Sensex slumps 2% after reports of capital gains tax on investments from Mauritius.
The stock markets were already reeling under rising interest rates and general corporate pessimism about future growth. The mood worsened on Monday on reports the government wanted to tax capital gains on investments routed through Mauritius, triggering fears that foreign inflows could take a hit.
Even a hasty clarification from the finance ministry that no such decision has been taken couldn’t improve the mood, pushing the Bombay Stock Exchange Sensex down by 3.1 per cent in the morning. The index closed at a four-month low of 17,506, falling over two per cent, or 363 points.
What is of concern is that the outlook is gloomy. The Indian market has been the worst performer among key global markets, losing 14 per cent this calendar year. This is more than double the fall suffered by a majority of its global peers.
“Indian equities could remain listless with a downward bias until the uncertainties dissipate,” Manishi Raychaudhuri of BNP Paribas said in a note. BNP Paribas has lowered its end-2011 Sensex target from 23,600 to 20,500 citing a reduction in estimates of earning per share, downgrades and lower valuation multiples.(Click here for graph & table)
“We earlier said the Sensex would be around 16,000 by June-end,” said Saurabh Mukherjea, head of equities, Ambit Capital. “India’s forward price to earning multiple is too high, considering that we have the highest inflation among the major economies. These two factors cannot co-exist. With QE2 coming to an end and a difficult macro environment, we reiterate our stand that the Sensex will be around 16,000 by June-end,” he added.
These forecasts come close on the heels of global financial major Citi lowering its year-end Sensex target from 22,000 to 21,500 earlier this month.
Some market observers said the report about the treaty with Mauritius were just an excuse for market players, mainly foreign institutional investors (FIIs), to press the sell button harder. FIIs, which invested $29 billion last year, have put in just $52 million in Indian equity this year. “Mauritius was not responsible for that,” said a broker.
The double tax avoidance treaty (DTAA) between India and Mauritius, from where a large number of FIIs route their investments into India, has always been a sensitive subject for the markets here. There are reports that India wants the treaty to be revised so that it can tax capital gains on investments from Mauritius.
Earlier in the day, the index lost more than 500 points, as investors dumped shares anticipating a huge sell-off from FIIs in the near future.
In an attempt to calm these fears, finance ministry officials said there was no such agreement at present. “How can you do that (impose capital gains tax)? There has to be some agreement on that. Right now, it is not there in the agreement. You cannot impose it arbitrarily,” Finance Secretary Sunil Mitra said in New Delhi. This helped the Sensex recover somewhat.
Even senior officials of Mauritius tried to play down the fears. Mauritius cabinet minister Sheilabai Bappoo and the consul general in Mumbai, Thailesh Kumar Chamane, told Business Standard talks on reviewing the DTAA were underway. The two, however, said the Mauritius government had not taken any final decision in this regard.
The inability of the European governments to agree on a loan payment scheme to spare Greece from default also dampened the mood. The move is expected to push Greece to pass laws to cut deficit and sell state assets. The impact was clearly visible with leading equity indices across Asia and Europe falling 1-2 per cent.
The buzz regarding re-negotiation of the DTAA kept the dealers busy. With almost 40 per cent foreign direct investment into India coming through the Mauritius route, any treaty taxing capital gains would have a serious impact on the markets here.
Among stock-specific action, GTL group stocks saw their market capitalisation halve on buzz they were facing margin calls. There were also reports GTL had shelved fund-raising plans. The company denied it was facing such problems in a stock exchange announcement.
Reliance Infrastructure and Reliance Communications lost 6-8 per cent as they will be excluded from the Sensex from August 8.
