Zero Dark Thirty - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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6 APRIL 2013

Zero Dark Thirty is a widely acclaimed movie about the hunt for the world's most dangerous man, Osama Bin Laden.

Last week the BSE-Sensex , an index that comprises 30 stocks, saw Zero Dark 21, with 21 of the stocks declining during the week. The Sensex itself fell 385 points, to end the week at 18,450, whilst the NSE-Nifty 50 declined 129 points to close at 5,535.

The fall was due mainly to the selling pressure by foreign institutional investors (FIIs) whose buying has been propping up the Indian stock market. They sold on nervousness about a likely early election with yet another scandal breaking out from the inexhaustible supply of scandals by an ethically moribund Government.

The Government's flagship welfare programme, the rural jobs programme called NREGA, has, according to Bloomberg, been paying wages to dead workers. This is one more avenue for corruption, amongst many others. The extent of rot is such that the truly guilty have never been punished or had the ill gotten loot been confiscated from them.

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Au contraire, in what smacks of utter desperation to raise revenue (partly to compensate for leakages such as payment of wages to dead people) the Income Tax Department is slapping tax demands that appear to be illogical.

It has slapped a demand on Shell India, for Rs 15,000 crores, for allegedly underpricing shares it issued to its parent. Issue of shares is a capital receipt and, so, the pricing of the shares by its fully owned subsidiary, cannot be subject to tax. In earlier days there used to be an authority called Controller of Capital Issues which used to decide, in its wisdom, the fair price for a share. One thought that the days of the CCI were over!

Strangely enough, when Hero Motocorp set up a wholly owned subsidiary in the Netherlands, and paid a premium for the stock of its subsidiary, the IT Department is seeking to tax the company on the ground that the premium is a 'loan' on which an 'assumed interest income' is to be added to Hero Motocorp's income and taxed!

At the same time, Finance Minister P Chidambaram is touring the globe (he was in Japan recently) seeking foreign direct investment into India. One of the most urgent requirements for India, due to its unsustainably high current account deficit, is investment in discovering oil and gas, both conventional and nonconventional, such as shale gas. Extraction of shale gas requires the technology of horizontal fracturing (or fracking), which is available with a few firms.

China has given Shell, one of the oil majors having the technology, permission to search of shale oil and gas; China is believed to have one of the largest shale reserves in the world. Shale has agreed to invest $ 100b. in such exploration. India has slapped a tax demand, on specious grounds, of Rs 15,000 crores. That is hardly a way to attracting foreign investment.

Another factor that is bothering foreign investors is inconsistency in policy. Consider what used to be called the success stories of the liberalisation of economic policies after the crisis in early '90s. The story was led by telecom, where home grown companies became strong enough to face foreign competition from existing stalwarts and where call charges were amongst the lowest in the world.

This success story has been completely messed up because of the mishandling of allocation of spectrum by then Telecom Minister, A Raja, a part of the party of a coalition ally, who favoured a few at the cost of others. The Supreme Court cancelled all 127 licences issued, including legitimate ones, thus throwing the baby out with the bathwater.

The Supreme Court also directed the Government, in what appears to be a regulatory overreach, to allot all future spectrum only through auction and to re-allot the spectrum of the cancelled licences. The auctions failed to get the Government the desired revenue, causing it great angst.

As a consequence, the Government is taking further steps to kill the telecom sector , once a success story. It is refusing to renew the telecom licence of Vodafone, when it expires late 2014, unless Vodafone bids for spectrum, since, as per the new telecom policy, the issue of licence and allotment of spectrum have been separated. Vodafone is, obviously, chagrined at being subjected to such whims and fancies for the continuation of a business set up at huge cost. Again, this is hardly an example of an investor friendly environment.

Yet another strange order to arise out of the embers of a burnt telecom policy is that to companies which have made arrangements for sharing of spectrum, in circles where they don't have it, to stop such arrangements. Bharti Airtel, which appealed to the Delhi High Court against the DoT order, lost It is appealing to the Supreme Court.

Now everyone knows that spectrum is a scarce resource (which is why A Raja tweeked policy to favour a few). If it is, then does it not make eminent sense to share spectrum? Why, then, does DoT desire that each telecom company needs to buy spectrum in all the circles? Is that a good use of a scarce resource? And, by denying the sharing of it, is it a good policy towards the consumer?

The most successful and innovative countries are the ones in which citizens are given the advantage of cheap telephony. The citizens use that to do creative things. In other words, in such countries, like Sweden or South Korea or Japan, spectrum is treated, not as a scarce resource, for the Government to make the most money out of its sale, but as 'commons', or a resource to be used for the common good.

It was on this basis that the Government had earlier, correctly, switched over to a revenue sharing basis for telecom companies. This was the start of the success story for the sector, which has now turned into a nightmare, simply because the premise of the Government has once again changed from treating spectrum as a commons to treating it as a scarce resource, to be milked.

The other success story of liberalisation was airlines. Here too, the success has been watered. Air India is bankrupt, a fact recognised by everyone except the owner, the Government, which continues to pour funds into it. Then, to get the funds to pour into a hopeless cause, the Government unleashes its tax officials, fed with steroids and convoluted logic to make demands on a handful of companies.

The other airline, which had initially made waves for the quality of its service, aircraft, crew and food, viz. Kingfisher Airlines, is heading towards bankruptcy. The banks have been allowed to sell stocks in United Breweries which they held as collateral, and have also moved the court to enforce the personal guarantee of Vijay Mallya and also the corporate guarantee. The impending deal of Jet Airways to sell a significant stake to Etihad, has been postponed until such time as the Government of India signs an agreement to protect foreign investment.

The power sector was also considered another success story, with lots of power generating capacity coming up after economic liberalisation began. It is now mired in problems, including those of supply of coal. Last week, National Thermal Power Corporation (NTPC) stopped payment of Rs 1,000 crores to Coal India, stating that the coal supplied contained some 30% stones and rocks, for which it, obviously, refused to pay. Coal India countered by withholding supply of coal to about 5,000 MW of power capacity, which could cause a problem in the Northern and North Eastern grids.

The sensex has gone below its 200 exponential moving average, which is not a good sign. Indian markets have become hugely dependent on foreign institutional investors. The domestic institution of any importance, viz. LIC, has become enfeebled because it has been compelled to support the Government's efforts to divest stakes in public sector companies. LIC has invested Rs 3,260 crores in six of the PSUs, and all of them are currently quoting below the purchase price.

Should FIIs decide to sell aggressively for any reason, there would be no domestic institution with the financial strength to stanch the decline. The declining standards of governance, combined with the Government's dependence on a motley band of coalition partners, are enough reasons for FIIs to be worried. Caution is advocated.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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3 Responses to "Zero Dark Thirty"
sunita
Apr 9, 2013
Interesting and sad !!
Like 
M.K.Sreedhar
Apr 8, 2013
Your comments on taxing shell and other MNC's appear to be biased in favour of M N C's. Tax cannot be levied by whims and fancies or just to make good the deficit in revenues. Such huge demand cannot be be raised callously or in cavalier fashion. The Co.s like she'll are represented by very powerful Tax Auditors and Tax Advocates. Assessment process involves providing a reasonable opportunity of being heard to the tax payers. I think Mr mulraj is aware of this legal process. Like 
Om Prakash Sharma
Apr 7, 2013
Perfect. This Govt has destroyed every sector for corruption and bringing in Rahul Gandhi so that it gives them one more chance for looting Indai Like 
  
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