Thursday, July 10, 2014

UNION BUDGET - BOOST FOR CAPITAL MARKETS

Providing a fillip to capital markets, the government today proposed a number of reforms including tax incentives and easier regulations for foreign investors, bonds and new products like realty investment trust REITs. Finance Minister Arun Jaitley in his maiden Budget 2014-15 announced incentives for two new investment instruments -- REITs and InvITs -- to help attract long term funds from foreign and domestic investors, including the NRIs.
He proposed uniform (Know Your Client) norms for the entire financial sector, as well as a one single demat account for all financial assets.
Jaitley also proposed a complete revamp of the Indian Depository Receipt (IDR) and introduction of a much more liberal and ambitious Bharat Depository Receipt (BhDR).
He also recommended for liberalising the ADR (American Depository Receipt)/GDR (Global Depository Receipt) regime to allow issuance of depository receipts on all permissible securities. These depository receipts are used by companies to raise capital from overseas investors.
Although the BSE benchmark Sensex climbed over 400 points during Jaitley's Budget speech, it reversed all gains and shed 72 points to close at 25,372.75.
Stating that financial market reforms are important, the minister advised the financial sector regulators "to take early steps for a vibrant, deep and liquid corporate bond market and deepen the currency derivatives market by eliminating unnecessary restrictions".
He said the government will extend 5 per cent withholding tax on corporate bonds till June 30, 2017. (At present, the tax rate varies across bonds and could be higher as well).
He proposed: "Extend a liberalised facility of five per cent withholding tax to all bonds issued by Indian corporate abroad for all sectors and extend the validity of the scheme to 30.06.2017."
To energise overseas investments into Indian capital markets, the minister also proposed a liberal tax regime for Foreign Portfolio Investors (FPIs) willing to shift their base to India.
The proposed move of treating income arising from transactions conducted by FPIs as capital gains, rather than business income that attracts higher taxes, would help remove uncertainties related to characterisation of their income and encourage their fund managers to shift to India.
FPIs are a newly created category of foreign investors and encompass all existing structures like foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFI).
Regarding Real Estate Investment Trusts, Jaitley said the Budget intends "to provide necessary incentives for REITs which will have pass through for the purpose of taxation."
Jaitley said: "As an innovation, a modified REIT-type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (InvITs), which would have a similar tax efficient pass through status, for PPP (public- private-partnership) and other infrastructure projects."
These structures would reduce the pressure on the banking system while also making available fresh equity. These instruments would attract long term finance from foreign and domestic sources including the non resident Indians (NRIs).
Emphasising upon the need for a stronger legislative regulatory framework, Jaitley said the government is committed to bringing a new Code for streamlining various regulations in the financial sector.
Indian Financial Code (IFC), suggested by the Financial Sector Legislative Reforms Commission (FSLRC), lays out clear objectives for financial regulations.
The minister proposed raising long-term capital gains tax on debt-oriented mutual funds to 20 per cent from 10 per cent, to bring parity with banks and other debt instruments.
The move may come as a blow to the mutual fund industry
However, it proposed to increase the period of holding in respect of long term debt funds units from 12 months to 36 months.

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