Sumit Agrawal.Finance Minister Arun Jaitley tabled the Union Budget 2018 in the Parliament today. This piece quickly captures the 9-point regulatory updates from the perspective of capital, insurance and commodities markets..I BlockChain and CryptoCurrency .There was a debate in India if the virtual currencies like bitcoins, litecoins etc. fall under “Currency” under RBI Act, 1934 or a “legal tender” under the Indian Coinage Act, 1906 or “Securities” under Securities Contracts Regulation Act, 1956. Some people had argued such currencies to be treated as “commodity” or interpreting them as “software” and labelling all cryptocurrency transactions as essentially the sale or purchase of software. Although the Reserve Bank of India (RBI) had been issuing advisories to caution on its use..Finance Minister has settled the issue once and for all for cryptocurrencies and use of blockchain technology that supports cryptocurrencies. FM clarified that Cryptocurrencies shall not be deemed as legal tender and strict actions might be taken against investors in Cryptocurrencies. However, he also mentioned that Government of India can explore ways for using the blockchain technology for digital transactions..This means if it is not considered as legal tender, whether any transaction in it will be subject to GST or not, is yet to be clarified by Ministry of Finance. This taxation aspect will require clarification..II Amendment in Securities Laws & First-Time Provisions .Securities and Exchange Board of India, Act 1992, Securities Contracts (Regulation) Act 1956, and Depositories Act 1996, are being amended to streamline adjudication procedures and to provide for penalties for certain infractions. These proposals are in the Finance Bill, 2018..While the amendment through Budget Speech look procedural, it is going to have significant change in securities laws and might impact some of the pending cases as well..For the first time, provisions are being introduced to deal with the failure of a stock exchange or a clearing corporation to conduct its business in a manner, which is not in accordance with the rules and regulations made by SEBI. Perhaps it is a policy change post regulatory learning after the colocation issue at National Stock Exchange (NSE) and erstwhile National Spot Exchange Limited (NSEL) experience in commodities market..On the lines of what was argued in the book authored on SEBI Act, the Finance Bill, 2018 has proposed now introducing a provision for imposing monetary penalty on any person who furnishes or files false, incorrect or incomplete information, return, report, books or other documents in the same manner as a person who fails to furnish the required information..There is also an amendment to state that the settlement amount (excluding legal costs and disgorgement amount) realized under SCRA will be credited to the Consolidated Fund of India.The Finance Bill provisions also introduce continuance of SEBI Recovery Proceedings against a legal representative for recovery of sums due from securities laws defaulter even when the defaulter person dies..III Fintech, VCFs and Angel Funds, Alternate Investment Funds.Finance Minister acknowledged that the use of Fintech in financing space will help growth of MSMEs. He announced that a group in the Ministry of Finance is examining the policy and institutional development measures needed for creating right environment for Fintech companies to grow in India. He further said that the Venture Capital Funds and the angel investors need an innovative and special developmental and regulatory regime for their growth and the Government will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India..We can wait for SEBI board discussing these in its upcoming board meeting by amending SEBI (Alternative Investment Funds) Regulations, 2012 and tax department clarifying tax sops to them..IV Long Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG).Finance Minister announced that there is a strong case for bringing long term capital gains from listed equities in the tax net and proposed to tax long-term capital gains exceeding INR 1 lakh @ 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 were announced to be grandfathered..V Development of Bond Market & Amendment to Stamp Act .The Budget Speech acknowledged that RBI has issued guidelines to nudge Corporates access bond market. SEBI will also consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market. Corporate bonds rated ‘BBB’ or equivalent are investment grade. In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment. It is now time to move from ‘AA’ to ‘A’ grade ratings. The government and concerned regulators will take necessary action..It is likely that in the upcoming board meeting of SEBI, it will make mandatory for top 500 listed companies to obtain financing needs from accessing bond market under the threshold..Finance Minister also committed take reform measures with respect to stamp duty regime on financial securities transactions in consultation with the States and make necessary amendments the Indian Stamp Act..VI Amendment to RBI Act.Government of India proposes to amend section 17 of RBI Act, 1934. Finance Minister said that to provide the Reserve Bank of India an instrument to manage excess liquidity, Reserve Bank of India Act is being amended to institutionalize an Uncollateralized Deposit Facility..VII Regulatory needs for IFSC .FM said that International Financial Service Centre (IFSC) at Gift City, which has become operational, needs a coherent and integrated regulatory framework to fully develop and to compete with other offshore financial centres. The Government will establish a unified authority for regulating all financial services in IFSCs in India..VIII Development of Commodities Market .Finance Minister announced to provide that trading in agricultural commodity derivatives on a recognized stock exchange shall not be treated as a speculative transaction even if no Commodities Transaction Tax (CTT) has been paid in respect of those derivative transactions. He further proposed to amend Finance Act, 2013 to rationalize levy of Commodities Transaction Tax (CTT) on options in commodity futures..Separately Finance Minister also announced that Government will create an institutional mechanism, with participation of all concerned Ministries, to develop appropriate policies and practices for price and demand forecast, use of futures and options market, expansion of warehouse depository system and to take decisions about specific exports and imports related measures..Taking stock of last year budget announcement, FM said that more than 86% of our farmers are small and to enable them to directly transact at APMCs and other wholesale markets the Government will develop and upgrade existing 22,000 rural haats into Gramin Agricultural Markets (GrAMs). In these GrAMs, physical infrastructure will be strengthened using MGNREGA and other Government Schemes. These GrAMs, electronically linked to e-NAM and exempted from regulations of APMCs, will provide farmers facility to make direct sale to consumers and bulk purchasers. Accordingly, FM announced setting up of Agri-Market Infrastructure Fund with a corpus of INR 2000 crore for developing and upgrading agricultural marketing infrastructure in the 22000 Grameen Agricultural Markets (GrAMs) and 585 APMCs..IX PSUs, CPSEs, Insurance and Infrastructure Sector.FM announced that to raise equity from the market for its mature road assets, NHAI will consider organizing its road assets into Special Purpose Vehicles and use innovative monetizing structures like Toll, Operate and Transfer (TOT) and Infrastructure Investment Funds (InvITs)..Hon’ble FM also said that the Government and market regulators have taken necessary measures for development of monetizing vehicles like Infrastructure Investment Trust (InvIT) and Real Investment Trust (ReITs) in India. The Government would initiate monetizing select CPSE assets using InvITs from next year..It was also announced that Government of India has approved listing of 14 CPSEs, including two insurance companies, on the stock exchanges and the Government has also initiated the process of strategic disinvestment in 24 CPSEs. This includes strategic privatization of Air India. Further, 3 public sector general insurance companies National Insurance Company Ltd., United India Assurance Company Limited and Oriental India Insurance Company Limited will be merged into a single insurance entity and will be subsequently listed on the stock exchanges..Remarks .Finance Minister’s Speech largely focusses on soaps for rural and agricultural economy, it does not announce any sensational issues thankfully. Though 10% tax on LTCG of INR 1 lakh on equity or equity mutual funds may make capital markets volatile and may be perceived as a dampener. From a policy perspective, it is a good budget on what regulatory India needs today..Just on a quick note, the language of Finance Bill, 2018 amending regulatory laws has what meets more than the eye..(Author is a Securities Lawyer and a former SEBI Official Views are personal. Twitter: @sumit12agrawal )
Sumit Agrawal.Finance Minister Arun Jaitley tabled the Union Budget 2018 in the Parliament today. This piece quickly captures the 9-point regulatory updates from the perspective of capital, insurance and commodities markets..I BlockChain and CryptoCurrency .There was a debate in India if the virtual currencies like bitcoins, litecoins etc. fall under “Currency” under RBI Act, 1934 or a “legal tender” under the Indian Coinage Act, 1906 or “Securities” under Securities Contracts Regulation Act, 1956. Some people had argued such currencies to be treated as “commodity” or interpreting them as “software” and labelling all cryptocurrency transactions as essentially the sale or purchase of software. Although the Reserve Bank of India (RBI) had been issuing advisories to caution on its use..Finance Minister has settled the issue once and for all for cryptocurrencies and use of blockchain technology that supports cryptocurrencies. FM clarified that Cryptocurrencies shall not be deemed as legal tender and strict actions might be taken against investors in Cryptocurrencies. However, he also mentioned that Government of India can explore ways for using the blockchain technology for digital transactions..This means if it is not considered as legal tender, whether any transaction in it will be subject to GST or not, is yet to be clarified by Ministry of Finance. This taxation aspect will require clarification..II Amendment in Securities Laws & First-Time Provisions .Securities and Exchange Board of India, Act 1992, Securities Contracts (Regulation) Act 1956, and Depositories Act 1996, are being amended to streamline adjudication procedures and to provide for penalties for certain infractions. These proposals are in the Finance Bill, 2018..While the amendment through Budget Speech look procedural, it is going to have significant change in securities laws and might impact some of the pending cases as well..For the first time, provisions are being introduced to deal with the failure of a stock exchange or a clearing corporation to conduct its business in a manner, which is not in accordance with the rules and regulations made by SEBI. Perhaps it is a policy change post regulatory learning after the colocation issue at National Stock Exchange (NSE) and erstwhile National Spot Exchange Limited (NSEL) experience in commodities market..On the lines of what was argued in the book authored on SEBI Act, the Finance Bill, 2018 has proposed now introducing a provision for imposing monetary penalty on any person who furnishes or files false, incorrect or incomplete information, return, report, books or other documents in the same manner as a person who fails to furnish the required information..There is also an amendment to state that the settlement amount (excluding legal costs and disgorgement amount) realized under SCRA will be credited to the Consolidated Fund of India.The Finance Bill provisions also introduce continuance of SEBI Recovery Proceedings against a legal representative for recovery of sums due from securities laws defaulter even when the defaulter person dies..III Fintech, VCFs and Angel Funds, Alternate Investment Funds.Finance Minister acknowledged that the use of Fintech in financing space will help growth of MSMEs. He announced that a group in the Ministry of Finance is examining the policy and institutional development measures needed for creating right environment for Fintech companies to grow in India. He further said that the Venture Capital Funds and the angel investors need an innovative and special developmental and regulatory regime for their growth and the Government will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India..We can wait for SEBI board discussing these in its upcoming board meeting by amending SEBI (Alternative Investment Funds) Regulations, 2012 and tax department clarifying tax sops to them..IV Long Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG).Finance Minister announced that there is a strong case for bringing long term capital gains from listed equities in the tax net and proposed to tax long-term capital gains exceeding INR 1 lakh @ 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 were announced to be grandfathered..V Development of Bond Market & Amendment to Stamp Act .The Budget Speech acknowledged that RBI has issued guidelines to nudge Corporates access bond market. SEBI will also consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market. Corporate bonds rated ‘BBB’ or equivalent are investment grade. In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment. It is now time to move from ‘AA’ to ‘A’ grade ratings. The government and concerned regulators will take necessary action..It is likely that in the upcoming board meeting of SEBI, it will make mandatory for top 500 listed companies to obtain financing needs from accessing bond market under the threshold..Finance Minister also committed take reform measures with respect to stamp duty regime on financial securities transactions in consultation with the States and make necessary amendments the Indian Stamp Act..VI Amendment to RBI Act.Government of India proposes to amend section 17 of RBI Act, 1934. Finance Minister said that to provide the Reserve Bank of India an instrument to manage excess liquidity, Reserve Bank of India Act is being amended to institutionalize an Uncollateralized Deposit Facility..VII Regulatory needs for IFSC .FM said that International Financial Service Centre (IFSC) at Gift City, which has become operational, needs a coherent and integrated regulatory framework to fully develop and to compete with other offshore financial centres. The Government will establish a unified authority for regulating all financial services in IFSCs in India..VIII Development of Commodities Market .Finance Minister announced to provide that trading in agricultural commodity derivatives on a recognized stock exchange shall not be treated as a speculative transaction even if no Commodities Transaction Tax (CTT) has been paid in respect of those derivative transactions. He further proposed to amend Finance Act, 2013 to rationalize levy of Commodities Transaction Tax (CTT) on options in commodity futures..Separately Finance Minister also announced that Government will create an institutional mechanism, with participation of all concerned Ministries, to develop appropriate policies and practices for price and demand forecast, use of futures and options market, expansion of warehouse depository system and to take decisions about specific exports and imports related measures..Taking stock of last year budget announcement, FM said that more than 86% of our farmers are small and to enable them to directly transact at APMCs and other wholesale markets the Government will develop and upgrade existing 22,000 rural haats into Gramin Agricultural Markets (GrAMs). In these GrAMs, physical infrastructure will be strengthened using MGNREGA and other Government Schemes. These GrAMs, electronically linked to e-NAM and exempted from regulations of APMCs, will provide farmers facility to make direct sale to consumers and bulk purchasers. Accordingly, FM announced setting up of Agri-Market Infrastructure Fund with a corpus of INR 2000 crore for developing and upgrading agricultural marketing infrastructure in the 22000 Grameen Agricultural Markets (GrAMs) and 585 APMCs..IX PSUs, CPSEs, Insurance and Infrastructure Sector.FM announced that to raise equity from the market for its mature road assets, NHAI will consider organizing its road assets into Special Purpose Vehicles and use innovative monetizing structures like Toll, Operate and Transfer (TOT) and Infrastructure Investment Funds (InvITs)..Hon’ble FM also said that the Government and market regulators have taken necessary measures for development of monetizing vehicles like Infrastructure Investment Trust (InvIT) and Real Investment Trust (ReITs) in India. The Government would initiate monetizing select CPSE assets using InvITs from next year..It was also announced that Government of India has approved listing of 14 CPSEs, including two insurance companies, on the stock exchanges and the Government has also initiated the process of strategic disinvestment in 24 CPSEs. This includes strategic privatization of Air India. Further, 3 public sector general insurance companies National Insurance Company Ltd., United India Assurance Company Limited and Oriental India Insurance Company Limited will be merged into a single insurance entity and will be subsequently listed on the stock exchanges..Remarks .Finance Minister’s Speech largely focusses on soaps for rural and agricultural economy, it does not announce any sensational issues thankfully. Though 10% tax on LTCG of INR 1 lakh on equity or equity mutual funds may make capital markets volatile and may be perceived as a dampener. From a policy perspective, it is a good budget on what regulatory India needs today..Just on a quick note, the language of Finance Bill, 2018 amending regulatory laws has what meets more than the eye..(Author is a Securities Lawyer and a former SEBI Official Views are personal. Twitter: @sumit12agrawal )
