The budget last year focused on some key changes for the markets such as changes in taxation, higher room for public investors to invest in listed companies or setting up innovative trading platforms. However, the big shocker was the levying of surcharge on foreign portfolio investors (FPIs), which resulted in several savvy investors pulling out of Indian markets. It took a significant corporate tax rate cut for the tides to turn, and FPI inflows as of December stood at over ₹1.3 trillion, including ₹97,250 crore inequities the highest in the last six years.
Here’s a list of hits and misses of capital market reforms from last year’s budget as we usher in the next one.
Minimum public shareholding hiked to 35%
Union finance minister Nirmala Sitharaman, in last year’s budget, announced that the Securities and Exchange Board of India (Sebi) will increase the public float for listed companies to 35% from the existing 25%. Soon after the budgetary announcement, the Sensex fell. One year later, the proposal did not find takers in the markets. Ajay Tyagi, chairman, Sebi after the meeting of its board on 21 August had, in fact, said there were several issues with the proposal, including excessive liquidity, a dull public offers markets. The other issues include the potential flight of capital and the inability of state-owned companies to bring public float to even 25%. As of now, Sebi’s primary markets committee has failed to come to a consensus and Sebi has communicated its reservations to the finance ministry.
A social stock exchange
A budgetary proposal in 2019-20 was to create a social stock exchange and electronic transparent fundraising platform for organizations working on social welfare. “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion,” said Sitharaman. One year down the line, Sebi has formed a high panel committee to draft proposed norms. It is expected to work on the lines of the Institutional Trading Platform (ITP). However, the proposal faces bigger issues in terms of how these institutions will be valued due to lack of any uniform parameters, said a regulatory official. As of now, this one also seems to be on the back burner.
Inter-operability for all depositories
The budget, in a bid to give a boost to retail investments in treasury bills and government securities, had announced institutional development through the inter-operability of Reserve Bank of India managed depositories and Sebi depositories. This would have resulted in a seamless transfer of treasury bills and government securities between RBI and depository ledgers. Since then, Sebi has successfully implemented interoperability for its regulated clearing corporations. This enables orders of BSE, NSE, and MSE being cleared through any clearing corporation. However, no new information came on enabling interoperability across the two regulators supervised depositories.
No budget is complete without some shockers for the markets due to policy flip-flops and unwelcome surprises on the taxation front, and last year was no exception. There was a furor due to levy of a surcharge on foreign portfolio investors registered as trusts and other non-corporate structures. This could have potentially led to their taxability reaching up to 42%. As a result, FPIs were net sellers of Indian equities during the July-September quarter and withdrew ₹22,463 crore from Indian capital markets during the period. It was only after a rollback was announced did the FPIs turned net buyers during the year, resulting in markets touching new highs.