On The Mat Over MAT

The controversy over retrospective tax is a pointer to how India functions, or to be specific, how it chooses not to function

Saw some numbers crunched by a newspaper the other day. For the last eight years, it shows that average monthly foreign institutional investor (FII) flows into India dry up in May and are at the lowest for the year — 1 per cent of total FII inflows for the year. The best month for inflows, according to the deep dive is September when as much as 16.55 per cent of the flows have come on an average over the last eight years. That is why sometimes the adage is completed by saying ‘sell in May and come back in September’.T IS CALLED THE HALLOWEEN INDICATOR — sell in May and go away. This theory points to the fact that November to April are the best months in terms of stock market fund flows. This has been empirically proven across the world markets. It holds good for India too.

Thanks to the retrospective tax overhang,

April was a lousy month this year, with FII inflows strangled. The BSE Sensex, which was going along swimmingly was down close to 3.5 per cent in April. But there is a bigger story that needs attention. Some­thing material to the controversial retro tax and once again throwing into stark reliefhow India functions or, should I say chooses not to function.

Symptomatic of this dysfunctionality is as always a case pending in the courts. The government and Castleton Invest­ment have agreed to expeditious hearings in the Supreme Court on a tax dispute, which is at the kernel of the current problem. The dispute pending since 2013 could settle the Minimum Alternate Tax (MAT) issue one way or the other.

Castleton approached the Supreme Court against a 2012 ruling by the Authority for Advanced Rulings, which said

By Sandeep Bamzai

that it would have to pay MAT on capital gains arising fron the sale of shares. With a similar announcement in the Bud­get, it allowed the income-tax (I-T) authorities to swoop down again. Since I-T authorities can reopen tax assess ments going back six years, panic gripped foreign portfoli; investors (FPI). Then news came that 68 notices amounting to unrealised gains of Rs 602 crore had been sent out. State­ments like as much as Rs 40,000 crore could be garnerec through this route didn’t help; neither did talk that portfolio investment routed through countries with double taxatior. avoidance treaties would not be taxed. The seed of doubt hac been planted. This led to widespread consternation once again, convincing foreign investors that India will allow retrospective taxation through the backdoor. Markets hac slumped nearly 3,000 points from their top. The pervading mood was that FPIs had been dry-gulched.

BMR Advisors tried to provide some clarity on this highly contentious issue, which has led to a flight of capital from Indian stock markets. Here is a quick gander at what BMR said after finance minister Arun Jaitley’s clarification on the Finance Bill in Parliament:

The original Bill proposed an explicit exemption to foreign institutional investors or foreign portfolio investors from

applicability of MAT on income in the form of capital gains from transactions in securities (other than short-term capi­tal gains on transactions on which securities transaction tax does not apply).

While the proposal addressed the controversy on applica­bility of MAT to FIIs/FPIs for the future, it raised concerns over MAT becoming applicable, by inference, to foreign companies, especially given the conflicting judicial rulings on the matter.

The revised Bill proposes to extend the explicit exemption to any foreign company that earns income in the form of capital gains on securities or earns income in the nature of interest, royalties and fees for technical services, which are taxable on a gross basis, pro­vided tax payable on such in­come is at a rate less than the rate of MAT, i.e. 18.5 per cent.

The amendment only reas­serts the government’s posi­tion that provisions of MAT apply to all foreign companies as well. This controversy on applicability ofM AT to all for­eign companies is likely to get addressed through a ruling of the Supreme Court, which is currently examining this is­sue in a particular case that also forms the basis for the government’s view and the controversial notices to Fils/

FPIs to collect MAT on capital gains transactions.

The amendment also does not align with the industry’s demand that explicit exemption be made to apply with ret­rospective effect. The finance minister excluded this aspect while addressing the Lok Sabha. Several FPIs have filed a writ in the Bombay High Court against the notices issued by the government. The fate of these notices rests materi­ally on the view the court takes in the weeks ahead. The FPI writ, which wants this lethal tax withdrawn, revoked and cancelled states: “because provision of Section 115JB is in plain language applicable only to domestic companies and given the fact that the petitioner is aforeign company, which has no place of business in India, the imposition of MAT on the petitioner is an illegal extension of a law meant to apply to domestic assesses to book profits that are in financial statements outside India — thereby imparting extra ter­
ritorial application to domestic tax law — and that too in a manner contrary to its plain language”. The petition further argues, because holding that the provision of Section 115 JB applies tothe petitioner, defeats the obvious objective of the law to exempt Fils from regular tax on such income, thereby to promote investments in Indian capital markets by Fils”.

Under the current regime, foreign institutions are not re­quired to pay any tax on long-term capital gains (gains from investments exceeding one year). Institutions are liable to pay short-term capital gains tax (tax on investment less than one year) at 15 per cent. Given the sensitivities and sentiment

involved and the fact that the matter is pending before the Supreme Court for a couple of years now, and the fact that we are going into a summer recess, an expeditious re­sponse from India’s judicial system is vital. The only way out is a vacation bench hear­ing the matter and giving a decision.

What does all this tell you? That babudom continues to call the shots, tax terrorism is an integral part of the Indian administration, that even reformist politicos succumb to rabid populism and most importantly, we remain one of the most litigious nations in the world. The matter is pend­ing before the apex court for three years and we continue to wait for relief.

Meanwhile, we go ahead and do what we always do: set up a committee. On May 20, the finance ministry con­stituted athree-member committee to look into the appli­cability of MAT on Fils before April 2015. The committee is headed by A.P. Shah, chairman of the Law Commission of India. The other members are former chief economic advisor Ashok Lahiri and Girish Ahuja, former associate professor of commerce at Shri Ram College of Commerce, University of Delhi. More damagingly, Reuters put out a story recently, which said the finance ministry ignored warnings on notices sent out September 2014 onwards on this issue, allowing the sore to fester. Typically, doing business Indian ishstyle.

 

SEA OFRED Revenue(Rscr) NetProfit(Rscr) Net Loss(Rscr) LACKING SPICE

 

The Deal And After

As part of share sale and purchase agreement, Maran transferred his 58.46 per cent of SpiceJet stake to Singh in February 2015. The deal also received requisite statutory clearances, though not everyone agrees with the level of transparency. The most vocal among those who criticise the deal is senior BJP leader Subramanian Swamy. He has already written a letter to PM Modi seeking an inquiry into the manner in which the deal was made. In Mid-May, Swamy also filed a petition in the Supreme Court seeking an inquiry into the matter. “Maran offloaded 58 per cent of SpiceJet shares to Ajay Singh. But, at what price? How can you keep that a secret? It is against company law, it is against the Sehi regulations,” says Swamy.

Swamy also complained that the deal occured without a mandatory open offer, which is against company law.

“Sebi claims that it made an exception. How can it do
that? What is his (Singh’s) net worth? How is he running the airline? Where does the money come from? Did it come from some offshore bank in Britain?” he asks. In his petition in the Supreme Court, Swamy illustrates the SpiceJet deal in the context of black money. “I have sought an inquiry. The court has on 13 May asked the govern­ment to respond,” he says. Singh refutes all the allegations raised against him. “We acted completely as per Sebi’s rules and regulations. There were provisions in the Sebi law that permitted an exception under certain conditions. And we used those provisions,” he clarifies.

On the larger ground of equity and fair play, Singh says that Sebi has only done its job of protecting investor inter­est. “If this acquisition had not happened, the value of the shares held by small investors would have gone to zero.

So, by doing what we did, we protected the small inves­tors. They would have been zero. They are at 20 bucks now. I followed the law, I acted in the interest of SpiceJet, and its small investors.”

Singh says that the money (Rs 550 crore) that he has infused since acquisition has come from a mix of investors and banks. “We are getting a lot of funding offers from various players such as private equity, debt providers, hybrid products and even foreign airlines. We will choose the mode of investment that comes at the lowest cost. If any further dilu­tion of stake is needed, that will be done at better valuation. Our im-

CHANGEIN FORTUNES

 

MAY 2015

 

Daily Flights

 

Fleet size

41Boeing737-

800/900ER

aircrafts+15

BombardierQ400

Fleet size

32Boeing737-

800and6Boeing

737-900ER+15

BombardierQ-400

300

 

Source: Company

 

proved performance will reflect in our stock price. We would need another Rs 500 crore for complete revival of the company.” So how much time to reach the 2010 level?

Singh says that he is still planning. “The first order of business was to stabilise. To make sure that flights start on time, as we were down to almost 40 per cent on time performance. In March and April, we have crossed the 80 per cent margin,” he claims. The company has stabi­lised that. It has brought some of the most outlier costs under control. “We shut down some airports and cur­tailed the network to get back to low-cost model — which is fewer stations and higher frequency to these stations,” he adds.Singh is also renegotiating debt-re­structuring plans. “We have amended the contracts. We are re-negotiating a large number of contracts to bring the costs back in line.”

A new SpiceJet board is also in the making. “We have applied for four members in the board. Security clear­ances have come for three. Harsha Vardhan Singh, former deputy director general of World Trade Organisation, is one of them. As we expand, we look to get aviation profes­sionals, finance professionals on board,” he adds.

He also refutes the charges of nonpayment of dues. “Ever since I joined I have cleared all the statutory debts and every single rupee of bad debt, all employee salaries are up to date and oil companies are paid,” says Singh. The company’s cash flow has become much stronger than an­ticipated, according to Singh who so far has pumped in Rs 550 crore and has a larger funding plan to infuse capital as and when required. They were reports that the Lessors aircraft owners had sought the return of their Boeing air­craft and a payment of millions of dollars from SpiceJet to cover several months of unpaid rent and maintenance costs. ‘We have cleared debts of Lessors and are in the process of paying large creditors, in some cases, vendors have agreed to be paid in instalments, things are under control at the moment,” says Singh.

The crisis had also resulted in an exodus of top-level management, pilots, cabin crew etc., says Kiran Kotesh- war, chief financial officer and acting human resource head of SpiceJet. “Since Maran was not physically present in a day-to-day business, there was an environment of gloom among employees especially during the crisis time that the airline went through in the last few months. But Singh’s presence in the office exudes confidence and moti­vation among employees that things will go right because he is a very hands-on executive,” says Koteshwar.

According to him, the company is still looking for a full­time HR Head. “We will hire about 100 pilots, 50 com­manders and as many co-pilots. We will also hire 200-odd cabin crew and flight engineers,” adds Koteshwar. At pre­sent, SpiceJet has a fleet of 17 leased Boeing 737s and 15 Bombardier Q400s that it owns.

Singh believes in a flat and leaner organisational set up. He is hiring old hands who left the place during Maran’s time. With Singh back in SpiceJet, many who had quit are returning now. Singh had made it clear that he would give first opportunity of joining to those who had either quit or had been laid off during the airline’s difficult days. Some have already returned. As part of his cost-reduction strat­egy, Singh has trimmed his expensive top management. “I want a leaner management with responsibilities dispersed equally at the mid-level,” says Singh, who fired the top load that were drawing salary of Rs 2 crore per annum.

With all the revamping and restructuring, Singh has no more time to spin off his mantra: “Fly our flights on time, make sure they are safe, clean, and the people who are flying are happy. The fares are reasonable. Just stick to the basics.” Ed

[email protected] & [email protected] *0 @joecmathew & 0 @monicabehura For more on the aviation sector, znsitimow.businessworld.in

 

“Maran offloaded 58 per cent of SpiceJet shares to Ajay Singh. But at what price?” SUBRAMANIAN SWAMY, BJP leader

He was also part of BJP’s key campaign team in the last general elections and is credited with coining the winning phrase, “Ab ki boar Modi sarkaar”.

Almost five years later, Singh was told that the airline he helped build will either have to be taken over by him, or be left to die. “My sense initially was that the problems (that led to mounting losses and a desperate stake sale plan) were pretty severe. I said I am willing to look at it, but I need to understand what the problems are,” he says.

The Maran-Singh dialogue did not get anywhere at that time. Three months later, Maran approached Singh again.

This time, he was very clear, says Singh: “They said I should take a call, otherwise they will shut it down.”

Goldman Sachs had given “dud” value to SpiceJet. Ac­cording to industry experts, the enterprise value of the company at that time was Rs 3,000 crore in accumulated losses that it had made, and Rs 1,400 crore of liabilities it had. Singh was virtually offered the airline “free”, though it was his responsibility to raise enough funds to steer the company away from its liabilities and turn it around.

The call Singh eventually took is evident from the fact that he today owns over 60 per cent stake in SpiceJet.

 

Jan 2015

Sees fleet reduction, flight cancellations with shutdown

Feb 2015 Maran

sells58.46% stake to Ajay Singh, who now

holds6031% stake as

promoter

Though the takeover was not without controversies, it is very clear that Singh means business. He claims to have cleared all debts of the ailing company in just three months since the takeover in December last year. The company is talking about fleet expansion and fresh hiring. His revival strategy for SpiceJet is to get the basics right.

Experts are not ruling out the revival possibilities either. “They have to recoup a lot of things. Overall, it looks posi­tive,” says Amber Dubey, partner and head, aerospace and defence, KPMG India. “They are back in business. Com-

petition is always good for the entire aviation industry. Not only does it keep us on our toes, it also pushes us to keep improving our products and services,” says Phee Teik Yeoh, CEO, Vistara.

Second Coming

As promoter of the airline, it was a second coming for Singh. His entry as SpiceJet promoter for the first time happened in December 2004 when he, along with his in­vestor friends re-named and re-launched Royal Airways (originally known as Modiluft) — an airline company that had suspended its operations in October 1996 — as Spice­Jet. The following years saw the company pursue a low- cost model to increase its fleet size, network of operations and revenues to culminate into some profit in 2010, the year when Maran took control.

Several things changed after SpiceJet became part of the Sun Network. And some of which proved too costly for Maran. “I think the airline deviated from its principles of trying to reduce cost on a regular basis. You have to keep knocking down costs which I didn’t think was the focus under Maran’s leadership,” says Singh. He also points out that there was a lot of dilution of revenues due to faulty design of promotional schemes. “They went more for spread, in terms of opening up of large number of opera­tions as opposed to having higher frequency. Also, the air­line was functioning under an absentee leadership be­cause Maran was not physically present here (in Delhi, its operational head quarters). It’s a very competitive space, you can’t afford a hands-off deal,” says Singh.

An investor note from ICICI Securities, which an­nounced the suspension of SpiceJet coverage on 17 De­cember 2014, explains the dire situation that compelled Maran to take the airline company to Singh a second time: “SpiceJet has reduced flights across its network from 332 daily to 239 from 1 September till date. It has cancelled 1,861 flights till this month end, which has also affected its brand image. With three consecutive years of net losses and mounting outstanding dues of over Rs 2,000 crore, it needs at least Rs 1,000 crore immediately to keep it off the ground. Given this backdrop, amid high uncertainty over funding, we suspend our coverage on the company and recommend that investors exit the stock.” If SpiceJet was in such a bad shape and seemingly at point of no-retum, how did Singh became interested in it?

“The fuel prices were low, the economy was picking up, the brand was good, and it was a brand that I intimately knew,” says Singh. “I also thought it was a national service. But it couldn’t have been done if there wasn’t a rational reason. I knew there was an honourable way to do it and I had the ability to do it,” he says.

 

SYSKA LED: A Trendsetter in LED Lighting in India

SYSKA LED is the flagship company of the modern, futuristic and diversified conglomerate Shree Sant Kripa(SSK) Group. Within a short span of just two years, the SYSKA brand has succeeded in creating a strong brand recall through aggressive marketing campaigns along with smart sales strategy. SYSKA has been recognized as the “Most Trusted Brand in Household Lighting”by BrandTrust Report.

At SYSKA LED the mission is: To relentlessly strive to innovate and create LED Lighting Solutions which will be efficient, reliable, safe, future-ready and environment friendly. In keeping with this mission, the organization has developed a vast range of specialized eco-friendly LED lighting solutions. These lights consume upto 70% less power than conventional lights like CFLs. They provide excellent luminous efficacy, versatility and uniform light distribution. They are designed to last exceedingly long, give quick payback periods and are completely free of toxic components like mercury, lead, etc., they are extremely durable and come with a 2-year warranty.

SYSKA LED’s expertise covers the entire gamut of LED solutions – including design, manufacturing, supply & installation of fixtures and strong after-sales service. A dedicated team of engineers with over 15 years of experience work round-the-clock with the aim of creating customerdelight.

Demand for SYSKA LED lighting products is growing at a fast pace.” We are aiming to take LED lighting to masses by offering retrofit solutions and emerge as the leader in this LED-based lighting segment, which is the future of lighting”, asserts Mr. Govind Uttamchandani, the dynamic and far-sighted CMD of the SSK group.

SYSKA LED has the most extensive array of LED lighting solutions of international quality for residential,
commercial, industrial and outdoor usage.

The residential range has functional lights like bulbs, tubes, panels to high-end products like chandeliers.This range of products is RoHS compliant. The Commercial range is also vast and has a wide range of retrofit solutions, downlights, 2 by 2 fixtures and sleek panels (withdimmableoption).

The Industrial and Outdoor portfolio cater to a wide range of applications and encompasses street lights, high-bays, tunnel lights, beam lights, garden lights and landscape lights.

SYSKA LED is nowfocused towards rapidly expanding its distribution network across India. They are making their mark through exclusive brand outlets called SYSKA LED Lounges and have robust plans of setting up 200 lounges within next one year. Says Mr. Rajesh Uttamchandani, Director, SSK Group,”In continuation with our commitment to provide the best in-class products, SYSKA looks forward to opening such Lounges across major cities in India. These will also enable us to strengthen our partnership with interior designers, architects, consultants and lighting professionals.”

In addition to its manufacturing plant in Korea, SYSKA LED has started their manufacturing operations at Rabale, Maharashtra and is planning to create a Manufacturing Zone spread across 25 acres in Madhya Pradesh.Thiswill helpthem catertothe hugedemand of LED lighting across emerging markets.

A strong manufacturing backbone, world-class R&D infrastructure, a robust distribution network and a superior sales & service team are the key drivers towards making SYSKA LED the leading player in the Indian LED lighting landscape.

COVER STORY OF JIO

exists in India.

Back in 2001, when Reliance Infocomm had entered the Indian telecom market to provide 2G services and caused massive disruption, mobile technology was a proven technology worldwide. In comparison, Long Term Evolution (LTE) services are still in the nascent stages globally. The entire 4G ecosystem has not yet developed in terms of devices. 3G itself has not taken off the way it should have. There is a lot of potential for 3G services, which is slowly getting tapped. 4G ecosystems has not yet developed in terms of devices, deployment of towers. 4G maturity will take time, which puts aside any apprehen­sions that Jio’s aggressive plans will shake the industry.

The incumbents are ready to fight harder for a larger share of pie. It is not that easy for a new operator to add value customers by just giving discounts and freebies. Jio undoubtedly will get customers initially, but it might not be the case that will help them in the long-term. They, too, need to have quality and loyal customers instead of getting unnecessarily aggressive they are ex­pected to be calculative.

It’s always dangerous to be a rookie in this sector.

Reliance has to play really, j well. They are launching a very new technology that has yet to evolve. Every time they make a mistake, a com­petitor will learn from it.

We feel that every time Reliance will try to make the right moves, the incumbents will try to ensure that they do not compromise their leadership position. After gaining a first-mover advan­tage, Bharti Airtel has been steadily rolling out its 4G services across its licensed circles. Spectrum liberalisa­tion has encouraged non-BWA spectrum holders to foray into the space-using spectrum in the 1800MHz band. Idea Cellular and Vodafone India have picked up large amounts of spectrum in this band in the recent auction and can become potential challengers for Reli­ance in the 4G space over the long-term. Airtel and Idea are established players in the field with millions of users. It is difficult for another player to just enter and impact the market instantly.

The competition is cut throat, and intense and thriving in this segment are difficult. The BWA rollout deadline will also see other players holding spectrum in the 2300MHz band launching services and competing with Reliance in some circles. As per the government rules, all the companies that won BWA spectrum in 2010 are re-

quired to roll out services in at least 90 per cent of their service areas by August 2015. However, we believe at pre­sent Reliance, is better prepared than its competitors for a service launch in the BWA space. Therefore, the company wjll have to build a highly-effective business model around a differential pricing strategy and innovative ap­plications. To make an impact, Reliance Jio will need to offer applications that attract the mass market.

Reliance has spent close to four years strengthening its infrastructure muscle, bringing in more investments, de­vising fresh strategies, signing partnerships (Samsung handsets), and acquiring spectrum. However, the gesta­tion period has been a long one, and the company has failed to convert all the hype into a commercial or main- j stream service launch. Going ahead, the long-awaited launch of Jio is expected to usher in some much needed dynamism into the data segment. Its potentially reasona­bly priced 4G services could give a shot in the arm to the 4G mar- . . •                kets if the business model is

p|VJ y               i shaped properly. As for its

^impact on the incumbents’

* business, the entry of a new Mjitt player like Reliance Jio will

  • ‘•stir the waters, and put pressure on revenue growth, margins and capex over a long time, but in the short- run, the impact might not be what they caused in 2001. At the same, it will result in the creation of huge capacity across the telecom value chain. For the con­sumers, the main beneficiaries, they can look forward to some exciting times and superior speeds. After all, the Jio’s 4G launch is expected to usher in a new broadband era in the Indian telecom sector.

This time market place is different, scope for policy ma­nipulation is limited or has already been consumed, cus­tomer is not gullible, and most importantly, the competi­tors, too have deep pockets, are smart street fighters and are no novices. Whatever happens the ultimate winner would be the consumer and the biggest adjudicator as to who succeeds in today’s world of choices. Incumbents are advised to prepare for tsunami and Reliance Jio to be pre­pared for a long haul pitted as they are against formidable entrenched players. Let us see who is startled, incumbents by tsunami or Reliance by resilience and resistance of the enemy? DEI

The author isformer CMD ofVSNL and currently serves as a director at Sonata Information Technology. His views are personal