Some change in rules can make capital markets play an important role in building economy: Rashesh Shah

As the new government takes charge and an expected revival in the investment cycle begins, capital markets can play an important role in developing the economy. For a visible upturn in the economic cycle, we must see a combination of consumption, investments and savings in financial instruments within a stable, efficient and transparent system.

Industry and investors - the key capital markets stakeholders - will contribute in building a robust capital market if their needs are addressed. The availability of capital to industry at a reasonable cost and in an efficient manner will propel participation.

Rationalising tax and duty structures could be the first step in this direction. For example, reduction or removal of securities transaction tax (STT), abolishing short-term capital gains on equity investments and rationalisation of stamp duty and turnover tax, making them on a par with other developed nations. Allowing provident funds to invest in equities would go a long way in minimising capital market volatility and bring about stability. Raising foreign direct investment in insurance and pension to 49 per cent would ensure these sectors grow rapidly.

The corporate bond market is largely undeveloped with about 95 per cent credit flows through the banking sector and only 5 per cent through the bond market. This should become 75:25, partly possible if liquidity in corporate debt paper is increased and/or bonds are linked to attractive tax incentives. Also, retail investor participation by simplifying KYC norms to a single identity across financial instruments. Long-term vehicles such as insurance and pension easily complement the role played by banks in channeling savings.

All these can ensure that capital markets can play an important role in channelising savings into long-term investments.