Sops planned for MF investments

RUN UP TO BUDGET 2006

Move aims to encourage domestic institutional investors.

The finance ministry is considering providing non-tax incentives in the coming Budget to make investments in mutual funds more attractive.

The move has twin objectives "" to provide a less risky option to retail investors and encourage domestic institutional investors. Officials said the ministry would work on a package of incentives on the basis of recommendations to be made by the Securities and Exchange Board of India.

They said encouraging the growth of the mutual fund industry would also assuage political parties, particularly the Left, which was apprehensive of large FII inflows.

The finance ministry was also keen to make mutual funds more attractive since pension reforms were held up due to Left objections, the officials said.

The Budget is also expected to amend income tax rules to clarify that a tax set-off will be available on gains made in derivatives against general losses suffered in the previous year.

"There is an anomaly in the existing rules as the set-off is available in derivatives against losses suffered in the previous year only in that segment, and not general income," an official said.

The Budget is also expected to implement the recommendations of an experts' group on encouraging foreign institutional investment and checking the vulnerability of capital markets to speculative flows. The group is headed by finance ministry's Chief Economic Adviser Ashok Lahiri.

The committee has recommended that the FII investment ceiling, if any, should be over and above the prescribed FDI sectoral caps. As a transitional arrangement, the committee has said the current policy of a composite cap, wherever it exists, for both FDI and FII, should remain.

Saying that participatory notes should continue, the committee wants Sebi to have full powers to obtain information regarding their final holders and beneficiaries at any point of time in case of a probe, and that FIIs should be obliged to provide the information to the market regulator.

Officials said some of the recommendations of an experts' group on corporate bonds and securitisation were also likely to be taken up in the Budget.

In addition to having a uniform stamp duty, the committee has said that interest rates on small savings instruments be aligned with market interest rates.

The government was also likely to expand the definition of infrastructure to include ports and airports for external commercial borrowings, they added.

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WISHLIST

Amend income tax rules to clarify that a tax set-off will be available on gains made in derivatives against general losses suffered in the previous year

Raise the FII investment ceiling, if any, over and above the prescribed FDI sectoral caps

Bring interest rates on small savings instruments at par with market interest rates