‘FPI tax issues put divestment at risk’

Players meet FM, say Centre may take steps to revive overseas investor interest in capital markets

CARACAS, VENEZUELA - JUNE 26: A small-business woman counts and pays her office stationery articles in USD dollars on June 26, 2019 in Caracas, Venezuela. Everyday, more Venezuelans use American dollar notes to buy groceries, pay a hair cut or fill the tank of their cars and motorbikes. As IMF forecasts a 10 million percent inflation for 2019 in Venezuela, using dollars is a way to protect savings. Today, one US Dollar is worth 6,359 bolivares soberanos according to Venezuela Central Bank. Due to official restrictions, most people get dollars in the black market at higher rates. (Photo by Matias Delacroix/Getty Images)

The government could risk missing its record ₹1.05 lakh crore divestment target that has been set for the current financial year as foreign portfolio investors (FPIs) could stay away from such share sales if the ongoing tax concerns are not resolved soon, according to capital market participants.

The participants, who met Finance Minister Nirmala Sitharaman on Friday, also urged her to address the liquidity concerns of non-banking finance companies (NBFCs) — especially those focussed on consumer spending — before the festive season begins, to spur overall consumption growth in the country.

According to persons familiar with the deliberations, the government has taken the suggestions ‘positively’ and has hinted that it would take all possible steps to revive overseas investor interest in the Indian capital markets.

“The Finance Minister was quite receptive and said that the government would take all necessary steps to allay the concerns of foreign investors,” said a person, who was part of the meeting.

“Even the PMO [Prime Minister’s Office] is involved and is keen to address the tax concerns, which are impacting the capital markets. There was unanimity that the tax surcharge could discourage FPIs from participating in the divestment offerings in the coming months and hence need to be urgently reviewed,” he added on condition of anonymity.

In the Union Budget 2019-20, the Finance Minister introduced a surcharge for individuals earning more than ₹2 crore. However, FPIs became the collateral damage of the proposal as bulk of such investors structure themselves as trusts or a Limited Liability Partnership (LLP) that are not recognised as a corporate entity by the Income Tax Act and hence are taxed as per the individual tax slabs based on their earnings.

Selling spree

FPIs, often looked upon as prime drivers of any bull run in the Indian stock market, ended July as net sellers at ₹12,419 crore. This was the first time since January 2019 when foreign investors ended a month as net sellers.

Between February and June, FPIs bought shares worth nearly ₹83,000 crore. In the current month till date, FPIs have net sold shares worth ₹11,135 crore.