Expectations: High

Delivery: Good

MEASURES

l 25,000 crore for bank recapitalization in FY17. The government will find resources for additional capital.

l Comprehensive code on resolution of financial firms; bill to provide a specialized resolution mechanism to deal with bankruptcy.

l Amendment to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002 to enable the sponsor of an asset reconstruction company to hold up to 100% stake and permit non-institutional investors to invest in securitization receipts.

l Set up the Bank Board Bureau—which will spell out a road map for consolidating state-owned banks—and get it working in FY17.

l Strengthen debt recovery tribunals for speedier resolution of stressed assets.

l Transform IDBI Bank Ltd and consider stake reduction to below 50%.

l Deepen corporate bond market by allowing Life Insurance Corporation of India to set up a dedicated fund to provide credit enhancement to infrastructure projects.

l Expand investment basket of foreign portfolio investors—include unlisted debt securities and pass-through securities issued by securitization special purpose vehicles.

l Tax exemption for investors who have invested in sovereign gold bond scheme and deposit certificates issued under gold monetization scheme.

l Dividend distribution tax of 10% for annual dividend income of 10 lakh or more.

l Increase the rate of securities transaction tax for options to 0.05% from 0.017%.

l Individual foreign investor can hold up to 15% in an exchange, up from the current 5%.

l Permission for 49% foreign direct investment (FDI) in non-banking financial companies (NBFCs) via the automatic route.

l NBFCs shall be eligible to claim deduction to the extent of 5% of income when providing for bad and doubtful debt.

IMPACT

l Overall, the budget is negative for banks. While sticking to the fiscal deficit means that bond yields went down and open the room for a rate cut, banks don’t have enough capital if credit demand picks up.

l Capital infusion of 25,000 crore is inadequate for public sector banks. The government has provided less than half of what is required in FY17. It is not enough to solve one of the “twin balance sheet problems" highlighted by the Economic Survey.

l A comprehensive code to deal with bankruptcy situation may reduce the severity of losses for investors, but the challenge lies in its implementation.

l Amendments to SARFAESI Act should lead to better cash recovery for banks burdened by bad loans. It will allow asset reconstruction companies to raise more capital and grow. These firms will be able to deleverage and diversify their source of funds.

l The Bank Board Bureau with professional members will improve corporate governance and efficiency at state-owned banks.

l There is a huge backlog of cases at debt recovery tribunals, but again, challenge lies in implementation.

l Encouraging long-term investments in infrastructure bonds will hopefully aid in an investment led recovery.

l Budget encourages participation of foreign portfolio investors in corporate bonds and help borrowers diversify.

l Tax exemption for gold scheme investors might help reduce India’s dependence on gold imports.

l Tax for high net worth investors in equities goes up marginally.

l Increased securities tax on options will push up transaction costs and may impact volume. Negative for brokerage firms.

l Higher FDI in stock exchanges will theoretically enhance global competitiveness, allow them to adopt best technology and global market practices.

l Higher FDI limit positive for NBFCs. They also get a small tax breather.

STOCKS IN FOCUS

l IDBI Bank Ltd gained 5% on announcement of government stake sale.

l Poorly capitalized smaller public sector banks like Bank of India, Canara Bank, Union Bank of India and Oriental Bank of Commerce fell over 1% each. Krishna Merchant

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