March Newsletter - 2018

Estimated reading time: 8 minutes 38 seconds


Symptoms - An investor who is likely to hold on to his investments or may invest more even if the opportunity cost is high because of the time and the money (cost) that has already been spent (sunk) on it. 

An example at an institutional level could be the PSU Banks which lend more money to distressed companies so that the initial funds could be recovered. 

Steps to correcting the bias - Future investment decisions should not be done on the basis of sunk cost. In the words of Sir Richard Branson who created over 350 companies, "So, I think cutting one's losses is something which is often tough to do, but it's important to do early on. Rather than wasting away a lot of money, you can actually reinvest that money in creating new jobs elsewhere, rather than chasing a dying industry." 


SEBI has permitted sale of shares held by promoters/promoter group in the open market up to 2% of the total paid-up equity capital of the company. The sale valume should not exceed more than five times the average monthly trading volume of the shares of the listed entity. SEBI has given time till August 21 for the public listed companies to bring its minimum public share holding to a minimum of 25%. 

SEBI has directed HDFC Bank to identify individuals, including bank officials responsible for leakage of sensitive financial details through WhatsApp before the formal results announcement. The market regulator has found inadequate controls at the lender as 'prima facie' reason for the leak. 

SEBI on 15th Februrary released a circular suggesting that retail investors need to be compensated if bankers fail to make the allotment in an IPO despite their eligibility. The regulator also added an interest amount of 15% as additional compensation for failure if any, to resolve the greviance within 15 days. Sebi said there should be a uniform policy for calculation of minimum compensation payable to investors and no compensation will be payable if the listing price is below the IPO price. 

Post the Punjab National Bank (PNB) fraud, SEBI is looking to tighten its Know Your Client (KYC) norms. Currently, there is no specific format for the registered intermediaries and therefore different KYC formats are used by different intermediaries even if the end client is one. SEBI held a meeting to identify the potential use of blockchain in the existing process for SEBI's registered intermediaries, broking houses and private banks. 

Employees Provident Fund Organisation (EPFO) has reduced the interest rate to 8.55%, a 5 year low, for 2017-18 as against 8.65% for 2016-17 and 8.8% in 2015-16.


Dividend Options in Equity Funds were sold to many investors as attractive alternative to FD's and being "safe, regular income and tax free". The "tax free" part has been abolished in the 2018 budget. All dividends by equity funds will now be taxed at 10% plus 12% surcharge and 4% cess. Effectively, for every Rs.100 of dividend, there will be a tax paid to the tune of 11.45% that will be from the dividend pool itself post which the investor will be getting a dividend of Rs.100. The safety feature is actually a non existent feature as Equity investments are volatile. The regular Income feature is a effect of markets. When markets tend to fall, then dividends may be withdrawn from the capital. Whether the market rises or falls, the dividend option in a way reduces the growth potential of the invested money. The compounding benefits of equity happen on a lower capital base due to dividend distribution. For regular income, SWP in debt funds should be used. For profit booking in Equities, use SWP in growth option whenever markets are over valued. Unlike dividends, here units are withdrawn and therefore the tax paid is much lesser because of the initia cost of the units being sold.


The PNB Scam has already reported frauds adding up to ~Rs.12,600 Cr that went undetected for more than 6 years. 

The scam surfaced in January when officials of Nirav Modi and Mehul Choksi groups approached the PNB's Brady House Branch in January to seek a "Letter of Undertaking" (LoU) for making payments to suppliers. Deputy Manager, Gokulnath Shetty had retired last May and the new PNB officials demanded margin money to issue the LoUs. However, they were told by Nirav Modi group officials that they had been getting such a facility for years without margin. Once the PNB officials checked, the whole fraud unravelled. 

According to CBI officials, the practice of illegally issuing Letters of Understanding (LoUs) and Foreign Letter of Credits (FLCs) and then rolling them over to favour Nirav Modi and Mehul Choksi groups started in 2008 and continued till these were discovered in January this year. 

PNB officials have claimed to be unaware of the scam though the illicit activities resulting in fraud of Rs.11,300 crore occurred under the nose of top PNB officials despite having an integrated risk management division and monitoring of accounts with exposure of above 50 Cr. 

It has also come to light that the last audit of PNB's Brady House Branch that mainly deals with HNI's, was done by RBI in March, 2009. The recent scam has prompted the government to discuss the setting up of the National Financial Reporting Authority by the Union Cabinet. This new agency will remove the regulating and disciplinary functions from the control of the Institute of Chartered Accountants of India (ICAI).


The National Company Law Tribunal (NCLT) on 26th Februray accepted an appeal by the UK based company, Liberty House against the rejection of its proposal to acquire and turn around the operations of Bhushan Power & Steel. The resolution professional (RP) and Committee of Creditors rejected Liberty House's bid for Bhushan Power on 16th of Februrary as it was submitted after the deadline had passed, on February 8. The parties will be heard by the NCLT's Principal bench on March 5th. The Union Cabinet has decided to end the monopoly status of state-miner Coal India Ltd (CIL) by opening commercial mining for the private sector. 

US President Donald Trump has described India's reduction of customs duty to 50% from 75% on imported high end motor cycles as "inadequate" and wants the Indian Goverrnment to reciprocate the 0% duty imposed on import of motor cycles from India. 

In a scam similar to the PNB Scam, the Oriental Bank of Commerce has alleged that the firm, Dwarka Das Seth International has cheated the bank using multiple Letters of Credits (LC's) amounting to Rs.390 Crores. 

A recent ruling of the Pune bench of the Income Tax Appellate Tribunal has allowed a pharmaceutical company to account for their spending on Doctors as a deductible expense. The tribunal's order came in a case involving Emcure Pharmaceuticals Ltd, which filed returns in which expenses of Rs.2.07 crore were claimed as 'advertisement sales promotions. Earlier, the pharma company's claim was disallowed by the IT department on the ground that it violated the MCI code of ethics.


India will bypass China as the driver in global energy growth by 2030 as per a top official of British Petroleum. The official said that currently, both India and China with world's 1/3rd population account for 50% of the world's energy growth. According to us, this would also mean a reducing share of contribution from coal sources and an increasing share of renewables. 

US Flash Composite Purchasing Managers' Index (PMI) in February came in at 55.9, a two-year high. The Flash Composite PMI is an advanced estimate of private sector activity in both the manufacturing and the services sectors. The report also said that costs are rising at the steepest rate for 4.5 years in the Service sector and at a 5 year high in Manufacturing sector. While stock markets can look at the growth and say that the growth will counter the interest rate hike, the bond market will take the development negatively as rates look set to go higher. 

Japan's economy grew at an annualized rate of 0.5% in the December Quarter. This marked an eighth straight quarterly expansion, the longest stretch in nearly 30 years. However, it was a decline from the more than 2% growth in each of the previous two quarters. A rising Yen is set to lower import prices and this may make the Bank of Japan difficult to hit its 2 percent inflation target. 


The Indian chapter of World Gold Council said, the demand for gold grew 9.1% in India to 726.9 tonnes in FY17 from 666.1 tonnes in FY16. Globally the gold demand last year fell by seven per cent to 4,071 tonnes, compared to 2016, World Gold Council said. 

India's retail inflation based on consumer price index (CPI) slowed down to 5.07% in January from a 17 month high of 5.21% in December. Food inflation corrected to 4.58% in January from 4.85% a month ago. According to a UBS report, inflation is expected to trend higher in fiscal 2018-19 which may increase the chances of a rate hike otherwise expected to be held at current levels by the RBI. 

As per Morgan Stanley and Reuters, India's economic recovery is expected to have picked up momentum with demonetization and GST effects starting to fade. The economy is expected to post a GDP growth of 7% for the December Quarter. India's GDP grew by 6.3% in July-September quarter of the fiscal, up from 5.7% in the first quarter. 

The Department of Industrial Policy & Promotion is working with the finance ministry on the details related to providing exemption to start-ups related to investments made by individuals or angel networks in start-ups, from paying the "angel tax". In its current form, funds from angels are taxed at 30.9% if it is more than the fair market value (FMV). Introduced in 2012, this clause in Section 56 of the I-T Act explicitly states that all startups are liable to pay taxes on money invested as capital, including on angel funds that is over and above the amount that is considered as "fair value". It is also reported that government may give complete exemption to less than 10 Crore funding in start-ups registered before 2016. 

The India Meteorological Department (IMD) says that the average temperatures from March to May across half the country are likely to be above normal by more than 10 Celsius. Delhi, along with Haryana, Punjab and Rajasthan, is likely to see average temperatures soar above normal by 1.5 degrees.


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