Blog Posts by Deepak Shenoy

On Friday, 20^th April 2012, two mysterious events occurred on the National Stock Exchange (NSE). In the morning, Infosys futures crashed over 20% and quickly recovered back to the original level. In the afternoon, just before 2:30pm, Nifty futures crashed 6.7% from the 5,350 level back down to 5,000, and then nearly instantly recovered back to 5200. Both crashes were blamed on algorithmic trading.

Program trading has been blamed for "flash crashes" for nearly 25 years. In October 1987, US markets took a nose dive on a single day and for years, the blame game went on with the primary suspect being program trades. This is understandable. Since a computer can trade with much faster speed than a human, it can set off a spiralling price change by continuously buying or selling with no real control. Why then, should we even allow algorithmic trading?

Program trading can provide for great trading opportunities with less human error. Much of the arbitrage that used to happen in Indian markets

Much has already been written about a new proposal in the Budget, where a private company is required to "justify" the valuation it receives when an Indian resident investor buys shares in it. This doesn't apply to public companies, or those in which the investment is by a venture capital fund. It also doesn't apply if you buy shares at "par" — that is, at the face value of the shares.

When a company is created, shares are issued to the initial investors at face value, in proportion to their investment. For example, take a company started with 100,000 rupees, with two founders putting in Rs. 60,000 and Rs. 40,000. Each will get 6,000 and 4,000 will get shares of Rs. 10 face value, respectively, for a total of 10,000 shares.

The founders work for 6 months and build a prototype for a software to revolutionize online payments. They demonstrate this, with a business plan, to an angel investor, asking for Rs. 20 lakh as an investment to hire people, buy some equipment and for marketing.

At

India may be a poor country but we all differ on what "poor" is. There was a furore last year when a per-capita income of Rs. 32 a day was considered "poor" — because Rs. 32 buys you nearly nothing these days. But that is hardly true if you consider the average size of a household is four, and that this means the per-household line for poverty is Rs. 128 per day. There is a more substantial Rs. 3,800 per month, a figure that most of the people, who were outraged at the Rs. 32 per day, will find their household help earns per month. (And in fact, around what the much-maligned rural employment guarantee scheme provides for one household member for 100 days a year)

"Poor" is what you make of it. At a broad level, being poor means the inability to afford what one would consider a basic necessity or standard of living. What I might consider a basic necessity will be different from someone else's; if I think access to clean toilets are a basic human need, someone else might argue that there

Vodafone's Dutch Subsidiary bought a company in the Cayman Islands, in a transaction paid for in foreign currency. Vodafone is a buyer, and not subject to their worry for the last year or so? That the Indian Government wants to tax them.

India has a case. The company being bought controls Vodafone India, one of the largest Telecom operators here. The deal was done abroad purely to avoid Indian capital gains tax that Hutchison would otherwise need to pay, if they sold the Indian company instead. Nearly all of what the Cayman Islands based entity owned was the Indian company's assets in India. Yes, the tax would apply to Hutchison, but Vodafone should have cut taxes on the purchase and paid that to the Indian government.

Vodafone went to court and after a long battle, won the case. The Court specifically said that the law wasn't clear on whether such transactions, done abroad, are subject to Indian capital gains tax. The Direct Tax Code (DTC) does clarify, but the bill approving the DTC

The Service Tax provisions in the budget detail out 17 areas on which you will not be charged a tax, and for absolutely everything else that involves a service, you will need to pay 12 % (plus cess). The seventeen areas are:

1. 1. Services by the Government or local authorities: These will include such services like getting a passport, a driving license, paying municipal taxes, car registration fees, police fines and so on. What you pay for such services will not include any service tax.

   But of course, there are exceptions. Service tax will still be applicable on:
   - Speed or Express Post, and life insurance bought from a post office
   - airport services
   - government services provided to businesses. (Companies will pay it on the annual filing charges payable to the Registrar of Companies, for instance).

2. 2. Services by the Reserve Bank of India. They won't tax the ones that print the money!

1. 3. Foreign consulates and embassies in India. Hopefully this will mean to visa fees as well.

1. 4.

Pranab Mukherjee has presented a budget that has left everyone wondering what really happened and whether we should give it more attention than Sachin's hundredth hundred. But after you have replayed the highlights over and over again, you might find it less heartening to see that customs and excise duty are higher, and you're going to have to pay more to watch your cricket matches in future.

But it could have been worse. Budgets come with expectations, and in this budget, the Finance Minister has ignored way too many of them.

Expected, in this budget, were direct tax cuts — income taxes have been cut in some way or the other in the last few years. What we got was a tax hike of some sort. The government is struggling for revenue and facing high expenditure, and it has raised both excise duty and service tax to 12% (from 10%)  Also, now every service comes under the service tax regime, barring 17 areas (such as school education, government service and so on). In addition, the imposition

In the run up to the budget, and a few days after, the markets have reacted differently. The average budget day move, since 2000, is a tiny 1.08%. But that masks the volatility that the budget has seen, in both directions:

Bud Stock Moves

In the last two years, budget days have been incredibly benign and positive. In those budgets, we have expected, and got, tax cuts in various measures. In 2009, the expectations ran away, perhaps, as the markets toppled after both the interim and final budget presentations.

But are budgets usually positive? If you look at the budget moves from one month earlier to the previous day of the budget, and then onwards to one month after, is there a clear picture that emerges?

Bud And Stock Markets

There is no single direction the market has taken after the budget, based on its trajectory before the budget. In 2001, while the markets moved up more than 4% on budget day, they ended up falling 15% more in the subsequent month. The 2006 budget saw a flat budget day, and a benign period prior, and

Diesel prices are way below the price of petrol for a long time now, with the difference of about Rs. 24 in Delhi (petrol costs Rs. 66). The reason: the government controls the retail price of diesel. Even if the oil marketing companies (HPCL, BPCL and IOC) lose money on selling diesel, that's the rate they need to sell at.

But this has created many problems. For one, our oil "under-recovery bill" is out of control. With Brent crude at $125 per barrel and the rupee-dollar equation at Rs. 50, the input price of our fuel basket is above Rs. 6,000, among the highest ever. Prices of diesel haven't been revised up since Jun 2011, when the price of crude was $108, and the rupee was around Rs. 45 to a dollar. Since then, crude has gone up 15% while the rupee has fallen about 10%, which is a near 25% increase in cost.

This difference is currently sitting as a loss on the books of the Oil Marketing Companies (OMCs) who hope, fervently, that the government will reduce it, by first transferring