The story of the Maharashtra government’s bizarre attempt to extract stamp duty from investors in other states is headed for a resolution. Maharashtra had taken the stand that all investors trading through the two national stock exchanges should pay stamp duty to the state government, merely because the stock exchanges were domiciled there. Despite protests from the market regulator, the state government went ahead and issued an ordinance followed by legislation to enable collection of stamp duty.
Strong protests by the Karnataka and Andhra Pradesh governments (both Congress-led) had no impact, nor did the litigation filed by a Delhi-based investor. We learn that a call from the Finance Minister, based on a representation by the Securities and Exchange Board of India (Sebi) finally did the trick.
The Finance Minister, say sources, told the state leadership not to take a short-term view of the situation by focusing on immediate revenue generation. He impressed on Maharashtra that it could easily lose its position as India’s financial capital by insisting on exploiting the location of India’s largest stock exchanges. Last week, top state officials met the capital market regulator and the stock exchange representatives and hammered out an answer.
The Maharashtra government has agreed to issue a notification or ordinance modifying the applicability of stamp duty rules to brokers. Stock exchanges have agreed to provide broker-wise trading data and to ask brokers to provide segregated information of trades originating within the state and from outside.
They will also need to provide audited certificates of this break-up, which in turn will be forwarded to the government and clearing banks.
The clearing banks will collect stamp duty and remit it to the government on a quarterly basis, instead of the earlier proposal where stock exchanges were to extract this information and collect duty.
The Maharashtra government has also turned pragmatic about stamp duty on proprietary trades. Although it has refused to scrap this duty, the rate has been slashed by more than half in order to make duty avoidance uneconomical.
The man who helped clear the stamp duty mess was the state finance secretary and former Sebi executive director O.P. Gehrotra. Ironically, brokers and investors, who would be worst affected by the duty, have all made so much money in the bull-run that they have not had the time to protest. That would have happened in a bear phase.
The Income Tax (IT) Department was the common factor in two vicious political battles last week. First, it embarrassed Finance Minister P. Chidmabaram by failing to inform him that it had engaged his wife Nalini Chidambaram as senior counsel at Chennai. The ensuing controversy saw some politicians with dubious personal records turning righteously indignant and demanding Chidambaram’s resignation.
In 1992, Chidambaram was trapped by his political opponents when he decided to set a higher standard of ethical behaviour by offering to resign because he owned shares in the discredited Fairgrowth Financial Services. He hasn’t repeated the mistake this time and faced a vicious and far-fetched attack orchestrated by political rivals.
In Mumbai, the IT department benefited from turmoil in the Shiv Sena’s top hierarchy. Its raids on a prominent builder, who has allegedly flouted dozens of municipal regulations in constructing a controversial shopping mall, were possible because of information provided by a former Sena insider who was recently humiliated and thrown out of the party. The mall apparently obtained a series of unorthodox clearances because a top Sena leader is a silent partner in the venture.
A side-effect of the booming capital market is the rash of unsubstantiated media reports. Sometimes the press is gullible and is misled and at other times journalists are a party to the deliberate distortion. But what does one do when the lines between market intermediaries and the media are swiftly getting blurred?
The first stage of this blurring happens when companies that disseminate sensitive market information are listed entities under pressure to announce a better performance every quarter.
Many of these are openly selling editorial space to public relations (PR) agencies without making any distinction between genuine reportage and paid publicity. Investors have already alerted the regulator about several cases where the media publicises fake news and facilitates circular trading.
There is also a new breed of entities like India Infoline, which are research outfits, publish news and analysis like a newspaper and also offer brokerage services and distribute financial products. The company has tried to resolve the inherent conflict in its various roles through a disclaimer saying that its trading entities do not have positions in the stocks “currently” recommended on the websites and analysts who do recommend scrips are subject to restrictions.
Internal controls are good, but they do not answer a larger market need. As the lines between media entities and their other businesses get increasingly blurred, the regulator must put in place a set of rules as well as a monitoring mechanism to protect investors from false and misleading information.