Corporate Laws 01 Feb,2020
Key takeaways from Budget-2020: Corporate Laws perspective
Editorial Team

The Finance Minister has made various announcements in the Union Budget, 2020. This was in fact the longest ever budget speech in the history. The Budget 2020 is based on three themes - Aspirational India, Economic Development for all, and Caring Society. Although majority of the proposed amendment relating to non-tax items were part of the budget speech however they are not covered in the Finance Bill. Following are the keyways from Finance Bill and Budget Speech, 2020 related to corporate and allied laws.

1. Govt. proposes to exempt levy of stamp duty on transactions in stock exchanges established in IFSCs

The Finance Bill, 2020 proposes to exempt levy of stamp duty in respect of instruments of transaction in stock exchanges and depositories established in IFSC set up under SEZ Act, 2005. In order to give effect to the proposed amendment, a new proviso has been proposed to be inserted to Section 9A (2) of the Indian Stamp Act, 1899.

The exemption of the stamp duty on transactions carried out on stock exchanges and depositories established in IFSCs will lower the transactions cost and would encourage investments in IFSCs.

Last year, in Finance Budget, 2019 the Govt. had inserted Section 9A to the Indian Stamp Act, 1899 whereby it was proposed to consolidate the stamp duty provisions relating to issue, sale or transfer of securities under the newly inserted section 9A and 9B of the Indian Stamp Act, 1899. The Amendment Act also proposed a uniform system for collection and payment of stamp duty on the issue and transfer of securities.

The Finance Bill, 2020 further proposes to include new regulation for issuing the directions and authorize SEBI and RBI to issue instructions, circulars or guidelines for carrying out the provisions of Part AA of Chapter II and the rules made thereunder. Part AA of Chapter II of Indian Stamp Act, 1899 relates to the liability of instruments of transactions in stock exchanges and depositories to duty.

2. Deposit Insurance Coverage limit to be increased From Rs. 1 Lakh to Rs. 5 Lakh per depositor

The Finance Minister in her budget speech has assured depositors' that there money is absolutely safe with scheduled bank. She said that robust mechanism is in place to monitor the health of all Scheduled Commercial Banks. Further, she announced that the Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase Deposit Insurance Coverage for a depositor, which is now Rs 1 lakh to Rs. 5 lakh per depositor.

Meaning of Insurance deposit- As per Section 2(j) "insured deposit" means the deposit or any portion thereof the repayment whereof is insured by the Deposit Insurance and Credit Guarantee Corporation under the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961

The decision of the FM to hike the deposit insurance amount is a welcome step. The hike in deposit insurance will give major relief to the depositors post Punjab & Maharashtra Co-operative Bank (PMC) scam and would help in re-building depositors' confidence in the banking system. Post PMC scam both Govt. and RBI faced much criticism for capping the deposit insurance limit to Rs. 1 lakh.

This announcement was earlier made in Nov'19 and it was expected that Govt. would bring amendment to effect the hike in limit of deposit insurance in winter session. It is to be noted that although this amendment has been proposed in the budget speech yet no amendment has proposed in the Finance Bill-2020 to bring amendment to the Deposit Insurance and Credit Guarantee Corporation Act, 1961.

3. Eligibility limit for NBFCs for debt recovery under SARFAESI Act to be reduced to loan size of Rs. 50 Lakh.

The FM in the budget speech has announced that the limit for NBFCs to be eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 is proposed to be reduced from Rs. 500 crore to asset size of Rs. 100 crore or loan size from existing Rs. 1 crore to Rs. 50 lakh.

The reduction in the loan size limit for using SARFAESI for cases of Rs 1 crore to Rs. 50 lakhs would mean that now NBFCs can enforce the security interest for lower ticket size loans. This would improve their ability to recover smaller loans.

4. Specified Government securities to be opened for NRIs

In order to attract foreign investment in India, the Finance Ministry in her speech proposed to provide certain specified categories of Government securities exclusive for non-resident investors only, apart from being available to domestic investors as well.

It is a very positive proposal by Govt. it will bring in a new class of investors in Indian G-secs. Issuance of G-secs to NRIs would bring down the cost of borrowing for the Government. However, the exercise of issuance of G-secs would be prone to currency risk. It would be interesting to see how Govt. will formulate framework to address the currency risks involved in process of issuance and remittance of G-secs.

5. Investment limit for FPIs hiked

In order to boost inflow of foreign funds into the Indian Capital Market, It has proposed to increase the limit for FPI in corporate bonds from 9% of outstanding stock to 15% of the outstanding stock of corporate bonds. This move will push inflow from overseas investors in the country's capital markets.

6. Partial Disinvestment of LIC

The Government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO). The FM supported this move by saying that listing of companies on stock exchanges discipline a company and provides access to financial markets and unlocks its value. It also gives opportunity for retail investors to participate in the wealth so created.

This is a welcome move, the proposal is in line with recommendation made in the economic survey for undertaking aggressive disinvestment to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in the selected Central Public Sector Enterprises (CPSEs) for which the Cabinet has given in-principle approval.

The best example of disinvestment as reported in economic survey was for Bharat Petroleum Corporation Limited (BPCL) "Approval for strategic disinvestment of Government's shareholding of 53.29 per cent in Bharat Petroleum Corporation Limited (BPCL) led to an increase of around Rs. 33,000 crore in the value of shareholders' equity of BPCL when compared to Hindustan Petroleum Corporation Limited (HPCL). This translates into an unambiguous increase in the BPCL's overall firm value, and thereby an increase in national wealth by the same amount."

As per the economic survey, A comparative analysis of the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04 reveals that net worth, net profit, return on assets (ROA), return on equity (ROE), gross revenue, net profit margin, sales growth and gross profit per employee of the privatized CPSEs, on an average, have improved significantly in the post privatization period compared to the peer firms

The ROA and net profit margin turned around from negative to positive surpassing that of the peer firms which indicates that privatized CPSEs have been able to generate more wealth from the same resources.

"The analysis clearly affirms that disinvestment (through the strategic sale) of CPSEs unlocks their potential of these enterprises to create wealth evinced by the improved performance after privatization." said report.

7. New Debt-based Exchange Traded Fund

The Union Budget 2020 proposes a new Debt-ETF with an objective to access of government securities to retail investors. The Debt-based Exchange Traded Fund (ETF) recently floated by the government was a big success. Therefore, it has proposed to expand Debt-ETF by floating a new Debt-ETF consisting primarily of Government securities.

8. Mechanism to support Partial Credit Guarantee scheme

With an aim to provide liquidity support, a partial credit guarantee scheme for public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and Housing Finance Companies (HFCs) had approved in Union Budget 2019-20. Therefore, in order to boost scheme, the budget speech, 2020 proposes to put a mechanism to ensure the scheme will benefit to NBFC and HFCs.

9. Separation of NPS Trust for government employees from PFRDAI.

In order to strengthen the Pension Fund Regulatory body's regulating role, Finance Minister has proposed amendments in the PFRDA Act and forming of pension trusts by employees other than government employees. The FM also proposed separating the role of the Pension Fund Regulatory and Development Authority of India (PFRDA) from that of trust for government employees. This move will ensure easy mobility, while in jobs and provide safeguards for the accumulated corpus.

The PFRDA regulates the National Pension System (NPS), subscribed by employees of Central and State Governments as well as by employees of private sector organizations those in unorganised sectors.