BQuick On Feb. 27: Top 10 Stories In Under 10 Minutes

This is a roundup of the day’s top stories in brief.

2. Fit-And-Proper To Run Equity Broking But Not Commodity Broking?

The market regulator found subsidiaries of India Infoline, Motilal Oswal and Anand Rathi groups not fit and proper to offer commodity broking services for their alleged role in the Rs 5,300-crore payments scam at the erstwhile National Spot Exchange Ltd. But does that put the other businesses of these financial services groups at risk of facing similar action?

• SEBI in its order said close association with the NSEL and serious adverse observations of the various courts and authorities has “seriously eroded the reputation and belief in competence, fairness, honesty, integrity and character of the noticee”.
• In this case, India Infoline Commodities Ltd., Motilal Oswal Commodities Broker Pvt. Ltd. and Anand Rathi Commodities Ltd.
• The question to then ask is will they behave differently in other segments, Amit Tandon, co-founder and managing director of shareholder advisory firm IiAS, told BloombergQuint over the phone. “Should the clients in those segments expect to be treated any differently?”

SEBI’s order is clear but it leaves an unanswered question.

3. Markets Fall On Geopolitical Tensions

Indian equity benchmarks ended lower for the second day, erasing morning gains, after tensions between India and Pakistan continued to escalate.

• The S&P BSE Sensex ended 68 points or 0.19 percent lower at 35,905 after rising nearly 400 points intraday.
• The NSE Nifty 50 Index ended at 10,806, down 0.26 percent.
• Seven out of 11 sectoral gauges compiled by NSE ended lower, led by the NSE Nifty Media Index’s 0.88 percent decline.
• On the flipside, the NSE Nifty PSU Bank Index was the top sectoral gainer, up 0.52 percent.

Follow the day’s trading action here.

U.S. stocks fell, tracking a decline in European shares, on fresh headwinds from disappointing corporate earnings and geopolitical tension in Asia.

• The dollar was steady and Treasuries fell as traders awaited the second half of the Federal Reserve chairman’s testimony to Congress.
• The benchmark S&P 500 opened lower, led by declines in heath care and information technology shares.
• The pound headed for its highest close since last June, spurred by a promise from U.K. Prime Minister Theresa May for a vote to delay Brexit if her proposed deal fails.
• Oil posted its second daily gain as Saudi Arabia, OPEC’s most powerful member, signaled that it’s inclined to extend supply cuts into the second half of the year.

Get your daily global markets fix.

4. Biggest Earnings Downgrades And Upgrades

Earnings estimates of more than half of widely tracked Indian companies have been lowered after the third-quarter results as the recovery has fallen short of analysts’ expectations.

• Earnings per share forecast was cut for 151 of the 253 companies tracked by at least 10 analysts, according to data compiled by Bloomberg.
• The deepest cuts were witnessed by sectors like automobiles, cement and commodities on weak outlook.
• Construction, pharmaceuticals, consumer and retail saw the biggest upgrades.
• The Nifty 50 earnings per share missed the consensus estimate by 19 percent in the quarter ended December, according to BloombergQuint’s calculations.

Here are the stocks with the biggest jump in EPS estimates.

5. GST Evasion Alert

The government detected goods and services tax evasion of around Rs 20,000 crore between April 2018 and February 2019.

• Of the Rs 20,000 crore, Rs 10,000 crore was recovered, John Joseph, member (investigations) at the Central Board of Indirect Taxes and Customs, said while speaking at an event organised by industry body Assocham.
• The government will take more measures to increase compliance, and act against evaders so that genuine businesses do not suffer, he said.

Here’s what the government is relying on to detect evasion.

6. Direct Tax Law Overhaul Delay

The task force constituted to redraft the direct tax laws has sought an extension of about three months from Finance Minister Arun Jaitley to submit its recommendations, a government official said on the condition of anonymity.

• The tax force, headed by Central Board of Direct Taxes member Akhilesh Ranjan, had to submit its suggestions to the government by Feb. 28.
• If it gets the extension, the report of the task force will be submitted before the final budget for 2019-20, that the new government will present after the general election, the official quoted earlier said.

The committee is drafting a new law in-line with the tax systems in other countries.

7. RBI’s Banker Pay Overhaul

The Reserve Bank of India’s proposal to overhaul the compensation structure for chief executive officers of private sector banks and wholly owned subsidiaries of foreign banks, could mean a decline in effective salaries from current levels. The rules seek to cap the level of variable pay, including stock options, in relation to the fixed pay, at 200 percent. Earlier while variable pay was capped at 70 percent of fixed pay, ESOPs were not included.

The RBI is proposing the following changes in variable pay:

• Total variable pay, including ESOPs, should be capped at 200 percent of fixed pay.
• At least half the variable pay should be non-cash.
• A minimum of 60 percent of the total variable pay must be under deferral arrangements.
• Of this, at least 50 percent of the cash component should also be deferred.

Here’s how this will change the salary structure of top bankers.

8. Credit Rating Agencies, Conflict Of Interest, And Knee-Jerk Responses

What is identified as the root cause of rating agencies’ shortcomings is the ‘issuer-pays’ model. But merely changing that to ‘investor-pays’ would replace one form of conflict of interest with another, writes Deep Mukherjee.

• If a mutual fund or a pension fund pays for the rating, it can be argued that once a security is part of a portfolio it is not in the best interests of the fund manager that the bond is downgraded.
• The fund manager may, potentially, end up paying a rating agency to keep the rating intact.
• Secondary buyers could fear that they are buying a bond from its previous owner at what could be an inflated rating.

So what’s the solution?

9. ‘Shell Companies’, MCA’s New Form, And The Colour Of Money

The problem is never the ‘shell companies’ per se. They are mere vehicles in the journey of transporting money with a view to masking ownership and/or evade taxation, writes R Balakrishnan.

• The Ministry of Corporate Affairs’ forms seem to have been designed to make compliance more complex and expensive rather than deter money laundering.
• Money can cross all geopolitical barriers. So, plugging spaces here is not going to be of much use.

The problem is, the world over, white-collar crime does not carry punishment that deters.

10. Goldman Sachs’ Reading

The global economy may have already bottomed out, according to Goldman Sachs Group Inc. Chief Economist Jan Hatzius.

• While growth remains soft, Goldman’s current activity indicator in February is slightly above the downwardly-revised December and January numbers.
• "Some green shoots are emerging that suggest that sequential growth will pick up from here," Hatzius and Sven Jari Stehn wrote in a note dated Feb. 26.
• Still, the risk to Goldman’s global GDP forecast of 3.5 percent for 2019 "is probably still on the downside."
• The case for a pickup from the current pace is strongest in the U.S. as the drag from a tightening of financial conditions eases, according to Hatzius.

Goldman is positive on risk assets and maintains a bearish dollar view. Here's why.