While presenting the Union Budget for the financial year 2021-22, Finance Minister Nirmala Sitharaman proposed merging some of the most important Acts that govern the capital markets and securities into one common code. So why has the government taken this decision and what does it mean for the capital markets or the investor community?
“I propose to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalised single Securities Markets Code,” said the finance minister while presenting the Union Budget on Monday.
The SEBI Act is like a mothership Act, which gives the regulatory body the power to regulate the capital markets through various regulations while also ensuring that investor interest is always protected.
The Securities Contracts (Regulation) Act, or SCRA, largely governs the affairs of the stock exchange, which is one of the most important institutions in the capital market. The Depositories Act regulates the depositories of the country that hold the all-important securities worth billions of dollars.
Lastly, the Government Securities Act is a legislation that gives the Reserve Bank of India (RBI) the power to amend the laws governing the government securities or G-sec market.
While the finer details of the proposal are awaited, a common view that has emerged is that a single code would provide more operational efficiency to the regulator that has the task of regulating various forms of securities like equity, commodity, currency and interest rate. Further, it also regulates stock exchanges, which provide a trading platform for government and private sector bonds as well.
Hence, there was a view that some of the Acts that have been in place for decades can be repealed and a new more efficient and modern framework can be put in place.
“There are a lot of overlapping regulations that require tweaks or amendments and a single Securities Markets Code could just achieve that,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal.
The greatest merit of this Budget is that it clearly indicated that the economic policy of this government is in the right direction. Undeterred by the farmers strike, the government has made it clear that it will go along ‘the road less travelled’ when it comes to economic policy. The proposal to privatize two nationalized banks and one general insurance company is a clear message that privatization is on top of the government’s agenda. Raising the FDI limit in insurance to 74 per cent from 49 per cent is a step in the right direction. The proposed Asset Reconstruction and Management Company will help clean up the banks’ balance sheets. India’s financial sector is headed for much better times.
The thumps up given by the stock market to the Budget stems from the conspicuous absence of new tax proposals and the focus on growth. There were rumours that the government may consider raising more money through STT and LTCG since the stock market gained from the pandemic. But the government did the right thing in rejecting this thought and decided to focus, instead, on raising money from the buoyant stock market through disinvestment and privatization. The disinvestment target of Rs 175,000 crore can be comfortably achieved in this bullish market. The challenge, however, is in implementation.
Even though the absence of new tax proposals is a big relief, there is a concern on huge reliance on financing the expenditure through borrowing. The fiscal deficit at 9.5 percent of GDP for FY21 is worse than expected and the FY22 target of 6.8 percent is on the higher side. The government targets to borrow around Rs 12 lakh crore to finance the expenditure of Rs 34.83 lakh crore. However, it is a relief that Rs 5.54 lakh crore of the proposed expenditure is capital expenditure. Bond yields are likely to rise, going forward.
It is possible that the actual deficit may be lower than what was projected in the Budget. The FM has been very conservative in assuming a 14 per cent nominal GDP growth and 14 per cent tax revenue growth. Going by the latest trends in high frequency indicators like electricity consumption, e-way bills, GST collections and sales of cement, autos and steel, 11.5 percent GDP growth, 16 percent nominal GDP growth and 18 percent growth in tax revenue are within the realm of possibility. This is likely to bring the fiscal deficit down.
The Budget has struck a fine balance between India and Bharat through increased allocations for health care, infrastructure, agri-infrastructure, rural development and agriculture.
In these nightmarish Covid times, the FM has to be appreciated for delivering a 'Dream Budget'.
Analysts remained bullish on banks and infrastructure stocks as they expect Budget 2021 to push growth and lift corporate earnings. India will set up a new development finance institution to raise funds for infrastructure. It will be set up with a capital base of Rs 20,000 crore and will have a lending target of Rs 5 lakh crore in three years, Finance Minister Nirmala Sitharaman said during her budget speech on Feb. 1. Besides, the government extended its Rs 111-lakh-crore National Infrastructure Pipeline to cover more projects by 2025. The government has also proposed a bad bank-like structure to better manage non-performing loans. An asset reconstruction company and asset management company structure will be set up to take over the bad loans on public sector bank balance sheets and manage recoveries, Sitharaman has said. It also proposed to privatise two public sector lenders and one general insurer.
Apart from these, the budget increased spending allocation for the healthcare sector in the next fiscal, raised capex for railways, lowered limitation period for reopening tax cases and eased compliance for senior citizens, among others.
That prompted Indian equities to post their best budget-day rally in 24 years. The Sensex and Nifty 50 have erased more than 60% of their six-day drop before the budget.
What Analysts Think
Morgan Stanley, the research firm, raised its target for Sensex to 55,000 by the end of this calendar year from 50,000 projected earlier. That, it said, because Budget 2021 augurs well for a new private investment cycle, a recovery in domestic equity flows and earnings growth.
Edelweiss termed Budget 2021 as India’s “most focussed” in decades. “Distinctly top-down”, Edelweiss said the translation into bottom-up economics will be its test. “The market at its current valuations, post its response to the budget, largely reflects its fair value for the year ahead,” Edelweiss said in a note. It expects the Nifty to touch 14,200 by December 2021.
The research firm remains overweight on IT, banks, industrials and real estate. It sees risks in inflation, global stimulus and liquidity support and that the market possibly not pricing it in.
JM Financial remains positive on the banking sector, given lower-than-expected stress formation, strong capital levels and improving economic activity. In its post-budget note on the JM Financial said privatisation of PSU banks is a step in the right direction and can act as a test case for privatisation of other major PSU banks in the future. “The most likely candidates will be from the pool of banks which were not part of the consolidation in the first round — Bank of India, Central Bank of India, Indian Overseas Bank, Bank of Maharashtra and UCO Bank,” it said.
The resolution of stressed assets by setting up ARCs and AMCs to consolidate and take over existing stressed debt and then manage and dispose of the assets to alternative investment funds or other potential investors for eventual value realisation will require swift implementation as the past attempts at creating such vehicles have not met with much success, JM Financial said in its note.
The research firm recommends a ‘buy’ for private lenders such as ICICI Bank, Axis Bank, HDFC Bank, IndusInd Bank and Bandhan Bank. It’s also positive on state-run lenders like State Bank of India and Bank of Baroda.
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