Union Budget FY 2019-20 : General reforms for the corporate sector

Deepening of corporate debt market

To deepen the corporate tri-party repo market in corporate debt securities, the government will work with the regulators, RBI/SEBI, to enable stock exchanges to allow AA-rated bonds as collateral. The move would provide greater liquidity for better rated corporate bodies. This is naturally positive for higher-rated corporate.
Increase in free-float in the listed equity market
FM has proposed raising the minimum public shareholding in listed companies. The minister has asked SEBI to consider raising the current threshold of 25% to 35%. Due to such a move, corporate with concentrated promoter holding could see volatility in prices and could be negative for companies not meeting requirements. Some of the companies like MNCs might contemplate delisting if they do not want to dilute stake. In the short-term, bunching up of offer for sale can also impact primary issuance and secondary market liquidity. Yet, in the longer-run, higher free-float would increase efficiency of price discovery, liquidity and perhaps governance of the listed companies.  More on this tomorrow in detail.
Meeting of free-float norm by listed PSU companies
The budget has proposed to take all necessary steps to meet public shareholding norms of 25% for all listed PSUs and raise the foreign shareholding limits to the maximum permissible sector limits for all PSUs which are part of the emerging market index. In the short term, this could be negative for PSBs (especially banks in which the government has recently infused capital), since the valuations of many of these companies have been beaten down. Yet, in the medium term, this step, however, is likely to improve the divestment process, governance and operations of PSUs. 
Taxation of buy-back of shares
In order to discourage the practice of avoiding the dividend distribution tax (DDT) through a buy-back of shares by listed companies, it is proposed that listed companies will also be liable to pay an additional 20% tax in case of buy-back of shares, as is the case now for unlisted companies. Earlier, companies (especially IT companies) chose buy-backs rather than dividends. We feel that the move closes an arbitrage opportunity and in the medium term would be neutral for the corporate sector.  

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