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April Newsletter - 2019

Estimated reading time: 13 minutes 16 seconds

FINANCIAL NEWS

SEBI clarified that trail commissions can be up-fronted for systematic investment plans of up to Rs 3,000 per month, per scheme, for first-time investors in mutual fund schemes. SEBI had earlier asked the asset management companies (AMC) to adopt full trail model of commissions in all schemes while allowing upfronting of trail commission only in case of inflows through systematic investment plans (SIPs).

The RBI raised the investment limit for FY 2019-20 for foreign portfolio investors in government securities to 6% of outstanding stock of securities from 5.5% in FY 2018-19. MCA tightens noose on ponzi scheme operators as the Investor Education and Protection Fund (IEPF) Authority under the MCA is coming up with a portal with the sole purpose of getting information about investor grievances and the firms that dupe gullible investors. The MCA also wants to have a complete ban on cryptocurrencies. The aim is to protect investors from a virtual world that has no regulatory back-up. 

SEBI has reduced the minimum subscription requirement as well as defined trading lots for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). REIT's have to offer their units in lots worth minimum Rs 50,000 in initial and follow on public offers while InvIT's have to offer their units in lots worth minimum Rs. 100,000. The minimum trading lot for InvITs has been reduced from Rs 5 lakh to Rs 1 lakh, and for REITs from Rs 1 lakh to Rs 50,000. As per SEBI's new insider-trading norms, companies and promoters will have to be more cautious in dealing with "unpublished price-sensitive information" (UPSI). SEBI will hold them responsible if they hold on to UPSI without any 'legitimate purpose'. SEBI's recent amendment has widened the applicability of its insider-trading norms. Senior employees of materially significant subsidiaries and promoters of listed companies will now come under the requirement of reporting trades, and seeking clearance before trading in the listed company's shares. Companies will have to formulate policies to determine what constitutes 'legitimate purpose', whistle-blower norms for reporting leaks of UPSI and inquiry norms for determining the source of leaks. SEBI has specified that the term 'legitimate purpose' will include the sharing of UPSI in the ordinary course of business by an insider with related parties inside/outside the stock exchanges. 

JET SET GONE?

Jet Airways was started by Naresh Goyal in 1993. At that time, Air India was the only player in a nacsent aviation market. In 2005, when Jet Airways came out with its IPO, the carrier controlled 41% of the passenger share vis-à-vis its capacity market share of 36% while Indian Airlines controlled 33% of the passenger share vis-à-vis its capacity market share of 39%. In 2006, Jet Airways embarked on an aggressive international expansion plan under which the carrier ordered 22 wide-body aircraft for delivery over 18 months, starting in 2006 in a cash deal. In 2007, Jet bought a struggling Indian airline called Sahara for 14.5 billion rupees. The deal did not create any value for Jet Airways as Sahara had an ageing fleet and did not fit Jet's corporate culture. At around the same time, the low-cost carrier IndiGo started to bite into other airlines' market share with cheap fares. 

In 2013, Jet was rescued by Abu Dhabi's Etihad Airways which bought a 24 percent stake in the Indian airline when the company was almost cash bankrupt. As part of the deal, Etihad also bought three pairs of Jet's landing slots at London's Heathrow airport and 51% stake in its frequent flyer program. 

As the Indian Market witnesses a massive rise in travel preference to low cost airlines, Jet started to lower prices while continuing to offer expensive services. High aviation fuel prices and taxes resulted in the company posting losses in eight of the past 10 years. Its share of the domestic passenger market has fallen to about 15.5% in 2018 from 22.5% in 2015. In early 2019, Jet and its main lender, SBI failed to impress the aircraft leasing firms regarding the debt repayment plan. This prompted some of the lessors to pull back their planes from Jet's airlines fleet. This led to the carrier cancelling lot of flights. As of today, Jet Airways has more than 8400 Crores of Debt outstanding and with outstanding payments to its staff along with lessors wanting to reposses the aircrafts. The lenders to Jet Airways have laid out terms for potential bidders to buy up to 75% stake in the carrier with final bids due on April 30. Moreover, FDI in Airline sector is capped at 49% and that would mean a domestic entity will have to step in as the Government would want Jet to remain with an Indian entity. 

KNOWLEDGE - RESTRAINT BIAS

Symptoms - Overestimating our ability to show restraint in the face of temptation or in our ability to control various impulses. Example - Many who smoke regularly start thinking they know it is a bad habit and therefore being quite rational will be able to kick the habit. Similarly, Investors who consider themselves contrarians or different to others actually tend to behave similar and give in to the temptation of buying at all time highs and panic when the markets are down. 

Effects - The bias makes us feel we have self control and unknowingly leads us to higher exposure to dangerous financial and lifestyle habits. Restraint bias is especially dangerous in the wealth management space because we tend to believe we have great control on our spending habits and finally find out that the lifetime savings are simply not enough. 

Correcting the Bias - Leaving everything on the willpower to show restraint or act in a predetermined way is definitely not the right solution because if the bias has been diagnosed than it means that the willpower has clearly failed. An STP initiation during a market fall is the best way to move money in to asset classes rather than relying on our ability to act contrarian and thereby trying in vain to time the markets. If I have to stop smoking than buying a pack in the night will surely not help. Sometimes, the inner mental struggle is absent but its place is taken up by external triggers that we ourselves have created. Like enjoying listening to market news which will be mostly in tune with the current sentiment of the market. Retail shops strategically make you walk the entire shop even if you have to buy very few items and rarely a person takes a u-turn before reaching end of shelf line. As in any bias, first step is to acknowledge the presence of the bias. 

SHIFT OF BASE YEAR FROM 1981 TO 2001

Indexation - Indexation means adjustment in the acquisition cost of capital asset based on the Cost Inflation Index (CII). This inflated cost is considered as the cost of acquisition while computing profit or loss on sale of capital asset. The CII is fixed by Government of India to measure inflation and is used in computing the inflated cost to arrive at the long term capital gain in relation to sale of assets. For determining CII, Government has fixed a particular calendar year as base year and fixes the CII starting from base year. In case of assets acquired prior to base year, the taxpayer has an option to choose either Fair Market Value (FMV) computed as on first day the of base year or actual cost if higher to arrive at the indexed cost and compute capital gain/loss. 

Fair Market Value - FMV is an estimate of the market value of an asset such as property or gold, based on an arm's length transaction between a normal rational buyer and seller. The FMV can be obtained from a Registered Valuer. 

Shift of base year from 1981 to 2001 - Prior to the Finance Act 2017 base year for fixing CII was 1981. The reason for shifting of base year to 2001 is considering the difficulty in getting relevant information for computation of FMV of assets as on 1 April 1981 or any year before 2001. 

Impact of shift of base year - At present, the base year is 2001 and the CII for 2001 is indexed at 100. Therefore, cost of acquisition of an asset acquired before 1 April 2001 shall be allowed to be determined based on the FMV as on 1st April, 2001 or actual cost if higher and the cost of improvement shall include only those capital expenses which are incurred after 1 April 2001. In almost all situations, the base year shift from 1981 to 2001 would help in giving a practical value to the cost of the property, lowering the capital gains and the tax burden. The long term capital gain would be less based on the FMV in the base year 2001 if the appreciation in price of asset is more than the increase in CII between year of acquisition and 2001 which would benefit the real estate owners who had acquired property prior to base year i.e., 2001. This also helps the government in arriving at a proper cost for a property as records on transactions would be more readily available in 2001 than in 1981. 

DOMESTIC ECONOMY

Wholesale prices in India rose by 3.18 % year-on-year in March 2019, accelerating from a 2.93 % rise in the prior month while markets had expected 3.2 %. On a monthly basis, wholesale prices increased by 0.4 % in March, following a 0.25 % gain in February. 

India trade gap narrowed to USD 9.6 billion in February of 2019 from USD 12.3 billion a year earlier and below market expectations of USD 14.3 billion. 

India's steel export to the US in 2018 declined by 49 % to USD 372 million, while that of aluminium increased by 58 % to USD 221 million, the independent Congressional Research Service (CRS) said in its latest report. 

India's exports rose to a five-month high of 11 % in March on account of higher growth mainly in pharma, chemicals and engineering sectors, marking the outbound shipments at $331 billion for FY 2018-19 as per official data. 

After declining 4 straight months till January 2019, Consumer Price Index inflation increased for the second straight month in March led by an increase in food prices. Consumer Price Index inflation stood at 2.86% in March compared to 2.57% in February 

CPI food inflation stood at 0.3% in March compared to -0.66% in February. As per Crisil's Chief Economist, "The food inflation trajectory is looking upwards and will pan out depending on the rains and the global food price movement. At 0.14% for 2018-19, CPI food inflation was the lowest since 1991. 

Skymet and IMD have so far given contrasting forecast for the monsoon, which will determine how food inflation trends in FY20. While Skymet expects the rainfall to be below normal, IMD feels it could be near normal. Along with normal monsoon, IMD also predicts that the rainfall is likely to be well distributed throughout the country. This augurs well for a higher production during the Kharif season, which could lift overall economic growth. Last year, the IMD predicted rainfall of 97% of the LPA, but by the end of the season, the country received 91% rainfall. LPA is the average rainfall received as a whole during the monsoon for a 50-year period. The current LPA is 89 cm, based on the average rainfall. 

On 29th March, the Centre notified that it would borrow Rs 4,42,000 crore via sale of dated securities in the first half of 2019-20. 

Based on 104 companies in the BSE 500 Index that have declared their results, Net Profit grew -0.5% in Q4FY19 over Q4FY18 and Revenue grew 12.9%. Interest payment was the fastest-growing cost head during the quarter growing at 32.5% YoY, against 12.9% growth in revenue and 5.8% growth in operating profit. Though earnings are expected to improve as more companies declare their earnings, the consensus estimates of a 23.6% earnings growth in Q4FY19 looks very less likely. 

INTERNATIONAL NEWS

U.S. GDP was revised to 2.2% in the fourth quarter of 2018 compared to the previously reported 2.6% increase. Economists had expected the pace of growth to be downwardly revised to 2.4%. 

Eurozone's economic sentiment index fell to 105.5 from 106.2 in February. Economists had expected a score of 105.9. The industrial confidence index dropped to -1.7 from -0.4, and the services measure fell to 11.3 from 12.1. 

Japan's manufacturing sector continued to contract at a steady pace, the latest survey from Nikkei revealed with a manufacturing PMI score of 48.9 (a score below 50 is considered as recessionary). 

The Bank of Japan recently cut its assessment for three of the country's nine regions, the biggest number of downgrades in six years, indicating a slowdown in exports and factory output. 

Over 1 million UK citizens signed a petition to reverse Brexit as Theresa May was seeking extension for getting the withdrawal plan approved. On the 10th of April, British Prime Minister Theresa May secured the extension to the Brexit deadline to 31st October 2019 after failing to resolve the differences in her own Conservative Party over the terms of Britain's departure from the EU. If the British MP's fail to agree to the withdrawal agreement then there will be no transition period till Dec 2020 and EU laws will stop applying immediately to the UK. 

Germany's February exports and imports both fell more than expected indicating that Europe's largest economy is likely to post muted growth in first quarter amidst global weakening in trade. The seasonally adjusted exports were down by 1.3 % on a monthly basis while imports fell 1.6 %.

In a Bloomberg Survey of Economists, Chinese GDP growth forecasts have been revised upwards by 0.1% to 6.3% in 2019. The survey suggests that the Chinese Economy is seeing a recovery amidst doubts on the domestic financial sector and the recent effect of the trade war with the US. 

SECTORAL & COMPANY NEWS

Chinese brands controlled a record 66% of Indian smartphone market in the first quarter, led by Xiaomi Corp, with volumes rising 20% on the back of popularity for brands like Vivo, RealMe and Oppo. Although Xiaomi's India shipments fell by 2% Y/Y, the Beijing-based company continues to be the biggest smartphone brand in the country, followed by Samsung Electronics Co Ltd, according to Hong-Kong based Counterpoint Research. Shipment volumes for Vivo increased by 119%, while those of Oppo rose by 28% in the world's fastest growing market for smartphones. 

L&T signed an agreement with VG Siddhartha and his related entities, namely Coffee Day Trading Limited & Coffee Day Enterprises Ltd. buying 20.3% Mindtree shares post which, L&T would acquire 15% stake through open market purchases and then make an open offer of about 31% to shareholders of Mindtree in order to secure a comfortable majority stake of 66% in the IT firm. The acquisition of Mindtree would make L&T's return profile more stable and strong as it would increase the share of revenues from services businesses (presently comprised of technology and finance) to 33% from 20% currently. Though the company is adequately prepared to fund the acquisition through internal accruals and cash balances of Rs 16,000 crore, a Nomura report states that the deal would be slightly earnings dilutive to neutral in FY20 but earnings accretive from FY21. 

The US-India Strategic and Partnership Forum's (USISPF) President Mukesh Aghi says that about 200 American companies are seeking to move their manufacturing base from China to India post the general elections in India. 

Lakshmi Vilas Bank (LVB) announced its merger with India Bulls Housing Finance. The approval is subject to the Reserve Bank of India (RBI) and other regulatory & statutory approvals. As per the deal, shareholders of the Chennai-based bank will get 14 share in Indiabulls for every 100 shares held in LVB. The recent IDFC Bank- Capital First deal shows that merging with or acquiring a bank is a way for NBFCs to quickly get a banking license and mobilise public deposits. Not long back, IndusInd Bank, too, acquired Bharat Financial Inclusion. 

Maruti Suzuki has announced that it will completely phase out diesel cars below 1.5 litre after April 2020 as the BS VI emission norms become effective. Compliance to the norms will spike the price premium of diesel vehicles over petrol and nullify the higher economic benefit diesel vehicles enjoy over petrol vehicles. Around 23% of all units sold by Maruti in the domestic market currently are diesel cars.


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