Possibility of volatility in securities` trading

What is special about an annual Budget exercise and what is the value addition that a business lawyer derives from following the Budget announcements. Part A is of no real consequence to the business lawyer, with the focus on the agricultural and educational sectors. A quick look at Part B shows that direct tax rates have not been raised, lawyers continue to remain outside the service tax rate net, no change in applicable withholding taxes, the changes in the taxable income threshold don’t really affect most lawyers anyway.

But this is a micro view of the lawyer’s turf remaining intact. The Budget perception differs for the taxpayer, the businessman, the politician and media. The initiatives and changes in the financial scenario require the lawyers to evaluate the impact on the client’s business, which is why business lawyers were quick on Friday night to summarise the essentials and mail them out.

Major policy changes do not find place in the Budget any longer, since the intention to change labour laws a few years ago had to be backtracked. Pre-Budget wishlists included a crying need for a revamped legal framework for M&A transactions. The delay in the implementation of a proper Competition law and the inability to have a new Companies Act in place, are slow downs in the M&A process. Perhaps the Budget is not the right forum, but a nudge in this direction would have not been unwarranted.

What is disturbing from the legal perspective are the market initiatives.The increase in short-term capital gains tax is perceived as an obstacle to trading outside stock exchanges. The proposal to treat the Securities Transaction Tax (STT) as a deduction against business expense and not as a set off against other taxes will also adversely affect short-term trading. STT is currently levied on all transactions in the secondary market effected through the stock exchange. Therefore, either way there is the possibility of slowdown in volatility in buying and selling of securities. The requirement of PAN for all securities transactions, and not just mutual funds, may exclude small players. The threshold limits of exemptions are critical, as this could create roadblocks otherwise.

The introduction of Commodities Transaction Tax on the lines of the STT on options and futures, appears to be a hasty step, as the two markets are very different. There are no attendant incentives or benefits which have been announced, whose absence will only increase the transaction cost for the buyer. This requires reconsideration as a template will not simply work, particularly in an inflationary context.

On the initiative undertaken for corporate debt structuring, this is an area which requires attention as a vibrant corporate debt market is essential, particularly for the infrastructure sector. The Budget has announced that various types of financial instruments are to be structured and investors will be able to separate the embedded equity option from the convertible bond, for trading and instruments issued in demat form listed on recognised stock exchanges will be exempted from withholding tax. There is no clarity on who would regulate the corporate debt market, and this issue has been mulled over the last three years on how the responsibilities will be shared between the Sebi and RBI. While the broad consensus has so far been that Sebi will be responsible for primary and secondary markets (public issues as well as private placement by listed companies) RBI would regulate repo/reverse repo transactions. Regulation of trading of unlisted securities and derivatives on other corporate debt is still undecided. This framework has to be in place to make the market operative. However, Sebi had put in place framed Draft Regulations on Issue and Listing of Debt Securities and posted the same on its website along with a consultative paper for Public Comments. Salient features of the draft regulations include rationalisation of disclosure requirements, enhanced responsibilities of merchant bankers for exercising due diligence and mandatory listing of private placement of debt. The paper also makes provisions for e-issuances of corporate debt and proposes introduction of rationalised listing requirements for debt of a listed issuer.

Tax structures also have to be revisited which promise has been made in relation to stamp duties. Present tax incentives relating to infrastructure are profit-related and hence focus on equity investment in infrastructure. The incentives should also cover debt investment.

Bottom line — gains for some, bad news for some others and no change for most.