Bears refuse to loosen their grip on the equity market as foreign portfolio investors (FPIs) sell down Indian equities relentlessly ever since the budget blow of higher surcharge and taxation. In fact the total foreign institutional investor (FII) selling in July has almost gone up to Rs 14,400 crore.
Contrast this with the massive inflows the market was getting in March and April before the budget and elections. While Finance Minister Nirmala Sitharaman has made some comments about facilitating the transition from trust to company, the government has shown no intention of going back on its move of higher tax on FPIs and Category 3 funds.
CNBC-TV18 spoke with Co-CEO at Avendus Capital Alt Strategies Vaibhav Sanghavi, National Tax Leader at EY Sudhir Kapadia, Managing Partner at Karma Capital Management Nandita Parker and CEO of Dhruva Advisors Dinesh Kanabar to understand what is the way forward and whether the FPI selling will stop anytime soon.
Sanghavi said, "If it is possible to switch from a trust to a corporate structure, we would definitely look at it. In India if we talk about Category 3 AIFs, which have got affected because of the surcharge, Indian Company Law does not provide specific fund carve-outs for an open-ended scheme to be managed. There are lot of regulatory or operational difficulties in operating like a company. So, virtually it is impossible to manage a fund under the company structure in India."
Parker remains upbeat about the statement of the finance minister. "After the bill was passed 10 days ago, we were very disappointed. We continue to make overtures to the government and all our conversations at the Finance Ministry level seem to have indicated that this surcharge was unintended on FPIs at least and that something would happen. So, now that the finance minister has come out and made this statement, I am a little more hopeful. The point that everyone has made is that this surcharge does impact at least 40 percent of the FPIs that are registered in India," she observed.
"FPIs are registered in such a way to meet global statutory norms and requirements and not just for India. Therefore it would be very difficult for them to change their structures just for India and by imposing these surcharges we are hurting an enormous amount of capital that might come in going forward. This whole question of taxing capital gains is making India stand out in the world as a difficult tax regime," Parker noted.
According to Kapadia, an institution earning more than Rs 5 crore cannot be superrich. "I think it would be a wrong direction to expect a conversion to company to escape the surcharge because you have a sword of Damocles like GAAR hanging which is bound to be subjective by its very nature," Kapadia added."First thing is whether the regime under which people operate will permit them to be structured as a company instead of a trust? Then let us assume you are in a position to migrate from a trust structure to a company structure, what about the inbuilt appreciation on which you will end up paying gains today? So, it is like saying that going forward if you want to make investments in India, set up a new corporate structure and make investment. There is no such structure in Income Tax Act which provides that regime to be tax free. So, if you are going to end up paying capital gains tax on your gains which have not been realised then is it a facilitation at all?" Kanabar asks.