How financial Institutions will be impacted by the Budget

A very subtle aspect focused on by the budget was on financial markets and institutions. These have larger implications for the integrity of the markets. Here are some of the key institutions that the budget addressed…

FIPB stands abolished… 

The Foreign Investment Promotion Board (FIPB) was anyways losing its relevance at a time when 95% of the FDI inflows were coming through the automatic route. Scrapping of the FIPB means two things. Firstly, the number of industries covered under the automatic route could be increased to simplify ease of doing business further. Secondly, it is also possible that the government may look to bring more industries under the 100% FDI route. India is already the world’s largest recipient of FDI and this trend will only get accentuated in the years ahead.

Commodity spot comes back… 

One of the intents of this budget is to bring back the commodity spot market, 4 years after it died a natural death in the aftermath of the NSEL scam. Bringing back the spot market and integrating it with the commodity futures market will give more hedging and risk management options to corporates looking to manage their commodity risk. In the process, it could bring down the cost of transacting in commodities substantially.

Resolving infra disputes…

This had been a major bone of contention in Public Private Partnership (PPP) projects in infrastructure. There was no institutionalized mechanism for resolving disputes. The budget has proposed modifications to the existing mechanism so that all infrastructure-related disputes can be resolved in a time-bound manner with minimal legal and procedural delays. This will ensure that more institutional money from banks and PE Funds will be willing to come into infrastructure. This reduced risk will also ensure that the cost of funding infrastructure projects reduces substantially and improves the IRR.

ETF route for divestment…

The government has not only set an ambitious target of Rs.72,500 crore for disinvestment but has also decided to use the ETF route for divesting stake in PSUs. This has multiple benefits. From an investor’s perspective it provides access to a basket of PSUs rather than individual PSUs. This substantially reduces the risk in PSU investing. Looking at the strong demand for investment in the CPSE ETF managed by RCAM, this idea has surely been a major hit with the public. There has been a strong demand from retail and institutional investors. From the government point of view, this offers a more credible and assured method of meeting divestment targets! ©

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