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Investors spooked: Markets skid on public float proposal

Budget proposal to raise public shareholding threshold fans fears of oversupply of new papers

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The proposal for a 20% buyback tax on listed companies clubbed with a bump in minimum public shareholding to 35% plunged key benchmark indices on Friday.

The Budget document states that to discourage the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies, it is proposed that listed companies be made liable to pay additional tax at 20% in case of buyback of shares, as is the case for unlisted companies currently.

Describing the effect of this provision, Ashok Shah, partner, NA Shah Associates LLP, said, "Listed company whose buyback is still open today would be taxed at the rate of 20% plus surcharge, and cess on the amount of consideration paid less the issue price of such shares. This would impact buyback by all listed companies."

The 30-share BSE Sensex opened at 39,990.40, touched an intraday high of 40,032.41, but soon fell to an intraday low of 39,441.38, before closing 394.67 points or 0.99% lower at 39,513.39. NSE Nifty 50, which opened at 11,964.75 and touched an intraday low of 11,797.90, closed 1.14% lower at 11,811.15.

Finance minister Nirmala Sitharaman said in her maiden Budget speech said the time was right to consider increasing minimum public shareholding in listed companies. "I have asked Sebi to consider raising the current threshold of 25% to 35%," she said.

Amar Ambani, president & research head, YES Securities, said the big surcharge tax on the high income group, possible squeezing of secondary market liquidity due to disinvestment, and increased public shareholding caused the stock market to fall on Friday.

According to him, increase in public shareholding is a potential negative for companies with high promoters' holdings. In many mid and small-cap companies, it is better to have more promoter skin in the game, since the domestic capital market is in a nascent stage.

"Many MNCs listed on Indian bourses may consider delisting if increased public shareholding is implemented. Supply of paper in the market will also increase. This will mean that money will be sucked out of the secondary market and valuations will remain under check," Ambani said.

Sitharaman has also proposed to extend the corporate tax rate of 25% to all companies with an annual turnover of up to Rs 400 crore from Rs 250 crore at present. This covers 99.3% of all companies. A relief has also been given to the levy of securities transaction tax (STT) by restricting it only to the difference between settlement and strike price in case of exercise of options.

Meanwhile, the government has proposed to permit investments made by foreign institutional investors and foreign portfolio investors (FIIs/FPIs) in debt securities issued by infrastructure debt fund-non-banking financial companies (IDF-NBFCs) would be transferred or sold to any domestic investor within the specified lock-in period.

A proposal to rationalise and streamline the existing Know Your Customer (KYC) norms for FPIs have also been put forward to make it more investor-friendly.

The government will offer an investment option in exchange traded funds on the lines of equity-linked savings scheme to encourage long-term investment in central public sector enterprises.

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