Sucheta Dalal :Roiling week
Sucheta Dalal

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Roiling week  

Nov 13, 2006

The benchmark Sensex soared to a new high to close at 13,282 last Friday, but the week was dominated by the turmoil in Reliance Industries shares which have a 11.6 per cent weightage in the 30-share index. Reliance shares have been on a roll ever since the Ambani brothers carved up Dhirubhai's empire into two. But a downgrade by Kotak Institutional Equities on November 7, along with concerted selling pressure did what a fire at its Jamnagar refinery had failed to do — it caused the share price to drop a sharp 3 per cent. Interestingly, Kotak has persistently predicted under-performance by Reliance, so its view that "we are unable to justify Reliance’s current rich valuations on weakening fundamentals and publicly available information", should not have surprised the market. The new element this time was a sudden burst of selling by the Jain community, which traditionally refuses to invest in companies dealing in non-vegetarian food or any industry that involves animal slaughter or processing. Their selling was triggered by reports that Reliance Retail planned to stock non-vegetarian food at its malls. Typically, the selling was immediately countered by fire-fighting from the Reliance group and the share bounced back. RIL plans to raise $2 billion next week. The company quietly clarified non-vegetarian food will not be sold within Reliance retail malls, but through a separate company that will be given its own space adjacent to each mall. Despite the assurance, its brokers had to work hard to sell this strategy to Jain investors by pointing out how they do not, after all, refuse to wear leather shoes or sit next airline passengers who eat non-vegetarian.

Jain Investments

The turmoil in Reliance shares suggests that the followers of Lord Mahavir continue to have a big influence on the valuation of stocks even in a more global Indian market. Not only do these investors shun companies dealing in non-vegetarian food, but orthodox Jains refuse to touch stocks of hotels, restaurants, leather product companies and often even pharmaceuticals (animal testing), shipping/transport (animal cargo), cosmetics (for use of tallow and testing), silk-woollen textiles and those that "produce materials for violence". In fact, restaurants in India's commercial capital, Mumbai, have learnt that being vegetarian gives them a better chance of success. In certain precincts, community pressure has forced even international food company outlets like McDonald’s to turn vegetarian.

Double taxation

In the rush to improve tax collections, the government seems set to make service taxes as messy and complicated as the tax on manufactured goods. Since the tax threshold is a low Rs 4 lakh, the Excise Department, which has little experience of dealing with tiny consultancies or individual service providers, is forced to collect from them. The result is hardship to small tax payers and anger about government harassment. Here is an example. A research-consultant in Mumbai spent three days trying to find service tax challans which have to be submitted in triplicate (no single forms here). They were neither available with the Excise office in Bandra nor the banks authorised to collect the tax. But small consultants are not the only ones complaining. The Excise Department has made a massive service tax demand on all stock exchanges claiming they are rendering a service to investors and market intermediaries. The Department's attention was probably attracted by the high profitability of top Indian bourses and depositories. For instance the National Stock Exchange has recently declared a 40 per cent profit margin almost Rs 200 crore net profit. High profitability makes all Indian stock exchanges, depositories and other utility-like services an attractive investment opportunity, but the costs are loaded on to intermediaries and ultimately the smaller investors who have no bargaining position. This is another factor driving retail investors to all-cash dabba markets (bucket shops).

Scrapping EDIFAR

The Securities and Exchange Board of India (Sebi) has finally accepted that EDIFAR (Electronic Data Information Filing And Retrieval), its e-filing system kicked off in 2002 in collaboration with the National Informatics Centre is a flop. Modelled on the lines of the US Securities and Exchange Commission's EDGAR (Electronic Data Gathering and Retrieval) system, it was to perform "automated collection, validation, indexing, acceptance, and forwarding of submissions by companies" that file financial information with the regulator. But, for years, it has remained turgid, ill-maintained and user-unfriendly. While EDIFAR is to be junked by January 2007, Sebi is working to enable a modern e-system for filing and dissemination of information that is being built by the Bombay Stock Exchange (BSE). Sebi wants the BSE and National Stock Exchange to work on a common e-platform to avoid duplication of effort and ensure that information is quickly available to a large body of investors. Sources working on the project say that the process involves strict standardisation of reporting requirements, which will help investors by making it easier to compare corporate performance within a peer group or across time periods.


-- Sucheta Dalal