It is indeed intriguing that a Budget speech that devoted so much airtime to discussing financial market measures should go down so badly with the stock market. But in the past, Budget speeches that the stock markets hailed as dreams-come-true have quickly given way to disappointment once the fine-print was evident.
Analysing financial market proposals in Finance Minister Sitharaman’s Budget, it appears that the market reaction could be off-the-mark this year too. The Budget moves that market participants have immediately perceived as negative, may do Indian financial markets and aam aadmi investors some good in the long run.
Equity investors
On equities, apart from the absence of cut in corporate tax or GST rates as demanded by the industry lobby, the markets appeared to be spooked by the FM asking SEBI to revisit its minimum public shareholding rule for listed companies. It suggested that promoters be asked to dilute at least 35 per cent of their shareholding, from the present 25 per cent.
The fear appears to be that this new rule will unleash a deluge of new equity issuances, at a time when investor appetite for equities isn’t all that robust. Quick number-crunching for 1,600 NSE-listed privately owned companies suggests that enforcing this rule will require 477 of them to tap the markets with public offers for nearly ₹2.7 lakh crore. While a one-shot mop-up of that order can certainly drain the market of liquidity, there are offsetting factors that can benefit investors in the long run.
One, the offers are unlikely to be one-shot, as SEBI is likely to offer companies an extended timeline (say 3-4 years) to comply with this rule.
Two, while markets appear to be worried about a deluge of poor quality paper, there are some very promising market names (which would otherwise have never diluted equity) which may be forced into offering shares after this rule — TCS, Wipro, Interglobe Aviation, Hindustan Unilever, HDFC Life Insurance, GSK Pharma, Siemens and a host of other MNCs. Should these companies choose to expand their public float (and not delist), Indian investors may well get a one-off opportunity to buy into high-quality businesses akin to the one they got when the first set of FERA companies listed in India.
Three, this forced expansion of market free float will open up lucrative investing opportunities for domestic institutions who have had a problem of plenty with retail flows in the last five years. Finally, a higher public shareholding can peg up corporate governance by loosening the promoter stranglehold over listed firms.
Likewise, the proposal to do away with the 24 per cent sub-limit for FPIs in listed firms has flown under the radar. This is a big positive both for the bellwether indices and the sectors where FPIs have been forced to stay away due to lack of headroom.
There are smaller giveaways to equity investors too. The levy of a tax on buybacks by listed companies at 20 per cent, though prima facie negative, may force domestic companies to re-explore the return of surpluses through dividends. Dividend payouts are far more equitable to small investors than buybacks, as the latter only offer selective participation.
Section 80C tax breaks for NPS Tier II investments makes this ultra low-cost vehicle more attractive to retirement investors. The separation of NPS Trust from the pension regulator is a welcome move too, as it allows the regulator to supervise the investment decisions of NPS’ private fund managers without any conflicts of interest.
Debt investors
For long, retail investors in India’s debt markets have been handicapped by their lack of direct access to the safest bonds in the market — treasury bills and G-secs. This has forced them to rely on inefficient intermediaries and take haircuts on their returns. Regulators have paid a lot of lip service to ‘opening up’ the G-sec market to retail investors, with very little changing on the ground.
The Budget’s suggestions on inter-operability between RBI- and SEBI-regulated depositories and rationalising security codes in the bond market address the key hurdles to easier retail access to debt markets. Once sovereign bonds are opened up to retail investors, they will no longer have to rely on low-return, illiquid vehicles such as traditional insurance plans or even bank deposits for their long-term fixed income allocations. Efforts to include AA-rated corporate bonds in the tri-party repo market can alleviate some of the liquidity issues faced by mutual funds, thus aiding their retail investors.
Sweeping housing finance companies (HFCs) into the RBI’s regulatory fold from that of the National Housing Bank, removes conflicts of interest between NHB’s regulatory and refinancing role.
Public depositors, NCD investors and shareholders in HFCs can now breathe easier, with uniform regulations and better supervision. The offer of a limited-period window of credit enhancement by the government to banks buying out loan portfolios can ease funding constraints to NBFCs and HFCs with sound balance sheets, ring-fencing them from the ongoing crisis.
There’s a general impression that middle class taxpayers have been left high-and-dry by this Budget, while the super-rich are in a meltdown over the significant increase in their income tax rates.
For the taxpayers
While doing nothing to alleviate their tax burden, the Budget does make an effort towards simplifying the heavy compliance burden on small taxpayers through three measures. It proposes to make Aadhaar an acceptable substitute for PAN in tax matters, provide investors with pre-filled IT return forms (a great boon when these forms are now running into 20-40 pages) and proposes to altogether do away with personal interactions with the assessing officer (with its huge scope for bribe-seeking) for scrutiny assessments.
Yes, as against this, there’s no let-up in efforts to sweep more citizens into the tax net. Folks who deposit more than ₹1 crore into their current account, take foreign trips costing over ₹2 lakh or spend over ₹1 lakh on their electricity bills will now to have to file their IT returns, even if their declared income doesn’t warrant it. While this may seem draconian, one must not forget that the biggest bump-up in India’s tax base (before the note ban) came during the one-in-six implemented in the UPA era.
Finally, there’s a silver lining even for the woebegone super-rich. They can cheer that while the FM is seeking to slap a surcharge on their annual incomes, she hasn’t ushered in the much-expected wealth tax or inheritance tax in her attempt to play Robin Hood. Wealth tax forces an asset owner to repeatedly cough up taxes on the same stock of assets year after year. Inheritance tax can extract a severe price on heirs by forcing them to liquidate assets to pay up the tax. A 10 per cent tax on one’s entire net worth may be infinitely more painful than a 3-7 percentage point increase in tax rates on one’s earnings.