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Investors fret at S&P’s rating, GAAR

An outlook revision by global rating agency Standard and Poor’s, the uncertainties arising out of the Centre’s proposed anti-tax avoidance rule (GAAR) and its recent policy reversals are weighing heavily on India’s equity market, causing foreign investors to withdraw Rs 777 crore in the month that ends Monday.

According to the latest figures released by market regulator Securities and Exchange Board, the foreign institutional investors bought equities worth Rs 39,008 crore in April 2012, while selling shares worth Rs 39,785 crore, resulting in a net outflow of Rs 777 crore.

The data said FIIs also pulled out Rs 2,111 crore from the debt market in April, taking the collective net outflow in stocks and bonds to Rs 2,888 crore.

Before the budget announcement about GAAR, in the months of January and February, the FIIS had invested a little above Rs 36,000 crore in Indian equity market. The investment totalled close to Rs 10,400 crore in January followed by over Rs 25,000 crore in February.

But the investments declined to about Rs 8,400 crore in March. The S&P downgrading India’s outlook also saw substantial FII outflow from the country in the past week.

Market analysts said the sharp decline in portfolio inflows soon after the budget this year were primarily due to the proposed GAAR announcement. According to the proposed law, all transactions routed through tax havens where foreign companies do not have a legitimate set-up, but only had a “paper presence,” will come under GAAR.

The announcement invoked widespread opposition from FIIs as any arrangements deemed “impermissible” would make them liable to pay short-term capital gains tax in India, which is around 30 per cent. This also means that portfolio investment from tax havens such as Mauritius will be severely hit.

The FIIs had also warned that India’s fiscal situation may come under pressure and equity markets may be headed for a severe decline if GAAR is implemented. They said FIIs are being discouraged at a time when the country needs foreign inflows the most.

Net inflows from overseas investors into Indian shares have come down in recent weeks also due to the status quo on petrol prices, the Coal India fuel supply penalty issue and the telecom regulator’s proposals for a steep increase in spectrum prices, analysts said.
“Policy uncertainty and confusion and most cases policy reversals have added to the FII withdrawals from India in the recent times,” Harish Galipalli of JRG securities told Deccan Herald.