The company 2019 kept

How Corporate India’s moments of pride, greed, envy, lust, gluttony, wrath and sloth played out in the year that was

Self-interest prevailed unashamedly and unambiguously in the year that was.  India walked away from the Regional Cooperation Economic Partnership with Asia-Pacific nations to protect domestic farmers and industry from a flood of cheap imports. Survival superseded consensus. The surgical strike on corporate tax by eight percentage points propelled India into the competitive league despite some dissent of cash handout being a better incentive to propel consumption and investment. Strike-back replaced compromise. Energy producers, staring at bankruptcy due to state power distributors’ reluctance to pay, took the lenders to court for clubbing them with other sectors to determine their solvency.  Self-preservation overrode commitment. Auditors and financial heads of several companies preferred to quit rather than acquiesce to dodgy numbers. Nationalism co-existed with political correctness. As capital of Rs 70000 crore was being infused into non-performing public sector banks, the Reserve Bank of India was pulling them up for under-reporting of their bad loans. The wealth destruction accompanying the auto sector’s painful transition to new emission norm to face the challenge of climate change was met with resigned acceptance by investors even as the contention that the plunge in sales was also due to buyers’ resistance to the ramp-up of retail prices gained some traction. With survival at stake, companies adopted desperate strategies to stay relevant. Telecom players grappled with issues such as the duration of the ring-tone and if the originator of calls should pay any fee to the receiving service provider. The drying up of liquidity following the collapse of IL&FS late 2018 torpedoed the transmission of the central bank’s rate cuts, with NBFCs mopping up funds above the benchmark. 

Pride suffered a blow. The fastest-growing economy was toppled from the pedestal by small economies in the neighborhood. The smugness that foreign investors have little option but to invest in India was busted when the first budget of the re-elected government hiked the surcharge on the tax on the super rich. The decision of a committee that the RBI should hand out a bigger payout to the treasury deteriorated into a contest of greed versus prudence. The access to funds was viewed as a lazy option to expend on fiscally damaging but socially relevant programs without taking the difficult road to grow revenues. On the other side of the coin was relief that the government’s market presence would be curtailed, leaving room for private borrowers. The wrath of the lenders, who refused to grant more roll-over of their repayment schedules, grounded a full-service air-carrier on the promoter’s reluctance to cede control. Among the receiving end of investors’ ire were mutual funds signing standstill agreements with borrowers unable to service their debt and the market watchdog for absolving fund managers by allowing separation of toxic paper to protect the NAV. The gluttony of two promoters of hitherto thriving enterprises in the banking and media space to add to the top line by pledging their shares dragged down their stocks and eventually led to their departure from their ventures nurtured from scratch.

IPOs, good and mediocre, got bumper subscriptions, capturing the lust for quick gains. Who was the suitor and who was wooed was a topic of speculation following Saudi Aramco agreeing to take up to 20% stake in RIL: the Saudi government-owned oil explorer had to justify to subscribers of its IPO the intended US$2-trillion valuation, at a time of down-trending crude prices, with additional income streams. The Indian oil-to-retail conglomerate needed to pare debt to raise more resources to drive the telecom business, a potential cash-cow. In contrast, the other marriage of convenience was forced than voluntary. Ten PSU banks were merged into four to make them attractive to prospective suitors. Envious of its unique entrepreneurial model, a construction conglomerate launched a hostile bid for a tech solutions provider that was rocked by stake-sale by one of its cash-strapped promoters to service the debt of his floundering quick-service restaurant chain.  Angry whistle-blowers played no small part in the regulator refusing its nod to a housing financier to merge with a legacy private bank and knocking down the valuations of an IT solutions provider and a drug maker, two heavyweights of the headline marker. How sloth can result in miscalculation was illustrated by telecom services providers who threatened to close down when asked to pay their share of under-reported revenues to the government instead of cutting flab and admitting that their business model of relying on voice calls at the expense of data had misfired. Indeed, the mainline indices hitting record highs even as mid and small caps languished as 2019 came to an end told a tale of a year that was disruptive yet riveting.    

 -Mohan Sule

What the market knows

The stock-surge that is discounting the lag effect can be torpedoed by richly-valued IPOs and governance issues

Mainline indices galloped amid evidence tumbling out of the economic slowdown worsening. An optimistic outlook might have justified the surge. That is not so. Global and domestic institutions seem to be in a race to slash growth forecasts. The divergence in the market’s behavior from ground realities should ideally be a cause of concern. It is not for two reasons. First, the market is aware of the lag effect. The inflow of foreign funds, fattened on the profit skimmed from the US markets recording new lifetime-peaks, has benefited mainly large and mid-cap biggies. The liquidity that will come from booking capital gains will percolate to small caps. As such, there is scope for front-line stocks to let off steam without causing an all-round collapse. Second, the underlying stress is providing a trigger to restructure the economy. The reduction in the base corporate tax rate to 22% has placed India among the most competitive countries to attract FDI. The big-bang reform is comparable to the opening up of closed sectors to private investment by the cash-strapped Narasimha Rao government in the early 1990s and setting up of a divestment ministry by the Atal Bihari Vajpayee government in September 2001 following the dot-com bubble burst at the turn of 2000. Now the Narendra Modi government might be giving up control of banks and withdrawing from the oil and gas sector. Unlike rating agencies basing their projection on past performance, the market is discounting the path the Modi government is going to travel to make India a US$5-trillion economy. Standard & Poor’s seems to have read the signals correctly. It sees India outperforming its peers going ahead.

The market recognizes that some companies can outperform the country. Reliance Industries is hitting new highs irrespective of gloomy macro indicators. The Bajaj financial services twins are in a fine fettle even as the NBFC space is struggling. IPOs of IRCTC, India Mart InterMesh, CBS Bank and Ujjivan Small Finance Bank got good response despite risk-aversion. The market is sensitive of the collateral damage caused by governance issues. The IL&FS default has had a cascading impact on lenders including companies, banks, NBFCs and mutual funds. Heavily-leveraged DHFL has become the first financial services firm to undergo the resolution process. Promoters of Yes Bank and Zee had to shed stake and management control. The issue of divergence in reporting of bad loans turned off investors from private banks. The market’s distaste for small caps lingers more than a year after the auditor of Manpasand Beverages quit, setting off a chain of resignations. In a throwback to Satyam Computer Services’ accounting scandal, the board of CG Power and Industrial Solutions confessed of manipulations by its head. The market fears whistle-blowers for the wealth destruction they inflict. The recovery of Infosys, Indiabulls Housing Finance and Sun Pharmaceuticals has not fully made up for the value erosion caused by allegations of malpractices. The market is watching how the issue of misuse of client funds by stock broker Karvy is handled by the regulators as such scams can put off investors for a long time as happened after broker Ketan Parekh was found in 2001 to have manipulated prices of 20 stocks. The market knows that the standstill agreements executed by mutual funds, allowing borrowers to roll over their repayment and quarantining such paper, have resulted in loss of confidence in debt funds.

The market is aware that the frenzy in the primary market can result in a stampede to exit if a richly-valued IPO disappoints. Reliance Power debuted in February 2008 at a 17% discount and never ever crossed the offer price. It accelerated the meltdown of the primary and secondary markets that was gathering speed as the housing mortgage market in the US was coming under increasing strain. The market has realized that the world is flat. The over year-long US and China trade-tariff tiff and the tortuous course that Britain is taking to exit from the EU are overhangs on the direction of the global economy. Central banks have to track the Federal Reserve’s moves to determine their policies. Would the Reserve Bank of India have taken a pause if the Fed had not hinted that it would not undertake any more rate cuts next year? At the same time, the market has now understood that inter-connectivity and supply-chain links are fragile. The US has demonstrated that an inward-looking economy can triumph over free trade. Not surprisingly, India’s rejection of the Regional Comprehensive Economic Partnership, covering the Asia-Pacific region, did not create any ripples in the market.

-Mohan Sule

Never say never again

No matter your attitude or mood, stocks have the capability to surprise you by their turnarounds

Every rally and pullback amazes and stuns. Stocks dismissed with contempt spring back and those viewed with awe stumble. Two recent instances confirm that investors should never, never say never again. A few days after the market welcomed its impressive quarterly results, Infosys dragged down the mainline indices by slipping 16% in two days following a whistle-blower’s complaint of financial irregularities. The IT bellwether is up about 9% since Chairman Nandan Nilekani asserted to the NSE that such a possibility is remote due to fail-proof safeguards. Rating downgrades and resignation of three independent directors were the beginning of Yes Bank’s travails. The Reserve Bank of India in October 2018 refused to give the founder-CEO an extension beyond March 2019. The new-gen private bank’s slide thereafter spilled into the open the top manager’s leveraged position. It shed more than 90% before the promoter divested most of his stake but nearly doubled from its low after an NRI agreed to pump in US$ 1.2 billion. The automobile industry captures the dilemma if the worst is over or there is still more pain for a sector. The pile-up of inventory and the resultant production cuts by manufacturers are turnoffs for slowing the growth momentum. Low prices are viewed as an opportunity by the contrarians because the disruption due to the transition to BS VI norms from April 2020 is expected to last for a couple of quarters more before a refurbished industry is ready to roar. Backers of PSUs for the comfort of controlling government stake are in a better place today. Savvy investors recognized that the acknowledgement of bad loans, creation of an insolvency vehicle and consolidation are carefully calibrated steps to the eventual privatization of nationalized banks. The recent Supreme Court judgement that creditors take precedence over operational facilitators in bankruptcy proceedings has fortified those who believed in these lenders. The Nifty PSU Bank index has appreciated 7.6 % from end August, when Rs 70000-crore capital was loaded upfront.

Discerning observers who understood Aramco’s buy of RIL’s 20% stake as a forerunner to the opening up of the oil and gas sector would have felt justified after the government put its entire stake in BPCL on the block. Debt-laden Vodafone Idea and Bharti Airtel were written off after a price war and the Supreme Court’s demand to pay backdated revenues. The  decision to differ the installments payable for buying spectrum in the next round for two fiscal years and principal competitor RelianceJio’s plan to start levying tariffs on voice calls rekindled hope of a second coming. At the same time, a sudden adverse turn by counters that have been creating wealth year after year can shake up complacency. Graphite makers capitalized on China’s clampdown on polluting industries and recovery of user industry steel. Graphite India returned 1,401% and HEG 2,808% in the 20 months till August 2018.The over 80% plunge in Graphite India’s net profit in the latest quarter was a shock but not a surprise as the US-China trade war sparked more than a year ago dampened demand. In fact, HEG had started showing signs of stress in the June 2019 quarter, with the bottom line sliding 70%. The removal of the anti-dumping duty on Chinese imports was a double whammy. Both have shed nearly 70% in 15 months.

 Buying into a company that has been unstoppable so far is as much a gamble as trying to catch a falling star. There is no knowing when overvaluation will burst the bubble or when the bottom will be reached. For Titan, with P/E of about 72, growth-driver gold turned into an obstacle as prices pierced the resistance level. The jeweler has declined 15%, while the mainline index has inclined 3.5% in the past month. Those sticking with ICICI Bank amid mounting bad assets and the Videocon loan scandal might feel vindicated as it has gained about 80% in the near 14 months following the installation of a new CEO and MD. Faith imposed in Indiabulls Housing Finance on its proposed merger with Laxmi Vilas Bank might seem misplaced now as the deal did not get the regulatory nod despite the group divesting most of its real estate assets. It has given up 80% in the ensuing six months. The confidence in Zee, on the other hand, might be bearing fruit as the overhang of pledged shares is disappearing, with the promoters offloading most of their holdings to pay their loan obligations. The many divesting from the NBFC space wholesale after the collapse of IL&FS in September 2018 might be stumped at the resilience of Bajaj Finance, amassing 90% on its October 2018 low even as peers are struggling. To modify the soundtrack of an old James Bond movie, no matter your attitude or your mood, the stock will surprise you.

-Mohan Sule

A nod to risk-takers

Policy makers are recognizing that the shareholders can no longer be ignored to favor consumers

There is an 80-pound gorilla in the room and the policy makers are finally acknowledging its presence after a bruising price war and an imminent auction of the next-generation airwaves. A committee of bureaucrats will decide how to revive a once-emerging sector gasping for breath. Judicial interventions, policy muddles and cut-throat competition have contracted the marketplace to three universal telecom services providers. What needs to be determined is if the sector is so critical to the economy that there is a need for a life-support system. After all, aviation is none the worse for the wear and tear after passing through an identically tumultuous phase. Many fly-by-night operators folded or sold out just like in the telecom space. If budget carriers IndiGo and SpiceJet shone a light on the flawed business model of full-service carriers Kingfisher Airlines and Jet Airways, eventually resulting in their grounding, free voice calls and low data offered by RelianceJio  since September 2016 and slashing by over half the fee paid by the call-generating teleco in October 2017 hastened Idea Cellular’s merger with a stronger and dominant partner Vodafone India in August 2018 and the shift in Bharti Airtel’s focus on Africa to hedge the domestic margins. If the first-come-first-served process adopted in awarding licences for 2G spectrum distorted the field, so will providing a breather to ailing participants to pay the discovered price in the 5G spectrum auction, because they have to share more revenues with government as per the recent SC ruling, interfere with market forces. Lenders did not roll over Jet Airways’ debt on losing hope of recovery but due to doubts of eventual de-leveraging without the promoters diluting their stake for capital infusion and ceding management control.

Unlike automobile makers facing a slump in demand across the board due to transition to a stricter pollution emission standard and global slowdown, telecom services providers’ woes do not stem from faltering usage. The market has in fact exploded, with the mobile subscribers using the GSM platform expanding more than 90% in the three years till end 2018. Their problems have similarities as well as differences with those of airlines. Low tariffs as against surging overheads bind the two sectors. Idea Cellular dipped into red in FY 2018 for the first time since its IPO 11 years ago as revenue growth faltered and operating profit dipped. Though the consolidated loss of Vodafone Idea has stabilized at the Rs 4870-crore level in the June 2019 quarter from a peak of Rs 5005 crore in the December 2018 quarter, its equity and debt papers have turned into junk. Standalone Bharti Airtel made a loss in the December 2017 quarter for the first time since its IPO in 2002.  If high Central and state taxes, going up to 40%, on volatile aviation turbine fuel are weighing down airlines, backbreaking bidding for circles are draining telecom players. Barti Airel paid nearly half its standalone revenues and double its net profit and Idea Cellular over 30% of its standalone revenues and three times its profit in FY 2016 to bag spectrum at the last auction in October 2016. Vodafone Idea’s consolidated debt stood at Rs 1.18 lakh crore and Bharti Airtel’s Rs 1.08 lakh crore end March 2019.

It will be tempting to view RelianceJio’s eventual consolidation to monopoly status as inevitable. That need not be so. Green shoots are visible. The 16% slide in the average revenue per user in the year to the December 2018 quarter indicates the beginning of the slowing of RelianceJio’s momentum. Incremental additions on the largest base of over 330 million subscribers end June 2019 will not be necessarily accompanied by higher margins. In contrast, Bharti and Vodfone are showing signs of bottoming out, recording a slight improvement in the revenue provided by an average user. RelianceJio has started imposing a nominal six paise per minute for calls from October to put pressure on Trai to totally abolish interconnect usage levy. The players are undertaking financial engineering to reduce leverage. Bharti Airtel is merging its tower arm and its tower joint venture with Vodfaone. To become debt-free to raise Rs 20000 crore for investment in the telecom business, RIL is transferring its fibre and tower business to an investment trust and equity investment in RelianceJio to a wholly owned digital subsidiary. What these developments signify is that the attention is now shifting from the consumers to the shareholders who contribute the risk capital. Making available goods and services at the lowest price is possible as long as investors’ pain threshold is not crossed. The political leadership has understood that the beast needs to be tamed without subduing the animal spirits.

-Mohan Sule

Click and bait

The strategy to entice investors with underpriced IPOs to offer richly-valued FPOs going ahead can backfire

What the slashing of the corporate tax did to the secondary market, the IRCTC IPO has done to the primary market. The cloud of pessimism has given way to giddy euphoria. If the flight of foreign investors slowed down in the aftermath of India’s transit to a competitive economy with a 22% peak base rate, the more-than-100-times subscription and over cent-per-cent listing gain, a rare feat for a PSU, dispelled the myth of a liquidity crunch. Overseas and local investors’ appetite for Indian paper was amid, or despite, a flurry of downward revision of growth projections by domestic and global institutions for the current and the next fiscal year. The market is sentimental but practical. The Indian Railways’ catering and online booking provider and tour operator was sought after not only for its monopoly but also for its impressive core performance. Such debuts are rare. The last one that was greeted with a similarly rapturous reception was in 2017. Since then, the enthusiasm has partially evaporated save for exceptions such as IndiaMart InterMesh, a B2B e-commerce platform that was 36% oversubscribed, opened at 34% over the offer price and has returned 48% in the four months since then. Leadership position of a company is a strong motivator for investors to part with their money. The concern is sustainability.

The rise and fall of MTNL is a chilling reminder of how fortunes of in-favour themes can deteriorate on changes in the composition of the market and government neglect. The IPO of BSNL, the government-controlled supplier of telecom services, except to Mumbai and Delhi, did not materialize. Instead MTNL will become a listed subsidiary of BSNL in a mega merger. VSNL was a crown jewel before it was completely absorbed by the Tatas in February 2008, six years after buying a 45% stake. The stock has shed half of its value at the current market price. Air India’s descent accelerated after the sky was thrown open. The problem once again was cannibalization of the business by new-age operators and indifference of policy makers. Slowly but surely IR is being dismantled. Private players can operate freight and some passenger routes. What needs to be seen is if the latest success story will consolidate and continue to create wealth for the shareholders like Avenue Supermarts or fizzle out like Astron Paper and Board Mill and Career Point, among the few whose collection exceeded 100 times the issue size.  When the operator of offline retailer D-Mart entered the market, doubts were raised about its dated business model despite its conservative approach to cash management. Digital marketplaces were gaining popularity. Departing from the favorable view of businesses with asset-light model, the market found virtue in owned outlets in prime residential localities, a hedge in a worst-case scenario. Justifying the confidence, the grocer has appreciated 85% in over 32 months.  The diluted EPS has expanded 74% in four years. In contrast, struggling Flipkart was bought lock-stock-and-barrel by Walmart. Amazon has to be satisfied with 51% multi-brand FDI cap.

That the stunning performance of Avenue Supermarts and IRCTC will encourage sound companies to raise capital even in a hostile market will be a welcome outcome. What is not is the unease about discovery. Book-building is undertaken to assess demand from long-term institutional investors, who balance the past with the outlook. The process aims to eliminate over- or under-pricing. A manageable contribution sees securities getting credited in the demat accounts of most participants. The modest payoff on debut attracts new investors. There is no hurry to tap the market. It is puzzling how investment bankers could be so horribly out of tune with the mood on the street in determining the offer band. Besides undermining the proportionate allotment model, the exercise has turned into a lottery for speculators looking to book quick profit. A lower valuation restricts capital expenditure or debt clearance, affecting growth plans. The recipe to entice investors with a discount to come out with richly-valued FPOs going ahead can go wrong if earnings do not keep pace with the enlarged base. The Astrom Paper and Board Mill IPO mopped up more than 240 times the issue size. The 58% opening advance end 2017 has slumped to about 15%. In retrospect, the cautious approach of Avenue Supermarkets seems justified. The promoters were diluting their stake to stay listed through issue of new shares. The premium was accrued to the company for de-leveraging. The railway ministry has short-charged tax payers funding the enterprise by agreeing for below-par collection. The government will get the entire proceedings of the divestment. Benefits to IRCTC, if any, going ahead are uncertain if does not turn into another MTNL in the meantime.  

-Mohan Sule

Out of control

Cooperative banks should be converted into small finance banks and brought under the supervision of the RBI

Even as the flow of credit to the economy is being eased, the pipeline is springing unexpected but not surprising leaks. The Rs 6500-crore gap in the books of Punjab and Maharashtra Cooperative Bank has overshadowed recent moves to nurse public sector banks to become fit to lend. The attraction of fewer strong institutions to meet the demands of a growing economy will be nullified if investors panic.  The latest cooperative bank to be in trouble created fictitious accounts to give nearly 73% of its lending surplus to a single borrower. Regulations are as good as their implementation. What the implosion underlines is that collusion between cunning customers and corrupt officials is not specific to any category. Broker Ketan Parekh triggered the collapse of the Madhavpura Mercantile Cooperative Bank and the new-age Global Trust Bank, later merged with Oriental Bank of Commerce, by using his access to their treasuries to manipulate stocks.  Punjab National Bank’s board was not aware of the misuse of letters of undertaking by Nirav Modi for overseas transfers from a single branch in Mumbai.  PMC Bank kept quiet despite HDIL not servicing the loans for many years. Auditors of these banks were either careless or collaborators. That these small but systemically important outfits have escaped from being taken over by the government even half a century after nationalization speaks of the powers that have come to control them. The Reserve Bank of India governor has said discussions are on with the Central government to reform the sector. The stage for cosmetic tinkering is over.

The cooperative movement started in the early 1950s, when banks were controlled by large industrial groups. The principle of each member being a stakeholder and a potential borrower was to ensure prudent practices and disciplined repayment. The 0.5% to 1% point higher interest offered by this category compared with government-owned banks, while not unusual in a competitive era after freeing of rates, should have resulted in a scrutiny of their practices. Excluding cooperative banks from exchanging high-value currency notes in November-December 2016 provides hints of the monetary authority’s unease. The PMC management admitted to siphoning of funds by the HDIL group after the board and auditor had approved the annual report and expressed satisfaction with the financial strength. Clearly, the dual-regulatory regime is not working. The RBI supervises their banking function. It does not have the power to constitute, supersede or liquidate the boards or remove directors. Registration, management and audit are by the registrar of cooperative societies.  A committee appointed by the central bank in 2015 had recommended converting multi-state urban cooperative banks with Rs 20000 crore of business into scheduled commercial banks. Even the very few that qualified did not show any enthusiasm. The recently issued norms for on-tap licensing of small finance banks should be modified to envelope these shaky edifices.  In the meantime, these entities should be barred from taking exposure to the corporate sector and instead limited to financing consumer goods, automobiles and gold. Treasury operations should be restricted to inter-bank transactions.  

A rapid crisis action team needs to be deployed to fire-fight a run on banks.  Clamp-down on withdrawals, though necessary to gauge the damage to the balance sheet, can prove counter-productive. Loss of confidence can set off a chain reaction of flight of deposits, undermining the foundation of even stable banks. The first step even before investigation starts into the causes and extend of rot is to ensure liquidity. A centralized contingency fund, with each bank contributing a percentage of its liabilities by subscribing to RBI's lending-rate-linked bonds issued by the task force, can provide support to troubled lenders. They can draw from the pool to return at least the principal if not the accumulated interest of worried savers. It will eliminate an important source of irritant: right now only up to Rs 1 lakh is insured and guaranteed by the deposit-taker. It is likely that housing societies, trusts and other non-profit organizations will be examining safer options. Most will opt for nationalized banks. Mutual funds should woo these risk-averse investors to money market schemes that invest in government securities. Redemption is assured. The entire subscription is available along with modest gains. The tax outgo, too, compares favorably with bank fixed deposits: as per the tax slab up to 36 months. The rate lowers to 20% with indexation benefit beyond that. There is no TDS applicable, unlike on bank fixed deposits if interest income crosses Rs 40000 in the year. Instead of trying to patch up the leakage after each eruption, the RBI’s focus should be on how to replace the pipeline to avoid any disruptions in future.

-Mohan Sule

Sting in the tail

Get set for migration of established companies with new business ideas to the low-tax regime for start-ups

The equity market finally got the trigger it was waiting for in the unexpected deep rate cut to 22% from 30% in the base corporate tax and scrapping of the surcharge on long-term capital gains for the super rich, capping nearly a month-and-a-half of monetary and fiscal stimulus in driblets. The Nifty gained 7.7% in two days, its best performance till date. If previous high-decibel actions including the recall of high-value notes in November 2016 and implementation of the universal goods and service tax from July 2017 and real estate regulations from May 2016 did not produce such a big impact, it was because their outcome was never meant to be visible in the short term. Their intention was to change entrenched habits to effect a transformation. The benefit of the latest fiscal reform to level the field with other competitive economies could be captured just like when the Reserve Bank of India slashed the lending rate to a nine-year low and kept provisioning at 5.5% of the balance sheet, instead of the earlier 6.8%,  to hand out to the treasury Rs 1.76 lakh crore of surplus. The market’s relief following the government deciding to front-load Rs 70000 crore into public sector banks was much more noticeable than the reaction to easing NBFCs’ access to liquidity, opening coal mining and contract manufacturing to 100% foreign direct investment and relaxing local sourcing norms for single-brand retail to an average of five years instead of every year.

The spurt in stock prices factored in higher earnings growth. If so, mid and small caps, too, should have bounced back when the eligibility for 25% corporate tax was hiked to include those with turnover of Rs 400 crore from Rs 250 crore in July, covering over 99% of all companies. Yet, the relaxation did not lift the market mood as many of the intended beneficiaries had opted for exemptions or the lower minimum alternate tax, now brought down to 15%, from 18.5%, of book profit plus surcharge and cess. Several were grappling with the execution of GST. A few would be disclosing more taxable income to avail of the input tax credit. That the latest tax bonanza is applicable across the board is a welcome realization that concessions should encourage risk-taking. Limiting them to size and nature of business distorts the marketplace. Booming orders from original equipment manufacturers can do more to encourage formalization of the unorganized support system relied on for outsourcing than preferential treatment. The indirect tax regime is already transiting to two-three slabs. Large, mid and small caps have gained in tandem, based on the premise that the savings in tax outgo will be used to expand capacity and product portfolio, diversify into new markets, revive consumption, clear debt, increase dividends or issue bonus. Even in the crowd, companies with no or negligible leverage populating certain sectors got more attention. Banks turned into favorites in the belief they would have more cash to lend and their borrowers would be in a better position to service their loans.

 Worries about fiscal deficit ballooning on tax revenues declining Rs 1.45 lakh crore without a rollback in government expenditure took a back seat because of the central bank’s bumper dividend and consolidation and capital infusion expected to spur a PSB turnaround. Higher payouts will improve the dividend distribution tax mop-up. The reluctance to reduce GST from 28% on automobiles sends a message that the sector’s woes stem from structural issues. The thrust on housing for all and infrastructure does merit a lenient view of cement. If the sector failed to get any sympathy it speaks of the doubts of pass-through of any benefit due to the tendency of the players to flock together. The stunningly low 15% tax rate on new companies setting up manufacturing between 1 October 2019 and 31 March 2023 is the sting in the tail. In the giddy euphoria of imagining an exodus of foreign investors from China to India, what has failed to get traction is the possibility of legacy companies taking advantage of the eight percentage point arbitrage in the tax rate to stay ahead.  When the cap on foreign direct investment limit was removed in many non-core industries, MNCs saw more drawbacks in compliance than upsides of raising capital from the Indian market to stay listed.  Those that were hobbled by the high price thrown up by the reverse book-building process to go private shied from new launches. Some set up new units to make value-added products. If Indian promoters turn copy cats, the shareholders hoping for bumper wealth creation going ahead will be disappointed. After enjoying a short-lived spike in valuations, investors will face a choice of a stagnant future or starting afresh.  

-Mohan Sule