Interview with Business Standard (Ahmedabad)

Benchmark indices (Sensex and Nifty) are near its all time high of 2008. What factors do you think contributed to the rise of market? Specially when in July – Aug the country was talking about policy paralysis, slowing economy, fiscal deficits and poor monsoon? 

The last time one saw the indices close to current levels was only a couple of years back. The Indian Investor in Capital Markets has had to exhibit great patience. The gloomy scenario that existed in the country looks to be changing, with the government exhibiting some urgency in addressing certain reforms like FDI in retail and increase in price of Petroleum products, to reduce burden of subsidy, Increase in Railway Fares etc. While it can be argued that these measure could give rise to further inflation, no one can dispute that it will they will go some way in addressing the Fiscal deficit situation in the country.Internationally, too, the fiscal cliff was averted. The markets are now looking forward to some stimulus by way of the RBI reducing Interest rates 

What the sectors and companies which has contributed to current rally?

In the current rally the FMCG and Banking stocks have been the favourite of the markets

What do you think liquidity or fundamentals as the key driver for the current rally? 

While the fundamentals of any stock have to also bear out and support, the main driver of this rally has been liquidity. The unabated flows that we have seen through out the last year has contributed to the rally.

Do you think this is the right to time enter the market? Or one should stay invested in the market? Or get out of the market with profit booking seat on sidelines and wait for fall to re enter? 

For Investors who have not invetsed in the markets ever, this is a time to enter the markets by making use of the Rajiv Gandhi Equity Savings Scheme. This will give the first time investor a tax saving on Investments upto Rs50,000/-. For investors who are already invested, they could wait before booking profits,as the outlook for the current year looks promising

Which are stocks/ sectors you would recommend someone to invest in the market? – The shocks which can derail the rally and stimulus that can sustain it. 

As our company policy prohibits  I don't recommend specific individual stocks through the media. But the sectors that the investors should be looking at, currently, are those sectors that have not participated in the rally viz the telecom sector, real estate or mining sector. The union budget is round the corner and the market has pinned its hopes that policy inaction which is preventing these sectors from performing, will be addressed shortly.If  such policy action is missed out in the Budget and the budget turns to be just populist exercise (bearing the elections, next year, in mind) the markets can, once again. begin to stagnate.

What is your expectation of the market by the end 2013? 

Its always unwise to try to predict the markets but I think that the Sensex should be around 21500 by Dec 2013

Retail participation in the current rally specially after 2011 is coming down. Do you think only big boys are getting the benefit of the market? 

There are several factors that have contributed to the retail investor shying away from  the equity markets. The emphasis, in recent times,  has been on real assets like real estate and gold.Because of Securities Transaction Tax we  have seen a flight to speculative and intraday traders to other markets where such a tax is absent. We certainly hope that this anomaly of a tax arbitrage is addressed in the Budget. I disagree that its only the big boys who are getting the benefit, the fact of the matter is that markets do not discriminate and a s an old Dalal Street saying goes "  the tea becomes only as sweet as the sugar you put in it".

Article published on 'STT' in ADC

STT Should Be Removed 

Monday, January 14, 2013

We definitely, would like to see Securities Transaction Tax (STT) done away with, but...the STT would not be abolished since it generates revenue for the government. During the bull period the STT had contributed Rs. 7000 crore to the exchequer. The Securities Transaction Tax is charged on all the transactions in the stock market where it is profit or loss done by the traders. Income that is arising out of the transactions in the stock markets are ether shown as Capital Gain or it is being shown as business income. 

Here the point is that investors who are earning this income under capital gains are more than happy as they have tax advantage in the form that there is no long term capital gains tax which is Nil (after having paid STT) and there is short term capital gains tax at the rate of 15 %. 

The problems lies with the trader investors who are showing this income under business income are at the loss for the following reasons. STT increased when the market is in Bull Run, but in the bear market the cost of transaction hurts the trader sentiment and reduces the trading volumes. This has adverse impact since the impact cost goes up. There has been flight of business to other organized markets like the commodities market, interest rate futures and also government securities market. Dabba Trading which is the hurting the genuine stock market business as it leads to illegal activities hurting the overall economy and the stock exchanges in terms of revenue collection to the exchequer. As people have moved to other organized markets the trading volumes has gone down and this has increased the impact cost of trading due to which the investors suffer.

Some alternative but workable options are…
1. Introduce a dual STT structure where FIIs pay higher STT in return for complete exemption for all taxes - LTG, STG, Business Income and Speculation irrespective of domicile for all transactions, irrespective of any dual taxation treaties. This would be in line with the Shome Committee recommendations, which is suggesting higher STT for completeexemption of all taxation. 

The additional revenue from this higher STT rate for FII should be setoff against lower STT for domestic investors. This would boost volumes, increase depth, reduce impact cost, lower transaction charges and yet be revenue neutral for the exchequer.

2. STT paid by companies on shares held in investment account on transactions which then get classified as capital gains should be adjusted against MAT payments. That would reduce MAT liability which in any case is like an advance and can be adjusted against future tax payments at full rate of taxation.

Restoration of Rebate under Sec 88E 
As per Sec 88E, where the total income of an assesses in a previous year includes any income, chargeable under the head “Profits and gains of business or profession”, arising from taxable securities transactions, he shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions, computed in the manner provided in sub-section (2), of an amount equal to the securities transaction tax paid by him in respect of the taxable securities transactions entered into in the course of his business during that previous year. This rebate is not allowable after AY 2009-10 and now STT paid is allowable except from the sale and purchase amount for the computing of capital gains/losses.

In our view Section 88E must be reintroduced, so as to give the benefit of rebate which will help small investors a lot. The argument given earlier by the Department was that there is a lot of misuse of the STT rebate by transferring the benefit to other accounts by the Brokers. Things have changed drastically from then and now. As per present provisions, SEBI has imposed a severe penalty on the Client Code changing, which has made it almost impossible for any Broker to make any fictitious code changes with the mala fide intention of transferring the STT benefits. 

If the government cannot lower the STT on the ground of revenue loss, the rebate u/s 88E must be restored, which will be restricted to tax amount on the profits of dealing in shares.

Other expectations
Industry status should be given to the broking industry to enable easy access to funds from Banks and other financial Institutions.

Rajiv Gandhi Equity scheme to be extended to existing investors:- The Rajiv Gandhi scheme should be extended to the existing  investors  which would make large number of investors get the benefit and bring them back o the equity markets who have shun equities over the past few years. Tax benefits for consolidation among brokers.