Though proposals related to the capital markets took up a chunk of airtime in Nirmala Sitharaman’s maiden budget speech, the stock markets were not particularly thrilled at the Union Budget for 2019-20.
Market participants were expecting some dose of revival for the economy, which lost the steam of growth and wished that the Finance Minister would present the budget, which will not only kick-start the slowing economy but will also give some direction to lost financial markets.
Instead, Sitharaman’s maiden budget not only lacked adequate incentives, but certain proposals absolutely failed to strike a chord. Schemes such as Super Rich Tax, hike in public shareholding limits for listed companies and ambitious disinvestment target set for the Financial Year 2019-2020 (FY20) proved to be detrimental for the market and has caused irreparable damage to market sentiments.
This story was penned on Friday, July 19, when the benchmark indices closed with second most heavy losses in the calendar year till date. The Bombay Stock Exchange (BSE)’s S&P Sensex dropped by 560 points while the National Stock Exchange (NSE)’s Nifty50 shed 178 points to close respectively at 38,337 and 11,419 points.
Commenting on 2019’s second largest fall in the benchmark indices, Arun Thukral, MD and CEO, Axis Securities said, “The correction was in response to a combination of the surcharge on the Foreign Portfolio Investors (FPI), tepid results by a couple of companies and rising slowdown concerns. The markets are expected to be volatile in the near term on account of eclectic events such as US Fed policy meeting scheduled on July 30 or 31, the progress of monsoon and results of various companies.
Sharing his views on the same, Jagannadham Thunuguntla, Senior VP and Head of Research (Wealth), Centrum Broking said, “Indian capital markets are in capitulation mode, as there has been clear dearth of good news. The continuous corporate defaults, high-tax regime, weak earnings season and fragile economy are not helping the already-delicate sentiment. With the crisis deepening and widening, markets are eagerly looking forward if policymakers can talk-up the markets with market-friendly tone.” For the first time, Union Budget introduced two additional surcharge slabs of 25 per cent and 37 per cent for individual taxpayers and also introduced two surcharge slabs of two per cent (annual income between `1 crore-10 crore) and five per cent (for annual income exceeding `10 crore) for foreign companies operating in India.
This budgetary proposal has caused severe pain not only to the domestic High Networth Individuals (HNIs) but also to FPIs, the providers of ample liquidity to the market. As the number of slabs increased and also the rate was hiked, these proposals together came to be called Super Rich Tax.
Most FPIs operating in India are registered as Association of Persons (AoPs) or as Trusts and do not fall under the ambit of Ministry of Corporate Affairs (MCA) and provisions of Companies Act. The request and representation made by FPIs to Sitharaman proved futile as she suggested they get registered as Companies in India. The budgetary provision related to surcharge and other tax proposals were ratified unaltered in the Finance Bill that was approved by Parliament.
According to sources, paying surcharge may not be a serious problem for FPIs, but the provision introduced for foreign companies to get registered in India as an incentive to surcharge at a lower rate is what is troubling them. Sharing his views on this, Rachit Sharma, Company Secretary, Taxmann said, “Once they get registered as Indian companies, they will have to comply with all the rules, regulations, disclosures and provisions of MCA and follow financial reporting structure laid down by the ministry. This is their main cause of pain.”
However, a respected broker agreeing to speak under anonymity spoke in defense of the FPIs. He said, world over, these players are not taxed in any of the jurisdictions they operate in. Their entry and exit has no restrictions. One has to keep in mind that the buoyancy that we see in our market is because of the ample liquidity provided by them and also India is not the only emerging market in this globe, which provides them earning opportunity, we have to keep this in mind. For them, there are various destinations available to park their funds. The government should have taken into account the cost-benefit ratio of levying such tax proposals, he explained.
Another budget proposal, which had significant impact on the markets, is the enhancing of public shareholding float from current a 25 per cent to 35 per cent.
Thunuguntla said, budget proposal on reduction of Maximum Promoter Shareholding from 75 per cent to 65 per cent, will see public shareholding rising to 35 per cent from current 25 per cent for all the listed companies.
Based on the latest shareholding data available, he further said, that research shows 1,174 listed companies have promoter shareholding above 65 per cent (see table). In other words, 25 per cent of the entire universe of listed companies (~4,700 companies) will have to go through off-loading promoter stakes to meet this requirement. At the current market prices, the total quantum of sale that needs to be done by these 1,174 companies works out to about whopping amount of `3,87,000 crores. It means that much amount of liquidity will be sucked out of the market.
Thunuguntla further stated that, “While we need to await Securities and Exchange Board of India (Sebi) regulations regarding how much time will be given to these companies to meet this minimum public shareholding norms, the overhang of this requirement of off-loading of promoter shareholding can have significant impact on the markets and specific stocks. The regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters.”
Out of the total quantum of sale to be carried out by over 1,100 companies, top three companies would be TCS (~Rs59,600 crore), Wipro (~Rs15,000 crore) and D-mart (~Rs14,000 crore). This will constitute roughly 23 per cent of the amount that will have to be divested by India Inc to comply with all the provisions.
Another serious fall out of this budgetary proposal could be flight of multi-national companies (MNCs), whose shares are listed on Indian bourses. Majority of MNCs listed in India have significant amount of promoter shareholding and they see to it that it is not diluted in order to avert any possible takeover threat. Another reason for MNCs choosing to maintain high level of promoter shareholding is they can earn higher income in the form of higher dividend.
Sitharaman has also set an ambitious target of disinvestment at Rs1,05,000 crore for FY20.In FY19 the central government mobilised Rs85,000 crore, exceeding the target by Rs5,000 crore.
However, this was done through rejig in the shareholding of various public sector undertakings and milking cash rich government companies. If it has to achieve this year’s aggressive target, it will not only have an impact on the secondary market but will prolong the process of revival of primary market, experts in the investment banking circle opined.
Maneesh Ajmani, Head, Insignia Preferred Banking, TPP & Wealth Management, RBL Bank said, “Going forward, monsoon will play a critical factor in rural demand and aggregate demand in the overall economy.”
Sparsh Chhabra, Head of Economic Research, Centrum, in his note to clients about progress of South-west monsoon in India said, “The recent sign of improved performance in the progress of the Southwest monsoon has provided some form of respite to the already prevalent, sluggish rural economic activity conditions. Though, Southwest monsoon has made noticeable progress but its delayed arrival continues to weigh heavily on the outcome of agriculture output, and, hence, rural income.”
He further stated that, domestic tractor sales growth, often regarded as the bellwether to track rural economy, has been registering contraction for the past five months. The recent ongoing moderation in rural economic activity is largely attributable to the overall weak macroeconomic scenario, lower government spending, tighter liquidity conditions coupled with lower credit availability, lower procurement despite Minimum Support Price hikes by the government and limited beneficiaries of PM KISAN scheme.
However, modest monsoons and rural income supplement from the government hold greater potential to provide the much-needed fillip to the stagnated rural consumption in second half of the fiscal year. Pan-India monsoon scarcity has declined by 14 per cent as on July 16, 2019 from 36 per cent to 28 per cent, the Centrum note mentioned.
On regional basis too, scarcity has contracted significantly in certain sectors during the week ending 10 July except East, Northeast India and South India, where rainfall continues to remain at a 22 per cent and 28 per cent deficit of LPA. Central India recorded above-average rainfall, reducing the deficit to fair one per cent from 44 per cent in the preceding week. Spatially, now 13 out of the 36 subdivisions have received normal to heavy rainfall, thereby showing signs of modest pickup. With 55 per cent of the country’s area, receiving normal to heavy rainfall, compared to only 17 per cent in June, there awaits a silver lining, the note said.
Due to its late arrival this year, still 20 of the 36 subdivisions in India are experiencing rainfall deficiency this year compared to 11 during the same period in 2018. Water storage availability in 91 major reservoirs of the country exhibited modest improvement with recovery in rainfall. Reservoir storage as a percentage of total capacity stands at 22.9 per cent on July 11, 2019, indicating signs of marked improvement from 18 per cent as on June 13.
With prevalent weak El Nino conditions and the anticipation of these conditions going weak ahead, clearly indicates that a progressive monsoon outlook in turn will provide a further boost to the sowing levels of kharif crops, which is currently showing de-growth of 8.62 per cent versus last year’s levels, in the same week.
“Within food grains, cereals and pulses are witnessing contraction of 9.22 per cent and 25.16 per cent respectively relative to contraction of 20.27 per cent and 31.72 per cent last year. Sugarcane, oil seeds and fibres continue showing contraction,” Chhabra concluded. Finally, it be said that the Budget’s effect on market is here to stay.
yagnesh@outlookindia.com