Session on “Budget 2020 and Its Impact on Equity Markets” by Mr. Jaideep Merchant

Contributed By: Ria Agarwal

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On 8th February 2020, the Pune Chapter of the CFA India Society held a session wherein Mr. Jaideep Merchant, Fund Manager, Janak Merchant Securities Private Limited gave a presentation on ‘Budget 2020 and Its Impact on Equity Markets’. He provided insights on topic while focusing on four crucial areas:

  • Impact on government bond market

India has understandably been cautious in the past by capping the FPI’s (Foreign Portfolio Investors) investment in its debt market, but this budget proposes to open the bond markets for FPIs. This year the government is allowing certain government bonds to be issued without any limits to non-residents. This move is intended to help specific Indian government bonds to be included in global bond indices. Exchange Trade Funds (ETFs) that invest in sovereign bonds are large pools of capital that did not have access to Indian markets due to limits in place.In the long run this can help relieve the pressure on the local bond market along with decreasing the current account deficit of the country.We can monitor the progress by:

  1. Timeline of inclusion
  2. Size of bond issuance
  3. Liquidity in those bonds
  4. Tenure of bonds
  5. Volatility over the cycle especially when there are outflows

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  • Dividend Distribution Tax Abolishment

The abolishment of the DDT was an attempt to increase FDI in the manufacturing sector. The impact of the same could be in various forms:

  1. The MNCs operating in India could increase the dividend pay-out ratio going forward. The MNC parents were unable to set off the dividend tax paid by their subsidiaries on dividend repatriated by them to their home country.
  2. A lower DDT should make it more attractive to move manufacturing plants to India. Combine this with the lower corporate tax rate of 15% for new manufacturing companies announced last year there is higher probability that MNCs will move more production to India.
  3. Domestic companies’ behaviour towards compensation and dividend completely depends on the promoter’s behaviour. There is a large possibility for large buyback of shares in place of giving dividends. This measure is a negative for the domestic investor as now dividends are tax in their hands at the slab rates
  4. Equity mutual fund investors should evaluate moving to growth option and use systematic withdrawal plan for managing their cash flows

 

  • Disinvestment

The government has an ambitious divestment target of Rupees 2.1 lac Crore. This was a major announcement of the 2020 budget. This includes strategic divestment in Air India, Concor and BPCL among others. Jaideep says, the budget deficit target hinges on strategic disinvestment. We can consider this as a good opportunity to look at the CPSE ETF. Due to the decreasing stake of the government in the PSUs we should keep an eye on the companies entering and exiting the CPSE ETF as any company stock that has reached 51% government holding, will be removed from the index. This will result in an increase for the supply of stock and the government kept stocks reduces. It may bring opportunities that arise when promoters are forced to sell their equity shares in the market due to regulatory or financial reasons and those stocks are available at distressed prices during that time.  Many of these companies’ trade at very low valuations and have good prospects. The PSU index could be wider apart from the benchmark and the dividend yields could also be higher.

  • Tax collections assumptions and Tax collection at source (TCS)
  1. Mr Jaideep Merchant says that if the states focus more on GST enforcement, it is likely that collections should be much better in FY 2021.
  2. The 5% TCS announced on LRS will help increase the transparency of transactions for the government and a few other key changes made are that TCS of 0.1% should be collected by seller if the turnover is above 10 crore rupees per year.
  3. 1% tax on sale of goods if sold on e-commerce platforms will be collected by the platforms and paid on behalf of the vendors.

The above listed points are only a few aspects of the budget that were mentioned by the speaker. Overall Mr Merchant provided practical insights into the budget.

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