Why the Malhotras are heading towards bankruptcy

Did you think that having ample money is an assurance of a good, prosperous life? Mr and Mrs Malhotra (names changed) live in an upmarket housing society in South Mumbai. Most people would see them to be truly blessed, prosperous and would want to be in their situation. Read on and discover how you would feel in the shoes of Mr. and Mrs. Malhotra.

Here is an insight in their current life:

• Current net worth -- Rs 11 crore (Rs 110 million). This includes residence at Peddar road of Mumbai - Rs 2 crore (Rs 20 million), farm house - Rs 1 crore (Rs 10 million), RBI Bond Investment - Rs 1 crore (Rs 10 million), jewellery and diamonds - Rs 75 lakh (Rs 7.5 million), PMS (Portfolio Management System) schemes - Rs 25 lakh (Rs 2.5 million), their share in family's commercial properties in Aurangabad, Delhi and Ahmedabad valued at Rs 4 crore (Rs 40 million), their share in family's business premises in Mumbai valued at Rs 2 crore (Rs 20 million)
• Loans and liabilities - Negligible, some car loans
• Have half-a-dozen gold and platinum credit cards
• Have premium relationships with all companies -- private banking, premier banking, priority circle, etc.
• Sought after for business by all relationship managers of all companies
• 2 children -- both studying in the USA at Wharton
• Generally, a 5-star lifestyle

Here is some more insight in their current life:

• Ongoing business income -- practically nil due to business and stock market losses in 2000-01
• Investment income -- Rs 600,000 per annum from Rs 1 crore invested in 6 per cent RBI Bonds
• Expenses -- Rs 900,000 per annum approximately -- deficit of Rs 300,000 and gap widening each year with inflation.
• Commercial properties are all under double dispute, i.e. amongst siblings and with encroachers; assets cannot be used as they are part of family trust and trust was formed by Mr Malhotra's late father who died in 1996 without a will. Assets can be seen but can't be used or touched till disputes are resolved. As a result, business premises in Mumbai also under family squabbles since last 8 years.
• Children's fees at Wharton partly paid -- no more liquid money available for fees.

Now they are considering taking a loan for a number of things, which in my opinion is a very bad idea given their situation.

Their situation is so critical that it is hard to imagine that someone who is worth Rs 11 crore (Rs 110 million) today has problem in funding their children's education, children have to work and earn their fees, parents -- i.e. Mr. & Mrs Malhotra -- are in depression, can't afford to think about holidays, feel strangulated to maintain their lifestyle.

If you think that they can cut their expenses it is not possible. That's because they come from a section of society where either they continue to be part of that society or get totally cut off. I am not being sarcastic here but granting them their lifestyle requirements, given our societal thinking and background.

Everyone else in their community is okay but for them. Social relations and obligation force them to have a lifestyle -- they have to have a good car -- can't do with a Maruti Esteem, they have to go to parties, they have to entertain guests now and then, they have to have help at home, have to pay society dues; and living in upmarket South Mumbai apartments anyway can cost you Rs 50,000 to Rs 1 lakh (Rs 100,000) per month, comfortably.

Things are only going to get worse -- both Mr and Mrs Malhotra are now looking for jobs and at their age of around 50; and with little or no corporate experience things are difficult. They have been business owners forever.

Why did this happen and how to come out of a situation like this:

The Malhotra family suffers from paranoia of 'safety.' Late Mr Malhotra was overbought in real estate with no proper plans to manage real estate. Now, there is encroachment on their land. Moreover, given legal expenses and absence of father's will, how and who will bear all expenses -- legal and otherwise -- is a major question.

Our Mr Malhotra has hardly got any money to pay but some of his siblings do and because they will fund all expenses -- they want a larger share of the estate, which is naturally not acceptable to the other siblings who are not as wealthy.

Even in Mr Malhotra's case, he has majority of his investments in RBI Bonds from which he is earning peanuts in terms of 6 per cent given this lifestyle and expenses.

His PMS is doing just okay, but his brokers are happily churning his portfolio five-eight times a year and earning handsome brokerage. Mr Malhotra, given his risk profile earns about 6-10 per cent on his PMS post taxes, brokerage and accountant's charges.

Each year, he is cutting slices from his PMS to fund his life and is worried as the PMS he started with Rs 50 lakh (Rs 5 million) is now down to half given his slice cutting each year for the last 4 years.

Mr Malhotra is really stuck. Even if he takes a loan against RBI Bonds -- from where will he pay interest on the loan? So much for the so-called 'safety' and this 'safety' at what cost? Rather have the knowledge to understand what is safe and what is not. What is the point in such type of safety if he does not have enough to eat?

Now we may not see many with a Malhotra type family situation, but we surely see many with a 'financial management' situation that is really similar to the Malhotra's. Large assets and tiny earnings.

The solution is not easy. He is in desperate need of liquid cash and must consider some hard decisions -- selling properties, consider unfavourable offers from siblings to surrender his share, restructuring his portfolio, analysing new income sources, etc, to name a few.

Even after the cash is generated it will have to be invested using variety of asset allocation models based on various goals and monitored closely. This is to provide him some cash support and first bridge the impending gap of inflation on expenses and thereafter look at creating some surplus.

Given the current situation, Mr Malhotra is speeding towards a black hole of financial management: bankruptcy.

Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik.jhaveri@transcend-india.com.

Disclaimer: The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.