India: Budget 2004 Offers Mixed Bag for Investors
Last Updated: 26 July 2004

The Finance Minister increased FDI caps for several sectors including insurance and telecom while presenting the budget and said "the key to growth is investment, public and private, domestic and foreign". Long term capital gains tax on traded securities was abolished, short term gains tax reduced and a 0.15% transaction tax was introduced creating good news for investors and bad news for speculators. FII investment cap in debt market was raised to $1.75 billion from $1 billion.

SEBI MoU with CFTC

The Indian securities and derivatives regulator, SEBI, signed a cooperation agreement with the Commodity Futures Trading Commission, Washington, D.C. to strengthen communication channels and establish a framework for assistance and mutual cooperation. This is the sixth bilateral Memorandum of Understanding signed by the Indian regulator in addition to a multilateral MoU signed previously.

Market Break

The Indian stock market saw its largest point fall in history on the occasion of an unexpected political victory of the congress party in the national elections. The market was brought to a halt for several hours according to market- breaker rules. While government sources blamed ‘speculators’, the fall represented the concern of investors - of the country being run by a coalition (though headed by the architect of Indian economic reforms) supported by a communist party. Specific concerns related to slowing of the privatization of the public sector – inefficient behemoths seen by some as jewels because of their supra-normal profits arising from their monopoly status. Much of the dramatic loss is slowly getting reversed though.

Hedge fund entry

The regulator is considering allowing hedge funds in through the front door. Hedge funds may be allowed to invest in India as a specie of Foreign Institutional Investors (FIIs). They would not be permitted to raise capital in the country though. The proposal marks a change in the belief of the regulator that hedge funds are merely carriers of hot money and are the potential cause for undue volatility. Hedge funds which have invested in the Indian market till now, have remained only in the shadows, often using participatory notes to invest. The funds are not expected to register en masse given concerns of over-regulation.

Dresdner Kleinwort Benson barred

An investigation by the regulator showed circular trading or ‘wash sales’ by Dresdner Kleinwort Benson (DKB). DKB was found to have entered into matching orders with respect to quantity, price and time with other brokers in select scrips on behalf of a client. Its incredible defense that they innocently followed their client’s suggestion to enter trades at a particular time (right down to the second) to improve its chance of execution was rejected as gross negligence, if not aiding and abetting. DKB’s broking license was suspended for 18 months for manipulating the markets.

ESOP guidelines sought to be revised

A committee formed under the chairmanship of Prof. J.R. Varma of the Indian Institute of Management, Ahmedabad recommended several modifications to the ESOP/ESPS guidelines including a disclosure clearly highlighting the impact of the grant/exercise of ESOPs on the earnings and profits of the company.

Bank ownership capped

In a surprise move the Central Bank is seeking to limit ownership of private banks at 10%. The Reserve Bank of India proposed to extend its previous restriction on the cap on voting rights of any one shareholder to 10% to the currently proposed cap on ownership itself. The central bank has also put in place a 5% cap in cross holdings of banks which will also restrict the expansion of foreign banks by buying private Indian banks. The move was aimed at encouraging diversified holdings in private banks.

Central Listing Authority

The Central Listing Authority (CLA) is gearing up towards taking control of the issue process and unifying listing standards. The CLA recently clothed with several powers is busy revising several regulations related to raising of capital.

IOSCO Annual conference in India in 07

In a growing recognition of the maturing of the Indian capital markets, the leading body of securities regulators of the world - International Organisation of Securities Commissions (IOSCO) - will hold its annual conference in India in the year 2007. With 181 members, the body represents the voice of regulators towards harmonizing of the regulatory and operational structures of capital markets. It also seeks to strengthen co-operation for enforcement and exchange of information between different nations.

Norms for Preferential issue to be revised

Private placement of equity and convertibles will attract a tighter set of regulations as several investor groups complain of misuse of such placements to promoters or select investors at discounts to their market value, thus ensuring guaranteed returns in a world where there are few opportunities for free lunch.

Stock Exchange not ‘State’

A High Court ruled in Anil Agarwal v. UP Stock Exchange that Stock Exchanges are not ‘state’ and therefore a Writ Petition would not lie against the Exchange. The position creates a split amongst high courts as to whether Exchanges are ‘state’ within the meaning of the constitution.

Takeover Regulations sought to be tightened

A committee of the regulator proposed reduction of the scope of use of off market transactions for takeovers. It recommended reducing the threshold percentage required for making a compulsory tender offer in case shares were acquired in off exchange transactions. The committee also proposed restricting sales by the acquirer during the period of a tender offer.

This press release is for general informational purposes only and does not represent our legal advice as to any particular set of facts. You should get legal advice for any specific query that you may have.

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