First thought this morning
The government's proposal to hike registration fee for new
vehicles has met with widespread criticism. I am however not able to decipher
what this criticism is about - timing of the proposal when the auto industry is
struggling with poor demand and mounting inventories; the principle of sin tax
being applied to the motor vehicles; or both.
I distinctly recall that last winter when the air pollution levels
in many cities, especially the capital Delhi, crossed the last limits, many
experts have suggested steep increase in parking and registration charges to
demotivate people from buying more vehicles.
There have been numerous cases of young kids developing serious
respiratory conditions like asthma, premature graying of hairs and problems
related to eyesight. Recently, doctors in Delhi have suspected a case of lung
cancer in a young lade due to air pollution in Delhi. The capital city
witnesses many cases of violence including murders every year for parking of
vehicles in colonies with inadequate parking space. It is therefore only
appropriate that vehicle population is controlled through all means including
policy measures like higher levies and better public transport.
The point whether the government could have waited for the
automobile demand to normalize before taking a policy action is debatable.
I feel additional levy of Rs5000 for car registration and Rs1000
for two wheeler registration may not be a deterrent for the buyers at all.
Chart of the day
Miror, Mirror on the wall...who is ugliest of all
The market participants in their late 50s and older would distinctly remember the days when the practice of Badla Financing was banned from March 1994. This was the time when the country was witnessing massive regulatory and commercial changes.
The market participants in their late 50s and older would distinctly remember the days when the practice of Badla Financing was banned from March 1994. This was the time when the country was witnessing massive regulatory and commercial changes.
Liberalization of economy had opened up many businesses to
global competition. MRTPA and FERA dilution had liberated large businesses to
grow larger, wider and faster. Thousands of SME businesses were winding up.
Banks, UTI and Insurance companies were saddled with huge amount of losses. All
three large development financial institutions namely, IDBI, ICICI and IFCI
were saddled with bad assets, especially steel, cement and textile firms' loans
that have been rendered totally unviable due to liberalization of economy and
competition.
Stock markets had just recovered from the damage caused by the
Harshad Mehta scam that caused huge losses to banks, intermediaries, traders
and investors. Foreign investors were allowed to invest in Indian listed
equities in 1991, but only had marginal exposure thus far. Non UTI Mutual Fund
industry was still in nascent stage.
Ban on Badla trading (indigenous method of financing stock
market transactions and stock lending) shook stock markets. Sensex (there was
no Nifty then) fell ~10% in a month. Brokers and traders lamented the Finance
Minister Manmohan Singh and his colleague from Delhi School of Economics Dr L.
C. Gupta as destroyer. The common refrain was that Indian equity market has
been killed for good as its fulcrum (Badla financing) has been broken. The 25
odd stock exchanges that were mostly run as private clubs of brokers were
facing existential threat.
Then came a slew of SEBI regulations, NSE, Depositories, F&O
Trading, a deluge of foreign investments, GDR/ADR issues, and Indian equity
markets were soon making mark on global canvass.
India became first country in world to achieve 100% electronic
trading, completely eliminating the trading floors. India was also the fastest
country to achieve 100% dematerialized settlement of securities.
25years later, I see the market standing at the same crossroad
again. The colossal failure of self regulation on part of exchanges, intermediaries,
fund managers, and traders has caused a serious crisis of confidence in the
markets. All this has happened when the financial system has been under
unprecedented stress. A number of large businesses in steel, power, road,
cement etc sector have failed. Increased global competition and implementation
of GST is threatening to eliminate numerous MSME firms. New Insolvency and
Bankruptcy Code (IBC) and deeper regulatory scrutiny has broken the
banker-promoter nexus rendering both unscrupulous bankers and entrepreneurs
liable to severe legal and regulatory punitive action.
Markets participants
(intermediaries, traders, fund managers, financiers, non-compliant FPIs,
unscrupulous promoters and market manipulators, et al) are obviously enraged.
All are blaming the finance minister and regulators for not doing enough for
salvaging the equity markets. But No One, yes you read it right, No One is
talking about the total failure of self regulation that has raised the need for
deeper and wider scrutiny and restrictive regulations which is the primary
cause of the crash in stock valuations, in my view.
- There have been many cases of mutual fund managers surreptitiously financing corporate and promoter in violation of prudent norms and inadequate due diligence. There are allegations that many such financing deals might have involved illicit payments to the respective fund staff. Stricter limits have been applied on mutual funds to check on excessive exposure to one entity or group. That has also caused some unwinding in markets.
- NSE has infamously alleged to have conspired with certain brokers to grant discriminating access to trading system.
- But the worst has been the traders using off market route to make abnormal gains. Misuse of "off market" transfer of securities to "others" account has been the most commonly used instance of self destructive self regulation violation has been. This practice, inter alia, includes the following modus operandi:
1. Transfer of
securities to related party account, who shall use such securities for active
trading, providing as margins or collateral or even lending purpose. The
beneficial owner would usually make such transfer at beginning of financial
year and a reverse transfer would be made towards the end of the financial
year. This allows the transferee to over leverage and earn and share profits
with the beneficial owner in cash, thus evading taxes.
2. Transfer of
securities to broker, who would use this as margin deposit or collateral and allow
excessive leverage to other clients charging interest as high as 20-25%. The
interest so charged is shared with the beneficial owner in cash. Tax evasion
and excessive & naked leverage makes market vulnerable to sudden crashes.
3. Promoters
transferring share to financiers without creating a pledge and thus avoiding
disclosure to market about the actual extent of promoter leverage. A default in
servicing the loan would lead to sale of transferred shares without actually
disclosing lowering of promoter stake.
4. Transfer of
securities as collateral against temporary business or property loan allowing
speculative positions in third party account.
These types of transfers have frequently caused substantial
forced selling leading to higher volatility and undue destruction of wealth of
investors.
All such "off market" transfers have been banned with
effect from 3 August 2019. This has sent the "undisclosed borrowers"
scrambling to unwind their positions so that the securities could be
transferred back to the beneficial owners' accounts before the deadline.
- Brokers would usually allow excessive leverage out of their own resources to earn extra brokerage and survive in competition with bank brokers. Stricter lending norms and disclosure requirements for NBFCs has curtailed this source of undesirable funding.
- NBFCs financed the promoter-broker-operator Nexus with impunity to enable manipulation of market price of securities. Many PMS and funds are allegedly involved in this Game of fleecing gullible household investors. Stricter regulations, wider disclosure norms (including in IT return form) and tighter lending norms have certainly made a dent in this Nexus, if not broken it completely. This is causing lot of pain to brokers, financiers, promoters and investors.Two points I am trying to make are as follows:
(a) Total failure of
self regulation is equally responsible for sever correction in stock valuation,
along with poor earnings growth. In fact, excessive taxation may or may not be bothering
the markets too much, since for a lot of companies effective tax rates have
been reduced thus positively impacting the post tax earnings. Perhaps, the loss
of opportunity to manipulate markets and earn extra money at gullible
investors' expense is more likely to be real cause of pain.
(b) Tighter
regulation, better lending discipline and enhanced transparency will strengthen
the market foundation significantly. The next market up move will be much
sustainable, larger, wider and profitable for all participants.
The regulatory framework for Indian securities market itself has
some congenital flswa. But that story some other time.
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