Attractive valuations, macro prospects to stem FPI outflows

Mumbai, July 31 (IANS) Attractive valuations along with long-term macro-economic prospects have slowed the pace of foreign fund outflows from India, which were triggered off earlier by a new super-rich taxation surcharge.

Market observers pointed out that the trend is on its last legs and is expected to reverse soon.

"FPIs will keep evaluating attractiveness of Indian equity markets. Their sales have reduced lately. This may be the result of values falling and or redemption pressure ebbing," said Deepak Jasani, Head of Retail Research for HDFC Securities.

"India as an emerging market with demography and legal systems in place cannot be ignored for long... lack of revival of corporate earnings growth makes Indian markets expensive for the time being," he said.

As of July 30, an outflow of over Rs 15,300 crore had taken place in July, which is the highest this year.

According to Sahil Kapoor, Chief Market Strategist Edelweiss Professional Investor Research, the quantum of selling is not unprecedented. Even in the year 2000, foreign portfolio investors (FPIs) were net sellers of more than $1.5 billion in the equity segment in a single month.

"Moreover FPIs remain net buyers of debt in the month of July 2019. So FPI outflows remain a source of stress for markets but India remains an attractive long term story for foreign investors," Kapoor said.

"At current levels, given the way results are being reported, Indian indices have worked off froth from large-cap and mid-cap stocks and are hitting below average valuation. These levels should open up opportunities for investors," he added.

Proposed in the full-Union Budget on July 5, the higher tax surcharge on the super-rich will affect over 40 to 50 per cent of the FPIs.

The Budget had proposed a levy of an additional surcharge on individuals and trusts earning more than Rs 2 crore and Rs 5 crore, respectively.

"The sentiments have been impacted by the higher tax on FPIs registered as Trusts and Association of Persons. However, the main reason for the selling is the sharp slowdown in the economy particularly in segments like autos," said V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"Commentaries from corporates declaring Q2 results also have not been reassuring."

Stock markets participants fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions.

The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.

While the rationale behind such an increase in surcharge is to levy a higher surcharge only on high net worth individuals (HNIs) to garner more revenues in a scenario of falling tax collections, the move has sent jitters among FPIs and partially triggered the subsequent crash in the stock market.

Taking this into account, the Central Board of Direct Taxes (CBDT) Chairman P.K. Modi had recently offered a solution to such FPIs to restructure themselves as corporate entities.

With the outflow of over Rs 15,300 crore in July - the highest this year - the S&P BSE Sensex has, consequently, shed over 2,000 points since the Budget announcement on July 5.

While ruling out tweaking the FPI surcharge, Finance Minister Nirmala Sitharaman said earlier this month that trusts should register as companies to come out of the ambit of the surcharge.

"Some FPIs are registered as trusts. Therefore, as an individual entity he comes under the taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as company", she said in a reply to the debate on the Finance Bill 2019 in Parliament.