Budget 2013 Holds Limited Positives For Capital Market

The performance of the stock market on budget day may mask the positive prospects of the Budget announcements specific to the capital market. The broader indices fell by more than 1.5% primarily due to the negative factors that would impact the financials of the companies that ultimately move the indices (For details, please see our sectoral analyses on the Union Budget 2013).

Nonetheless, there were certain proposals that were in favour of the capital market. First and the foremost was the reduction in the Securities Transaction Tax (STT) on different categories. The following cuts were proposed on STT:

• In the equity futures segment, STT would be brought down from 0.017% to 0.01%.
• For Mutual Fund (MF) and Exchange Traded Fund (ETF) redemptions, STT would be cut from 0.25% to 0.001%.
• Further, in the case of purchase or sale of MFs and ETFs on exchanges, STT would be reduced from 0.1% to 0.001%, only on the seller.

Although these changes will have little impact on the government kitty, it will help to reduce the transaction cost for investors. In addition to this, the proposed introduction of the Commodity Transaction Tax (CTT) in a limited way may divert some funds towards the equity market.

The other important proposals regarding FIIs are the simplification of the procedures for uniform registration and other entry norms for foreign portfolio investors. Designated depository participants authorised by the SEBI may register different classes of portfolio investors, subject to compliance with KYC guidelines.

FIIs will also be permitted to use their investment in corporate bonds and government securities as collateral to meet their margin requirements.

Further, in a bid to deepen the debt market, stock exchanges will be allowed to introduce a dedicated debt segment on the exchange.

Besides this, there were certain cosmetic changes too. For example, an investor with a stake of 10% or less in a company will be treated as FIIs, and an investor who has a stake of more than 10% will be treated as an FDI.

Overall, we believe that although the stock markets are down in today’s trading, the proposals are supportive for the capital market in isolation.