Finance minister Nirmala Sitharaman’s maiden Union Budget for FY20 did not charm the equity markets like her predecessor Piyush Goyal did with the interim Budget on February 1 this year.

While the S&P BSE Sensex had gone up by over 521 points after Goyal’s speech, this time round the 30-stock index fell over 465 points from its previous close to touch a low of 39,441.38. The difference between the day’s high of 40,032.41 and the day’s low was a sharp 591 points. “The government has refrained from any significant boost to rural spending capabilities, and hence does not bring any meaningful thrust to consumption spending,” said Navneet Munot, chief investment officer at SBI Mutual Fund.

The fall was a surprise given that Sitharaman spelt out that “it is right time to consider increasing minimum public shareholding in the listed companies”. The finance minister mentioned having asked the market regulator, the Securities and Exchange Board of India (SEBI), to consider raising the current threshold of 25% to 35%.

Market participants however saw a positive in this development. “The measures to increases public shareholding from 25% to 35% is the biggest wealth-shifting announcement in the interest of ordinary men,” said Jimeet Modi, founder and CEO of Mumbai-based Samco Securities. But the going would not be so easy. “The proposal to raise public stake in listed companies is desirable but will face practical constraints in implementation in the case of some large-cap companies,” said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

Mumbai-based Jagannadham Thunuguntla, senior vice president and head of research (wealth) at Centrum Broking had quick numbers to quantify the impact of the reduction in maximum promoter shareholding from the current level of 75% to 65%. Based on the latest shareholding data available, Centrum Broking’s research highlights that 1,174 listed companies have promoter shareholding above 65%. “To put in other words, 25% of the entire universe of listed companies (nearly 4,700 companies) will have to go through off-loading promoter stakes to meet this requirement,” said Thunuguntla. “At the current market prices, the total quantum of sale that needs to be done by these 1,174 companies works out to a whopping amount of ₹3,87,000 crore,” he added.

The Centrum Broking research estimated 100 companies which would have the highest quantum of share sale. The prominent ones were Tata Consultancy Services (nearly ₹59,600 crore), Wipro (₹15,000 crore), and D-Mart (₹14,000 crore). But, like Geojit’s Vijayakumar pointed out earlier, the side effect of the move became prominent as Thunuguntla added that one needed to await SEBI regulations regarding how much time the companies would get to comply with the norms. “The overhang of this requirement of off-loading of promoter shareholding can have significant impact on the markets and the specific stocks,” Thunuguntla warned. “The regulator needs to provide sufficient time to meet this requirement so as not to flood the markets with stake sales by promoters,” he added. While this requirement would cause a high supply of stock, it could also increase India’s weight in the global indices, Munot said.

Sitharaman also highlighted that India’s sovereign external debt to GDP was among the lowest globally, at less than 5%. “The government would start raising a part of its gross borrowing programme in external markets in external currencies,” she said. “This will also have beneficial impact on the demand situation for government securities in the domestic market.”

Mumbai-based Arun Thukral, MD and CEO at Axis Securities, welcomed the diversification of government borrowings. “This move was cheered by the bond markets as this would in turn help to reduce the crowding out of private borrowings and reduce the cost of funds for India Inc,” he said.

R.K. Gurumurthy, head of treasury at Lakshmi Vilas Bank, acknowledged that part of borrowings within the gross borrowings, which was proposed to be raised overseas, would put less pressure on domestic liquidity. “Indian rupee can gain a bit on the back of this development,” he said. However, in his opinion, most of Friday’s reactions could reverse as timing was key. “Bond yields were expected to test 6.50% and today’s low was close to that,” he said. “Bias remains for softer yields this quarter.”

Gold lacks lustre

Customs duty on gold, along with other precious metals, was proposed to be raised from 10% to 12.5%. According to Somasundaram P.R., managing director-India at World Gold Council, the import duty hike would negatively impact India’s gold industry, as it would impede efforts to make gold an asset class, particularly when gold prices are rising globally. “In addition, the grey market will thrive which will dilute efforts to reduce cash transactions,” he said. Millions of Indians invest in gold as part of their household savings, he said, adding “An increase in duty will be counterproductive to the objectives stated in the previous year’s Budget and encapsulated in NITI Aayog’s recommendations for transforming the gold market.”

Chirag Mehta, senior fund manager-alternative investments at Mumbai-based Quantum Mutual Fund, said customs duty had become a major revenue-earner for the country and the dream of making India the gold-trading capital had been sacrificed for the sole purpose of filling government coffers in a bid to reduce the deficit. “Further increase in customs duty will only distort markets further as the current differential between Indian gold prices and international gold price will widen by 2.5%-15.5% in total,” he said, adding that the price difference may augur well for illicit gold imports, which would further distort gold markets. “Such interventionist policymaking ensures that India will never be at the centre of global gold markets despite being the largest consumer and will continue to remain a price taker,” he said. “Such distortions make it difficult to channelise the hoard of India’s gold savings into circulation and thereby integrate the gold market with other financial markets.”

Companies with more revenues to be taxed lesser

On the corporate tax front, the finance minister said that the government would continue with phased reduction in rates. Currently, the lower rate of 25% was only applicable to companies with an annual turnover of up to ₹250 crore. Sitharaman proposed to widen this to include all companies with an annual turnover of up to ₹400 crore. “This will cover 99.3% of the companies,” she said. “Now only 0.7% of companies will remain outside this rate.”

“This will reduce the tax burden on many midsized companies thereby spurring expansion and job creation,” said Mukesh Aghi, president and chief executive officer of US India Strategic Partnership Forum. But Axis Securities’ Thukral in his wish list for the Budget had said that “to further stimulate economic growth and accelerate corporate earnings, the government should also consider a reduction in the corporate tax rate for all the companies”. He had said that changes in the regulatory framework and simplifying the corporate tax law should be addressed in the Budget “as it could attract foreign investors to invest in India without any technical or procedural restrictions”.

NBFC woes get FM’s attention

The importance of the overburdened non-banking financial services (NBFC) sector, which has been reeling under pressure ever since the IL&FS saga unfolded, was highlighted by Sitharaman as a sector playing an extremely important role in sustaining consumption demand as well as capital formation in the small and medium industrial segment. “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse,” the finance minister said in her speech. She proposed that for purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of ₹1 lakh crore during the current financial year, the government will provide a one-time six months’ partial credit guarantee to public sector banks (PSBs) for its first loss of up to 10%.

“The reiteration that NBFCs are a cogwheel of the Indian economy, and incentivising PSBs to buy assets from NBFCs will ease the current credit environment which is positive for debt mutual funds,” said Radhika Gupta, chief executive officer of Edelweiss Asset Management.

In another significant move, NBFCs would now have a level playing field with ‘scheduled banks, public financial institutions, state financial corporations, state industrial investment corporations, cooperative banks and certain public companies like housing finance companies’ when it comes to interest income on bad or doubtful debts. Now, such income of NBFCs is charged to tax on an accrual basis. She proposed that interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically important non deposit-taking NBFCs should be charged to tax on receipt basis. Further, she also proposed to provide that deduction of such interest shall be allowed to the payer on actual payment.

Sitharaman pointed at the fact that while the Reserve Bank of India (RBI) is the regulator for NBFCs, it has limited regulatory authority over NBFCs. “Appropriate proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill,” she said.

On the housing finance sector, Sitharaman highlighted that efficient and conducive regulation of the housing sector was extremely important. “The National Housing Bank (NHB), besides being the refinancer and lender, is also regulator of the housing finance sector,” she said. “This gives a somewhat conflicting and difficult mandate to NHB,” she added while proposing to return the regulation authority over the housing finance sector to RBI.

More capital for public sector banks

On the banking sector, Sitharaman mentioned that financial gains from cleaning the banking system were now visible. “NPAs of commercial banks have reduced by over ₹1 lakh crore over the last year, record recovery of over ₹4 lakh crore due to IBC and other measures has been effected over the last four years, provision coverage ratio is now at its highest in seven years, and domestic credit growth has risen to 13.8%,” she said.

The finance minister also said that having addressed legacy issues, PSBs would be provided ₹70,000 crore capital to boost credit. Reforms will also be undertaken to strengthen governance at PSBs, she said. Anil Gupta, vice president and sector head-financial sector ratings at credit rating agency ICRA saw the PSB capital infusion as a positive as it would not only address regulatory capital requirements but also growth capital. “With this capital infusion, all the PSBs should be able to exit the PCA framework and also facilitate the merger among PSBs,” he said. “Further, the dependence on banks for raising capital from market sources also stands substantially reduced and the credit growth of 12-13% is assured, even if PSBs are unable to raise capital from markets.”

According to Sandeep Upadhyay, MD & CEO of Centrum Infrastructure Advisory, fresh capitalisation of PSBs came as a pleasant surprise. “This will go a long way in terms of getting lending back on track and stimulating growth in sectors languishing due to legacy issues and dealing with the menace of NPAs,” he said. But, the success attributed to IBC initiative could have been toned down as it had seen “limited success in stressed assets resolution”, he said.

At the close of trading hours, the S&P BSE Sensex closed 394.67 points (-0.99%) lower at 39,513.39 points compared to the previous day’s close of 39,908.06 points. The S&P BSE MidCap and SmallCap index fell over 207 points (-0.39%) and 195 points (-1.36%) compared to their previous close. Like the Sensex, the MidCap and SmallCap indices also witnessed a fall of over 267 and 243 points each between their respective day’s high and low points. In comparison to the Sensex, National Stock Exchange’s Nifty50 closed over 135 points (-1.14%) lower compared to the previous day close of 11,946.75. Between the day’s high of 11,981.75 and low of 11,7987.9 points, the Nifty50 saw a decline of over 183 points (1.53%).

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