Association of Mutual Funds in India
BUDGET PROPOSALS FOR FY 2018-19
Introduce Debt Linked Savings
Scheme (DLSS) to encourage Long-Term Household Savings into Bond Market.
Background
Over the past decade, India has
emerged as one of the key markets in Asia. However, the Indian corporate bond
market has remained comparatively small and shallow, which continues to impede
companies needing access to low-cost finance.
As per the data from Asia
Securities Industry & Financial Markets Association (ASIFMA), the corporate
bond markets of Malaysia, South Korea, Thailand, Singapore and China exceed
that of India as a percentage of GDP.
Historically, the
responsibility of providing debt capital in India has largely rested with the
banking sector. This has resulted in adverse outcomes, such as accumulation of
non-performing assets of the banks, lack of discipline among large borrowers
and inability of the banking sector to provide credit to small enterprises.
Indian banks are currently in no position to expand their lending portfolios
till they sort out the existing bad loans problem.
Thus, there is a need for a
vibrant bond market in India, to provide an alternative platform for raising
debt finance and reduce dependence on the banking system.
Several committees [such as the
R.H. Patil committee (2005), Percy Mistry committee (2007) and Raghuram Rajan
committee (2009)] studied various aspects of the issue and have made
recommendations, but the progress has not been as desired.
The heavy demands on bank funds
by large companies, in effect, crowd out small enterprises from funding. India
needs to eventually move to a financial system where large companies get most
of their funds from the bond markets while banks focus on smaller enterprises.
While it is highly unlikely
that the corporate bond market will ever replace banks as the primary source of
funding, experts agree that India needs a more lively corporate bond market.
This can also play a part in disciplining companies that borrow heavily from
banks to fund risky projects, because the borrowing costs would spike.
While RBI & SEBI have taken
the welcome steps in developing a vibrant corporate bond market in recent
times, it is imperative that other stakeholders complement these efforts,
considering the fact that with banks undertaking the much needed balance sheet
repairs and a section of the corporate sector coming to terms with
deleveraging, the onus of providing credit falls on the other players.
The Government’s plans to
significantly increase investment in the infrastructure space will require
massive funding and the banks are not suited to fund such investments. If large
borrowers are pushed to raise funds from the market, it will increase issuance
over time and attract more investors, which will also generate liquidity in the
secondary market.
A vibrant corporate bond market
is also important from an external vulnerability point of view, as a dependence
on local currency and markets will lower risks.
Proposal
It is proposed to introduce
“Debt Linked Savings Scheme” (DLSS) on the lines of Equity Linked Savings
Scheme, (ELSS), to channelize long-term savings of retail investors into
corporate bond market which would help deepen the Indian Bond Market.
At least 80 per cent of the
funds collected under DLSS shall be invested in debentures and bonds of
companies as permitted under SEBI Mutual Fund Regulations.
Pending investment of the funds
in the required manner, the funds may be invested in short-term money market
instruments or other liquid instruments or both.
It is further proposed that the
investments upto ₹1,50,000 under DLSS be eligible for tax benefit under Chapter
VI A, under a separate sub-Section and subject to a lock in period of 5 years
(just like tax saving bank Fixed Deposits).
CBDT may issue appropriate
guidelines / notification in this regard as done in respect of ELSS
Justification
To deepen the Indian Bond
Market and strengthen the efforts taken by RBI and SEBI for increasing
penetration in the corporate bond markets, it is expedient to channelize
long-term savings of retail segment into corporate bond market through Mutual
funds on the same lines as ELSS.
In 1992, the Government had
notified the Equity Linked Savings Scheme (ELSS) with a view to encourage
investments in equity instruments. Over the years, ELSS has been an attractive
investment option for retail investors.
The introduction of DLSS will
help small investors participate in bond markets at low costs and at a lower
risk as compared to equity markets.
This will also bring debt
oriented mutual funds on par with tax saving bank fixed deposits, where
deduction is available under Section 80C.
No comments:
Post a Comment