Impact of Budget 2019 proposals on financial markets

By Morningstar |  05-07-19 | 
 

Finance Minister Nirmala Sitharaman presented the much-awaited Budget of the new government today. The FM reiterated  that there will be full tax rebate on income of up to Rs 5 lakh, as proposed by the Interim Budget.

To boost affordable housing, an additional income tax of up to Rs 1.50 lakh deduction on home loans​​ taken up to March 2020 for houses worth Rs 45 lakh will be provided.  There will be an additional income tax deduction of Rs 1.5 lakh on the interest paid on loans taken to purchase electric vehicles. At the same time, the government has raised the surcharge for those earning more than Rs 2 crore anually.  The Budget also talked about giving boost to exchange traded funds on the lines of equity linked saving schemes.

Here are some of the other key proposals made by the Finance Minister:

  • Foreign Portfolio Investors (FPIs) to be allowed to invest to listed debt securities issued by Infrastructure Investment Trusts (INVITs) and Real Estate Investment Trusts (REITs).
  • PAN and Aadhar to be made interchangeable.
  • Government will create a payment platform for Micro, Small & Medium Enterprises (MSMEs) to enable filing of bills and payment on the platform itself.
  • Several reforms would be undertaken to promote rental housing.
  • Government will examine suggestion on opening foreign direct investment (FDI) in aviation, media and
  • Government has asked Securities and Exchange Board of India (SEBI) to increase minimum public shareholding in listed companies from 25% to 35%.
  • To ensure hassle-free experience to foreign portfolio investors, government plans to streamline Know Your Customer (KYC) norms to make it more investor-friendly.
  • Government to allocate Rs 350 crore for 2% interest subvention for all GST-registered MSMEs on fresh or incremental loans.
  • 100% FDI will be permitted for insurance intermediaries.
  • To deepen the market in corporate debt security, government will work with regulators like RBI and SEBI to allow AA corporate bonds as collateral.
  • To boost NRI investments in Indian capital market, the Finance Minister proposed to merge the NRI portfolio investment scheme route with FPI route.
  • Government to allocate Rs 80,250 crore for upgrading 1.25 lakh km of roads in the next five years.
  • A social stock exchange to be set up which will allow electronic fund raising (equity, debt and units) for social enterprises and voluntary organizations.
  • Promoter holding in listed entities to be cut to 65%.
  • A scheme of faceless electronic assessment involving no human interface to be launched this year.
  • Pension to be offered to 3 crore shop owners whose turnover is less than Rs 1.50 crore under Pradhan Mantri Karam Yogi Man Dhan Scheme.

Banking and Financial

  • Government to allocate Rs 70,000 crore for recapitalization of PSU Banks.
  • For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to Public Sector Banks for first loss of up to 10%.
  • To allow NBFCs to raise funds in public issues, the requirement of creating a Debenture Redemption Reserve (DRR), which is currently applicable for only public issues as private placements are exempt, to be done away with.
  • Government to invest Rs 100 lakh crore in infrastructure over the next five years. An expert committee will be set up to suggest measures on this.
  • Regulation of HFCs to move from National Housing Bank (NHB) to the Reserve Bank of India (RBI).
  • NPS Trust to be separated from PFRDA.
  • Branches by foreign reinsurers in International Financial Services Centre (IFSC) net owned fund requirement reduced from Rs 5,000 crore to Rs 1,000 crore.
  • On purchase of high-rate pooled assets of NBFC amounting of Rs 1 lakh core in this FY, government will provide one-time 6-month credit guarantee.
  • Divestment through CPSEs will remain a priority for the government. Government sets a divestment target of Rs 1.05 lakh crore.
  • Government will start raising part of borrowing in foreign currency.

Taxation

  • Corporate tax rate of 25% widened to annual turnover of up to Rs 400 crore.
  • Goods and Services Tax on Electric Vehicles (EVs) reduced from 12% to 5%.
  • Taxpayers having annual turnover of less than Rs 5 crore can now file quarterly returns.
  • Securities Transaction Tax (STT) will be levied only on the difference between settlement and strike price in case of exercise of options.
  • Pre-filled tax returns will be made available to taxpayers which will contain details of salary income, capital gains from securities, bank interests, and dividends etc. and tax deductions.
  • Government waives merchant discount rate (MDR) changes on cashless payment. ​​
  • Increased custom duty on gold and precious metals from 10% to 12.5%.
  • Excise duty on petrol and diesel hiked by Rs 1.
  • Currently, start-ups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). Valuation of shares issued by Category II AIFs will be beyond the scope of income tax scrutiny.
  • Government to extend the period of exemption of capital gains arising from sale of residential house for investment in start-ups up to March 31, 2021.

Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Advisers India, shares his thoughts on the impact of Budget 2019 for bond markets, NBFCs, HFCs, Mutual Funds and PMS.

An action plan to deepen the market for long term bonds including for deepening markets for corporate bond repos, credit default swaps etc., with specific focus on infrastructure sector, will be put in place. To deepen the Corporate tri-party repo market in Corporate Debt securities, Government will work with regulators RBI/SEBI to enable stock exchanges to allow AA rated bonds as collaterals.

Impact: Positive for the corporate bond market particularly if credit default swaps are introduced, since credit risk hedge mechanisms which are prevalent in other markets have been absent in India. Repos with AA rated bonds as collaterals would improve liquidity. Details on these proposals are awaited.

Merging of the NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment Route.

Impact: NRIs required PIS to invest into PMS and an NRI could hold only one PIS thereby making it difficult to invest in multiple PMS. Doing away with the PI requirement would enable further investments from NRIs into capital markets particularly via PMS. Positive for equity market flows and PMS.

For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees one lakh crore during the current financial year, Government will provide one time six months' partial credit guarantee to Public Sector Banks for first loss of up to 10%.

 Impact: Aim is to reduce stress in the NBFC sector. Should encourage PSU banks to buy out pooled loans (retail housing loans, etc.) from troubled NBFCs.

Strengthening of RBI’s regulatory powers over NBFCs and shifting regulatory authority of HFCs from NHB to RBI.

Impact: Fall-out of recent NBFC crisis starting with IL&FS in September,2018. Positive for the sector.

Government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs.

Impact: Government aiming to boost disinvestment programme.

The Government would start raising a part of its gross borrowing programme in external markets in external currencies.

Impact: Positive for domestic bond markets as the supply of government bonds may reduce but exposes the government/RBI to foreign currency risk once sovereign bonds are issued abroad. Indian government bond would also be subject to the vagaries of global bond markets.

Incentives to National Pension System (NPS) subscribers. Increase in the limit of exemption from current 40% to 60% of payment on final withdrawal from NPS.  Deduction for employer’s contribution up to 14% of salary from current 10%, in case of central government employee. Allow deduction under section 80C for contribution made to Tier II NPS account by Central Government employees.

Impact: Further boost to NPS with earlier proposal (i) being enacted and additional benefits particularly for central government subscribers. Clearly the government is trying to position NPS as the primary vehicle for retirement savings with incremental benefits in every budget over the last few years.

Proposal to increase the statutory limit for FPI investment in a company from 24% to sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold. FPIs will be permitted to subscribe to listed debt securities issued by ReITs and InvITs.

Impact: This could result in greater FPI interest in certain stocks where additional limits open up for investments which are also widely held by mutual funds.

 
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