Street welcomes promise of composite caps for FPI & FDI, introduction of bankruptcy code in FY16
Banking stocks soared on Saturday as the government said it would introduce composite caps for foreign portfolio investors (FPIs) and foreign direct investment (FDI) as well as put in place a comprehensive bankruptcy code in FY16.
The Bank Nifty surged 616.65 points to close at a near one-month high of 19,691.20. The rise in the benchmark Sensex was much more muted — it ended the day 0.48%, or 141.38 points, higher at 29,361.50, while the Nifty rose 57.25 points, or 0.65%, to close at 8,901.85.
“Clubbing FPI and FDI would translate into more foreign investment for banks. The bankruptcy code is also good news. It is largely a prudent Budget, with focus on infrastructure spending,” said Andrew Holland, CEO at Ambit Investment Advisors.
“To further simplify the procedure for Indian companies… I propose to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps. The sectors, which are already on a 100% automatic route, would not be affected, “ finance minister Arun Jaitley said in his speech.
“The proposals to remove distinction between FPI and FDI, and the bankruptcy code, fuelled the rally in banking stocks. The code would address the asset quality concerns in the system. It will also allow banks to take control of (defaulters’) assets to recover dues,” said Rajesh Cheruvu, chief investment officer, RBS.
The Budget clarified that FIIs will not be liable to pay minimum alternate tax (MAT) and also proposed modification in permanent establishment norms to encourage offshore fund managers to relocate to India.
“The clarification on MAT is positive and was absolutely essential. It will not necessarily lead to increased flows, but its implementation would have led to massive problems and outflows,” said Samir Arora, founder and fund manager at Helios Capital. “The removal of the distinction between FPI and FDI will specifically help a few private sector banks. We are happy, for we own those shares,” he added.
India is the best-performing market in the world so far in 2015, with gains of 9.45% in dollar terms. Among emerging market peers, India has received the second highest foreign inflows.
Among other measures, the Budget announced an allocation of R7,940 crore to recapitalise public sector banks in FY16. Benchmark indices settled higher after the Budget gave more clarity on taxes and proposed measures to boost investment, but fell short of adhering to an earlier target of fiscal deficit.
Jaitley pegged the deficit at 3.9% for FY16, higher than the earlier envisaged 3.6%. The Budget also proposed to reduce the rate of corporate tax from 30% to 25% over the next four years.
After trading higher for most part of the morning session, the markets slipped into the red, before bulls regained control and took the Sensex above the 29,350 mark. The thrust on infrastructure spending and clarity over taxation structures with regards to foreign institutional investors were among the key positives seen by market watchers.
“While the market was expecting a spurt to growth by way of public spending, there was enough to indicate that there is latent firepower being built by way of infrastructure spend to enable the same,” said Tushar Pradhan, CIO, HSBC Global Asset Management.
On Saturday, FIIs bought shares worth $99 million, taking their year-to-date purchases to $4.3 billion.
The government set a disinvestment target of R69,500 crore, up nearly 20% from last year’s Budget estimates of R58,425 crore. However, the government lowered its FY15 disinvestment target to R31,350 crore.
Experts don’t see a major rally in the near term. “The market may remain range-bound in the near term; we may see stock-specific trading interest. Earnings projections will take time to change, while the Street will expect continued delivery from the government on key reforms,” Holland added.
Among sectors, BSE Bankex was the major gainer, up 3.27%. BSE Auto gained more than 1% with an additional expenditure of R70,000 crore proposed for infrastructure.
BSE Healthcare ended 2% higher with an allocation of R33,150 crore proposed for healthcare. Meanwhile, BSE FMCG lost more than 4% with index heavyweight ITC losing 8.27% — its biggest single-day fall in seven years — after the Budget proposed to raise excise duty on cigarettes.