The budget has an array of`real-good' and `feel-good' measures for the capital market. Reduction ofdividend tax to 10 per cent, removal of all surcharges (except the Gujaratsurcharge) on income tax and increasing the limit of FII investment inIndian corporates to 49 per cent are indeed laudable. If these buoy up thesecondary market, the primary market would also witness increased activity,though not necessarily of a desired quality.An attempt has been made to `lure' back the investor, after having failed torestore his confidence through regulatory measures. A key initiative is theexemption of long-term capital gains tax if such gains are invested inprimary issues ,though at this time it is not clear if such exemption isvalid only for IPOs or also on public issues of debt, public issues ofequity by listed companies and rights issues. While this concept isequitable, it is unlikely to move any significant sums to the primarymarket. The investor is primarily concerned about the safety of the capitalitself as exemplified by the `vanishing' companies phenomenon on one handand lack of punitive, deterrent action on the other.
The expectation that reduction of interest rate on small savings will helpdivert money to the equity market is also misplaced. Investment in smallsavings has been rising primarily because of tax benefits and concern forsafety. The earlier reduction by 1 per cent point incidentally had also notimpacted small savings and bank deposits. The other side of this decisionis, however, heartening as banks having to pay lower interest to depositorswill now be able to lend at lower rates, bringing down the cost of capitalfor the industry.
The budget is again disappointing on the disinvestment front. While lastyear's target of Rs 10,000 crore has been almost missed, the new year'starget at Rs 12,000 crore, though realistic, is nowhere near the need of theday. It is also disheartening that the method of disinvestment has beenstipulated through strategic sales. This will continue to pose problems inimplementation, if delays of the past and Balco-like imbroglio are anyindication. A cleaner, faster and effective way would be selling the PSUshares to retail investors.
There has at last been a recognition of the need for the development of thelong-term debt market. It is clear that such a market is a pre-requisite forthe development of the infrastructure sector. The budget, however, has notadequately addressed the development of the pension funds market. The needto nurture and grow the venture capital industry has also been overlooked.
To bring back investor confidence, strong penal measures are required. Theseinclude improving pre-issue and post-issue information disclosures andlevying severe penalties for non-disclosures; amending law to provide forpersonal liability of promoters, etc. The investor recognises the riskinherent in equity; what he should not be asked is to manage the risk offraud.
(The writer is Managing Director, PRIME Database)
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
