With Union Budget 2019 announced, there were quite a number of issues that became the bone of contention. Four issues really stood out in the budget. Firstly, government planned an issue of sovereign bonds. Secondly, the buyback tax was introduced. Thirdly, the surcharge on HNIs was increased which impacted FPIs in the process. Lastly, the budget also made a proposal to increase mandatory public shareholding in listed companies from 25% to 35%. Apart from the buyback tax, the government has done a U-turn on the other three.
Going slow on FPI tax
The rethink on this subject was clear the moment the PMO called the FM for a high level meeting. The budget had introduced higher surcharge on persons earning more than Rs.2 crore and Rs.5 crore in graded slabs. The catch was that this rule would also apply to AOPs. Now, 40% of the FPIs in India are structured as trusts or AOPs and they would automatically come under the ambit of higher surcharge. This would increase the effective capital gains tax liability on these FPIs. It had led to surge in selling from FPIs with more than $3 billion exiting Indian equities since the Union Budget. Now, there is an indication that the government may invoke provisions of Section 119 to make a special exception for FPIs. After all, selling by FPIs is not something the Indian rupee or the Indian economy can afford at this point of time!
Public shareholding hike
Another big announcement in Budget 2019 was the proposed increase in public shareholding from 25% to 35%. The government surely had its heart in the right place because it would just ensure that more quality paper will be available in the stock markets. This would address the issue of liquidity and also the issue of asset price inflation that we have been seeing in equities for quite some time. However, the backlash from the markets had a different point. Firstly, this would force large companies like TCS, Wipro and D-Mart, among others to mandatorily dilute their stake. Secondly, this could result in additional floating liquidity of around $50 billion in the market depressing valuations and prices. Not surprisingly, this idea has been put in cold storage for now!
Rethink on sovereign bonds
One more announcement that has been silently put in the back burner is the issue of sovereign bonds. Here again, the PMO had raised concerns over the currency risk in the event of any weakening of the rupee. Government may try its best to underplay the sovereign bonds and that is already obvious from the cues coming from finance ministry. The FM is now talking about a phased issue of sovereign bonds rather than issuing $10 billion in one go. For now, it looks like these bonds are not taking off! ©