Hard landing but why this is also market’s reality check

There were some signs of panic in the last hour of trading as margin calls kicked in and speculators and punters were forced to unwind their hugely leveraged positions. Until that happened, the market was prepared for a correction and even seemed set to adjust to a 400-500 point intra-day volatility in line with the choppiness witnessed all through this week.

Since investors tend to hold on to bluechips in this situation, there was wide-spread selling across the board, as is visible in the decline in all major indices.

The sharp market correction was long overdue and it was only triggered by several factors, global and local. Even at today’s closing of 11,391 Indian frontline stocks still remain expensive and several Foreign Institutional Investors (FIIs) have long been on record saying stocks will look attractive again when the Sensex had dipped below 11,000.

It will be foolish, however, to look at the Indian market and the excellent performance of Indian corporates alone. Past experience in South East Asian markets shows that when global money panics, it tends to sell indiscriminately and based on events that have little to do with the local economy.

Even this week, hedge funds operating through participatory notes are understood to have led the selling by booking quick profits. Thursday’s sharp fall is attributed mainly to global factors—the worldwide fall in equity, currency and commodity markets, mainly metals. If Indian markets fell more sharply than their emerging market counterparts and European and American markets, then one must remember the run up in prices was also that much sharper.

An Indian angle to the selling pressure is over the lack of clarity on the taxes payable by FIIs as well as domestic investors. For over a year, investors have celebrated what they thought was an unqualified bonanza for investors, when the Union Budget of 2005 chopped long term capital gains taxes.

The Tax Department however, quotes a string of precedents which gives assessing officers the absolute discretion of what investment (thereby eligible for capital gains tax concessions) and what amounts to speculation or short-term trading, where the profits will be taxed at the highest applicable rate. If classified as business income, tax officials say that it will be irrelevant whether the shares have been held for a year and the profit will not qualify as long term capital gains. If the government and its tax department stick to this view, lakhs of investors will see a big chunk of their bull market profits vanish and that is bound to unnerve the market. The government will have to find a solution to this vexed issue in the coming days.

Market experts seem to think that Thursday’s fall was sharp enough to continue to reverberate on Friday, especially since high net worth individuals have not yet been affected by the margin calls that forced small punters and day-traders to scurry for the exit. The next few days could see further correction if these investors feel the pinch.

One of the biggest pluses of this correction may be that it will bring some sanity to the real-estate market as well as the wild fund raising plans of industrialists.

Thanks to near manic situations in these markets, several loss-making companies have drawn up plans to raise public money through expensive issues and some who have just raised money, have drawn up a second and third round of fund raising plans.

The biggest culprits are real estate and construction companies that have seen an absurd run-up in the prices of their stocks.

Hopefully, they will be forced to re-evaluate and plan for the future.

Manufactured crisis based on uninformed reporting: FM clears air

• Finance Minister P Chidambaram says it’s “a manufactured crisis based on uninformed reporting”

• “No FII has been assessed as a trader but as an investor, because they have no permanent offices in India”

• “Uninformed reporting and reaction to uninformed reporting is not a desirable thing”

• Market pundits attributed fears to a CBDT release, inviting feedback on its idea to “provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks.” Operators read it as an attempt to tax FIIs’ income as traders and not investors