European financial institutions keen to make a splash

European institutions, which had steadfastly kept way from the Indian markets, are reportedly showing signs of interest in investing in India, now that the tax regime has been substantially changed.

"There is a lot of interest now from European funds," said Deepak Chhabria, head of institutional equities at IL&FS Investsmart India. A lot of it has to do with the abolition of long term capital gains tax, lowering the short term capital gains tax, and the introduction of a transparent transaction tax.

Sometime back, David Graham of Merrill Lynch had said that the unfavorable tax regime was the main reason why European funds had avoided establishing a beachhead in India.

Additionally, the Authority for Advance Ruling (AAR) last week ruled in the Fidelity case that all income arising from investments in India would be treated as business income and this income would not be subject to tax in India. This means that any gains on the sale of shares invested under the FII route would not be taxed.

"Everything is changing," said Chhabria. Many the funds-both from the US and Europe - are making enquiries about setting up their offices in India and establishing a direct presence here.

So far, however, no details are available on the number of institutions which have set up establishments here. While names of some prominent institutions, especially from the US, are being thrown around, no confirmations were available.

"I know of at least 14 to 15 FIIs which are keen to enter India, and are in an advanced stage of preparations to set up their establishments here," Chhabria said.

Industry sources said the recent statements made by the finance minister, P Chidambaram - where he had said that a different type of investor should look at India and be encouraged to invest - has also sent out the right signals to overseas investors.

"It is being interpreted to mean that the investing climate would be made favourable for those wanting a piece of the action in the Indian markets," an analyst at a foreign brokerage pointed out.