Investors stay negative to India's reform budget

PUBLISHED : Monday, 12 August, 1996, 12:00am
UPDATED : Monday, 12 August, 1996, 12:00am

In a mere three trading sessions after the July 22 Indian Budget for the remainder of the financial year, the Bombay Stock Exchange (BSE) fell more than 400 points, lopping 12 per cent off market capitalisation.

Even more than a fortnight after new Finance Minister P. Chidambaram took the floor in the Lok Sabha, India's lower house of parliament, the market has not recovered from what was initially dismissed as a knee-jerk reaction.

The BSE Sensitive Index languishes in the 3,450 to 3,550 range, well below the peak mark of 3,921 it had reached during the last pre-budget session, and even more substantially short of its all-time high mark of 4,643 on September 12, 1994.

The former chairman of the Unit Trust of India, S. A. Dave, said: 'In the case of the last four budgets since 1993, the market's response within one month of presentation has been negative and prices have declined in all four years.' This has happened despite the fact that all four budgets were pro-liberalisation, pro-reform. It has led Dr Dave to consider the stock market's reaction 'enigmatic'.

BSE president M. G. Damani said: 'What has hurt the capital market most is the fact that the Finance Minister has done nothing to revitalise the sagging market, despite the fact that concrete suggestions were made to him before the budget.' It had been expected that the hated 15 per cent surcharge on corporate tax would be done away with. The minister redressed this grievance partially - he halved the surcharge, and promised to do away with it in his next budget.

The other proposal which has hurt sentiment is the new minimum alternate tax proposed on those profitable companies, which have through shrewd investments in keeping with the letter of the law, avoided paying any income-tax.A minimum effective tax rate of 12 per cent has been imposed on such firms.

Mr Damani said: 'Among the proposals that have not been accepted is one relating to dividend tax. We had said to the FM - if it is revenue considerations that are coming in your way, go ahead and tax the companies which are not paying anything. The second part has been accepted, but not the first part.' Another BSE suggestion that has not been accepted is a request for a level playing field as far as capital gains tax is concerned.

Indians, resident and non-resident, pay a 30 per cent capital gains tax, and Indian companies pay 20 per cent, but foreign institutional investors pay only 10 per cent.

Former BSE president Bhagirath Merchant said: 'If you want foreign exchange, what is provided so specially by foreign institutional investors that non-resident Indians don't provide? 'And it must be remembered that 96 per cent of the capital in India - I'm talking about six trillion rupees [about HK$1.29 trillion] has come from non-resident Indians, Indian companies and Indian citizens, and just 4 per cent from the foreign institutional investors.' Mr Merchant said that of the overall shareholding pattern in Indian companies, 45 per cent equity is held by financial institutions and 10 per cent on the average by promoters.

'Forty-five per cent of the capital of most companies is held by individual Indian investors, who have given this money since the decade of 1970s. By giving individual investors this sort of step-motherly treatment, there seems to be a strong resolve in the minds of the authorities that we should have only institutional investors in this country, and not individuals.'