Budget 2013: Easier norms for equity investments, removal of cap for FIIs expected.

NEW DELHI: Finance Minister P Chidambaram may announce extensive changes in the regulatory regime governing capital markets in the upcoming budget, including scrapping the cap on the amount foreign institutional investors can invest in rupee corporate debt and putting in place a simpler regime for foreign investors in stocks and bonds.

Further, the minister may also unveil a simpler version of the Rajiv Gandhi Equity Savings Scheme, which is meant for new investors, relax stringent know your customer (KYC) norms for individuals, and come up with tax sops for certain mutual fund products.

"The budget will have a strong package for the capital markets," said a finance ministry official privy to the discussions.

India needs to attract foreign capital to bridge its current account deficit that is projected to worsen to 4.4% of GDP due to rising import of gold and crude oil.

In the current year, foreign institutional investors have invested $8.7 billion in buying up Indian stocks and debt, over and above the $31 billion they brought in last year. But stock market sentiment has soured in the past few weeks, as the impetus generated by reform measures announced since September 2012 begin to fade.

Carnage in Mid and Small Caps

The Sensex is down nearly 3.5% from its January 21 peak of over 20,000, but the carnage is more in the mid-caps and small caps, a trend the budget will be looking to reverse.

Making investments in the capital market more attractive is also expected to moderate investor fascination for gold.

Deepening the corporate bond market has long been identified as a priority area by the government and the budget could announce several measures towards this end, including removing the withholding tax on interest payment, besides doing away with the cap on foreign investments in debt.

Alternatively, the foreign investment limit could be specified in terms of percentage of the issue size.

Various panels, including a high-powered expert committee on making Mumbai an international finance centre, had suggested removing the cap on foreign investments in debt that currently stands at $25 billion.

"Caps may be coming in the way of flows...It would be a good idea to introduce some flexibility, especially at this juncture when yields are attractive," said Jyoti Rai, head, business development, SBI-Soc Gen Custodial Services.

The withholding tax is currently 5% on infrastructure bonds and 20% on corporate bonds, and is widely regarded as an irritant.

The finance ministry is also looking to unify various regulatory regimes that govern investments in stocks and debt.

This could be done, officials said, by extending the framework governing qualified foreign institutional investors, essentially family offices and wealthy individuals, to foreign institutional investors, non-residents and venture capital funds.

The ministry could also allow qualified foreign investors to invest over and above the foreign direct investment cap in sectors where there is no limit specified by Parliament.

In a series of overseas road shows earlier this month, Chidambaram had promised to unveil more measures in the budget to make the country's regime friendlier to foreign flows.

"The idea is to create vibrancy in the stock market by making the overall investment framework attractive for both domestic and foreign investors," the official quoted earlier said, adding that measures to boost savings are on the cards.


Source : economictimes.indiatimes.com