Union Budget 2022 is expected to make some tweaks for global investors’ debt investment

19 January 2022
4 mins read
Union Budget 2022 is expected to make some tweaks for global investors’ debt investment

Finance minister Nirmala Sitman is likely to give a tax break to overseas investors in the upcoming Finance Budget of 2022. In January so far, although Foreign Portfolio Investors (FPIs) have been net buyers with net buying of more than Rs. 3,000 crores, they have been the sellers in debt securities. This has raised an alarm.

The industry experts also believe that despite the foreign funds being active in the debt segment, it is very mild. Earlier, the FPIs were very active in the Indian debt market. This calls for some step from the Union Government’s end.

This would help India, not only in attracting more debt investment but also gain inclusion in the global bond index.

Perks of Global Recognition of Indian Bonds

The inclusion of Indian bonds in global bond indices could trigger significant capital flows into the country’s debt securities, which could lead to lower interest rates.

Following the inclusion of certain sovereign securities in global bond indexes, foreign investors may start trading in these securities. The inclusion of these securities can attract about $250 billion of new money into India over the next decade.

Capital Gains Tax on Bonds and its effects

If capital gains tax is applied on bond transactions, it will have a significant impact on the liquidity, which will have a negative impact on the global indices. The solution could be to split the all-inclusive model into segregated mode.

Currently, the tax regime in India is such that if the foreign investor sells a listed bond within 12 months, they have to pay the short-term capital gains tax. Depending on the nature of the investor, the short-term capital gains tax incidence is around 30 pc to 40 pc.

Solutions to Attract More Investment

Abolition of capital gain liability is one of the easiest ways to have Indian debt listed on Euroclear. If this vision of getting listed on Euroclear is clear, then the capital gains tax on the debt needs to be modified. The best solution can be to completely get done away with the capital gains tax.

Sovereign entities benefit from having securities listed on global indices. However, the experts believe that it is not feasible to list sovereign papers on global indices.

Further Key Takeaways

The government’s decision to allow short-term capital gains liabilities to be waived will help India’s inclusion in global financial indices. Since Euroclear, which is an online platform that enables users to trade foreign funds, cannot calculate the tax levy on short-term capital gains. Euroclear, which is a leading international clearing firm, operates in 49 different countries.

Foreign portfolio investors can now buy bonds, with a widespread of tenors, worth Rs. 16,98,044 crore through the Fully Accessible Route as per Clearing Corporation of India (CCI). There are various types of bonds with varying maturities ranging from 2024 to 2051.

The government may consider a capital gains tax holiday for secondary market sales to attract offshore investors. Debt is a completely different ballgame as there are no multiple options available as they are in the case of the equity asset class.


What is Euroclear?

Euroclear is a securities clearinghouse that operates in the Eurozone. It carries out its operations by verifying the information provided by securities dealers to the exchanges. Aside from stock transactions, Euroclear also offers services related to fixed income instruments and derivatives.

Who are the main parties that assist the Clearing Corporation of India in the clearing process?

For the clearing process, the Clearing Corporation of India (CCI) is assisted by depositories, clearing banks, clearing members, and custodians. The main role of CCI is to act as a guardian in the process of clearing and administering the government securities.

Which debt instruments are available in India?

The Indian debt markets offer instruments like government securities, treasury bills, commercial papers, debentures, bonds, certificates of deposit, etc. Investment in debt instruments gives you fixed income through interest and has a specific maturity date.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.