‘Risk reward ratio for FPIs does not justify, expect outflow’

By Ravi Dutta Mishra

Mumbai, July 12 (IANS) Foreign Fund outflow of over Rs 2,000 crore has been witnessed since the Budget proposal as the raised surcharge on the super-rich hit the FPIs and in turn the stock markets.

Despite the dovish comments by the Federal Reserve on Wednesday, believed to aid FII inflow in the emerging markets, analysts believe that the negativity over the surcharge will far out way the fresh possibility of a Fed rate cut.

"The risk reward ratio does not justify for the FPI," Rusmik Oza, Head of Research, Kotak Securities.

"I am expecting FIIs to pull out money because the taxation part is more impactful than the dovish remark by the Fed," Oza added.

The likely hood of FIIs to remain in a sell mode is also high as both the Central Board of Direct Taxation (CBDT) and Finance Minister Nirmala have hinted no change in stance on the higher surcharge levied on the super-rich.

Aiming to assuage the markets, which have bled heavily off-late owing to the surcharge, CBDT Chairman P.C. Mody earlier in the week said that the proposal was not intended towards the Foreign Portfolio Investors (FPI).

"The base rate was not changed, it was just the surcharge which was changed.. as a collateral damage if you can call it, it affected the FPIs of AIF category-III... There again the option is to go to the corporate structure. I don't see any kind of differential treatment," Mody said at a CII event.

Oza, however, said that "converting into corporate is not the solution for them".

The surcharge is very negative "because 40-50 per cent of the FII's are non-corporate and for them the jump in capital gains is very substantial... unless they think of converting into a corporate entity".

"But most will rather think of moving out of India, because the long-term capital gains for these entity are going up from 12 per cent to 14 per cent and short-term capital gains from 17 to over 19 per cent", Oza added.

Most of the FPI are waiting for some clarification in this regard, and if the clarification does not come and the bill gets passed, there will be a lot of outflow seen, he added.

Almost 40 to 50 per cent of the FII money come through this route, so there is a risk of a lot of outflows.

Besides, the government has ruled out a rollback of the 'super-rich' tax on foreign portfolio investors (FPIs) organised as trusts or association of persons.

Saurabh Jain, AVP-Research,SMC Global said that the FPI apart from the surcharge issue are in a sell mode as in general the market sentiments are negative.

"Investors being taxed on the profit that they are making is a separate issue, the market is currently going a rough patch because of lack of demand in the economy," Jain said.

But the earnings will be guiding the sentiments as well as the direction of the FPIs flow, he added.

Deepak Jasani of HDFC Securities however said that the fears of FPI selling due to the adverse provisions in the Union Budget will be abated for the time being, in light of the increased chances of a rate cut.

The Budget last Friday raised surcharge on the super-rich. Accordingly, those with an annual income of between Rs 2 crore and Rs 5 crore would be levied a surcharge of 25 per cent from 15 per cent previously.

For those earning Rs 5 crore or more annually, the surcharge has been increased from 15 per cent to 37 per cent. With this, the effective tax rate will go up to 39 per cent for those in the Rs 2-5 crore income slab and 42.74 per cent for for those in Rs 5 crore and above group.

Most FPIs earn more than Rs 5 crore in a year and hence would come under the highest income tax bracket. They generally route their investments through trusts and body of individuals in the country's capital markets.

(Ravi Dutta Mishra can be reached at ravidutta.m@ians.in)