Google Pay has a new buddy 👋🏽

LenDen, the P2P marketplace, is bringing its lending and borrowing services to the payments app.

This is edition 251 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

Tech giants have long used the marketplace as a starting-point to understand how their customers behave with other service providers before jumping headlong into it themselves. Is that Google’s plan with peer-to-peer lending?

Other tech giants like Alibaba and Tencent in China are facing heat from smaller rivals that want to establish their own dominance.

And tax authorities in India are going after mutual fund related cases dating back six years. Will they find what they’re looking for? 

We revisit the results from the WFH poll we ran earlier this week. The results show that a shake up of pandemic-related products is in order.

Google Pay’s adventurous lending bet

An interesting press release landed in my inbox yesterday. It said peer-to-peer (P2P) marketplace LenDenClub has partnered with GPay (Google Pay) to bring P2P lending on the payments app. That means Google’s 60-70 million users can now play both borrower and lender. While Google brings the users, LenDen is the one licensed to be a P2P lender by the Reserve Bank of India.

A licensed P2P platform’s job is to bring borrowers and lenders together, collect borrower details, and help them match with the right lenders. While they may assist the lender with the collection, the onus of collection is left to the lender. So basically, lend at your own risk. 

In all likelihood, a measure like this helps Google understand the credit needs of its users. And sometime in the future, it can cut P2P lenders like LenDen out and do it by itself with an RBI license. But that can happen only if this move doesn’t turn into a disaster. 

One of the reasons why P2P lending in India has not gotten big is because there is no one big platform that has been able to attract enough lender-investors— those who would lend the money in exchange for high-interest rates—and borrowers. For instance, LenDen has 1.5 million people on its platform. In most cases, borrowers almost always outstrip the number of lenders. Google’s users help solve that issue and in having the right lender-borrower ratio. 

High net worth individuals who saw P2P as a neat way to make hefty returns hardly saw their money back. Non-Performing Assets (NPAs) were high. And the marketplaces could do precious little—their job was only to get enough borrowers and present them to the lender. 

But there is a mismatch in how much Google allows people to lend and to borrow. Borrowers can visit the ‘InstaMoney’ spot on GPay and get loans ranging anywhere from Rs 5,000 (US$70) to Rs 12,500 (US$172) transferred to one’s bank account within minutes. Similarly, investors can visit the ‘LenDenClub’ spot on GPay and invest as low as Rs 500 (US$7), thereby offering loans to borrowers directly. 

This would mean multiple lenders will finance one borrower. So if a borrower defaults or even pays back partially, which “investor” gets back the money first? 

At the beginning of this piece, I said P2P lending hasn’t scaled in India because of the absence of a large platform. That’s why China-esque disasters—where P2P lending collapsed due to widespread defaults—have been sidestepped. But a partnership with Google is likely to take P2P lending mainstream.  

If I were Google, I’d be wary of this, because if lenders lose money (and they will), they are bound to blame Google for it, and leave GPay altogether. Or worse, attract the regulator’s ire. 

Dividend-stripping. Is the I-T department barking up the wrong tree?

Rewind to 2010.

In a significant ruling, the Supreme Court has ruled that taxpayers can legally reduce their liability through dividend-stripping, a term used for selling mutual fund units at a discount post-dividend. An apex court bench headed by Chief Justice SH Kapadia has said there is nothing wrong in dividend-stripping after getting the tax benefits. The bench further said such dividend stripping after availing of the tax rebates cannot be termed as abuse of law. "Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction," said the bench agreeing with an earlier Bombay High Court order.

Cut to 2021. 

Yesterday, the Economic Times reported that “the tax office asked at least three large fund houses to share information on dividends paid, dividend dates and redemption amounts from FY14 to FY20.” 


Before we get ahead, let’s understand dividend-stripping and look at it through the lens of the actual case the Supreme Court was dealing with when it passed a verdict in 2010.

Back in March 2000, Chola Mutual Fund took out newspaper ads telling people, ‘hey, invest in our fund before 24 March 2000, and we’ll pay out dividends. You won’t have to pay tax on it. And since the fund invests in high-growth technology stocks, that’s a winning combination’. 

You have to remember a couple of things here. It was the height of the dot-com boom so everyone liked tech stocks. And if you promise anything that’s tax-free, people will lap it up. 

So a company called Walfort Share & Stock bought units in Chola’s Freedom Technology Mutual Fund worth Rs 8 crore (US$1.1 million). And as promised, on 24 March 2000, Chola paid out the dividends from its fund. Now the dividend is paid out of whatever the fund has earned previously. So the net asset value (NAV-kind of like its price) of the fund fell from Rs. 17.57 to Rs 12.97 (US$0.24 to 0.18) to reflect the dividend paid. 

And Walfort Share & Stock sold off their units. At a loss of nearly Rs 2.10 crore  (US$289,000)—since they invested at a NAV of Rs 17.57 and sold after it fell to Rs. 12.97.

But remember, they’d already received a dividend of nearly Rs 1.90 crore (US$261,000). Which was tax-free.

(For simplicity, we’ve ignored things like an exit fee or an entry fee, and even an incentive that the company allegedly received) 

So in a nutshell, dividend-stripping involved buying into a mutual fund scheme immediately before it paid a tax-free dividend. And then selling-off the investment at a loss, after the NAV adjusted for it. The loss on sale of the mutual fund units would then get adjusted against the investors’ income and ergo, reduce the tax outgo.

Pretty nifty. And it was easy to do this since most mutual funds announced dividend dates beforehand. But it also created losses for the government. And in the case of Walfort Share & Stock, the taxman wasn’t too pleased.

In 2004, the government first tweaked the rules. But it still gave investors two options and said:

  1. You need to have invested in the fund at least three months prior to when the dividend was announced (record date); or
  2. You need to hold your investments for at least nine months after the dividend is paid. 

The logic for #1 was probably that you’d need to have some insider information to know about dividends well in advance. And that’s not really legal, or ethical. 

And for #2, it meant that even if the NAV dropped after paying dividends, given a period of nine months, the NAV could rise again (market-linked and all that). And any loss claimed by an investor wouldn’t be too large. So the I-T department wouldn’t lose out on much. 

It made sense. But dividend-stripping remained rampant.

It wasn’t too hard to know three months beforehand that a dividend would be paid. I guess the various teams (read sales, usually) let slip this sort of information in advance?

And India’s capital market regulator, the Securities and Exchange Board of India (Sebi), had earlier said that nearly Rs 25,000 crore (US$3.4 billion) was collected by some schemes between April 2014 and October 2015. All for dividend-stripping purposes.

In fact, in 2016, Sebi wanted mutual funds to declare if they’d ever taken part in such activities. Sure.

But investors didn’t really break any rules when they indulged in this very interesting practice. So going after them for what they did during FY14 to FY20 may not really make sense. And can the tax folks really find instances of a fund house signalling in advance about dividend payouts? Doubt it.

PS: Read more about how certain mutual fund schemes from Reliance Mutual Fund and JM Mutual Fund saw a bump up in their assets on account of dividend-stripping and a similar bonus-stripping activity during 2014-15. 

China’s internet giants are shaken but not stirred

The winds of change are blowing on China’s internet space. Upstarts ByteDance, the media firm behind TikTok and other services, and e-commerce challenger Pinduoduo (PDD) have both cut into dominant players Tencent and Alibaba.

PDD, a 5-year-old service best known for group-buying and farm fresh products, announced a new user milestone that tops Alibaba. China’s dominant e-commerce service practically invented online selling. PDD reached 788.4 million shoppers in the last year, narrowly ahead of Alibaba’s 779 million.

It’s an important milestone because PDD has shown that China’s digital elite can be bested by new concepts. The service pioneered the concept of buying in social groups for discounts. It is also heavily focussed on mobile-only users—it doesn’t even offer a website for buyers. Chinese shoppers, with an eye for a bargain, have flocked to the service, which operates in stark contrast to Alibaba’s services that span marketplaces, branded malls, and more.

A similar challenge is mounting in the media space where ByteDance, better known than PDD, is challenging Tencent. Tencent is best known for WeChat, China’s top messaging app, but games make up the bulk of its revenue. It also owns the makers of top titles like Fortnite and PUBG.

But ByteDance is encroaching. Just last week, it successfully outbid Tencent to buy gaming studio Moonton at a reported valuation of US$4 billion. ByteDance has been working hard to prove that TikTok, known as Douyin in China, is no fluke. While it also operates news apps, Google-like productivity services for business and other media apps, games are very much a focus.

According to TechCrunch, ByteDance’s new gaming division has 3,000 employees—that’s without counting Moonton. It has invested in 11 gaming startups and acquired six of them. Moonton is a big deal because its halo title, Mobile Legends, is well established.

The game crossed US$500 million in total earnings last year, thanks to growth in Southeast Asia, with over 500 million downloads and 100 million monthly users. It could provide just the linchpin for ByteDance’s gaming ambitions to truly take off.

But China’s internet giants are far from defeated.

PDD and ByteDance have shown their progress, but there’s still an enormous gulf that they need to close.

Alibaba, for example, may have fewer shoppers than PDD but it knows how to make money. PDD doubled its revenues over the last year, but its sales represent  less than 13% of Alibaba’s annual income of US$72 billion. Alibaba is also hugely profitable, whereas PDD posted an annual operating loss of US$1.4 billion.

Then there’s Tencent. ByteDance is a nuisance to the internet giant, but it isn’t stopping its business. Earlier this week, Tencent’s announced its annual results which included a net profit of US$18,8 billion.

Chipping away at a giant is one thing. Demolishing them is something else altogether.

Source: Giphy

The future of the workplace is hybrid

Earlier this week, my colleague Seetharaman wrote that, “a year down the line, working out of the office only half the time will seem as unusual as permanent remote working appears now.”

And he asked the subscribers of our newsletter what they thought about going back to a physical workplace. The overwhelming majority prefer a hybrid model.

People miss the random chats in the hallways, grabbing lunch together, even collaborating in person for projects and all that. 

After all, being cooped up at home and the blurring lines between work and home has meant that remote work has caused an increase in anxiety, depression, stress, and loneliness.

But now that people are returning to work (RTW-yes, that’s the new pandemic acronym), either full-time or via the hybrid model, there’s now stress of another kind.

Mental health consultants like Optum, Innerhour and Heart to Heart Consulting Centre have been flooded with calls complaining of severe anxiety about return-to-work (RTW) plans rolled out by several employers over the last couple of months.

Re-adjusting to the old normal is difficult. What happens to the extra hours you save on commute, the additional responsibilities that you took up at home, and the hobbies that you enjoyed? And not to forget rising Covid cases, especially in India. 

And Zoom, the video conference app that was a runaway success during the pandemic is aware that while things will change, RTW could still be hybrid permanently. So it’s introducing the option to white-label it its products to keep it real. 

Zoom said Monday that it would start selling its videoconferencing technology so other companies can embed it in their own products, Chief Technology Officer Brendan Ittelson said. The calls would still run over Zoom, he said, but wouldn’t carry the company’s brand.

The pandemic isn’t over. Everyone’s just trying their best. 

That’s a wrap for today.

Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back on Monday.

Stay safe,
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