Pre-Budget 2022 Expectations For Capital Markets

Capital markets in India have been growing at a fast pace. Market capitalisation has increased from around Rs 120 lakh crore in 2016-17 to Rs 230 lakh crore in December 2021. Average monthly equity cash market turnover has increased from Rs 8 lakh crore in financial year (FY) 2019-20 to Rs 15.5 lakh crore till October 2021. In the equity derivatives segment, the premium value of Rs 19 lakh crore in FY 2019-20, has increased to around Rs 28.4 lakh crore in the current FY, till October 2021. Further, the assets under management of the mutual fund industry have surged from Rs 21 lakh crore in 2017-18 to Rs 37 lakh crore as on 31 October 2021.

There is a significant rise in the participation of retail investors in the last two years, such as an increase in the number of Demat accounts, mutual fund folios and the number of SIPs. In FY 2019-20, on average, 4 lakh new Demat accounts were opened every month which increased to over 26 lakh per month in the current FY. In the case of mutual fund folios, at the beginning of FY 2019-20, the total number of folios were 8.25 crore, which increased to 11.44 crore as on 31 October 2021.*The above statistics data has been taken from the Securities and Exchange Board of India (SEBI) Bulletin December 2021.

In last year’s Budget, the Finance Minister had inter alia proposed the following:
•  Consolidate the provisions of – (i) SEBI Act, 1992, (ii) Depositories Act, 1996, (iii) Securities Contracts (Regulation) Act, 1956 (SCRA), and (iv) Government Securities Act, 2007 into a rationalised single Securities Markets Code. 
•  Support the development of a world-class Fin-Tech hub at the GIFT-IFSC. 
•  Create a permanent institutional framework, whereby the proposed body would purchase investment-grade debt securities, both in stressed and normal times, and help in the bond market’s development. 
•  Establish a system of regulated gold exchanges in the country with SEBI as the notified regulator.
•   Warehousing Development and Regulatory Authority will be strengthened to set-up a commodity market ecosystem arrangement, including vaulting, assaying, logistics etc., in addition to warehousing. 
•   Towards investor protection, propose to introduce an investor charter as a right of all financial investors across all financial products. 

Some Policy initiatives implemented during the year
SEBI launched the Securities Market Trainers (SMARTs) programme for investors awareness. 
For investors protection, a few measures were introduced by the SEBI:
(i)   Investor charters issued in some lines of business;
(ii)   Introduction of a pledge-repledge system for clients’ securities collateral; 
(iii)   100% Upfront Margin effective from September 2021 to mitigate settlement risk against defaults and contain overleveraging; and
(iv)   Introduction of T+1 rolling settlement on an optional basis from 25 February 2022 to help investors to infuse and remove funds in markets on a faster basis.

The Reserve Bank of India-Retail Direct (RBI-RD) Scheme was launched in November 2021. It will bring government securities within easy reach of the common man by simplifying the investment process. 

A revised framework for regulatory sandbox was issued by the SEBI to grant certain facilities and flexibilities to the entities regulated by SEBI so that they can experiment with FinTech solutions in a live environment and on a limited set of real users for a limited timeframe. ‘InFinity Forum’ - India’s beyond boundaries Fintech event was hosted by the IFSCA.

SEBI issued a Circular in August 2021 on “Security and Covenant Monitoring using Distributed Ledger Technology (DLT)” effective from April 2022. The system using DLT shall be used for the recording of the process of creation and monitoring of security (viz. due diligence, charge creation etc.), continuous monitoring of covenants by Debenture Trustees (as applicable), the credit rating of the non-convertible securities by the Credit Rating Agencies, etc. Thus, this system will be a quasi-registry of charges. 

Recently, SEBI has (i) notified electronic gold receipts as securities under the SCRA, (ii) issued the Framework for operationalising the gold exchange in India, and (iii) notified the SEBI Vault Managers Regulations 2021.

Pre-Budget 2022 Expectations 

Budget 2022 expectations from a capital market perspective are:
•   Use of blockchain technology (DLT) for settlement and trade processing at the stock exchanges and banks for quicker settlement. 
•   Certainties on tax (income-tax and indirect-tax) and regulations on cryptocurrencies and cryptocurrency exchanges. Should the definition of securities under SCRA be amended to include cryptocurrency. 
•   Introduction of longer trading hours on a stock exchange which shall help foreign investors to trade as per their time zone and result in more liquidity in the capital markets. Trading hours similar to the IFSC stock exchange may be considered.
•   Exemption from withholding tax applicable to Foreign Portfolio Investors (section 196D of the Income-tax Act 1961) be extended to all non-residents selling on the stock exchanges in India. 
•   Initiative for payment of taxes in the form of securities (presently taxes are paid in cash) directly to the government without selling the securities on off-market / on the market so as to reduce the cost of sale of investments.
•   Exemptions be extended to Indian resident investors investing in securities in IFSC. As compared to non-residents, resident investors pay higher taxes in India and so to bring in equality, even resident investors in IFSC securities should get tax exemptions.
•   Reintroduction of exemption of dividend and dividend distribution tax to reduce compliance burden on investors in the stock market.
•   Bank deposit has limited insurance protection similarly, limited insurance protection of capital invested in the stock market should be introduced so that more retail investors could invest in the stock market.
Conclusion
Policy initiatives of the previous year Budget have been largely implemented by the government. The capital market is a pillar of the Indian economy, so policy measures and initiatives for innovation in operation and trading process such as DLT, new products, and investor awareness and protection would go a long way to boost and strengthen the capital markets. 
Information for the editor for reference purposes only

(Bahroze Kamdin is Partner, Deloitte India; and Sanket Khuthia is Manager with Deloitte Haskins & Sells LLP )