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Sunday, December 28, 2014

JPMorgan's Asian Infrastructure fund is in advanced talks to partner with Indian carrier SpiceJet's co-founder, Ajay Singh, for a planned $200M investment into the cash-strapped airline. JPMorgan (NYSE:JPM) and Singh, who have so far invested about 170M rupees in SpiceJet to help it clear dues to oil refiners, plan to finalize the deal in a month’s time.

BOJ under pressure as CPI slowed & contraction seen in factory output

Keeping the BOJ under pressure, Japan core consumer inflation slowed to 0.7% in November, far below the central bank's 2% target. Factory output also unexpectedly fell and real wages marked their steepest drop in five years, dealing a blow to PM Shinzo Abe's stimulus policies aimed at pulling the world’s third-largest economy out of stagnation.

Russia may lose its investment-grade credit rating

For the first time in a decade Standard & Poor’s placed the country on CreditWatch Negative. The move "stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system," the agency said in a statement. S&P will resolve the CreditWatch upon the conclusion of its review, which is expected by mid-January.

Monday, December 22, 2014

Oil is climbing again today as investors increased bets on rising prices following Saudi Arabia's confidence that crude will rebound as global economic growth boosts demand. Blaming the fall in oil prices on speculators and the lack of cooperation from non-OPEC producers, Saudi Arabia also announced that it would not cut output even if non-OPEC nations did so. Brent crude is up 1.2% at $62.13/bbl. WTI is up 0.9% at $57.64.

Thursday, December 18, 2014

World shares are on the rise today following a vote of confidence from the Fed on Wednesday that the U.S. economy was on track. The Dow and S&P surged yesterday to their strongest percentage gains of the year on the news, following Janet Yellen's comments that an interest rate increase was unlikely for at least the next two FOMC meetings. Whether hikes come sooner, faster, or on that date, said Yellen, depends on the incoming data.

Wednesday, December 17, 2014

Brent crude oil & WTI continuing their downward slide

Oil prices are continuing their downward slide today, as markets brace for the outcome of the U.S. Federal Reserve meeting this afternoon. Analysts anticipate an upward revision to GDP growth forecasts in response to the slump in oil prices, and expect the Fed to signal that a rate hike is likely in mid-2015. Brent crude is still below the key $60 mark, down 0.7% at $59.62 a barrel. WTI is down 1.2% at $55.24.

Tuesday, December 16, 2014

selloff in crude oil boosted demand for yen.

Japan is considering lowering its corporate tax rate by 2.5 percentage points next fiscal year to increase corporate competitiveness, Prime Minister Shinzo Abe had been planning to lower the corporate tax rate over several years to around 20% from more than 35% currently. Meanwhile, Japanese stocks continued their slump for a second day, dropping to 6-1/2 week lows, as an ongoing selloff in crude oil boosted demand for the safe haven yen.

Russian ruble's collapse morr than 10%

Despite hiking interest rates to 17% from 10.5% in an emergency midnight move, Russia's central bank has still failed to halt the ruble's collapse. The currency fell more than 10% yesterday, its worst intraday drop against the dollar since the 1998 financial crisis. Erasing earlier gains, the ruble last traded at 69.48 rubles per dollar, compared to 65.50 before the announcement.
Brent crude and WTI have turned sharply around after tumbling to fresh 5-1/2 year lows overnight on OPEC's announcement that it will not cut output even if prices fall as low as $40/bbl. The rally is pushing European shares higher. Brent crude is up 1.1% at $62.55, after hovering close to $60/bbl yesterday. WTI fell below $57 last night, but is now up 0.7% at $58.22 per barrel.

U.S. Senate passed a $1.1T spending bill

Lifting the threat of a government shutdown, the U.S. Senate passed a $1.1T spending bill over the weekend that will fund every federal agency through next September except the Department of Homeland Security. The bill, which included a rollback of Dodd-Frank banking reforms, passed by a vote of 56 to 40. The measure will now go to President Obama, who is expected to sign it into law before federal spending authority expires at midnight on Wednesday.

China's economic growth may slow to 7.1% in 2015.

China’s economy may slow to 7.1% in 2015 from an expected 7.4% this year as a sagging property sector weighs on the world’s second-largest economy, researchers from the nation’s central bank said. Stronger global demand could boost exports, but not by enough to counteract the impact from weakening property investment. China’s economic growth came in at 7.3% in Q3, its slowest pace in five years.

Sunday, December 14, 2014

European stocks are on the decline as commodity prices continued to fall while the take-up of the ECB's latest cheap money program, known as TLTROs, met expectations on Thursday, but was still disappointing compared to earlier expectations. Brent crude hit a five and a half year low today, touching $63 a barrel, while WTI dropped as much as $58.80/bbl - also the weakest since July 2009.

Tuesday, December 9, 2014

Weak data from China & Germany spook markets

European stocks fell for a second day as German imports and exports contracted in October, while Tesco (OTCPK:TSCDF, OTCPK:TSCDY) and energy companies plunged. German October imports slid 3.1% from a month earlier, while exports fell 0.5%. Snapping a world-beating rally, highly volatile Chinese stocks tumbled the most since August 2009, with the Shanghai Composite Index closing down 5.4% at 2,856.27 after earlier gains of as much as 2.4%.

Monday, December 8, 2014

The families of four co-founders of Infosys have sold about 65B rupees ($1B) of stock to capitalize on a gain in their price and to fund various philanthropic activities. Together, the group holds a combined 91.5M shares (nearly 8% of Infosys' (NYSE:INFY) outstanding shares), according to the company's annual report. Shares closed down 4.8% at 1,972 rupees in Mumbai.

Japan slipping into recession

Japan’s economy shrank more than initially reported in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak. Last month, the government estimated that GDP contracted 1.6% during the July-September period. The revised data confirms Japan slipping into recession less than a week prior to general elections that Prime Minister Shinzo Abe has framed as a referendum on his economic policies.

Monday, December 1, 2014

The European Commission has given Belgium, France and Italy until March to bring their budgets in line with legal requirements, saying they were at risk of breaking EU rules. This gives the countries more time to adjust policy before the EU executive decides whether to fine France for missing consolidation targets or put Italy and Belgium under a disciplinary procedure because of their debt. The Commission will also publish the draft budget assessments of the 18 euro zone countries, except Greece and Cyprus which remain under bailout programs.

U.K. manufacturing PMI is at highest level in four months

U.K. manufacturing PMI edged up to its highest level in four months, rising slightly to 53.5 in November from 53.3 in October and topping consensus of 53.0. Domestic demand offset falling exports due to sluggish orders from the euro zone and emerging markets. The pound gets a lift and is up 0.5% at $1.5722, while the FTSE 100 is -0.8%.

Moody's Investors Service has downgraded Japan's Sovereign debt rating

Japan's sovereign debt rating by one notch to A1 from Aa3, citing heightened uncertainty over the achievability of fiscal deficit reduction goals and effectiveness of growth enhancing policy measures. The yen dropped to a seven-year low of 119.14 per dollar immediately following the announcement, but is now trading down 0.1% at 118.48.

Tuesday, October 28, 2014

Softbank has agreed to buy a $627M stake in Indian online retailer Snapdeal, making it the largest investor in the e-commerce firm. "We believe India is at a turning point in its development and have confidence that India will grow strongly over the next decade," says Softbank (OTCPK:SFTBY) chairman and CEO Masayoshi Son. The deal aims to strengthen the Japanese telecom group's presence in India and leverage synergies with its network of Internet companies around the world.

France promise to cut Budget defecit & keep it close to 4.3% of GDP

Hoping to avoid slowdown in EU,France says it will cut its budget deficit next year by an additional €3.6B, boosting the country’s structural adjustment efforts to above 0.5%. Until recently, France committed to reduce its budget deficit to 3% of GDP by next year, and was supposed to cut its structural deficit target by 0.8 percentage points, as outlined by EU rules. However, Paris said earlier this month that next year’s budget deficit would be closer to 4.3% of GDP, and promised a mere 0.2 point improvement on its structural deficit target.

Thursday, October 23, 2014

The IMF is urging Japan to go ahead with its second tax hike.

Japan needs to go ahead with its second tax hike next year in order to maintain credibility of its fiscal framework. Japan's national sales tax rose to 8% from 5% in April and the government is due to decide by year-end whether to proceed with a second tax increase to 10%. The IMF expects Japan's economy to grow by an annualized 3.4% in July-September, rebounding from its deepest slump since the 2009 global financial crisis last quarter following April's tax hike.

France & Italy Budget plans risk breaching EU rules.

Following the submission of euro zone countries' budgets to Brussels for review last week, France and Italy will likely hear back today that their budget plans risk breaching EU rules, FT reports. France is required to get its deficit back under the EU ceiling of 3% of economic output by next year but its plan ignored that commitment. Italy must modify its structural budget into balance by 2015, as its public debt currently sits at 135% of GDP, far above the EU ceiling of 60%.

Tuesday, October 21, 2014

China's economic growth slowed in the third quarter

China's economic growth slowed in the third quarter to its weakest in more than five years as it battled a slumping real-estate market and weak domestic demand and industrial production. The world's second-largest economy grew 7.3% between July and September from a year earlier, slightly above the 7.2% forecast by analysts but slowing from 7.5% in Q2. The GDP data reinforces expectations that Beijing will need to unleash further stimulus to avert a sharper slowdown.

Monday, October 20, 2014

Fraud in determination of LIBOR/ EURIBOR no reason to discard it as ALP

Vijay Electricals Limited vs. ACIT (ITAT Hyderabad)

The department claimed that in determining the ALP of an international transaction of loan by the assessee to its AE, LIBOR could not be treated as the ALP as there was a “fraud” regarding fixation of ‘LIBOR’ as evidenced by the fact that Barclays Bank & UBS were fined by the United States Department of Justice for attempted manipulation of the LIBOR and Euribor rates and ultimately UBS agreed to pay to regulators. HELD by the Tribunal:
Even though Revenue has raised additional grounds on the reason that LIBOR cannot be considered as a basis as it was fraudulently fixed, we are not in a position to agree with the additional grounds. Whether that was fraudulently fixed or not is not a consideration now, as it was the basis for all international transactions at that point of time as far as borrowing of funds are concerned. In fact, assessee’s A.E. also obtained loan from a local branch at LIBOR plus basis only. Accordingly, assessee has justified the interest on the rate prevalent at that relevant point of time. Even though there may be same fraud involved in fixing the rate of international rates, as it became basis for subsequent international transactions at that point of time, We do not see any reason to differ from the LIBOR plus basis points for T.P. comparison. The Revenue cannot contend that rate of interest prevailing in India has to be adopted as the rates in India cannot be compared while loans are obtained abroad, even though funds are flown from India. What is required to be seen is whether the transaction is at arms length or not. Since, the international loan rates are based on LIBOR, we do not see any reason for differing from the Ld. CIT(A) order, which itself based on Coordinate Bench decisions that LIBOR plus basis points is at arm’s length.

S. 43(5)(a): Loss on foreign currency forward contracts by a manufacturer/ exporter is a “speculation loss” and not a “hedging loss”

Araska Diamond Pvt. Ltd vs. ACIT (ITAT Mumbai)

In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. In other words raw material in respect of which the assessee has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. As the assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5) of the Act. (Contra view in Intergold (I) Ltd, Bombay Diamond Co. Ltd, Friends and Friends Shipping & Badridas Gauridu distinguished)

Thursday, October 16, 2014

Oil prices fall off again

With more forecasts out indicating weak global demand. The American Petroleum Institute reported a 10.2M barrel increase in the stockpile of U.S. crude oil, while a U.S. Energy Information Administration tally due out later today is expected to show a 2.2M barrel increase.

Wednesday, October 15, 2014

No disallowance u/s 14A & Rule 8D can be made towards exempt income earned on strategic investments

Interglobe Enterprises Ltd vs. DCIT (ITAT Delhi)

The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The disallowance under Rule 8D(iii) has to be computed by excluding the value of strategic investments. No disallowance under Rule 8D(i) and 8D(ii) is also warranted (REI Agro (ITAT Kol) followed)

Oil prices have continued to slide today

Oil prices slide while Asian shares rose and European stocks have fallen. German 10-year Bunds have benefited from safe-haven status and yields have touched a fresh record low of 0.814%. The U.K.'s FTSE 100 has led the decliners in Europe.

Chinese inflation dropped to an almost five-year low in September

Chinese inflation tumbling to 1.6% on year from 2% in August and coming in below consensus of 1.7%. Factory gate prices (PPI) slumped 1.8% vs -1.2% previously. "You got falling oil prices, falling house prices, excess capacity in the industry and an appreciating currency," "So everything is pointing to deflation getting a whole lot worse before it can get better."

Monday, October 13, 2014

Vodafone Transfer Pricing Verdict: High Court Mocks Dept’s 'Unique' Interpreta​tion Of Law

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)
Neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act.
The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. The High Court directed the DRP to decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s decision, the assessee filed another Writ Petition. HELD by the High Court allowing the Petition:
(1) A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act.
(2) The word income for the purpose of the Act has a well understood meaning as defined in s. 2(24) of the Act. The amounts received on issue of share capital including the premium is undoubtedly on capital account. Share premium have been made taxable by a legal fiction u/s 56(2)(viib) of the Act and the same is enumerated as Income in s. 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);
(3) In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word ‘Income';
(4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium.
(5) Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be a subject-matter of taxation;
(6) The department’s method of interpretation indeed is a unique way of reading a provision i.e. to omit words in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/outside the jurisdiction of Courts.
(7) In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- (a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above;
(8) The contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax.
(9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament to tax issue of shares to a resident, when the issue price is above its fair market value. In the instant case, the Revenue’s case is that the issue price of equity share is below the fair market value of the shares issued to a non-resident. Thus Parliament has consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad.
(10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.

Thursday, October 9, 2014

Producer prices in the EU continued to fall in August

With Eurostat displaying new figures of a 0.1% drop from July. Goods leaving the eurozone's factory gates were down 1.4% from August 2013. The fall indicates that the currency area is set to remain mired in a state of very low inflation, weakening the eurozone's fragile economy even further. The producer price figures were released as members of the ECB's governing council meet in Naples, Italy, to decide upon further stimulus measures.

Mario Draghi is set to push the ECB to buy junk rated bonds.

To buy junk-rated Greek and Cypriot bank loans, a move that will likely increase tensions between Germany and the bank. The ECB's executive board will propose that existing requirements on the quality of assets accepted by the central bank be relaxed to allow for the purchase of safer slices of Greek and Cypriot ABS. Despite Germany's opposition, the country may be outvoted if other eurozone members choose to back it.

Sunday, September 14, 2014

The International Energy Agency(IEA) has lowered its forecast for global oil demand growth.

IEA for the third month in a row, calling the recent slowdown in demand "nothing short of remarkable." The IEA now foresees global oil demand growth of 900K bbl/day in 2014, a decrease of 65K bbl/day vs. last month's forecast and down by 300K bbl/day since July. The agency now expects oil demand to rise by 1.2M bbl/day next year, but that's 100K bbl/day less than it forecast last month.

Thursday, September 11, 2014

CCEA cleared stake sales of Coal India,ONGC & NHPC.

After a long hiatus, the government finally seems to be on track to meet its divestment target of over Rs 400 bn for the current fiscal. As per a leading financial daily, the Cabinet Committee on Economic Affairs (CCEA) yesterday, cleared stake sales for Coal India, ONGC and hydropower utility NHPC. At the current stock price levels, disinvestment in these companies is expected to meet the budget target of Rs 434.25 bn. CCEA has cleared a 5% stake sale in ONGC in which the government currently holds 68.94% stake. This is likely to fetch over Rs 190 bn at current price levels. CCEA has cleared a 10% stake sale in Coal India in which the government currently holds 89.65% stake. This could fetch the government close to Rs 240 bn at current prices. The proposed 11.36% stake sale in NHPC is expected to fetch over Rs 30 bn. Given the buoyancy in the markets, achieving the divestment target may not be a big challenge if the government gets the pricing right. The proceeds will be great help in meeting the fiscal deficit target for the fiscal which has been pegged at 4.1% of GDP.

Sunday, September 7, 2014

Draghi announced new measures to boost economy.

In its latest attempt to boost economic activity in the European region, the President of the Euro Central Bank (ECB), Mario Draghi, has announced new measures. This includes its own version of the QE program, something other developed nations such as US and Japan resorted to; to provide a fillip to their respective economies. This development seems to have come at a time when the central bank does not have many monetary policy options; given that interest rates stand at 0.05% (benchmark rate) after being reduced by ten basis points. Deposit rates stand at minus 0.2%, indicating that the spending is being encouraged.

In the attempt to boost the economy and push in more capital in the system, the central bank is as such looking to purchase bonds of about 700 bn Euros or US$ 906 bn. However, as reported by Bloomberg, a full-fledged QE plan was not announced given the split in views amongst the members of the Governing Council. Nevertheless, what this could possibly mean is over time, such capital could find its way to chasing higher returns. What is concerning is that this would add to the already existing bubble scenarios that are being witnessed in various parts of the world.

Thursday, September 4, 2014

Foreign Banks will now be allowed to lend in INR-RBI's new guideline

Amidst the asset quality and poor credit off-take woes, here comes another trouble for Indian banks. In one set of news, foreign banks will now be allowed to lend in Indian rupees. The central bank has allowed non-resident foreign banks to offer debt to local companies in Indian rupees. This is expected to happen through swap arrangement with Indian banks. However, this will call for fresh competition for Indian lenders from the foreign counterparts. Primarily because foreign banks are not bound by the reserve requirements of cash reserve ratio (CRR) and Statutory Liquidity Requirement (SLR). This would make it easier for them to lend at cheaper rates. Moreover, the fact that foreign banks can set up representative offices in India for lending purposes also is a big encouragement for them to set up base in India. While the Indian banking sector dynamics are undergoing a sea change, underlying challenges persists for the domestic players.
The Bank of Japan held to its upbeat view on the economy and heavy monetary stimulus this morning, despite the recent stings from a 3% sales tax hike in April. The projection of economic recovery saw consumption benefiting from a tightening job market resulting in higher wages. Leaving its policy framework unchanged, the central bank also pledged to increase base money by 60T-70T yen ($571B-$666B) per year via aggressive asset purchases to reflate its declining economy.

All eyes are on the ECB's policy meeting today,

Which will decide whether an overvalued euro and tensions with Russia will lead to further stimulus measures. Although most economists expect the ECB to keep interest rates on hold and refrain from large-scale QE at least for today, many banks predict that Mario Draghi may commit to buying ABSs. Draghi previously announced at Jackson Hole that the ECB's Governing Council will "use all the available instruments" to deliver price stability over the medium term.

Wednesday, September 3, 2014

Indian Services PMI

The HSBC services PMI (seasonally adjusted) for -India stood at 50.6 in August from 52.2 in July. This marked the fourth consecutive month of expansion. The composite index came in at 51.6 in August as against 53 in July.    

India figures nowhere in global competitiveness

India has taken rapid strides in the fields of business and technology. But the country lags behind in global competitiveness due to lack of inclusive growth. In the latest survey on global competitiveness by World Economic Forum, India has slipped down further to the 71st ranking in FY15 from the 60th ranking in FY14. Switzerland tops the list as can be seen in today's chart. Also, it is interesting to note that the ease of doing business in India is the least among BRICS nations comprising of Brazil, Russia, India, China and South Africa. The main factors acting as stumbling blocks for doing business in India are long bureaucratic processes to start business, poor infrastructure, high inflation and tax rates and low primary health and education resulting in rigid and inefficient labour markets. However, the redeeming factor is that the country still ranks favourably on business sophistication and innovation. Therefore, if India were to attract global investments and achieve export competitiveness, then these structural issues need to be urgently resolved.

Tuesday, September 2, 2014

Infra Companies saw ease in leverage ratio

Infrastructure is one sector which is the biggest beneficiary since Narendra Modi came to power this May. The ease of doing business increased dramatically after the elections. Not only that, even the financial condition of these firms has improved quite a bit. As an article in Business Standard points out, the combined debt to equity ratio of the top 17 infra companies has declined to 3.5x in FY14 from 3.7x in the previous year. Fund raising and non-core asset sales have helped these companies improve their financial health. With the investor appetite failing to wane amidst the promise of ache din, it appears that the balance sheet of these companies may improve further.

So, should investors lap onto them? Well, not , in general. High working capital, huge debt and wafer thin margins makes infra as a business quite susceptible. Bureaucracy adds another layer of susceptibility. Though bureaucracy may not be a big worry now with Mr Modi assuming power, financial risks remain. Hence investors should be careful while investing in them as the current euphoria may be short lived.

FII's ownership of sensex

According to a BofAML report foreign institutional investors' ownership in Sensex was a record high of 22% in the quarter ended June'14. Additionally, the FIIs control close to 40% of the free float.    

Wednesday, August 27, 2014

India's antitrust regulator has fined major automakers over anti-trust violations.

India’s antitrust regulator has fined major automakers over anti-trust violations, just days after authorities in China imposed similar penalties. The commission found that carmakers were able to charge high prices by providing spare parts only to authorized repair shops. A total fine of 25.4B rupees ($420M) was slapped on 14 automotive groups including Tata Motors (NYSE:TTM) and the local units of Honda (NYSE:HMC), Volkswagen (OTCQX:VLKAY), Fiat (OTCPK:FIATY), BMW (OTCPK:BAMXY), Ford (NYSE:F), General Motors (NYSE:GM), Mercedes-Benz (OTCPK:DDAIY), Nissan (OTCPK:NSANY) and Toyota (NYSE:TM).

Wednesday, August 20, 2014

Argentina is looking to push bondholders to swap defaulted debt for new notes, in order to dodge a U.S. ruling that prevents the government from paying creditors. Argentina's last interest payment of $539M was blocked by a NY court, resulting in the country's sovereign default on July 30. President Cristina Fernandez has continued to argue that Argentina is not in default, and has called for a new bond swap as a result of the ruling.

Monday, August 18, 2014

Wall street Weapons of mass destruction back again.

They were called weapons of mass destruction! But that was back in 2008. Six years hence Wall Street seems to have found its lost love for derivatives. And the too big to fail banks are once again at the forefront of creating new toxic products. Names like JP Morgan and Goldman Sachs were associated with toxic instruments like CDOs post Lehman bankruptcy. It seems these firms have learnt no lesson and are back to their notorious tactics putting the global financial system at risk! As per Bloomberg, Goldman Sachs is planning as much as 10 billion Euros (US$ 13.4 billion) of structured investments that bundle debt into top-rated securities. J P Morgan Chase is offering a swap contract that makes it easier for investors to wager on the debt. Thus while the big banks are back to vetting investors' risk appetite, the regulators are hardly prepared to avert another 2008 like crash. One can only hope that Western central banks, including the US Fed, take the RBI's warning signals more seriously!

Eurozone banks are expected to borrow about €250B from ECB under LTRO

Eurozone banks are expected to borrow about €250B in cheap four-year money from the European Central Bank in September and December under the ECB’s "targeted long-term financing operations". The new loans would come on top of the more than €1T in cheap finance the ECB pumped into the financial system between late 2011 and 2012 to avert a financial crisis, and are expected to boost lending to the region’s credit-starved businesses.

Wednesday, August 13, 2014

Japan's economy contracted sharply in the second quarter.

Japan's economy contracted sharply in the second quarter after a national sales tax in April rose 3% and triggered a sharp decline in consumer spending. Real GDP shrank 6.8% in the three months through June on an annualized basis from the prior quarter. Prime Minister Shinzo Abe will have to address the tax issue again soon. A sales tax increase (which will raise the rate to 10%) has been approved by the Japanese government and will take effect in October 2015.
The Treasury Department posted a U.S. budget deficit of $95B at the end of July, down 3% from $98B in the same period last year. Fiscal year-to-date, the deficit of $460B is off 24% from the same period a year ago, and the lowest for the first ten months of the fiscal year since 2008. Receipts last month totaled $211B, up 5% from the year-ago period, and spending totaled $305B, up 3% from July 2013.

Tuesday, August 5, 2014

RBI keeps key rate unchanged

In the first quarter Monetary Policy review today, the RBI kept the key lending rate (repo rate) unchanged. Repo rate or the rate at which at the central bank lends money to commercial banks remains unchanged at 8.0%. Even the cash reserve ratio (CRR) stayed at 4%. However, in an effort to ease some liquidity the statutory liquidity ratio (SLR) was reduced from 22.5% to 22%. In the last policy review too, the central bank had chosen to tinker with the SLR, while keeping other rates unchanged.

Transfer pricing implications of interest-free loans, corporate guarantee & export turnover adjustments explained

Kohinoor Foods Ltd vs. ACIT (ITAT Delhi)
(i) Interest free loans to AEs: We have no issue of the TPO applying the CUP method. But the problem arises when in the name of applying CUP method; a wholly inapplicable comparable model applied which leads to distorted results. A significant sector of multi-national corporate set up involves creation of subsidiaries and associate enterprises for advancement of their overseas business. They help them in terms of finance by offering soft loans and subsidiary loans; they are primary focused to spread the business of the principal unit. It would have been very reasonable, judicious and appropriate on the part of the TPO to have looked into such type of transactions and applying it as uncontrolled transactions. Re-course straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. While the real income theory has no application to a fictional working as provided by section 92 but this being part of the Income-tax Act, the valid consideration for properly assessing a transaction cannot be given a go by. Every fiction has limits to its application. In view thereof, the rate of 13.49% applied solely relying upon a third party opinion by applying on uncontrolled set of transaction is factually not correct and cannot be accepted. The correct comparable which can be applied is of LIBOR rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific uncontrolled comparable to be applied to the assessee’s loan transactions

Monday, August 4, 2014

The FM is considering proposal to tax builders to pay tax on unsold stock

A real estate developer's key role is to construct properties and sell them. But when sentiments are poor, more often than not the unsold inventory starts to pile up. So should the developer be taxed on these unsold properties, even if these are not rented out? Well, the major response would be 'no'. However, as mentioned in the Economic Times, the government is considering asking builders to pay taxes on unsold stock, which would be computed on the basis of annual letting value. What this could lead to is realtors taking up measures to clear off the inventory which would include reducing prices, something that seems required in India. However, whether this will be implemented or not remains to be seen as the Finance Ministry is considering this proposal. It may be noted that there are over 760,000 apartments that remained unsold at the end of June this year. Bringing in such a move would be a major setback for developers, but a positive for buyers.

Japanese stocks fell to a more than one-week low

This morning, with financials and sea transporters leading the losses, as investors turned risk averse due to last week's U.S. stock sell-off, concerns over Argentina's default and Portugal's banking problems. The Nikkei sank 0.3% to 15,474.50, its lowest close since July 25, extending losses for a third straight trading day. The Topix shed 0.4% to 1,276.19, while the JPX-Nikkei Index 400 dropped 0.3% to 11,620.36.

HNI and hedge funds' investments through P-notes rises to a 5-year high

Investments by HNIs and hedge funds into the Indian equity markets through the participatory notes (P-notes) route has risen to $37 billion in June, the highest level seen since May 2008. P-notes account for 15-20% of total FII holdings in India.    

Amenments to Investment limits by FII's in GOI securities

The Reserve Bank of India has decided to enhance the investment limit in government securities available to FIIs by $5 bn by correspondingly reducing the amount available to long term investors from $10 bn to $5 bn within the overall limit of $30 bn.
The incremental investment of $5 bn will have to be invested in GoI bonds with a minimum residual maturity of 3 years.

Sunday, August 3, 2014

Argentina a 'selective default'

In this world of ever increasing debt, the possibility of a default is always around the corner. And if the defaulter in question happens to be a sovereign government, then the result could be catastrophic. This is exactly what has happened in Argentina. The South American nation which has a long history of sovereign defaults has done it again. Back in 2001, the Argentina had defaulted on its foreign debt for the seventh time in its history, amounting to US$ 82 bn. In the restructuring exercise that followed, some of the country's creditors held out. They demanded that they be repaid in full. This group of creditors has now received a court order to that effect and this has triggered a fresh crisis. Argentina has refused to pay up. S&P has called it a 'selective default'. So what happens now?

As Argentina has been shut out of the global markets since 2001, there will be little impact felt immediately. However, the longer this saga drags on, the more nervous global markets will become.
FIIs may not press the panic button just yet but if last minute negotiations do not result in a settlement, large outflows from the Indian markets cannot be ruled out. At such times, it is best if investors remain cautious and remain invested in companies with excellent fundamentals.

Brent Crude Oil slips as OPEC has pumped more supplies

Just last month, record high bets were placed on rising oil prices due to supply disruptions in Iraq. However, oil prices have surprised once again. Despite the tensions surrounding the Middle East, Africa and Ukraine, the Brent crude oil price has slipped as OPEC has pumped more supplies. What has further kept price under control is the low demand from the US and higher gasoline inventories. In fact, all these factors are likely to account for the biggest monthly loss in oil prices over last 15 months.

While the trend bodes well for India, as it largely depends on oil imports, the risk to Indian energy sector does remain. This is because dollar still remains strong, supported by US economic growth data. Further, OPEC is quite known for changing supplies as per its whims and a further cut down cannot be ruled out. As India hopes to introduce regulatory reforms in the energy sector, a rise or volatility in oil prices is likely to slow down the pace of the same.
Some of Russia's largest companies are starting to move their cash reserves to Asian banks as worries surface that Russia could eventually be completely shut out of U.S. dollar funding markets. On friday, the EU adopted its toughest Russian sanctions to date, including heavy restrictions on the country's financial markets, energy industry and a complete embargo of the arms trade between the two.

Monday, July 28, 2014

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.

Tuesday, July 22, 2014

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.

Monday, July 21, 2014

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.    

Wednesday, July 16, 2014

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.

Tuesday, July 15, 2014

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.

Monday, July 14, 2014

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).

Sunday, July 13, 2014

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.

Thursday, July 10, 2014

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.

Wednesday, July 9, 2014

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.    

Tuesday, July 8, 2014

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.

Thursday, July 3, 2014

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.

Wednesday, July 2, 2014

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.

Monday, June 30, 2014

Crude-oil futures fell in Asian trading hours today, due to waning concerns of Iraqi oil supply for the near term. On the New York Mercantile Exchange, light, sweet crude futures for delivery in August traded at $105.45 a barrel at 4:52 GMT, down $0.29 in the Globex electronic session. August Brent crude also fell $0.29 to hit a low of $113.01 a barrel. Brent futures are still up 3.4% in June

A techinical default for Argentina

Argentina will enter a state of technical default today, as the $832M payment given to holders of the country’s restructured bonds was declared illegal this past Friday. The showdown continues as the New York judge presiding over the case insists the holdout creditors must be paid $1.5B before any other payments can be made. Argentina will still have a 30-day grace period until it enters a formal default.

Wednesday, June 25, 2014

An extension is now being discussed between Argentina and holdout investors, allowing the country to pay other bondholders first if the litigation between the two makes good progress before July 30. Without a suspension on the order or a court stay, Argentina will have to pay the $1.3B it owes to holdout creditors, before making another $900M bond payment next Monday. A 30-day grace period will take place before an actual default can be declared.

Tuesday, June 24, 2014

The $96B tobacco bond market is declining

The $96B tobacco bond market is continuing its decline, as most Americans have quit smoking at a faster rate than estimated in the previous decade - when most of the bonds were sold. E-cigarettes have been a major factor to the recent decrease, along with prior declines due to public smoking bans and new excise taxes. A forecast last month from Moody's Investors Service estimates 65-80% of tobacco bonds are headed toward default.

Reserve Bank of India(RBI) permits banks to engage in proprietary trading

The RBI once again permitted banks to engage in proprietary trading in the exchange traded currency derivatives segment, overturning a ban that came into effect in July 2013 in the wake of sudden Rupee weakening.    

French manufacturing & services slow down

French manufacturing and services contracted in June, the second consecutive month of decline. The manufacturing PMI fell to 47.8 from 49.6 and services PMI dropped to 48.2 from 49.1.   

Sunday, June 22, 2014

US Fed continues its tapering program

The Federal Open Market Committee (FOMC) trimmed its bond buying program by another $10 bn for the fifth straight month, to $35 bn per month.

Siemens & Mitsubishi Improving their offer for Alstom

Siemens (OTCPK:SIEGY) and Mitsubishi (OTCPK:MHVYF) will now pay €8.2B ($11.2B) in cash, in place of their last bid of €7B. This will value Alstom (OTCPK:ALSMY) at €14.6B, which is well above GE's (GE) offer of €12.4B. Siemens has also expressed it is willing from the start to enter a mobility management joint venture with Alstom. Mitsubishi is also willing to purchase a 40% stake in the energy business, raising its cash payment €3.9B from €3.1B.

SEBI's step to revive primary market

The IPO market is on a death bed. Hardly any company is tapping the primary market to raise money. So, in order to revive the same SEBI has decided to introduce a slew of measures. These include having reservation and discount for retail investors in Offer for Sale (OFS) mechanism as well as hiking the minimum public shareholding for PSUs. Reservation for retail investors in OFS will increase their participation, while the increase in PSU float to 25% (from 10% currently) will attract investor interest.

While these measures are likely to give a new life to the dormant primary market, we feel that along with such steps, the market watchdog must also tighten its screws over issues ranging from price rigging to market manipulation.If SEBI tightens its screws on regulatory matters, the confidence of investors in the markets would increase. And this would lead to increased retail participation in equity markets.

Thursday, June 19, 2014

Crude futures in Asia climbed higher

Crude futures in Asia climbed higher today, after data was revealed showing a 579k barrel decrease in U.S. weekly oil stockpiles, and a growing crisis in Iraq. Still, U.S. domestic crude production is currently its highest in 28 years. The Obama administration is also signaling that Iraqi Prime Minister should step down, stating he is unable to stabilize the region.

Euro Zone Bond yields returned to historic low

Euro zone bond yields returned to historic lows, after the Fed displayed a dovish outlook on its monetary policy yesterday. Earlier this week, longer-dated euro zone bonds sold off as higher-than-expected U.S. consumer price inflation put forward the possibility the Fed may raise rates. Italian and Spanish 10-year yields fell 7 basis points to 2.78% and 2.69% respectively. Yields on top-rated euro zone bonds were 3-4 bps lower.

Circumstances leading to formation of PE and estimation of profit attributable therto under Rule 10 explained. Even foreign assessees are liable for interest u/s 234B

Nortel Networks India International Inc vs. DDIT (ITAT Delhi)
Nortel Networks India Pvt. Ltd, an Indian company, entered into a contract with Reliance Infocom for supply, installation, testing, commissioning of hardware equipment. Immediately thereafter, the Indian company assigned the supply part of the contract to the assessee, a USA company, without any consideration. The Indian company retained the other obligations of the contract. The assessee purchased the equipment from a group company, Nortel Canada, and supplied them to Reliance Infocom. The assessee claimed that it had suffered a loss from the transaction. The AO took the view that the assessee did not have any manufacturing or trading infrastructure or financial or technological capability of its own and that it was only a paper company incorporated for the sole purpose of evading taxes in India. He accordingly held that the Indian company constituted a PE of the assessee and assessed its income under Rule 10 by recasting the global profits to arrive at the percentage of profit likely to have accrued from the Indian operations. He adopted the global gross profit margin percentage as 42.6% and allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. The CIT(A) upheld the stand of the AO in principle but held that only 50% of such profits had to be considered to be attributable to the PE. On appeal by the assessee to the Tribunal HELD dismissing the appeal:
(i) The contract entered between the assessee and Reliance Infocom is a turnkey contract, indivisible contract for supply, installation, testing, commissioning etc. Nortel India has undertaken the responsibility for negotiating and securing the contracts. The contract for installation and commissioning was also undertaken by Nortel India. These arrangements show that assessee is getting its work executed through Nortel India. The assessee is merely a shadow company of Nortel Group and for all practical purposes, all the facilities and services available to the Nortel Group of Companies are equally available to the assessee. The hardware supplied through it is installed by Nortel India. The contracts were pre-negotiated by Nortel India. Thus, Nortel India is a fixed place of the business and dependent agent PE of the assessee. The Liaison Office of Nortel Canada is rendering all kinds of services to all the group companies including the assessee. The LO building pertaining to Nortel Canada constitutes fixed place PE of the assessee. The assesee’s contention that sales were completed overseas and installation was done under a separate contract is not acceptable. The compensation which has been represented as a sale consideration for the equipment represents the payment for works contract where entire installation and customisation has been carried out in India;
(ii) As regards the estimation of profits attributable to the Indian operations, the accounts of the assessee have no sanctity as they are not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reason that it has been designed as such to avoid taxation in India. The accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Though in other cases such as Nokia, Rolls Royce, ZTE Corporation & Huawei Technologies, the profit was limited to 20% to 35%, that is on the facts of those cases. In the present case, from the gross profit computed by reference to the rate applicable to the global accounts of the assessee, further substantial deduction has been allowed for selling general and marketing expenses and also R&D expenses. Thereafter, 50% of the resultant figure has been attributed to PE. This meets the ends of justice;
(iii) As regards the levy of interest u/s 234B, though the assessee is a non-resident whose income is subject to TDS u/s 195, the assessee had always been holding the position that receipts are not taxable in India and so it cannot be absolved from the liability to pay interest u/s 234B (Jacabs Civil Inc 330 ITR 578 (Del) distinguished; Alcatel Lucent (Del) followed)

Wednesday, June 18, 2014

The European Central Bank has expressed its concerns regarding foreign currency benchmarks, stating that relying on one set of data to compile a benchmark cannot guarantee its reliability. The ECB's concerns are related to an EU proposed law to regulate market benchmarks after banks were fined for fixing the Libor rate. Regulators are also now probing related accusations regarding the currency markets.

S&P lowered Argentina's long term Foreign Currency rating to CCC-

Argentina's long-term foreign currency rating of CCC+ has been lowered by Standard & Poor's to CCC-, due to an increased risk of default on the country's foreign currency debt. However, S&P affirmed the country's short-term foreign currency rating at C, saying that the court ruling was not likely to affect the government's service on local currency debt.

Tuesday, June 17, 2014

The IMF has reduced its 2014 US economic growth forecast

The International Monetary Fund has reduced its 2014 U.S economic growth forecast to 2% from the 2.8% it predicted in April, due to a weak first quarter, although the fund has maintained its 3% growth outlook for 2015. Markets are predicting the Fed to start raising rates in the middle of next year, although the IMF related that it is not certain about the expected increase. Rates have been near zero since late 2008.

ECB Negative Interest rates policy leads to increase in carry trades in euro

The European Central Bank's cut to its main lending rate and institution of negative interest rates earlier this month has spelled trouble for the euro. After hitting a 2-1/2 year high in early June, the euro has declined over 3%, due to monetary easing and increase in carry trades. Data released last week shows the net short position for the euro/dollar reaching its highest level since late May 2013.

Poor Monsoon will have significant impact on India's GDP.

While the South West monsoons have already made their presence felt in some parts of India abating worries of a delayed rainfall, fears of El Nino have still not subsided completely. Many forecasts continue to claim that El Nino will disrupt India's monsoon this season. It may be noted that El Nino phenomenon has occurred thrice in India since 2004 resulting in below average rainfall in the respective years. Out of these three occasions India faced a drought like situation twice.

Thus, a forecast of El Nino this year sounds a grave concern for India. Particularly because India is an agrarian economy. A below average rainfall can hurt agriculture growth in India and thus put GDP growth under pressure. Further, fall in agricultural growth can also lead to a decline in farm income. This will impact the rural spending as disposable incomes decline. Lastly, poor rainfall may also lead to a spiral in food prices. All these factors indicate how a deficient monsoon could spell a death knell for Indian economy. That is why it is important that the government focuses on ramping up infrastructure in agriculture; particularly by bringing more of the land under irrigation

China has surpassed the largest issuer of corporate debt.

As the world’s largest issuer of corporate debt, according to a report released today by S&P. However, S&P approximates that around one-quarter to one-third of China’s corporate debt comes from the country’s shadow banking sector - non-bank lending that caters to borrowers who have difficulty obtaining financing. In turn, this raises red flags of the ability for Chinese companies to make interest payments and repay their bank loans.

Sunday, June 15, 2014

Eight years have passed since the subprime crisis surfaced in the US. And by now it is fading from our memories. However, China seems to be preparing to remind us of it. As per an article in Bloomberg, the current trend of 'zero down payment 'in China is a scary reminder of the subprime bubble. The ghost cities in China are a reflection of the frothy property market. However, in a bid to remove the signs of glut in property markets, the housing financers are easing up down payment norms. The authorities defend the decision citing the need to offer easy payment terms to students and fresh graduates. However, loosening down-payment requirements could erode China's financial stability. Banks in the country already have a shoddy track record in sustaining asset quality. In addition by allowing realty companies to flourish, the economy could be skirting with a banking crisis in the years to come. At a time when China is headed towards the weakest growth in 24 years, a subprime crisis-of-sorts could lead the economy to a very hard landing.

Thursday, June 12, 2014

Indian IIP grew after two months of contraction

Output as measured by the index of industrial production grew by 3.4% in April after two consecutive months of contraction. Manufacturing which constitutes 75% of the index grew by 2.6%.    

Indian CPI for May at three month low

Consumer price inflation for May came in at a three-month low of 8.28%, lower than the 8.59% in April. Core inflation stood at 7.72%, while food inflation was 9.56%.    

OPEC has kept its output unchanged to 30MBPD

OPEC has announced it has not changed its output target of 30M barrels a day, despite a higher demand forecast of 30.4M barrels for the rest of the year, stating the rest of demand will be covered by growth outside the group. Production is still facing challenges though, with turmoil enveloping Libyan output, Iran sanctions, and political unrest in Iraq.

The CBO forecasts a full year deficit of $492B

The Treasury Department says the total  U.S. government budget deficit for May was $130B. The announcement comes after a big $106.9B surplus in April caused by the inflow of tax revenues. Although the budget for the first eight months is still down from the same period in 2013, the current shortage still totals $436.4B. The Congressional Budget Office forecasts a full year deficit of $492B ending September 30.

Tuesday, June 10, 2014

If you wish to buy a car, but cannot afford to pay the monthly installment, what's the way out? Extending the loan period seems like one solution. This is what seems to be happening in the US right now. As per Moneynews, a growing number of Americans are looking to extend their loan terms for buying vehicles to as many as 11 to 12 years! As reported by Wall Street Cheat Sheet, one-fourth of new vehicle loans ranged from 73 to 84 months, up 27.6 % from a year earlier. In any way you look at this, it seems like a cause of concern and one that could lead to being a bubble situation. Especially considering that such buyers would end up paying a lot more in the form of interest payment; and could possibly face issues when it comes to trading their vehicles for a new model! Not to mention, this route is mainly being taken by people who don't have the best of credit records.
The new government seems to be taking some baby steps towards some crucial reforms. There is some good news regarding the coal sector. The sector may be opened to private players with conditions attached. The government is considering a proposal to auction mining leases to private bidders. This would include the leases to those areas that Coal India is unable to mine. The Coal ministry is also developing a long term plan to reform Coal India by 2030. This would be in line with the new governments view to reform PSUs instead of privatizing them.

While these steps will certainly help, we believe that if the government were to go in for reforms in any sector, it should be decisive. Coal India is a cash rich PSU that enjoys a monopoly. The government should consider ending its monopoly. Participation of private companies with a proven track record into the coal mining sector should be allowed. This will lead to an increase in the supply of this important commodity in the local market. Indian power companies will then not need to import a commodity that it has in abundance.

Monday, June 9, 2014

Asian stocks hit their highest levels

In nearly three years today, after the Dow Jones and S&P 500 ended at new records this past Friday. The Nikkei stock average is up by over 0.3%, and Hong Kong up 0.7%. The yuan rose after the People's Bank of China unexpectedly fixed its daily midpoint higher against the dollar for the second straight session, leading to an additional rise in other Asian currencies.

Sunday, June 8, 2014

RBI has hiked the LRS Limit to US$125000 from the currentUS$75000

As the wave of liquidity around the world has increased, there has been growing interest in investing in foreign listed stocks. Given that the stock markets in the US appear over valued in relation to the economic fundamentals there, investors have been looking at other options. With more money in their hands, the risk appetites for better returns have also risen. For instance, there seems to be a lot of interest of late in Chinese and Russian stocks. And now India too is toying with the idea of letting Indians invest abroad. As per an article in the Business Standard, the RBI has hiked the Liberalised Remittance Scheme (LRS) limit to US$ 125,000 from the current US$ 75,000. But Indians should not get lured by the prospects of foreign stocks just because they seem to be the flavour among global investors. Just like they would do for stocks back home, Indian investors will need to do their homework in terms of understanding the businesses and valuations of these companies before they take the decision of investing in them.

Interest rates in the emerging world stay high

While the interest rates in the West remain low, those in the BRIC nations have been quite firm. while the rich world has been grappling with deflation, for these emerging economies especially India, inflation remains a key concern. In India at least, high inflation has been a problem for quite some time now. And the RBI is in no mood to ease rates unless this comes down within acceptable levels. If the Modi government gets its development agenda rolling and many of the supply side bottlenecks are done away with, then there are very good chances of inflation cooling off. And this will be a good enough signal for the RBI to also start reducing interest rates.

Bank of America is in talks to pay at least $12B

To settle mortgage-related probes from the Department of Justice and various states. The DOJ was previously reported to be seeking more than $13B from BofA (BAC) over its mortgage lending - generally over loans tied to Countrywide and Merrill Lynch. The bank has already reached a $9.5B settlement with the Federal Housing Finance Agency.

Bundesbank has raised its growth forecast for Germany

Expecting a growth of 1.9% this year, replacing the December forecast of 1.7%. As the euro zone's largest economy, Germany has been looked to as a source of euro zone recovery, especially given the ECB's cut yesterday to the deposit rate below zero. The Bundesbank growth forecasts for 2015 and 2016 are unchanged at 2% and 1.8% respectively.

Expl to s. 73: Speculation loss on transactions in derivatives can be set off against the gains of delivery shares

CIT vs. Baljeet Securities Pvt. Ltd (Calcutta High Court)

Under the Explanation to s. 73 where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Therefore, the entire transaction carried out by the assessee was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares.

Thursday, June 5, 2014

A transfer of shares under a family arrangement is for a determinable “consideration” & is not “voluntary”. Consequently, the shares are not received under a “gift” & the transferee cannot claim benefit of cost, and holding period, of the transferor

ACIT vs. Bilakhia Holdings P. Ltd (ITAT Ahmedabad)

The members of the Bilakhia family entered into a deed of family arrangement with a view to consolidate and equalize values of the assets held by each of the parties. Pursuance to the said family arrangement, the family members transferred the shares of Nestle India Ltd and Hindustan Lever Ltd held by them as investment to the assessee, an investment company in which the individual members of the family had equal interest. The assessee sold the shares and claimed that as it had acquired the shares vide a “gift”, in computing the capital gain, the cost of acquisition of the shares to, and the period of holding by, the transferors, had to be considered. The AO rejected the claim though the CIT(A) accepted it. On appeal by the department to the Tribunal HELD allowing the appeal:
(i) On the issue as to whether the shares received on family arrangement is pursuant to a “gift”, s. 122 of the Transfer of Property Act 1882 provides that a transfer of moveable or immovable property can be treated as a gift only if the same is made voluntarily and without any consideration. It cannot be said that a family arrangement is “without consideration”. In CWT vs. HH Vijayaba, Dowgner Maharani Saheb of Bhavnagar Palace 117 ITR 784 (SC) it was held that a family settlement or family arrangement which is to buy peace is for good consideration and creates an enforceable agreement between the parties. Consequently it cannot be said that a family arrangement is without consideration and a “gift”;
(ii) On the issue as to whether this consideration can be measured in money or monies worth, the purpose of the family arrangement was to equalize the holdings between the respective families of three brothers. Therefore, it cannot be said that consideration for transfer of shares cannot be measured in terms of money or monies worth. The equalization of wealth has only monetary connotation. To avoid disputes cannot be said to be without monetary consideration as it is common knowledge that family disputes ruin the family financially. The family disputes are being settled in monetary terms by resorting to arbitration and in case such settlements is not done, matter travels to the court and the family suffers heavily not only mentally but also financially. Thus, it cannot be said that the consideration for transfer of shares was not for monetary consideration;
(iii) On the issue as to whether the receipt of shares under the family arrangement was “voluntary” or not, the term “voluntary” is defined to mean “free choice; done with free will; without any compulsion ..”. The family arrangement cannot be said to be voluntary because it was enforceable and binding on the parties and with the purpose of equalization of wealth of the family members, which had monetary connotation.

Tuesday, June 3, 2014

Gold investors are a concerned lot these days. The price of the yellow metal has been in a down trend recently. In the month of May, the gold price fell by about 10%. The main reason for this correction was the Reserve Bank of India's (RBI) decision to ease gold import norms. However, there is more negative news in store. Keeping in mind the fall in global gold prices too, the Indian government has cut the import tariff value on gold from US$ 424 per 10 grams to US$ 408 per 10 grams. The import tariff value is the base price at which the customs duty on gold is calculated to prevent under-invoicing. Thus expectations are high that the new government will cut the import duty on gold in the upcoming budget. These measures would certainly result in more gold imports into the country.

Also, the months from June to September have traditionally witnessed weak demand for gold. All these factors have led many market participants to conclude that the price could fall another 5-10% over the next one to two months. Should these factors affect investors' allocation to Gold'? We don't think so. Gold should form 10-15% of an investor's portfolio as it is an effective portfolio diversifier and acts as a good hedge against inflation. Gold is a good long term investment and investors should not speculate on the price based on short term factors.
Euro zone flash inflation data for May is due today, with the consensus being a 0.7% rise year-on-year. The numbers are expected to reinforce the case for a heavy monetary stimulus from the European Central Bank. Barclays (BCS), RBS (RBS) and JPMorgan (JPM) predict an annual inflation reading of 0.5%, far below the ECB's target of 2%. A softer reading will also boost the chances of the ECB loosening its policy towards negative deposit rates.

Sunday, June 1, 2014

Municipal-bond prices have soared so far in 2014

Bond prices have soared so far in 2014,compared to the same time one year ago. 2013 was the market's worst year in almost two decades, after registering losses nationwide - ranging from Detroit's municipal bankruptcy-protection filing to pension costs in Illinois. The revival of the $3.7T muni-market comes as bond buyers attempt to find higher returns amid dropping U.S. interest rates. Yields on municipal debt fell to 2.325% this past Wednesday - their lowest in almost a year.

Thursday, May 29, 2014

The energy research group IHS has released a report stating the benefits of U.S. oil exports. Advantages include an added domestic investment of $750 billion, fuel prices lowered by 8 cents a gallon, and an added 394,000 jobs. Congress previously enacted a ban on exports after price shocks from the 1973 Arab oil embargo. With the possibility of Russia cutting its gas and oil supply to Europe, there is a greater focus on available U.S. energy.