Denmark Seeks EU Fix To ‘Div-Arb’ Deals

A Danish politician is asking the European Commission to examine stock loan deals that drain the country and many of its neighbors of tens of millions of dollars in forgone tax revenues.


The request, made by Jeppe Kofod, a Danish member of the European Parliament, could open a new front in lawmakers' efforts to stamp out the deals, which help large shareholders avoid paying their share of taxes on dividends paid out by corporations in Denmark and elsewhere.


"I have asked the Commission to examine the extent of the problem - both in relation to Denmark and in general." Kofod said in an interview. "They also need to look at whether it is legal. If so, we must confront it with regulation."


The Commission initiates and implements European Union policy across the bloc's 28 member countries, of which at least 13 - including Denmark - are losing revenue to the tax avoidance deals, according to confidential trading records obtained by ProPublica. That count excludes Germany, which passed a law in June to end the deals there.


Kofod made the request to the Commission hours after ProPublica and Børsen, Denmark's biggest daily finance newspaper, disclosed that the transactions are costing the small Scandinavian country about 400 million Danish crowns, or $60 million, in tax revenue per year, though that's a conservative estimate.


For Denmark, whose population totals 5.7 million, the loss amounts to about $10 per resident annually - enough for politicians to care about shutting down the transactions.


If the Commission acts on Kofod's request, it could potentially lead to legislation that ends the costly practice in many markets. It's thriving in Sweden, France, Poland, Finland, the Netherlands, Spain, Austria and Belgium, among others.


"It is not just a Danish problem, but also an international problem," Kofod said.


In the transactions, known as dividend arbitrage or "div-arb," banks temporarily transfer large holdings of stock from tax-liable shareholders to investors with lower or no tax obligations. The transfers, which occur for just a few days around dividend time, help the shareholders capture a larger share of dividend payments by avoiding taxes. They split the savings with the banks and tax-free investors who enable the deals.


Investors have said they don't actively seek out div-arb transactions. Vanguard, one large U.S. mutual fund manager whose trades ProPublica has profiled, said it passively lends shares to earn extra income for its investors in the form of lending fees from holdings it owns on their behalf.


Banks, for their part, have said the activity is legal and that when they lend investors' shares they do so in full compliance with local regulations - putting the onus on lawmakers and regulators to act.


Some experts have questioned the legality of div-arb deals, however. And even if they are legal, officials like Kofod say investors should shy away from them: "I call it pure and simple tax evasion," he wrote in an op-ed published after our report.


In the op-ed, Kofod said he has drafted policy recommendations to tighten tax-evasion laws more broadly. The recommendations were approved by the European Parliament but the Commission must still decide whether to forge them into actual legislation. "If bankers knowingly help customers with tax evasion their authorization to work in the banking world should be torn apart," Kofod wrote.


Lawmakers also turned up pressure on Denmark's tax minister, Karsten Lauritzen, to prevent further losses from div-arb deals.


"We must investigate the problem and ways to get rid of it. I will ask the minister to do that," said Louise Schack Elholm, a member of the Danish Parliament and tax spokeswoman for the ruling Liberal Party.


Jeppe Bruus, a Danish MP who sits on the Parliament's Tax Committee, demanded that the Danish Ministry of Taxation halt further reclaims of dividend taxes for investors who lend out their shares.


"The (financial) sector's pressure on the system emphasizes the need for very strict regulation. To put it bluntly: It flows with rottenness," Bruus said.


Lauritzen, who is currently on vacation, could not be reached for comment.


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Nifty, Sensex may struggle to head higher – Wednesday closing report
We had mentioned that Nifty, Sensex momentum continue to be up in Tuesday’s closing report. The major indices of the Indian stock markets ended flat on Wednesday after listless trading. The trends of the major indices in the course of Wednesday’s trading are given in the table below:
Profit booking, coupled with disappointing macro-economic inflation data and lower crude oil prices, subdued the Indian equity markets on Wednesday. Consequently, the key indices closed the day's trade on a flat note, as heavy selling pressure was witnessed in automobile, consumer durables and capital goods stocks. The NSE Nifty market breadth was skewed in favour of the bears -- with 17 advances and 34 declines.
Initially the benchmark indices opened on a higher note, in-sync with their Asian peers. However, equity markets soon ceded their initial gains, as profit booking hampered the upward trajectory. Besides, lower crude oil prices, weak rupee and disappointing inflation figures for June eroded investors' confidence. Nevertheless, healthy progress of monsoon season, expectations of robust quarterly results, recapitalisation of state-run banks supported prices at the lower levels. Profit booking ahead of key event risks and disappointing inflation figures dragged the Indian equity markets lower. However, good progress of monsoon season, expectations of healthy quarterly results, more economic reforms supported prices at the lower levels. Nifty traded on a flat note due to profit booking at higher levels. Banking and pharma sector stocks traded with mixed sentiments on profit booking.
The Cabinet on Wednesday approved 15% divestment of the government's stake in National Buildings Construction Corporation Limited (NBCC) aiming to collect approximately Rs1,706 crore. “The Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, has approved the disinvestment of 15% paid up equity of NBCC out of government’s 90% shareholding,” the Union Finance Ministry said in a statement. The balance 10% of the equity is held by the public. “It would result in estimated receipts of approximately Rs1,706 crore to the government. However, the actual realisation amount will depend upon the market conditions and the investor interest prevailing at the time of actual disinvestment,” the statement said. The government aims to generate Rs56,500 crore through disinvestment in PSEs this financial year. During 2015-16, the government could manage to meet less than half the budget estimates at Rs25,312 crore as against the target of Rs69,500 crore. "The disinvestment would broadbase NBCC's shareholding and enhance the disinvestment receipts for making them available to the government for utilisation as per disinvestment policy," the statement added. NBCC India shares closed at Rs229.80, down 10.72% on the BSE.
The top gainers and top losers of the major indices are given in the table below:
The closing values of the major Asian indices are given in the table below:


Fund crunch will limit PSB growth at 9%, slowest in past two decades
Limited availability of growth capital for public sector banks (PSBs) could pull down their loan growth trajectories to a CAGR of 9% over FY16-FY19, says India Ratings and Research (Ind-Ra). 
This growth is the bare minimum needed to generate sufficient spreads that can absorb our expected operating and credit costs over this period, the ratings agency says. 
Ind-Ra says, "The growth is likely to be lower at 8.1% over FY16-FY19 for mid-sized PSBs with a few banks witnessing a loan book decline. Even for this growth, Ind-Ra estimates the average Tier-1 capital needed during FY17-FY19 to be around 22% of FYE16 CET (36% for mid-sized PSBs). This estimate is over and above the capital committed under Indradhanush programme."
While Ind-Ra says its expectation of limited credit demand beyond the refinancing requirements of levered corporates appears to be largely in line with the estimated credit supply for FY17, a sustained moderation in PSBs' credit growth is likely to start impacting the nominal gross domestic product pick-up for FY18-FY19.
The ratings agency expects non-performing loan (NPL) aging to keep credit costs for PSBs at elevated levels of 170-180 basis points (bp) in FY17 compared with 280bp in FY16, continuing the pressure on profitability and consequently, some PSBs would continue to report losses in FY17. 
Following the asset quality review (AQR) by the Reserve Bank of India (RBI) during first half of FY16, a sizeable proportion of NPLs, including slippages from FY15, is likely to shift to the next classification bucket over FY17-FY18, attracting higher provisioning. The quantum of fresh slippages from the large corporate exposure may come down during FY17-FY18, the ratings agency feels.
Ind-Ra says it expects un-provided non-fund-based exposures of large stressed accounts to continue to pose a threat to profitability for FY17-FY18. "However, the AQR exercise has ensured recognition of impaired loans and higher provisioning for cyclical sectors in deep stress, such as iron and steel, and a large proportion of stressed corporates that are yet to be provided for now belong to the infrastructure sector. Hence, stress resolution with a going concern approach,  such as the Scheme for Sustainable Structuring of Stressed Assets (S4A) may prove to be effective," it added.
Ind-Ra's support floor for PSBs remains unchanged as the agency expects, even under severe stress scenario, the potential equity requirement or the bailout cost, to avoid approaching the point of non-viability triggers, to be manageable at Rs8,500 crore to Rs10,000 crore. This, the agency says, however, could change if the government of India changes its support stance. 
The agency believes that the chances of additional tier 1 (AT1) coupon deferral remain high for banks with depleted reserves. It says, "Elevated credit costs are likely to keep profits subdued which would put PSBs with low, or in some cases non-existent, revenue reserves under pressure. However, we believes that the ability to service AT1 bonds varies widely within PSBs with a few banks benefitting from having built significant retained earnings over the years and a few with their stronger standalone profiles."
Ind-Ra estimated that at this projected growth PSBs still require a Tier-1 capital of Rs1.2 lakh crore over FY17-FY19 including Rs40,000 crore in common equity tier 1 and Rs71,000 crore in AT1 bonds. The need for a pickup in AT1 market remains critical to managing the capital availability through the Basel-III transition. A mere Rs18,000 crore of AT1 bonds have been issued so far, with insurance and pension funds, which have the requisite liability profile and risk appetite to invest in these instruments, keeping away on account of regulatory hurdles and inadequate price discovery. 
Ind-Ra believes that barring a few large PSBs, most banks are looking to consolidate their balance sheets, reduce risk-weighted assets, and preserve capital.


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