Electronic trading of rights entitlements proposed :
After amending its guidelines to reduce the time line for rights issues, SEBI has now proposed electronic trading of rights entitlements (REs) through stock exchanges. The regulator had recently amended its Disclosure and Investor Protection guidelines, crunching the time taken for a rights issue to around 43 days from 109 days.
In the proposed process, the rights entitlements will be credited into the individual shareholder’s demat account. Currently, the process involves physical renunciation of right entitlements. “The electronic rights issue process shall apply to shareholders who have an active demat account and hold shares in demat form as on the record date of the rights issue,” said the SEBI concept paper seeking comments from market participants.
The registrar, on the instruction of the issuer, will credit the REs in the given ratio into the demat accounts of the shareholders. Thereafter, the rights issue will open for subscription and renunciation/trading of the REs can commence on the stock exchanges.
The trading in REs will happen on the secondary market platform of the stock exchanges as in the case of ordinary shares, but a separate ISIN (international securities identifying number) will be given for the REs to separate RE-trading from trading of ordinary shares.
Transfer Pricing Scenario in India.
The complex issue of Transfer Pricing arose with the increasing participation of multi-national companies in global transactions and varying tax laws in different countries. Basically transfer pricing is concerned with setting prices for purely international transactions between related enterprises. Transactions entered into between two or more enterprises located in different countries, belonging to the same multi-national group were structured in such a way that often the maximum profit arose in a country where the tax rates were very low and minimum profit where tax rates very high.
For e.g.: A Co. AB Ltd incorporated in India has a 100% subsidiary X Ltd in the U.S. AB Ltd manufactures shoes in India and transfers it to X Ltd. to be sold in the US retail market. Suppose the cost of AB Ltd is Rs. 50 per shoe. The corporate tax rate in India is 30% and in US, say, 40%. Say, X ltd. sells it for Rs. 400 in the US retail market. Now the question arises as to what should be the transfer price for AB ltd. If AB ltd transfers it at Rs. 50 i.e. cost, it will earn no profit and hence no tax incidence will arise in India and profit for X ltd. will be Rs. 350 (since the transfer price paid by X ltd will be its cost price) on which it pays a tax of Rs. 140 to the US treasury. Now suppose the transfer price paid by X ltd is Rs.150 instead of Rs.50. Now the profit of AB ltd is Rs. 100 and that for X ltd. It is Rs.250. The total tax paid is Rs. 130. Again say the transfer price is Rs. 250. The total tax paid will be Rs. 120. In this way the company can transfer the incidence of tax where the tax rates are low by manipulating the transfer price.
Read the full coverage in Eure CAtalyst : June '08
Insurer cannot deny theft claim in the absence of a FIR :
Insurance Companies cannot deny theft claim to a consumer on the ground that no FIR was registered in connection with the incident, the Delhi Consumer Commission has said.
"It is a misconceived notion that the insurance policy covering the risk of theft is not indemnifiable unless and until a person produces the copy of FIR," Commission President Justice J D Kapoor said.
The Commission also called for removing "misconception" from the minds of the public regarding the necessity of registration of the FIR to claim reimbursements in theft cases.
The Commission said, "There is no difference between FIR and a simple complaint made by a person with the police detailing the facts of occurrence."
Finance Funds :
Floating Rate Fund: The volatility in the mainstream debt income fund categories affect the stability of the returns. The floating rate funds is a category of funds for the debt investors which offer them with stable returns that will stay relatively unaffected by the interest rate volatility. This is because the fund generally invests in products which have resetting option of their coupon rates.
Diversified Equity Funds: Diversified equity funds form an integral part of every long term investor's portfolio. These funds generally invest across different sectors & companies & may even invest across different market caps. Such funds may also be further classified as per the market cap they would focus on. Such funds carry relatively less risk as compared to sectoral funds. Depending on the trends/opportunities these funds exploit their flexibility to invest in areas of better opportunities.
Monthly Income Plan: MIP's are basically a variation of balanced funds that are meant for more conservative investors. They are essentially debt funds which carry small (10-30 percent) equity that can add a dash of extra returns to a primarily debt portfolio. As opposed to their name, the funds do not offer any regular monthly income.
Investor Dilemma: Capital Gain or Dividend Payout.
The tax implications on dividend payout make it a tough decision for the investor and the management to decide. The issue is to decide whether the investor would prefer capital gain or cash payout of dividend as return on his investment.
Dividends income is not taxable in the hands of the shareholder. Thus investors would prefer to receive gains in the form of cash dividend. However the firm has to pay dividend distribution tax before paying such dividend and this result in increased cash outflow to the company. Dividend is paid after companies are taxed on income. The cash-flow of companies is impacted and the payout to shareholders gets reduced
In the case of long-term capital gain, the investor is not required to pay tax (subject to certain conditions) and the company does not have to pay any tax. However in case of short term capital gain, an investor is required to pay tax @ 15% (Amended in Budget 2008) provided it was subject to STT. Thus tax implication is a vital factor in taking dividend decisions.
Real Estate Investment Trusts in India
Real Estate Investment Trust (REIT) is a company dedicated to owning, and in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. It buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some REITs are also engaged in financing real estate.
A REIT is a security, much like stocks. They usually sell on the major exchanges and invest in real estate directly, either through properties or mortgages. SEBI defines a REIT to be “a trust registered under the Indian Trusts Act, 1882 and registered with the Board under these regulations, whose object is to organize, operate and manage real estate collective investment”. SEBI has already come out with draft guidelines that will regulate the formation and the functioning of a REIT.
Read the full coverage in Eure CAtalyst : May '08
"One man's loss is another man's gain."
Its there on every business news channel but is it so serious a problem for us? I am talking about the approaching recession in the United States. Its true that a recession is upon the US but should we be worried about it here in India?
The industries relying heavily upon the US for business will surely get effected but thats it. On the reverse side Indian economy will attract more global investments benefiting from the US slowdown. We should not get paranoid about the bubble burst there.
As the US approaches a recession investing in the US markets won't remain a lucrative option any more. These funds have to find more profitable and safer grounds and what better place than India and China. Most of these funds will find its way into this region and we can expect a major portion of it.
Earlier, the US was the most attractive investment destination for funds from the Middle East and Russia. But all this is changing. India is becoming an important parking lot for investments. The gloomier the US outlook, the better it is for India from an investment point of view.We must ensure we do not get psyched into the sentimentality of the US downturn. It should not psyche India into pessimism or into an economic impact here.
The fundamentals of the Indian economy remain strong but a fine calibration is required to ensure that the momentum continues despite the gloomy economic outlook globally. The country's GDP would grow by more than nine per cent in 2007-08 and is expected to continue with the same trend in the future. So why should we be worried?
How is turnover in F&O transactions calculated?
How is turnover in F&O transactions calculated? If notional value is considered, even five to 10 transactions will exceed a turnover of Rs 40 lakh and would required tax audit. How are these details, under ‘Business income,’ to be furnished?
The transactions entered into F&O are non delivery based i.e., completed without delivery of shares and securities. The accounting is done only for the difference amount i.e. difference of purchase & sale price even though the contract notes are issued for full value of assets purchased or sold.
The Institute of Chartered Accountants of India has clarified in the guidance note of tax audit under section 44AB that, to determine the turnover in such type of transactions
The difference of all the trades entered whether positive or negative should be grossed up.
Premium received on sale of options is to be added.
Difference in case of reverse trades should also be considered.
The turnover so determined is to be reduced by the relevant expenses incurred in the course of business and the net amount will be taxable as business income.
Is refund of Securities Transaction Tax available where the income from trading in Futures & Options is negative in a financial year?
Deduction in respect of payment of securities transaction tax is available only where the total income of an assessee in a previous year includes any income, chargeable under the head “Profits and gains of business or profession”, arising from taxable securities transactions.
Provided that no deduction under this sub-section shall be allowed unless the assessee furnishes along with the return of income, evidence of payment of securities transaction tax in the prescribed form.
The rebate available for STT is lower of the following two: (a) STT actually paid; or (b) income from securities transactions X average rate of income-tax on taxable income.
When income from securities transactions is negative (a loss), then the value of (b) above would be nil and rebate available, therefore, would be lower of STT paid or nil. In other words, when there is a loss from securities transactions, no STT rebate is allowed.
Introduction of Index options with longer tenure
The SEBI Derivatives Market Review Committee (DMRC) headed by Professor M. Rammohan Rao, recommended the introduction of new derivative products in the Indian market, with option contracts on indices and stocks with life/tenure of up to 5 years (60 months) being one of them.
To begin with, it has been decided to launch long term options on Sensex and Nifty with tenures of upto 3 years. The options cycle shall be as under:
a. The 3 serial month contracts would continue to exist.
b. The following 3 quarterly months of the cycle Mar/Jun/Sep/Dec would be available.
c. After these, 5 following semi-annual months of the cycle Jun/Dec would be available, so that at any point in time there would be options contract with atleast 3 year tenure available for investors.
The risk containment and other measures applicable for existing exchange traded equity Index option contracts shall be extended suitably to long term option contracts on Index.
This circular is being issued in exercise of powers conferred by sub-section (1) of Section 11 of the Securities and Exchange Board of India Act, 1992, to promote the development of the securities market.
This circular is available on SEBI website at www.sebi.gov.in, under the category “Derivatives – Circulars”. The Circular shall come into force from the date of the circular.
Are gains (loss) from stock futures (STT paid) considered as short-term capital gains (STCG) or Income from Business? Can loss from these trades carried forward to next year?
Income from derivatives trading is more likely to be shown under the head, ‘Business income’, due to the short duration and nature and sheer volume of transactions. Once classified as business income, the next issue arises as to whether it is to be shown as speculative business income or non-speculative business income. Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. However as per section 43(5), an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange shall not be deemed to be a speculative transaction. If the income is shown as Business Income one can also claim rebate under section 88E in respect of STT paid and deduction of expenses paid. Moreover the gains will be taxed at the normal rate of Income Tax.
Insiders’ have to surrender gains from short-term deals.
Short-term profits from any share transactions made by an ‘insider’ will have to be surrendered to the company, according to draft regulations on insider trading issued by the Securities and Exchange Board of India on Tuesday.
‘Insiders’ associated with a company whose buy and sell transactions in that company’s shares happen within a time span of six months will have to surrender any profits made to the company itself, said SEBI’s proposals for “short swing profit” regulations.
“Such a regulation will check insiders who have greater access to price-sensitive company information from taking advantage of information for the purpose of making short-term profits (short swing profits),” said SEBI.
The regulator argued that insiders are assumed to have a long-term investment horizon in the company and are therefore “not expected to make rapid buy or sell transactions.” Such transactions would be based on at least some level of superior access to information whether material or not, said SEBI.
The regulator described two possible approaches with regard to who could be considered an insider for the purpose of surrender of short swing profits. One proposal is that ‘designated insider’ should capture within its ambit all key management personnel by whatever name called, all directors of the company, and all officers who are the beneficial owners, directly or indirectly, of 10 per cent or more of any class of equity securities. The second alternative is that in addition to officers of the company, all beneficial owners in excess of 10 per cent holding, singly or in concert, also be implicated in the definition of ‘designated insider’.
The mere fact of the trade will be sufficient for surrender of “short swing profits”. Liability would be imposed without any necessity for guilt or wrongfulness to be established. Conversely, a direction to surrender such profits shall not necessarily imply any form of guilt.
SEBI has invited public comment on the consultative paper.
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