TCS market capital crossed Rs5 Trillion.

As the markets scale new highs, India's largest software company, Tata Consultancy Services (TCS) has also achieved a milestone. The market capitalisation of TCS has crossed Rs 5 trillion or Rs 5 lakh crore mark! This is remarkable for many reasons. Its size is greater than the combined market cap of the next four largest Indian IT firms: Infosys, Wipro, HCL Tech and Tech Mahindra. What's more, TCS is bigger than the combined size of all other Tata group firms too. How has TCS reached this exalted position? And can the stock sustain such a premium?

The first question is easily answered. TCS has sustained a high growth rate over the years. This has come along with excellent profitability, margins, return ratios and cash-flow generation. The dividend payout has been good too. While its peers like Infosys and Wipro have struggled with growth and management issues, TCS has gone from strength to strength. This is evident from the fact that all its business divisions are aiding its growth. But what about the second question? Currently the stock trades at about 24 times its TTM earnings. Can such valuations be sustained? We believe the answer lies in the continuity of the company's growth momentum. TCS has not surprised on the downside in its quarterly results. The market has given the stock these valuations based on the assumption of sustained good performance. However, TCS could lose its premium billing if it delivers negative surprises for a few consecutive quarters.

Mere admission of Appeal by High Court sufficient to disbar s. 271(1)(c) penalty

CIT vs. M/s Nayan Builders and Developers (Bombay High Court)

In quantum proceedings, the Tribunal upheld the addition of three items of income. The assessee filed an appeal to the High Court which was admitted. The AO levied penalty u/s 271(1)(c) in respect of the said three items. The penalty was upheld by the CIT (A). The Tribunal deleted the penalty on the ground that when the High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances penalty cannot be levied u/s 271(1) (c). It held that the admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming deduction. It added that once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty. On appeal by the department to the High Court HELD dismissing the appeal:

 

This Appeal cannot be entertained as it does not raise any substantial question of law. The imposition of penalty was found not to be justified and the Appeal was allowed. As a proof that the penalty was debatable and arguable issue, the Tribunal referred to the order on Assessee’s Appeal in Quantum proceedings and the substantial questions of law which have been framed therein. We have also perused that order dated 27.09.2010 admitting Income Tax Appeal No.2368 of 2009. In our view, there was no case made out for imposition of penalty and the same was rightly set aside.

Investors in the telecom sector have a reason to cheer. The telecom regulator TRAI has recommended norms for sharing of telecom spectrum between two operators. All spectrum bands have been freed up for sharing. This move will certainly help telcos reduce operating costs. It will also lead to lower tariffs if the benefit is passed on to the consumer. After years of policy logjam, it is heartening that some progress is now being seen. However, it may not be a time for celebration just yet. The new norms are just suggestions as of now. They still have to be notified. What's more, the norms have come with caveats. The TRAI has put a 25% cap on the amount of spectrum that a company can share. Also, companies will be allowed to share spectrum that they hold in the same band. Thus a company cannot share its 2G spectrum with another telco's 3G spectrum. Despite these restrictions, we believe this is a positive move by the regulator. It will ease operating costs for telcos as well as improve the quality of service. We hope this is a sign of things to come. Easing of more regulations can certainly bring 'Acche Din' to the sector and to its investors.

Saudi Arabia, the Middle East's largest and most liquid market, is planning to open its $530B stock market to foreigners.

The country is hoping the new move will increase international investment and cut dependence on oil revenue. In 2008, Saudi Arabia began permitting foreign investors indirect access through swaps, but is now looking to fully unlock its market. The Saudi Tadawul index is already up +14% this year.

FII's pump nearly Rs22000 crores in the Indian Markets.

Foreign institutional investors have pumped in about Rs 22,000 crores in the Indian markets in July, till date. Net investments in the equity markets have been to the tune of Rs 10,755 crores, whereas those in the debt markets have been close to Rs 11,200 crores.    

The long-awaited New Development Bank has been launched

After BRICS (Brazil, Russia, India, China and South Africa) leaders put their finishing touches on the $100B bank and currency reserve pool aimed at reshaping the Western-dominated international financial system centered around the IMF and World Bank. The launch marks the first big accomplishment by BRICS countries which account for almost half the world's population. The bank is scheduled to start lending in 2016.

FII's Investments in India for July till date

Latest data from SEBI suggest that net investments by foreign investors in July, stood at Rs 7,500 crores in the equity markets and Rs 9,200 crores in the debt markets.     

WPI & CPI inflation for June.

Wholesale price inflation for June came in at a 4-month low of 5.43% in June, as against 6.01% during May. Food inflation was 8.14%, as against 9.5%. Meanwhile, consumer price inflation for June was 7.31%, as compared to 8.28% during the previous month.    

RBI allows banks longer amortization period on infrastructure loans

The Reserve Bank of India (RBI) has notified that banks will be allowed to consider longer amortization periods with respect to loans to the infrastructure and core sectors. This implies that banks will be encouraged to make long term loans (upto 25 years) with the condition of periodic refinancing (every 5 years). However, none of the loans should turn into a NPA during initial years.    

BRICS agree to set up an Infrastructure Bank

Leaders of the five BRICS nations have agreed to a deal to create a development bank, which will provide funds for infrastructure projects. The bank is proposed to have a corpus of USD 100 bn.    

Mario Draghi is warning that euro zone recovery is at risk with a strong euro and highlighted that large-scale purchases of public and private debt do fall within the ECB's mandate to keep inflation low and stable. EU growth has been faced with a difficult time due to an appreciated exchange rate threatening price stability. Draghi has also urged EU member states to implement tougher structural reforms to boost economic development.

The Bank of Portugal has ordered Banco Espirito Santo to replace management immediately in a move attempted at distancing the bank from the serious financial condition at Espirito Santo International - one of the bank's holding companies. Fears over Banco Espirito Santo's state last week sent tremors across the financial markets and led to the trading suspension of both Banco Espirito Santo and Espirito Santo Financial Group (OTCMKTS:OTC:ESFHF).

It would not be an exaggeration to call the banking sector a pillar for a nation's economy. It is a key organ, any disturbances in which can have serious implications for an economy. Some of the worst financial crises in the global economic history find their origins in the mess within the banking and financial sector. While the financial crisis of 2008 is still haunting the global economy, a new one seems around the corner. With Portugal's biggest banks showing sign of crisis, a panic has gripped the entire European economy. The case in point here is Banco Espirito Santo. The trading of the bank has been suspended by Portugal's regulator as its share price crashed 17%. The event has exposed fault lines in the European banking system, sending tremors to the entire European economy. In response, the STOXX index of European lenders has declined by around 11% since early June and has fallen to lowest level this year. Further, as an article in Telegraph suggests, the yield on country's 10 year debt has come down. Greek, Italian and Spanish debts have been other casualties. And this is just the beginning we believe. We would not be surprised to see other major economies getting caught in the doom loop.

U.S. municipal bond funds had some of the biggest outflows since January

After investors pulled out $790M in the week ending July 9. $691M of the outflows were in the high-yield sector, being withdrawn due to default concerns of Puerto Rican debt. Adding to the worries is Puerto Rico's newest law which allows for public corporations to restructure their debt. Barclays High Yield Municipal Bond Index, up more than 9.5% in mid-June, was up less than 5.5% this past Wednesday.

The Fed has agreed to end QE program in October

The Fed has agreed to end its bond-buying program in October. The new definitive closing date marks the end of the quantitative easing and controversial central-banking approach. The plan will decrease bond purchases in three increments until October, when the last $15B reduction is scheduled.

Weak gasoline demand in US leads to fall in price of Brent crude

Brent crude fell for a ninth straight session this morning following weak gasoline demand in the U.S. The drop marks its longest losing streak in four years, falling 14 cents to $108.14 a barrel at 3:45 GMT. U.S. crude tumbled for a tenth consecutive session, down 48 cents below Wednesday's close at $101.81 a barrel. The front-month price is on track to display its longest stretch of losses since July 1984.

India's services PMI in june shows expansion.

India's services PMI came in at a 17-month high of 54.4 for the month of June as against 50.2 recorded in May. A level above 50 signifies expansion.    

India's External Debt for FY2013-14 increased by 7%

India's external debt for FY 2013-14 came in at $440.6 bn, a 7% increase over the previous fiscal. This $32 bn increase was led mainly by the FCNR(B) swaps introduced by the RBI and increased external commercial borrowings by the banks. Short term debt stood at $89.2 bn.    

In order to overcome a funding crisis arising from widening current account deficit (CAD) the BRICS have thought of a novel idea. These nations are proposing setting up a US$ 100 bn fund which will provide financial help its member countries facing CAD crisis. All member countries will contribute to this fund and financial support will be extended to any country which faces a liquidity issue. Creation of such a fund would reduce reliance on IMF and other funding institutions. Apart from setting up of this crisis fund, BRICS nations are also toying with the idea of establishing a common development bank. This bank would meet the funding needs of the member nations.

We believe that steps such as these would enable BRICS to better cushion themselves against any external crisis. In the past, BRICS had been subject to huge currency volatility and funding crisis whenever the external environment changed. Take the case when the US decided to curb its bond buying program for instance. This led to a sharp outflow of money resulting in currency depreciation. Having a support mechanism like a pool fund as the one being proposed can go a long way in reducing excessive currency and CAD volatility amongst BRICS.

Euro area CPI increased by 0.5% y-o-y for the month of june

Consumer price inflation for the 18-country Euro zone increased by 0.5% y-o-y, for the month of June, remaining unchanged over the previous month. Sustained low inflation outlines fresh challenge for the European Central Bank facing persistent calls for a more elaborate avatar of monetary easing.    

India's external debt increase at 7% over the previous fiscal

India's external debt for FY 2013-14 came in at $440.6 bn, a 7% increase over the previous fiscal. This $32 bn increase was led mainly by the FCNR(B) swaps introduced by the RBI and increased external commercial borrowings by the banks. Short term debt stood at $89.2 bn.   

The Fed confirmed yesterday that it will not raise interest rates, in order to keep a safeguard on avoiding future financial crises. Fed chairwoman Janet Yellen issued the forceful comments at an IMF meeting in Washington, and also stated she first favors regulation and supervision to make the financial system more resistant against potential disturbances.

S. 47(xiiib)/ 47A(4): Giving of interest-free loans to partners of the LLP does not contravene Proviso (c), though it contravenes Proviso (f), to s. 47(xiiib). Capital gains have to be computed on the book value of assets transferred & not on market value

Aravali Polymers LLP vs. JCIT (ITAT Kolkata)

A private limited company namely Aravali Polymers Pvt. Ltd was converted into a Limited Liability Partnership (LLP) u/s 56 of the Companies Act and the assessee, Aravali Polymers LLP, came into existence. As per s. 58(4) of the Companies Act, the whole of the undertaking of the company stood transferred to and vested in the LLP and the company was deemed to be dissolved. One of the main assets in the company was shares of East India Hotels Ltd. The assessee also received Reserves and Surplus of Rs.3 crore of the company. The assessee gave an amount of Rs.50 crores as interest- free loan to the partners of the LLP in the same proportion as their shareholding in the company on the date of conversion. After the conversion of the company into the LLP, the said shares were sold. The resultant capital gains were offered to tax as long-term capital gains. The assessee claimed that the transfer of the assets by the company to the LLP was exempt u/s 47(xiiib). The AO held that by giving interest-free loans to the partners in the same proportion as their shareholding in the company on the date of conversion, the assessee had contravened proviso (c)& (f) to s. 47(xiiib) and that the exemption granted by s. 47(xiiib) was not available. He held that u/s 47A(4), the transfer of the said shares of EIH by the company to the LLP on conversion was assessable to tax on the basis of the market value of the shares on the date of conversion into the LLP. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD.

 

(i) Proviso (c) to s. 47 (xiiib) bars the shareholders of the company from receiving any consideration or benefit in any form or manner other than by way of a share in the profit and capital contribution in the LLP. This means that both the company and the LLP must exist for the shareholders of the company to receive any consideration. As, in the present case, the company does not exist after conversion, the question of a violation of Proviso (c) to s. 47(xiiib) does not arise;

 

(ii) As regards proviso (f) to s. 47(xiiib), it bars payment either directly or indirectly to any partner out of the accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. Here, the loans given by the assessee to its partners has been paid out of the Reserves and Surplus of the erstwhile Company. This is a clear violation of proviso (f) to s. 47(xiiib). The result is that exemption in s. 47(xiiib) is not available;

 

(iii) However, the AO’s action of invoking s. 47A(4) and of computing capital gains by adopting the market value of the shares on the date of conversion is not correct. S. 47A(4) applies to a case where the exemption u/s 47(xiiib) is available and the conditions laid down in the proviso are not complied with. However, as in the present case, the AY under appeal is the year on which the conversion took place and in that year itself, the conditions prescribed for the benefit of s. 47(xiiib) were not complied with and consequently the provisions of s. 47(xiiib) were not available to the assessee, s. 47A(4) is not attracted. Under s. 45, the market value of the asset transferred cannot be deemed to be the ‘consideration’. As the shares were transferred at the book value, the capital gains have to be computed on the basis that the book value is the consideration received for the transfer by way of conversion.

Portugal will offer a new 10-year U.S. dollar-denominated government bond, which already has a pre-sale demand above $2B. The issuance will be launched in October, and displays Portugal's new financial standing after an exit from its three-year bailout program in May. The initial price guidance for the bond is attractive to investors looking for higher yield, and will be priced 265 basis points above Treasurys, at a yield of around 5.20%.

Standard & Poor's has placed Argentina's CCC-/C long and short term currency ratings on watch.

Standard & Poor's has placed Argentina's CCC-/C long and short-term foreign currency ratings on watch, due to the likelihood of a default. "The CreditWatch placement reflects our view of at least a one-in-two probability that Argentina will not pay the outstanding $539M interest payment on the discount bonds within the 30-day grace period," says S&P. The agency has also maintained its negative outlook on the country's long-term local currency rating.