Markets Seek Direction Once Again
Stock Markets were tepid for most of Wednesday’s trading session with no major triggers to respond to
On Episode 369 of The Core Report, financial journalist Govindraj Ethiraj talks to veteran market analyst Ambareesh Baliga as well as tax expert Dinesh Kanabar, founder and CEO of Dhruva Advisors.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: The Price Of Reducing Friction
(06:17) Markets Seek Direction Once Again
(07:53) Gold Prices Edge Back But Stay In Record Territory
(08:36) Is The PSU Stock Bull Run Over For Now?
(18:33) Do You Have To Get An Income Tax Clearance Certificate Before Catching An International Flight?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday, the 22nd of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital, presently in transit.
The Take: The Price of Reducing Friction
A little over four years ago, just before the pandemic upended our lives, India’s trade minister Piyush Goyal went after Amazon saying they were not doing a great favour to India when they invested a billion dollars.
His argument then seemed to be that Amazon was making losses presumably by undercutting prices, so they had to fund that loss and that was in turn the investment. And thus it was not an investment in the true sense.
At least this is what I understood of what he was trying to say.
And on Wednesday more than four years hence, he said almost exactly the same thing, in the context of the claim that ecommerce could lead to social disruption and then targeted Amazon once again.
Why say the same thing four years on I wonder.
The minister did say he did not want to wish away ecommerce but rather argued for its orderly growth and was thinking of some 100 million retailers, which is of course the politically correct thing to say.
Anyway, any predatory pricing, including by electric motorcycles creates disruption in the market.
The statement by the minister came in the context of the launch of a report by a reasonably Government-friendly think tank
which actually seemed to argue the opposite
The report, authored by Pahle India, is run by Dr Rajiv Kumar which he set up in 2013 and then joined as VC of NITI Ayog, the planning body in Government and then returned to the think tank.
Pahle’s report says that Online vendors have generated 15.8 million jobs in India, including 3.5 million for women, with about 1.76 million retail enterprises participating in e-commerce activity.
The report 'Assessing the Net Impact of e-Commerce on Employment and Consumer Welfare in India' was launched by the trade Minister Piyush Goyal.
E-commerce, according to the report, has been a key driver of employment generation In India. On an average, online vendors employ 54 per cent more people and almost twice the number of female employees, compared to offline vendors.
The report noted that two of the most widely-recognised contributions of e-commerce penetration in the retail sector are --growth in employment and improvements in consumer welfare.
Importantly, the report claimed that rather than displacing physical markets, e-commerce is expanding into new territories like tier 3 cities.
The report also said that overall, more than two thirds of the online vendors interviewed experienced an increase in online sales value and profits in the past year," the report said, adding that 58 per cent saw an increase in both.
There are data points which suggest people spend a lot of time on ecommerce platforms even if they may not buy anything.
There are a few questions that arise out of this.
It's not clear whether the minister is attacking only foreign ecommerce platforms like Amazon or Flipkart or domestic ones.
Because predatory pricing is not the preserve of the overseas ecommerce companies by any stretch.
Indian companies, with overseas venture funding mostly, have been doing precisely the same thing.
You could argue the trends are being set by Flipkart and Amazon but equally there has been a benefit to sellers and buyers of the products.
What consumers really love about ecommerce is obviously the lack of friction which is more apparent in the Indian context, apart from the other benefits of the ability to scour millions of products and benefit from wide choice.
Reduction of friction in financial services and transactions has created its own set of problems as we can see, with more people for example snapping up loans maybe to buy products or maintain their lifestyles.
Ecommerce is at its very basic proposition, a logistics enabler and a reducer of friction.
The question is do we want to reduce friction or manage it.
More than that, it is not clear to me at this point that offline is suffering, except in some cases from the ecommerce onslaught.
Even if it is, the corresponding jobs and opportunities created by lets say the ability to make products that can be directly exported have also increased, for Indian entrepreneurs.
Or products that address for instance the beauty segment in India where there was a latent demand which ecommerce has better navigated.
Whether all this has been profitable is a different question though.
If there is a tilt in either direction, we must have good data to make a case.
The minister pointed out that countries like Switzerland have controlled the growth of ecommerce.
Possibly, but there is no comparison I feel with a large and logistically complex country like India.
Either way, it comes back to data on who benefits or not.
If Amazon is bringing in investments to fund its losses, that is a loss for Amazon and gain for the consumer, as it has been with all the funds that have come into and evaporated in the Ecommerce sector.
If the cost of reducing friction is too high, then eventually enterprises will be forced to raise prices and reduce their offerings.
And if consumers genuinely and still want to pay more, they will.
Cheap funding will not last forever, whether from venture capital or from small investors, given the number of new IPOs in this space.
Eventually, economics must decide the fate of this space.
And that brings us to the top themes for the day:
Markets seek direction once again.
Gold prices edge back but stay in Record territory
Is the PSU stock bull run over for now ?
Do you have to get an Income Tax Clearance Certificate Before Catching An International Flight ?
Markets & Rupee
Stock Markets were tepid for most of Wednesday’s trading session with no major triggers to respond to.
While there were movements in some sectors, like consumer products, there was nothing significant in the trading day.
The BSE Sensex ended at 80,905, up 102 points while the Nifty, too, settled 71 points higher at 24,770.
According to Business Standard, Titan, Asian Paints, ITC, HUL, Bajaj Finserv, Nestle India, Adani Ports, and JSW Steel were the top Sensex gainers today, rising in the range of 1 per cent to 2.5 per cent.
Elsewhere, the rupee dropped on Wednesday to log its worst single-day performance in nearly two months as dollar demand from importers and foreign banks wiped off nearly all of the currency's gains from earlier in the week, Reuters reported.
The rupee closed at 83.92 against the U.S. dollar, down 0.16% from its close at 83.87 in the previous session, its sharpest single day decline since June 26.
So, it would appear that the surge that we saw was more of a one-off event rather than representative of a secular climb, even if marginally since the Rupee usually moves in a very sharp band.
On Tuesday, the rupee hit a two-week high of 83.7550 on Tuesday.
Oil is still holding below $78 a barrel
Gold Pares Gains
Gold pared gains after hitting another record as eyes are now turning to a speech by US Federal Reserve Chair Jerome Powell later this week which could provide clues, specific or otherwise, on when interest rate cuts could come.
Bullion climbed to as high as $2,531.75 an ounce, taking this year’s gain to more than 22%, before giving up some of the advance, Bloomberg reported.
Powell’s address on Friday at the annual Jackson Hole symposium in Wyoming will be closely analysed for clues about the central bank’s thinking on widely expected rate cuts which of course benefits gold because lower interest rates mean gold becomes more attractive for its capital appreciation.
The PSU Dream Hits A Speedbreaker
For perhaps a year or more, several veteran analysts The Core Report have been highlighting that the PSU stock rally is overheated and overvalued.
At every turn, the market and thus mostly retail investors have responded by sending these stocks up further.
Institutional investors have attempted to climb onto the bandwagon too, with sector specific mutual funds for defence which is mostly PSUs for example.
An interesting report in the Economic Times now says that the multi-billion dollar rally in PSU stocks is finally taking a break.
It says at least 30 high-flying 'sarkari' or Government owned stocks are entering the bear market zone.
It quotes the example of defence PSU GRSE, which remains a six-bagger in 2 years, which has fallen 37% from its 52-week peak while BEML is down 31% and Cochin Shipyard 30%.
Street favourites like Mazagon Dock Shipbuilders, Bharat Dynamics, IRCON, IRFC, RITES and HUDCO are down at least 20% from their respective recent peaks.
A stock is commonly known to enter a bear market zone when its price falls at least 20% from 52-week high.
Last week, ICICI Securities said GRSE shares can fall up to 74% to Rs 515 while Mazagon Dock can slump up to 77% to as low as Rs 900.
ICICI Securities in general has been calling out overheating in the market, though in most cases no one listens to them.
Or perhaps no one listens to anyone in a raging bull market, including for sectors like this.
Moreover, mutual funds sold stakes in 28 PSU stocks in June, says the ET report, while FIIs were bearish on 30 such counters.
The interesting thing is of course that the boom was a bet on Government spending which is not really changing as I can see but also on a strong BJP Government returning to power.
The BJP Government is of course back but in a diluted way.
Market insiders bet that the PSU rally is not over as many of the companies have good prospects but the only devil is valuations in a liquidity-fueled bull market.
This is not to say that PSU stocks were bad in concept.
Many of them are good buys for their businesses, operations and surprisingly, governance.
The issue was primarily about valuation and of course the prospect that prices have been driven high because of low floating stock.
I reached out to veteran market analyst Ambareesh Baliga, who has been cautioning on PSU stocks, among other areas where he has found valuations stretched.
And began by asking him why this rerating was happening now.
INTERVIEW TRANSCRIPT
Ambareesh Baliga: Every multi bagger, whether it's a sector or a stock, goes through a particular cycle. And the cycle starts when it's very undervalued, undiscovered, and then people slowly start discovering it, and that's when the interest starts in it. And then, because of the momentum at the same time, because of the sort of performance, because surely the performance has to improve. Based on that, they start becoming multibagger, and then a lot more investors get involved, and that momentum continues as long as someone calls the shot and says that, yes, it's too overvalued. And that's exactly what has happened as of now, and because of which we have seen a correction. But this correction is nothing compared to the sort of a move which we have seen in the last about a year and a half, two years, couple of stocks, for example, if I can talk about the financials, you have the profitability going up about 4x but the stock is one of 20x I mean, how do you justify that? Unless, of course, you expect this sort of a move in the profitability to continue? I mean, every two years becoming four eggs, and that's not really possible. I mean, unless you're in a business which is completely unlike out of the world. So somewhere, I think, I mean, if a person calls it Emperor without clothes, I think that's exactly what has happened now.
Govindraj Ethiraj: Right. So a couple of questions. So first is, are you seeing anything within the trends? For example, let's say a company like Dredging Corporation, Cochin Shipyard, masagon dock. Now these are all part of, let's say the shipping and logistics space. Do you feel that within PSU two there is some selective selection happening?
Ambareesh Baliga: Oh no, I suppose it is more on the on the defense part, where we are seeing major correction. I think one of the reasons is that the market in the last one and a half two years has discounted the order flows. And the order flows have a stupendous I mean, no denying that. Fact. And if you look at the order flows, quite a few of them are filled up for the next possibly six to eight years, 10 years. Now, the question comes up is, when you already have sort of orders, the future orders, will that be as strong? Because no one will give you orders for delivery after value of 15 years if that's too far away. Number two, I mean, would you be able to execute it here? The market is assuming that execution will be flawless. And we have seen in the past that even large companies, I mean, something like L&T, I mean, we have seen them faltering on execution, and that has to be one of the things to be looked at. You have a whole sector moved up like this. I mean, what can go wrong with execution? And that was never discounted. It's only now that people are talking about it, and now we have also seen some of the, I mean, CEOs talking about it like for example, HAL CEO, he spoke about the exhibition issues. And at the same time, you really can't be doubling or tripling your capacity overnight, because it's not a question of getting the capex done. Yes, I mean, they can raise money for capex, but where do you have the skilled manpower? You can't get them overnight. So all these things will take time, and the market hasn't discovered all these issues. So suddenly, when you are more and more people talking about things like these, that's when the market realizes that, yes, I think it's too overvalued. I mean three or four years back. I'm not thinking of two years back, three or four years back. I mean these stocks like possibly 7x 77 earnings today, quite a few of them are quoting at 10 to 12 times turnover. Forget earnings. You talk 10 to 1210, times turnover, very, very difficult to justify. But when momentum is there in the market, you have to flow with that. But then you need to be good enough to keep booking profits at every level. You need to utilize the opportunity. You really can't go against the market, but you should be aware of where things can go wrong,
Govindraj Ethiraj: Right. So what you've done is really analyze many of these companies from a fundamental point of view. I mean asking questions about the business capability and ability to deliver and all that. But the investors who invest in these have been following perhaps some Pied Piper, real or virtual, who it could be one person or many persons. So how do you address that? And could that change?
Ambareesh Baliga: No, and see, unlike some of the past bull runs, which you seen in the 90s, there was a pipe paper, no doubt. But here, if you say a pied piper, it's the retail. And the amount of money retail has been pouring in, whether directly or through mutual funds, I mean, has been so huge that even Fi is selling doesn't really matter. And what I've seen, especially in this bull run, like once the momentum catches on, then those stock clearly become multibaggers. And in normal scenario, we would normally see a multibagger over a couple of years, a stock becomes a multibagger because of the performance over possibly four years, five years. I mean, here we are seeing multibaggers in six months and one year. And these are not exceptions. I mean, you have lots of shares which have become multibaggers. I think the last note which I had was, I think about 700 to 800 multibaggers out of those 3000 companies which are quoted and is still looking at the nifty 500 which are those top 500 companies out there? We have somewhat 60 or 70 multi baggers, and these multi bags I'm talking of within a period of a year. So this is unnatural, but then, like I said, You really can't go against the market. You can't tell people to sell off your portfolio and get out, because after you're sold off, you've seen, I mean, those stocks which have become 10 baggers have become 20 baggers.
Govindraj Ethiraj: Right. Yeah, so let me ask you the other question then amberish. So you know, there is a flood of money flowing into the market now, obviously, at various points, people try and put up a dam. I mean, it could be in the form of statements made by people like you, saying that this is not but if the flood continues as it is, all that will happen is that the water will move into a new direction and go and start filling up other stocks, so to speak. Do you see that happening? For example, if now we are seeing a reduction in prices in all these PSU and defense stocks, people may well move into something else, which is equally-
Ambareesh Baliga: Which is, which is, what has happened already? I mean, if you see the last six months, or last nine months, we have seen a lot of sector rotations happening. But then see, let me tell you that this liquidity has always been there. It's not a new liquidity is created. The difference now is that this liquidity, instead of flowing into some other investments, bank FDs and all that is flowing into the markets, and this liquidity will flow in as long as the confidence is there. I mean as long as you're making money, the liquidity flows the day you realize that, no, I mean, every extra rupee I'm putting in has been making losses. That is when the confidence gets shaken. That is when the liquidity stops or reduces. And that reduction of liquidity, or stopping of liquidity, is enough for the markets to start falling further, because this market, at every higher level, requires that much more of liquidity to maintain, not just move up, just to maintain. It requires that much more of liquidity. And if there's a reduction of liquidity because of lack of confidence, then the whole cycle, which we are looking at, the virtuous cycle, which was there earlier money coming in. Because of which the market goes up, and because of which again the again, more money comes in, that cycle starts reversing. And when that cycle reversal, then you say, there's panic, then we'll the I mean, after that, we look for reasons as to why that panic happened. But then this is what has our history has shown us. Every time this happens, the story could be different, the players would be different, but the main story remains the same,
Govindraj Ethiraj: Right? Ambareesh, very cautionary and important words at this point. Thank you so much for joining me.
Ambareesh Baliga: Most welcome My pleasure.
A New Tax Certificate Before You Leave The Country
The Government’s Ministry of Finance has said all Indian nationals are not required to obtain an ITCC prior to departing the country, despite what some recent stories claim.
The stories were based of course on the lack of clarity in the Budget pronouncements which had said that individuals domiciled in India to clear all tax dues and get 'clearing certificates' before departing the country.
Which gave the impression that anyone travelling abroad would first have to run to the tax department to get a clearance certificate that their dues were in order before reaching the airport.
Another 1970s feeling of which we have quite a few now.
So the clarification is that this modification which includes the application of Prevention of Money Laundering Act does not require all individuals to obtain a tax clearance certificate.
In this context, the CBDT has specified that the tax clearance certificate under Section 230(1A) of the Act, may be required to be obtained by persons domiciled in India only in the following circumstances:
Which include financial irregularities and the person’s presence is necessary in investigation of cases under the Income-tax Act or the Wealth-tax Act and it is likely that a tax demand will be raised against him, or Direct tax arrears: Where the person has direct tax arrears exceeding Rs. 10 lakh outstanding against him which have not been stayed by any authority.
There is more to this which goes in all possible ways.
I reached out to noted tax expert Dinesh Kanabar, founder & CEO of Dhruva Advisors and began by asking him how he was interpreting the broad directive.
INTERVIEW TRANSCRIPT
Dinesh Kanabar: Before the union budget of 2024 section 231, capital A contained a provision that any person leaving India who has got outstanding demand either under Income Tax Act Well, Tax Act, gift tax act, expenditure tax, etc, can be called upon by the assessing officer to obtain a tax clearance certificate at the time of leaving the country. And the word uses that you have to give the purpose of visit, etc, etc. That means that it need not be leaving the country for good, but even for a visit. Now, this section has been there for several, several years on the Income Tax Act in 2004 the government came up with a circular to say that the requirement of opening a tax clearance certificate arises in two situations. One is where a person is involved in serious financial irregularity, and his presence is necessary in investigation of cases under Income Tax Act, etc, or that a person has arrears of rupees, 10 lakhs for direct taxes and against him, the demand has not been stayed. So if there is an open demand, you have not paid, nor have you obtain a stay in such a situation, section 231A applies and going is important. To note that this is not automatic meaning. If these two situations arise, namely that either there is a grave financial irregularity or there is demand of more than 10 lakh rupees, then the assessing officer, with the approval of the commissioner, has to issue a notice to say that this person cannot leave without obtaining income tax clearance certificate. That has been the existing law prior to 2024 the change which was brought about by the Finance Act now of 2024 is that the included one more law, which is PMLA so Prevention of Money Laundering Act. So apart from the Income Tax Act, of course there is no wealth tax, then there is no gift tax, there is no expenditure tax. So apart from income tax, if there is anything to do with pmla, and again, if these two conditions are fulfilled, that is either there is an accusation of grave financial irregularity for investigation of which you are needed, or there is demand of more than 10 lakhs which has not been stayed. Then if the officer says that you cannot leave, then you have to obtain a tax clearance certificate,
Govindraj Ethiraj: Right. So this means that the certificate has to be acquired only if that notice were to first come to you from the Income Tax department, am I understanding correctly
Dinesh Kanabar: The office, The income tax office has to write to say that you gentlemen cannot now leave the country without obtaining tax clearance certificate. Presumably at that time, we will also intimate the immigration authorities every person files a tax return. Along with the tax return, you are also required to give you a passport number. So presumably at that time, you also write to the immigration saying, so and so. Person is the person against whom we have issued such a notice. So there is no automatic requirement at all. The requirement arises only and only when the Tax Office issues a specific notice that in respect of this person, one of these two conditions is satisfied, and therefore this person cannot leave the country without obtaining income tax clearance certificate.
Govindraj Ethiraj: Okay, so I'll just come back to the practical side of it, but you're also saying, therefore, that every passenger who travels overseas does not therefore I have to present a certificate saying that he or she paid taxes and so on
Dinesh Kanabar: Not at all.
Govindraj Ethiraj: Because that was the interpretation of the way. I think, at least in maybe in the public eye,
Dinesh Kanabar: There is no room for interpretation the section, and I'll lead the provision from the section itself. Basically says that "provided that no income tax authority shall make it necessary for a person who is domiciled in India to obtain a certificate under this section, unless he records the reason, therefore and obtains prior approval of the principal chief commissioner or Chief Commissioner of income tax". So, first of all, an Income tax officer has to come to that conclusion. He has to pass an order to that effect. And that order has to be done with the prior approval of the Commissioner of income tax, chief commissioner or the principal chief commissioner.
Govindraj Ethiraj: And what is the aspect of PMLA That's prevention of money not being added to this law? What does that actually signify
Dinesh Kanabar: Until now, it was only if there were proceedings against you under an Income Tax Act that the officer could pass the order. Now, even if there are proceedings against you under PMLAand there is a serious financial irregular identity for which you are needed, you can pass the order. So PMLA was not one of. The Laws for which he could have passed such an order. Now, PMLA is also one of the laws for which he could pass this order.
Govindraj Ethiraj: So how does that change? I mean, no, I'm because I'm trying to understand if, if there is a 10 lakh rupee outstanding as or a
Dinesh Kanabar: Govind, it's actually very, very simple. There is nothing obligated. So today, if there is a demand under Income Tax Act, gift tax act, wealth tax or expenditure tax, and none of the later three acts are there. But let's assume that there was a demand under income tax or wealth tax only, then he could issue to say more than 10x is due. Now, if there is a demand under PMLA also, he can do that. That's all, nothing else.
Govindraj Ethiraj: Okay, so now the practical question in your understanding of cases, that are such cases? How many cases do you feel or is it a common thing for people to be one having 10 lakh demands in their personal capacity, which is what I'm assuming it is. And second is the addition of pmla. Will that increase the number of cases? Or what could it be?
Dinesh Kanabar: So even today, individuals have demands running into not lakhs, but crores of rupees, because tax office makes an addition and then you are disputing that addition. However, it is not that every demand is a challenge. It is a demand which has not been stayed, which is a challenge. So if an officer makes an addition and you do not apply for a stay, or you refuses to grant you the stay, that means the demand is yet and now payable. If somebody refuses a stay, then you can go to the commissioner, you can go to a tribunal, you can go to a court to ask for a stay. But if there is no stay and you are leaving, then the presumption is that there is a financial due, and you are running away from the country. So this is part of trying to protect the interest of revenue. Pmla is a recent act compared to Income Tax Act, and as of today, there are not too many cases under pmla, but it has been seen given that in the recent past, it is the tendency of the tax office that in every time there is an income tax addition, there is also a pmla angle in what to say, here is an attempt to launder money, whatever else at the circumcision. So as that there are two conditions, either that there is a financial irregularity and to investigate that your presence is necessary. So one of the challenges would be that under Income Tax Act, to say there is a financial irregularity and your presence is necessary may be difficult, because it's one thing to say there is a demand, another thing to say the demand is because of a financial irregularity. I would believe that in cases of PMLA, it will be easier for the tax office to allege that there is a financial irregularity.
Govindraj Ethiraj: Okay, so do you feel that a lot of people will now have to ensure that they are compliant in some way, or will the effort increase because then you are running to the core to get a stay because you already have these demands out. So I'm just wondering, I mean, let's say x number of people, including those who run businesses and so on, who travel frequently? How many of them could be potentially affected in the manner in which it is likely to get rolled out?
Dinesh Kanabar: So Govind, you are asking me for our number, but maybe the way to look at it is slightly differently. The question is that until now, the Income Tax Office has not been using this provisions very frequently, if they now start doing it, all that the officer has to do is that every time he invokes and sends you a condition and says, I'm accusing you of PMLA, simultaneously, he will go to the commissioner, get an order and say, since I'm investigating you under PMLA, I'm hereby passing an order the 231-A so it is not the number of cases that is important. If that was wrong, the number of people impacted could be very few. The problem is that if the Income Tax Office makes it a practice that every time I accuse somebody of PMLA, and whether PMLA is applicable or not, may actually be decided much later, but in the meantime, I will just issue this notice that you are covered by PMLA, and by the way, there is a financial irregularity, and therefore, when do you leave? Please obtain ITCC, and if that happens, then you could be under a grievous situation.
Govindraj Ethiraj: Got it so. Anyway, I think so. The what I would take away from this is that most people, at least, let's say salary professionals and so on. I mean, are definitely not affected by this or unlikely to be affected
Dinesh Kanabar: Businessmen would be
Govindraj Ethiraj: Right. Right, Mr. Kanabar, thank you so much for joining me.
Dinesh Kanabar: Thank you.
