Surcharge roll-back fails to halt FPI selling

Since August 23 announcement, FPIs have sold shares worth nearly ₹6,200 crore

Attempts by the government to revive foreign investors’ interest in the Indian stock markets by rolling back the contentious surcharge has failed to make any impact as selling by overseas investors continues unabated.

Data shows that since August 23 when Finance Minister Nirmala Sitharaman announced the roll-back of the surcharge, foreign portfolio investors (FPIs) have been net sellers on all trading sessions but one, having sold shares worth nearly ₹6,200 crore.

Interestingly, the first trading session after the government announcement - August 26 — saw the Sensex surging 793 points but FPIs remained net sellers at ₹670 crore.

Market participants believe that while the government has acknowledged the issue and rolled back the tax surcharge, there are larger macroeconomic concerns — both domestic and global — gripping the markets that has made foreign investors bearish on equities.

“Persisting negative environment of lower risk appetite from foreign investors, given global uncertainty, flagging demand environment for consumption sectors and continued rural stress overshadowed the announcement withdrawing surcharge on long-term and short-term capital gains for FPI,” stated a report from Elara Capital.

An improvement in consumption demand during the upcoming festival season, coupled with current levels of valuation will make India an attractive destination, it added.

While presenting the Union Budget on July 5, Ms. Sitharaman announced a surcharge on individuals that earn over ₹2 crore but since many FPIs operate under a trust structure, they also became subjected to the tax.

The effect of the Budget announcement can be gauged from the fact that foreign investors sold shares worth over ₹30,000 crore in just two months — July and August. In September, FPIs are currently net sellers at ₹3,848 crore.

“We see the announcements... as a short-term positive for the market,” BNP Paribas had stated in a note, a day after the government announcement, while adding that a “revival in earnings growth is needed for a more sustainable rally.”

“The Q1FY20 [first quarter of 2019-20] earnings season was lacklustre... Furthermore, global factors such as the most recent escalation in U.S.-China trade tensions have turned more unfavourable,” stated the report.

Incidentally, domestic institutional investors, which include banks, insurance companies and mutual funds, have been buying even as their foreign counterparts have been aggressively selling.

Since August 26, DIIs have bought shares worth ₹7,342 crore.