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| August 11, 2017 |
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Impact 
“You can fool all the people some of the time, and some of the people all of the time, but you cannot fool all the people all the time.”—Abraham Lincoln
Punters on the Dalal Street are “shell-shocked” these days; their fly-by-night activities are apparently in the spotlight now. “Black-To-White” money rackets are shutting shop too. The Securities and Exchange Board of India (SEBI) recently asked exchanges to prohibit trading in 331 companies suspected to have been incorporated with ulterior motives of stashing, generating, and circulating black money. SEBI has classified such companies under Graded Surveillance Measure (GSM) stage VI.
While you might hear a lot of brouhaha about shell companies these days, their modus operandi is rarely spoken about.
Let’s understand the basics about shell companies
- Usually, most of the shell companies are listed with forged documents.
- They don’t have any legitimate underlying business, thus all financials are fictitious and forged as well.
- Yet such companies are traded actively in the stock market.
- Stock prices of these companies are manipulated through synchronised plays.
Through trading in such stocks, investors convert their black money into white. Let’s elucidate this with an example based on a real-life case.
Mr Black holds cash of Rs 15 lakh. Although this was generated through legitimate business activities, he dodged all tax liabilities associated with this income (including indirect taxes). Now he wants to convert this black money into white. But he’s clueless about how to make this happen. One day, he meets Mr Gambler who’s a stock broker in the full-time profession of assisting people like Mr Black.
Mr Gambler gives him an attractive deal. He asks Mr Black to invest Rs 1.5 lakh in a company called “Fake Enterprises Limited”. Of course, these investments are funded through white income. Mr Gambler is confident of being able to manipulate the stock of “Fake Enterprises Limited” 10 times over the next 15 months. So with the cheque of Rs 1.5 lakh, Mr Black hands over Rs 15 lakh in cash to Mr Gambler. Mr Gambler distributes this money among his associates and uses the same to jack up stock prices.
Simultaneously, he starts preparing for episode-2 of this game. He offers free tips to many other gullible investors and lures them to buy the shares of “Fake Enterprises Limited”—after all, he needs some scapegoats to absorb the selling pressure when Mr Black dumps his holdings. Mr Gambler earns a fixed commission for his services.
Shell companies are also used as a vehicle to do illegal offshore transactions, which have even higher implications for the economy as a whole. It’s no wonder the Government is cracking a whip on all such companies.
Moreover, authorities are pondering on making Aadhaar compulsory to invest in stocks and mutual funds. Since Aadhaar will be mapped against almost all financial activities of individuals, catching tax dodgers will become easy for the Income-Tax (I-T) authorities. Such an action will open up a whole new lot of misdeeds—benami properties, money laundering, terror funding, and what not. With just PAN requirements, the likes of Mr Black and Mr Gambler have managed to fool the authorities for all these years; but not anymore. Their days are numbered.
The modus operandi of the authorities is simple—beset cheats from all sides. After demonetisation, the Government implemented GST (Goods and Services Taxes). These two moves nipped the generation of new black money in the bud. Then to deal with an existing lot of black money, it launched aggressive campaigns such as ‘Operation Clean Money’, followed by the move of linking Aadhaar and PAN. Next was to make Aadhaar compulsory for filing returns. The recent crackdown on shell companies seems to be another stepping stone.
In a nutshell…
Making Aadhaar mandatory for the investments in stocks and mutual funds will be a masterstroke that may plug the major loophole in the present system of compliance and record-keeping. Another indirect benefit of this action would be unscrupulous stock brokers won’t drag gullible investors in shell company transactions.
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Impact
Credit growth in the banking system hit a multiple-year low in the Financial Year (FY) 2016-17. But don't make the assumption that credit demands have vanished permanently.
It's just shifted from corporate customers to individual ones. If credit card usage is the parameter to go by; apparently, credit demand is refusing to back down. In fact, the use of plastic money has reached unprecedented levels.
As on June 30, 2017, 31.47 million credit cards were active in the Indian banking system as against 25.54 million a year ago—a jump of 23.23%. Some of India's leading banks have witnessed 14%-40% growth in the new credit card issuances. While some banks have seen expenditure via credit cards as high as 74%.
To read more about this story and Personal FN's views over it, please click here.
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Impact
There was a time when Indian markets were totally at the mercy of Foreign Institutional Investors (FIIs). The mood of FIIs was a major sentiment indicator to gauge market strength. And, there was a tendency among the majority of domestic investors to follow in the footsteps of FIIs. It seems with changing times, this trend has reversed.
Nowadays, Domestic Institutional Investors (DIIs) have been countering FIIs. Earlier, they hoped FIIs stayed put, but now the general expectation is for FIIs to pare their ownership in some bluechip companies. Many fund managers openly talk about this. They believe if FIIs sell, valuations may become a bit cheaper, allowing them to accumulate stocks.
So, what has changed so dramatically?
The answer is, Indian retail investors seem to have realised the power of equity as an asset class. A majority of them are bullish on the prospects of the Indian economy, so they are flocking to the Indian markets through mutual fund schemes.
In July 2017, equity mutual fund schemes received net inflows of Rs 12,037 crore. While the combined inflows of balanced funds, Equity Linked Savings Schemes (ELSS) and other equity funds stood at Rs 20,591 crore as on July.
To read the factors and Personal FN's views, please click here.
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Impact
Bharat-22 is in the news of late. It’s the latest offering in the series of Exchange Traded Funds (ETFs) launched by the Government to offload its stake in some listed companies. Besides having exposure to CPSEs (Central Public Sector Enterprises), Bharat-22 will also capture a few of the holdings of SUUTI (Specified Undertaking of Unit Trust of India). The Government has set a divestment target of Rs 72,500 crore for the fiscal year 2017-18, and as per the official figures, the Government has so far raised Rs 9,300 through 9 transactions.
Where will the ETF invest?
As the name suggests, the Bharat-22 is set to comprise of 22 companies. The tentative allocation of the ETF would be as follows:
Constituents of Bharat-22
| Basic Materials |
| 1 |
National Aluminium Co Ltd. |
4.4 |
| |
Total |
4.4 |
| Energy |
| 2 |
Oil & Natural Gas Corp Ltd. |
5.3 |
| 3 |
Indian Oil Corp Ltd. |
4.4 |
| 4 |
Bharat Petroleum Corp Ltd. |
4.4 |
| 5 |
Coal India Ltd. |
3.3 |
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Total |
17.5 |
| Finance |
| 6 |
State Bank of India |
8.6 |
| 7 |
Axis Bank Ltd. |
7.7 |
| 8 |
Bank of Baroda |
1.4 |
| 9 |
Rural Electrification Corp Ltd. |
1.3 |
| 10 |
Power Finance Corp Ltd. |
1 |
| 11 |
Indian Bank |
0.2 |
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Total |
20.3 |
| FMCG |
| 12 |
ITC Ltd. |
15.2 |
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Total |
15.2 |
| Industrials |
| 13 |
Larsen & Toubro Ltd. |
17.1 |
| 14 |
Bharat Electronics Ltd. |
3.3 |
| 15 |
Engineers India Ltd. |
1.5 |
| 16 |
NBCC (India) Ltd. |
0.6 |
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Total |
22.6 |
| Utilities |
| 17 |
Power Grid Corp of India Ltd. |
7.9 |
| 18 |
NTPC Ltd. |
6.7 |
| 19 |
Gail India Ltd. |
3.7 |
| 20 |
NHPC Ltd. |
1.2 |
| 21 |
NLC India Ltd. |
0.3 |
| 22 |
SJVN Ltd. |
0.2 |
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Total |
20.0 |
Figures in %
(Source: Ministry of Finance)
Commenting on the sectoral exposure of Bharat-22, Finance Minister Mr Arun Jaitley said, “While selecting each of these sectors, we have also kept in mind sectoral reforms in each of the sectors which have had direct impact on the valuations of these shares.” This means the table above may undergo some alterations at the time of creation of an index and thereafter.
To read more about Bharat-22 and Personal FN's views over it, please click here. |
The number of I-T returns filed this season—to declare income for Financial Year 2016-17—has been 25% higher as compared to those presented last year. As on August 05, 2017, 2.82 crore returns were filed by August 05, 2017, as against 2.27 crore filed a year ago. A spate of actions taken by the Government to clean up black money seems to have hit bull’s eye.
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Money Laundering: Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.
(Source: Investopedia)
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Quote: “While it might seem that anyone can be a value investor, the essential characteristics of this type of investor-patience, discipline, and risk aversion-may well be genetically determined.”- Seth Klarman
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