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June 6, 1998


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Capital markets have missed positive facets of Budget

The Centre for Monitoring Indian Economy

The capital market was not too enthused with the budgetary proposals.

The Bombay Stock Exchange Sensex, which had soared by more than 100 points in the pre-Budget session on hopes of a investor/ industry-friendly Budget shed almost all its gains and turned distinctly bearish towards the close.

The disappointment was on two counts. One there were no immediately identifiable measures like the announcement of buy-back of shares, which had sparked off the pre-Budget buying. Secondly the market did not take kindly to the large doses of indirect taxes to which the industrial sector would be subjected.

Some of the other measures which had a negative impact on the sentiments are listed below:

  • Mandatory stipulation requiring the notification of the PAN/ GIR number in case of high value transactions of Rs 50,000 as also in bank deposits of the same amount. This could see lower funding on speculative transactions as also result in outflow of unofficial funds out of the markets.
  • There was no change in the capital gain tax structure. Market was expecting capital gains tax for individuals to be reduced to 10 per cent which would be on par with foreign institutional investors.
  • The imposition of eight per cent countervailing duty on imports as also the hike in excise would eat into the profits of the corporate sector. This is on the reckoning that it would be difficult for the corporate sector to pass on the duties to the consumers in a depressed market scenario. The protectionist measures would also not be taken kindly by the FIIs.
  • Service tax on underwriters The disappointment over the non-introduction of the direct measures eclipsed the proposal which could have a positive impact on the capital markets like
  • Increase in the extension of individual non-resident Indian limits to 5 per cent from 1 per cent and 5 per cent to 10 per cent for aggregate NRIs. While the overall ceiling of 30 per cent has been retained, this measure would have a beneficial impact in stemming the prices of global depository receipts markets. With many of the GDRs being available at steep discount, potential investors could take on larger exposure within the 30 per cent limit.
  • The fund flow of foreign funds through the SBI Resurgent India Bonds, UTI India Millennium scheme was also ignored. The dollar denominated scheme with 100 per cent repatriation facilities and fiscal concessions could see inflows into quality stocks and debts.
  • FIIs have been permitted to invest in unlisted domestic debt securities. This move would pave the entry for patient funds in the corporate sector.
  • Permission to open up the insurance sector for the domestic companies could also see more quality paper coming in the market. It would however have to be seen the extent to which foreign participation would be permitted in these domestic companies. This could thus be another money-spinner like the telecom sector.
  • Provident funds have been permitted to invest up to 10 per cent of the new accretion to provident funds to be invested in the private sector securities.
  • Employee stock options for software personnel to be offered in ADR/ GDR.
  • Permission to allow depreciation on intangible assets like knowhow, patents, copyrights, trade marks, licences (telecom companies, liquor companies, power can now claim write-offs) is a radical proposal. This move could see more companies going in for valuation and revaluation exercises in a bid to save taxes. Brand valuation could also be a popular mode for retaining higher surplus in the hands of the corporates.
  • Legislative changes would be introduced to treat derivatives as securities. This would facilitate introduction of futures and options.
  • Stock lending would be exempted from capital gains tax. This could enable high net worth individuals and institutions an additional hedging facility and participate in futures and options. There would also be higher supply in the badla trading.
  • Abolition of gift tax and shifting the incidence of tax in the hand of the recipient could be used as a legitimate tax vehicle.
  • Delicensing of industries like coal, lignite and petroleum products could also see investments flowing into this sector.
  • Reforms in the housing sector, especially the proposal to repeal the Urban Land Ceiling Act, could help generate cash for corporates. Provision allowing the carry-forward of losses from house property and set off against future income would also induce investments in this sector.
  • Public sector unit disinvestments, at least partial disinvestment of the companies like Indian Oil Corporation, Gas Authority of India, Videsh Sanchar Nigam and Container Corporation in the domestic market will provide more liquidity of quality stocks on the bourses.

On the whole the capital market seems to have missed out the finer points of the Budget and given undue emphasis on the negative ones. It would be a matter of time before the correction takes place.

To be continued


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Budget '98

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