Saturday, October 31, 2020

Index



A stock index or stock market index is a measurement of a section of the stock market. From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index.
The values of the grouped stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market and to compare the return on specific investments.
Two of the primary criteria of an index are that it is invest-able and transparent. Many mutual funds and Exchange-traded funds attempt to “track” an index fund with varying degrees of success. The difference between an index fund’s performance and the index is called tracking error.


Team
Bazarwiz

Tuesday, October 6, 2020

How dividend income is taxed in India now

*How dividend income is taxed in India now –* 

The Finance Act 2020 has shifted back to the classical system of taxing dividend in the hands of shareholders/unit holders from 01 April 2020, and abolished dividend distribution tax (‘DDT’), wherein the incidence was on the company.

*With this amendment, the following corresponding changes have been made to reduce the tax burden on shareholders:* 

a) As per the amended section 57 of the Income Tax Act, 1961 (‘Act’), interest expense incurred for the purpose of earning the dividend income would be allowed as a deduction up to a maximum of 20% of such income.
b) Section 80M of the Act has been introduced in order to remove the cascading effect of tax on dividend income for corporate shareholders. Domestic holding companies receiving dividend income from subsidiaries will be allowed to set off such amounts from their total taxable income. This set off shall not exceed the amount of dividend further distributed by it up to one month prior to the due date of filing of return.
Further, by making dividend taxable in the hands of shareholders, the Finance Act 2020 has rendered section 14A of the Act inapplicable in computing such dividend income.
*Taxability in the hands of resident shareholders* 
 *Individual –* For an individual shareholder, dividend shall be taxable as per the applicable slab rates.
Moreover, the government has abolished additional tax of 10% on dividend income in excess of Rs 10 lakh per year for resident non-corporate taxpayers (section 115BBDA of the Act).
*Companies –* For corporate shareholders, dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94% (including surcharge and cess).
*Taxability in the hands of non-resident*
*shareholders* 
Indian companies shall be liable to withhold taxes at the rate of 20% on payment of dividend to a non-resident shareholder, as per the provisions of the Act. Non-resident shareholders can claim benefit of the lower tax rate under the relevant tax treaty, provided they are ‘beneficial owners’ of the dividend income. Various tax treaties provide for a lower withholding tax rate, typically ranging from 5% to 15%.
The term ‘beneficial owner’ has been neither defined in tax treaties nor in the domestic tax laws, and the determination of the same is a fact based exercise. The OECD commentary indicates certain criteria for ascertaining beneficial ownership. The criteria, such as agent, nominee, conduit company acting as a fiduciary etc., cannot be considered as ‘beneficial owner’ or company should not be bound by contractual/ legal obligation to pass on dividends received from another person.
Various Indian judicial precedents have also laid down certain principles to determine ‘beneficial ownership’, such as the principle that a taxpayer should make independent decisions vis-à-vis investment, expenditure, etc. or should enjoy unrestricted right to use the income, etc.
Further, the impact of Multilateral Instruments (‘MLI’) needs to be evaluated. MLI came into force in India from 01 October 2019, and the provisions of MLI were effective on the Indian tax treaties from 01 April 2020. Article 8 of the MLI, which deals with dividends, provides that the concessional rate of tax on dividend in case of beneficial ownership will be available only in a case where the shares are held by the shareholder for at least 365 days.
In addition to ‘beneficial ownership’ and MLI, the Most Favoured Nation (‘MFN’) clauses of tax treaties also need to be looked into. MFN clauses forge a link between taxation agreements by ensuring that the parties to one treaty provide each other with treatment no less favourable than the treatment they provide under other treaties in areas covered by the clause.
Separately, non-resident shareholders should also get credit of withholding tax against tax payable in their home country, subject to local regulations.

Tuesday, September 1, 2020

Open Market Operation - OMO


*Open Market Operation - OMO* 

Open market operation is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
The objective of OMO is to regulate the money supply in the economy.
When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
RBI carries out the OMO through commercial banks and does not directly deal with the public.
OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

Monday, August 31, 2020

Collateralized Borrowing and Lending Obligation - CBLO


 *Collateralized Borrowing and Lending Obligation - CBLO* 

 The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.
The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans.  There is no such need of a collateral under the call money market.
Institutions participating in CBLO are entities who have either no access or restricted access to the inter -bank call money market. Still, institutions active in the call money market can participate in the CBLO market. Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc., are eligible for CBLO membership. These institutions have to avail a CBLO membership to do activities in the market.
Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the CBLO market. It is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to one year.
The CCIL provides the Dealing System through Indian Financial Network (INFINET) and Negotiated Dealing System for participating in the market.
 In the CBLO market, members can borrow or lend funds against the collateral of eligible securities. Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by the CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL. For trading, the CCIL matches the borrowing and lending orders (order matching) submitted by the members. Borrowers have to pay interest to the lenders in accordance with the bid.

Wednesday, August 26, 2020

AT1 Bonds



*AT1 Bonds* 

Additional Tier 1 bonds, also called AT1in market parlance, are a kind of perpetual bonds without any expiry date that banks are allowed to issue to meet their longterm capital requirement. That’s why these bonds are treated as quasi-equity instruments under the law. RBI is the regulator for these bonds.
• AT1 bonds are like any other bonds issued by banks and companies, which pay a fixed rate of interest at regular interval. Usually, these bonds pay a slightly higher rate of interest compared to similar, non-perpetual bonds. However, the issuing bank has no obligation to pay back the principal to investors.
• These bonds are listed and traded on the exchanges. So if an AT1 bond holder needs money, he can sell it in the market.
• Investors can not return these bonds to the issuing bank and get the money. This means there is no put option available to its holders. However, the issuing banks have the option to recall AT1 bonds issued by them (termed call option). They can go for a call option five years after these are issued and then every year at a pre-announced period. This way the issuing banks can give an exit option to AT1 bond holders.
• According to a report by rating agency ICRA, nearly Rs 94,000 crore worth of AT1 bonds are currently issued by various banks. Of this, Rs 55,000 crore is from PSU banks, while the balance Rs 39,000 crore is by private lenders.