After missing opportunities to appease the investor community, both foreign and domestic, in the past, Finance Minister Pranab Mukherjee has set a pro-investment tone for the budget by announcing a slew of reforms in the financial services and capital markets space.
The budget addresses the concerns investors had over the corporate bond market, equity capital markets, fungibility of funds under Indian depository receipts (IDRs) and disinvestment of government stake in public sector enterprises or PSEs.
The Finance Minister has announced a Rs 5,000 crore venture capital fund called India Opportunities Venture Fund, to be formed with Small Industries Development Bank of India (SIDBI). This fund will address the capital needs of micro, small and medium enterprises.
In order to deepen the corporate bond market, the ministry has decided to allow Qualified Foreign Investors (QFIs) to access the Indian corporate bond market.
According to the new IPO norms, to be announced by the Securities and Exchange Board of India (SEBI), companies raising Rs 10 crore or more from the offer will have to do it through electronic form. Electronic voting facility for shareholders will be also made mandatory to provide opportunities for ‘wider shareholder participation.’
Anil Singhvi, founder of the shareholder advisory firm IIAS, said, “We have been waiting for this to happen for some time. It is not possible for shareholders to vote due to geographical limitations. Earlier, it was voluntary for companies but now, maybe, they will start with the top 100-200 companies and make it mandatory for all listed companies going forward.” According to him, shareholder activism will help companies adhere to corporate governance norms and perform well.
Although the government has allowed the Indian depository receipts to be issued by multinational companies operating in India, there has been just one IDR – that of Standard Chartered Plc – which has been listed till date. In order to encourage more companies to issue such instruments and increase volumes of trading, two-way fungibility will be allowed hence. This will, however, be subject to a ceiling.
But according to the head of equity capital market business of a foreign investment bank, allowing two-way fungibility would not turn out to be a luring factor for future IDR issuances. “The issues are beyond two-way fungibility. May be this solution can pump up the volumes of the lone-listed IDR, but if you ask whether this will result in more companies rushing to issue IDRs, the answer is No,” he said.
Since the government has not been able to meet the disinvestment target of Rs 40,000 crore, set for the financial year 2011-12, it has come up with a modest target of Rs 30,000 crore for FY2013. Moreover, the way the equity capital market has remained for most of 2011-12, offering very few windows of opportunity, most of the companies have been compelled to put their capital-raising plans on the back burner and look for alternative funding sources.
According to the Mukherjee, the public sector enterprises will be allowed buyback of shares and listing at stock exchanges like private sector companies as a mode of disinvestment.
He claims that the treasury management options for PSEs have also been enhanced, resulting into improved returns on public assets and support for transparent environment for the divestment process, besides unlocking the value and resources for all stakeholders. For FY2012, the government managed to raise Rs 14,000 crore through disinvestment.
Reiterating its intent to capitalise public sector banks and to help them raise money, the government will consider the possibility of creating a financial holding company, which will raise resources to meet the capital requirements of PSBs.
Talking about the impact on the insurance sector, V Srinivasan, CFO Bharti AXA Life Insurance said, “Increasing the sum assured to premium ratio to 10 times will promote long term contracts. It will also encourage customers to go in for higher protection. On the flip side, this will make life insurance costly for older age bands if they procure a product after age 45 since mortality rates go up. Also, increasing the service tax rate by 2 per cent would result in an increase in cost of insurance for customers.
He, however, added that lifting the 20 per cent restriction in CENVAT credit and allowing 100 per cent credit is a welcome move as it enables insurance companies to recover the entire input service tax from the output service tax liability.
“Another point to note is the bringing of insurance companies within the ambit of minimum alternate tax(MAT). This would result in insurance companies paying tax, the moment they start showing book profits, though credit is available against future regular tax,” Srinivasan said.