2019 Union Budget: A Budget That Sparked A Sell-Off
Last week, India’s first female finance minister in almost five decades, Nirmala Sitharaman presented the 2019 Union Budget after the BJP-led NDA Government won the elections with a thumping majority in May, this year.
The budget did not have much of good news for investors, companies and stock markets – on the contrary, few of the budget proposals, spooked the stock market, leading to the S&P BSE Sensex posting its worst single day fall of 2019, plummeting by 908 points to touch an intraday low of 38,605.
How the 2019 Union Budget Planned On Taxing The Mega Rich
As per the 2019 Union udget, the effective tax on funds, earning more than Rs. 5 crore of annual income and structured as Association of Persons (AOPs) or Trusts, will increase from 35.8% to 42.7%. For funds earning between Rs. 2 crore and Rs. 5 crore in a year, the tax rate will rise from 35.8% to 39%. Many foreign portfolio investors (FPIs) are structured as AOPs or trusts and would be hit by this, with estimates suggesting this number to be at least 1500 to 2000. The hike in surcharge will also reduce the post-tax attractiveness of India, compared to other markets, where the rate is not as high.
The hike in surcharge will also adversely impact high-end consumption and reduce investible surplus of high-income individuals that usually flows into mutual funds, portfolio management schemes and the midcap segment.
Increasing Minimum Public Shareholding For All Listed Companies
The Finance Ministry has written to capital markets regulator, SEBI to mandate listed companies to increase minimum public shareholding from 25 per cent to 35 per cent. While this is positive for minority shareholders and will lead to a better price discovery, some multinational companies with low public float may prefer to delist. As per data from Centrum Broking, 25% of the listed universe – 1174 listed company promoters – will have to pare their stakes to comply with this. While more details on this are awaited, it is widely expected that SEBI will provide ample time to companies to fall in line.
In 2010, SEBI had mandated promoters of non-public undertakings to offload up to 25% and they were given three years to adhere to the rule.
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Taxing Share Buybacks By Listed Companies
Share buybacks by listed companies will no longer be tax efficient as compared to distributing dividends. The Government has proposed a 20 per cent tax on share buybacks for listed companies, earlier restricted only to unlisted companies. While dividend distribution attracted the dividend distribution tax (DDT) for firms and investors alike, the tax liability during a share buyback used to rest only with the investor – this announcement has put an end to that, contributing to the negative investor sentiment around the budget.
This came into effect from July 5 and will affect at least 6 share repurchases worth Rs. 10,000 crores including the Rs. 8,600 crore share buyback by Infosys that is already in progress. As the offer price of shares is already fixed and advertised, these companies will be unable to make any revisions to factor in the new tax and will have to pay the 20 per cent tax themselves. For investors, buybacks will be beneficial as they will not have to pay capital gains tax on these shares, which was the case earlier. Now, companies will have to deduct the tax amount payable due to share repurchases.
First ever overseas sovereign bond issuance announced
Perhaps, the only piece of good news was the Finance Minister’s announcement that the Indian Government would borrow US$10 billion in foreign currency to finance the budget deficit. India’s sovereign external debt to GDP ratio is less than 5%, making it amongst the lowest in the world.
However, this also indicates that the Government may be running out of sources to borrow from within the country. Indeed, India’s debt-GDP ratio stands at 68.4%, next only to Brazil among all the emerging markets, as per domestic financial services firm, Motilal Oswal’s analysis.