Rationalise Taxation to Boost Capital Markets

Q. Is SEBI taking any steps to revive the primary market to boost retail investor confidence, especially as their participation has gone down substantially?

A. SEBI has followed a multi-pronged approach for boosting the primary market. The measures include enhancing the confidence of retail individual investors by instilling discipline amongst issuers/market intermediaries, making the issue process more transparent and providing a level playing field for all market participants.

In addition to the existing channels, to widen the distribution network of IPOs to enhance retail participation, an additional mechanism, i.e., using the stock broker network of stock exchanges, has been made available to investors for submitting IPO application forms. This mechanism can be used by investors to submit both Applications Supported by Blocked Amount (ASBA) and non-ASBA applications. This facility will soon be available in more than 1,000 locations in a phased manner by early 2013.

Some of the other important measures announced by SEBI in recent years to boost retail investor confidence, inter-alia, are review of IPO forms and abridged prospectus to make them user-friendly, rich in content and easy to comprehend; introduction of measures to curb opening day volatility; non-withdrawal or lowering the size of bids for non-retail investors at any stage; giving more time to the market to analyse the issue by requiring publication of the price band along with relevant financial information of the IPO 5 days before issue opening as against the earlier 2 days; capping the ‘General Corporate Purposes’ which did not have any cap at 25 per cent of the proceeds raised by the issuer; etc.

Q. You have introduced a number of provisions to attract investment through the qualified financial/institutional investors (QFI) route, but little money has come in. Do you further plan to change norms for them?

A. SEBI has constituted a committee comprising of representatives from various market participants to simplify and standardise the norms regarding investment in the capital market by all overseas entities such as foreign institutional investors, foreign venture capital investors (FVCIs), qualified financial/institutional investors (QFIs) and NRIs, and also to strengthen surveillance over them. SEBI is also in consultation with the Government of India on rationalisation of tax issues related to QFIs.

Q. What is your opinion on the need for a super-regulator? What is SEBI’s stand on this issue?

A. There is no conclusive view that has emerged on the need for a super-regulator. Some jurisdictions have a single regulator and some others have multiple regulators for the financial sector. Each one has its own set of pros and cons.

In India, there are multiple sectoral regulators in the financial market. The establishment of the Financial Stability and Development Council (FSDC), inter-alia, has institutionalised the coordination mechanism between regulators in the Indian financial sector.

Over a period of the last year and a half, SEBI has engaged in extensive consultation with various stakeholders in the mutual fund industry over issues like need for expanding the reach of the industry across the country, increasing retail participation, widening the distribution network and enhancing focused efforts towards investor education

Q. What steps do you think are needed to propel the mutual fund industry, especially from the industry point of view?

A. Over a period of about a year-and-half, SEBI has engaged in extensive consultations with various stakeholders in the mutual fund industry over issues like need for expanding the reach of the industry across the country, increasing retail participation, widening the distribution network and enhancing focused efforts towards investor education. After a series of consultations and based on the recommendations of the Mutual Funds Advisory Committee of SEBI (MFAC), SEBI recently announced a number of key steps aimed at increasing the growth and strengthening the regulatory framework of the mutual fund industry in India.

Further, in order to strengthen the mutual fund industry and encourage long-term investments, SEBI is in the process of developing a long-term policy for mutual funds taking into account its importance in mobilising domestic savings for the growth of the economy. The policy will include all aspects, including enhancing reach and promoting financial inclusion, tax treatment, obligation of various stakeholders, etc. MFAC will recommend further long-term policy measures after wider consultation with all stakeholders.

Q. What do you feel are the issues impeding the development of a vibrant debt market?

A. A comprehensive agenda on the development of the corporate bond market was discussed in the meeting of the FSDC.

As far as development of the corporate bond market in India is concerned, SEBI has taken a range of measures in the past years which, inter-alia, include simplification of disclosure and listing requirements; setting up of reporting and trading platforms; introduction of exchange-traded interest rate futures; guidelines for issue and listing of structured products/market linked debentures; guidelines for Credit Default Swaps (CDS) for corporate bonds (issued by RBI); introduction of repo in corporate bonds by RBI; allowing mutual funds to participate in CDS; etc.

There is need for rationalisation of securities transaction tax (STT) in the secondary market for economising transaction costs and facilitating balanced growth of volumes in various financial products. There is also need to rationalise stamp duty across states as well as simplifying and bringing uniformity in the manner of levying and collection of stamp duty. Bringing parity in tax treatment among similar products under different sectoral regulators in the financial market is another issue which merits attention.

Continued and coordinated efforts are required to develop the corporate bond market further.

Q. What is the linkage between the capital market and economic growth? Where do you see SEBI in fostering such linkages?

A. The capital market pools funds from dispersed households and allocates them efficiently to diversify risk and maintain liquid investments. Since the establishment of SEBI, the securities market in India has developed significantly. It has led to a successful transition from a merit-based regulatory regime to a market-oriented, disclosure-based regulatory regime. SEBI’s focus has been on developing a well-regulated modern securities market in India by adopting global standards and international best practices to boost investor confidence and enhance investors’ participation.

Q. Today, only 1 per cent of all household savings are invested in equities. Despite large aggregate savings, there is acute shortage of domestic risk capital. Where do you see SEBI in promoting greater retail participation in the equity market?

A. Globally, in developed economies, mutual funds have grown to a significant size of the country’s GDP. In India, mutual fund products remain significantly un-penetrated across the country. There is huge potential in the mutual fund industry to mobilise long-term savings in providing risk capital for the sustained growth of the Indian economy. The proposed long-term policy for the mutual fund industry is expected to suggest a roadmap in this regard.

The recent measures taken to re-energise the mutual fund sector and revive the primary market are also likely to give a boost to supply of risk capital in the market through increased retail participation

Apart from this, the recent measures taken to re-energise the mutual fund sector and revive the primary market are also likely to boost the supply of risk capital in the market through increased retail participation.

Another area of focus by SEBI to attract household savings to the market is through investor awareness and complaints redressal. In this regard, SEBI has taken a gamut of important measures such as a new web-based centralised grievance redressal system called SEBI Complaints Redress System (SCORES), where complainants can track the action taken report submitted by the company/intermediary. SEBI has launched a toll-free helpline for investors in English, Hindi and many regional languages.

SEBI is also focussing on enhancing awareness among investors though workshops and a media campaign. SEBI is opening local offices at various locations in India to make it more accessible to investors as also to spread investor awareness.

Q. How important do you think is the need to reform the tax structure and rationalise transaction costs to make the markets more liquid and broad?

A. Tax incentives are pivotal in channelising long-term savings. There is need to rationalise and harmonise the tax regime across products and segments in the financial market for balanced growth which would be more conducive to economic growth and investors’ interests in India.

Q. What is the status of the National Strategy for Financial Education?

A. The National Strategy for Financial Education is under active consideration of various regulators in the Indian financial sector. Every regulator is putting in effort in a time bound manner to expedite the same.

Q. What steps do you think are needed to ensure greater synergy in the functioning of all entities associated with the process of financial inclusion, including technology service providers?

A. It is very important that all stakeholders – various ministries, regulators, industry associations, market participants, education boards, NGOs and professional bodies – with the help of technology providers/media create synergy of efforts and resources for financial education. Role of both the public and private sector can also be identified and their efforts be made complementary, so that the full benefits of financial inclusion and financial literacy are achieved.