Market freefall: Time for RBI, govt to act

Ishwar Grewal

The recent global selloff due to Covid-19 has spread its tentacles across the globe, wiping out an enormous amount of investor wealth in India and abroad, the losses increasing by the day. The BSE Sensex, which made an all-time high of 42,273 on January 20 this year, plunged to a yearly low of 26,714 on March 19, which amounts to a fall of nearly 36%. Equity mutual fund NAVs have plummeted, a major bank has gone bust leaving their AT1 bondholders in the lurch, many promoters have lost control of their companies as their pledged shares had to be sold in the open market by lenders/institutions/banks to recover their dues.

This brutish fall in the stock markets accompanied by fulfilling margin calls by brokers has led to small investors nearly selling out their portfolios with huge losses. The fear of stock prices falling further may be accentuated by yet another rude shock that may follow suit – a drastic cut in dividends by corporates and mutual funds in the next financial year. Credit agencies have downgraded bonds and financial instruments issued by corporates, increasing the stress on the already overstressed banking system.

Non-performing assets of NBFCs and banks are going to skyrocket, affecting further lending to the micro, small and medium enterprises. Although recently SEBI has taken measures to reduce short selling by hiking margin requirements for both the cash segment and the futures & options, however, I personally feel these penalties and measures brought about by SEBI are not stringent enough to stem the tide of massive short selling that is going on.

As a long-term investor, I would urge the Government and various other policy-making institutions to consider the proposals given below to bring back the animal spirit in the economy and the stock market:

Revoke tax on LTCG

The government’s collection from long-term capital gains is miniscule in a falling market. If this is done, sentiment will drastically improve. Paperwork regarding grandfathering of gains will reduce enormously. Initially, Securities Transaction Tax (STT) was introduced in lieu of LTCG. Operating both at the same time is a double whammy for investors concerned.

Rationalise DDT

From FY 20-21 the incidence of dividend distribution tax (DDT) will fall on the investor as per his income tax slab and not on the company which was paying DDT at a rate of 20.35%. Earlier, an investor paid DDT @10% above Rs 10 lakh, now he will have to pay DDT as per his income tax slab. Hence, at the highest slab, including surcharge and cess, an investor will be paying DDT @43%. If the DDT could be fixed at a flat rate of 15% or 20%, it would bring a big relief to the investor community and encourage promoters to distribute more out of retained earnings as dividends to shareholders.

Reduce buyback tax

Currently, a company which buys back its own shares from the shareholders is taxed @20%. To encourage corporates to reward shareholders in times of falling share prices, buyback tax should be reduced, not only will it enhance corporate earnings but should also have a positive impact on the exchequer.

Promote investment in NPS

The government should encourage investors to invest in the National Pension System as they can also avail of certain income tax deductions attached to it. This is very essential for building up a corpus for young investors and securing a pension for themselves after the age of 60.

Don’t emulate the West

The Government should not emulate the high tax rate structure of the West, as the investors there have social security and medical insurance to fall back on whereas they are sadly lacking in India. Hence, the tax rates in the West and in India are not comparable at all.

A concerted effort by RBI to bring down interest rates, a stimulus package by the Government keeping in view the demands of various sectors of the economy, checking malpractices in the capital market by credit agencies/SEBI should augur well and restore growth and investor confidence.

The black swan being Covid-19 is a medical pandemic which can lead to an economic catastrophe, probably the worst the world has seen since World War II. I am hopeful there is light at the end of the tunnel but hope it is not from an oncoming fast train! The waiting is over. The time to act has come.

The author, 40, is an individual investor with 22 years of experience in stock markets. The views expressed are personal.