Measures related to capital markets

Finance Minister Arun Jaitley did not make any new friends on Dalal Street as he hiked the securities transaction tax (STT) on options trading, while imposing dividend distribution tax for recipients of large dividends, moves that spooked the market (read here for more on how the markets swung during the day). But he came with a string of other measures that should evoke high fives after the initial reactions to the Budget is digested.

One big pinch is coming from an increase in STT applicable on options transactions from 0.017 per cent to 0.5 per cent.

Secondly, those earning more Rs 10 lakh per annum from dividends have been slapped with a dividend distribution tax (DDT). Currently such tax is payable only by firms doling out dividends to their shareholders. The new move will particularly affect institutional investors, corporates and HNIs who have large holdings in other companies. The tax has been set at 10 per cent of the gross amount of dividend.

On the positive side, investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 per cent to 15 per cent at par with domestic institutions.

Further, the existing 24 per cent limit for investment by foreign portfolio investors (FPIs) in Central Public Sector Enterprises, other than banks, listed in stock exchanges, will be increased to 49 per cent to remove the need for prior approval of the government for increasing the FPI investment limit.

The finance minister also said the basket of eligible FDI instruments will be expanded to include hybrid instruments subject to certain conditions. Moreover, investment basket of foreign portfolio investors will be expanded to include unlisted debt securities and pass-through securities issued by securitisation SPVs.

In his speech, the finance minister said the capital markets regulator Securities and Exchange Board of India (SEBI) will take a number of measures to strengthen the corporate bond market and will develop new products such as options in the commodity derivatives market.

To deepen the corporate bond market, SEBI will take a slew of measures including introduction of an electronic auction platform for primary debt offer for developing an enabling eco-system for the private placement market in corporate bonds.

Besides, a complete information repository for corporate bonds, covering both primary and secondary market segments will be developed jointly by the Reserve Bank of India (RBI) and SEBI.

“A framework for an electronic platform for repo market in corporate bonds will be developed by RBI,” the finance minister said adding that the enactment of Insolvency and Bankruptcy Code would provide a major boost to the development of the corporate bond market.

He said redemption by an individual of Sovereign Gold Bond issued by RBI shall not be charged to capital gains tax. It is also proposed to provide that long-term capital gains arising to any person on transfer of Sovereign Gold Bond shall be eligible for indexation benefits.

“Further, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company subscribed by a non-resident shall be exempt from capital gains tax,” the finance minister said.

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