Big Cyber Challenge to Small Businesses

 

The number of startups and micro, small and medium enterprises (MSMEs) are growing in India. They contribute considerably to the Indian GDP. They will play a crucial role in making Bharat a $5 trillion economy in the near future. They face many challenges to making their businesses sustainable and profitable. Cyber threats have emerged as one of the significant threats for big corporations as well as MSEMs. Cyber threats remain similar for big corporations as well as MSMEs. This is because both kinds of organizations use technology to capture, process and store sensitive data and information. This data includes financial data, customer data, intellectual property (IP), transactional data, and business emails.

Major cyber threats to MSMEs and startups are spam and phishing attacks, ransomware attacks, distributed denial of service (DDoS) attacks, identity theft, data theft, and IP theft. A recent report by the Cyber Peace Foundation revealed that 43% of cyberattacks target MSMEs and startups. The report's findings show that about 46% of SMEs are clueless when addressing cyber risks. Furthermore, around 60% of these small businesses that fall prey to cyber incidents shut down within six months. A study by cybersecurity firm Trellix indicated that Indian SMEs faced an average of 37 cybersecurity incidents daily, leading to a loss of nearly 7 per cent in revenue.

Big corporations are making investments in cybersecurity technologies to tackle cyber challenges. MSMEs and startups are at a disadvantage as they operate with limited resources. However, business owners must realize the financial implications of cyberattacks. It is essential to recognize that allocating resources to cybersecurity is an investment in the long-term protection of the business. Investing in cybersecurity early on is more economical than coping with the fallout following a breach, which can include monetary and reputational losses and legal ramifications.

Ignoring cyber threats will not solve business owner's problems. They need to understand cyber risk and take steps to mitigate it. The following points will help business owners to minimise cyber risks.

1.     Acknowledge cyber risk as a business risk.

2.     Use a holistic approach to cybersecurity rather than deploying cybersecurity countermeasures like anti-malware and firewalls without an appropriate strategy.

3.     Educate your employees and other stakeholders about cyber threats and their roles in preventing them.

4.     Stay prepared for cyberattacks.

5.     Work with the right technology partners.

In conclusion, SMBs and startups are central to India's growth story. With limited resources, they are also an attractive target for threat actors. Cyber incidents may have devastating effects on SMBs and startups. They must prepare themselves to take the cyber challenge head-on.

Is PPF and EPF part of the debt portfolio?

Many of us have this question .So, let me start by listing some details of the two instruments.

The Employees’ Provident Fund, or EPF, is a retirement fund for organised sector employees, managed by the Employees’ Provident Fund Organization, or EPFO.

Under the EPF scheme, a salaried employee pays 12% of basic salary (plus dearness allowance) every month, and an additional 12% is contributed by the employer. In total, 24% goes towards the EPF account. The interest rate is currently fixed at 8.5%.

The Public Provident Fund, or PPF, is a government-backed small-saving scheme. Though started in 1968 with the objective of providing social security during retirement to workers in the unorganized sector and for self-employed individuals, it has become a very popular tax-saving instrument. The interest rate is 7.1%; this is fixed every quarter.

Are these debt instruments?

A debt investment is one that offers a fixed return to the investor with a promise to repay the principal over a predetermined tenure. There are variations but this is the broad premise. Going by that definition, both the EPF and PPF are debt investments – an assured rate of return, and the principal will be returned over a predetermined tenure.

So yes, they are both part of the debt portfolio. BUT, they cannot be the only part of your portfolio. The reason being that both these investments have very long lock-in periods. They score on safety since they are both backed by the government. They have an assured return. But liquidity is not their strong point. The lock-in periods are long and premature withdrawals are applicable only for specified and predetermined situations. To compensate, debt funds must form a part of your portfolio.

How should you decide which debt funds?

Personally I don't like debt funds because for me Debt means safety of principal & interest , neither of which is guaranteed by Debt Funds. Still it might be prudent to carefully invest in some of them 

You can then select funds that are low on both, duration and credit risk. Do not deviate from this rule and you will avoid credit risk and interest rate risk. The advantage of such debt mutual funds is that investors get the benefit of lower tax rates (if held for > 3 years) and market returns. The appreciation in these funds is not only from the accrual of interest income, but possible capital appreciation due to interest rate movements.

Once you have the above in place, and you have cash to spare, then you can look for higher returns. But do not exceed 20% of your debt allocation to such funds. Here are some suggestions:

Gilt funds. These funds have no credit risk or risk of default. However it can have Interest Rate risk and you might loose your capital in case you redeem it in a bad time. If you expect interest rates to dip in the future, you could consider a tactical bet here.

Dynamic bond funds can also be considered.

Credit risk funds can be opted for by a seasoned investor who is willing to take that extra risk.

Remember that fixed-income portion of the portfolio is predominantly focused on capital preservation and protecting the purchasing power of the invested corpus. 

In case you have senior citizen parents consider investing in SCSS and Pradhan Mantri Vaya Vandana Yojna. Remember that designing a FAMILY PORTFOLIO is always better than a PERSONAL PORTFOLIO , atleast from the Taxation point.

It’s a personal choice.

The type of funds you select will depend on your holding period and your understanding of their strategy.

A family member who does not understand debt funds only has money in EPF and PPF. On the other hand, many young guns tell me that the PPF and fixed deposits have no place in his portfolio because the debt allocation is taken care of by debt mutual funds and EPF.

My debt portfolio comprises a fixed deposit, debt funds (very small part ), as well as PPF ( No EPF as I am not an employee) . 

Do you have an Emergency Fund?

To ensure that you do not dip into your Core Portfolio during times of emergency, I suggest that you should have an Emergency Fund. This is so as in case you urgently need money, you may have to sell your equity investments which would be a problem if the market is at a low.

For Emergency Fund I would suggest that convert your savings account a flexi / sweep account wherein the amount over and above a benchmark balance is automatically put in FD and in case of requirement you can just draw a cheque and need not have to fill the FD closure form. I would suggest that one should keep atleast NINE months expense requirements in the Flexi Account.

All About EPF

- PersonalFN

What is the Employee Provident Fund (EPF)?

An employee provident fund is created through the contributions made by an employee and employer. Under EPF scheme, both the employee and the employer has to make certain contributions every month towards the EPF scheme. You as an employee will get this money at the time of your retirement or if you discontinue working either temporarily or permanently due to any kind of disability.

The EPF is a tax-free investment instrument for the salaried class having an Exempt-Exempt-Exempt Status. The contributions made by the employee is eligible for tax deductions under Section 80C, the interest earned on the total investments and the withdrawal (including partial withdrawals for specific expenses) are exempt from the purview of taxation.

These contributions are made every month, thereby encouraging employees to save a portion of their salary each month. Investments made by a vast number of employees across India are pooled together and invested by a trust.

The EPF is created by the Employees Provident Fund Organization (EPFO) of India, a statutory body of the Indian Government under the Labour and Employment Ministry.

It states that an organization (irrespective of its structure) having 20 or more permanent employees (across different departments and branches whether located in the same location or otherwise), working in any of 180 plus industries, should mandatorily register with the EPFO.

What is interesting to note here is, the Act defines an “employee” as “any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer, and includes any person employed by or through a contractor in or in connection with the work of the establishment and engaged as an apprentice, not being an apprentice engaged under the Apprentices Act, 1961 (52 of 1961) or under the standing orders of the establishment”

Where does my monthly EPF contribution go into? 

Currently, the following three schemes are in operation under the EPF Act of 1952, and it is into these trusts that your monthly contributions go:

• Employees’ Provident Fund Scheme (EPF) (1952)
• Employees’ Deposit Linked Insurance Scheme (EDLI) (1976)
• Employees’ Pension Scheme (EPS) (1995)

EPF, EPS and EDLIS are calculated on the basis of your Basic + Dearness Allowance (DA) (including cash value of any food concession allowed to the employee) + Retaining Allowance (RA) if any. (Retaining Allowance means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services.)

What is the Employees’ Pension Scheme (EPS)?

The Employees’ Pension Scheme, 1995 (EPS 1995) came into effect from 16th November 1995.  It has been designed as a “Benefit Defined Social Insurance Scheme” formulated following “actuarial principles” for ensuring long term financial viability. 

The scheme aims at providing economic sustenance during old age and survivorship coverage to the member and his/her family. The EPS 1995 is funded by diversion of 8.33% of monthly wages (subject to the wage ceiling which is presently Rs 15,000/- per month) from the employers’ share of contribution. The Central Government also contributes 1.16% of monthly wages.

This part of your monthly contribution is targeted towards offering pension on:

• Member Pension upon retirement /superannuation
• Member Pension upon disablement while in service
• Withdrawal Benefit upon leaving service after putting in less than 10 years but more than six months of service
• Spouse Pension upon death of member
• Spouse Pension upon death of member as pensioner
• Children Pension along with spouse pension (up to age 25) for two children at a time
• Orphan Pension upon death or remarriage of spouse (up to age 25)
• Disabled Child Pension to children/orphan (life-long)
• Nominee Pension to the Nominee when no family exists
• Dependent Parent Pension when no family and nominee exist

The formula for calculating member pension under EPS’95 is as follows:


What is the Employees’ Deposit Linked Insurance Scheme (EDLIS)?

EDLIS is a social security scheme with an objective to provide a helping hand to the beneficiaries of the deceased employee. Most individuals in India are ignorant on the importance of owning a life insurance policy and would prefer not to buy one if given a choice to opt out. Hence in order to maintain the economic wealth of the family (and the society) the government has introduced the EDLI scheme.

The scheme gives life cover to the employees of the organized sector. It is a group term insurance plan which gets activated on the bereavement of the employee paying a maximum sum assured of Rs 6,00,000 to the nominee. The cost of the scheme is borne by the employer.

However, most employers opt out for the EDLI and choose to have a group life insurance cover for their employees; this works out better for the employees and does not increase any cost to the employer.
(Read this to know if your retirement money in EPF really safe )

What is the contribution percent of the employee and the employer?

The breakup of the contribution is different for the employee and employer.

An employee’s contribution goes directly into the EPF, while the employer’s contribution goes into the EPF, the EPS and the EDLIS.

Here is how it is broken up:

Employee:

• 12% into EPF (This comes out of the employees’ salary).

Employer:

• 3.67% into EPF
• 8.33% into EPS
• 0.5% into EDLIS
• 0.85% for EPF Administrative Charges
• 0.01% for EDLIS Administrative Charges

As you can see, you as an employee do not contribute to the life insurance premium charges. It is borne by your employer. Also, the administrative charges for both the EPF and the EDLIS are borne by the employer too While your contribution goes solely towards your EPF and your Pension.

Is India really experiencing jobless growth?

- Livemint Joji Thomas Philip, 29 July 2017 Jobless growth: it's a term that makes economists cringe, makes fund managers worry and causes sleepless nights for any Government in power. Jobless growth refers to economic growth without commensurate growth in jobs - which means rising unemployment, rising social tensions, widening gulf between the haves and the have-nots, slowdown in consumption with rising unemployment and therefore an economic growth that's not finally sustainable in the long run. The question is whether India is right now experiencing jobless growth or are job growth concerns overblown? Therein lies an answer to whether our secular growth story is for real or only a mirage.

Fact Checking The understanding amongst economists is that economic growth generates jobs, or that it ought to. However in recent years India has slipped into what is technically known as jobless growth. It describes a situation when increase in employment neither does nor correlate with economic growth. 'Jobless growth is an economic phenomenon in which a macro economy experiences growth while maintaining or decreasing its level of employment.'(The Hans India, Gudipati Rajendera Kumar Jun 08, 2017) In the 2005-10 period there were on an average12 million new entrants to the labour force. However, some experts say that only 7 million workers entered the workforce every year. Thus there is a statistical problem as well here, since accurate labour figures are hard to get in India. Says Kaushik Das, India economist at Deutsche Bank AG, "be cautious when you put numbers to job creation, because we do not have any formal data from the government on the number of jobs that are being created. People try to draw conclusions from piecemeal data that they get." (Livemint Joji Thomas Philip, 29 July 2017) In the same period as above, while 27.5 million new jobs were created, the number of self-employed persons reduced by 25.5 million. This is because many people who were previously self-employed took up jobs, mostly in the construction sector. According to the Labour Bureau, 2015 saw the lowest level of job creation. On top of all this worrying trends, underemployment continues to dog the India economy. The Labour Bureau's Annual Employment-Unemployment Survey Report in 2013-2014 showed only 60.5 per cent of persons aged 15 and above who were available for work for all the 12 months were able to get work during that year. Even more worrying is that for the 7 million young people who join the labour force, the open unemployment rate is 10 times higher than that for those 30 years and above. The 2011 census showed that while the economy had grown at a robust 7.7% in the previous decade employment had increased only at 1.8% per annum. According to Labour Bureau statistics, India added just 1.35 lakh jobs in eight labour-intensive sectors in 2015, compared to the 9.3 lakh jobs that were created in 2011.The rate of unemployment grew steadily from 3.8% in 2011-12 to 5% in 2015-16.Many experts feel that this is understated. Experts say that the main cause of the problem is inadequate development of skills and a mismatch between supply and demand in the labour market. "Clearly, not enough jobs are being created to meet the needs of people entering the workforce. The manufacturing and construction sectors are not doing well," said Dharmakirti Joshi, chief economist at CRISIL. (Nikkei Asian Review, Go Yamada May 31, 2017). Job Creation As many societies and countries industrialised, a large number of manufacturing jobs were created. Industry's share of the GDP went up, and that of agriculture declined relatively, while industry in turn then gave room to the services sector. According to Princeton economist Dani Rodrik, normally, services sector dominance arrives when per capita incomes are already high. But in recent years many developing countries, India most notably, have jumped from an industry fuelled growth to a services dominated economy. Rodrik says that in such cases, developing countries have been reaching their peak shares of income and employment in industry at much lower levels of income, particularly in the post-1990 period. So the underlying dynamic, that as jobs and incomes grow they fuel savings, which in turn brings in more growth, is endangered. It is also difficult to reap the harvest of the demographic dividend without a stellar performance by the industrial and allied service sectors. Currently, agriculture, information technology and construction sectors are not performing well, unlike in the recent past when they created a lot of job opportunities. A big problem of jobless growth is the employment capability of youngsters. It is a sad truism that many of our college graduates, not to mention school graduates are woefully short on employable skills. The education system, oriented towards rote learning, is simply not up to the task of producing intelligent, skilled andself-confident workers needed for a modern economy. Ways to mitigate One important way out is to pump up infrastructure spend. For example,taking off from the Golden Quadrilateral program of the earlier NDA regime, the government in the 2007-12period spent $475 billion on infrastructure. In this period, employment in the construction sector increased even while wages went up. This led to a consumer boom and sustained growth. However this growth in employment stagnated after 2012. Small and medium industries are four times as labour intense as large firms. Many large firms are capital intensive and create relatively fewer jobs. Hence encouraging smaller firms can theoretically push up employment. However it must be noted smaller firms need large firms to prosper since they mostly supply goods and services to large firms. Hence it may not be out of place to encourage large firms who in turn will give business to smaller firms. Thus, pushing growth is perhaps the best answer to the problem of joblessness. As Arvind Subramanian the chief economic advisor has said, India requires sustained growth of 8% and more to provide full employment. Government's response Several government schemes like Smart Cities, for building new cities, Sagar Mala for upgrading and building new ports and the renewed emphasis on road building are likely to help reduce unemployment. It has also allowed industry to hire more trainees and apprentices. This would give youngsters a chance to develop employable skills. Further, the labour ministry is offering to pay 8.33% of salary for pension contribution for newly hired workers earning up to Rs. 15,000. The government is fine tuning incentives for labour intense export oriented industries, though its Interest Equalisation Scheme and Merchandise Exports from India scheme. Further the government has relaxed foreign investment norms across the board, particularly in food retail, where the only condition is that the goods must have been manufactured in India. Further under the Stand Up India scheme, Dalit and Scheduled tribes and women entrepreneurs would be given loans, training and help with marketing. However many experts feel that the case for jobless growth is overblown. Indeed as it emanates more often from political quarters than economic experts, there may be some substance to the assertion. India is in a phase of strong structural economic reform that typically takes time to get reflected in macro numbers and country rankings such as ease of doing business, says Kaushik Das. According to Kaushik Das, "you will see jobs come through along with growth, and this is why the government is focusing on certain sectors that will give a fillip to jobs and have a multiplier effect. One could be increased focus related to low-cost housing. Or, if you draw this further and think of urbanization itself as a focus area of this government, then what happens is that it creates other layers of jobs. The concern on jobless growth is overrated. India will continue to grow at between 7.5% and 8% range over next 3-4 years. I am forecasting 7.5%, but I see the potential going up - when GST (goods and services tax) comes through, it will add at least 50 bps (basis points) or more to the growth rate."

Union Bank Hack

Date 21^st July 2016. An employee in the treasury department of union bank was reconciling the SWIFT (Society for worldwide interbank financial Telecommunication) payment for the day. He realised that an amount of $171mn was transferred from bank’s Nostro account (an account that a bank holds in a foreign currency in another bank) held with Citibank New York and J P Morgan Chase New York without his authorization. Money was deposited in accounts held in Cambodia (The Canadia Bank Plc and RHB Indochina Bank), Taiwan (Bank Sinopac), Thailand (Siam Commercial Bank) and Australia. Top management was immediately informed about the same. Management immediately got into action by connecting with RBI, MEA and CERT-In. Fortunately they were able to recover all the money. Let’s look at how it was done.

Attackers used a well-known technique of phishing. Phishing technique is generally used to steal confidential and sensitive information like password, credit card details etc. Attacker send an email addressed to individuals in union bank and customer care. Email appeared to originate from RBI with malware attachment. Some of the employee opened an attachment. Malware was activated and went viral in the network looking for interesting machine with higher privileges. Attackers used stolen SWIFT code to do the transfer. This attack is similar to Bangladesh central bank cyber theft where $81 mn were stolen.

Lessons learn:

• Train your most important Asset i.e Human which is unfortunately the weakest link in security
• Strengthen you technical and administrative security measures
• Integrate incident response with forensics

EBITDA - The Truth

Analysts often use EBIDTA to evaluate company financials. EBIDTA is essentially earnings before interest, tax, depreciation and amortization and is commonly referred to as operating profit. The operating profit is a measure of how well a company is able to manage expenses in running the day-to-day operations. But EBIDTA may not give the complete picture of a company's business strength. 

More often than not companies try to dress up financial statements using EBIDTA and such companies are more likely to do fraudulent transactions. Since EBIDTA excludes a number of non-cash charges, it does not give a true picture of a company's financial standing. One of the non-cash charge excluded is depreciation. In reality, depreciation entails outflow but only after a longer period of time. To understand this let us try to analyze the nature of depreciation expense in more detail. 

Plant and machinery is an important lifeline asset for a brick and mortar company. As per generally accepted accounting principles (GAAP), a company is required to amortize the machine cost over its useful life which in accounting language is known as depreciation. Therefore, depreciation has the impact of reducing reported profits each year although it does not result in immediate cash outflows. In that sense it is non-cash in nature. So depreciation allowance contributes to cash in the short term. 

In other words, depreciation can be looked upon as a yearly contribution towards a sinking fund to finance the replacement of the worn out plant & equipment. Amortization of goodwill, on the other hand, represents a yearly charge for an expenditure that happened in the past and for which the cash flows have already taken place. 

Therefore a more correct measure to evaluate business performance is to look at cash flows from operations obtained by adding back depreciation and amortization to after-tax earnings. 

Cash Flow from operations = Profit after Tax + Depreciation + Amortization 

This indicator factors in huge interest outflows in case of debt-ridden companies. But a more accurate indicator of a company's ability to profitably run business is the 'Free Cash Flow'. Free Cash Flows measure a company's ability to meet short term outflows to fund working capital as well as long term outflows for capital expenditure. Free Cash Flow is obtained by adjusting cash flow from operations for working capital changes (operating cash flows) and deducting capital expenditure. 

Free Cash Flow = Operating Cash Flow - Capital Expenditure 

A positive and high free cash flow indicates that the business is generating a lot of cash, a vital factor to drive its future growth. A negative free cash flow, on the other hand, shows that the business is burning cash which can be detrimental for a company's survival in the long run. 

Many companies with their asset-light franchise based business models are big cash generators.

History holds lessons for today's government

- Nilesh Shah

Margaret Thatcher, a grocer's daughter, became the first woman prime minister of the UK

The Narendra Modi led National Democratic Alliance government is improving efficiency of government spending, divesting stakes in public sector units (PSUs), following fiscal prudence, lowering inflation, carrying out financial sector reforms and an overall policy of minimum government, maximum governance.

While investors are satisfied with the direction of the policies, there are concerns about the lackluster performance of equities in last two years. There is, however, precedence in to reassure investors that markets will reward good economic policies.

In 1979, the UK was suffering from low growth, high inflation, high fiscal deficit and also high unemployment. The period was called 'Winter of Discontent' due to recessionary conditions. Margaret Thatcher, a grocer's daughter, became the first woman prime minister of the country. She fought elections on the issue of a non-performing labour government, under a catchy slogan - "Labour isn't working." She was once rejected from a job with a remark about being head strong, obstinate and dangerously self-opinionated. Her economic policies, which came to be known as Thatcherism, were based on free markets. She felt that a culture of dependency and welfare state had lowered the country's growth. She focused on controlling inflation, which was around 18% in the early 1980s, through high interest rates, tight liquidity and fiscal prudence, Inflation was brought down significantly - albeit initially at the cost of growth - through a hard fought battle. She followed the path of fiscal prudence by divesting stakes in PSUs across industries. She did this not only with PSU companies but also in real estate assets like council houses. Some of the assets were sold at a discount to market value to make divestment attractive. Assets and companies worth 47 Pound billion were sold to reduce the debt burden and also to make such companies market oriented.

Domination of public sector enterprises in the British economy and the role of the government in providing civic services was significantly reduced through divestment, including strategic sales. Productivity increased significantly, especially labour productivity, in such companies, which eventually benefitted the British economy. Thatcher lowered direct taxes to increase tax revenue through better compliance and increased indirect taxes to bring fiscal deficit under check. She took labour unions head on by closing coal mines that were not commercially viable. During a year long strike, which turned violent at times, she stood her ground. The police was equipped with better riot gear to handle militant labour movement members.

The number of working days lost due to strike came down from 29 million in 1979 to 2 million in 1990. On her economic policies, Thatcher said, "You turn if you want to, the lady's not for turning." She also earned the nickname of "Milk Snatcher" for abolition of free milk for school goings children in an attempt to cut public spending. According to official documents made public later, it was revealed that Thatcher preferred to live frugally at 10, Downing Street, including paying for an ironing board herself.

She encouraged deregulation, especially in the financial sector. She initiated Big Bang reforms in the financial sector, to make London a financial hub for trade and investment flows. She encouraged exchanges to grab global flows. She promoted the concept of "small government" to reflect the government's priorities towards free market.

Initially, however, her economic policies didn't bear fruit. Growth slowed down. Unemployment went up. In 1981, just three years into her tenure, 364 leading economists of that time tore apart her economic policies and warned citizens of impending disaster if her economic policies were allowed to continue. Fortunately, she ignored the intellectuals and pushed the UK from being a welfare state to a free market economy.

Eventually, growth returned. Unemployment remained stubborn for a while but finally fell significantly. The stock market handsomely rewarded the Thatcher government's economic policies. FTSE all share indexes multiplied over five times from a modest base of 221 in 1979 to 1,171 in 1990.

Thatcher was able to use the revenue from North Sea oil extraction to fund fiscal policies that were balancing the economy.

She and her government did face opposition from various quarters for pursuing tough economic policies. Her popularity fell to a level not seen by predecessors within the first two years of becoming Prime Minister. The Falklands War in 1982 provided an opportunity for her to regain popularity, and she won the 1983 elections. That re-election allowed her to reap the benefit of the work put in the first term.

She remains first among peers in the post-war history of the UK. At a celebration on her 80th birthday in October 2005, Geoffrey Howe, a long time Cabinet minister under Thatcher, said, "Her real triumph was to have transformed not just one party but two, so that when Labour did eventually return, the great bulk of Thatcherism was accepted as irreversible."

British history of between 1979 and 1990 does indicate that free market, small government, fiscal prudence, financial sector reforms, policies targeting lower inflation, and improved efficiency of public spending does improve growth and also creates jobs. Such policies handsomely reward long-term investors. What is needed is continuance of policies despite initial hitches.