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BSE seeks Centre's intervention to revive sentiment

The Bombay Stock Exchange has expressed serious concern over the continuous southward trend in the country's capital market, particularly after the nuclear tests conducted by India, and has sought the Centre's immediate intervention.

The BSE has already submitted various suggestions to revive the capital market and is waiting for some remedies for the reversal of the trading sentiments.

The BSE has pointed out that market capitalisation started increasing as soon as there was a clear indication of the Bharatiya Janata Party and its allies being able to form a government at the Centre under the leadership of Atal Behari Vajpayee. It registered an increase of Rs 1.53 trillion in market capitalisation between January 31, 1998 (Rs 4.69 trillion) and April 21, 1998 (Rs 6.22 trillion).

This was due to change of sentiment of the investing public. However, the market started declining sharply after the US announced its intention to impose sanctions. As on June 10, market capitalisation has come down to Rs 5.01 trillion, wiping out almost four-fifths of the gain and the panic still continues. This, despite the fact that the apex chambers of commerce and industry have hailed the budget as industry-friendly.

BSE senior director and former president M G Damani pointed to the emergence of a new phenomenon in the stock markets. This is the capacity of the foreign institutional investors to influence the movement of the BSE Index. These institutions have acquired substantial portion of floating stock of companies, which have a heavy weightage in the index. They have free and unlimited access to funds and hence financial muscle. They also play in the GDR market, thus maximising the profits of their holding companies.

Though the market capitalisation on BSE has decreased during the period from April 1996 to June 10, 1998, net investment of FIIs on the Indian stock markets has been strengthening rather than weakening. A strong market is one which is driven by domestic participants rather than by the whims and fancies of FIIs, which may not be in line with the inspiration of the nation.

For instance, in April and May 1998, FIIs sold equities and debt instruments worth Rs 980 million and Rs 8.52 billion respectively. Damani further said that after the announcement of economic sanctions by the USA and downgrading by the US-based rating agencies, the FIIs have been selling rather heavily with each passing day more so after the presentation of the Budget.

The market perception is that their net sales in the first fortnight of June will be higher than the figure for the entire month of May 1998. Incidentally, but for the effective presence of the Unit Trust of India in the market, aggressive selling by the FIIs would have resulted in further drop of 500 points in the BSE Sensex.

Damani has submitted 18 suggestions to the Union finance minister to bring back investor confidence in the market and reverse the downward trend. Thirteen of these suggestions have no revenue implications while five have negligible revenue implications.

He suggested that all investors including financial institutions and banks must subscribe to the UTI Index fund, which will be open-ended. Banks have already been permitted to invest ten per cent of their incremental deposits in the capital market, but they have not done so as each of these banks does not have necessary expertise to operate in the market and hence they should be advised to operate through UTI.

Moreover, the Life and General Insurance Corporations should also be encouraged to invest in the capital market in a big way and remain pro-active like UTI. The Reserve Bank of India should permit banks to do vyaj-badla while provident fund subscribers should be allowed to borrow money out of their accumulations for investments in shares.

He has pointed out that in the Budget, a bold step of disinvesting as much as 76 per cent in some PSUs has been announced. However, instead of disinvesting through the GDR route where prices are dictated by handful of institutional investors, he has recommended that it would be better to sell to domestic investors in India, even at a discount, to attract small investors to capital market once again.

Damani has ruled out any fear of rampant insider trading in case of buyback of shares by corporates and suggested that while permitting buyback to ensure complete transparency, simultaneous dissemination of information to all should be ensured. Since the Companies Bill may not be passed by Parliament in the near future, it is suggested that an ordinance for this purpose be promulgated immediately.

Collection of service tax levied on stockbrokers should be transferred to the income tax department instead of the excise department, Damani's paper said. Under the Takeover Code, creeping acquisition is allowed at the rate of 2 per cent per annum for government nominees. The Securities and Exchange Board of India (which governs the stock exchanges) should be advised to ensure that this is raised to 5 per cent per annum.

He also advocated abolishing the existing system which forced brokers to provide the permanent account numbers (income tax) to purchases above Rs 50,000 in the capital market. The BSE has pointed out that there are many investors in the country, like retired people and agricultarists, who are not tax payers and hence do not have a PAN. However, they do invest in the capital market and asked how the broker can provide a PAN in such cases.

Damani recommended that the market value of B group shares has eroded much more than the A group. As many as 4,037 scrips of B group were not traded even once during May 1998, and demanded immediate approval by SEBI for the BSE proposal permitting longer settlement cycle for this group.

According to him, five suggestions have negligible revenue implications, and therefore he suggests that Indian financial institutions should be strengthened by re-introducing incentives like the one contained under Section 80(M) of the Income Tax Act. Long-term capital gains tax for Indian investors should be brought down to 10 per cent.

He added that investors who sell their present holding should be exempted from payment of capital gains tax provided the sale proceeds are invested in primary market or for acquiring public sector units shares. The dividend from UTI and other SEBI-approved mutual funds should be fully exempt from income tax.

His last suggestion was that investment in PSU shares at the time of disinvestment by the government should be treated as eligible for a rebate under Section 88 of the Income Tax Act.