss or damage and submission of surveyreport by surveyors, which is one month from the dateof appointment by insurer. The said regulation castsresponsibility on the policyholder to co-operate withthe surveyor and provide him with all the information/documentstoenablehimtoassesstheloss.Delay,ifany,inthesubmissionofthereportbythesurveyorshouldbecommunicatedtotheinsurerandinsured.

Steps for conducting the assessment by the Surveyor and Loss Assessor:1) Preliminary Survey Report: After the first visit it is

thedutyofthesurveyortoissueaPreliminarySurveyReport to the insurer giving the details of the losssuffered,whetherthesameiscoveredunderthepolicyandanyviolationinthepolicytermsandconditions.

2) DetailsofSurvey/Verification:

a) GeneralDetails : name of the insured, address oftheinsured,andlocationoflossifnotsameastheregistered address as mentioned in the ProposalForm/Policy.

b) Particularsof loss -dateof lossandoccurrenceoflossasstatedbytheinsured.

c) Details of Insurance - name of the insurer, policynumber,periodcovered,typeofpolicy,suminsured,coverage and special conditions and exclusions, ifany,mentionedinthepolicy.

d) QuantityVerification(notapplicabletoallclaims)-IncaseoflossofstockduetofiretheSurveyormayresort tocarryingoutavolumetricanalysisof the

premises,by taking intoaccount the layoutof thepremises and method of storing the goods at thetime of occurrence of thefire.On thebasis of thequantumof stock and its present price, the valueof loss canbeascertained.Similarly, thesurveyormaycollecttheremainsoftheburntitemstogaugetheamountofstockinthepremisesbeforethefire,and thusdetermine thevalueof the loss incurredby the Insured. The stock present at the time oflosscanalsobecrosscheckedwiththelateststockstatementsubmittedtothebank,GSTreturnsandBalanceSheet.

3) SubsequentToFirstInspection:Subsequentvisitsmaybe required to the insured’s site to prepare inventoryoftheundamagedanddamagedstocks,toquantifythelossortoverifythedocumentsoftheinsured.Incasetheinsuredhasmorethanonepremisewheretheirinterestlies,thesurveyorshouldvisitallthepremiseseveniftheyarenotheldcoveredunderthegivenpolicy.Itisimportanttomaintainregularwrittencorrespondencewith the insured and obtain the documents withsignature. All the information noted at the time ofvisitshouldalsobecountersignedbytheinsured.ItisutmostnecessarytokeepthematterstransparentwiththeInsuredtoavoidbeingmisquotedandtoavoidanycontroversy.

4) AdmissibilityoftheLoss:Itisthedutyofthesurveyortocommentregardingtheadmissibilityoftheloss.Thesurvey report must clearly indicate whether the lossis admissible or not admissible under the policy andprovideadetailedreasonforthesame.Incasethelossispartlyadmissiblethesurveyorshouldclearlyindicatewhichportionoftheclaimoftheinsuredisadmissible.

5) Cause of Loss: The cause of loss should be describedin detail, narrating thewhole incidentwith all facts.Theaboveshouldbecoveredunderthefollowingthreeheads:

a) causeoflossaspertheinsured

b) causeoflossasmaybementionedinanyofthefirereports,policereporti.e.FIR/Panchnamaorthirdpartyevidence.

c) surveyor’s perception regarding the proximatecauseofloss.

6) ClaimofTheInsured:Theclaimoftheinsuredshouldbedescribedandthedetailsonthebasisofwhichtheclaimhasbeenmadeshallalsobeincluded.Thequantityandvalueoftheclaimeditemsshouldbestatedseparately.Thetotalclaimoftheinsuredshouldbefurtherdividedinto the claim for the building, stocks, plant andmachineryoranyotherheadasperthecoverageinthepolicy.

7) Adequacy Of The Sum Insured: It is important towork out the adequacy of the sum insured; the sameshould be done separately for each and every headcovedunder thepolicy.The itemsnot covered shouldalso be specified separately. If there is a partial lossthesurveyorisrequiredtoconsidertheimplicationof


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theaverageclauseandunderinsurancefactori.e.suminsured/totalvalueofloss.Incaseoftotallossifthereisunderinsurancethentheamountoflossisrestrictedtothesuminsured.

8) Salvage:Thenatureandquantityofsalvageshouldbediscussed and value of the salvage should be arrivedat logically either supported by the quotations or byprovidingthequantityofthescrapandgivingtheperkg scrap rate. It is always advisable to discuss thesalvage aspect with the insured and the insurer andobtainapprovalbeforeadjustingthesameinthereportalongquantificationofsalvageandhowthesamewasarrivedat.

9) LossAssessment:Theactualassessmentoflossstartsonlyafteralltherequireddocumentsarereceivedfromthe insured.Thedetailsofassessmentalongwiththebasis and its working should be stated in the reportclearly.Whenmakingtheassessmentthegeneraltermsand conditions, exclusions and additional clauses (forexample,earthquake,escalation,flood,reinstatement,terrorism etc.) and other add on cover of the policyshould be closely observed. Thus theAssessed loss isdeterminedinthefollowingmanner:

Sr. No. Particulars Amount

(Rs.)1 TotalLoss

Less:DepreciationifanyLess:ExcessifanyNetAssessedLossLess:UnderinsuranceifanyLess:Salvage(AsagreedbytheInsured)NetPayableLoss

As per the IRDAIRules, CMAs are generally issued theInsurance Surveyor’s Licence for Fire, Loss of Profit &MiscellaneousDepartments.TheMiscellaneous losses forwhichCMA’sareappointedareTheftofJewellery,Baggage,LossofCash&TravellersChequesetc.,GlassInsurance,HomeLoanPolicy,Banker’sIndemnityInsurance,FidelityGuarantee, Burglary Insurance (Business Premises).BesidesthesetypesoflossesCMA’sarealsoallottedclaimsforLossofProfit.Theneedfortheengagementofasurveyorarisesastheloss/damagesufferedisrequiredtobeassessedwithoutanybiasorprejudiceandwithcompleteexpertiseinthefield.CMAsarewellqualifiedtoassesslossesinvariedcircumstancesafterdetailedanalysisandverificationandhencearewellsuitedfortheInsuranceSurveyorProfession.

Theme for Coming Months

Month ThemeJuly GSTAugust ERP/SAP

Theme of July 2020 is GST. Editorial board invitees’ articles / papers on GST for the WIRC Bulletin for the month of July 2020.

Regular articles/papers on other professional matter are also going to be published in WIRC Bulletin apart from articles/papers on respective theme. Editorial board also invitees’ articles / papers on other professional matters.

Kindlysendyourarticlesonorbefore5thJuly2020byemailtoWIRC:wirc.admin@icmai.in.EditorialboardhadalsoformedminimumcriteriaforselectionofArticle/PaperforWIRCBulletininEditorialBoardmeetingheldon14thFebruary,2020.FollowingistheminimumcriteriaforselectionofArticle/PaperforWIRCBulletin.

1. TypeofArticle:Relatedtothemeofthemonthoranyotherprofessionalmatter.

2. Font:Arial/TimeNewRoman/Calibri

3. FontSize:11

4. MinimumlengthoftheArticle:1000Words(Otherthangraphs/tables/figure/pictures)

KindlysendyourArticle/paperaccordingly.

Pls. Note the final decision to consider Article/Paper is left with Chairman – Editorial Board.


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DWARF TO ‘CHAMPIONS’ A BOOSTER DOSECMA Pradnya Chandorkar

Mob.:99228 67455•E-mail:[email protected] Review of Investment and Turnover criteria for MSME

ThefinanceministerMs.NirmalaSitaramanhasannouncedthereliefpackagefortheMSMEson13May2020totideoverthe Covid-19 lockdown-induced crisis. The announcementsalsoincludedachangeinthedefiningcriterionforMSMEs.

MSMEsplaysasignificantroleintheIndianeconomywhichcontributestowards29percentofthegrossdomesticproduct(GDP)and48percent toIndia’soverallexports.Themicro,small and medium enterprises (MSMEs) are of immenseimportance to the Indian economy, in terms of generatingemploymentTherewereabout6.34croreMSMEsinIndia,ofwhich6.3 crorearemicrounits,while3.31 lakhwere smallbusinesses and 5,000 medium enterprises. MSMEs in thecountrywhichprovidejobstoover11crorepeople.

It is a sector that is vulnerable, and can quickly becomeunstableandunviable,particularlyinthepresenceofexternalshocks.

AttheheartofthisproblemisthedefinitionofMSMEplaysacrucialrole.Ifthethresholdorthecriteriatoqualifyissettoolowinthedefinition,Indiarunstheriskoffirmsstayingsmallandnotgrowing.ElevatedinvestmentlimitswillenabletheMSMEs to scale upwithout bothering about the loss ofassortedgovernmentbenefitsiftheygrewinsize,insyncwiththe ideamooted in theEconomicSurvey forFY19 that hadarguedagainst incentivising “dwarfs”.Aseconomiesof scalestemprimarilyfromfirmsize,thesefirmsareunabletoenjoysuch benefits and therefore remain unproductive, in India,suffersfrompoliciesthatfosterdwarfs.

Present CriteriaInIndia,MSMEsweredefinedbytheMSMEDevelopmentActof2006forthefirsttime.TheActusedinvestmentinplantandequipment formanufacturing and in equipment for services(excludinginvestmentsinlandandbuilding,costsofresearchand development and pollution control devices, etc) as thedefiningcriteria.TheexistingcriterionofdefinitionofMSMEsisdifferentformanufacturingandservicesunits.Itwasalsoverylowintermsoffinanciallimits.

As per Amendment BillMSMEDevelopment(Amendment)Bill2018introducedintheLokSabha to defineMSMEsby the turnover criteria alone.WiththeGoodsandServicesTax(GST)Actinplace,ameasureofturnoverwasseenasaneasierandamoretransparentwaytodefineMSMEs.Thiswas,however,metwithstiffresistanceon the grounds that the turnover thresholdswere too high,anddefiningtheMSMEsbyturnoveralonewouldexpandthegrouptoincludemuchlargerunits

Evenafterthepackageannouncedon13May,2020,therewereseveralrepresentationssayingthattheannouncedrevisionisstillnotinlinewithmarketandpriceconditionsandhenceitshouldbe furtherrevisedupwardly. “Keeping inmind these

representations, PrimeMinister decided to further increasethe limit formediumUnits.This has beendone in order toberealisticwithtimeandtoestablishanobjectivesystemofclassificationandtoprovideeaseofdoingbusiness

Notification dt. 01st June 2020UnionMinistryofMicro,SmallandMediumEnterpriseshasissuedGazettenotificationon1stJune2020forimplementationoftheupwardrevisioninthedefinitionandcriteriaofMSMEsinthecountry

Aspertherevisedcriteria,amanufacturingandservicesunitwithRs.1croreofinvestmentandRs5croreofturnoverwillbeclassifiedas ‘Micro’whereasaunitinvolvingRs.10croreofinvestmentandRs.50croreofturnoverwillbecategorisedasa‘Small’enterprise.AunitwithRs50croreofinvestmentand Rs 250 crore of turnover will fall under the ‘Medium’enterprisecategory.

Key Points of new criteria• There will be no difference between the manufacturing

andservicesectors.

• As part of new definition, exports will not be countedin turnover for any enterpriseswhethermicro, small ormedium.

• The new definition and criterion of Micro Small andMediumEnterprises (MSMEs)willcomeintoeffect fromJuly1st,2020

• The move is aimed at giving benefits to many suchbusinesses.It isgoingtotransformtheMSMEsector.Itwillalsoenablethemtomakemoreinvestments

• Objective system of classification and to provide ease ofdoing business Increase in investment limits will bringmanynewunitswithintherealmoftheMSMEsector,andthiswillleadtomoreinclusivegrowththatisrelevanttothepresentsituation.


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Investment size and turnover criterion: Defining MSMEs by the investment criteria has onemajor weakness; the “original” investment in plant andmachinery or equipment criteria does not offer a levelplaying field to newer entrants in the market. An olderplant would show substantially depreciated investmentsinitsbookofaccounts.Thisunitwouldqualifyasamuchsmaller unit, while any new entrant that needs similarmachineswouldhave tomakemuchhigher investments.Thus, what would be a micro unit because of historicalbookvalueof investments,wouldbeclassifiedasamuchlargerunit if setupmanyyears later. In this sense, theannualturnover-basedcriteriatodefinethesectormightbemuchmoremeaningful.Also,calculatingreinstatedcostsofmachineryisacumbersomeandcostlyprocess,andentailsphysical verification, often requiring the assistance of aprofessionalaccountant,andhence,additionaltransactioncosts.Turnovercanbe farmoretransparent,particularlynowthatalargenumberofMSMEsareundertheambitoftheGST.

Theturnovercriterionwascriticisedasitmightprovideanincentivetounder-reportandqualifyasanMSME.Though,under-reporting investment size is also a possible routeforaunittoremainclassifiedasanMSME.So,asolutionto under-reporting per se cannot be addressed throughchanges in the criteria for defining theMSMEs. Instead,thatwouldrequiremonitoringandinspection.

The new composite criterion has come in with lowerturnover thresholds thanwhat the 2018 amendment billhadproposed.However,itdoesnotundotheproblemsthatstemoutofusingtheoriginalsizeof investment inplantandmachineryasacriterion.

Importantly, the composite definition has assumed aturnoveroffivetimestheinvestmentforthethreecategoriesofenterprises.Suchanassumptiondoesnotconsider thevaried nature of the MSMEs. For certain sectors, hugeturnover is achieved due to the very nature of the finalproduct, even with a much smaller investment in plantandmachinery.Similarly,aunitwhichisahighlylabour-intensivesector,canachieveamuchhigherturnoverwithlow capital investments. On the other hand, there aresectors that have higher capital investments but lowerturnovers.Theseaspectswouldbeofimportancetocertainindustrialsectorsandwouldrequireattentionsothatthesectors that are particularly important to employmentgenerationdonotfalloutoftheMSMEambit.

The decision to revise the definition of micro, small andmediumenterprises(MSMEs)andsethigherturnoverlimitforgroupingthemintheMSMEcategorycouldcrowdouttherealsmall-scalemanufacturersanddimtheirchancesof availing concessional loansandbenefitsunder variousgovernmentschemes.

New definitions set forth are definitely confusing, a lotof companies will now have to start re-evaluating theirnumbers,ProfitandLoss(P&L)statementetc.totryandfitinthesenewregulations.

Thebankswouldalwaysprefertogiveloanstoafirm.Banks

wouldalwayslendtoacompanywhichhaslargecashflow.So,ifmorecompanieswithhighturnovergetMSMEstatusaspernewdefinition,thetrueMSMEsmayloseout,

Since details of investments and turnover are easilyavailable in books of accounts that are required to bestatutorilymaintained,complianceshouldnotbeanissue.Underthenewtaxregime,turnoverdetailsofenterprisesare being captured by Goods and Services Tax Network(GSTN)and turnoverdeclaredbyGST registeredMSMEunits can be easily verified through GSTN. Hence, theturnoverbaseddefinitionwouldbetransparent,progressiveandeasiertoimplement.

Exclusion of ExportThe provision of excluding the exports from counting ofturnover will encourage theMSMEs to exportmore andmorewithoutfearingtolosethebenefitsofaMSMEunit.This isexpectedtoexponentiallyaddtoexports fromthecountryleadingtomoregrowthandeconomicactivityandcreationofjobs.

Dilution of Micro Thenewcompositecriterionexpandsthemicrocategorytoaninvestmentsizeof‘1crore(fromtheerstwhile‘25lakh)anda turnover of ‘5 crore.This essentiallymeans thatanumberofunits,whicharemuchlargerwillnowbeclubbedtogetherunderthemicrocategoryitself.Thepossibilityofa focused attention to this sectorwill be further diluted,bothintermsofunderstandingthesector’srequirements,aswellasthedatacollected.

Anyprioritysectorschemethatseekstotargetbeneficiaries,includes certain entities and excludes others. Thus,definingtheseentitiesbecomesimportant.BeingclassifiedasMSMEsprovidesenterprisessomehandholdingbythestate, making them eligible for certain benefits. Theseincludepriority lending frombanks, collateral free loans,mandatorysourcingof25%ofprocurementsbythecentralgovernmentfrommicroandsmallenterprises(MSEs),andaslewofothertargetedbenefits.

The enlargement of the definition of MSMEs furthermarginalises the smaller enterprises and allows largerfirmstocomeintotheambitofmediumenterprises.Perhapsitwillonlybeofrealbenefittothemediumscalecompaniessincethesecouldhavegoneoutoftheslabpreviouslyandmissed out on the benefits. Itwill not really lead to anymaterialbenefitformicroandsmallunits.

MSMEsarequiteagile,flexibleandwitha little supportfromtheGovernmentandtheyareboundtobouncebackwithmorepower&strength.OnthisbackgroundHon’blePMLaunchesCHAMPIONSPortalforMSMEsonJune012020.

CHAMPIONS - Creation and Harmonious Applicationof Modern Processes for Increasing the OutputandNationalStrength.Itisatechnologydrivenplatformfor promoting theMicro, Small andMediumEnterprises(MSMEs)


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Key Performance Indicators (KPI) for MSMECA A. Hariharan

E-mail:[email protected]

SummaryIn the context of a stuttering economy shocked by theCovid 19 pandemic, many MSME are facing financialdistress,especiallyontheworkingcapitalfront.Whilethisis a time for fire- fighting and crisis management, goodworkingcapitalmanagementisveryessentialforsustainedbusiness survival and success. Just as you cannot drivea carwithout a dashboard and rear-viewmirrors, use ofkey performance indicators (KPIs) tomonitor, track andimproveperformanceisveryimportant.

BackgroundApopularsayinginbusinessis“whatgetsmeasuredgetsdone”. Performance measurement system is essential toenable enterprises take performance- based decisions inorder to meet business objectives and achieve financialsuccess.

AnynumberofKPIspanningprocess,operations,quality,financial,compliance,customers,stakeholdersareavailable;however, forMSME, it is critical to limit them to thosefactors that are essential to the SME reaching its goals.Working capital, profitability and cash flow remain thepressurepointsforMSMEoperationsandtheKPIshoulddwell on these. SinceMSME tend to have basic systemsandsimplerorganizationwithlessresources,measurementand calculationofKPI shouldnotbecomea complexand

self-defeatingexercisewhichnooneunderstandsoruses.

SharingofKPIwithenterpriseemployeesonregularbasis,perhapsingraphicalform,canbeapowerfulwaytoalign,inform and engage them with business objectives, andunderpintheircontributiontocontinuousimprovement.

Working Capital KPIThe twomost important KPI forMSME are Days SalesOutstanding (DSO) and Inventory Cover or InventoryTurnover(ITO).DSOmeasuresthenumberofdaysittakestocollectAccountsReceivables(A/R)andITOmeasuresthenumberofdaysof inventoryheldrelativetoconsumptionorsale.

AlongsidetheseKPI,itisalsousefultoevaluatetheageingprofile of Accounts Receivables and Inventory, which isquiteoftenmissedouttobereviewedregularly,i.eatleastquarterly,inmanyenterprises.

DSOTherearetwocalculationmethods,onebeingtheaveragemethodorBalanceSheetmethodandtheotherbeingtheRollbackmethod.Latterispreferableasitislessvolatilefrom onemonth to the next and is less impacted by thevariationsofturnover,thoughformeriseasiertocompute.Bothmethods can be refined to assessDSOby customergroup,geography(export/domestic)etc.

Balance Sheet method DSO = AverageA/Roflast12months/(AnnualSales/365)

Rollback method DSO = A/RatendofamonthdepletedbysalesofthatmonthandprecedingmonthstilltheA/Rbalanceisfullydepleted.


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Such DSO analysis can be a real eye-opener. OneMSME operated 60 days credit terms to customers, andbelievedaverage collectionperiodwasabout90days……managementwasastoundedtheDSOcalculation(Rollbackmethod)oversustainedperiodoflast2yearswasinexcessof130days.Customerageingstatementsshowedthatonaverage50%ofthecustomershadA/Rinexcessof180days,increasingtheriskofbadanddoubtfuldebts,apart fromstrainingtheworkingcapitalposition.Bytighteninguponthesefrontsafterperformingtheanalysis,DSOhasstartedtoshowreductionoverthelastfewmonths.TheenterprisecouldalsomakeconsciousdecisionstoreorientsaleseffortstowardscustomersandregionshavingbetterA/Rposition,i.eDSOclosertoexpectedcollectionperiodof90days,whileinitiatingregularfollow-upwiththedelinquentones.

Inanothercase,thoughtheperformanceguaranteeperiodhad ended, customers were holding guarantee retentionamountswhichwerenotfollowedup,sinceageinganalysiswas not regularly reviewed. A sizeable amount could bereleasedfromtheseretentionamounts.

Further analysis of DSO can be conducted for deeperunderstanding, which may reveal other improvementopportunities,apartfromtradetermsenforcement.CausesapartfromtradereasonsforhigherDSOcouldbe-delayin sending invoices to customers*, invoicing errors*,unaccountedcollectionssittinginthebankstatement,lackoffollow-upetc.

* These are examples of lead indicators in the sense that 100% accuracy or timeliness leads to improvement in DSO which is a lag indicator.

Government has reported that a number ofMSMEhavesizable payments overdue to them, from both PSU andprivate sector enterprises. Regular DSO analysis wouldhelpMSMEtoprioritizeandfocuscollectionefforts.

ExtractionofsalesandcustomerA/RdatafromERPlikeTally,QuickBooksisquiteeasy,followedbyusingEXCELtoperformaboveDSOcalculation.

ITO ITO=Averageinventoryoflast12months/(AnnualCostofGoodsSoldorCOGS/365).

Calculation is similar to that of DSO using the BalanceSheetmethod. ITO can be calculated separately for rawmaterials,packingmaterials,finishedgoods,oranyotherinventory group, to evaluate whether excess inventoryisbeingheldatanyoftheselevels.Ifthebusinessoftheenterprise requires a certain level of inventory holding,ITO calculation can reveal any excess inventory whichpotentially may remain unsold or deteriorate in qualityimpactingthefinancialposition.

Another calculation that is useful is inventory forwardcover. It is calculated similar to ITO except it usesProjected COGS for next 12 months to determine howmuchforwardinventorycoverisavailableasproportionoffuturebusiness.SensitivityanalysisoftheprojectedCOGS(orsales)alsohelpstoenvisagesituationswhereinventorymay be far in excess of requirement and take corrective

actions(liquidationorprocurementcutback)timely.

Inoneinstance,furtheranalysisofITOdaysrevealedthatan exporting enterprise was holding inventory for about15 additional days as external agency certificate had tobeobtainedpriortoexport.Byinitiatingthiscertificationin parallel to the final packing steps of the product, thisadditional inventory holding period was reduced by 7-8days.

Since inventory tends to consume a substantial amountof theworking capital and also occupywarehouse space,quarterlycalculationandreviewof ITOand itsageing isessential.IfCOGSdataisnoteasilyavailableonmonthly/quarterlybasis, ITO canbe calculatedusing sales in thedenominator.

Other Current AssetsAsemi-annualreviewofitemsclassifiedasOtherCurrentAssetscanreleasehiddencashflow,asquiteoftentender,rental and other deposits sit here for months and yearswithoutbeingrecovered.Inoneinstance,reviewofOtherDeposits account revealed sizeable amounts placed astender deposits which had not been followed up andrecovered,thoughtenderprocesshadbeenconcludedlongago.

In ConclusionContributionofMSMEinplayingtheirdueroleinIndianeconomydependson theirfinancialviabilityandsuccess.Efficient working capital management is vital toMSMEperformance,simpleandfocusedKPIwillhelptosteertheenterprise’ssustainabledevelopmentandgrowth.

CMA (Dr.) Ashish Thatte, Central CouncilMember, is Appointed to Member DevelopmentCommittee(MDC)ofConfederationofAsiaPasificAccountants (CAPA) for the term 2020-23. Outof the high number of Nominations received,significanteffortswereappliedwithcarefulreviewof all CVs on the application of various criteriaandhisnominationwasfinalized.WecongratulateCMA (Dr.) Ashish Thatte for being appointed toPrestigious International Accounting Body andwishhimsuccessforhistenure.

Congratulations


25

CFO SpeaksCMA G. Srinivasan

Director, National Insurance Academy, Pune

• What do you feel about your role as a Director of NIA?

National insurance Academy is an institution ofgreat eminence in the field of insurance education,training,researchandconsultancy.TheparticipantsinvariousprogrammescomenotonlyfromIndiabutfromvariouspartsoftheworld.TheinsuranceindustryisonahighgrowthpathandtheAcademyhasbeenensuringthatinsuranceemployeesareadequatelyskilledtotakecareofthegrowth.TheAcademyisalsohavingatwoyear PGDM inManagement with focus on insuranceforyoungsterswhoserveasthetalentpipelinefortheindustry.Theseyoungstersareoccupyingkeypositionsin insurance, technology industry all over the world.TheAcademy is also engaged in research onmattersrelating to insurance industry and these reports areveryusefultothem.AsadirectoritismyaspirationtotakeNIAtogreatereminence.

CMAG.Srinivasan,DirectorjoinedtheNationalInsuranceAcademy,Punewitheffectfrom11thDecember2018.

CMAG.Srinivasanhasmorethan38yearsofexperienceinGeneralInsuranceIndustrybothinIndiaandabroad.Awell-known name in the Indian financial sector, he is the longest servingCMD of Public Sector InsuranceCompanies.His lastappointmentwasthatofChairman-cum-ManagingDirectorof the largestIndianInsurer,TheNewIndiaAssuranceCo.Ltd.PriortojoiningTheNewIndiaAssuranceCompanyLtd.in2012,hewastheChairman-Cum-ManagingDirectorofTheUnitedIndiaInsuranceCompanyLimited.EarlierhehadservedasMDofTheNewIndiaAssuranceCo.(Trinidad&Tobago)Ltd.,PortofSpain.

Ineachofhisassignmentshehastakentheseorganisationstonewheights.Hehasbeenconferredwithnumberofnationalandinternationalawardsforhisextraordinaryachievements.

HehasheldChairmanshipof:GeneralInsuranceCouncilGeneralInsurancePublicSectorAssociation(GIPSA)GoverningBodyofInsuranceCouncilGoverningBoardofNationalInsuranceAcademyIndiaInternationalPte.Ltd.,SingaporeNewIndiaAssuranceCo.(T&T)Ltd.,Trinidad&Tobago

HehasbeenontheBoardofseveralcompanies,tonameafew:GICRe,MumbaiGICHousingFinanceLimited,MumbaiPrestigeAssurancePlc.Lagos,NigeriaAgricultureInsuranceCo.ofIndiaLtd.,NewDelhi

HewasalsothePresidentofInsuranceInstituteofIndia,Mumbai.

HeisaCommerceGraduatefromMadrasUniversity,andanAssociateofInstituteofCostAccountantsofIndia,andaFellowofInsuranceInstituteofIndia.

• What are your main constraints/ challenges you face as NIA Director?

The challenge is to adequately prepare youngstersand other insurance professionals for the growinginsurance industry. The market is changing, risksare increasing,customer aspirations are growing. Weneedtoensurethatourprogrammesprovideexpertiseto people take on these challenges andwork towardsmakingIndiaafullyinsuredsociety.

• How the CMA qualification helps you in your career?

TheCMAprogrammegivesanalyticalandmanagerialskillsessentialforleadership.Abilitytosolveproblems,thinking differently, innovative spirit, focus onefficiencyandeffectivenessaresomeofthetoolsCMAqualificationhasgivenmeinbeingasuccessfulpersoninmyprofession.


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• What is the scope of CMAs in Insurance Sector? As Cost and Management Accountants CMA

professionals have a large scope in insurance sector.CMAs can contribute towards pricing of products,improvingprocessesforefficiency,costoptimisationandincreasedcustomerservice.CMAscanbeveryeffectiveinternalauditors.AsamanagementaccountantCMAcan assist the top management in strategic thinkingandstrategicleadership.

• What are the challenges for Insurance Sector in current COVID Situation and How Insurance Sector works post COVID?

Insurance sector is affected as other segments ofeconomy due to Covid-19 situation. There is drop inbusiness,reductionininvestmentincomeandpossiblenegativeimpactonprofitability.ThetreatmentcostofCovid-19ishighandhealthclaimsareincreasing.Thepersonalisedserviceinsurersnormallygivehasbecomeverydifficultduetosocialdistancingnormsandlackofmobility.Theviruswillbewithus forsometimeandinsurance industry is learning to livewith it.Digitalis used extensively for customer connect, service andoperations. The industry will bounce back once theeconomyisfullyoperational.

• What will be a role of CMA in this Pandemic in Insurance sector in the year 2020?

CMAswillhavetohelptheindustrytounderstandissuesand come out with solutions which will mitigate thehardshipsofcompaniesandalsocustomers.Improvingefficiency,expensecontrol,goodunderwriting,claimsmanagement, adequate reinsurance are some of theareasCMAscancontributetoovercomethechallengesposedbythepandemic.

• In line with the consolidation of the Banks, do you feel that consolidation of Insurance Companies will help in reducing the overheads & better service to Customers?

Indiahasahugepotentialforinsurancetobetapped.There is space formore companies. It is also good tohave big companies of global sizewith large capacitytoinsure.Consolidationshouldhaveclearpurposeandshouldbeproperlyexecutedandcanhelpinbringingineconomiesofscaletothecustomers.

• To what extent things like Artificial Intelligence are being used in Insurance sector & how it is going to change the future of Insurance Industry?

Insurancesectorisfastabsorbinglatesttechnologyforbetter underwriting, faster claims settlement, fraudmitigation, great customer service and efficiency ofoperations. Artificial intelligence is extensively usedin risk acceptance, claims assessment and customerconnect. Block chains are also being explored ininsurance sector for full information about customersfor good underwriting and proper claims settlement.Machine learning, IOT, chat bots are all now usedroutinelybyinsurancesector.

• What do feel will be the impact of 100% FDI for Insurance Subsidiaries?

FDIininsurancecompaniesis49%.Ithasbeenincreasedto 100% in Insurance intermediaries. India has hugeuntapped Insurance potential. Insurance is also acapitalintensiveindustry.Hencepermitting100%FDIwill contribute to better insurance penetration. ThiswillalsobringincapitaltoIndiaapartfromglobalbestpracticesandnewproducts.

• What is your opinion about Insurance portability? Non life insurancepoliciesaremostlyannualpolicies

andarefreelyportableatthetimeofrenewal.Incaseof health insurance due to the issue of pre existingdiseases exclusion portability was difficult. Theregulator has therefore permitted free portability ofhealth insurance policieswithout loss of any benefitstocustomers.Howeverinpracticecustomersprefertocontinuewith their insurersandrenewal retention isveryhighinhealthinsurance.

• What are your views on Crop Insurance. What is your opinion about claim settlement of Crop insurance. How Insurance companies will be helpful to farmers in difficult times?

Crop insurance isavery important insuranceschemefor the benefit of farmers.The schemehas been verywell structured and the Government is subsidisingmajorpartofthepremium.Therearedelaysinclaimssettlementforvariousreasonsmostofwhicharebeyondcontrolofinsurers.TheCentralandStateGovernmentstogether with insurers should sort out these issues.Use of technology can remove subjectivity in lossassessments,reducedelaysandwouldremovedisputesinclaim.

Interview by CMA Chaitanya Mohrir (Member Editorial Board)

“The real difficulty is that people have no idea of what education truly is. We assess the value of education in the same manner as we assess the value of land or of shares in the stock-exchange market. We want to provide only such education as would enable the student to earn more. We hardly give any thought to the improvement of the character of the educated. The girls, we say, do not have to earn; so why should they be educated? As long as such ideas persist there is no hope of our ever knowing the true value of education.”

– Mahatma Gandhi


27

COMBAT COVID -19 : GST COMPLIANC REFLIEF MEASURES

CMA Vinod Shete


AlignedtomeasurestakenbycountriesaroundtheglobeforcounteringtheCOVID-19economicimpact,GovernmentofIndia,hadannouncedvariousmeasures,includingsomerelieffromaGSTperspectiveaswell.GovernmentofIndiahadinsertedsection168AbyTaxationOrdinance2020dated31stMarch2020.Notwithstandinganything contained in thisAct, theGovernmentmay, ontherecommendationsoftheCouncil,bynotification,extendthetimelimitspecifiedin,orprescribedornotifiedunder,thisAct in respect of actionswhich cannot be completedorcompliedwithduetoforcemajeure.Thepowertoissuenotificationundersub-section(1)shallincludethepowertogiveretrospectiveeffecttosuchnotificationfromadatenotearlierthanthedateofcommencementofthisAct.AccordingtoCGSTNotificationNo.30/2020dated3.4.2020,ReliefunderRule36(4);Current Rule : Input tax credit claim in respect of theInvoicesordebitnotesnotappearinginGSTR-2Aclaimedevery month in GSTR-3B cannot exceed 10% of eligiblecreditappearinginGSTR-2AatthetimeoffilingGSTR-3B.Relief :TheconditionsofavailmentofITCinGSTR-3BasperaboveRulefortheperiodFebruarytoAugust2020shallbe fulfilledona cumulativebasis.Accordingly, taxpayersneed to do final adjustments in ITC availed while filingGSTR-3B for the month of September 2020, i.e. in caseexcess ITC is availed by the taxpayers then such excessITCshallbeadjustedwhilefilingGSTR-3BforthemonthofSeptember2020.ThemajorreliefunderRule36(4),Taxpayercantakefullcredit of Input Tax Credit without any deduction underRule36(4)whilepayingoffaGSTliabilitytillthemonthofAugust2020.NotonlyitwillpositivelyimpactonWorkingCapital Management and Cash flows of Taxpayer, but also will reduce the burden of finance costs. Ultimately,it will have a positive impact on the bottom line of theCompany.

Following example shows the working of Relief under Rule 36(4)

Month ITC as per Books (Rs.)

ITC as per 2A (Rs.)

ITC in 3B (Rs.)

Apply10%ruletillJanuary2020Feb-20 100 Cumulative

Total600in2A100

Mar-20 100 100Apr-20 100 100May-20 100 100Jun-20 100 100July-20 100 100Aug-20 100 100

Calculation on cumulative basis as per Relief TotalITCasperbooks- : 700ITCasperGSTR-2A : 600ITCnotappearingin2A : 00MaximumITC : 660(600+60)ITCalreadyclaimed : 700AdjustmentinSep2020 : (40)

According toCGSTnotifications31, 32and33dated3rdApril 2020, Major Relief are given by extending GSTReturnsfilingdate,waivinglatefeesandPenalties.

Thereliefhasbeenprovidedinfollowingmanner:

• WaivingthelatefeeiftheGSTR-1or3Bforamonthorquarterisfiledtillcertaindates

• WaivinginterestifGSTR-3Bisfiledtillacertaindate

• Reducedrateof Interest@9%p.a.asagainstexistingInterestrateof18%p.a.ifGSTR-3Bisfiledtillacertaindate

BelowTableShowsRevisedDueDatesforGSTR-3BandGSTR-1

GSTR – 3B Turnover Above Rs.5 Crs.

Interest Late fee

Month Due dates

Niliffiled(within15daysfromduedate)

@9%p.a.iffiledbetween

@18%p.a.iffiledon orafter

Waivediffiledonorbefore

Feb-20 20.03.2020 04.04.2020 5thAprilto24thJune2020

25.06.2020 24.06.2020

Mar-20 20.04.2020 05.05.2020 6thMayto24thJune2020

25.06.2020 24.06.2020

April- 20

20.05.2020 04.06.2020 5thJuneto24thJune2020

25.06.2020 24.06.2020

May-20 20.06.2020 NA NA 28.06.2020 NA

GSTR – 1 Turnover Above Rs. 5 Crs.

Month Due dates Late fees waived if filed on or before

Feb-20 11.03.2020 NA

Mar-20 11.04.2020 30.06.2020

Apr-20 11.05.2020 30.06.2020

May-20 11.06.2020 30.06.2020

GSTR – 3B Turnover Above Rs.1.5 Crs But less than Rs. 5 Crs.


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Month Due dates Nil Interest if filed till

Late fee Waived if till

Feb-20 22.03.2020*/ 24.03.2020**

29.06.2020 29.06.2020

Mar-20 22.04.2020*/ 24.04.2020**

29.06.2020 29.06.2020

Apr-20 22.05.2020*/ 24.05.2020**

30.06.2020 30.06.2020

May-20 12.07.2020*/ 14.07.2020**

NA NA

GSTR – 1 Turnover Above Rs.1.5 Crs But less than Rs.5 Crs.


Feb-20 11.03.2020 NAMar-20 11.04.2020 30.06.2020Apr-20 11.05.2020 30.06.2020May-20 11.06.2020 30.06.2020

GSTR – 3B Turnover less than Rs.1.5 Crs

Month Due dates Nil Interest if filed till

Late fee Waived if till

Feb-20 22.03.2020*/ 24.03.2020**

30.06.2020 30.06.2020

Mar-20 22.04.2020*/ 24.04.2020**

03.07.2020 03.07.2020

Apr-20 22.05.2020*/ 24.05.2020**

06.07.2020 06.07.2020

May-20 12.07.2020*/

14.07.2020**

NA NA

*TaxpayerswithprincipalplaceofbusinessintheStatesofChhattisgarh,MadhyaPradesh,Gujarat,Maharashtra,Karnataka,Goa,Kerala,TamilNadu,Telangana,AndhraPradesh,theUnionterritoriesofDamanandDiuandDadraand Nagar Haveli, Puducherry, Andaman and NicobarIslandsorLakshadweep.

**TaxpayerwithprincipalplaceofbusinessintheStatesof Himachal Pradesh, Punjab, Uttarakhand, Haryana,Rajasthan, Uttar Pradesh, Bihar, Sikkim, ArunachalPradesh, Nagaland, Manipur, Mizoram, Tripura,Meghalaya, Assam, West Bengal, Jharkhand or Odisha,the Union territories of Jammu and Kashmir, Ladakh,ChandigarhorDelhi.

GSTR – 1 Turnover less than Rs.1.5 Crs


Jan.2020toMarch2020 30.04.2020 30.06.2020April2020toJune2020 31.07.2020 NA

The Table below Shows Relaxations to Composition Tax Payer according to CGST notifications 30 and 34 dated 3rd April 2020 :

Particulars Existing Due date

Revised Due date

IntimationinCMP-02foropting for CompositionSchemeforFY.2020-21

31stMarch2020 30thJune2020

FilingofITC-03 30thMay2020 31thJuly2020File of CMP-08 forQuarter January toMarch2020

18thApril2020 7thJuly2020

GSTR-4forFY2019-20 30thApril2020 15thJuly2020

Conclusion : Thegovernmenthas givenmany other concessionsapartfromtheabove-mentionedrelaxations,likeITC180daysRule, Summons issued u/s 70 of CGSTActs, 2017, TimelimitforJobwork–1yearsand3yearsandRefundofGSTu/s54etc.

Iwould say that, an extension offilingGST returnsandmany other relaxations given under the GST Act wouldbehelpfultotheCompaniesandindividualTaxPayerstofocusonresumptionofbusinessprocessesandtoregainthebusinessasbeforeCOVID-19.


29

Financing the future through Responsible Banking

CMA (Dr.) S. K. GuptaMob.:9810162341•E-mail:[email protected]

Sumit MishraE-mail:[email protected]

The perspectiveEconomies, societies and environment are intrinsicallylinked, and challenges or risks in one sphere invariablyimpact the others. Hence, today’s business mindsetneeds to go beyond the business-as-usual approach toa more balanced one, with sustainable and innovativepathways balancing aspirations, practicality and risks.Whilst global challenges need collective action, they alsoneed ‘glocalized’ responses.The global banking sector isunder increasing pressure to operate more sustainablyand be more transparent about its economic, social andenvironmentalimpacts.Asaresult,moreandmorebanksrecognizetheneedto integrateenvironmental,socialandgovernance (ESG) factors into their investment, lendingandprojectfinanceapproachesanddecisions.Manybanksrun significant asset management businesses and areexposedtoacomplexarrayofESGrisksandopportunities.ESGisalsoenteringthelendingandprojectfinancespacewherebankshaveacriticalroleastheprovidersofloanstocorporations,financingtoprojectsandadvicetoissuersof securities. Awareness is also growing that responsiblebankingapproachesandskillfulmanagementofESGcanimproverisk-adjustedreturns,enhancereputation,sparkcommercial opportunities, mitigate portfolio risks, andimprovemarketpositionsandvalue.

What is Responsible Banking The notion and concept of Responsible Banking helpsa bank to align the goals and strategies of bankingwiththat of society.The principles provide the framework fora sustainable baking system and help the industry todemonstrate itspositivecontributiontowardsthesociety.Sustainable banking is the integration of sustainabilityinto a bank’s core business through the integration ofenvironmental and social considerations into productdesign,mission,policiesandstrategies.Astheexpectationsofthesocietyhaschangedoveraperiod,itshightimeforthe banking institutions to be transparent about howtheirproductsandservicescreateandnurturetheethicsand values of their customers, clients, investors as wellas thesociety.Today’sbankingmindset isdefinitely inaneedtogobeyondtheusualapproachtoamorebalancedone,onasustainableandresponsiblepathwhichbalancesaspirations,practicalityandassociatedrisks.Responsiblebankingusesmoneytohelpcreatepositiveimpactforpeople,theircommunitiesandtheplanet.ResponsibleBankingisavalues-basedpositionthatguidesandchallengesabanktothinkdifferentlyabouthowabankoperateasafinancialinstitution.

The banking system should operate in a Sustainabilityzonewherewiderenvironmentalandsocialobjectivesaretargetedtobemetbysupportingnewemergingbusinessesthat not only promote financial growth but also enhancesocialcausesacrossarangeofthecommonmanbaseandthestakeholders,thusconstitutingtheeconomicpyramidasawhole.Tothisend,thebankshavetoofferinnovativefinancial solutions to address a wide spectrum of issuesregardingsustainablelivelihoods,publichealth,education&education.Stronginternaldecisionswhichhavetobesoundethicallyandcommitmenttosociallyresponsiblebankingcombinedwithproperandtransparentvoluntarydisclosurestosuchvaluesandethicsasembedded in thesocial responsibility statements shall go a long way inbuilding an equitable, socially responsible, sustainablecountry.

Principles of Responsible BankingThe Principles for Responsible Banking were launchedby 130 banks from49 countries, representingmore thanUSD47trillioninassets,on22and23September2019inNewYorkCity,duringtheannualUnitedNationsGeneralAssembly.

The Principles provide the framework for a sustainablebankingsystemandhelptheindustrytodemonstratehowitmakesapositivecontributiontosociety.Theyinclude:

• Alignment: Commitment to align their businessstrategies to be consistent with and contribute toindividuals’needsandsociety’sgoals,asexpressed intheSDGs,theParisAgreementandrelevantnationalandregionalframeworks.

• Impact and Target Setting: Continuously increasetheirpositiveimpactsandreducethenegativeimpactson,andmanagetherisksto,peopleandtheenvironmentresultingfromtheiractivities,productsandservices..

• Clients and Customers: Work with clients andcustomers to encourage sustainable practices andenableeconomicactivitiesthatcreatesharedprosperityforcurrentandfuturegenerations.

• Stakeholders: Responsibly and proactively consult,engage and partner with relevant stakeholders toachievesocietalgoals.

• Governance and Culture:ImplementthePrinciplesthrougheffectivegovernanceandacultureofresponsiblebanking.

• Transparency and Accountability: Periodicallyreviewindividualandcollectiveimplementationofthe


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Principlesandbetransparentaboutandaccountableforpositiveandnegativeimpactsandtheircontributionstosocietalgoals.

Case study – Yes BankYESBANK,sinceinceptionin2004,throughits‘ResponsibleBanking’ ethos has believed in creating sustainedvalue for its stakeholders, through social, economic andenvironmentaldimensions. Integratedwith corebusinessstrategy, Responsible Banking steers the sustainabledevelopmentagendaatYESBANKthroughitspathwaysof Social & Developmental Impact, Climate Action, andTransparency&Disclosures.

YES BANK leads the sector in its effort to mainstreamResponsible Banking and sustainability. It is the onlyBanktorankamongstthetop30ResponsibleBusinesseslistedin‘India’sTopCompaniesforSustainabilityandCSR2018’ (a studyby IIM–Udaipur&FuturescapeNetcoms).Highlighting its leadership position on Environmental,Social and Governance (ESG) performance, YES BANKis also the only Indian Bank to be selected in the VigeoEiris Best Emerging Market Performers Ranking, anindependent international ESG ratings provider, for thesecondconsecutiveyear.TheBankwasalsotheonlyIndianbanktobeaccorded‘Prime’statusbyOEKOMAG,aleadingESGratingsagencyinEurope&wastheonlyIndianBanktobeselectedinDowJonesSustainabilityIndices(DJSI)intheemergingmarketindex.

Dimensions of Responsible BankingSustainable Financing :Sustainabilityhasbeenacorevalueproposition toYESBANKsince inception,weavingsustainability into its operations as well as creatingstakeholder value through positive impact businesssolutions.ThecentralResponsibleBankingteamholdsthemandate to set anddrive thebank’s strategybased onatriple bottom line of financial, social and environmentalreturns.While India continues to account for a very lowpercapitaemissionlevel,overthepastfiveyears,overallCO2 emissions have risen. Climate change could resultin huge economic losses accounting to over 1% of India’sGDP.It isestimatedthataninvestmentofoverUSD2.5trillionwill be required for India to achieve its emissionintensity-reduction targets and adaptation to climatechangeby2030.Thismakesitcriticaltoalignthegrowthagendawithaddressingclimatechange,and forfinancialinstitutionstobringtheirexpertise,tothetaskathandofintegratingsustainabilityinfinancing.YESBANKhavingrealizedSustainabilityasthefutureofbusinesshasfocusedon developing a knowledge driven approach to banking,and isstriving todrive it through itssustainablefinanceinterventions.

Positive impact : To augment the community impactof ongoing social responsibility projects, YES BANK isworking on several positive impact initiatives as per thefocus areas outlined in its CSR Policy. These initiatives,launchedindividuallybytheBank,orinassociationwithits national partners, have created a sizeable impact inlivelihood security and enhancement in rural India, skill

building among youth, and improving environmentalsustainability, and energy efficiency and occupationalhealth&safetyintheMSMEsector.Additionally,thebankfocusesonimprovingcommunitywelfare,theearth’sstockofnaturalassetsandsocialawarenessthroughthepowerofmedia

Policy advocacy through leadership: Through programsand initiatives that engage directly with its upstreamstakeholders, YES BANK continues to work towardsestablishing its case for sustainable development at thehighest level. YES BANK has forged strong ties withnational and global thought leaders, multi-laterals, andgovernmentstoreleaseknowledgereportsthatareaimedat influencing policy decisions positively impacting thesociety,environmentandindustryatlarge.

Transparency in accounting : YESBANKhas set strongtransparency and accountability standards in the IndianBankingsectorandhasbeenreportingonitssustainabilityperformancesinceitsinception.Ithashelpeditbuildtrustamongst its stakeholders, create a strong competitiveadvantage based on innovation and entrepreneurship,attractcapitalfrommarqueeinvestors,andrealizestrongpartnership opportunities. Committed to managing andaccounting for itsownenvironmental footprint, theBankisthefirstIndianbanktobeasignatorytotheCDP,andalsothefirstIndianBanktobeISO14001:2004certifiedforEnvironmentalManagementSystem.

TripleBottomLine/SustainabilityDisclosures:YESBANKhassetnewbenchmarks in theIndianBankingsector inTripleBottomLineaccountingandreporting.YESBANKbelieves that integrated reporting helps its stakeholdersgainaconsolidatedviewoftheBank’sperformanceacrosseconomic,environmental,andsocialparameters.SinceFY2015-16, theBankhas adopted the IntegratedReportingframework of the International Integrated ReportingCouncil(IIRC),disclosingitsvaluecreationstrategyusingthecapitalsmodel,andreportingtheBank’sperformancevis-à-vis itsfinancial,manufactured, intellectual,human,social & relationship, and natural capitals. The Bank’sSustainability disclosures are in accordance with GRIStandards: ‘Comprehensive’ option as well asmapped toSDGCompass,whichalignsGRIreportingframeworkwiththeUNSustainableDevelopmentGoals.InFY17-18,theBank became the first Indian Bank to release enhancedsustainability disclosures aligned to the G20 FinancialStabilityBoard’s, Taskforce onClimate-relatedFinancialDisclosures (TCFD) recommendations. And in FY18-19, YES BANK became the first Indian Bank to releaseenhancedsustainabilitydisclosuresbasedonthePrinciplesforResponsibleBankingandTCFDRecommendations.

YESBANK is also the first Indian banking signatory totheUNGlobalCompact,andhasbeenincludingitsannual‘CommunicationOnProgress’,initsSustainabilityReports.

EnvironmentalaccountingandManagementsystem:YESBANK is theonly Indianbank tobe includedalongwith41 global banks in the RobecoSAM-DJSI SustainabilityYearbook’s2018edition.ThisselectionindicatesthatYESBANK’s ESG (Environmental, Social and Governance)


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performance is within 30% of the top-performing banksworldwide,whichisatruetestamenttobank’slazer-sharpfocusoncorporategovernance,riskmanagement,prioritizingESG performance and mainstreaming sustainability intheIndianbankingsector,throughcuttingedgesolutionsin climate and environmental finance and communityimpact.Therewere478companiesfrom43countriesthatfeatured in2018editionof ‘TheSustainabilityYearbook’.The selection is based on its RobecoSAM’s CorporateSustainabilityAssessment(CSA)2017,anESGanalysisofover2,479listedcompanies,leadingtothecompositionofDowJonesSustainabilityIndex.

ConclusionAccounting for over two-thirds of financing, the bankingsystemhasbeen the largestfinancier of an ever-growingglobal economy. Adopting a similarly significant role,banks can leverage their strength to finance the futureby adopting an ethos of Responsible Banking. The past

five years have alreadywitnessednext generation banksintroduce a number of innovative financial instrumentsand products to meet the needs of sunrise sectors. Yet,many banks face multiple challenges in designing andimplementingasuccessfulapproachtoresponsiblebankingandESG.Theserangefromalackofinternalresourcestoinsufficient ESG data to verify performance.India has tobehighlyendowedwithadeeplypenetratedbankbranchnetwork with policies such as to allow the banking findits roots in the remotest corners of the country whichcan deliver agricultural credit alongwith other financialservicesespeciallyatthefarmersdoorsteps.Stronginternaldecisionswhichhavetobesoundethicallyandcommitmenttosociallyresponsiblebankingcombinedwithproperandtransparentvoluntarydisclosurestosuchvaluesandethicsasembedded in thesocial responsibilitystatementsshallgoalongwayinbuildinganequitable,sociallyresponsible,sustainablecountry.

CHAPTER NEWSNASHIK-OJHAR

“Live interactive session on “Role of Banking sector postCovid-19forrevivalofEconomy.”

The chapter is always ready to provide knowledge toour belovedmembers in every situation. By keeping ourtrendinthepandemicsituationofCOVID-19theChapterconductedLivesessiononYouTubeformembersandotherstakeholder.

Theliveinteractivesessiononthetopic“RoleofBankingSectorpostCOVID-19forrevivalofEconomy”isconductedon19thMay2020.ThespeakerforthesamewasShriB.S.Tavhare (Zonal Manger (DGM) Nasik Region, Bank ofMaharashtra.Firsttimechapterconductedsessiononlineand more than 400 participants attended the session.SessionconcludedwithQuestionandAnswers.

Sessionwas useful to everyone. All Committeememberstakenactiveparticipationforthissession.

NAVI MUMBAIChapter organised the following programmes during theLockdownPeriod

· AWebinaron“IntroductiontoBlockchain”on17thMay2020 . Speaker on theWebinar wasMr. Sunil SenapatiDirectorTradeFinanceofBolero,Singapore.

TheProgrammecommencedwiththetraditionalwelcomeofthespeakerandtheaudiencebyCMAVivekBhalerao.CMAL.Prakash introduced the speakerandhighlightedthe importance of understanding Blockchain in the neweconomic scenario that is coming up. The Speaker dealton the subject in detail right from the Three Pillars onwhich it Stands viz Decentralization , Transparency &Immutability , how itworks , and howwe can use it by

providingnumerouspracticalexamplesforbringingintheTrustFactorinmanyofourBusinessProcesses.Thesessionwasveryinteractiveandspeakerthankedallparticipantsfor making session interesting with their questions anddiscussion. The programme ended with felicitation ofspeaker Mr Sunil Senapati by the PD Chairman CMAVivekBhalerao.ChairmanSirishVasantMohiteproposedthevoteofthank.

• AWebinaron“EInvoicing&UpcomingReturnFilingSysteminGST-ANewDimension”on26thApril2020.Speaker on the Webinar was CMA Amit Sarkar Sr.Director DeloitteHaskins& Sells LLP and AdvocateHarshillVoraManagerDeloitteHaskins&SellsLLP

The Programme commenced with the traditionalwelcomeofthespeakerandtheaudience)byCMAVivekBhalerao.TheSpeakerdealtonthesubjectinminutedetails.Thesessionwasvery interactiveandspeakerthanked all participants for making it interestingwith their queries and discussion. The programmeendedwith felicitationof speakersCMAAmitSarkar&AdvocateHarshillVoraby thePDChairmanCMAVivekBhalerao.ChairmanSirishVasantMohitegavethe vote of thank and specially thanked the SpeakerandAudiencefortheiractiveparticipation.

• On 7th April 2020 Webinar Classes for Final YearStudents was commenced and now even WebinarClasses for Intermediate Students have also startedand therehasbeenaverypositive response fromtheStudents&Faculties.

• On 11th April, 2020 a meeting of the managementcommittee was taken on Video Conferencing dueto Lockdown situation to discuss various matterspertainingtotheChapteractivities.


32

Pay Tax & Get Rich for Business Enterprises CMA Kartik Vasavada


“I like to pay taxes. With them, I buy civilization.”— Oliver Wendell Holmes Jr.

Why should you pay taxes?Isitsoundbusinessproposition?It looksparadoxical that bypaying taxand reducing thenetcashsurplus,onecangrowandgetrich.However,whilemaking statements, the underlying assumption is thatthe book profits/incomes do not generally represent truesurplus. If thatwasnot so, therewouldnothavebeenaparalleleconomy.ThismaliceisprevalentnotonlyinIndiabut theglobeoverwithdifference in its extent. In India,thegenerationofblackmoneyincirculationisestimatedtobeofthesameorderasthelegalmoneyincirculation.Theunaccountedmoneyassaidearlier,issometimesstockedinlockers,utilizedonunproductiveassetsorspentostensibly.This has the effect of underutilization to a substantialextentoftheproductiveuseofavailabletotalresources.Atpersonal,businessandnationallevelthisretardsprogressinrealterms.Reluctancetopaytaxesasdue,arises frombasicallytwofactors.There isdeep- rootedhumanpsychology that theincome/wealthearnedbyonceowneffortneednotbesharedwith others. And the lack of appreciation about the rolethat the government plays in maintaining the country’ssovereignty, security, law and order, education, healthinfrastructure etc. Though the state spends considerableamountonthecitizens’&Corporatewelfare,itisnotseendirectlyandhencenotappreciated.Ourpurpose in thisarticle isnot todebateon themoralissueoftaxpaymentbuttoexaminewhetheritisbeneficialinthelongruntopayduetaxesandmaintainproductiveassets.Thiswillleadtogrowthandprosperity.Whentrueprofit isnotdisclosed, theundisclosedportionofprofitiswithdrawnfromthebooksandisnotavailableforbusinesspurpose.Profitislifebloodforanyventure.Itprovidesnucleusforgrowthfrominternalsources.Externalsourceshaveacostattachedtoitanditsavailabilityisnotassuredaswhenrequired.Furtherexternalresourcesalsodependupon the state offinancialhealth of the venture.Strongerthenetworth,GreatertheProspectsofexternaleconomic borrowing if required. At any-time, growththroughinternalaccrualsisthebestoption.Withmarginsunderpressure forall fronts, itmakes immense sense tominimizeallcostsincludingborrowingcosts.To illustrate this point, the following example shownreflectingtheimpactofhigherretentionofprofitinbusiness.CompanyDis-Honestenterprisesprefertodeclare50%ofitsprofitsandCompanyHonestEnterprisesprefertodeclare

100% profit and pay tax thereon. In this exercise, it isassumedthatboththeunitsareinthesameindustry,havecomparablecapacity/coststructure,havestartedbusinessinthesameyearandthattheworkingcapitalcycleisof3months.Itisalsoassumedthatthegrowthisonlythroughinternalaccrualsandthatthereareampleopportunitiestogrowthebusiness.Basedon theseparameters, theprofitgenerationabilityofboththeunitsoverofperiodof5yearsshows thatDis-Honest enterprises could reach turn overandnetcumulativeprofitgenerationofRs239lacsandRs59lacsrespectivelyasagainstHonestenterprisesofRs661lacsandRs316lacsrespectively.Thisarisesonaccountofmultipleeffectofploughback.ThoughthesaidillustrationisofsmallbusinesshousetheprincipleappliesequallyforLarge,Mediumtradeandbusinesses.ThepowerofinternalaccrualshasbeenaptlydemonstratedbytheacquisitionofCorusGroupbyTataSteelamountedto$12.2billion.ItwasallCashdeal,paidoutofreserves– internal accruals so the cash rich company has vastopportunitiesofextendingitsarmforprofitablebusinesseswheneveropportunitiesarise.

Ifwelookaround,themostsuccessfulbusinesshousesarethosethathavegeneratedlargeprofitsandtakenadvantageof the available business growth avenues to make rapidstrikes.Forthemtax,hasonlybeentakenascostofbusinessandnotasaforcibleoutgo.Itgoeswithoutsayingthat,eventhetaxstatuebookmentionsthatataxpayerhasarightto so exemptions and deductions are available under theIncomeTaxActbothforbusinessesandindividuals.Thissupposeslegaltaxplanningonalongtermbasistoretainmaximumprofitinbusinessanduseitforgrowth.Wehaveshining examples ofReliance,Wipro, Infosys, Tatas, andmanyotherwhohaveenlarged theirbottom lineyearbyyear, paid taxesandgrown spectacularlyandachievedastatusofprimeintheInternationalbusinessarena.Theirstrengthhasbeeninidentifyingnewgreenfieldareasforgrowthwhere,asearlybirdtheyearnrichrewards.Inthismarchtowardsgrowth,theirbasicstrengthhasbeengrownthrough internal accruals basically.These companies arethetorchbearerswhohavedemonstratedthatitispossibletogrowbyleapsandboundsthroughmaximizingprofits.

Asa countrynow,with esteemed status in Internationalmarkets, we are on a threshold ofmassive expansion inbusiness opportunities. It is timewe adjust our businessstrategy and gear up ourselves to take advantage ofthe emerging new scenario. This can be achieved if theattention,insteadofbeingdivertedtotaxevasionisbetterfocusedonearningandretaininghigherprofitsinbusinessandensuringgrowth.


33

Projected Income Statement of DIS-HoneSt enterPrISeS for 5 YearsRs. in Lacs

Particulars Year 1 Year 2 Year 3 Year 4 Year 5Sales 100 115 139 177 239VariableOverhead (60%onSales)

60 69 83 106 143

FixedOverhead 28 28 28 28 28Profit 12 18 28 43 68BorrowingCosts (10%onRs20Lacs)

2 2 2 2 2

NetProfit 10 16 26 41 66Un-AccountedProfit (@50%)

5 8 13 20 33

TaxableProfit 5 8 13 20 33Tax@25% 1 2 3 5 8ProfitTransferredto Reserves

4 6 10 15 25

CumulativeBookProfits 4 10 19 35 59

Projected Balance Sheet of DIS-HoneSt enterPrISeS for 5 YearsRs. in Lacs

Assets Year 1 Year 2 Year 3 Year 4 Year 5FixedAssets 29 33 37 55 70CurrentAssets 30 37 48 47 75TOTAL 59 70 85 102 145LIABILITIES Year 1 Year 2 Year 3 Year 4 Year 5EquityShareCapital (200000sh@Rs10)

20 20 20 20 20

Reserves 4 10 19 35 59BorrowedCapital 20 20 20 20 20CurrentLiability 15 20 26 27 46TOTAL 59 70 85 102 145

Projected Balance Sheet of HoneSt enterPrISeS for 5 YearsRs. in Lacs

Assets Year 1 Year 2 Year 3 Year 4 Year 5FixedAssets 33 46 68 118 243CurrentAssets 30 39 67 132 263 TOTAL 63 85 135 250 506LIABILITIES Year 1 Year 2 Year 3 Year 4 Year 5EquityShareCapital (200000sh@Rs10)

20 20 20 20 20

Reserves 8 24 60 140 316BorrowedCapital 20 20 20 20 20Current Liability 15 21 35 70 150TOTAL 63 85 135 250 506

Projected Income Statement of HoneSt enterPrISeS for 5 YearsRs. in Lacs

Particulars Year 1 Year 2 Year 3 Year 4 Year 5Sales 100 130 196 341 661VariableOverheads (60%onSales)

60 78 118 205 396

FixedOverhead 28 28 28 28 28Profit 12 24 50 108 236BorrowingCosts (10%onRs20Lacs)

2 2 2 2 2

NetProfit 10 22 48 106 234Un-AccountedProfit (@50%)

0 0 0 0 0

TaxableProfit 10 22 48 106 234Tax@25% 3 6 12 27 59ProfitTransferredtoReserves

8 17 36 80 176

CumulativeBookProfits 8 24 60 140 316

GROWTH ANALYSIS OF MARKET VALUE AT THE END OF 5 YEARS (Rs in Crs)

PARTICULARS DIS-HONEST HONEST IncrementalEnterprises Enterprises Growth%

MarketValue 2.00 10.00

Un-accountedCash 1.00

TotalWealth 3.00 10.00 233%

Assumptions Considered:

1. MarketisavailableforProductProduced2. VariableCostis60%ofSales3. FixedCostamountstoRs28Lacsperannum4. MarketValueofEnterpriseisconsideredas3timestheBookValue5. BorrowingCostis10%ofRs20Lacsborrowedcapital6. InDis-HonestEnterprises,50%ofprofitisundisclosed7. Everyrupeeofprofitearnedincreasesturnoverby4times8. GrowthconsideredonlythroughInternalAccruals9. Allprofitisre-investedinBusiness

COMPARATIVE PROJECTIONS OF HONEST ENTERPRISE & DIS-HONEST ENTERPRISE (Rs in Lacs)

PARTICULARSYEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Dishonest Honest Dishonest Honest Dishonest Honest Dishonest Honest Dishonest Honest

Sales 100 100 115 130 139 196 177 341 239 661

NetProfit 10 10 16 22 26 48 41 106 66 234

Unaccounted-Profit 5 0 8 0 13 0 20 0 33 0

TaxableProfit 5 10 8 22 13 48 20 106 33 234

CumulativeReserves 4 8 10 24 19 60 35 140 59 316

BookValueofBusiness 24 28 30 44 39 80 55 160 79 336

MarketValueofBusiness 71 83 89 132 118 241 164 480 238 1,008


34

Construction Industries, Migrant Workforces and COVID-19 : An impact analysis

CMA Subhasish PaulMob.:9320334616•E-mail:[email protected]

Introduction: Timehasreallycometorecognizeandvaluethe ‘God of Small Things’. Certain aspects of life whichwemighthavenot consideredseriouslyeven fewmonthsagohasbecomeourreasonsforexistenceornonexistencein real sense. Every aspects, every contribution, everyaddition in any value chain in every human endeavouris equally important. InRamayana,whilemonkeyswereconstructingthebridgeovertheseawithbigrockstoreachLanka,alittlesquirrelwascarryingpebblesfromseashoreanddroppedintothesea.Whilemonkeysweremakingfunofthesquirrel,LordRamasaid‘Don’tmakefunofthesmallandweak.Hisstrengthisnotimportant;whatimportantis his intention and love for contribution’.How true it iseventodayinanyconstructionindustry.Wehavequalifiedengineers, advanced technology, latest equipments, timetested plan, full proof evaluation mechanism. Still allthesehavenooralittlevalueifthedailyworkforcedoesnotmaketheirdaytodaycontributionintermsofphysicallabour.DuetotheoutbreakofCOVID-19andsubsequentnationwide ‘Lockdown’, all constructionworkhasbecomestandstill.Moreconcernthanthecurrentstoppageofworkforfewmonthsisthatthereturningof‘MigratedWorkforce’totheirnativeplacewillcreateahugeshortageofworkerwhen construction work will resume. In the followingparagraphs, Iwill try to analysis the probable impact ofsuchshortageofworkforceintheconstructionindustries.

Reasons for Migration:Propertyknowsnorule.Nobodywants to die of starvation when anyone can earn theirbread somewhere else when not available at home. Themajorreasonsforsuchmigrationareasfollows

a) TherearebothSocialandEconomic imbalanceof theStatesinIndialeadstointernalmigration.Peoplelivingbelowthepovertylinewanttohavebetterearningsandmigratesomewhereelse.

b) IthasbeenobservedthatthestateswithlowIndustrialandcommercialbaseshavewitnessedmajormigrationfrom the states. Private and public investmentscreate more industries as well as job opportunities.Maharashtra, Gujarat, Andhra Pradesh has moreprivate and public investments then Bihar, UttarPradeshandWestBengal.

c) Populationdensityandpercapitaactualearning,percapitadomesticproductsandfutureearningscopealsoanotherreasonsformigrationtowardstheeconomicallysoundstates.Pushfactorsarepoverty,unemployment,population density, low yield from agricultural, lackofcivilactivities, internalfightsonthebasisofcaste,creedraceetc.

d) Now a day’s political outlook, political culture andfuturistic plans for economic growth of the rulinggovernment also induced people to step out of theirstatesforbetterandsecurefuture.

So, for better earning and secure future, workforcemigratestothestateswheremoreandmoreconstructionworksarebeingcarriedout.Scopeofworkbeingwiderandscarcityoflabourforceinthatstatesprovidesscopeformigrantworkers.

Impact on Local Labour Force and on Industry and Motivational Factors :TheStateswhichhavescarcityoflaboursindomesticmarkets,welcomesandaccommodatethemigrantworkersforsmoothandeconomicalrunningofconstructionindustries.Itcanhavethefollowingbenefits

a) Localworkforcefindsthecompetitionfromthemigrantworkforce and becomes more responsive to marketdemandandfeelurgeforimprovement.

b) Therewill be a balance between demand and supplyofworkforce and neither the owners nor theworkerscanenjoythedominionstatus.InIndia,workforcesaremainlycontrolledbythe‘Worker’sUnions’andtosomeextent theyarebeingmanaged, supported,motivatedaswellasexploitedbytheUnions.

c) Migrantworkersfindextramotivationsas theyknowthattheyneedtosurvivefortheirexistenceatadistantplace and induced to work with extra motivationsand enthusiasm. This will certainly increase theirproductivity and the employer organization beingbenefited.

Impact of COVID-19 on Migrant Worker :COVID-19pandemicortheNovelCoronaVirus is thewordof thesedaysandthemostscaringwordnowis‘positive’.Allmosteveryconstruction industriesare feelingtheheatofsuchdeadly virus. Construction sector in India was alreadystruggling with multiple challenges like lack of capital,regulatory burden, credit avenues and environmentalcompliance.NowthisNovelCoronavirushasaddedaverynoble causeof concern for organizations,workersaswellasGovernments.GovernmenthasannouncedNationwiseLockdownfrom25thMarch,20for21daysinfirstphase.Whilewritingthisarticle,Indiaiswitnessingfifthphaseoflockdownthoughunlockplanhasstartedinphasedmannerfrom1stJune,2020.Theimpactofsuchsuddenlockdownhascreatedthefollowingmajorproblems.

a) Allonasuddenallconstructionactivitieshasstoppedand revenue generation for the contractors havestopped.


35

b) Workers unable to work at construction site andbecomesincomeless.VeryfewOrganizationsinIndiahave looked after the jobless worker during theseunemployedperiod.

c) Within a month timemajor jobless workers becomespennilessandnothavingwithfood,waterandshelters.

And the very reasons for which theymigrated againstarts propelling them to rethink for retuning backhome at anymeans. The country haswitnessed thatlakhsofworkersreturnedhomebywalkingthousandsofkilometre.Manyofthemhavelosttheirlivesontheway.

d) As the majority of migrant workers have gone backhomebywalkingorby‘ShramikSpecial’train,bussesorLorries, therewillbescarcityofworkerswhentheconstructionworkwillresumeinfullswings.

Demand Supply Theory, Cost of Labour, Cost of Projects : Impact on Construction CompaniesThe construction companies will face a major hardshipduringthelockdownperiodaswellaswhentheworkwillresumeafterthecrisisperiodbeover.

a) Firstly, the contractors have to plan for the safety ofits own employees and the labours working at sites.Anyirregularityinthisregardmaybethefataltotheorganizationasallregulatoryeyesarehavingfocusonthis.

b) Construction companieswith high level of ‘Debt’ andlowcashreservewillfacealiquiditycrisis.

c) Construction companies with zero revenue will facethe problems of meeting contractual obligations likesalarypayments,Administrativeoverheads,statutorypayments and subcontractor’s minimum paymentobligationsaspercontract.

d) Contractmanagementandnegotiationwithcustomerswill come into sharp focus. Customer seeks torenegotiatethescopeofthework,contractpriceormayeventerminatethecontractincertaincases.

e) When the work will resume, there will be certainto have shortage in work force. It means the supplyof the labour will be less than the demand for samefor industry as whole in any particular location or aparticularhomogeneoussectorofworkings.Itwillhavefollowingconsequences.

1) There will be unhealthy competitions among thecontractorforhiringtheavailableworkforce.Costoflabourwillcertaintoincreaseandhencethecostof contract will increase. The principal contractormayhavetopaytothesubcontractoranadditionalamount as ‘claim’ beyond the initially agreedcontractprice.

2) Theconstructionworkcannotbecarriedatitsdesiredlevelofspeedaspertheplansandschedule.Itwillleads to thedelay in completion.Governmenthasissuedvariousdirectivestocopewiththisstoppageofwork.Theschedulecompletiondatetobediffered

automaticallytotheextentofperiodoflockdown.Insomecases,retentionmoneyshavebeenadvisedtoreleasetotheextentofworkcompletedtocopewithliquidityproblems.PerformanceBankGuaranteeshavealsobeenaskedtoreleaseproportionately.Buttheinvisibleissuewhichhasneitherbeenaddressednoritcanbequantifiedasofnowtheimpactofdelayinworkandconsequentialincreaseincostsduetotheunavailabilityofworkforce.

3) Non availability of specialized workers may alsocausesthequalityofworkarealconcernsandmayleadstothe‘penalty’orincreasedcostintheformof‘rectificationofwork’.

f) Inmostofthecontract,amajorportionofthe‘hardcost’ is steel and cement. As an industry practice inIndia,thesesteelandcementvendorsneedstobepaid100%advancebeforesupplyorinsomecases,thecreditperiodisverylow.Nowinthepresentsituation,everyindustry is facing either of the two situations and inboththesituationsahugeamountofworkingcapitalisbeingblockedandfacingliquidityproblems.

1) Thosewho have already acquired thesematerialsby paying on the anticipation that materials willbe billed to customer either in material forms orincorporatingintotheservices,arenowstuckandhugeworkingcapitalisbeingblocked.

2) Thosewhohavemadetheadvancestothesupplierbutmaterials havenot yet been received are alsofacingsameproblemsofliquidity.

g) Theremaybe impact on employeesalso.Someof theemployees are in danger of losing their jobs. In someothercases,theirsalarybeingreduced.Companymayhave to be restructured fully to remain financiallysolvent.

Liquidated Damage Clause: Time is the essence ofany contract. In every contract a ‘ Liquidated Damage(LD)’clauseisincorporatedsothatboththecustomerandcontractorhasanenforceablerightoneachotheronbreachofcontract.TheessenceoftheLDclauseisthattheprojectneeds to be completedwithin a stipulated period of timefrom ‘Zero Date.’ If the contract is not completedwithinsuch period of time without any valid reasons and suchdelayhasbeenapprovedbythecustomer,thecustomerwillchargea‘LD’ataspecifiedrateperweek/monthofdelay.InthecurrentscenarioofCOVID-19,itisalmostcertainthatno project will be completed within the agreed period oftimeforthereasonsdiscussedabove.Itmeansiftheprojectisnot completedwithin the time initiallyagreeduponormutually extended, theContractorswill have to face thefollowingconsequences,

a) Thecustomerswilllevy‘LD’.Overallcontractrevenuesarecertaintodip.

b) Moreover,chancesoflitigationsincreases.Contractorand Customer will fight a legal battle for long time.Costandtimeofsuchlitigationishuge.

c) The subcontractors may have to be paid extra for


36

‘escalationclauses’intheircontractforoveralldelayinproject.

d) Indirect cost of the projects like AdministrativeOverhead,Costofcapital,costofcomplianceiscertaintoincrease.

Force Majeure: To what extent it can save ? In any construction contract between consumer andcontractor, a ‘Force Majeure’ clause is incorporated.Presently Ministry of Finance has by way of an officememorandum ( No O.M. No. 18/4/2020-PPD) issued onFebruary, 20, 2020 clarifies the applicability of ‘ForceMajeure’ clause in this COVID-19 pandemic scenario.‘Forcemajeure’hasbeendefinedintheofficeorderas

‘A Force Majeure means extra ordinary events orcircumstances beyond human control such as an eventdescribed as an act of God (like a natural calamity) oreventssuchas,war,riot,strike,crimes(butnotincludingnegligenceandwrongdoing,predictable/seasonalrainandanyothereventsspeciallyexcludedintheclause).

From a contractual perspective, a force majeure clauseprovides temporary reprieve to a party from performingitsobligationsunderacontractuponoccurrenceofaforcemajeure event. A force majeure clause typically spellsoutspecific circumstancesorevents,whichwouldqualifyas force majeure events, conditions which would havebe fulfilled for such forcemajeure clause to apply to thecontractandtheconsequencesofoccurrenceofsuchforcemajeureevent.

Asper theabovementionedOfficeMemo,anydisruption

of supply chain due to corona virus will be coved in theForceMajeureClauseasitwillbeconsideredasacaseofnaturalcalamityandForcemajeureclausewillbeinvokedwherever considered appropriate. How the courts willinterpretCOVID-19inrelationtoforcemajeureprovisionswillbeinterestingtowatchoutinthecourseofthisyearoncetheimpactofCOVID-19settles.

But with this veil and protection of this ‘ForceMajeure’clause,howmuchanorganizationisgoingtobebenefitedisverydoubtful.

Conclusion : Itisnodoubtandnoreasonsnottobelievethatallconstructionindustriesarefacingandwillbefacingaverytoughtimeinthecomingyears.Forsome,existenceitselfwillbeachallenge.Theworkerswhomigratedforsomebetterlivingwillbeworstsufferer.Theirrecentexperiencewilldemoralisedthemtocomebackinrecentfuture.TherewillbecertainlyachallengeforthoseStateswheremajorityofthemigrantworkershavereturnedbacktoarrangefortheirwork,foodandhealth.Butassayinggoes,nothingispermanent,weknowall these troubleswillbeoversomedaysandourconstructionindustrieswillbebouncedback.TheentiremigratedworkerwillcomebackforthejobsandIndiawillshineagain.Alltheorganizationshavetofocusdiligently on capital structure planning, working capitalplanning,manpowerplanningandtoexploreopportunitieshowcanweusetechnologytogainoperationalleverage.

Disclaimer: This article has been written on the basis of experience of working in the Construction Industry over 12 years and all view are my personal views from experience and judgment.


37

Repairs Expenses and Employee Cost – Whether to classify as variable cost or Fixed Cost

CMA Rajesh KapadiaE-mail:[email protected]

ManagementisoftenrequiredtoClassifytheCostElementsintoVariableorFixedforworkingoutMarginalCostandContributionanalysis.

RepairsExpensesandEmployeeCostareoneoftheCostElementstobeclassifiedasVariableorFixed.

MainFeaturesofCostElementsEithertobeClassifiedasVariableCostElementsorFixedCostElementsareasmentionedbelow:

Variable Cost :ItremainssameperUnitofProductionirrespectiveofVolumeofProductionorCapacityUtilisation.

IthasgotlinearrelationshipwithVolumeofProduction.

Fixed Cost :In totality it remains same for a given period irrespective of

VolumeofProductionorCapacityUtilisation.

However,CostperUnitofProductiondecreaseswithincreaseinProduction Volume and increases with decrease in ProductionVolume.

NolinearrelationshipwithVolumeofProduction.

Characteristics of Repairs ExpensesItisrequiredtokeepPlant&Machineryingoodcondition.

Ifastudy ismade for trendofRepairsExpenses,say for last3yearsasmentionedinANNEXURE-1,itmaybeobservedthatithasnolinearrelationshipwithvolumeofproduction.

As it has no linear relationship with Production Volume, it isalwaysadvisabletotreatitasFixedCostalthoughit isneitherVariablenorFixedinnature.

ANNEXURE -1 — Trend of Repairs Expenses

Products F.Y.2019-20 F.Y.2018-19 F.Y.2017-18Production Rs.Lacs RS/MT Production Rs.Lacs RS/MT Production RsLacs RS/MT

Product1Product2Product3Product4Product5Product6Product7

ANNEXURE -2 — Trend of Employee Cost

Products F.Y.2019-20 F.Y.2018-19 F.Y.2017-18Production Rs.Lacs RS/MT Production Rs.Lacs RS/MT Production RsLacs RS/MT

Product1Product2Product3Product4Product5Product6Product7

Characteristics of Employee CostEmployee Costs are essentially incurred for the followingactivities:(1) TorunManufacturingPlants(2) TorunUtilitiestoSupportManufacturingPlants(3) To run Maintenance Activities to maintain Manufacturing

Plants&UtilitiesinGoodConditions(4) To run Other Supporting & Essential Activities Like to

ManageFinance,Administration,MarketingoftheProducts&Servicesetc

IfastudyismadefortrendofEmployeeExpenses,sayforlast3yearsasmentionedinANNEXURE-2,itmaybeobservedthatithasnolinearrelationshipwithvolumeofproduction.

MoreoveritisStaticinnatureirrespectiveofvolumeofProductionorCapacityUtilisation.Sowith increase inProductionVolume orCapacityUtilisation,Employee Cost Per Unit of Production will decrease and withdecreaseinProductionVolumeorCapacityUtilisation,EmployeeCostPerUnit ofProductionwill increase. Increase inValue ,ifany,inF.Y.2018-19overF.Y.2017-18andthatofF.Y.2019-20overF.Y.2018-19maybeattributabletofollowingfactors:1) NormalIncrements2) UnionWageSettlements,ifany3) ManagementPayRevision,ifany4) InternalPromotions,ifany.Soinviewofwhatisstatedabove,

itisadvisabletoclassifyitasFixedinNature.

RNI No. 22703/72 Posted at Mumbai Patrika Channel on 10th of every month. Date of Publication is on 10th of every month.Postal Regn. No. MCS/089/2018-20 WPP License No. MR/TECH/WPP-41/South/2018-20

Printed&PublishedbyAshishkumarSureshchandraBhavsar onbehalf of theWestern IndiaRegionalCouncil of the Institute ofCostAccountantsofIndia,PrintedatM/s.SurekhaPress,A20ShalimarIndustrialEstate,Matunga,Mumbai400019.PublishedatWesternIndiaRegionalCounciloftheInstituteofCostAccountantsofIndia,RohitChambers,4thFloor,JanmabhoomiMarg,Mumbai400001.Editor:AshishkumarSureshchandraBhavsar.

Disclaimer1. WIRCdoesnottakeresponsibilityforreturningunsolicitedpublicationmaterial.Unsolicitedarticlesandtransparenciesaresent

inattheowner’sriskandthepublisheracceptsnoliabilityforlossordamage.2. TheviewsexpressedbytheauthorsarepersonalanddonotnecessarilyrepresenttheviewsoftheWIRCandthereforeshouldnot

beattributedtoit.3. WIRCisnotinanywayresponsiblefortheresultofanyactiontakenonthebasisofthearticlesand/oradvertisementspublishedin

thebulletin.Thematerialinthispublicationmaynotbereproduced,whetherinpartorinwhole,withouttheconsentoftheEditor,WIRC.

THE INSTITUTE OF COST ACCOUNTANTS OF INDIAWESTERN INDIA REGIONAL COUNCIL

ANNOUNCES WEBINARS ONSl.No. Date Topic Time

Ind AS Speaker - CMA Milind Date

1 14-06-2020 OverviewofIndAS&itslinkagewithCAS 4to5.30

2 18-06-2020 FrameworkforIndASandIndAS1–presentationofFS&INDAS-2Inventory 4to5.30

3 20-06-2020 IndAS16–PPE 4to5.30

4 21-06-2020 IndAS23–Borrowingcosts&IndAS36–Impairmentofassets 4to5.30

5 23-06-2020 IndAS38–Intangibleassets&IndAS40–Investmentproperty 4to5.30

6 25-06-2020 IndAS41–Agriculture,IndAS105–Assetsheldforsale&IndAS106–Mineralresources 4to5.30

7 27-06-2020 IndAS116–Leases 4to5.30

8 28-06-2020 IndAS20–Govt.grants 4to5.30

9 30-06-2020 IndAS115–Revenuefromcontractswithcustomers 4to6

10 02-07-2020 IndAS37–Provisions&IndAS12–Incometaxes 4to6

11 04-07-2020 IndAS19–Employeebenefits 4to5.30

12 05-07-2020 IndAS102–Sharebasedpayments 4to5.30

13 07-07-2020 ConsolidationIndAS103&110–Businesscombinations&consolidatedFS 4to6.30

14 09-07-2020 FinancialinstrumentsIndAS32&109 4to6

15 11-07-2020 PresentationIndAS7–Cashflow 4to6

16 12-07-2020 Ind AS 34 – Interim reporting, Ind AS 33 – EPS, Ind AS 108 – Operating segments & IndAS8&10–Accountingpolicies&eventsafterreportingdate

4to6.30

17 14-07-2020 IndAS21–Effectsofchangesinforeignexchangerates&IndAS113–FairValue 4to6.30

GST - Speaker - CA Pratik Shah

1 20-06-2020 GSTAudit-GSTR9-PartI 11to12.30

2 21-06-2020 GSTAudit-GSTR9-PartII 11to12.30

3 27-06-2020 GSTAudit-GSTR9C-PartI 11to12.30

4 28-06-2020 GSTAudit-GSTR9C-PartII 11to12.30

(1 CEP Credit hours will be provided to CMAs on basis of attendance)For link please visit - www.icmai-wirc.in

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