Uday Kotak urges holistic financial sector review in year-end musings, FM commends his insights

Kotak highlighted the widening gap between the highest marginal tax rates on debt and equity, emphasising the need for a reconsideration of double taxation on dividends.

"While we must avoid tax arbitrage in debt, unless debt markets grow it will be a one-legged race. The current gap on the highest marginal tax rate between debt and equity of 39% and 10% is perhaps too wide. Double taxation on dividends needs a relook. A shareholder is like a partner. There is no additional tax when money is moved from the partnership to the partners capital account. Same principle applies to shareholders," he posted on platform X.

Kotak also cautioned against the potential distortion of financial markets due to low-cost leverage through derivatives. He also addressed the historic transformation of Indian savers into investors.

Kotak articulated the evolution of India’s financial landscape from a nation primarily inclined towards traditional assets to one embracing diversified financial instruments.

He traced this shift, highlighting the gradual move towards bank deposits, mutual fund platforms, equities, derivatives markets, insurance funds, and global private equity in India.

Expressing concerns about potential bubbles in the current market, Kotak stressed the importance of ensuring a sustainable growth story. He drew attention to the cautionary tale of Japan’s Nikkei Index peak in 1989, still below its zenith even after 34 years, serving as a reminder to avert market bubbles through robust policy measures and quality investment avenues.

The stalwart of India’s banking sector further emphasised the necessity for the corporate sector to pivot towards capital markets (both debt and equity) away from heavy reliance on banks.

"Banks will become distributors of corporate debt rather than storage houses. They will need to penetrate mid-sized corporates, MSMEs and consumers," he said.

Highlighting critical areas requiring immediate attention, Kotak underscored the urgency of reforms in acquisition financing and the streamlining of the IBC/NCLT (Insolvency and Bankruptcy Code/National Company Law Tribunal) process to fuel India's aspirations for growth.

In Kotak's vision, the financial sector emerges as the linchpin for India’s progress, poised to steer the nation towards its envisioned $30 trillion GDP by 2047, with a sustained growth rate of 9% annually.