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Primary float mart to be deepened

BS Markets Bureau

Government crackdown on dividend stripping was expected in the Budget.

Unexpectedly, instead, it provided investors with a legitimate way to avoid paying taxes - put the proceeds from long term capital gains into primary market issuances for tax exemption.

"It is definitely a positive sign for the primary market," said Shanti Ekambaram, executive director, Kotak Mahindra Capital Company Ltd.

She added that the move would deepen the retail market for initial public offerings as high net worth individuals and other individual investors, whom this exemption is targeted at, would try to save on their tax liabilities.

Ashok Wadhwa, managing director, Ambit Corporate Finance, while welcoming the move, pointed out that UK was the only other country that offered this incentive of investing money in the primary markets.

Since a year retail interest in primary market offerings has been lukewarm.

At least three companies have been forced in the recent past to either scale down their offer price or defer or abandon their IPOs altogether.

The post-listing performance of the scrips has not been sufficiently encouraging to lure investors to invest in IPOs.

In beginning of last year a few issues witnessed phenomenal over-subscriptions. However, six months down the line interest petered out, and numerous scrips were bailed out by institutional subscriptions.

At present high net worth individuals adopt dividend stripping or invest in Nabard or Hudco bonds to get tax exemptions. This tax break will dissuade investors from going the dividend stripping way to avoid paying taxes on capital gains.

"Instead of taking the devious route of dividend stripping and other routes for reducing tax impact, investors can now take the legitimate route and put their money into the primary markets," said a primary market analyst with a foreign bank.

Market watchers said that with this move the government has not only encouraged flow of funds into IPOs, but has also ensured that individuals have an alternative and legitimate route to channelise their funds.

Source: Business Standard

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