Sucheta Dalal :FII in realty
Sucheta Dalal

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FII in realty  

Jul 2, 2006

The Reserve Bank of India's (RBI) reported move to clear Foreign Institutional Investment (FII) in IPOs (Initial Public Offerings) of realty companies is rather surprising, even if it comes with the stipulation of a three year lock-in. The question that the RBI must ask is why would any FII want to lock itself in for three years, unless it is getting shares at a massive discount to market price? If these are genuine institutional investors, they would not dare to put themselves in a position where an exit route is shut tight and they cannot dump the shares even if the company performs very badly. On the other hand, we know that large chunks of Indian promoters' money round trips its way back to India in the guise of FII investment, usually through Participatory Notes (PNs). Obviously this investment will not be averse to a 3-year lock-in. Interestingly, when former MP and investor activist Kirit Somaiya wrote to the RBI seeking a break-up of FII investment, especially the quantum of PNs, the central bank said that the break up was not available with it. In fact, now that the Securities and Exchange Board of India (Sebi) has plugged the loophole of Venture Capital funds being able to take pre-IPO allotments without a lock-in, the RBI would do well to be equally careful. If it is really concerned about FII investment leading to a realty bubble, then a lock-in for FIIs will not prevent it.


STT invasion


The Central Board of Direct Taxes (CBDT), says a pink paper, is getting ready to crack down on investors and stock brokers who evaded Securities Transaction Tax (STT) and wealth tax. This is interesting, because STT was considered the neatest possible tax because it was deducted directly by the stock exchanges and easily verifiable from the bourses. Moreover, it has fetched the Finance Ministry Rs 2,500 crore bonanza while the capital market has boomed and trading volumes have soared to over Rs 60,000 crore a day. Further, STT is collected on every single transaction irrespective of whether an investor makes a profit or a loss, but nobody complained, because the Finance Minister in his budget speech led them to believe they were in for a major concession on long term and short term capital gains tax. If the tax department is just starting its scrutiny of assets, one wonders how it has concluded that there is large scale evasion of STT. In fact, if brokers and investors have really claimed a set off of STT in such large numbers, it only means that they are declaring their investment as business income and willing to be taxed at the highest applicable rate. Investors believe that the CBDT's scrutiny guidelines just another way of harassing them, even as hundreds of crores of tax evaded money continues to be go out of the country to return as Foreign Institutional Investment (FII).


Paying their taxes


If the CBDT really wants to keep busy, here is something it ought to look at. A Chandigarh-based paper has reported that the Punjab government has passed a law whereby the state exchequer not only pays the salaries and perks of its MLAs but also their income tax. The paper reports that this began as a perk for the Chief Minister during Pratap Singh Kairon's time, but it was quietly extended to all MLAs without a squeak two years ago. If true, this would mean that when the Finance Minister (FM) was plotting a Fringe Benefit Tax (FBT) for the 'aam aadmi', one set of elected representatives were getting the public to pay their entire tax liability. Was the alert CBDT unaware of this? Activist Veeresh Malik has decided to use the Right to Information Act to get some answers. He has asked how many categories of persons have had their taxes paid by Central or State government or any public authority and under what law do they do so. His sources say that when a foreign airline had paid tax for its employees the tax department cracked down by adding it to their income and claiming a higher tax payment. The answers to Malik's queries should help the Finance Minister while drafting his next budget.


‘World cup air’


An enterprising Chinese businessman, Li Jie, who had once involved in a failed attempt to sell plots of land on the moon through a company called Lunar Village New Energy Science and Technology Co Ltd, is now hawking plastic bags of 'World Cup Air', says a report in Beijing's Star Daily. He has apparently filled tiny 3 x 9 cms plastic bags with air that was allegedly gathered from the ''German stadia when the workers mowed the grass in the field before the matches''. So far, he has no sales licence and is only offering free samples to people, but hopes to charge 50 Yuan for the sachets. The American judiciary was clearly far-sighted in anticipating such schemes. Way back in the 1900s, a Supreme Court Judge ruled against ''speculative schemes which have no more basis than so many feet of 'blue sky''' leading to the framing of Blue Sky laws to protect investors.


-- Sucheta Dalal