Markets are approaching their highest level in two years

The market ended on a firm note today. The BSE Sensex closed at 17,644, up 86 points and the Nifty closed at 5,282, up 22 points. It is now once again reaching the highest level in two years, a level it had hit in January. The market has been up for seven weeks in a row and the chances of a correction next week are high. We expect a reaction by the middle of next week.

Asian stock markets were also higher today, despite a subdued overnight market in the US. Japanese exports were looking up due to the weak yen. The key benchmark indices in China, Hong Kong, Indonesia, Singapore, Taiwan, South Korea and Japan rose by 0.41%-1.55%. The Dow Jones rose 5.06 points (up 0.05%) to 10,841.21. The Nasdaq declined 1.35 points to 2,397.41 and the S&P 500 fell 1.99 points to 1,165.73.

Tata Motors (up 3.3%) is reportedly selling about 20% stake in its equipment and service unit Tata Construction Equipment Company (Telcon) to Japan’s Hitachi Construction Machinery Company for about $220 million. Bharti Airtel (down 1.1%) has set up two special purpose vehicles in the Netherlands and Singapore to facilitate the $9-billion Zain deal. ONGC (up 1.8%) is considering buying an asset in Canada that can produce around 10,000 barrels a day of heavy oil, worth at least $1 billion.

Patel Industries has received a $1-billion contract to develop a waterfront integrated township project in Mauritius. GMR Energy, a subsidiary of GMR Infrastructure (up 1.1%) plans to raise over Rs16,000 crore from a group of private equity players led by Singapore-based Temasek Holdings and banks to fund its expansion. Gitanjali Gems (ended flat) plans to divest 25% of its holding in each of its brands from September 2010. Videocon Industries (up 3.7%) launched its GSM mobile service. The company plans to invest Rs14,000 crore over the next three years to build up the wireless network and will cover 100 towns in the next 100 days. 

Institutional investors are on a buying spree. Foreign and domestic institutional investors purchased Rs653 crore and Rs156 crore yesterday, respectively.

Initial jobless claims in the US for the week ended 20th March were 4,42,000 which was a bit less than the expected total of 4,50,000 and down 14,000 from the prior week. The US Federal Reserve said on Thursday that it would remove the economic stimulus once the economic recovery looks strong. It also hinted that asset sales would be the biggest part in the exit strategy. European leaders decided on Thursday to create a joint financial safety net with the IMF to help Greece. As per the agreement, eurozone nations and the IMF will give a loan to Greece to help it tide over its debt crisis.

Maharashtra is trying to push value-added tax on homebuyers by passing it under a ‘composition’ scheme

The Maharashtra State Budget 2010 has proposed to introduce a ‘composition’ scheme for builders and developers, where 1% value-added tax (VAT) will be levied on homebuyers. This tax appears to be an insignificant amount. But if it is levied, the proposed tax will come with riders—buyers won’t be able to contest the legislation, and they will not be eligible for any refund once they pay this tax.

“The low rate of 1% is a sweetener for builders and developers. One of the reasons for introducing (the) composition scheme is to reduce legal resistance on the subject. Once this scheme is accepted, it cannot be fought in a court of law, since it signifies voluntary acceptance, notwithstanding whether the levy is legally tenable or not,” said Prem Chhatpar, a charted accountant.

Moneylife had reported yesterday (see here) on how builders and developers were forcing homebuyers to cough up VAT of 4.5% on their booked properties.

A few industry experts were aware that VAT was being pushed through the State Budget.

“Unless and until the Supreme Court gives a final judgement (on applicability of VAT on under-construction properties) within the intervening period, collection of this tax won’t be legal. 

“It is unconstitutional for the State government to introduce VAT on sale of immovable property, because it does not fall under their jurisdiction. The State has the power to levy tax on sale of goods or deemed sale of goods,” said Mr Chhatpar.

It is still not clear if the State government has scrapped the 5% VAT completely as there is no mention of the same anywhere in the Budget. It has introduced a fresh VAT of 1%. But the question of whether consumers who had earlier paid 5% VAT will get a refund still remains unanswered.

“The government did not say that it is bringing down VAT from 5% to 1% to help the real-estate industry. They said that they want to impose 1% (VAT) from 1st April,” said Pranay Vakil, chairman, Knight Frank (India) Pvt Ltd, a real-estate consultancy.

Fund houses are paying upfront brokerage of three years which includes trail commission to incentivise distributors for ELSS schemes

Fund houses are providing an advance lump-sum upfront brokerage for
equity-linked saving schemes (ELSS) in an attempt to woo distributors.

SBI Mutual Fund is giving an upfront brokerage of 2.25% for its Magnum Taxgain Fund which includes trail commission. No trail commission is paid for three years. Even Morgan Stanley is offering 2.5%-3% upfront commission for its diversified equity scheme, Morgan Stanley Growth Fund.
ELSS schemes usually have a lock-in period of three years. In the belief that an investor would stay invested in the fund for the entire period, fund houses are passing on the commission in advance.

According to industry sources, HDFC Mutual Fund is giving a three-year lump-sum commission of 3% upfront for its ELSS schemes.

“HDFC has two tax-saving schemes. When the entry load was banned by the Securities and Exchange Board of India (SEBI), HDFC was giving 1.75% upfront commission and for the other scheme they were giving 4% upfront commission but no trail commission for three years,” said a certified financial planner (CFP).

HDFC Mutual Fund declined to comment on the issue.

Sources say that the upfront commission spells good news for distributors but the flipside is that investors may start demanding rebate from distributors especially during March, when people rush to put money in ELSS schemes.

“The investor goes on a kickback shopping. Whoever gives the investor highest kickback, he will invest with him,” said an IFA.

“There will be no long-term loyalty with the customer. The new broker will not get any commission because it’s paid in advance in case of ARN change. SEBI officials say that rebating should not be given,” said a source.

If an investor opts to change his distributor, then the new distributor does not get the trail commission because it’s already paid in advance to the old distributor. Sometimes fund houses decide the terms of brokerage with the distributor.
An email query sent to Morgan Stanley remained unanswered.