Budget 2018: How Finance Minister Arun Jaitley has made interesting changes to financial regulations

I have a short piece in today’s Financial Express on the impact of the budget on financial regulations. Linked here and quoted below:

Budget 2018: The Budget attempts to juggle the competing interests of various people to maximise political, fiscal and economic capital. The Budget has made some interesting changes to financial regulations.

The Budget 2018 attempts to juggle the competing interests of various people to maximise political, fiscal and economic capital. The Budget 2018 made some interesting changes to financial regulations. First, the reintroduction of capital gains tax was a negative for capital formation in the public markets. But an introduction of a ‘grandfathering’ clause protects gains made till the Budget’s introduction. In other words, if shares of a listed company were acquired 10 years ago at Rs 10 and its price on January 31, 2018 was Rs 1,000, the cost of acquisition would be considered as Rs 1,000 and not Rs 10. In a shrewd and sophisticated word play, the bill does not provide any benefit of capital loss if the shares were sold at say Rs 900 in March 2018. The extent of tax losses because of the exemption in the last year alone was close to a staggering Rs 3.75 lakh crore. With the zero tax treaties going away, both domestic and foreign investors will now pay capital gains tax, though at the concessional rate compared to capital gains on almost all other asset classes. 

The second major proposal in the bill is of incentivising the corporate debt market. There are huge benefits of expanding the corporate debt market. It is far more transparent, with disclosures, frequent mark to market, and oversight by a rating agency. By comparison the loan market is opaque and incentivises suppression of default where both the borrower and lender benefit by the omerta code of silence. Much of the NPA problem we see today is a result of the festering of the wounds not exposed to the rigours of transparency of the public markets, causing deep systemic issues within the banking system. The bond market is also a natural shock absorber, where risk can easily be transferred to those who are better placed to assume it.

Third, there are many kind words for various funds like alternative investment funds (AIFs), infrastructure funds, real estate funds and venture capital funds. Similarly, there are soothing words for the growth of fintech. The words will, however, need to translate into action. Currently, many forms of funds face absurd tax claims where funds raised by investee company are treated as profits. Similarly, certain kinds of AIFs investing in listed equity do not get proper pass through treatment of tax or certainty of taxation. Several fintech platforms have faced regulatory heat.

The fourth announcement is with respect to the creation of a unified regulator in the international finance centre at Gujarat. This is useful, since creating a competitive offshore financial centre requires quick adaptability and a modular design of development for which the large monolithic regulators RBI and Sebi are not fully equipped. They are more adept at restricting and regulating rather than promoting and developing. Additionally, what works onshore often does not work in the offshore market.

Fifth, there is a significant change in the enforcement process at Sebi. With pending proceedings expected to last over a decade, there was a need to streamline multiple proceedings. The bill takes a major step in consolidated duplicative processes at Sebi.