In what could step up participation in the markets and bring in a stricter regulatory regime for key intermediaries, especially mutual funds, capital market regulator Securities Exchange Board of India (Sebi) is trying to push through several initiatives. ?The regulator is definitely working on expanding market participation and they are seriously considering to do away with the earlier mandate of having only institutions who are registered in a country that has a regulatory body,? said an investment banker with a leading Asian bank.
With the excesses of the over-leveraged hedge funds participating in global markets shrinking, the need to do away with this ?precautionary? measure is being seen. And keeping this in view, foreign and domestic investors have started investing in creating back-office facilities like custodial services.
Former Sebi chairman M Damodaran had enforced this regulation in October 2007 with a view to restrict the influence of hedge funds participating in India through the participatory notes route and creating a situation where ?hot money? was present in the domestic markets. This was given the context of the sub-prime crises, allowing several funds to leverage and raise funds to invest in varied markets and running the risk of pull-outs and quick crash.
The issue is likely to be discussed at length at the Sebi board meeting scheduled for June 18 in Mumbai, said a source. As of now, there are 1,660 registered FIIs and 5,130 sub-accounts. From the beginning of the year till date, overseas investors have invested Rs 26,903 crore in the Indian equity markets. This is in stark comparison with FIIs actually pulling out Rs 20,690 crore in the same period last year.
Apart from this critical move, Sebi has been urged to take actions to revive the secondary and, more importantly the primary market, say finance ministry officials. Sebi has already made a recommendation to either reduce the current securities transaction tax (STT) from the current 0.125% levels. ?Reducing these taxes will make India one of the most competitive bourses in the world and attract more investment,? says a senior member of a leading broking firm in India. Tax collections through STT were more than Rs 8,500 crore in 2007-2008. However, they crashed through Rs 5,500 crore in 2008-09, say sources.
?There is a need for reduction in STT, rationalisation of stamp duties across states, and greater clarity on classification of income from sale of securities. Currently, there is confusion on what constitutes short-term capital gain and what constitutes gain from speculative business,? said Motilal Oswal, CMD, Motilal Oswal Financial Services.
Sebi would also be changing norms for qualified institutional placements (QIPs), initial public offers (IPOs) and rights issues to enable companies to raise capital quickly. The proposal has already been discussed in the Primary Market Advisory Committee last month, says a member of the committee. ?The clear mandate for Sebi is to widen the scope of capital markets as an effective source of financial intermediation which will parallel the banking sector’s ability to allow corporates to raise capital,? said a finance ministry official.
However, mutual funds are to come under the scanner. Already the regulator is in discussions with the fund houses about implementing a variable load scheme, where the investor would be able to choose a scheme along with the applicable load. And schemes with lower fund manager involvement and customisation would attract lower rates. The regulator is also expected to come down heavily on the malpractices undertaken by the funds to sell their funds.
Meanwhile, the move to increase stamp duty in Maharastra to a uniform 0.01% seems to have got into a backburner as it was faced with severe opposition. States levy varied stamp duty rates and Maharasthra, the crucial state for equity investments and trading, which accounts for more than half of the Indian equity trading, wanted to up the rates for trading without delivery from 0.002% and 0.001% on broker’s proprietary transactions to an uniform 0.01%.