Changes in CCI norms proposed to bring buyer cartels under competition law

Buyers forming a cartel may be penalised if the changes proposed by the Ministry of CorporateAffairs (MCA) to the Competition Act are enacted.
The ministry sought to give monetary and penal powers to the director general for investigation under the Competition Commission of India (CCI).

The MCA has put the draft Competition (Amendment) Bill, 2020, in the public domain incorporating these elements, seeking feedback from all stakeholders. Comments on the Bill can be given by March 6, before which Parliament would reconvene after the recess.
Rahul Goel, partner, IndusLaw, said buyer cartels were not covered under the Competition Act and hence the proposed changes would give clarity to this aspect.
So far, the CCI has not imposed any penalty on buyer cartels, he said.
The draft amendments also seek to empower the director general for investigation to send a person to prison for up to six months or impose a fine of Rs 1 crore if the latter refuses to produce any book, paper, or document the former has asked for. Currently, the CCI imposes penalties on companies on the basis of their turnover if they flout competition rules. When it comes to directors of companies or proprietorship firms, penalties are imposed on the basis of their income. However, the law does not have any provision to empower the CCI to impose penalties on the income of individuals.
Changes in CCI norms proposed to bring buyer cartels under competition law
To remove the lacunae, the MCA suggested the Bill has a provision of income, on which penalty could be imposed under Section 27 of the Competition Act.
“Including the word ‘income’ in the Act may provide a legal basis to the CCI to impose penalties on individuals,” Goel said.
However, the amendment does not take into consideration the concept of “relevant turnover” as decided by the Supreme Court in the Excel Crop Care matter in 2017.
As such, penalties may still continue to be an issue of discretion and debate, Goel said. The draft amendments also call for introducing a “commitment and settlement” clause in the Competition Act. The enabling clause will allow those found in contravention of the competition law to “commit” to correct their ways to avoid action even before investigation is completed. Even in cases where investigation is over, evidence has been found, and the adjudicating process has started, the companies can still enter a settlement. The companies will have to pay a certain amount as fine and avoid legal proceedings after ensuring that any anti-competitive practice will be corrected.The proposed amendments also seek to provide clarity to “hub and spoke cartels”. The MCA suggested hubs also be covered under Section 3(3), which deals with cartels that hinder competition.
A hub-and-spoke cartel is basically an arrangement between companies where a dominant player, called hub, is wooed by other firms, called spoke, to destroy competition by, say, increasing or lowering prices.
Goel said hub-and-spoke agreements were not specifically covered under the Competition Act.
The CCI has imposed penalties by independently invoking Section 3(1) of the Competition Act.
“However, the CCI’s powers to invoke Section 3(1) independently are pending adjudication before the Supreme Court,” he said.
The proposed amendments also seek to expand the composition of the CCI by including part-time members in the Commission. The Commission is currently a four-member body, including the chairman.

Rs 75,000-crore minimum alternate tax credit dilemma grips India Inc

Vast swathes of Corporate India may not be in a hurry to shift to the new corporation tax regime. Ninety-nine companies, which also include some unlisted ones, have more than Rs 100 crore each of minimum alternate tax (MAT) credit on their books, cumulatively adding up to Rs 75,000 crore. Of these, 15 heavyweights such as NTPC, Reliance Industries, Bharti Airtel, Vedanta, and TCS have MAT credit in excess of Rs 1,000 crore each.
“By utilising MAT credit, many companies will be able to bring down their effective tax cost to 17.47 per cent from 25.17 per cent (under the new regime), leading to substantial tax savings of about 8 per cent,” said Saumil Shah, partner, Dhruva Advisors. “Only those companies whose effective tax cost is higher than 25.17 per cent will shift to the new regime.”

MAT credit is the difference between the tax the company pays under MAT and the regular tax, and is allowed to be carried forward for a period of 15 financial years.
According to experts, infrastructure companies as well as those from sunrise sectors such as telecom, IT, and renewable energy are likely to maintain the status quo owing to the substantial MAT credit on their books and the tax holidays enjoyed by them in the past. A third of the 850 top CRISIL-rated companies surveyed – from capex-heavy sectors such as power and oil & gas – have expressed a desire to continue with the current tax regime, CRISIL said in a note on Tuesday.
“The MAT rate has reduced irrespective of whether you come under the new tax regime or not. So, if you were to defer your migration to the new regime, you still pay only 17.16 per cent tax under MAT (as opposed to 21.16 per cent until March 31, 2019). By doing so, the company may not be required to write down the MAT asset,” said Bhavin Shah, leader, financial services tax, PwC India.
Companies that are mainly into exports may also eschew moving to the new regime. “If a company has more of local business for which it is not claiming any incentives, it can set up a new company for its local business and benefit from the new 25 per cent tax rate. However, it can let the export part of the business remain in the old company,” said Rajesh Gandhi, partner, Deloitte India.
“For large corporate groups like ourselves, it will continue to be attractive to stay with tax holidays and additional depreciation benefits as we have invested very heavily in capex,” Pallavi Joshi Bakhru, group head taxation, Vedanta, had told Business Standard earlier this month.
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Companies in the highest effective tax rate of 34.94 per cent — including banks, NBFCs, and FMCG majors — would move to the new regime as they would get 9 per cent benefit. Those from sectors such as auto, chemicals, textiles, gems & jewellery, and retail are also likely to shift.
Manufacturing companies and those into sole proprietary businesses may want to set up a new company to take advantage of the lower tax rates. These companies, however, have to ensure that they set up a new business for getting the lower rate of 15 per cent and not just transfer business from an existing company, experts said.
“Companies in the highest tax bracket wanting to move to the new regime would need to be aware that MAT credit, brought forward losses in account of any tax holidays or R&D benefit and additional depreciation would be lost and may require re-computation of past tax returns to determine losses or depreciation available,” said Saumil Shah.
The Central Board of Direct Taxes (CBDT) clarified earlier this month that companies would not be allowed to adjust the MAT credit against their tax liabilities if they opted for lower corporation tax rates. They will also have to let go of incentives under special economic and tax-free zones. Companies opting for the new regime can’t go back to the old one.
MAT is akin to an advance tax. The concept of MAT credit was re-introduced in 2005 with a carry forward mechanism of five years. This was subsequently increased to 10 years, and to 15 years in 2018.

Q4 preview: March quarter estimates show earnings growth losing steam

The trend of steady improvement in corporate earnings growth seems to be losing steam, with the combined net profit of India’s top 50 companies, which are part of the NSE Nifty50 index, estimated to grow by 10.9 per cent year-on-year (YoY) during the January-March 2018 quarter, down from the 11.5 per cent YoY growth clocked in the third quarter and 40.5 per cent growth during the year-ago quarter.
The combined net sales of these 50 index companies are estimated to grow by 12.1 per cent during the fourth quarter (Q4) of FY18, again lower than the 13.8 per cent YoY growth during the quarter ended December 2017 and 15 per cent growth witnessed during Q4FY17 (See adjoining chart).

With this, India’s top listed companies are estimated to report 8.1 per cent YoY growth in their combined net profit for FY18, the lowest in the last three years. The combined earnings for the Nifty50 companies were up 13.2 per cent during FY17. However, their top line growth, at 12.2 per cent in FY18, is expected to be the best since FY14, when index companies’ combined net sales were up 13 per cent on a YoY basis.
Excluding financials, energy, metal, and mining companies, the combined net profit of the rest of the Nifty firms is expected to grow by 4.2 per cent YoY for Q4FY18, slightly up from the 4 per cent growth clocked in the December quarter and 0.5 per cent increase seen in the year-ago period. The sample companies’ combined net sales are expected to grow by 10.7 per cent YoY, better than the December quarter’s 9.6 per cent and the March 2017 quarter’s 3.2 per cent YoY growth.
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The analysis is based on January-March 2018 quarter (Q4FY18) earnings estimates by equity brokerages, including Kotak Institutional Equities (KIE), Edelweiss Securities, Emkay Global, and Elara Capital. For banks and non-banking financial companies (NBFCs), net sales reflect their gross revenues net of interest expenses, while for others, it is total income from sales & goods and services (net of indirect taxes).
Analysts attribute the slowdown in the pace of earnings to the emergence of margin pressure due to higher commodity prices, continued poor show by export-oriented sectors such as information technology (IT) services and pharmaceuticals, and also the decline in private sector investments hitting the growth of capital goods sector.
“The positive impact of demand recovery and a favourable base effect is seen fading in Q4FY18 despite continued strength in demand conditions.
This is largely because of higher tax burden and emergence of margin pressures, indicating that pricing power across sectors is still to gain further traction,” says Dhananjay Sinha, head research, Emkay Global Financial Services. Sales growth for Emkay’s universe of companies (ex-financials and oil & gas) is expected to moderate to 9 per cent YoY in the March quarter of FY18, from 11.3 per cent YoY increase in the quarter ended December 2017, while net profit (adjusted for exceptional gains and losses) is estimated to grow by 4.2 per cent YoY, against a growth of 14.6 per cent in preceding quarter.
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KIE expects Nifty50 companies’ net profit to grow by 4 per cent YoY, while combined earnings for all companies tracked by KIE are estimated to grow by 7 per cent YoY in Q4FY18. “We expect strong growth in the net profit of automobiles, consumer products, industrials, metals and mining, and NBFCs,” writes KIE’s Sanjeev Prasad, in his earnings estimates for the March quarter.
A deeper look at the estimates show that 96 per cent of the incremental growth in Nifty companies’ combined net profit for the March quarter is expected to come from just five firms – State Bank of India (28 per cent), Indian Oil Corporation (24.8 per cent), Coal India (18.1 per cent), Oil and Natural Gas Corporation (14.3 per cent), and GAIL (India) 10.8 per cent, all of which are from the public sector.
At the other extreme, ICICI Bank, Axis Bank, Vedanta, Tata Steel, and Bharti Airtel are expected to be the biggest laggards with a sharp dip in net profits. Bharti Airtel, India’s largest telecom operator, is expected to report its first quarterly loss in nearly 60 quarters, indicating the continued stress in the sector.
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In all, 15 Nifty companies are likely to report a YoY decline in net profit, while 25 are expected to report double-digit growth in earnings and the rest (10 companies) are expected to report a single-digit increase in their earnings.
Not surprisingly, some brokerages are concerned about the quality of earnings growth, with most of the incremental growth coming from commodity producers such as energy companies. “While overall earnings are improving, the quality leaves much to be desired as commodities account for little over 80 per cent of the profit growth,” say Prateek Parekh and Akshay Gattani of Edelweiss Securities in their report on earnings estimates for the March quarter.
A lower-than-expected earnings growth in Q4 is likely to result in earnings downgrade for the index companies. “FY18 estimated earnings growth of our universe/Nifty will be 4 per cent and 7 per cent, respectively, implying 300 basis points downgrade of FY18 estimated earnings itself. This is the seventh consecutive year of EPS downgrades and sub-10 per cent growth,” writes Edelweiss’ Parekh.
According to analysts, the key factor to watch out for in the forthcoming quarter would be banks’ asset quality, corporate capex outlook, global trade conflicts, its impact on Indian companies, and bond yield trajectory.
Q4

One-third of registered firms have shut down, 15% only last year: Govt data

A third of the companies registered with the Ministry of Corporate Affairs (MCA) have shut down, with nearly half of them folding up in the past year.
Data from the MCA reveals that as of January 31, 2018, about 1.7 million companies were registered with the government. Of these, 538,000, or about 32 per cent, had shut shop. About 238,000 or 15 per cent of the total, had folded up in the past year. This means one in seven firms shut down in the year.
On January 31, 2017, there were about 300,000 companies that had folded up, according to the MCA’s data.
Most of these companies had gone defunct under Section 248 of the Companies Act 2013. This law allows the Registrar of Companies (RoC) to strike off the name of a company for three reasons: It failed to start business within a year of its incorporation; the company does not have sufficient capital; and the company has not done any business for the two preceding financial years and has not applied to be classified as a dormant one.
Of the about 538,000 companies that had shut shop till the end of January this year, nearly 495,000 were in this category.
A crackdown on shell companies, increased regulatory compliance and failure of companies to avail bank credit, and defaulting on loans are some of the reasons cited by accounting professionals for the closure of such a large number of companies in the span of a year.
“These companies are mostly defunct as they have not complied with regulations for the last three or four years. With the new companies law the compliance norms have been made stringent.
Often the companies also do not want to disclose a lot of information,” said Mamta Binanai, a resolution professional and company secretary.
“Many of the firms might be in the non-performing asset category. Also, due to a crackdown on shell companies, a large number of these have ceased to exist,” she added.
Corporate Affairs Min data reveals 1 in 7 firms registered shut last year Over the last few months, several functional companies have also been referred to the National Company Law Tribunal (NCLT).
“A number of functional companies have also been labelled as defunct. For example, if there is a dispute among the promoters and they fail to submit data to the RoC, the company can be classified as defunct. In many cases, the NCLT is seeking details, leading to a defunct status. There has to be some mechanism to classify such companies,” said Mohit Chawla, a Chandigarh-based finance professional.
As of January 2018, there were about 1.15 million companies active in the country, against about 1.14 million as of January 2017.
A classification of active companies by economic activity reveals that the biggest chunk were in business services (346,498), followed by manufacturing (232,059), trading (151,843), and construction (104,359).
Business services comprise information technology, research and development, and other services such as law, auditing, accounts and consultancy.

Domestic, global flows are expected to stay favourable in early 2018

Benchmark indices gained about 28-29 per cent in 2017, their best yearly performance in three years. The gains came despite corporate earnings disappointing and the economy growing at a sluggish pace. Many stocks saw their valuations get re-rated, taking multiples way above their historic averages. This was made possible by the highest-ever investments by domestic mutual funds (MFs) and supportive global portfolio flows.
The rally in stocks is expected to continue in 2018 on hopes of a revival in corporate earnings and economic growth. However, as demonstrated in 2017, market’s fortune will largely be linked to how liquidity — both domestic and global — pans out. Stepping into the New Year, there doesn’t seem to be any pertinent concerns that will spoil the fund flow party. Thanks to increase in financialisation of domestic household savings, money continues to flow into equity MFs. On the global front, too, though the US Federal Reserve (Fed) is moving towards unwinding of its quantitative easing (QE) programme, other liquidity outlets — European Central Bank (ECB) and Bank of Japan (BoJ) continue to pump money. This is ensuring benign liquidity conditions, which are eventually finding their way into riskier emerging markets (EMs).
Equity strategist are forecasting the market dream run to continue till the first half of 2018 but don’t rule out shocks, as liquidity supply is expected to tighten in the latter part of the year.

Graph Source: NSDL/Sebi “One other difference between 2017 and 2018 is Fed’s upcoming balance sheet reduction and QE unwinding programme. While in 2017 it was all talk about unwinding balance sheets, in 2018 we get to learn how that will actually impact markets when the actual unwinding starts,” says Herald van der Linde, head of equity strategy for Asia-Pacific at HSBC.
Robert Subbaraman, managing director and head of emerging market economics, Nomura adds, “We don’t see any significant risk in the first quarter of 2018. But, in the second or third quarter, we could see some market shocks from Fed normalisation. We are also concerned with what happens with the ECB and BoJ. This could cause a risk-off as investors will look to reassess the credit risk in the EMs.”
Strategist at Bank of America Merrill Lynch don’t rule out a possibility of a “flash crash” in the first half of 2018 as global central banks continue to withdraw liquidity. The US-based bank says total central bank liquidity infusions will peak in the June 2018 quarter.
If the coordinated global asset inflation pauses, ends or reverses it will hurt Indian equity prices, says Sanjay Mookim, India Equity Strategist, Bank of America Merrill Lynch.

markets Photo: iStock Foreign portfolio investors (FPIs) inflows into Indian equities in 2017 totalled $8 billion, most of which found its way into Initial Public Offerings (IPOs).
Neelkanth Mishra, managing director and India equity strategist at Credit Suisse is more bullish on foreign flow outlook. According to him, India will continue to attract strong FPI flows as primary issuances in 2018 are expected to remain strong amid continuance of easy global liquidity conditions.
“With inflation staying low globally despite the commodity price increases, the withdrawal of central bank accommodation is unlikely to be sudden. The aggregate balance sheet of developed market central banks will barely change in 2018,” says Mishra.
Meanwhile, the liquidity outlook on the domestic side appears to be much more sanguine. Average monthly inflows into equity schemes in 2017 were close to Rs 12,000 crore. This momentum is expected to sustain, say most experts.
“Domestic households continue to make a shift away from gold into equities – a structural trend we expect will persist in 2018,” says Ridham Desai, managing director, Morgan Stanley India.
Experts believe investors have poured money into equities due to lack of alternative investment options--with global and real estate prices remaining soft. Poor returns in other asset classes will drive more investors towards equities, they add.
Another reason for sustained flows into equities has been low volatility in 2017. But, experts say a spike in volatility or frequent shocks to the market could test investors’ risk appetite and dwindle flows into equities.