New Delhi: India’s stock markets have not taken favourably to Nirmala Sitharaman’s Union Budget.
The government’s decision to impose a surcharge on the super-rich that impacted many foreign portfolio investors has seen nearly Rs 2.8 lakh crore of market capitalisation wiped out over the last two weeks.
The benchmark BSE Sensex has fallen by more than 1,500 points, or 3.9 per cent, since the finance minister presented her first budget on 5 July. The NSE Nifty has also fallen by 528 points, or 4.4 per cent, in the same period.
On Friday, a day after Sitharaman refused to offer any respite to foreign portfolio investors from the super-rich tax, the markets slumped to a two-month low. The Sensex dropped 1.4 per cent to 38,337.01 — the lowest level since 17 May — with 27 out of the 31 shares on the gauge slipping into the red. The NSE Nifty 50 Index declined 1.5 per cent.
The surcharge on the super-rich also applies to trusts — a preferred choice of structure for many of the foreign portfolio investors investing in India. During a debate on the Finance Bill in the Lok Sabha, Sitharaman had said investors who operate as trusts have the option of converting into a company to escape the tax. The bill was then passed in the Lok Sabha, ending hopes of a rethink.
A complex task
Deven Choksey, managing director of K.R. Choksey Investment Managers Private Limited, outlined just what the government’s decision means for foreign portfolio investors.
“The government’s decision to change the tax structure with immediate effect has not gone down well with global investors. Around 40 per cent of foreign funds are operating as individuals or in the trust category. They will need to unwind their positions by selling in the market, retiring the existing products and devising new products to re-enter the market,” he said.
“Ideally, the government should have given investors 18-24 months to unwind their positions. The government talks about ease of doing business but its actions are defeating this intention. Nearly Rs 3 lakh crore of market capitalisation has been wiped out since the budget announcement.”
Ajay Bodke, CEO & chief portfolio manager (portfolio management services) at Prabhudas Lilladher Pvt Ltd said the markets are grappling with ‘multiple headwinds’.
“Ahead of the budget, there were a lot of expectations that a relief will come through fiscal sops for beleaguered sectors like automobiles and consumer durables. However, these hopes were belied with only some measures announced to boost the affordable housing segment. The taxation of foreign portfolio investors has also impacted the markets,” he said.
Bodke added that investment cycle is also moribund. “In all likelihood, the revival in private sector capex is two to three quarters away. The 19 per cent earnings growth expected in 2019-20 is likely to be pushed back by another year as delays in resolution under the insolvency and bankruptcy code hit earnings of private sector banks,” he said.
Even if the investors decide to change into a company structure, it is not going to be an easy task, analysts point out. Punit Shah, a partner at Mumbai-based Dhruva Advisors LLP, said if an existing FPI restructures itself to a corporate entity, it may have to provide a non-tax commercial rationale for doing so. “The migration to a corporate structure could also entail additional capital gains tax burden,” he said.
Bodke said policy makers should make amends and either allow a carve-out for FPIs who come through the trust structure, or allow for a one-time forbearance, letting them convert their structures from trusts to companies.
(With inputs from Bloomberg)