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Key stock indices rose to their record
peaks in the fortnight ended 4 March 2005. After the market traded steady in the first
half of the fortnight, Finance Minister P Chidambaram’s Union Budget 2005-06 proved
to be a catalyst for a sharp rise in stock prices in the second half.
The 30-share BSE Sensex touched its lifetime high of 6,864.62 on 4
March, before ending the fortnight with a solid gain of 265.16 points, or 4.02%, at
6,849.48. The broader 50-share NSE S & P CNX Nifty index also touched its lifetime
high of 2,152.75 in intra-day trades on 4 March, before ending the fortnight at 2,148.15,
up 92.60 points, or 4.50%, over its previous fortnight’s close.
Despite expectation of a cut in corporate tax and peak customs duty,
the market traded cautiously in the first half of the fortnight ahead of the announcement
of the budget on 28 February–with the key indices almost unchanged–on account of
the expiry of the February series futures contracts. There were concerns about a sharp
hike in the securities transaction tax (STT).
While the rest of the market traded steady, real estate stocks Morarjee
Realties, Ansal Properties, Lok Housing & Construction, BSEL Infrastructure Realty and
Mahindra Gesco were in the limelight after the government, on 24 February, cleared the
proposal to allow 100% foreign direct investment in the construction sector though the
direct route.
On the day of the budget, the market opened steady and traded so till
about afternoon as the finance minister read out the initial budget announcements. Stocks
gathered momentum as Chidambaram announced a cut in the peak customs duty rate to 15%,
from 20%, and a cut in the corporate tax on Indian companies from 35% to 30%, while
increasing the surcharge from 2.5% to 10%.
The market rose further towards the close of the session as the initial
response from the corporate sector and investing community was positive. Banks led the
gains as the budget proposed to given them freedom to issue preference shares to raise
Tier I capital and consolidate operations. Eventually, the Sensex ended with a
solid gain of 144 points on the budget day.
However, a good part of the gains on the budget day was erased in the
following session. Tech stocks led a 63-point fall in the Sensex on 1 March on the issue
of ‘fringe benefit tax’ of 30% on a predetermined percentage of the cost of
fringe benefits provided by an employer to his employees collectively. Software companies
will have to pay 30% tax on 20% of the travel expense, 10% of telephone expense, 20% of
repairs and maintenance expenses and 50% of the expenses incurred on gifts, clubs,
entertainment, superannuation and employee welfare.
But the correction on 1 March proved short-lived and the markets went
on to touch new highs subsequently on the back of strong liquidity. FIIs put in a huge
Rs 3772.60 crore in equities in the fortnight. Foreign fund inflows have reached
$2.58 billion so far in 2005, as against $8.5 billion in the whole of 2004. Domestic
mutual funds, too, are flushed with funds following substantial collections from IPOs of
new equity schemes launched in the past few weeks.
Foreign investors apparently decided to focus on the positives in the
budget such as the cut in the corporate tax and peak customs duties, emphasis on
infrastructure development and the continuation of the reforms process. Construction,
tyre, sugar and tea stocks were also in the limelight following sector-specific sops in
the budget.
Construction stocks Nagarjuna Construction, Hindustan Construction,
Gammon India, IVRCL Infrastructure, Simplex Concrete Piles, Patel Engineering, Madhucom
Projects, Jaiprakash Associates and Unitech rose to their lifetime highs in the fortnight,
cheered by the thrust on infrastructure sector in the budget. The record foreign exchange
reserves are to be channelised through a special purpose vehicle for infrastructure
projects with a borrowing limit of Rs 10000 crore in FY 2006.
Tyre stocks Goodyear India, Ceat, JK Industries, MRF and Apollo Tyres
gained after various tyre makers cut tyre prices between 2.5% to 6%, which was lower
compared to the 8% reduction in excise duty on replacement tyres in the budget to 16%,
from 24%. This is expected to improve the margin of tyre makers.
Sugar stocks Dwarikesh Sugar, Oudh Sugar, Dhampur Sugar, Bajaj
Hindustan, Bannari Amman Sugar, Upper Ganges Sugar and Balrampur Chini moved up after the
finance minister announced a package that cut interest rates on all outstanding loans to
sugar factories as on September 2004. Sugar factories registered in FY 2003 will be
provided assistance to re-structure and a moratorium on repayment of loans and interests
announced. Sugar mills are also allowed to re-negotiate high interest rate with banks.
Tea stocks Harrisons Malayalam, Warren Tea, Jayshree Tea, Parry Agro,
Tata Tea and Goodricke Group perked up after the additional excise duty of Rs 1 per
kg on tea was abolished.
Banking stocks traded mostly higher after the budget proposed to give
freedom to banks to issue preference shares to raise resources. This would not dilute the
government stake.
The Reserve Bank of India (RBI), later in the evening of 28 February,
announced that foreign banks can buy minority stakes in private sector banks identified by
RBI for restructuring. In such banks, foreign banks would be allowed to acquire a
controlling stake in a phased manner, but their stakes would be capped at 74%. Any
individual or company, which is not a bank, would not be allowed to own more than 10% of a
private bank without its permission.
Among other measures, STT on day traders was increased to 0.020%; from
0.015%; on F&O to 0.0133%; from 0.01%; and on delivery-based trades to 0.20%, from
0.15%. The hike in STT was lower than expected and, therefore, the market took it in its
stride.
Profit from F & O trades was hitherto treated as
‘speculative’ and taxed as per the income tax rate slab of the investor.
Henceforth, it would attract short-term capital gain tax of 10%.
Euphoric investors ignored high international oil prices. US light
crude for April delivery ended at $53.78 a barrel on 4 March on the New York Mercantile
Exchange. In fact, the oil price had spiked to $55.20 in intra-day trades on 3 March, just
marginally short of the all-time trading high of $55.67 a barrel hit in October last year.
With the market trading close to its lifetime highs, there could be
some selling pressure in the coming days as investors have the tendency to book profit and
trade cautiously at higher levels. |
