Higher asset allocations pose risk to small investors: Adhia Market rout

Exemption to equities from the long-term capital gains (LTCG) tax was leading to higher asset valuations and was posing a potential risk to small investors, Finance Secretary Hasmukh Adhia said this week.

Explaining the rationale behind the reintroduction of the LTCG tax after 14 years, Adhia said while long-term investments in all other assets generating returns are taxed, the same in stocks was exempted, which was creating distortions as there was a demand-supply mismatch.

"So what happens is too much money is chasing shares and mutual funds. So because of extra inflow the asset valuation keeps on increasing and sometimes the asset valuation may not be reflecting the fundamental strength of the company you are investing [in],” he said.

“It is a potential risk particularly to small investors. And so it wasn't a good idea to keep one class completely out of taxation," Adhia said at post-Budget meeting hosted by lobby group PHD Chamber of Commerce and Industry, in the national capital.

Talking about the declines in the key stock market indices, Adhia said the rout was due to the global market meltdown over the past few days and not because of the imposition of LTCG tax. "What happened on Feb 2 and Feb 5 was mainly because of the global shake up that was happening. Ofcourse there is a ripple effect of whatever happens in the world, on the stock market. Most of it is because of the global market otherwise the Sensex and the Nifty would have come down on the first and the second day (post the Budget),” Adhia added.