A lot on 'PM' Narendra Modi FMs plate as Finance Ministry lines up capital market reforms

Written by Arup Roychoudhury | New Delhi | Updated: May 23 2014, 17:16pm hrs
Narendra ModiMost of these reforms can be called 'low-hanging fruit' as far as Narendra Modi is concerned. (AP)
The Finance Ministry has lined up a clutch of reforms for capital markets over the next one year to attract investments, both domestic and foreign, senior government officials told FE, which will be on the to-do list of incoming PM Narendra Modi's new finance minister's list.

Most of these reforms can be called low-hanging fruit, which don't require legislation, and a few would necessitate minor amendments to income tax laws, officials said. These will be presented to the incoming finance minister as a blueprint for action, they added.

The measures to be implemented over a period of three months include uniformity in withholding tax on external commercial borrowings (ECBs), infrastructure and non-infrastructure bonds. Currently, companies raising ECBs are required to withhold tax at 5% on the interest income of the overseas lender. the withholding tax in case of issuers of infrastructure and non-infrastructure bonds (where FIIs are allowed to invest) is 5% and 20%, respectively. The proposal is make the tax uniform at 5% for all the three categories, sources said.

Also, the ministry has proposed in the blueprint the draft regulation on real estate investment trusts (REITs), published by Sebi in October 2013, allowing this category of investment vehicles in India. This could be notified soon. REITs, which exist in most developed markets, take investors' money and invest it on their behalf in real estate projects. They are akin to mutual funds for stock market investors.

Further, the ministry wants the incoming dispensation to relax the tax provisions so that fund management companies can be persuaded to have permanent establishment (PE) in India. As for foreign funds that invest in India, most of them are based abroad. The fund managers are mostly averse to having their physical operations in India, as they fear such presence will lead to paying taxes on their investment income. We want to remove that fear and ensure that the fund managers can establish presence in India, a ministry official said.

Besides, the ministry is also pitching for passage of the Securities Laws (Amendment) Bill, 2014 in the next session of Parliament, which, inter alia, proposes to empower Sebi to investigate chit funds and other ponzi schemes.

Retirement-linked plans of insurance companies are currently regulated by Irda while those of banks are regulated by the RBI. A proposal under consideration is to bring all such products under the pension regulator, PFRDA. The above have been proposed for the forthcoming full budget, or for implementation over the next three months.

For a longer term of a year, the ministry recommends deepening of the corporate debt market, reduction of time and cost of issuance of an initial public offering (IPO), creation of a single record for all financial assets, measures to increase retail participation in capital markets, easing of delisting regulations and strengthening and deepening of interest rate futures markets.

Sources say some of the measures are pending proposals from the previous regime that could not be implemented. For example, on REITs, Sebi had the draft regulations out in October 2013, but they have not yet been notified. Similarly, attracting more retail investors has always been one of the goals of the government.

Sources added that for a number of these reforms, the capital markets division of the ministry has no concrete plans in place and would only develop those further down the year.

Interest rate futures market in India is only months old. We will have to see how to develop that. Similarly, points such as deepening of corporate debt, IDRs, currency derivatives, and easing up of delisting and IPO regulations will be discussed in the future, the official added.