An uneven field

The heat over different tax slabs in a uniform tax regime is just one of the asymmetric situations that investors face

Does a uniform tax imply a single rate on all goods and services across the country or different rates for different groups that are the same everywhere? The answer to the question is at the center of the debate if the roll-out of the goods and services tax has simplified the indirect tax regime. Five slabs replaced various Central and state government levies from 1 July. The unfairness of applying the same rate on wheat flour and luxurious cars are noted in support. The counter-argument is that, even at the same rate, the absolute tax revenue generated will depend on the cost. Categorization leads to arbitrariness and disputes. The finance minister has hinted that eventually the 12% and 18% tax rates will be merged and there will be three groups comprising the poor man’s basic necessities at zero tax, demerit goods in the highest slab of 28% and the rest in between. A few items still remain at the discrimination of states. There is a consensus that mass consumption items require moderate rates. Yet, along with alcohol, fuels are heavily taxed both by the Central and state governments. Despite unanimity on the need for one rate on the same product, the disagreement on whether there should be a single rate has underscored the fact that tax payers and investors have to contend with a field that is not leveled. If it were so, there would be one income tax rate. 

The market assigns higher valuations to mid and small caps due to their potential despite the downside of these companies requiring to sacrifice the quality of their earnings in the quest for growth. At the same time, companies belonging to the same industry get different treatment after taking into account tangibles such as promoter holding, the margins, deployment of cash, capital expenditure and dividend payout as well as intangibles such as corporate governance and brand image. Algo trading gives big-ticket investors advantage in placing orders. Despite proportionate share allotment, the primary market is rife with instances of favoritism. The book is run through big investors to determine the price range. Nearly two-thirds of the issue is assigned to institutional investors. Though the quota for small bidders has increased over the years and a discount is offered on the cut-off price, those opting for the lowest band and minimum quantity often return empty-handed. Steps have been taken to correct the perception. Information that might have an impact on share prices has to be immediately disseminated to stock exchanges. Still, issuers prefer qualified institutional placement to raise capital. Obviously, these fat cats have access to the top managers and better insights about the company’s operations and outlook. The voice of the ordinary stakeholders is frequently ignored at AGMs. To rectify the situation, companies have been directed to get a majority of the small shareholders on board for passing resolutions. The problem is not all the members of this category hold equal number of shares. How a dominant section can subvert the process has been displayed during the reverse book-building exercise for de-listing. Several companies prefer to stay put than agree to the exorbitant demands. To get even, ordinary investors are directed to mutual funds in spite of absence of mechanism to demand accountability from the fund managers for their performance even as the asset management company continues to enjoy a fixed fee.

      

Amalgamations, too, create an unfair situation though the apparent aim is to create synergies, enlarge the product basket and market reach and cut costs. Mergers are never between equals. A sluggish leader often takes over a smaller but efficient peer with better growth prospects. A group might want to combine a capital-guzzler with another with plenty of cash or hive off a division weighing on the discounting of the flagship. The immediate problem from the asymmetry is valuations. Should the transaction price take into account debt, sales, operating profit or market cap? Discontent over the share-swap ratio has resulted in the dissolution of several merger proposals. Succession planning has forcefully brought investors face to face with market distortion. In an ideal world, the heirs would get a share of the empire that is equal in value. In an unfair world, some businesses might be doing well, while a few might be mediocre performers. Obviously the patriarch cannot slice and dice the conglomerate so that a portion of each business is grouped and parceled off to each of his children. The small shareholder who has spread his investment across the group to de-risk or with faith that the new businesses too will get the promoter’s magical touch feels short-changed at the division that creates uncertainty as not all the  siblings will have inherited the good businesses or their father’s acumen.