DHL: Impost irregularity

DHL open offer participants will pay more tax

DHL's 20 per cent open offer to Blue Dart shareholders brings to the fore a tax anomaly that's the result of the introduction of the securities transaction tax (STT).

Investors who wait to tender shares in the open offer would be paying higher tax rates compared with those who chose to book profit at current market rates.

Effective October 1, 2004, stock market investors have been paying a nominal transaction tax on every trade done through exchanges, while at the same time long-term capital gains tax has been abolished (10 per cent earlier) and short-term capital gains tax has been cut to 10 per cent (30 per cent).

These changes in capital gains tax rates, however, do not apply to stock transactions done outside exchanges; namely open offers, buybacks and negotiated deals. Investors tendering shares in, say, an open offer would continue to pay tax at 10 per cent and 30 per cent for long-term and short-term capital gains tax.

For most investors, it makes sense to sell at current prices, mainly because of the differential in tax rates, especially in the case of short-term capital gains. However, this means selling at prices that are about 7 per cent lower than the price DHL is willing to pay Blue Dart shareholders.

There is no reason why there should be different tax rates for selling the same underlying asset. The only issue is the collection of the STT in cases like an open offer, since the transaction is not done through an exchange.

But open offers and share buybacks (done off-market) are regulated affairs, and, to a large extent, are transparent in nature. Policy makers can ensure that STT is collected even for off-market transactions like open offers and share buybacks.

This could be cumbersome, which is the reason the anomaly has been left untouched. But as a result, investors of companies that have open offers or off-market buybacks end up losing.

BILT

Ballarpur Industries Ltd (BILT) is reportedly increasing its production capacity to 5,00,000 metric tonnes (MT) by the end of FY2006, about 30 per cent higher than the its existing capacity of 3,86,600 MT (excluding the installed capacity of 22000 MT at the company's Choudwar unit, where operations were closed w.e.f 31st March 2003).

Actual production of paper in FY04 stood at 3,78,349 MT, close to 100 per cent utilisation. Much of the incremental capacity will manufacture high end paper, which already account for an estimated 70 per cent of the company's total production.

Realisations in the high end segment are approximately Rs 4000 - Rs 5000 higher for every tonne sold, vis-a-vis the lower end uncoated paper segment.

An increased proportion of high end paper will also help the company tackle cost pressures. Although BILT meets its pulp requirements largely from captive sources, it has been facing cost increases on other important inputs like caustic soda, prices of which have risen by over 45 per cent in the last three months to over $300 a tonne. In addition, fuel cost is also now higher.

While improving realisations is one part of the story, BILT is also trying to cut cost. The company is increasingly trying to target customers directly, bypassing the dealership route.

This move is expected to help the company pocket the 4-5 per cent odd margin it used to pay dealers. These moves, however, have failed to impress the markets - the BILT stock has been flat over the past two months, despite a 10 per cent rise in the Sensex.

The rise in bank deposit rates

Banks have started raising their deposit rates. Bank of India, Bank of Baroda, Canara Bank and Central Bank have all raised their deposit rates by 0.25 to 0.50 per cent. The reasons for banks raising deposit rates is simple-bank loans are growing much faster than their deposits, which is why banks are trying to raise resources for lending by raising rates.

In the month to October 29, for instance, while bank deposits rose by Rs 12,292 crore (after adjusting for the effect of IDBI becoming a bank), advances rose by Rs 19,688 crore (after making a similar adjustment). That's an incremental credit-deposit ratio of 160 per cent.

The change can best be seen by comparing the growth in deposits and advances in the quarter to October 29 (the latest date for which RBI data is available) with growth for the previous three months.

During the three months from May 14 to August 6, deposits increased by Rs 38,826 crore, while they rose by a lower Rs 30,657 crore in the next three months.

The big difference, however, has been in the explosive growth of advances-these increased by Rs 27,831 crore in the three months to August 6, but the rate of increase more than doubled to Rs 63,365 crore over the next three months.

Moreover, after adjusting for the IDBI effect, fixed deposits with banks are now at a lower level than they were two months ago. Bank term deposits were Rs 13,70,838 crore, compared to Rs 13,74,528 crore on October 1 and Rs 13,71,564 crore on September 3.

The erosion in term deposits seems to indicate that depositors are becoming increasingly dissatisfied with the high negative real interest rates on deposits, and are switching over to small savings instruments in a bid to conserve their capital.

With contributions by Mobis Philipose and Amriteshwar Mathur