The stock markets went into a tizzy in the post-Budget session. The Sensex was down by 400 points (1%), and Nifty fell by 135 points (just over 1%). It seems that the markets are confused about the implications of the various proposals, which may work at cross-purposes. Some of the Budget decisions may spur the various stocks, but others may pull them down. However, some experts contend that there were no “big bang” proposals for the investors.
One of the proposals in the Union Budget 2019 was the increase in minimum public shareholding in listed companies – from 25% to 35%. Finance Minister Nirmala Sitharaman said that she has asked the market regulator, SEBI, to consider this move. While this will definitely shift wealth from the hands of the rich promoters and institutional investors, it also implies that companies will throng the markets to sell the extra shares to retail investors.
This can create a huge liquidity crunch, which means less money will be available to invest in secondary markets, or directly through the exchanges. This can pull down the Sensex and Nifty in the future. In addition, many of the smaller listed firms, not-so-profitable ones, and losing making companies, which witness minimal investors’ interest, will need to sell the extra shares at cheap prices. This too can lead to negative sentiments in the bourses.
But at the same time, the finance minister intends to hike the availability of “investible stock” to foreign portfolio investors. Hence, she announced that the cap of 24% of the holding of a particular company will be hiked to the sector FDI limit, “with option given to the concerned corporates to limit it to a lower threshold”. This implies that if the FDI limit in a sector is 49%, foreign investors can increase their stakes in companies in the sector from 24% to 49%. However, the specific companies in the sector can limit it.
Even if only some companies agree to hike the limit, this will crate additional demand for Indian stocks, which can boost the market. But this will also suck out the liquidity of the large foreign investors. If both global and domestic liquidity is crunched, one can only guess at the implications for the stock markets. Unless the scenario plays out, the investing community will remain confused.
The markets are also worried about the income tax surcharge on high net worth individuals, who are among the major buyers of stocks. Individuals with income between Rs 2-5 crore will pay an additional 3% tax, and those above Rs 5 crore will pay an extra 7%. This too will reduce the quantum of investible surplus available with them, and have a negative impact.
According to media reports, the government imposed a 20% tax on buyback of shares by the companies. Several firms, which are flushed with surplus cash, tend to buy back their own shares at a premium from existing investors, instead of doling out extra dividends to the shareholders. This tends to reduce the floating stock, and increases the share prices of the companies. However, the government felt that most companies opted for buyback to avoid dividend tax. To protect government revenues, a similar tax had to be imposed on buybacks. This will obviously impact future buybacks.