Yesterday, once more: Will LIC come to govt’s rescue again?


On January 13, 2015, the ministry of finance declared the indirect tax collection numbers for the period April to December 2014. And they aren’t looking very impressive.
The government managed to collect Rs 3,77,648 crore during the period, in comparison to Rs 3,54,049 crore it had managed to collect during the same period last year. This is a jump of 6.7%. Indirect taxes include excise duty, customs duty and service tax.
The trouble is that the indirect tax collection target for this financial year is Rs 6,24,902 crore. The total amount collected in the last financial year stood at Rs 5,19,520 crore. Hence, it was assumed that the indirect tax collection would grow by 20.3% from what was achieved last year.
What this tells us clearly is that the growth of the indirect tax collections is nowhere near what it was assumed to be. In the first nine months of the year, the government has managed to collect only 60.6% of the year’s target, meaning that 39.4% of the target still remains to be collected in the last three months of the financial year. Also, unlike direct tax, the collection of indirect taxes is not totally skewed towards the end of the year.
In a report titled
Will the Government Meet the Fiscal Deficit Target for F2015? analysts Chetan Ahya and Upasana Chachra of Morgan Stanley point out that “tax collection picks up seasonally toward the end of the fiscal year, with direct tax collection between December and March at 51.4% of total (five-year average) and indirect tax collection at 42% of total.”
So, between December and March, in the last five financial years, the government managed to collect 42% of the indirect tax target set for the year. This time around it needs to collect 39.6% of the annual target between January and March, which will be a tough ask indeed.
It needs to be pointed out here that during the last five years, the economic growth for a significant part of the period was greater than 8%. Currently, the economic growth is around 5%. Hence, indirect tax collections will slowdown to that extent.
Take the case of excise duty. In the first nine months of the financial year the government managed to collect Rs 1,19,719 crore of excise duty, a jump of just 1.6% in comparison to the last financial year. When the budget was presented the government had assumed that excise duty collection will jump by 15.4% during the course of the year.
The government has increased the excise duty on petrol and diesel thrice since October 2014. The third increase came on January 1, 2015, and hence, the excise duty collected because of this increase are not a part of the just released indirect tax data.
The higher excise duty on petrol and diesel is expected to boost the indirect tax collections between January and March 2015 by Rs 14,600 crore, write Ahya and Chachra.
At the same time the “removal of excise SOPs for autos and consumer goods sectors from December 31 [is]expected to add ~Rs 2,400 crore between January and March,” feel the Morgan Stanley analysts.
But even this will not help the government meet its excise duty target of Rs 2,07,110 crore. Taking into account average collections over the last five years and this year’s indirect tax collections it is highly unlikely that the government will be able to meet its indirect tax target for this year. My guess is that it will fall short of the target by around 8-10%.
This gap will amount to Rs 50,000-60,000 crore (~ 8-10% of indirect tax target of Rs 6,24,902 crore). How will the government fill this gap? One way as I have often pointed out in the past will be to cut expenditure.
A recent newsreport in the Business Standard points out that “on an average, key ministries, including those of agriculture, rural & urban development, and infrastructure, might see cuts of up to 20 per cent in Plan allocation compared to the FY15 Budget estimates.” This can’t be good news in an environment where corporate investment is slow due to excessive debt levels.
The government will also force public sector units to shell out higher dividends as it had done last year as well. The dividends from public sector units were supposed to contribute Rs 29,870.12 crore to last financial year’s budget. Ultimately the government ended up collecting Rs 43,074.58 crore. This year’s target is Rs 27,815.10 crore. The actual number this year will also be considerably higher.
What adds to the troubles of the government is the fact that it looks highly unlikely to meet the disinvestment target as well. Disinvestment of shares in public sector units was expected to bring in Rs 43,425 crore. Until now only Rs 1,700 crore has come in through this route. Now news coming in suggests that bankers are having a tough time lining up investors for the shares of companies that the government wants to disinvest.
The Economic Times reports that: “Bankers are finding it tough to convince foreign investors to commit money in the proposed share sale as the government is yet to implement reforms that it had promised while marketing the issues previously.”
Whenever such a situation has arisen in the past, where the market is not ready to buy shares of public sector companies, the government has forced the Life Insurance Corporation (LIC) of India to come to its rescue by buying these shares.
The money invested by LIC is essentially the hard earned savings of millions of people and it is not fair to use it to help bail out the government all the time. From the looks of it something similar seems to set to happen this year as well, which is clearly not good news.
What does not help the government is the fact that it has very little time left to carry out the disinvestment. For reasons, which only the government can best explain, there has been barely any activity on the disinvestment front over the last six months and only now things are looking to pick up. But it may be a case of too little too late.

The column originally appeared on as a part of The Daily Reckoning on Jan 15, 2015

Why minority investors protesting against Maruti Suzuki stinks of hypocrisy

maruti-logoVivek Kaul 
The minority shareholders of Maruti Suzuki are not a happy lot these days.
They are protesting against the decision of Maruti Suzuki’s parent company Suzuki, to establish a car plant in Gujarat, under its wholly owned Indian subsidiary, Suzuki Gujarat. The cars produced by Suzuki Gujarat will be sold to Maruti Suzuki.
This has not gone down well with the minority investors. The
Business Standard reports that seven mutual funds (HDFC MF, Reliance MF, UTI MF, DSP BlackRock MF, SBI MF, Axix MF and ICICI Prudential MF) have written to the company against this proposal of setting up a new car plant in Gujarat under the aegis of Suzuki Gujarat. The Life Insurance Corporation(LIC) of India, the big daddy of Indian stock markets, has also sought details on this from Maruti Suzuki.
There are various questions that are being raised on this decision.
Analysts point out that that Maruti Suzuki currently has around Rs 7,000 crores of cash. Why is this cash not being utilized to make cars, rather than just buy them from a subsidiary and then sell them? Also, the depreciation benefits on setting up a new plant would help the company bring down its effective rate of tax, the analysts point out. In short, it makes immense sense for the company to set up a new car plant, instead of buying cars from a subsidiary of its parent company.
The analysts further point out that with this move, Maruti Suzuki might be in considerable danger of being regarded just as a trading company, which buys cars and then sells them, rather than a manufacturing company. If this were to happen, the stock would be de-rated.
As a fund manager told the Business StandardTrading concerns (companies) trade at significantly lower PEs [price to earning ratios] than manufacturing ones.”
News reports suggest that the Securities and Exchange Board of India (Sebi) is looking into the issue, given that it is a related party transaction. Suzuki owns 56.21% of Maruti Suzuki and it owns 100% of Suzuki Gujarat.
The Companies Act 2013, defines a material related party transaction as one which in aggregate exceeds the higher of 5% of the annual turnover of a company or 20% of its networth. A report in the Mint suggests that Maruti Suzuki will take approval from its minority shareholders on this.
Prima facie it seems correct that the minority shareholders are protesting. But the question is where are they when the government of India is ripping the public sector units? Take the case of Coal India, which on January 14, 2014, declared an interim dividend of Rs 29 per share. The government owns 90% of the company and as a result got a total dividend of Rs 16,485.71 crore.
The government also earned a dividend distribution tax of Rs 3,113.05 crore, thus netting a total of Rs 19,598.76 crore.
This dividend was essentially declared to help the government meet its fiscal deficit target. Fiscal deficit is the difference between what a government earns and what it spends. The money handed over to the government of India could have been used to produce more coal and thus help India become self sufficient when it came to the consumption of coal.
ICICI Prudential MF is one of the seven mutual funds which have written to Maruti Suzuki Ltd. Data from shows that as on January 31, 2014, the mutual fund owned Rs 72.91 crore worth of Coal India shares through the ICICI Prudential Dynamic Fund. Why was there not a whiff of protest from ICICI Prudential MF, when the government decided to rip off Coal India? Like it owns shares in Maruti Suzuki, it also owns shares in Coal India. The same was the case with LIC, which owned 1.83% of Coal India’s shares as on December 31, 2013.
Or take the case of ONGC being forced to pick up 5% stake in the Indian Oil Corporation from the government of India.
This is expected to cost ONGC around Rs 2,500 crore. This is nothing but a move by the government to strip the company of the cash it has on its books.
Data from shows that HDFC Mutual Fund, as on January 31, 2014, owned shares of ONGC worth Rs 207.23 crore, through HDFC Top 200 fund. It also owned shares worth Rs 165.08 crore through HDFC Equity Fund. Why did HDFC MF not protest when the government was busy ripping off ONGC? LIC decided to keep quiet in this case as well. As on December 31, 2013, the insurance major held 7.82% of the total number of shares of the company. No mutual fund has protested against the government forcing public sector banks to pay interim dividends. As has been noted here on FirstBiz, the public sector banks are not in great shape. . As the latest RBI Financial Stability Report points out“Among the bank-groups, the public sector banks continue to have distinctly higher stressed advances at 12.3 per cent of total advances, of which restructured standard advances were around 7.4 percent.”
The stressed asset ratio is the sum of gross non performing assets plus restructured loans divided by the total assets held by the banks. In this scenario where the stressed assets of public sector banks are on the higher side, it makes sense that these banks not be forced to declare interim dividends. The money thus saved should be used to shore up their capital.
Given these reasons, the protest of mutual funds and LIC against Maruti Suzuki, basically stinks of hypocrisy.
The article originally appeared on on March 5, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek)