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Budget 2018-19: Impact on Securities Market

Finsec Law Advisors

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On February 01, the Finance Minister introduced the Budget for the financial year 2018-19. We discuss the major proposals affecting the securities market as proposed in the Budget Speech and the Finance Bill, 2018:

Reintroduction of LTCG

The long-term capital gains (LTCG) tax has been re-introduced. An additional tax at the rate of 10% would be applicable if the total long-term gains crosses Rs.1 lakh in an assessment year. However, to ensure that the introduction of LTCG is fully prospective, a grandfathering provision to protect the gains made till the re-introduction of LTCG has been proposed. In brief, if shares of a listed company were acquired 5 years back at Rs.100 per share and its closing price on January 31, 2018 (the day prior to the re-introduction) is Rs.500, the cost of acquisition would be considered to be Rs.500 and not Rs.100. However, during the time of the sale and after January 31, 2018, if the price of the share falls to Rs.400, then the grandfathering provision will not provide any benefits towards the capital loss.

In 2004, Securities Transaction Tax (STT) was introduced on transactions in equities to check undisclosed profits. To provide some respite to the investors and to encourage equity investments, LTCG was exempted. However, considering that the LTCG is now reinstated, the government could have removed STT; especially as the STT generated is far less in comparison to the Rs.3.67 lakh crores revenue lost due to the exemption from payment of LTCG in the previous year. While the re-introduction may create temporary negative sentiments in the market, it is a positive move for the economy.

Unified Regulator at IFSCs

The government has proposed a unified authority for regulating all financial services in the International Financial Services Centres (IFSCs). Any financial institution at the IFSC would be treated as a non-resident Indian entity located outside India. Given this unique nature of IFSCs, any policy changes for IFSC required amendments in various regulations framed by multiple regulators such as SEBI, RBI and IRDA. This was seen as one of the major impediment in fast and focused development of IFSC in India.

A unified regulator with consistent and focused policy for IFSC has been a long-standing demand of the market participants at the GIFT City, currently the only IFSC in India. This move of the Government would provide the necessary push required for development and success of the GIFT City, one of the cherished projects of the Prime Minister.

Spot Exchanges to regulate trading in “Gold”

The Budget has recognized the urgent need to promote the development of gold as an asset class. Gold as a “commodity” can be traded through spot contracts and financial derivatives on regulated exchanges. The regulation of spot markets for gold in India is scattered across various authorities and lacks uniformity, as neither the central government nor state governments have specific legislative powers in relation to the regulation of spot markets for commodities. Therefore, it is essential to create a centralized regulator for supervising spot markets for gold. It seems that SEBI possesses requisite resources and regulatory knowledge and experience for the said purpose and it can be empowered to regulate such gold spot exchanges and their related intermediaries.

Corporate Bonds

To give an impetus to the growth of the corporate bond market, the Budget has proposed that SEBI should consider mandating certain listed companies to raise a portion of their finances from the bond market. It would be difficult for SEBI to compulsorily mandate this requirement on companies; it may rather consider liberalizing the norms on public offer of bonds in India and make uniform rules for calculation of interest and redemption payments on bonds to make the corporate bond market more cost efficient.

Proposed changes in the legal regime

The Bill has proposed certain amendments to the SEBI Act, 1992, the Securities Contract (Regulation) Act, 1956 and the Depositories Act, 1996, with regard to the following:

Streamlining enforcement proceedings of SEBI

There has been a lot of criticism of SEBI on its slow and lengthy enforcement proceedings. One of the major cause for such delays is that currently, the whole-time members of SEBI, who otherwise administer and enforce regulatory framework of SEBI, are not allowed to impose monetary penalties and fines. Although the WTMs can issue preventive, remedial and disgorgement orders including, debarring access to securities market, suspension of registration of market intermediaries, etc. for violations of SEBI regulations; however, separate adjudication proceedings have to be initiated for imposing monetary penalties. Such adjudication proceedings are parallel actions where a separate officer of SEBI is appointed to adjudicate upon the matter and upon hearing decides on imposition of fines.

Such duplication of proceedings has caused a considerable delay and inefficiencies in the enforcement of SEBI regulations. The Bill has now proposed extension of such powers to levy penalties upon the WTMs. This is a welcome move and we believe that this will provide an opportunity to SEBI to revamp the process of enforcement proceedings to make it both efficient and effective.

Penalties against market intermediaries

The Bill proposes specific penalties for violations of newly framed regulations on investment advisers, research analysts, AIFs, InvITs and REITs. The Bill imposes minimum penalties of Rs.1 lakh and maximum of Rs.1 crore or 3 times the amount of gains made, whichever is higher. The new amendments continue to provide minimum penalties even though the courts have frowned upon such provisions in the past.

Penalties on submitting false information to SEBI

The Bill provides additional powers to SEBI to impose penalties against persons who provide any false, incorrect or incomplete information to SEBI when sought during its inquiry or enforcement proceedings.

Liability of Legal Representatives

Currently, if a wrongdoer dies during the pendency of the proceedings, then the matter gets terminated. The Bill has recommended that regulatory proceedings (except penalty proceedings) may be initiated against the legal representatives of a deceased and he may be held liable for the actions of the deceased to the limited extent to which the estate of the deceased devolves on such person. Such changes will ensure that the unlawful gains made by the wrongdoers does not pass on to their legal representatives upon their demise.