The revised tax treaty with Mauritius, which will also be mirrored in India’s similar treaty with Singapore, will bring “clarity and certainty to investment decisions and help investors plan their flows,” law companies and market intermediaries felt.
After an initial knee-jerk reaction on the day after, the stock market seemed to chime in with this opinion, and stabilised on hopes that a visible tax regime would make foreign investments into Indian equities more clear.
Mauritius and Singapore account for about 50% of India’s foreign direct investment (FDI) inflows over the last 15 years.
“The prospective only change is good. IRR (returns) on India investment to fall marginally but (will) not deter long term investors,” said Sanjay Mookim, equity strategy (AsiaPac) at Bank of America Merrill Lynch.
Foreign portfolio investment, which greatly influences Indian equity markets, had seen major selloffs in January and February, while the trend reversed in March. According to RBI data, there was a net inflow of Rs 21,143 crore in March, compared to pullouts of Rs 11,126 core and Rs 5,521 crore respectively in January and February.
“While there will continue to be major flows till March 2019, post that there could be some slowing down,” felt Sunil Gidwani, executive director at PwC. “There are still some grey areas on the announcement, as we have not heard so far from the Mauritian government.”
“Long-term investors will now need slightly higher pretax returns to cover the cost of capital,” said BofML’s Mookim. “Increased taxation should not deter investments. India continues to offer opportunities ahead of cost of capital.”
Impact on Sensex moderate
The Bombay Stock Exchange benchmark Sensex sank over 315 points to 25,435 points soon after opening, before clawing back to the previous closing levels of 25,759 points. The Mauritius impact was evident in the early part of the trade, but at the end of a day of yo-yo trading, the index closed 176 points down at 25,597 -- which was far less than feared previously.
The impact was sharp on Tuesday, but it had mellowed on Wednesday once investors realised that there would be the amendment on transactions after March 2019.
“The apprehension over the tax on capital gains made through P-Notes (Mauritius) has negatively impacted the market. The short term investments from FIIs may get hurt in the near term. On the other hand, investors are awaiting the macro economic data like CPI inflation and the index of industrial production tomorrow. The CPI inflation for April is expected at 5%, which is a tad above 4.83% recorded in March,” said Vinod Nair of BNP Paribas.
The fall was broadbased, with all sectors, apart from media and private banks, trading in the red. PSU banks, healthcare and IT stocks bore the maximum brunt of the fall.