5 Paisa - Features of indian stock market

We have been positive on the markets for the last four to five months. The underlying factors still continue to be positive, but recent issues are pointing towards a more cautionary stance. First, is the ghastly communal violence in Gujarat. Once again we expect most government activities to come to a standstill as it gets embroiled in political battles. Secondly, the electoral reverses in Uttar Pradesh, Punjab and Uttaranchal means that the government itself may pussyfoot on important decisions and allies may flex their muscles against seemingly unpopulist decisions. Also without the support of Congress in the Rajya Sabha many legislations will anyway remain non-starters.

Apart from the political scenario and its fall out, the Ministry of Finance has reportedly asked SEBI to ensure that companies do not pay out hefty dividends in this fiscal ahead of the changes in budget proposals. The recent move by the government to tax dividends in the hands of the recipients has started a scurry among corporates to declare dividends before the new provisions become law. Thus, they will be postponing the effectiveness of the new legislation by a year. It has happened in the past when the tax was hiked by 10% to 20%. The stock exchanges can stop this from happening since there is a mandatory 30-day notice to be given before finalizing the date for dividend. As long as the settlement schedule does not get affected stock exchanges do not have any problem in waiving the listing condition.

If Finance Ministry has its way then the corporates can hit back by not declaring any dividend in next fiscal or declaring puny dividends. Many corporates can reward shareholders the HLL way by announcing bonus debentures on which investors would pay capital gains tax during redemption. Anyway growth companies these days do not pay hefty dividends – in fat in US they do not pay any dividends. Instead companies can look to buy back shares ion order to boost shareholder value. There is only one problem – a majority of the companies that have rushed to declare dividends have large holding by individual promoter groups. And hence the rush to declare dividends so as to save the promoters the tax incidence. But whatever the companies may do the government’s move can spoil the feel good factor at the bourse for some time and also result in it not gaining any hefty revenues if companies decide to forgo dividends altogether. In days of 1 day rolling settlement, the mandatory notice period should also be suitably reduced.

The disinvestment in Neyveli Lignite may get delayed due to some archaic laws. The stock that has seen a tremendous run since the PSU bulls were unleashed. Neyveli Lignite is governed by the Coal Mines Nationalisation Act and under the Act only public sector companies can sell coal to end-users. The change in legislation, which will allow private players to enter into coal and lignite mining, has been pending for quite sometime and nothing has been done about it. Now power sales used to account for as much as 90% of the company’s turnover till last year. But with expansion of its mines, power sales accounted for about 60% of the company’s sales in 3QFY02. If the government cannot amend the Coal Mines Nationalisation Act suitably, it has two choices:

But the need of the hour is for the government to act fast. Any delays or let up in the urgency showed so far would dampen the stock markets and whatever little feel good factor that exists. Pechiney has already evinced interest in taking a stake in National Aluminium (Nalco). Nalco is likely to firm up on the back of this development. On the other hand, the government has failed to increase the foreign shareholding limit in PSU banks, in line with the relaxation in norms for private sector banks. As a result SBI has been under the sellers hammer even as other bank stocks are rallying. Given the above, it is time to be cautious on the markets. Book at least partial profits where gains have been made. Leading IT shares may see some gains as reports of fresh orders and improved economic outlook in the US keep doing the rounds.

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