Title: FIIs bring taxmen
to their knees
Author: Ashok Mahajan
Publication: The Observer
of Business and Politics
Date: April 12, 2000
LAST week was a hectic
time on the littoral of the bourses. Stocks sank and rose unprecedentedly
caught between wild upheavals - the neap tides and spring tides of trading.
April 4th turned out to be a Black Tuesday on Wall Street where Nasdaq
nosedived 350 points, consequent to the adverse verdict pronounced against
Bill Gates' Corporation. A US Federal Judge, Thomas Penfield Jackson, sided
with the US government and said that Microsoft kept "an oppressive thumb
on the scale of competitive fortune", violating the country's anti-trust
laws through predatory behaviour. Nemesis struck Nasdaq soon after the
ruling was announced. And almost instantaneous was its effect on the BSE
where the Sensex plummeted by a shattering 361 points. It was its biggest
fall after the crash of 1992, when the Securities scam had led to a 570-point
wipe out in a single day.
Compounding this calamity
was the action of the Central Board of Direct Taxes to investigate tax
evasion of Mauritius-based FIIs. A finance ministry spokesman averred that
of the 150 FIIs operating in India, tax benefits were permitted only to
24 cases. Of these two dozen FIIs, five were issued demand notices. The
amount involved was Rs 8.67 crore (two million dollars). But the panic
spread uniformly across the FIIs which believed that they would be deprived
of all tax benefits, although they are Mauritius-based. Double- taxation
would be the weapon employed.
The finance ministry's
clarification that the income tax department had issued notices to FIIs
only in specific cases and that there was no move to change the existing
treaty with Mauritius to do away with double taxation, made little impact
on the capital market. Rumour mills had their way and while Bulls were
hammered ruthlessly, Bears had a field day.
In the meanwhile, the
hitech scrips took a historic beating. Infosys, Satyam Computers and NIIT
hit the downward circuit filter limit of eight per cent. Some observers
felt that the slide was expected as the IT stocks were overvalued in any
case. Their bottoming out would bring stability to the market because their
current price to earning ratio was so steep as to make future growth difficult.
The stock market spurted
smartly on Thursday. Infosys Technologies, which was influenced by the
overnight sharp rise in the company's ADR at New York, attracted fresh
spell of buying support at prevailing lower levels and hit the upper end
of the circuit filter. On Friday (7 April), the Stock Market bounced right
back gaining 352 points - the third largest single day gain in the history
of stock exchange - the Sensex ending up at 5219. However, the volumes
traded were very low - Rs 1600 crores as compared to Rs 2900 crores, the
previous day. A spectacular happening was that of RIL GDR which scaled
an all-time high of $27.50 at the London Stock Exchange. It implies that
an RIL share abroad commands a price of Rs 600 ($13.75), whereas at home
it rules at Rs 350 per share. This reflects on the perverse perception
of domestic players who value IT, media, FMCG, entertainment scrips more
than the economy stocks.
Speaking on the Tuesday
crash at BSE, the finance minister said, "It is unfortunate that Indian
stock markets often operate on the basis of unfounded and exaggerated rumours.
No responsible market should behave in this manner." But Yashwant Sinha
did appear to capitulate before the might of FIIs. Income-tax notices to
select foreign investors were discreetly withdrawn. Concurrently, D R Mehta,
the Sebi Chief, made some good revelations. He said that out of $11.4 billion
net portfolio investment by FIIs, an overwhelming seven billion dollars
has come through the controversial Mauritius route.
He also asserted that
there was no risk of payment crisis from sweeping fluctuation in the bourses,
since the margin system was quite tough and secure. No one would have challenged
his statement when he mentioned that the market has been saved precisely
because of the strict margins imposed. It will be quite sometime after
this debacle, if brokers should squeal at the rates of penalties levied
when scrips hit the lower or the upper circuits. Should there be stray
cases of payment default, the adequate margin and the corpus in the trade
guarantee fund is now enough to ward off the risks.
In a surprising move
to revive the primary market, Sebi relaxed IPO norms for the media, entertainment
and telecom sectors. This will bring them at par with the IT industry.
An official spokesman said the firms need offer to the public at least
10 per cent of their cost-issue capital, comprising a minimum of 2 million
securities. Firms in other areas are required to offer at least 25 per
cent of their capital to the public. The size of the net offer to the public
in the case of media, telecom and entertainment sectors should not be less
than Rs 50 crores.
It was clarified, however,
that the relaxation would be applicable only when 75 per cent of the revenue
and profits came from these firms, and sector-wise details are disclosed
in the offer documents themselves. Book-building norms have also come in
for revision. A 100 per cent one- stage book building has been permitted
at bidding centres of all cities with stock exchanges. The issuer will
have to disclose only the floor price as the indicative price. Earlier,
bidding commenced at the upper end and the actual price (invariably lower)
remained concealed - a grave disadvantage to the public and institutional
investors. Amendments of this type will help to rationalise the existing
provisions of book-building and introduce greater transparency. The present
practice of allowing 75 per cent of the issue through the book-building
route would continue. 25 per cent of it would continue to be available
to individual investors applying for up to 1000 shares. In another development,
Sebi has approved amendments to the Mutual Fund Regulations to permit investments
in the mortgaged-backed securities, having a credit rating of not below
the investment grade. This would solely represent mortgages, not real estate.
These are all positive
steps. But Sebi has resolved not to lag behind in prophylactics as well.
An investigation has been ordered into the Tuesday fiasco, most probably,
at the behest of the finance minister who has been made to feel small by
the blackmailing tactics of FIIs. "We are duty-bound to look into all the
aspects of any undue volatility in the market place", said D R Mehta.
While the Mauritius issue
may be put to rest, Dalal Street's new- found sympathy for Nasdaq appears
to be a matter of greater concern. In the recent past, our capital markets
have been taking all their cues from what happens at the Big Apple. ICE
(Information, Communication and Entertainment) scrips slipped 8 per cent
each day of the past week, driven by downslides of their New York counterparts.
It is high time the BSE gentry moves out of the New World's shadows, and
asserts identity of its own.
