The Hindu Business Line : Time to provide direction to IPO market

In the Budget of 2000-01, the then Finance Minister gave a promise to the Indian Diaspora that the Government will allow Indian exchanges to set up their trading terminals abroad. Even after six years we are unable to install trading terminals outside the country due to the absence of enabling provisions.

If sub-brokers (introducing brokers as is called in other developed markets) can be appointed in other countries who are regulated by the regulators of the respective countries this issue can be addressed. The 24 million strong NRIs look forward to trading in Indian markets and hence there is a pressing need for fulfilling that promise.

Capital Account Convertibility

If full capital account convertibility is unlikely to arrive for sometime, the Government should allow at least NRIs to have capital account convertibility with adequate quantitative restrictions, if necessary. The current PIS route of NRI investment in Indian stock market is cumbersome and needs reform since the provisions are outdated. These provisions were introduced decades ago and hence do not fall in line with the current realities in view of sweeping market reforms that have happened in India during the last decade.

An NRI cannot net his transactions on a daily basis today on account of the requirement of settling each trade separately to enable tax deduction at source for each trade. If an Indian can do day trading why not an NRI?

Investment Abroad

The current regulations permit an Indian to spend up to $50,000 per year overseas. However, we have not framed a policy for allowing a resident Indian to invest this amount overseas. This is a paradox and should be addressed appropriately. If one can gamble away this money without questions why are we not allowing Indian residents to formally invest through open and transparent manner?

Short-Term Capital Gains

There has been an ambiguity regarding the current provision of 10 per cent short-term capital gains since various assessment officers take different view regarding what is short term and what is business income. Hence the investors are subjected to harassment and protracted litigation.

The Budget should adequately clarify this provision with appropriate definitions. At the time of introduction of securities transaction tax (STT), the Government had promised this reduction in short term capital gains in clear terms. The Government has started collecting large amounts under this head without any leakage and hence there must be a liberal definition of short-term capital gains vis-a-vis business income.

The application of STT has been unfair towards investors on many occasions. For example, when an investor buys Out of the Money options he will end up paying STT which will be more than the brokerage. On a contract of Rs 5,00,000 in options when the brokerage is calculated on premium it will work out to a maximum of Rs 100 as brokerage and Rs 85 will be the STT.

If brokers are not allowed to charge brokerage on strike price, why should the STT be charged on strike price. This also should be on premium only. In fact options are used more by genuine investors and there is an unfair tariff.

IPO Reforms

There is considerable amount of difficulties for an investor today in the IPO market starting from sourcing the application to filling it and submitting it along with cheques. When we have one of the world's best trading and settlement infrastructure available why can't we use that infrastructure rather than insisting on a parallel market for IPOs? This will be a good time to provide a direction to the IPO market as well to attract new investors into the market.

Since lending of cash is permitted in the market through margin trading the one link that is missing is the ability for the market to short sell by borrowing securities. This will also be good at times when the market is over heated to throw some cold water around. The retail investor also should be allowed to lend through appropriate vehicles.

The author is Managing Director, Geojit Financial Services Ltd.

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