Mumbai: The announcements for the capital markets in the Union Budget 2018 are more regulatory than reformative in nature. Finance minister Arun Jaitley announced a slew of amendments, giving the Securities and Exchange Board of India (Sebi) more power to levy penalties on intermediaries, including stock exchanges.
In addition, the International Financial Services Centre (IFSC) will get a separate single regulator. Currently, the centre is regulated by multiple entities including Sebi and the Reserve Bank of India.
“Securities and Exchange Board of India Act 1992, Securities Contracts (Regulation) Act 1956 (SCRA), and Depositories Act 1996, are being amended to streamline adjudication procedures and to provide for penalties for certain infractions," Jaitley said in the budget speech.
“The amendments are to streamline the penalty proceedings. Now, a whole-time member (of Sebi) can levy penalties in the final orders along with passing directions. This will help in channelizing resources better. Dual proceedings, once by the member and then by an adjudicating officer, will not be needed," said Sandeep Parekh, managing partner at law firm Finsec Law Advisors.
The Finance Bill has inserted a specific section in the SCRA that provides a penalty structure for exchanges and depositories. Sebi will now be able to impose a minimum penalty of Rs5 crore on stock exchanges and clearing corporations if they breach regulations. The penalty can go up to Rs25 crore, or three times the amount of gains, whichever is higher.
“The introduction of minimum penalties on securities markets infrastructure companies such as exchanges, clearing corporations and depositories is avoidable. Minimum penalties pose problems for constitutional validity. The quantum of penalty imposed by nature has to depend on factors such as gravity, circumstances, intention etc. The Supreme Court has frowned upon minimum penalties for this reason," said Somshekhar Sundaresan, an independent counsel.
The Finance Bill also introduced stringent penalties on investment funds for non-compliance with Sebi regulations.
The finance minister announced that the IFSC at Gift City—an under-construction central business district between Ahmedabad and Gandhinagar in Gujarat—needs a coherent and integrated regulatory framework to fully develop and compete with other offshore financial centres.
“The government will establish a unified authority for regulating all financial services in IFSCs in India," the finance minister said.
Currently, financial services firms and other intermediaries working and trading in IFSC are regulated by their respective regulators including Sebi, RBI, the Insurance Regulatory and Development Authority of India, and so on. This has led to regulatory overlaps and increased compliance.
The budget also proposed tax concessions for exchanges located in the IFSC.
“All transactions on our exchange will now be exempt from capital gains (both long-term and short-term) in derivatives for all non-residents. Non-residents include both foreign portfolio investors and eligible foreign investors," said V. Balasubramaniam, managing director and chief executive of India International Exchange IFSC Ltd (India INX).
The budget also cut transaction charges on commodity options. Now on exercise of the commodity option, the tax payable will be 0.0001%. This was 0.125% earlier.