Budget expectations: Ten expectations of capital markets from Budget 2020

Amidst high expectations of reforms and reduction in tax rates, the government has a formidable task of achieving a fine balance between addressing the current slowdown and maintaining fiscal discipline. The budget on February 1 is an opportunity for the government to show its intent to revive a slowing economy. I expect this budget to be focused on stimulating consumption and growth. The government may temporarily deviate from its stated plan of maintaining fiscal discipline.

Here are the 10 things that the capital markets will want:

1. Revenue Enhancement: Public spending will be needed to kickstart the economy. With no significant headroom for increasing tax, the government needs to monetise assets through privatisation/ disinvestment and other innovative methods like floating of ETFs and setting up of an investment holding company to raise funds. A holding company structure will allow flexibility in decision making of timing, sequencing, valuation and borrowing against stock.

2. Corporate Bond Market: Even though many big-ticket infrastructure projects are now in the pipeline, the financing for it remains a challenge as commercial banks are largely staying away from project financing. The corporate bond market could be a solution, provided the rating of the bonds are AA and above. Towards this, the government may consider setting up a credit enhancement institution.

3. Government Funding: As was envisaged in the previous budget, the government should again consider issuance of sovereign bonds in the international markets. Although the cost of borrowing may be similar to domestic funding, this will ensure that the domestic market is not crowded out.

4. Streamlining of Long-Term Capital Gains Tax: In February 2018, the long-term capital gains tax on listed securities was reintroduced after a gap of 14 years. This has caused significant confusion without yielding meaningful increase in tax collection. LTCG and STT coexisting implies double taxation and is a deterrent to attract investments. This issue needs to be addressed.

5. Dividend Distribution Tax (DDT): Today, dividend income practically is taxed thrice as corporate tax, DDT and income tax at the shareholder level in certain cases. There is a need to replace DDT with a shareholder level tax. This would help shift the tax burden on dividends from corporates and reduce the cost of doing business in India. With growing use of technology, there is a slim chance of any under-reporting of dividend income going unnoticed.

6. Foreign Ownership of Insurance Companies: To achieve deeper penetration and higher capitalisation of insurance companies there is a need to increase foreign ownership from 49% to 74%. The cap on FDI of 49% can continue to enable a diversified shareholding of this critical sector. Further, in line with regulations of the other critical sectors, to keep effective control with Indian residents, a SOEC (substantial ownership and effective control) condition should be applicable. Additionally, RBI should over a period of time restrict banks/ NBFCs ownership to reduce the risk exposure and capital requirement of banks/ NBFCs.

7. Simplification of Delisting Guidelines: In order to streamline the entry and exit from capital markets, the current delisting guidelines which require reverse book building for price discovery should be relooked at. This coupled with a mandatory minority squeeze out will make our markets globally competitive.

8. Governance of Unlisted Companies: Our governance for the listed companies is quite robust. In the recent times, significant minority capital has flown in unlisted companies also. To protect the minority shareholders of unlisted companies which are not backed by a proper shareholder agreement, an appropriate governance structure will be useful.

9. Ownership structure for Capital Market Infrastructure Institutions (MIIs): MIIs are an important element of the market and are self-regulated organisations. There is a need to increase the foreign ownership limit to 74% with a cap of 49% on FDI holding. Further, existing single owner conditions may continue. This move will help attract higher foreign investment.

10. Corporate M&As and Restructuring: To streamline the lengthy process of corporate M&As/ restructuring through the courts, the government should either prescribe a fixed time frame for the process or designate SEBI or department of company affairs as a single-window authority for all approvals.

(Author is founder, NovaDhruva Capital, an investment bank)