Mumbai, not NY or Frisco, is the place for global money

 

The stockmarket has done better than anybody imagined ever since P Chidambaram took over once again as finance minister of the country in 2004. The Bombay Stock Exchange Sensex is on the verge of breaching the 10,000-mark. We are also well above the magic figure of $500 billion in market capitalisation - the market value of all listed shares. There’s no denying that foreign institutional flows have played a major part in driving the market up to its current highs. These flows, in just the last three years between 2003 and 2005, added up to $25.8 billion (about Rs 1,14,000 crore).

 

So what would the markets expect from the budget? A budget that reduces procedural hassles for foreign investors and provides a seamless way to bring in money would be positive for the markets. The regulatory mechanism, the legal structure in terms of tax codes, and foreign exchange regulations must be conducive for foreign investors to think seamlessly about global markets and the instruments they invest in.

 

If the right regulations are in place to attract funds into the country, smart money will always find its way into the market - eventually. However, some of the long-term funds of foreign institutional players get stuck in bureaucracy. This clearly deprives the market of enormous liquidity and, hence, efficiency.

 

What can affect the markets negatively? I feel that the finance minister must take a cautious approach on the securities transaction tax (STT), especially if he is planning some changes. The Indian markets are already in a fine state of  balance, with the Sensex near record levels of 10,000. Any unreasonable increase in STT would needlessly result in a drop in the markets. Even if the finance minister is considering dropping the short-term capital gains (STCG) tax of 10% - as has been suggested by some people in the market - he should not overcompensate by increasing the STT disproportionately. It would help if he took knowledgeable representatives from the stockmarket into confidence before deciding on the new STT rate.

 

In sum, if STCG goes and the STT is hiked only marginally, the markets would cheer the move since it would go a long way in reducing procedural hassles and paperwork for investors. This is specially true for foreign institutional investors (FIIs), who would then be much more comfortable entering the Indian market. Besides, if STCG is abolished, liquidity will improve considerably since trading activity will increase.

 

Any unreasonable increase in STT will, on the other hand, be taken negatively. In any case, an increase in the rate would hit volumes, which would eventually reduce the tax collected by the government. At current rates, the tax collection from STT is healthy given the high trading volumes in the market. The markets would also be very happy to see the Fringe Benefits Tax (FBT) being scrapped, given the procedural heartburn it generates. Instead, the government can consider increasing the corporate tax rate marginally from current levels of 30%.

 

Finally, global interest about investing in India is growing by the day. Unfortunately, most of these funds are managed from overseas centres like London, New York, Hong Kong, Singapore, Boston and San Francisco. All these financial centres are in different time zones, and far away from the centre of action, which is Mumbai. Although last year’s budget had mentioned that “the time has come to begin work on making Mumbai a regional hub for finance”, there aren’t any signs of progress on this front. The finance minister must seize the opportunity provided by the high foreign interest in Indian stocks to create an environment that is conducive for fund managers to base themselves in Mumbai and manage their billions from here. This will enable them to not only manage the funds invested in India, but also other funds managed in this part of the world in similar time zones.

 

To create global awareness about Mumbai’s strengths in terms of infrastructure - physical, legal, stock exchange, and regulatory - would call for holding global roadshows and actively canvassing support from fund houses to set up large offices for research and fund management in Mumbai. The government must create a compelling environment for this knowledge- based industry.

 

 

 

A small increase in STT is fine if short-term capital gains tax goes

 

Bureaucracy and paperwork must be eased for foreign investors

 

If the fringe benefit tax goes, the markets won’t mind a slightly higher tax rate