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Can the new Government honour the wish-list of D-street? - Outside View by PersonalFN
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Can the new Government honour the wish-list of D-street?
May 31, 2014

Everyone has high expectations from the newly elected NDA Government. Aam admi wants lower inflation, corporate want favourable business environment and investors want higher economic growth. The list doesn't end there.

Mentioned above are the areas where the change is considered to be a must. But industry and investors expect a lot more from the Government. But can the new NDA Government keep everyone satisfied? For instance, it is quite possible that by giving benefit to one industry, the Government may have to take tough measures for the other. So there's no doubt, the newly elected Government is going to find it tough to do a balancing act.

Sooner or later, the new NDA Government will have to start announcing economic policies, implement changes and give guidance pertaining to role of Government on various issues. And therefore in this context, the Union Budget in July 2014 would be one interesting event to watch. We are little over a month away from the budget and everyone seems to quite curious with Mr Narendra Modi at the helm and Mr Arun Jaitley in charge of finance. Various industry bodies are busy these days preparing their separate wish-lists. All we got to see, which of the wishes the does Mr Jaitley honour.

Let's talk about wish-list of companies in the capital markets (such as stock exchanges, brokerage houses, and other financial service providers) and what they expect from the new NDA Government. Some of them are:

  • Major restructure or removal of Rajiv Gandhi Equity Savings Scheme (RGESS)

    RGESS was introduced with an aim of increasing participation of retail investors in equity markets. The benefit of RGESS is available only to first time investors. However, response to RGESS has been tepid. After having garnered only about Rs 60 crore over last two years, the industry has started doubting the success of this route for attracting new investors. While around 40,000 new demat accounts have been opened, only a fraction of them have seen actual investments. The industry perceives the structure of the scheme to be complex and therefore wants a major overhaul in its structure or it be scrapped.

    They are instead seeking tax incentives for investors who invest in equity Exchange Traded Funds (ETFs).

    PersonalFN's view: PersonalFN has always believed that, to increase participation of retail investors in equity markets, investor education and awareness programs should be given priority. Merely giving tax breaks may not encourage people to invest in equity. Taking advantage of market momentum and launching New Fund Offers (NFOs) when the market is strong may not instil confidence. Yes, RGESS has not been well thought to attract first time investors in the Indian equity market, and therefore requires an overhaul. If that's not possible, then first time investors can be catered through equity ETFs, which are passively managed.

  • Allowing retirement funds in the capital markets

    It has been a long standing demand of the industry for getting a huge pie of retirement money invested by Employees' Provident Fund Organisation (EPFO). However, labour ministry has repeatedly opposed to the idea of investing retirement savings of thousands of employees in mutual funds. So far, the Securities and Exchange Board of India (SEBI) has been successful in getting positive response from the finance ministry. But no final decision could be taken under UPA II regime due to resistance of labour ministry.

    PersonalFN's view: This issue has been pending for more than 5 years now. The finance ministry had allowed EPFO to invest upto 15% of retirement savings of its subscribers in shares or equity oriented mutual funds. However, no such investment has been made thereafter. Being concerned over risk involved in equity related investments, labour ministry guided that no such investments can be made. PersonalFN believes, unless subscribers of EPF themselves understand what are the risks associated with equity and what is the reward potential, they may not be comfortable with market linked investments. PersonalFN is of the view that, financial circumstances and risk appetite of all subscribers of EPF scheme wouldn't be the same. Therefore, it wouldn't be appropriate to expect EPFO to invest a fixed proportion of its corpus in equity. PersonalFN has always believed that investors should follow personalised asset allocation.

  • Allowing higher ownership by foreign exchanges in domestic exchanges

    Market intermediaries and stock exchanges are of the view that, in order to make stock exchanges more global it would be advisable to allow raising foreign ownership in them, up to 49%, which may improve competitiveness in the domestic industry. It is noteworthy that, currently foreign exchanges can hold only 5% in Indian exchanges, while Indian exchange can hold 15% in foreign exchanges.

    PersonalFN's view: You see, unless there is meaningful stake, foreign partners are usually reluctant to engage fully and bring in the required competitiveness. The present norms, limit the competitiveness and the advantage which the domestic bourses can offer. Allowing foreign exchanges to own more in domestic bourses enhances the competitiveness of domestic capital markets.

  • Lowering of Securities Transaction Tax (STT) and uniformity in Stamp Duty

    Industry has also been demanding lowering of STT in equity segment and total removal of STT for derivative segment. Moreover, market players have demanded that stamp duty be made uniform across states.

    PersonalFN's view: In the Union Budget 2012-13, during the UPA regime the then finance minister, Mr Pranab Mukherjee had cut STT on delivery based traded by 20% in the cash market, while keeping it unchanged for other types of transactions. So now once again, in order to bolster the capital market such a wish is made. But given amid challenges in the path of fiscal consolidation, the new NDA Government may not honour this. Stamp duty may be made uniform across states.

  • Modifying e-IPO (Initial Public Offering) process

    Stock exchanges have also proposed to the finance ministry modifying the e-IPO process in-line with the secondary market transactions to make things simpler, faster and more efficient. This according to the exchange will help reduce number of days for listing to 2 from current 15.

    PersonalFN's view: A proposal which can help reduce the number of days for listing could reduce the price rigging which occurs in the grey market until the stock is first listed / traded. It would help bringing down inefficiency and possibly even reduce wide deviation in stock price when it gets listed. As a result, primary market participation of investors may go up.

To conclude...

PersonalFN is of the view that, while reforms in asset management and financial services industry may help industry players to expand their business, unless investors start coming to markets on their own thinking that equity is the asset class for them, no reform would give sustainable results. Sustainability of business for financial firms as well as exchanges is closely linked to confidence of investors in the system. Low retail participation in equity indicates that investors are still wary about investing in equities and possibly perceive it be speculative asset class carrying very high risk which is not meant for them. To attract investors in equity, there is no substitute to investor education.

PersonalFN believes, some of the demands of the financial services industry may be fulfilled some may be not in the forthcoming budget. However, it remains to be seen whether approach of aam aadmi changes toward equity as an asset class.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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