Lower production, higher profits?

Reports indicate that corporate tax collections in the first quarter of the financial year have gone up by 39 per cent on a period to period basis. At the same time excise collection has taken a dip indicating that production is down. This is an anomaly. How could production decrease while profits increase? Especially when margins are under strain? One reason could be the payment of corporate dividend tax (CDT). The CDT is payable on dividend declared, distributed and paid after June 1, 1997. The dividend is considered declared when it is approved in the AGM. The entire corporate sector, with the notable exception of Crompton Greaves, had provided for the CDT in the accounts for 1996-97.

Non-food credit rise due to oil credit

THE Reserve Bank of India figures for non-food credit offtake indicate that the decline in non-food credit (including investment in corporate paper) shows a decline of only Rs 1,382 crore compared to a decline of Rs 6,350 crore in the first quarter of 1996-97. In particular, the RBI lifting restrictions on investment in corporate paper has resulted in bank investments in these instruments increasing by Rs 1,872 crore, compared to the first quarter of 1996-97.

Is this increase in non-food credit sufficient indication of a turnaround? Perhaps not, if one keeps in mind incremental borrowing by IOC, BPCL, HPCL, the other refineries, ONGC and Oil India. With total dues from the oil pool account being around Rs 18,000 crore, these companies have had to borrow heavily, and at least a part of this borrowing must have been from banks. Small wonder that, although the other indicators in the economy do not look good, non-food credit has picked up.

Regulating rating agencies

Sebi seems to be taking all the wrong things seriously. The latest in a round of knee-jerk reactions to the CRB fiasco is regulating the rating agencies. It seems that it is not enough that it regulates the functioning of stock exchanges, brokers, merchant bankers, registrars, AMCs and MFs. Now it wants to add rating agencies to this list, and will be the first capital market regulator in the world to police a rating agency.

Sebi says that it plans to vet those activities that pertain to the capital markets. Rating agencies are neither capital market intermediaries nor issuers. They simply offer an independent observation through the exercise of their rating symbols on the solvency of a company. In no way is the rating a recommendation to purchase the company's securities or a statement on the potential of the company's secondary market listing.

It is bad enough that Sebi wants to regulate rating agencies but it also will reserve with itself the powers to sanction the setting up of new agencies. This could be the making of another Sebi inspired disaster: Sebi's record is hardly cause for confidence.

The only area of rating agencies' activities that Sebi might want to vet is the retail dissemination of information. By that logic they should vet financial newspapers and news magazines.

If Sebi really wants to protect the small investors then they should focus on educating them on their rights and the risk reward relationship between investing and expected returns. They need to be taught that high returns are associated with high risk. But perhaps Sebi would be more comfortable with legislation on the lines of banning greed altogether.

Will the markets hold?

A slew of economic data seems to indicate that the stock markets in India could continue to rise on the weight of foreign money. The Malay ringgit as well as the Philippine peso are under pressure, in sharp contrast to the rupee's rock-like stability.

But while exchange rates holding up are all very well for those who want to sell, a depreciation will help get more new money. At the same time, a positive outlook for second quarter US earnings will mean that money will continue to flow into the US funds, and the outlook for global liquidity flows is good. Till interest rates in the US rise, liquidity flows into the mutual funds should continue,since it is the level of interest rates which determines the split between money flowing into stocks and bonds. Further, rising asset prices increase the opportunity costs of holding cash, and a virtuous circle arises in the markets.

One factor which could involve a re-rating of the Indian market is the depository, although demat volumes haven't picked up yet. Nevertheless the risk premium should decline, meaning more funds. Other factors calling for higher valuations are lower taxes and interest costs.

On the supply side, the absence of new issues has been a positive factor for the secondary market so far. For the week to July 4, Sebi received only one offer document for a Rs 1.30-crore offer. Debt issues too seem to have trailed off. Perhaps more importantly, UTI is not only not facing any selling pressure, but money is now coming into its schemes, auguring well for the market.

Nevertheless, the market could see some shocks when the first half figures for corporates are out, and perhaps even earlier when the current figures are announced at AGMs. Earnings figures lower than expected could result in values come tumbling down. There is a lot of front-running in today's markets, and the end of the book closure period could hold some nasty surprises. And given the fact that it can take anything upto three months to receive your transferred share certificates, investors who have a policy of holding only transferred certificates could be badly hurt if prices decline in the meantime.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.