Finance Minister Nirmala Sithraman presented the new Modi Government’s first budget and her first maiden budget on July 8th. BSE S&P Sensex opened on Monday at 39,891.19 and closed on Wednesday at 38,557.04, while the Nifty opened the week at 11,930.40 and closed on Wednesday at 11,498.90.
The Union Budget failed to provide momentum to Dalal Street and this lead to three straight sessions of wealth erosion. The BSE Sensex fell by 1,334.15 (3.34%) and Nifty fell by 431.50 (3.62%).
The reason for the sharp fall in Indian markets is largely due to the disappointment of investors with regards to the budget not having any broad stimulus measures to revive the slowing economy. The government’s move to increase minimum public shareholding from 25% to 35% in listed companies, further disheartened investors. Approximately a quarter of the 4,700 companies listed on the Indian Stock Exchange have promoter shareholding more than 65%. To meet the norms of this policy change, promoters will now have to sell shares worth close to Rs. 3.9 Lakh crores.
In June 2010, the regulators had increased the minimum public holding to 25% and had given companies a time span of three years to meet these norms. The worry in the market is that this proposed move could prompt listed MNC’s who do not rely on funding locally or IT companies with a large promoter holding to exit the market.
The markets are bound to face short-term pain, however, the proposed move will likely be beneficial for retail investors and the market in the long run. The shares blocked by promoters can bring in more money through investors. Diversification of ownership by institutions and retail investors will also be beneficial for corporate governance. India’s weightage on many global indices could also be increased through this proposed move as global indexes consider shares readily available to purchase in the market and this will directly influence the inflow of foreign investments as FII’s invest based on these conditions. A smaller public shareholding also leads to higher volatility in prices in the market due to more number of purchases and sales.
Let’s look at some of the other factors affecting the markets:
- FM Nirmala Sitharaman announced, amidst a host of budget proposals, that there will be an increase in surcharge on income tax. This hit foreign portfolio investors the hardest. Although their concerns on tax surcharge were voiced, there was no remedy for them.
- Bank shares took a hit due to the news of the fresh loan fraud at Punjab National Bank (PNB). This disclosure dragged bank stocks and has affected the sentiment across the board especially in PSU Banks.
- The export sector has been reeling under global headwinds and its growth has already flatlined. The Budget failed to address this issue of boosting exports. The liquidity crunch faced by the sector was not adequately addressed.
The reaction in the market to the budget has been less than satisfactory despite the FM’s efforts to improve the growth of our country in the long term. The push towards the strengthening of financial markets, targeting of the liquidity crisis at NBFC’s and the infrastructure sector as a whole is a game-changer. The measures will give local and global investors more confidence. The budget lacks short term fixes and populist measures but has surely laid a blueprint for long term benefits.