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Boost to capital market reforms gets positive response Thursday, March 1, 2001
The markets reacted positively to the Budget proposals, with the Sensex closing at 4277.04 points up 177.36 points over Tuesday's closing figures. Finance Minister Yashwant Sinha said in his Budget speech that the financial sector and capital market reforms would continue and proposed a number of initiatives in this regard.
Among the initiatives is the proposal to raise the foreign investment limit in a company under the portfolio investment route by Foreign Institutional Investors to 49 per cent from 40 per cent.
Sinha said provided that foreign investors bring in a minimum of $50 million, Foreign Direct Investment (FDI) in non-banking financial companies would not have to be accompanied with a divestment of a minimum of 25 per cent of their holding in the domestic market.
Turning to capital account liberalisation, he said Indian companies may now invest abroad up to $50 million annually through the automatic route without three-year profitability condition under the account.
He said companies which have issued ADRs/GDRs may henceforth make foreign investments up to 100 per cent of these proceeds, up from the current ceiling of 50 per cent.
Besides, he said Indian companies that have issued ADRs/GDRs, may acquire shares of foreign companies up to an amount of $100 million or an amount equivalent to ten times of their exports, whichever is higher.
Sinha said Indian companies would be permitted to list in foreign stock exchanges by sponsoring ADR/GDR issues against block shareholding. This facility would have to be offered to all categories of shareholders.
Turning to debt market, Sinha said a clearing corporation for further orderly development of money market, government securities market and settlement of forex transactions will be set up.
Stating that the Public Debt Act would be replaced by a Government Securities Act, he said the RBI would set up an electronic negotiated dealing system by June this year to facilitate transparent electronic bidding in auctions and dealings in government securities on a real time basis.
The finance minister said RBI would set up electronic fund transfer (EFT) and real time gross settlement systems (RTGS) within the next year.
He said there would be removal of taxation anomalies to promote issuance of strips, zero coupon bonds, deep discount bonds and the like.
On banking sector, he said seven more debt recovery tribunals would be set up during 2001-02 and legislation to facilitate foreclosure and enforcement of securities in cases of default would be introduced.
Besides, he said the banking service recruitment boards would be abolished by July 31 this year or earlier. Banks to do all future recruitment themselves, he added.
Markets happy with the Budget
"It's a great Budget," commented Bajaj Auto chairman Rahul Bajaj. Bajaj is not the only one who is cheering finance minister Yashwant Sinha on Wednesday afternoon. The stock market, which reflects the mood of the nation, was also in a jubilant mood.
The Sensex at 1.30 pm was at 4,248, a good rally from its overnight close of 4,069. There is a freeze on many of the key stocks as these scrips have already hit the 8 per cent limit. Sectors which are witnessing a bull run include FMCG, software and Old Economy.
Among infotech stocks, Himachal Futuristics, Global Telesystems, Infosys, SSI, Aptech, and NIIT are among the major gainers. In FMCG, stocks like HLL and Nestle have exhausted their 8 per cent limit. Old Economy stocks like Grasim, L&T and Telco are also up sharply.
The market is particularly happy with the government decision to reduce dividend tax. Ajit Sanghvi of Malini Sanghvi Securities said that the reduction in dividend tax from 20 per cent to 10 per cent has improved the overall sentiment.
Stockbrokers were praying for a scrapping of the dividend tax, but they are happy with this reduction. In his last Budget speech, Yashwant Sinha had announced an increment of dividend tax from 10 to 20 per cent.
The reduction in dividend tax will have a strong bearing on market sentiments, and a buoyant stockmarket is critical for India -- especially since the government wants to offload its stake in already listed PSUs, said a senior stockbroker.
"The government would be suitably compensated for the loss in revenues. The gain in the market capitalisation of PSU stocks alone would be much more than the loss in revenue. The government's efforts in divesting its stake in PSUs and raising funds would derive benefits out of this exercise," Sanghvi added.
Concessions for software services also made the markets happy. Some of the announcements which are seen to be helping the software industry include Indian companies can now claim exports concessions for their on site services. The decision to increase the investment limit of foreign institutional investors in companies to 49 per cent from 40 per cent will also help out these companies.
The decision to allow companies to use up to 100 per cent of ADR proceeds for investments abroad, and allowing companies to invest up to $50 million abroad without applying the three-year profits rule have all made the stockmarkets happy.
Tax holidays for infrastructure projects and the decision to exempt capital gains tax for new issues were welcomed. The reduction in customs duty on IT and telecom equipment, and downsizing of government machinery have also been welcomed by the market.
Observers however said that the government is likely to come under pressure from the opposition over some of its announcements on excise duty reduction and labour law reforms. The decision is reduce the small savings rate has also been criticised
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