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Post Budget Reactions: Financial Sector

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Chanda Kochhar, Managing Director & CEO, ICICI Bank
The budget has balanced near term priorities and long term growth drivers. The progress in fiscal consolidation is indeed welcome. At the same time, the budget has articulated various measures to facilitate and boost investment in the country, such as the investment allowance deduction and ensuring fuel supply for thermal power plants. Measures for further expanding and deepening financial markets and facilitating foreign participation have also been announced. The budget is one part of overall economic policymaking and the budget presented today is a certainly a step forward in the series of initiatives announced by the government in recent months.

Sanjiv Bhasin, General Manager and Chief Executive Officer, DBS Bank
I think it is a realistic, encouraging and a growth-oriented budget. The FM has indicated that he is committed to fiscal prudence with the Fiscal Deficit being pegged at 4.8 per cent of GDP for FY2013-14 and as such he is living up to the promise that he has previously made at various investor forums.  The public expenditure is up by 30 per cent which should drive growth even though there could be an adverse impact on inflation which can creep up. In keeping with the deregulation of fuel prices, petroleum subsidy has been reduced to INR 65,000 cr versus Rs 96,000 cr in the last fiscal. The Budget has a slew of policy measures on improving the investment climate to kick start the economy along with a focus on improving the capital markets. Overall, I think it is a good budget considering the macro environment. The FM has spelled out initiatives that seek long term sustainability and there are no major negative surprises for the investor community.
 
Meera Sanyal, Country Executive, RBS India
The Budget has several announcements for financial inclusion especially for inclusion of women. The Women's bank is a novel idea of including women entrepreneurs in the mainstream of the economy and will help increase their contribution to the Indian growth story. The Finance Minister has also aimed to widen the reach of the insurance sector to smaller cities and spread of the banking system through electronic channels via implementation of the CBS which will facilitate their integration into the national payments system. Announcement of taking the Direct Benefit Transfer scheme to the national level through the Aadhaar and the banking system, will help reduce leakages and directly reach beneficiaries thus improving the effectiveness of financial inclusion measures.

T R Ramachandran, MD & CEO, Aviva Life Insurance
The Finance Minister, through this budget, has tried to give a big push to infrastructure, incentivise savings through financial instruments and property particularly at the lower end, and focus on the inclusive growth agenda. It is a commendable effort, at finding balance. The focus on financial markets was clear with positives for capital markets, mutual funds, banking and Insurance. Specifically on insurance, in continuation of the inclusion theme, the budget has announced key steps that will increase the distribution penetration of both life and general insurance in the hinterland and rural geographies. Automatic approval for opening branches in tier II cities and smaller towns as well as the presence of one LIC and one PSU GI office in towns with population of over 10,000 will provide this essential outreach. The simplification through uniform KYC norms for banks and insurers, allowing banks to act as insurance brokers and allowing banking correspondents to sell micro insurance products will be another step towards expanding the insurance distribution network across India. The relaxation in insurance premium rates for disabled people, further expanding group insurance net to domestic workers and anganwadi workers and the extension of RSBY to larger base of sanitation workers, mine workers, rag-pickers and auto rickshaw drivers and pullers will promote greater financial inclusion. While these are positive steps, the FM has missed an opportunity to both give a much needed fillip to the Insurance sector, and channelise retail investments into the stock market and garner long tenure funding for infrastructure and allied sectors by not changing the 80C limits or carving our additional amounts of exemption for Insurance - as was widely expected.
 
Interestingly, the Budget speaks about increase in foreign investment through FII and FDI routes, and while the Government has changed the FDI norms in retail sector, the Insurance sector is still at 26 per cent. The industry would be keenly looking at the budget session for debate and decision on the Insurance bill.

Shalini Kamath, MD, Human Resource, Ambit Holdings

I would laud this initiative. It provides an opportunity for employment creation specifically for women. Considering the minuscule representation of women in the Leadership positions, a dedicated bank would provide CXO level opportunities to women as well.

The women bank would understand the needs of women consumers and therefore provide innovative products for their needs and therefore carve out a specific niche business segment which has great potential but has not been harnessed yet.

The responsibility of the safety and security of its citizens lies with the Government and the communities of the country. It is unfortunate that there are so many cases of violations against the women of our country, not just for safety but of varied nature of violence and atrocities. This is a small step, rather late. This problem requires a holistic approach and will not be resolved through creation of a Fund alone.

Pavan Dhamija, MD & CEO, DLF Pramerica Life Insurance
The Budget presented today has been disappointing. We were hoping that the FM would announce some significant measures to spurt growth. Inflation however may come down if fiscal deficit can be contained in the way stated in the budget. Last year's Union Budget had laid a strong emphasis on government spending in sectors that have a long term impact on the economy viz. education, infrastructure and health and agriculture, which was well appreciated. This year, although some additional budget was allocated to these sectors, the increase isn’t substantial.

From a Life Insurance industry’s standpoint, we welcome the statements of the FM to permit insurance companies to open branches in tier II cities without prior licenses.In addition, the announcement around KYC of banks being sufficient for companies to issue policies will not just simplify processes, but also reduce operating costs for the industry. Another announcement which will benefit the insurance industry and its customers is the decision of allowing banks to act as brokers for selling insurance products of multiple companies. Also allowing bank correspondents to sell micro insurance products will help increase insurance penetration in the country. The FM also announced that insurance companies will be directly allowed to trade in debt market. It will mean some reduction in costs and may help deepen debt markets, which is required. We continue to be hopeful that the Insurance Amendment Bill will be passed soon.

Naresh Makhijani - Partner, Tax - Banking and Financial Sector, KPMG in India
FM is wooing the foreign investor by simplifying the norms planned for foreign portfolio investors. In his own words-Doing business with India should be easy and friendly. It is a step towards fiscal prudence and we commend this measure. Reduction of STT across financial instruments will provide a boost to the capital markets".

Government will introduce Inflation-indexed bonds or security certificate in consultation with the RBI-Good step for savers that may entice them to move away from Gold as an investment and help the government reduce the gold import duty. Opening up of Insurance branches in Tier-2 cities without IRDA approval is a welcome step-Fulfills government's motto for inclusive and sustainable growth.

Despite the elections in 2014, Budget is focused on fiscal prudence. Finance Minister aims to have a fiscal deficit target of 5.2 per cent of GDP in 2013 and 4.8 percent in 2013/14 and has taken steps towards it. Indian Economy needs foreign investment to reign in the current account deficit and FM has given clear signals in the budget to ensure that 'doing business in India should be seen as easy, helpful and friendly'. There are no earth-shattering moves or reforms but on the whole, budget lives up to its commitment of prudent expenditure.

Nilesh Sathe, Director & CEO, LIC Nomura Mutual Fund
As  against the market expectations of announcement of a populist budget on the backdrop of General Election next year, FM has announced a realistic, balanced and pragmatic budget.

Fiscal deficit target of 4.8 per cent is possible in view of disinvestment target enhancement from Rs 30,000Crs of Current fiscal to Rs 40,000Crs  and reduction in subsidies. Emphasis on infrastructure funding is also laudable. Surcharge of 10% on super-rich is not going to affect large numbers but will add substantial amount to the exchequer. First time investors in RGESS will have a tax relief for their investments for 3 years. It will certainly attract more investors in equity market/mutual funds Introduction of Inflation Index Bonds and additional relief on Housing loan interest will attract small tax payers. DTC not coming so soon is also a welcome sign.

V. Laxmikanth, Managing Director, Broadridge Financial Solutions
Overall a simple budget that attempts to bring in inclusiveness. Certain areas which needed immediate attention are addressed by the finance minister in the Union Budget 2013. Current requirements of our economy are around revival and sustaining growth rate, the Budget, however, has focused on arresting further fall rather than inducing growth.

Current account deficit seems to be on top on the FM’s agenda and he has recognized it to be the biggest concern. Though he has not dealt on the topic in detail – he has emphasised on the foreign investments and ECB route to bridge the $75 bn gap.

It was very motivating to see government recognising the need to give a boost to start-up/incubation eco system. With the announcement of expenses/investment made on incubators qualifying as a CSR spend and hence eligible for rebates will bring in an enhanced support from the industry towards encouraging innovation. A very innovative move considering it is tied to the initiative being recognised as CSR by the Government and yet leading to investments in the product arena. Building a stronger eco-system.

As a part of his inclusive agenda two aspects have been addressed regarding women — funding to enhance the security and a bank for the women by the women.

The good news is that need for increasing the  investments on all fronts has got a prominence in the FM’s speech which is likely to lead to GDP growth and improvisation of rating of the country though the impact could be an increase in inflation down the road.

As required, infrastructure gets significant allotments which are need of our country. Innovative methods have been proposed to mobilize funds in infrastructure like infrastructure debt funds, India Infrastructure Corporation Limited in partnership with ADB will extend credit policies etc. Education, skill development and health have also received attention at the budget presentation with 17 per cent increased allocation to the ministry of HRD for various education and skill enhancement schemes.

For the IT sector specifically, Union Budget 2013 does not carry too much given that no new SOPs or relief have been announced, instead an increase of surcharge on the income above Rs 10 crores has been added.
 
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Mohit Ralhan, Managing Partner at Indus Balaji
The Budget 2013-14 can be construed as being both pragmatic and balanced. Gone are the days when the Union Budget used to be a game changer, when the economy was inward looking. Today, policy changes are happening practically every month, classic examples of these being the transformations in FDI retail or deregulation of the oil sector. Simply put, one can safely say that the budget is an annual operating plan of the Government.

The Finance Minister has laid out a number of planned initiatives to augment growth and bring about an environment of equality. Let's try & analyse some of the key initiatives and whether they would actually bring about a turnaround of the largely gloomy Indian economy, and put it back on course towards achieving its potential growth.

Initiatives To Boost Economic Growth And Reduce Twin Deficts
To bring back the Indian economy on a scale of growth, the Finance Minister indicated multiple plans including anincreasein the present Government expenditure by 30%, which would positively improve the GDP growth for the coming year. Several initiatives would be introduced in sectors like agriculture, technology, semi conductors, infrastructure, affordable housing, coal and energy including renewable energy generating a positive impact. 

While growth measures are being induced, the concerns over the twin deficits - fiscal deficit and current account defict (CAD) continue to prevail. Currently, the Government has been able to contain the fiscal deficit to 5.2 per cent in 2012-13 by following a path of fiscal consolidation but CAD is the greater worry. Our policy framework is focused on reducing CAD in its core components — imports of gold, coal and oil — be it through Government encouraging PPP Projects, or its initiatives in reducing gold imports.

Further,  to supplement the increase in government expenditure there should be a provision to increase revenues by selective increase in taxation. Here some short term tax measures applicable for FY14 have been taken. However,  this solution might not be sustainable from a long term perspective, and the Government should consider prudent widening of the tax net.

Focus On Capital Markets
Modernisation and sophistication of the Indian capital markets have always been a key priority for the Government. After all, a well-oiled capital market is key to a healthy, functioning economy. In this connection certain measures have been mentioned in the budget that are aimed towards improving the capital markets' functioning in India.

As far as tariffs are concerned,the STT (Securities Transaction Tax) has been reduced from 0.17 per cent to 0.1 per cent . Additionally, CTT (Commodity Transaction Tax) has now been imposed on non-agricultural commodities. Another critical development is the introduction of debt as a segment on stock exchanges. Clearly this is aimed at developing  the country's fledgling debt market. While banks and primary dealers will be the proprietary trading members, insurance companies and provident funds will be permitted to trade directly to create a complete market.

Additionally, FIIs will be allowed to participate in the exchange traded currency derivative segment to the extent of their Indian rupee exposure in India. Finally, SEBI has simplified the classification related issues of angel investors and FIIs.The budget also encourages the spirit of entrepreneurship by increasing the refinancing capacity for SIDBI for MSMEs.

These have been some major announcements in the budget that cater to the capital markets. And from a capital market perspective it has been generally viewed positively. Infact, expectations might have been exceeded in some quarters.

Other Economic Measures
The real estate sector will see a boost as first time home buyers may avail of an additional interest deduction of Rs 1 lakh on housing loans up to Rs 25 lakh. Additionally, the  schemes of affordable housing  are surely a positive stride towards helping numerous families  avail of low cost housing.

The budget also highlighted initiatives for women such as setting up of an all women's bank. A first of its kind the bank will have an initial capital of Rs 1,000 crore and be served by women bankers. It will lend mostly to women and women run businesses, support SHGs and women's livelihood, thereby addressing aspects of empowerment and financial inclusion.

Further, funds provided to technology incubators located within academic institutions will be considered as CSR. This is likely to facilitate growth for campus startups, creating a pipeline of companies which would provide wider investment choice for investors, ultimately leading towards SMEs that drive growth within the economy.

To sum it up, while the Finance Minister has been vociferous about growth, the budget has been balanced between growth and equality. The Finance Minister has done a reasonably good job given the backdrop of low growth, high inflation, high twin deficit and the upcoming elections. He has tried to define a road map that would drive growth, but what should be seen is whether it can be achieved in the near future, or not.

Deepali Bhargava, Chief India Economist, Espirito Santo Securities
Fiscal consolidation: The finance minister delivers a budget broadly in line with what he had already prepared the market for. Fiscal deficit/GDP is expected to fall to 5.2 per cent in FY13 and 4.8 per cent in FY14. But any concrete measures to arrest the fall in infrastructure investment; and promote increase in financial savings have come as a disappointment. Overall consolidation is once again based on one-off asset sales.

No mention of GST and DTC roll-out: No roadmap for GST has been issued. The FM has budgeted a sum of INR 90 bn towards the first installment of the balance of CST compensation. The key issues -- constitutional amendment; need for State Governments and the Central Government to pass a GST law that will be drafted by the State Finance Ministers and the GST Council, still remain. Nothing concrete on DTC was said.

Measures to boost financial savings not enough: The income limit on Rajiv Gandhi Equity Savings Scheme has been enhanced to from `Rs 10 lakh to Rs 12 Lkah, to include investment for three successive years. We think the impact of the enhancement may still be limited as its restricted to only new investors. Other measures like hike in investment limit in infrastructure bonds  for individuals or promoting investment in deposits is missing. There is also absence of any schemes which could have provided inflation-linked returns

Rationalization of Subsidies: There’s a commitment to reduce subsidies to 2 per cent of GDP in FY14, which is achievable if diesel subsidies are eventually eliminated. Increase in fertilizer subsidy is disappointing.

Impact on investment: The budget doesn’t give any respite from high government borrowing and private sector crowding out. 89 per cent of the fiscal deficit is budgeted to be funded by market borrowing. Net market borrowing has gone up from Rs 4.67 tn in FY13 to Rs 4.84 tn in FY14 (against expectations of Rs 4.7 tn). The positive is lower reliance on short-term borrowings (Rs 198 bn in FY14 vs. Rs 1.2 tn in FY12)

Mahendra Swarup, President, IVCA (Indian Private Equity & Venture Capital Associtation)
Overall the budget has indicated a mixed bag of reactions from the VC/PE Funds investing in India. The Budget provisions in connection with-
  • extending the sunset clause in tax holiday to the power sector
  • extending concessional rate of tax to rupee long term infra bonds and infrastructure debt funds set up as Mutual Funds, would boost investments in the infrastructure space

However, the VC/PE Funds were expecting much need clarifications / amendments in the following aspects:

1. Clarity on long term capital gains tax rate for non-residents
Finance Act 2012 introduced concessional tax rates of 10 per cent on long term capital gains of unlisted securities. This was a laudable step and widely appreciated by private equity funds investing in India. However, the manner in which the term ‘unlisted securities’ has been defined and certain judicial precedents lead to confusion whether the 10 per cent concessional tax rate would be applicable to gains arising on transfer of shares of private companies held as long term capital assets

Especially considering that a significant portion of the investments made by the PE / VC funds in India is actually in private limited companies for several regulatory / commercial reasons, introducing clarity in this connection would have been a welcome measure and boosted confidence of PE / VC Funds.

2. Tax pass-thru status for all category of AIFsMahendra Swarup, President, IVCA (Indian Private Equity & Venture Capital Associtation)
Overall the budget has indicated a mixed bag of reactions from the VC/PE Funds investing in India. The Budget provisions in connection with-

·  extending the sunset clause in tax holiday to the power sector
·  extending concessional rate of tax to rupee long term infra bonds and infrastructure debt funds set up as Mutual Funds, would boost investments in the infrastructure space

However, the VC/PE Funds were expecting much need clarifications / amendments in the following aspects:

1. Clarity on long term capital gains tax rate for non-residents
Finance Act 2012 introduced concessional tax rates of 10% on long term capital gains of unlisted securities. This was a laudable step and widely appreciated by private equity funds investing in India. However, the manner in which the term ‘unlisted securities’ has been defined and certain judicial precedents lead to confusion whether the 10% concessional tax rate would be applicable to gains arising on transfer of shares of private companies held as long term capital assets

Especially considering that a significant portion of the investments made by the PE / VC funds in India is actually in private limited companies for several regulatory / commercial reasons, introducing clarity in this connection would have been a welcome measure and boosted confidence of PE / VC Funds.

2. Tax pass-thru status for all category of AIFs:
There has been a long standing demand of the VC/PE industry that the tax pass-thru status should be given to all category of Alternative Investment Funds (“AIFs”) and all category of incomes earned by AIF. However, the Budget proposes to grant the pass-thru status only to Venture Capital Fund sub category of AIF-I. Therefore, the pass-thru status is limited only to AIFs which invests primarily in start-ups, emerging or early stage ventures. Funds such as Social Venture Funds, Infrastructure Funds and SME Funds are also not granted pass-thru status leave the category II and III AIFs. This would lead to avoidable litigation in the area of complex trust taxation laws which already provides for one level of tax.

Similarly, the pass-thru status is applicable only to income from investments in Venture Capital Undertakings (“VCU”).  These provisions has resulted in creating a number of disparities:
 
  • Treatment accorded inter-se between the three categories of AIFs.
  • Grandfathered VCF / VCC who continue to be governed by the VCF Regulations will enjoy complete tax pass through status for any income earned from VCUs thus creating a disparity between grandfathered VCFs and Category II and Category III AIFs as well.
  • Tax treatment of two different income streams – income from VCUs would be entitled to pass-thru status and the balance income would be taxable as per general trust tax provisions (for VCFs / AIF 1 constituted as trust).

Such disparities will trigger needless litigation between the funds and the revenue authorities and result in cost of compliance.

Providing a tax pass-thru status only provided a flexibility and simplicity to the VCF/AIF and did not provide any income-tax exemption on the income earned by the VCF/AIF since the investors of the VCF/AIF have to pay tax on the same. Further, there is no deferral of tax as well since the investors pay tax as and when income is accrued to the VCF /AIF. In a nutshell, the tax pass-thru mechanism only provided for a flexibility and tax certainty to the VCF/AIF without compromising on the tax base or the timing of tax collection.

It is interesting to note that the tax regime prevalent between Assessment Year 2001-02 upto Assessment Year 2007-08 (i.e. prior to the amendments introduced by the Finance Act of 2007), entitled the whole of income of SEBI registered funds to be taxed on a pass through basis. Introduction of similar provisions could have brought about the much needed simplicity in tax regime governing VC/PE Funds.

3. Indirect transfer provisions
Finance Act 2012 introduced provisions for taxing transfer of shares of offshore companies, if it derived its value substantially from assets located in India.

Whilst the Government set up an Expert Committee under the chairmanship of Dr Shome, the Budget 2013 has neither considered the recommendations of the Committee nor provided for any clarity on the interpretational issues surrounding the above indirect transfer provisions.

Hence, much needed clarifications required from the perspective of boosting PE/VC investments have been missing from the Finance Bill.

4. Introducing tax on buyback of shares
The Budget has introduced additional income tax @20% on company upon buyback of unlisted shares. The provisions effective from June 1, 2013, would require companies to pay additional income tax on income (i.e. excess consideration over sum received at the time of issue of such shares) distributed to its shareholders. Such income arising to the shareholders would be exempt.

Secondary transaction would be impacted as the cost base benefit for such transactions would not be available for buy back. Further, such provisions would also impact exits thru buybacks by Private Equity Funds. This would significantly impact PE/VC investments.

There has been a long standing demand of the VC/PE industry that the tax pass-thru status should be given to all category of Alternative Investment Funds (“AIFs”) and all category of incomes earned by AIF. However, the Budget proposes to grant the pass-thru status only to Venture Capital Fund sub category of AIF-I. Therefore, the pass-thru status is limited only to AIFs which invests primarily in start-ups, emerging or early stage ventures. Funds such as Social Venture Funds, Infrastructure Funds and SME Funds are also not granted pass-thru status leave the category II and III AIFs. This would lead to avoidable litigation in the area of complex trust taxation laws which already provides for one level of tax.

Similarly, the pass-thru status is applicable only to income from investments in Venture Capital Undertakings (“VCU”).  These provisions has resulted in creating a number of disparities:
 
  • Treatment accorded inter-se between the three categories of AIFs.
  • Grandfathered VCF / VCC who continue to be governed by the VCF Regulations will enjoy complete tax pass through status for any income earned from VCUs thus creating a disparity between grandfathered VCFs and Category II and Category III AIFs as well.
  • Tax treatment of two different income streams – income from VCUs would be entitled to pass-thru status and the balance income would be taxable as per general trust tax provisions (for VCFs / AIF 1 constituted as trust).

Such disparities will trigger needless litigation between the funds and the revenue authorities and result in cost of compliance.

Providing a tax pass-thru status only provided a flexibility and simplicity to the VCF/AIF and did not provide any income-tax exemption on the income earned by the VCF/AIF since the investors of the VCF/AIF have to pay tax on the same. Further, there is no deferral of tax as well since the investors pay tax as and when income is accrued to the VCF /AIF. In a nutshell, the tax pass-thru mechanism only provided for a flexibility and tax certainty to the VCF/AIF without compromising on the tax base or the timing of tax collection.

It is interesting to note that the tax regime prevalent between Assessment Year 2001-02 upto Assessment Year 2007-08 (i.e. prior to the amendments introduced by the Finance Act of 2007), entitled the whole of income of SEBI registered funds to be taxed on a pass through basis. Introduction of similar provisions could have brought about the much needed simplicity in tax regime governing VC/PE Funds.

3. Indirect transfer provisions
Finance Act 2012 introduced provisions for taxing transfer of shares of offshore companies, if it derived its value substantially from assets located in India.

Whilst the government set up an expert committee under the chairmanship of Dr Shome, the Budget 2013 has neither considered the recommendations of the Committee nor provided for any clarity on the interpretational issues surrounding the above indirect transfer provisions.

Hence, much needed clarifications required from the perspective of boosting PE/VC investments have been missing from the Finance Bill.

4. Introducing tax on buyback of shares
The Budget has introduced additional income tax at 20 per cent on company upon buyback of unlisted shares. The provisions effective from June 1, 2013, would require companies to pay additional income tax on income (i.e. excess consideration over sum received at the time of issue of such shares) distributed to its shareholders. Such income arising to the shareholders would be exempt.

Secondary transaction would be impacted as the cost base benefit for such transactions would not be available for buy back. Further, such provisions would also impact exits thru buybacks by Private Equity Funds. This would significantly impact PE/VC investments.