Budget could attempt enhancing foreign portfolio flows into markets

It is that time of the year again when market participants talk of little else besides the Union Budget. The stock market was not given much attention in the last budget. But with the current account deficit mounting, the need for foreign portfolio flows to bridge the gap is a matter of great importance to the Government. The Finance Minister has indicated there could be a package to improve foreign portfolio flows in to the country.

One way suggested to achieve this is by increasing the ceiling that currently exists for foreign institutional investment in to corporate bonds. The current ceiling for FII investment in Government debt is $15 billion and for corporate bonds it is $25 billion.

But of the total FII debt limit of Rs 3,71,000 crore, Rs 1,71,000 crore or 46 per cent remains unutilised.

Most of this unutilised portion is in the long-term debt category. While there are hardly any takers for the Qualified Foreign Investors (QFI) category, the infrastructure debt issues by corporates is also not used to the extent of 72 per cent.

This implies that just hiking the debt limit might not help improve inflows. Simplifying the rules governing QFI investments and reducing withholding tax on corporate bonds can help. There is also an expectation that know-your-client regulations for FIIs can be eased. This, however, does not seem to be a good idea given rampant misuse to the FII route by money launderers.

Securities Transaction Tax

STT always comes in to reckoning in pre-budget discussions in stock market. Indian stock market is among the few stock exchanges that levy transaction tax on derivatives.

STT on delivery based transaction is currently levied at the rate of 0.1 per cent. This was reduced from 0.125 per cent in the Union Budget 2012. Cash market transactions that are not settled by delivery are taxed at a lower rate of 0.025 per cent.

The method of imposing transaction tax on derivatives is different. The seller of option is taxed at 0.017 per cent. Buyer of option is taxed only if the option is exercised.

Sellers of futures are taxed at the rate of 0.017 per cent.

There is a strong case for removing STT altogether both on cash and derivative volumes since volumes in both the segments are declining resulting in collection from this source falling 13 per cent in the period between April and November 2012 at Rs 2,905 crore. Collection for the fiscal 2011-12 was just Rs 5,656 crore, down from Rs 7,155 crore in the previous fiscal.


Stock markets can look forward to another round of disinvestments in the fiscal 2013-14 as the Government resorts to this mode to bridge the deficit gap.

Of the Rs 30,000 crore targeted to be divested in the last fiscal, the Government could raise only Rs 21,504 crore through stake sales in NBCC (Rs 125 crore), Hindustan Copper (Rs 5,973 crore), NMDC (Rs 3,141 crore) and NTPC (Rs 11,457 crore).

Reports cite that the disinvestment target for the next fiscal will be fixed around Rs 40,000 crore. Approvals have been granted to Tyre Corporation of India, Hindustan Copper, Steel Authority of India, Rashtriya Ispat Nigam and BHEL to raise money from the capital market.

There are also expectations that the Government could offload shares held by Specified Undertaking of the Unit Trust of India (SUUTI). SUUTI holds shares of ITC, Axis Bank and Larsen and Toubro.

There are also expectations that there could be some modifications brought to the Rajiv Gandhi Equity Savings Scheme. Annual income limit for those qualifying for the scheme can be raised or done away with.

The list of instruments qualifying under this scheme can also be added to. The Government might also consider changing the clause that tax saving will be limited to the initial year of investment.

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