The recategorisation of MF (mutual fund) schemes led to an institutional selling just to meet regulatory requirements.
The market is expecting key announcements in the Budget that could kick-start growth and revive sentiment. While measures to revive consumption are most anticipated, Dhiraj Relli, managing director and chief executive officer of HDFC Securities, is of the view that long-term capital gains (LTCG) tax should be done away with for equities and equity mutual funds. In an interview with Urvashi Valecha, he said it was an easier move for the government to boost positivity. Edited Excerpts:
What is your view on the business of brokerage industry going forward?
The brokerage industry is due for consolidation. As on date, there are 600 depository participants with CDSL and 279 depository participants with NSDL. There are no entry barriers in the broking business as with very small capital, you can start your own business. The cost of risk and compliance management has been increasing. Consolidation is due on the brokerage side. The big brokerage houses have the trust factor playing for them. After the Karvy episode, there is a trust deficit in depositories and broking firms, with people being more skeptical about whether their demat accounts are safe or not. Bank-based brokerage houses are at an advantage because they can continue to invest in compliance and cybersecurity, technology, quality talent, effective client engagement and research – very much the required elements of a common investor’s wish list.
The market has seen intense polarisation over the last two years. Will it continue and do you expect midcap and smallcap stocks to outperform this year?
The reason for polarisation is that of formalisation – after GST implementation, larger companies are the beneficiaries of formalisation of the economy. These are the companies which are the beneficiaries of even (corporate) tax cut as well. Needless to say, they are gaining market share and are able to save tax which is directly adding to their bottom line – paving the way for a polarised market. Please note that we are referring to polarisation here in terms of stock prices only. Stock prices are ultimately a reflection of earnings growth and the gain in the market share of these companies.
The recategorisation of MF (mutual fund) schemes led to an institutional selling just to meet regulatory requirements. Sebi, also at that time, in the six-nine month period, introduced the surveillance margin which had small companies grappling with the formalisation of the economy, demonetisation and other issues. Big companies, on the other hand, were able to cope with these changes faster, gain share from some of smaller companies and there was also a flight to safety. In 2017, midcap and smallcap index witnessed sharp upside, while in 2018 and 2019, negative returns were registered. This year, we strongly believe that midcap will do a lot of catching up. Midcaps could outperform large caps. We are at the cusp of a recovery. Smallcaps may take some time with a lag of one or two quarters but select quality midcaps may give handsome returns.
What are your expectations from the Budget and what will happen in FY21?
The government has to take steps to boost consumption and keep the fiscal deficit in check though some leeway will be pardoned in such times. LTCG should be done away with for the equities and equity mutual funds. Post LTCG introduction in the last two years, the government did not gain any taxes – in fact there are hardly any long-term capital gains in the market. It is an easier move for them to boost positivity. In any case, we need more risk capital in India and if we do not incentivize the risk capital, we will face capital shortage. The Securities Transaction Tax (STT) will remain since it is an immediate revenue. STT provides some stability in terms of revenue generation.
The market regulator (Sebi) is said to be evaluating disclosure norms by companies. What are your views on this?
Governance is another reason why there is polarisation. Earlier, governance was imposed, then it became a culture and now there is no other option but to go for good governance because that has played out so well. ESG is a big factor which was earlier there as a judgement, but not as framework. Now, all banks are putting that as a framework. That is where ITC has been valued at a discount from other companies. For a company like ITC, the best option probably would be to hive off the hospitality and FMCG businesses. ESG will play out very well and this is an important parameter. It is a crucial framework for investment and for lending. Sooner than later, anything that is impacting the environment, people and their governance-related concerns, will be clamped down or hammered by either regulators or NGOs or by people who would stop consuming those products.