Budget should focus on investments and retail

Updated: Feb 26 2013, 05:43am hrs
Prithvi Haldea

The Budget is just a few days away. Given the interest and focus of the finance minister, the expectations of the people are extremely high. The capital market, of course, is pinning a lot of hopes. Suggestions abound; I too have some but these are all focused on encouraging investments, and not just trading, and are aimed at channeling household savings into the capital markets. Some suggestions are fiscal. The Budget, as is the practice, can also be used for making some policy announcements.

Fiscal measures

* To help capital formation and not just trading, RGESS should be made available only on investments made in all IPOs/FPOs and also cover all PSU offers for sale and on investments into such mutual fund schemes that invest only in the primary market. The investment limit should be raised to R1 lakh and be available every year, and continue to be aimed at only those individuals who have an annual income of up to R10 lakh, but irrespective of whether they are first-time or existing investors. The lock-in should also be only for one year. Demat accounts should be opened on the basis of bank KYC norms; the demat KYC may be mandated only when the investor wants to sell.

* Our markets are dominated by speculative trades. To encourage investments, the STT on delivery transactions should be removed completely.

* Investors should be allowed to book losses on very old untraded shares listed only on regional stock exchanges or lying suspended on the BSE (over 3,900 IPOs in the 1992-96 period have not been trading for years now), almost all of which thus have a zero value. As per the present laws, an investor cannot secure any deduction of his capital losses with respect to such shares, until he finds a buyer (at any price) and thus has a valid sale transaction. All original investors holding up to 5,000 shares of such companies that made a public issue after April 1, 1992, and whose shares have not been traded at all in the preceding 5 years, should be allowed to offset the complete value of their investments against any type of capital gains, though setting off against any type of income would be even more welcome. This scheme will be very welcome and be pro-small investors, helping erase bad memories, and allowing investors to look afresh to the future (a government-designated bank or institution can be nominated by the government to whom such shares could be sold by the investor at zero prices). The transferee institution may probably derive some compensatory benefits on account of revival or acquisition of some of these companies.

* To make more money available for investments as also to take care of inflation, the personal tax exemption limit should be raised to R3 lakh. On the other hand, the time has come to introduce two taxesone on income of the rural rich (why should a rich mango-grower be exempt from tax while a candle-maker is not) and the second on the super rich. We can probably start with a 10% additional tax on all annual personal incomes above R10 crore, and such taxes could be earmarked for a national cause (some new areas could be womens security, fast-track courts, adult education, Lokpal, etc).

* To stem the increasing flow of domestic savings into foreign gold, a deterrent import duty needs to be imposed, and stiff, speedy punishments to smugglers should be simultaneously announced.

* Recognising the need for huge capital outlays for infrastructure, sovereign long-term (20-25 years) infrastructure bonds should be issued by the government at floating rates, with tax benefits, but a complete lock-in.

Policy announcements

* A minimum of 50% of all PSU divestment offers (IPOs, FPOs, OFS, IPP) should be reserved for retail investors applying up to R1 lakh at a fixed price which should be at least at a 15% discount to the institutional price (the government may not maximise its returns, but the wealth of the public enterprises will thus be shared rightfully with the public). Significantly, this method of divestment would not invite any opposition as it benefits the small anonymous investors. It would help enlarge our investor base significantly.

* Banks should be allowed to act as custodians of their account holders and apply in IPOs/FPOs/OFS on their behalf and hold shares in custody, without the need for any new KYC. Only when such account holders want to sell the shares, they would be required to open a demat account. This would bring in millions of new investors for whom entering the market is very daunting.

* A safety net should be made compulsory for all IPOs.

* Abridged prospectuses for IPOs should be made compulsorily available in all major regional languages (at least 10 of them).

* EPFO should be mandated to invest in equityto begin with, maybe only 5% of the incremental corpus and that too only in PSU stocks.

* With stock exchanges becoming for-profit and also being allowed to go for listing, there is a real issue of conflict of interest. This conflict was attempted to be redressed about a decade ago by transferring the regulatory role of the exchanges to the central listing authority, which, unfortunately, for political reasons, was wound up even before commencing operations. As the threat is real now, this concept may be revived.

* To raise concerns regarding investor awareness, there is surely a need now to announce a National Financial Literacy Mission.

The author is chairman & managing director of Prime Database