Commentary

Vodafone has won the case against the Income Tax department, with the Supreme Court ruling that the IT department has no jurisdiction to tax Vodafone.

Vodafone had acquired Hutch a few years back for USD 11.2 billion, and the acquisition wasn’t in India; the owner of the Indian company was a Hong Kong company (Hutchison Group), and the transaction was in the Netherlands/Cayman Islands. Effectively since there was no money exchanged in India, no one should have been taxed by India. But the IT department maintained that this was effectively a sale of the Indian assets so capital gains would apply, and Vodafone would have to pay.

This is strange, for multiple reasons. Firstly, it is never true that a buying company is responsible for capital gains tax – it’s always the seller. The reason the IT department targeted the buyer – Vodafone – was that they couldn’t do a darn thing about the seller, which was a Hong Kong company. This is stupid because you don’t go after someone just because you can’t go after the real culprit.

As an aside: This reminds me of a story of three teams of cops – British, American and Indian – sent into a forest to capture a lion. The American team brings a lion within an hour. The British team comes back in 2 hours successfully, but there’s no sign of the Indian team even after 10 hours. Fearing the worst, the camera crews and rescue staff go into the forest to find the Indian cops roughing up a bear tied to a tree, saying, “Now admit you’re a lion”. ( “Bol Tu Sher Hai” )

That sounds like the IT department in this case – when it can’t find the real culprit, catch anyone in sight.

Secondly, the issue was about the Indian assets being transferred, by virtue of buying out the owning company. But similar tax rules should have applied when Merrill Lynch was acquired (effectively) by Bank of America – effectively, BoA should have paid the capital gain on whatever ML owned in India, even if the merger was between two companies abroad? And so on for every single merger? Doesn’t entirely make sense.

(Btw, these structures are also used when transferring property – use a company to buy a piece of property, and when you need to sell it, sell the company instead. The idea is to avoid the 5% to 7% stamp duty on property transactions.)

Also, since tax havens have been used, it could be that this deal is unique in that it is executed abroad purely for the sake of avoiding Indian tax. This will be a problem in the new Direct Tax Code, even if this particular judgement went for Vodafone. But the IT department will have to go and hit the "seller” for the tax, in this case, the Hutchison Group. I wonder why a case against them hasn’t been initiated already.

The win also positions Vodafone well for an Indian IPO that they are planning. Also, the clarity is useful in that buyers can’t be chased for cap gains – sellers may still be on the dock for it.

Subra debunks the myth that real estate prices can’t fall. I agree with him. Real estate prices have fallen big time in the past, and will continue to when there is a crisis. And there is a crisis going on right now.

Only sellers in Parsvnath, says Moneycontrol.The stock is down 10% at the lower circuit. But then we are at two year lows and looking worse.

Both houses adjourned because the opposition had an uproar on the price rise. This is policy and action paralysis. With over 54 bills that need to be passed, this is stalemate. There is no point having elected reps if they cant have a decent discussion in parliament.

China’s PMI (prelim estimate) came down to 48 from 51 in October. This is preliminary, but a <50 number indicates contraction, which is not very good. In the same article, they show comparative inflation in the BRIC countries:

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month.

A brilliant Guide To The Eurozone Crisis by Percy Mistry.

After the BSE cancelled all futures trades in Mahurat trading on Diwali due to a rogue algo program, SEBI has decided to investigate high frequency trading for risk management.

The stock market regulator, the Securities and Exchange Board of India (SEBI), said that it will do a thorough review of the risk management system in high frequency or algorithmic trading. Such an exercise aims to stop repetition of the Muhurat trading mishap on the Bombay Stock Exchange (BSE).

On October 26, the BSE was forced to annul all the derivatives trades. It said that it observed large movements in Sensex futures during the special session, conducted as Muhurat trading, for Diwali. This has again raised the question of risk management measures in high frequency trading.

But the reason heard that the BSE annulled all trades was that one member stood to lose 100 cr. That member should have been forced to lose that 100 cr. , one thinks, to send a message that if you screw up, it’s your problem. But no, now they will investigate if algo traders have “risk control”.

I’ll tell you what is likely to happen. SEBI will ask for an audit. The algos are too complex to be actually revealed, so each algo firm will do some random demonstration of how well their risk functions work, and SEBI will be satisfied. Nothing will change; if they try to change the rules at the exchange itself, in terms of capital requirements, even regular prop shops will get affected and that is a no-no.

More interesting is this part:

The SEBI chairman endorsed the concerns of the trading community that trading costs, of buying and selling shares, have gone up. “Time has come to re-look. SEBI is in dialogue with the Government, which will take steps at an appropriate time,” he assured.

The Finance Ministry is working on a proposal to reduce the Securities Transaction Tax (STT), which is levied on buying and selling of shares in the cash and the derivatives markets. At the same time, the Ministry plans to amend the Stamp Duty Act to have a uniform duty nationwide.

Removing STT will hugely help algo traders, most of whom are darn scared of doing option trades that involve being long options to expiry, simply because STT takes away everything. I’ll expand if anyone’s interested.

The awesome Devangshu Datta writes about Behavioural Quirks:

Very few investors have the self-awareness required to analyse their own performances as objectively. Even fewer possess the self-discipline to change bad methods. Yet, it often doesn't take much in terms of time or trouble. All it really takes is the humility to admit that not all losses are due to ill-fortune.

Before entering into investing, an individual needs to ask himself a few questions. One is, how much is he prepared to lose? A second is, what is the minimum return he wants? The third is, how long is he prepared to wait for those returns? If the answers are honest and realistic, he has a template for investing methods. He knows his risk:return profile.

The idea is to have a little discipline. But like common sense, it’s hard to find!

(Disclosure: DD is a dear friend, but he’s awesome anyhow)

MF Global has filed for bankruptcy as the European debt crisis claimed its first big profile victim in the broker-dealer space. The company, led by ex-Goldman Chief and ex-US-Senator Jon Corzine, went belly up after a series of bets on Euro debt went sour – largely the 50% haircut on Greek bonds as agreed recently.

The bankruptcy, the seventh-largest by assets in U.S. history, is reminiscent of 2008 when Lehman Brothers collapsed at the height of the financial crisis. But market participants said the impact from this collapse, far smaller, would likely be contained.

MF Global traders and counterparties were left scrambling and confused on Monday, as MF Global halted its shares, but did not file for bankruptcy until well after the U.S. markets had opened.

…

Three traders wearing MF Global jackets were seen leaving the Chicago Board of Trade prior to the opening of pit trading and floor sources told Reuters they had been turned away after their security access cards were denied.

The New York Federal Reserve suspended MF Global from conducting new business with the central bank. CME Group Inc, IntercontinentalExchange Inc and Singapore Exchange Ltd and Singapore's central bank all halted the broker's operations in some form except for liquidations.

I had visited the MF Global India office in Mumbai, in 2008, where we’d had some business when I was part of Moneyoga. The place was great and honestly I thought they were one of the most refined brokers out there. I hope the people there are safe, even if the bankruptcy will take its toll.

This doesn’t look like another Lehman. But hey, even Lehman didn’t look like Lehman when it first happened.