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June Newsletter - 2018

Estimated reading time: 8 minutes 32 seconds

KNOWLEDGE-OUTCOME BIAS

Symptoms - The Isolation Effect (The Von Restorff Effect) is likely to be exhibited when people value a thing differently depending on whether it differs from the rest and whether placed next to an inferior alternative. Hedwig von Restorff recognized the Von Restorff effect in 1933. She conducted a set of memory experiments around separate and distinctive items, concluding that a different thing, in a list of otherwise related things, would be better remembered than an item in the same relative position in a list where all items were similar.

An example - An Asset Management Company may market a mutual fund with an appealing name for the fund to get better attention and therefore more investment even if there is no historical performance to support an investment. Even online investment firms may attract visitors by designing call-to-action buttons regarding systematic investment plans on "regular" funds. The movie "Drishyam" is a classic illustration of the Von Restorff Effect as the protagonist plants false memories in the people's minds.

Steps to correcting the bias - Avoid making decisions on memory inputs because memories are mostly reconstructed, instead rely on writings, creating checklists and reviewing them periodically which could be useful for Investment Plans.

PETROL AND DIESEL BREAK-UP

As crude oil crossed 80$'s a barrel (1 barrel ~ 159 litres), the various central and state government levies came into sharp focus. The table below shows the break-up of petrol and diesel prices per litre in Delhi to give an idea of the price break up into various components.

The above table shows that the dealer prices for petrol is lower than 50% of the retail price per litre of petrol and therefore, the remaining amount is made up by the State and Central Government Taxes. Increasing diesel prices can create a short run inflationary effect because of a rise in transportation costs, the impact of which will be passed on to consumers of the end-product. Petrol, on the other hand, is a fuel mostly used for personal transportation which even if charged higher would lead to a mass shift in preference for public transport and a higher petrol price also acts as a pollution charge on personal vehicles. Most importantly, the Government Taxes will go towards meeting budgeted Government Expenditures. A reduction in excise duties especially when fuel prices are rising is not a right decision as that will increase the budget deficit and result in a higher borrowing which will ultimately lead in sovereign ratings deteriorating and higher interest accumulation and a rising oil import bill.

FLIPKART SHARESALE TAX ASPECT

US-based Walmart took a 77% stake in India's e-commerce company Flipkart for $16 Billion by buying the stake in Singapore based company, Flipkart Pte Ltd. which owns the Indian Company. As more than 50% of the value of Flipkart Singapore comes from Flipkart India, Section 9(1)(i) of the Income Tax Act will be applicable to a non-resident selling their stakes in a capital asset based in India to another non-resident player and consequently the income deemed to accrue or arise to non-residents will be taxed in India. If the seller of shares in Flipkart Singapore is a tax resident of Singapore/ Mauritius or any other country which has a DTAA tax treaty with India that exempts capital gains from income tax in India, then the seller may claim treaty benefits on shares if purchased before 1st April 2017.

The other tax aspect to consider is whether Flipkart India under Walmart will be allowed to carry forward the losses for the adjustment against income tax payable by the company. As per Section 79 of the Income Tax Act, carry forward, and set-off of losses cannot happen when more than 51% of shareholding has changed hands.

FINANCIAL NEWS

SEBI had issued a circular on the categorisation of schemes in October 2017 and had given six months as the time to move or rename funds as per the new category in which the funds could fit. The primary objective for the re-categorisation of mutual funds is to help investors select schemes easily. According to SEBI, the schemes should be "clearly distinct regarding asset allocation, investment strategy, etc.." An MF can have only one scheme under each category unless in the "other fund" category. The market regulator divided mutual fund schemes into five broad groups, which are further divided into a total 36 categories as follows:

Investors should not exit the existing mutual funds based on the fact that there will be no exit load on the funds if the fund has been merged or renamed to another fund because subsequent unnecessary expenses will be borne by the investor especially if the regular option in these funds is selected. New funds are needed only if the holdings, the characteristics or the mandate has to be changed by a fund due to the SEBI regulation. The re-categorization is likely to help a small cap fund in the long run as the small-cap universe will start with companies from the 251st rank and below for market capitalization.

DOMESTIC ECONOMY

Consumer Price Inflation (CPI) for Apr-18 stood 30 bps higher at 4.58%, as compared to 4.28% in Mar-18 as inflationary pressures emanating from food, fuel and services components. Core Inflation (excluding food and fuel) stood significantly higher at 5.92%, upward from 5.37% in Mar-18.

Wholesale Price Index (WPI) came in at a four-month high of 3.18% in Apr-18 as compared to 2.47% in the previous month, primarily led by a sharp rise in the prices of food and fuel components. The CPI and the WPI readings for Apr-18 are the last before RBI's Second Bi-monthly Monetary Policy Statement for 2018-19 on June 5th.

The monthly GST collections crossed Rs.1 lakh crore for the first time in April at Rs.1.03 Lakh Crores, the average monthly collection till March 2018 from July 2017 was close to Rs.90,000 Crores. However, the first quarter in FY18 is likely to be muted as manufacturing activity slackens a bit implying order inflows slowdown amidst setting of targets for the new financial year.

PwC's global indirect tax leader Jo Bello told The Economic Times that GST has started changing India's perception not just for policymakers in other countries but also for global investors. She also added that the success of the online Goods and Services Tax (GST) System in India could trigger similar experiments in the common European trading bloc.

The Indian Meteorological Department (IMD), in its first forecast, sees a 'normal' Southwest monsoon this year at 97% of the Long Period Average and has forecast the onset date to be May 29th with the error margin of +/-4 days. The Southwest monsoon brings about 70-75% of India's annual rainfall, and its arrival coincides with the commencement of Kharif season that begins in June and ends in October. The government has announced food grain production target of 283.7 million tonnes for the FY19, with 140.2 million tonnes for Kharif and 142.5 million tonnes for Rabi in the wake of normal monsoon prediction by the IMD. Major Kharif crops in India include rice, jowar, bajra, maize, ragi, millet, tur, urad, moong, groundnut, castor seed, soybean, cotton, turmeric, guar seed, sunflower, and sugarcane. Some of these crops like soybean, cotton, guar seed and castor seed are traded actively on various Indian commodity exchanges.

SECTOR & COMPANY NEWS

RBI has currently put IDBI Bank, Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank under Prompt Corrective Action (PCA) framework. Three more PSU Banks, Punjab National Bank (PNB), Canara Bank and Union Bank of India, may come under Reserve Bank of India's PCA framework. All three banks have net Non-Performing Assets (NPAs) above 6%, one of the 3 conditions RBI considers before putting a bank under the PCA to restore their health. Besides the NPA rule, two years of consecutive losses or capital adequacy ratio (CAR) below the regulatory requirement could also make the RBI put the banks under PCA.

The aviation ministry has proposed the removal of all cancellation charges if the air tickets get canceled within 24 hours of booking provided the ticket is itself booked 96 hours before flight departure. In cases where the cancellation charges cannot get avoided, the ministry has proposed that the cancellation fee cannot be more than the base fare. The draft on passenger charters would finalize within one month from May 22nd.

Tata Steel, through its 100% subsidiary has completed the acquisition of Bhushan Steel (BSL) for Rs.35,200 Crores, the first significant successful resolution under the dedicated bankruptcy code. As per the deal, Bhushan Steel will issue new shares to Tata Steel giving the latter a controlling interest of around 72% in the company, while lenders will hold about 12%, and the existing shareholders will hold the rest of the equity. According to CFO Koushik Chatterjee, a greenfield project of 5 million tonnes per annum (MTPA) hot rolled coils (HRC) and 2 MTPA cold rolling (CR) mill will require a capex of Rs.31,000 crore, assuming Rs.5,100 crore per million tonnes of HR capacity, plus the cost of infrastructure. Since the land acquisition, ministerial clearances and plant building will easily require at least 40 months, the opportunity cost of not acquiring BSL would come to another Rs.13000 -15000 Crores.

INTERNATIONAL NEWS

U.S. President Trump canceled his planned summit on June 12 with North Korean leader Kim Jong Un. The continued uncertainty over U.S.-China trade relations and the volley of back-and-forth replies between U.S. and North Korean officials over the denuclearization of the Korean Peninsula is likely to dampen global investor sentiment.

After having no government for 2ó months, Italian President Sergio Mattarella grudgingly accepted the populistic Euroskeptic coalition government's nomination of Giuseppe Conte and gave him the mandate to assemble a cabinet. The Prime Minister choice is an unknown academic and lawyer with no political experience. Investors braced themselves by selling Italian government bonds resulting in highest level for 10-Year bond yields since 2014.

The odds of early elections have increased dramatically in Spain after calls for a no-confidence vote in the ruling government, due to court convictions of high-level officials in a graft case. The court judged that the Prime Minister Mariano Rajoy's party had benefited financially from an illegal kickback scheme. The developments could eventually lead to Mr. Rajoy getting removed at a time when the independence push of Catalonia has shaken Spain.

KEY DATA AND METRICS



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