Clarity on tax avoidance boosts Indian equity markets

Sat, 30 Jun RoundUp

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It was a positive week for the world stock markets. Barring China and Brazil, the key markets closed on a positive note. France was the highest gainer during the week, followed by India and Germany. France and Germany were up by 3.4% and 2.7% respectively during the week. However, Brazil and China were down by 2.0% and 1.6% respectively. The US stock markets were up 1.9% during the week. The rescue plans suggested by European leaders to help banks and debt ridden Governments countered the discouraging economic reports on US economy earlier during the week.

The Indian equity markets registered the second highest gains for the week across the world. The Sensex raced past 17,000 levels and registered biggest single day gain on Friday in 2012 on account of clarity on tax avoidance rules and positive global sentiments. The Finance Ministry proposed that General Anti-Tax Avoidance Rules (GAAR) would not be applicable below a particular limit. However the complete details of the changes are still awaited.

The Rupee was not untouched either with the positive developments and posted its biggest daily gain in three years on Friday as government said that GAAR would not apply retroactively on foreign investors. The rupee was trading at Rs 55.64 to the dollar.

Source: Yahoo Finance

Barring Software, all the sectoral indices ended the week on a positive note with stocks from Power, Capital Goods and Pharma leading the pack of gainers. The BSE - Power and BSE-Capital Goods indices ended the week higher by 6.6% and 5.2% respectively. The BSE - IT index stocks ended on a flattish note.

Source: BSE

Let us now take a look at key economic news during the week. Mr. Pranab Mukherjee resigned and the finance portfolio was taken over Mr. ManMohan Singh who signaled a speedy revival in the economy. To arrest the depreciation of the rupee, the Reserve Bank of India raised the limit of external commercial borrowing (ECB) to US$ 10 bn. The favourable news on domestic and global economic front led to an appreciation in the domestic currency and rupee registered highest weekly gain since the start of this financial year. The Finance Ministry announced draft guidelines for the implementation of Anti-Tax Avoidance Rules (GAAR) .As per the announcement, the rule will not apply retrogressively and the GAAR provisions will be invoked in case where Foreign Institutional Investors (FIIs) will choose to take the benefit of double tax avoidance treaties.

Now let us take a look at key corporate events during the week. As per a leading financial daily, the Department of Telecommunications (DoT) will issue demand notices of Rs 15.9 bn to leading telecom companies for under reporting revenues and paying lower contributions to the Government as revealed by the special audit for 2006-08. Normally, the telecom companies pay about 10 % of their annual revenue as licence fee and up to 6% as spectrum usage charges. As per the audit, the telcos did not disclose the income from investments which they considered were not generated through telecom business. However, as per the licence agreement, the revenue share applied to all revenues. By reporting lower profits, the company avoided paying taxes to the Government. It is expected that Reliance Communications (RCom), Bharti Airtel, Tata TeleServices and Vodafone India will be paying Rs 5.5 bn, Rs 2.9 bn, Rs 3.9 bn and Rs 2.5 bn respectively as penalty. The companies will be given maximum 15 days to pay the penalty.

Auto stocks are up as petrol price was revised down by Rs 2.46 per litre with effect from last midnight. This was the second cut this month and follows a Rs. 2.02 a litre cut in prices from June 3. The two successive cuts have to a large extent countered the huge Rs 7.5 per litre hike in rates last month bringing much relief to the common man. The petrol will now be available at Rs 67.8 per litre in Delhi and Rs 73.4 per litre in Mumbai. While Automakers have cheered the move, they are demanding more cut in the wake of the demand slump. There is further scope for cutting rates by a further Rs 1 per litre due to overall weakness in the easing in global crude prices. Also, the State owned companies will be revising petrol prices on a random date instead of a fortnight revision so as to deter petrol pump dealers building positions.

In news from Oil and Gas sector, Petronet LNG's (PLNG) Kochi terminal will be able to operate at just 20% of its actual capacity for a year due to delay in the commissioning of the supply pipeline. The terminal with a capacity of 5 million tonnes per annum (MTPA) is being built at a cost of Rs 45 bn. In a separate news, Oil and Natural Gas Commission (ONGC) ) is planning to sell its overseas investment arm ONGC Videsh Ltd (OVL) next year to raise funds for aggressive foreign acquisitions. The company has in its Perspective Plan 2030 set a target production of 20 million tons (MT) and 60 MT of oil and oil equivalent gas by 2017 and 2030 respectively for OVL's overseas properties (versus a current production of over 9 MT). However, acquiring exploration and production assets will need a lot of capital which parent ONGC cannot afford alone. Hence, in order to meet the fund requirement, the company may go for an initial public offering (IPO) of at least 10 % equity shares.

The leading FMCG companies are likely to face slowdown on account of a delayed monsoon and weakening Indian economy. The companies are expecting a slowdown in demand from rural areas which is one of the key growth drivers. Also, demand in the mass-premium is expected to suffer if economic scenario does not improve soon. The FMCG companies suffering from rising costs of input had till now maintained growth momentum on the back of high-margin products, strong rural demand and innovations. However, delayed monsoons have added further to their woes. The companies expect subdued revenue growth over next two quarters.

Movers and shakers during the week

Company	22-Jun-12	29-Jun-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
REI Agro Ltd.	8	9	19.4%	30/8
NCC Ltd.	41	45	11.4%	87/28
Tata Power	94	105	10.9%	133/81
GMR Infra	23	25	10.8%	34/18
Aban Offshore Ltd	352	389	10.5%	572/320
Top losers during the week (BSE-A Group)
Cairn India Ltd	326	308	-5.7%	401/250
India Infoline	64	62	-3.5%	91/43
JaiPrakash Power	36	35	-3.1%	50/31
Indian Bank	180	175	-2.7%	265/157
Welspun Corporation	122	118	-2.6%	178/65

Source: Equitymaster
Moving on to some more economic news it may be noted that the Rupee registered biggest gain against the dollar on Friday in percentage terms in three years as the Finance Ministry ruled out imposition of e retroactive taxes on foreign investors in its draft guidelines for General Anti-Avoidance Rules or GAAR released on Thursday.

The crude oil rose to US$92.9 a barrel during the week due overall positive sentiments as European leaders came up with the rescue plan for banks and debt ridden Governments. If the trend continues, it could raise concerns for India as it is primarily dependent upon crude oil imports. For the coming week, how the monsoons shape up and with Prime Minister Manmohan Singh stepping into the Finance Ministry, any action on policy reforms will be key triggers for the markets.