With no big-bang reforms and a slew of proposals, the Budget has been a mixed bag. Hopefully, it will bring the much-needed long-term stability with plans focussed on the fundamentals

Finance Minister Nirmala Sitharaman’s first maiden Budget failed to excite the bourses. The Sensex fell 793 points, the biggest crash in a single day witnessed this year on Monday. The general feeling after the Budget was that no stimulus package was provided to kickstart the economy. No specific announcements were made to lift the sagging economy. The only silver lining was that fiscal deficit target was brought down from 3.4 per cent to 3.3 per cent for FY 2019-20. This indicates that the Government wants to focus on macro-economic variables. The recapitalisation plan of Rs 70,000 crore for public sector banks has been taken positively by markets as it was higher than what was expected.

In addition, the announcement to cut the corporate tax rate from 30 per cent to 25 per cent for firms having an annual turnover of up to Rs 400 crore, which, in fact, covers 99.3 per cent of the country’s companies, is welcome. This will provide the much-needed respite to organisations that are still grappling with Goods and Services Tax (GST) blues. This move will also benefit many foreign companies, which have set up manufacturing plants for advanced technologies like semiconductors, lithium batteries and solar charging infrastructure in India. These firms will also be the recipients of tax exemptions and benefits, giving much boost to the ‘Make in India’ programme.

In a similar move, to encourage foreign companies, the Government relaxed regulations requiring foreign retailers to source a portion of their raw materials locally. This will encourage retailers like Apple, IKEA and Uniqlo to do more business in India. We may also consider opening up the aviation, media and insurance sectors to foreign investments. The Government plans to offer an investment option in exchange-traded funds (ETFs), on the lines of Equity Linked Savings Scheme (ELSS). An ELSS offers investors a tax deduction of up to Rs 1.5 lakh under Section 80C and comes with a lock-in period of three years. This move will draw retail investors to Central Public Sector Enterprises  (CPSE) ETFs, which have seen strong participation from institutional and high net worth investors. It will also have a more concentrated portfolio than an ELSS fund as the universe of companies available to it is smaller. Higher concentration can make performance of these ETFs volatile — both on the upside and downside. Therefore, investors must weigh the merits of underlying investment, instead of investing in it just for tax returns.

The stocks markets were, however, spooked as in a bid to give more teeth to the minority shareholders, the Budget proposed to increase the minimum public shareholding in listed firms to 35 per cent from 25 per cent. If implemented, this will give larger say to retail investors in influencing the verdicts of special resolutions, where till now because of higher shareholding percentage, promoters have had their way. Besides, raising public holding to 35 per cent will lead to a supply of high-quality papers in the market and will provide an excellent opportunity for investors waiting on the sidelines for further investment in stocks. This will also lead to a better price discovery.

However, this move may lead to MNCs — with low public float to delist, and many companies with higher promoter holding — to come out with follow on public offerings to reduce their stakes. This may potentially squeeze liquidity in secondary markets. According to Centrum Broking, promoters in as many as 1,174 listed companies will have to offload their stakes to meet this requirement. This is 25 per cent of the total listed universe.

The move to tax the super rich is straight out of Robinhood tales. The Finance Minister increased the 15 per cent personal tax surcharge on high income brackets. The new surcharge for incomes between Rs 2 crore and Rs 5 crore is at 25 per cent and 37 per cent surcharge will be levied to those who earn above Rs 5 crore. The Government should look at incentivising wealth generation instead of penalising the same. We should aim to develop as a creative and innovative economy and increase the number of entrepreneurs. The overall economy has to be more encouraging. The Government should try to make more millionaires.

In the second term, the present Government is trying to make domestic markets more attractive to foreign investors. India has always been a market that offers great promise of consumption but at the same time, it is marred by  corruption, poor regulatory frameworks with constant corporate governance issues and policy drawbacks. To win back investors’ trust, it is important to create an environment of improved disclosure and transparency. Making auditors and credit rating agencies more accountable for their actions will go a long way in making equity markets safer. The current Budget is aimed at boosting India’s attractiveness to foreign investors as it proposes a slew of reforms as also aims to increase the statutory limit for FPI investment in a company from 24 per cent to sectoral foreign investment limit with an option given to the concerned corporates to limit it to a lower threshold.

The Government is also permitting FPIs to subscribe to listed debt securities issued by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). The Finance Minister has also proposed to permit investments made by FIIs/FPIs in debt securities issued by infrastructure debt fund-non-banking financial companies (IDF-NBFCs) to be transferred and sold to any domestic investor within the specified lock-in period. In addition, the Know Your Customer (KYC) requirements for FPIs have also been eased. These steps are taken to ensure a positive, investor-friendly and hassle free experience to FPIs as they have always been a vital source of capital.

However, the Budget provided no incentives to the mutual fund industry. This sector, which channelises domestic savings into equity and debt markets, has been left high and dry. According to the Association of Mutual Funds of India (AMFI), the industry was hoping that the Finance Minister would oblige some of their demands like the introduction of debt-oriented tax saving schemes or DLSS similar to ELSS; exemption from dividend distribution tax or DDT; and exclusive tax benefits for mutual fund retirement schemes. The introduction of DLSS could witness more participation from retail investors, who are risk averse and would be interested in investing in less risky instruments and at the same time benefit from tax savings.

The same results would also be evident if sops are given for retirement schemes. With a total penetration level of just 11 per cent (equity 4 per cent, debt 7 per cent), as compared to 114 per cent in Australia, 91 per cent in the US and 51 per cent in the UK, India’s mutual fund industry remains under-penetrated. The Government has to give definite sops to the industry to channelise household savings into it and give more options to retail investors.

Although the mutual fund industry did not get DLSS, the Government has plans to help retail investors to invest in securities and treasury bills. The Budget has taken a step further to attract individual investors towards bond markets. To make the process of investing in treasuries and Government bonds less cumbersome and easier for individual investors, it was announced that inter-operability between the Reserve Bank of India’s (RBI) depositories and the capital market regulator, the Securities and Exchange Board of India’s (SEBI) depositories will be introduced in consultation with both these regulators.

At the moment, buying and selling of Government securities is cumbersome as investors do not get g-secs (Government securities) deposited directly in the demat account, like other equity instruments. Securities are issued in the Securities General Ledger account and from there, it is a tedious process to get them transferred to demat accounts of investors.

The Government also proposed to deepen the market for long term bonds, including the deepening of markets for corporate bond repos, credit default swaps with a specific focus to infrastructure sector. It plans to deepen the corporate tri-party repo market in corporate debt securities by working with regulators like RBI and SEBI to enable stock exchanges to allow AA rated bonds as collaterals. Since details of the proposal are still awaited, initial feeling is that the repos with AA rated bonds as collaterals would improve liquidity.

The maiden budget presented by Sitharaman has been a mixed bag. Although, it was not very flashy, hopefully, it will be able to bring the much-needed long-term stability with plans focussed on the fundamentals.

(The writer is Assistant Professor at Amity University)

Writer: Hima kota

Courtesy: The Pioneer

With no big-bang reforms and a slew of proposals, the Budget has been a mixed bag. Hopefully, it will bring the much-needed long-term stability with plans focussed on the fundamentals

Finance Minister Nirmala Sitharaman’s first maiden Budget failed to excite the bourses. The Sensex fell 793 points, the biggest crash in a single day witnessed this year on Monday. The general feeling after the Budget was that no stimulus package was provided to kickstart the economy. No specific announcements were made to lift the sagging economy. The only silver lining was that fiscal deficit target was brought down from 3.4 per cent to 3.3 per cent for FY 2019-20. This indicates that the Government wants to focus on macro-economic variables. The recapitalisation plan of Rs 70,000 crore for public sector banks has been taken positively by markets as it was higher than what was expected.

In addition, the announcement to cut the corporate tax rate from 30 per cent to 25 per cent for firms having an annual turnover of up to Rs 400 crore, which, in fact, covers 99.3 per cent of the country’s companies, is welcome. This will provide the much-needed respite to organisations that are still grappling with Goods and Services Tax (GST) blues. This move will also benefit many foreign companies, which have set up manufacturing plants for advanced technologies like semiconductors, lithium batteries and solar charging infrastructure in India. These firms will also be the recipients of tax exemptions and benefits, giving much boost to the ‘Make in India’ programme.

In a similar move, to encourage foreign companies, the Government relaxed regulations requiring foreign retailers to source a portion of their raw materials locally. This will encourage retailers like Apple, IKEA and Uniqlo to do more business in India. We may also consider opening up the aviation, media and insurance sectors to foreign investments. The Government plans to offer an investment option in exchange-traded funds (ETFs), on the lines of Equity Linked Savings Scheme (ELSS). An ELSS offers investors a tax deduction of up to Rs 1.5 lakh under Section 80C and comes with a lock-in period of three years. This move will draw retail investors to Central Public Sector Enterprises  (CPSE) ETFs, which have seen strong participation from institutional and high net worth investors. It will also have a more concentrated portfolio than an ELSS fund as the universe of companies available to it is smaller. Higher concentration can make performance of these ETFs volatile — both on the upside and downside. Therefore, investors must weigh the merits of underlying investment, instead of investing in it just for tax returns.

The stocks markets were, however, spooked as in a bid to give more teeth to the minority shareholders, the Budget proposed to increase the minimum public shareholding in listed firms to 35 per cent from 25 per cent. If implemented, this will give larger say to retail investors in influencing the verdicts of special resolutions, where till now because of higher shareholding percentage, promoters have had their way. Besides, raising public holding to 35 per cent will lead to a supply of high-quality papers in the market and will provide an excellent opportunity for investors waiting on the sidelines for further investment in stocks. This will also lead to a better price discovery.

However, this move may lead to MNCs — with low public float to delist, and many companies with higher promoter holding — to come out with follow on public offerings to reduce their stakes. This may potentially squeeze liquidity in secondary markets. According to Centrum Broking, promoters in as many as 1,174 listed companies will have to offload their stakes to meet this requirement. This is 25 per cent of the total listed universe.

The move to tax the super rich is straight out of Robinhood tales. The Finance Minister increased the 15 per cent personal tax surcharge on high income brackets. The new surcharge for incomes between Rs 2 crore and Rs 5 crore is at 25 per cent and 37 per cent surcharge will be levied to those who earn above Rs 5 crore. The Government should look at incentivising wealth generation instead of penalising the same. We should aim to develop as a creative and innovative economy and increase the number of entrepreneurs. The overall economy has to be more encouraging. The Government should try to make more millionaires.

In the second term, the present Government is trying to make domestic markets more attractive to foreign investors. India has always been a market that offers great promise of consumption but at the same time, it is marred by  corruption, poor regulatory frameworks with constant corporate governance issues and policy drawbacks. To win back investors’ trust, it is important to create an environment of improved disclosure and transparency. Making auditors and credit rating agencies more accountable for their actions will go a long way in making equity markets safer. The current Budget is aimed at boosting India’s attractiveness to foreign investors as it proposes a slew of reforms as also aims to increase the statutory limit for FPI investment in a company from 24 per cent to sectoral foreign investment limit with an option given to the concerned corporates to limit it to a lower threshold.

The Government is also permitting FPIs to subscribe to listed debt securities issued by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). The Finance Minister has also proposed to permit investments made by FIIs/FPIs in debt securities issued by infrastructure debt fund-non-banking financial companies (IDF-NBFCs) to be transferred and sold to any domestic investor within the specified lock-in period. In addition, the Know Your Customer (KYC) requirements for FPIs have also been eased. These steps are taken to ensure a positive, investor-friendly and hassle free experience to FPIs as they have always been a vital source of capital.

However, the Budget provided no incentives to the mutual fund industry. This sector, which channelises domestic savings into equity and debt markets, has been left high and dry. According to the Association of Mutual Funds of India (AMFI), the industry was hoping that the Finance Minister would oblige some of their demands like the introduction of debt-oriented tax saving schemes or DLSS similar to ELSS; exemption from dividend distribution tax or DDT; and exclusive tax benefits for mutual fund retirement schemes. The introduction of DLSS could witness more participation from retail investors, who are risk averse and would be interested in investing in less risky instruments and at the same time benefit from tax savings.

The same results would also be evident if sops are given for retirement schemes. With a total penetration level of just 11 per cent (equity 4 per cent, debt 7 per cent), as compared to 114 per cent in Australia, 91 per cent in the US and 51 per cent in the UK, India’s mutual fund industry remains under-penetrated. The Government has to give definite sops to the industry to channelise household savings into it and give more options to retail investors.

Although the mutual fund industry did not get DLSS, the Government has plans to help retail investors to invest in securities and treasury bills. The Budget has taken a step further to attract individual investors towards bond markets. To make the process of investing in treasuries and Government bonds less cumbersome and easier for individual investors, it was announced that inter-operability between the Reserve Bank of India’s (RBI) depositories and the capital market regulator, the Securities and Exchange Board of India’s (SEBI) depositories will be introduced in consultation with both these regulators.

At the moment, buying and selling of Government securities is cumbersome as investors do not get g-secs (Government securities) deposited directly in the demat account, like other equity instruments. Securities are issued in the Securities General Ledger account and from there, it is a tedious process to get them transferred to demat accounts of investors.

The Government also proposed to deepen the market for long term bonds, including the deepening of markets for corporate bond repos, credit default swaps with a specific focus to infrastructure sector. It plans to deepen the corporate tri-party repo market in corporate debt securities by working with regulators like RBI and SEBI to enable stock exchanges to allow AA rated bonds as collaterals. Since details of the proposal are still awaited, initial feeling is that the repos with AA rated bonds as collaterals would improve liquidity.

The maiden budget presented by Sitharaman has been a mixed bag. Although, it was not very flashy, hopefully, it will be able to bring the much-needed long-term stability with plans focussed on the fundamentals.

(The writer is Assistant Professor at Amity University)

Writer: Hima kota

Courtesy: The Pioneer