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Budget 2018 - Impact on Corporate India & Its Investors

An analysis by

While the budget 2018 is the fourth consecutive budget of the current Government and the Hon’ble Finance Minister. It is also the last full-fledged budget by this Government considering the Central Election scheduled for 2019.  Accordingly the budget was expected to be on the one hand populist at the same time on the other hand justifying the actions taken by the Government during its tenure of 4 years.

On populist front, the budget has proceeded to allocate significant funds to primary sector (agriculture and fisheries), health, education, infrastructure and affordable housing as also detailed the schemes by which the funds intended to be employed. However the budget has fallen short of justifying the utilization of funds allocated in the earlier budgets to similar schemes announced therein. But the Finance Minister has very strongly and effectively, right in the start of the speech, showcased the positive impact of various reforms implemented since its coming into power. 

On the Tax proposals the Finance Minister has attempted to play a balancing role by, on the one hand granting / expanding deductions from taxable incomes, whereas on the other hand bringing back a Long Term Capital Gains on sale of securities as well as increasing the surcharge for specified categories of tax payers. The grandfathering provision announced along with the re-introduction of Long Term Capital Gains would ensure a check on the sellout of long term holdings.

One wonders whether the budget announcements have fallen short of meeting the commitment made by the Finance Minister of reducing the corporate income tax from 30% to 25% for all companies and not only those having a turnover up to Rs. 250 crores.

Over all the budget seems to be a well-balanced populist budget as would have been expected in the year before elections. It would be interesting however to see how the various schemes announced in the budget are effectively implemented. It would also be interesting to see how the Finance Minister is able to maintain the fiscal deficit at 3.3% as estimated by him for FY 2018 – 19.

Set out below are the key takeways on policy level changes that are expected as per the announcements made during today’s budget and have a bearing on private equity and venture capital industry. 

1. Key Changes brought out in the SEBI Act

Power to levy penalties: Section 11B of the SEBI Act is proposed to be amended to give power to levy penalties in proceedings before them. Currently, the present section does not mandate the power to impose monetary penalties.

Penalty for the violation of regulations in respect of Alternate Investment Funds (“AIF”), Infrastructure Investment Funds (“InVITs”) and Real Estate Investment Trusts (ReITs) – The Finance bill proposes to insert Section 15EA in the SEBI Act providing penalty in respect of persons for failure to comply with the regulations made by the SEBI or directions issued by the Board in respect of AIF, InVITs and ReITs. Such penalty shall be of an amount not less than INR 1,00,000 but which may extend to INR 1,00,000 for each day during which such failure continues subject to a maximum of INR 1,00,00,000 or three times the amount of gain made out of such failure, whichever is higher. 

Penalty for the violation of regulations in respect of investment advisor or Research Analyst- The Finance bill proposes to insert Section 15EB which provides for a penalty for the failure by an investment adviser and research analyst to comply with the regulations made by SEBI or directions issued by the Board. The penalty shall be an amount of not less than INR 1,00,000 but which may extend to INR 1,00,000 for each day during which such failure continues subject to a maximum of INR 1,00,00,000.

Continuance of proceedings - The insertion of Section 28B of the SEBI Act contemplates the continuance of proceedings after the death of a person in a significant departure from the abatement of proceedings due to the death of a person. The language suggests that the “Legal Representative” shall be liable to pay any sum which a deceased would have been liable to pay, if he had not died. In case of any penalty payable under the SEBI Act, a legal heir shall be liable only in case the penalty has been imposed before the death of the deceased person. The liability of a legal heir is limited to the extent to which the estate of the deceased is capable of meeting the liability.

For the said purpose, “Legal Representative” has been defined to mean a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued.

2. Key Changes brought out in the Securities Contracts (Regulation) Act, 1956

Adherence to SEBI Regulations by Stock Exchange or a Clearing Corporation: Section 23GA is proposed to be inserted which provides for penalty in respect of failure to conduct business in accordance with rules or regulations made by the SEBI or directions issued by it to a Stock Exchange or a Clearing Corporation. Such penalty shall be an amount of not less than INR 5,00,00,000 but which may extend to INR 25,00,00,000 or three times the amounts of gains made out of a failure, whichever is higher 

Continuance of proceedings - Section 23JC is proposed to be inserted which provides that a “Legal Representative” shall be liable to pay any sum which the deceased would have been liable to pay if he had not died. However, it has been specified that the Legal Representative shall be liable only in case the penalty has been imposed before the death of the person. 

For the said purpose, “Legal Representative” has been defined to mean a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued.

3. One-Fourth of the financing needs of large corporates from the Bond Market

In addition to the RBI issuing guidelines to nudge Corporates access bond market, the Finance Minister has proposed SEBI to consider mandating, beginning with large corporates, to meet about one-fourth of their financing needs from the bond market.

Further the Finance Minister has proposed to include bonds with “A” grade ratings for investment.

The proposed change would deepen the bond market and would encourage more investment opportunity through investing in bonds for corporates.

4. (ReITs) and (InvITs)  

The Finance Minister has proposed to monetize select Central Public Sector Enterprises (CPSE) assets using InvIts from next year.

The Finance minister has appreciated the efforts of the Government and Market Regulators for development of ReITs and InvITs. The above change would further popularize ReITs and InvITs.

5. Stamp Duty Regime on Financial Securities Transactions  

The Finance Minister has suggested that the Government will undertake reform measures with respect to stamp duty regime on financial securities transactions in consultation with the States and make necessary amendments the Indian Stamp Act.

6. Hybrid Instruments

The Government intends to evolve a policy for Hybrid Instruments so as to attract foreign investments in certain sectors. 

7. Long-term Capital Gains Tax

Long-term capital gains of 10% imposed for gains exceeding Rs. 1 lakh without allowing the benefit of indexation. Gains upto March 31, 2018 to be grandfathered. No change to the rates of short term capital gains tax. 

8. Start-ups and Fintech

Group of investors in Ministry of Finance will be examining policy and measures for Fintech sector. It was also announced that the Government to work out additional measures to strengthen environment of growth and operation for Angel investors and Venture Capital investors. 

Although the announcement promise many changes and potential measures, the industry will have to wait for them to be announced and implemented. The private equity and venture capital sector may feel there were much expectation for immediate relief on some of the burning issues, such as, angel tax to be taken away, allow management expenses to be capitalised, permitting securities that can provide valuation adjustments for angel investment, etc which seems to have remained unaddressed.

Click Here to download ELP's detailed analysis of the budget and its impact across sectors.


Economic Laws Practice ("ELP") is a leading full-service Indian law firm established in the year 2001 by eminent lawyers from diverse fields. The firm’s Private Equity & Venture Capital practice brings onboard a unique understanding of commercial matters and legalese to be able to provide effective solutions to all stakeholders in a transaction. The team looks at providing a bespoke legal service experience, which is sector agnostic in nature and driven towards successful consummation of the relevant transactions.

ELP advises clients on all aspects of private equity and venture capital transactions, whether from a fund formation perspective or a potential portfolio investment or a relevant exit transaction. Our services include right from conceptualising a structure, to conducting the legal due diligence exercise, to the preparation of the relevant documentation, to providing assistance to the final closure including negotiations and corporate secretarial assistance.

ELP is the firm of choice for clients because of its in-depth expertise, continuous availability, geographic reach, transparent approach, competitive pricing and most importantly the involvement of partners in every assignment.

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