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The Rediff Budget Jury/D R Mehta

'Budget encourages setting up of tech companies'

BUDGET 2000

The budget has made some important proposals pertaining to the capital market and Corporate India.

The general rule is that all the foreign institutional investors put together cannot hold more than 24 per cent of the equity of any company. Earlier, exemption was granted under which this limit could go upto 30 per cent, provided there was a resolution of the general body meeting of the company.

Budget 2000 has raised this limit to 40 per cent but the same condition would apply if the shareholders of the company are themselves willing to permit FIIs to go upto 40 per cent. So I don't understand why anybody else should object to this proposal. If the shareholders consider this as a threat, they could straightaway reject the proposal.

Regarding the venture capital companies, SEBI is adequately equipped to frame and enforce certain regulations. The exemption on stamp duty will be available on the transfers of debt instruments in the demat form. This by itself would promote the debt market.

We have also separately said that the negotiated deals even in case of debt instruments would have to be put through the stock exchanges. This also would mean that the telephone market in debt will be replaced with the screen-based market. We are also thinking of securitisation of debts.

The stock exchanges are in a sound and solid position because of the various risk containment measures taken by them. The margins they are collecting are enormous. Secondly, many of the software companies (which were earlier finance companies but subsequently changed their names to make people perceive them as infotech companies) are on the rolling settlement list.

Besides, these companies cannot access the capital market unless their three years' track record of profitability is in the IT sector itself. Besides this, the surveillance on these companies ensures that investors are protected.

SEBI has repeatedly advised the investors to deal in the shares of all companies including the software or IT companies only after checking the fundamentals. If still the investors disregard fundamentals of the companies and buy their shares, they themselves will have to bear the blame and loss.

One important announcement in the Budget relates to venture capital. The FM has announced that to promote venture capital funds, there will be a singe regulatory authority, namely SEBI.

Besides, he said that venture capital funds would be treated as pass-throughs for the purpose of taxation. This is going to facilitate setting up new technology-oriented companies. These would be midcap companies to begin with. Some of them might fail also but those which will survive might even become giants. This would also encourage science and scientists.

The second important announcement relates to the banks in the public sector. They have been allowed to disinvest one-third of the government equity. This would make many such banks enter the capital market. The market thus would be broader.

We already have a set of regulations for the venture capital funds. We are amending these following the Budget announcements.

Stock exchanges react on the basis of fundamentals and sentiments. On the Budget day, as usual they responded to sentiments more than to the fundamentals as was evident from the trading, the next day.

The pricing of shares whether of IT or other companies is the function of the markets. Many of the IT companies will continue to enjoy the exemption from the tax. Besides, some of them are already paying taxes abroad where the benefit of double taxation treaty is available. Thus, many of these companies will not be affected by the tax imposition.

No, we need not proliferate the regulatory bodies. However, the frauds in the e-trade also need to be addressed. Thus, SEBI has to be strengthen internally both in legal and investigative terms.

The Indian market, like all markets in the world, is volatile. Volatility is an endemic feature of all markets. The issue is how this volatility is contained. In India, in last three-four years, we have evolved a comprehensive and effective system of margining. We have daily margins, mark-to-market margins, additional volatiliy margins, special margins, etc.

Indeed, on certain days, the daily margin being collected by the stock exchanges on the transaction on their screens are in the range of Rs 75 billion. During the 1992 securities irregularites, the margin collected was not even one per cent of this. Besides, we have the circuit-breaker system and the exposure limits. The surveillance and action by the stock exchanges has also increased substantially.

In case a broker fails, the investor protection funds could be used by the exchanges to compensate the investors upto a certain limit. Different exchanges have different limits. This is basically to help the small investors.

When the growth rate is 7-8 per cent of GDP, obviously the capital market would broaden and deepen because this would be possible when more companies increase their production or new companies are set up. Such companies will have to access the capital market or raise more money from the capital market. This would mean more activity in the capital market. It would thus mean more reliance on and more benefits to the capital market.

Yes, increased venture capitalism and greater access of the banks to the capital market will certainly help the capital market.

D R Mehta is chairman, Securities and Exchange Board of India.

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