The Hindu : Business : Transaction tax jitters in shares

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Monday, Jul 12, 2004

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Transaction tax jitters in shares

THE PRE-BUDGET rally on the bourses for the second week in succession came to an end after the budget proposals were presented to Parliament on July 8. The announcement of a turnover tax of 0.15 per cent on purchases of securities on stock exchanges resulted in selling across the board and the Sensex (the benchmark index of the Bombay Stock Exchange), shed 112 points on Thursday, wiping out the gains of the previous two days.

Marketmen were expecting a lower tax of 0.05 to 0.10 per cent. The abolition of long term capital gains tax for securities and a single short term capital gains tax rate of 10 per cent instead of the earlier slab rates seemed to have been ignored for the present. There were widespread protests by the broking community at various centres opposing the new levy.

However the bourses witnessed buying in the last session of the week by foreign institutional investors and domestic financial institutions following clarifications on the transaction tax by G. N. Bajpai, Chairman of the Securities and Exchange Board of India. The index was up 102 points on Friday to close the week with a gain of 75 points at 4,945.48. The S&P CNX Nifty of the National Stock Exchange gained 15.70 points to end at 1,553.20. However the volume of business was poor. Interestingly foreign funds remained net buyers.

Early in the week, the presentation of the Railway Budget and the Economic Survey had a positive impact on the bourses as they had led to an expectation that the Union Budget would contain many market friendly measures.

It is now believed that turnover tax will affect sentiment especially as it is also applicable to derivative transactions. There are concerns that the volumes in the cash as well as derivatives sections may fall as most of these volumes come from day traders who usually buy and square the purchases on the same day with margins as low as 0.10 per cent. It is feared that the impact cost for other investors could be high in the case of low volumes and poor liquidity.

In the preoccupation with the transaction tax issues, some favourable reform measures such as enhancement of foreign direct investment (FDI) limits in key sectors such as insurance and telecom have been overlooked.

Sector wise, commodity stocks were in demand following the announcement of unchanged freight rates in the Railway budget.

SAIL and Tata Steel regained some of their early losses in the week on Friday amid talks that the budget proposal to hike excise duty on steel from 8 per cent to 12 per cent may not affect steel companies adversely.

The counters of Punjab Tractors (up 11.6 per cent to Rs. 229.05) and M & M (up 9.7 per cent to Rs. 510.70) witnessed hectic buying on withdrawal of the excise duty of 16 per cent on tractors.

Shipping stocks such as GE Shipping (up 5.49 per cent to Rs 141.10) and Shipping Corporation of India (up 5.27 per cent to Rs. 112.75) were lively following the proposal to replace corporate tax with tonnage tax for shipping companies, a long pending demand of the industry.

On the power front, Alstom Projects surged 31 per cent to Rs. 114.90 after the company announced the receipt of an order for Rs. 1,000 crores to build a 469 MW combined cycle power plant for Gautami Power in Andhra Pradesh. Banking stocks, which had declined sharply early in the week following the directive from the Reserve Bank of India limiting investments by a single entity in private banks to 10 per cent, staged a smart recovery.

The coming week is expected to witness hectic activity after the Finance Minister's meeting with brokers. Also, corporates including Infosys will be coming out with their quarterly numbers. Marketmen are optimistic over the performance of IT sector, enthused by the spectacular profit rise of Mphasis BFL.

Interest rates up

Interest rates moved up, from the earlier fall in the week, on higher inflation expectations. The year on year inflation moved up to 6.09 per cent on June 26. The ten-year government securities were traded at 5.85 per cent and the five-year securities at 5.45 per cent.

Rupee bounces back

Overcoming severe early pressures, the rupee bounced back sharply and climbed to new 3-week closing highs of Rs. 45.66/68 a dollar on Friday, driven up by strong exporter dollar sales.

In fairly active two-way trade at the interbank foreign exchange market, the rupee gained a massive 22 paise from the previous weekend closing levels of 45.87/89.

In anticipation of attracting fresh foreign fund inflows, exporters sold dollars both in the spot and forward markets, resulting in the rupee strengthening against the U.S. currency, dealers said.

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