The new Narendra Modi-led government has introduced a slew of proposals aimed at boosting capital markets activity and attracting foreign investment.
To create a more investor friendly environment, the government has curbed the use of retrospective taxation, a move aimed at allaying concerns among investors raised by Vodafone's long-standing tax dispute with the government.
In addition, the Indian government has raised the foreign direct investment limit on insurance and defence companies from 26% to 49% – which opens the door for foreign companies to raise their stakes.
On the bonds side, the Indian government has proposed lowering the withholding tax on foreign currency bond issuance from 20% to 5%. In the past, only infrastructure companies were allowed to tap the bond market at a tax rate of 5% but that has now been extended to all borrowers. Companies can tap the markets at a 5% tax rate up till July 1 2017 and the lowered tax rate will take effect from October 1 this year.
Companies with refinancing needs, such as Tata Steel, are expected to benefit from this change. The steel maker is eyeing the US dollar bond market as part of a giant refinancing package and deciding between the Reg S and Reg S 144a market, according to one source familiar with the matter.
Lending to the beleaguered infrastructure sector also got a leg up as the government has allowed banks to raise long-term debt that is exempt from statutory liquidity requirements and cash reserve requirements -- which typically ties up about a quarter of the funding raised.
The government has also proposed tax incentives for real estate investment trusts (Reit), though the actual details will have to be hammered out before India can see its first Reit listing. Indian regulator Sebi had released draft guidelines for Reits last year but the government's proposal is another step towards opening up the market to Indian real estate and infrastructure companies that now typically head to Singapore, which has an established Reit market, to list.
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