MARCH 22, 2012

Key policy announcements for financial services sector – Budget 2012

By Suresh V Swamy

THE Finance Minister presented the Union Budget 2012-13 setting out certain vital objectives which included domestic demand driven growth recovery and high growth in private investment. In this background, the Finance Minister made a number of policy announcements including those impacting the financial services sector, some of which are discussed here.

The Government has been initiating measures to develop the nascent Indian corporate bond market. To take it a step further, it is proposed to allow the Qualified Foreign Investors (‘QFIs') to access the bond market. QFIs have already been allowed access to equity markets and mutual funds.

More and more corporates are expected to go public in the near future. To reduce the overall cost of going public and help the corporates reach a wider investor base, public offers would mandatorily need to be made electronically.

Shareholders are usually spread across the length and breadth of the country. However, meetings are generally held in the city where the company has its registered office; often making it impossible even for a willing shareholder to participate in the meetings. The Government's proposal to introduce electronic voting, though initially proposed to be made mandatory to top listed companies, would go a long way to encourage shareholders' participation.

Currently, there are no tax incentives for investing in the equity market, although certain tax benefits are given in relation to income from equities and investing in mutual funds. To encourage savings and improve the depth of domestic capital market, it is now proposed to introduce a scheme, Rajiv Gandhi Equity Savings Scheme, under which the retail investors, having income below Rs. 10 lacs, would be allowed a deduction of 50% on investing directly in equities up to Rs. 50,000. This should cover at least 90% of taxpayer population in India.

Under the existing norms prescribed by the Reserve Bank of India (‘RBI'), banks are required to maintain capital adequacy ratio of 9%.Recent events indicate the need to augment capital of public sector banks (‘PSBs'). The Government has recently committed capital infusion to one of the largest PSBs. To protect the financial health of PSBs, the Government has proposed allocation of substantial funds for the capitalisation of PSBs. The Finance Minister also proposed the creation of Financial Holding Company structure for PSBs. The Reserve Bank of India had placed a report of the Working Group in May 2011 for comments; the Government was not in favour of this set-up for PSBs. The Government now seems to have accepted suggestions of the Working Group for PSBs as well.

For the year 2011-12, tax-free bonds for Rs. 30,000 crore were announced for financing infrastructure projects. This amount has now been proposed to be increased to Rs. 60,000 crore. This should entail more number of tax payers in the country to the related tax benefits. Hopefully, the Government does not crowd out private sector players.

To address certain funding related issues impacting infrastructure sector, it is also proposed to allow External Commercial Borrowings to part finance rupee debt of existing power products, capital expenditure on the maintenance and operations of toll systems on roads and highways and working capital requirements of airlines.

Many of the above announcements look promising. Let's hope the Finance Minister succeeds in achieving these objectives.

(The author is Executive Director - Tax and Regulatory Services, PwC India )