A Growth Oriented Plan: Gautam Khaitan
The proposal to have a single Securities Code rationalising and consolidating the SEBI Act, the Securities Contract Regulation Act, the Depository Act, and the Government Securities Act is an important move towards making corporate legal framework business friendly. Senior Corporate Advocate Gautam Khaitan, analyses the Union Budget 2021 delivered by Finance Minister Nirmala Sitharaman in an exclusive interview.
Do you feel the Budget 2021 is holistic in its approach to recovery and reform?
Yes, I believe the Budget is holistic in its approach to recovery and reform. It focuses on resetting the Indian economy by enabling it to emerge from an unforeseen disruption.
It is clear that the objective of the government is to revive the economy and build a strong foundation through infrastructure spending, strengthening the financial sector by boosting manufacturing, increasing foreign direct investment in insurance, and monetising assets through divestments. This holistic approach will address the gaps in the economy.
The bad bank proposal through which the government proposes to set up an Asset Reconstruction and Management Company for stressed assets, will strengthen state-owned banks and clean up their balance sheet. Investments in sectors such as infrastructure and healthcare and strategic disinvestment of companies like BPCL, Air India, Pawan Hans, IDBI Bank, etc., will improve the efficiency of these companies and provide momentum for privatisation.
The Budget has also streamlined reforms in the manufacturing sector and the government plans to spend INR 1.97 lakh crore in sectors such as electronics, automobiles/auto components, pharma, telecom, and textiles to enhance domestic manufacturing capacities.
What do you feel is the long-term vision of the government, through this year’s Budget plan?
This year’s Budget has addressed the needs of an economy severely impacted by Covid-19. It lays out an action plan for ‘Atmanirbhar Bharat’. This is evident from the focus on disinvestment; the action plan to reduce fiscal deficit; the move to strengthen roadways, railways, metro rail, port development, irrigation and infrastructure for gas connectivity; boosting the health sector with the Aatmanirbhar Health Yojana; increasing reliance on privatisation; and major planned investments in capex projects and infrastructure initiatives to revive the construction sector and steady the employment cycle post the pandemic era.
It is clear that India is marching ahead from survival to revival and the journey has started with this game changer Budget. We just hope that all such intentions are carried out with a well-planned roadmap.
What are the legal implications of the Budget on corporate entities?
The most significant change for corporate entities is the disallowance of depreciation on goodwill for present and future deals. Further, the depreciation on goodwill on deals done earlier cannot be claimed from 2020-21 onwards. This step will hurt the profitability of several listed and unlisted companies.
Some other changes brought in by this budget for corporate entities include the classification of the Manufacturing and Service Sector as “Small Scale Industries”; removal of restrictions on single person companies in terms of Share Capital or Turnover; reducing the criteria for Director Residence to 120 days; the decriminalisation of the Limited Liability Partnership Act in line with the Companies Act; the exemption of Stamp Duty on transfer of business or immovable properties by Government Companies in case of disinvestment; and major incentives have been provided for start-ups.
What measures have been put in place to boost corporate investment?
Significant measures have been put in place to boost corporate investment including an increase in Foreign Direct Investment in the insurance sector; the proposal of a stake sale by the government in public sector companies and financial institutions, including two public sector banks and one insurance company; allowing FPIs to provide debt funding to InvITS and REITS; enhancing digital payments; and encouraging the use of artificial intelligence in governance.
The consolidation of securities laws and the proposed decriminalization under the LLP Act marks an important move. Providing tax exemption for aircraft leasing companies set up in the IFSC will boost foreign investments. Reducing the timelines for reopening past tax cases will reduce tax litigation however, removing the allowability of depreciation on goodwill will be a major dampener for M&A transactions.
Please summarize your thoughts on the Budget 2021 - its advantages and disadvantages.
I believe some of the positive points include the focus on capital investment to push growth, the re-introduction of Developmental Financial Institutions, special allocations for COVID vaccination programs, the decision to expand fiscal deficit to provide growth impetus, all of which indicate a long-term vision to make a self-reliant India.
The privatisation proposal of public sector banks and the hike in the FDI limit in the insurance sector are a welcome move. Further, the proposal to set up ARC/AMC - a new entity which will take bad loans off balance sheets, allowing banks to focus on their core business of lending and supporting economic growth, was positive. I also believe that maintaining status quo in tax rates is important for the stability of the tax regime.
However, I feel certain things have not been adequately addressed. The Budget does not offer any relief to those who suffered massive income loss owing to the coronavirus pandemic. Particularly, the agriculture infrastructure cess on petrol and diesel would lead to a price hike of commodities.
The Government has paid special attention to election bound states, with large capital outlays being announced for Kerala, Tamil Nadu, West Bengal and Assam. It would have been nice to see the same kind of emphasis given to the poor, working class migrants, agricultural labourers etc.
The unexpectedly large fiscal deficit numbers unfortunately entail huge borrowings, much beyond market expectations. Government bond yields have hardened too. The Finance Ministry and the RBI will have to work closely together to check the rise in yields and ensure that the budget does not ultimately result in a sharp rise in borrowing costs across the board.
On a parting note, however, I feel it is a growth-oriented and well-thought Budget.
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