Foreign investors ask FM to relook at GAAR

Asia Securities Industry and Financial Markets Association (ASIFMA) along with the global investors’ body SIFMA wrote a letter to Finance Minister Pranab Mukherjee to consider some of the proposals in the new Finance Bill which might be detrimental to the performance of Indian capital markets. Of course, they were referring specifically to the General Anti Avoidance Rules (GAAR), a much talked about issue which has given jolts to the market in the past week.

The relevant provisions of the Bill are expected to take effect from 1 April, 2012, and it appears that market participants have already begun to reduce their positions in India.

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Foreign Institutional Investors(FIIs) have assets of more than Rs 10 lakh crores. This constitutes 17 percent of the capitalization of India’s equity markets. In addition, they invest substantial sums in Indian government and corporate debt.

Participatory notes or P-notes as they are known, are used to take positions in the market by foreign investors without revealing identity. And when routed through Mauritius, the gains on the shares are not taxed. GAAR now intends to tax these transactions which the market is getting jittery about. The letter says, there are fears arising of double or even triple taxation in certain transactions, and “Such onerous taxation - or even the risk of such taxation - could threaten this important source of capital for India’s businesses. "

The letter mentions that the concerns of the market is an “unintended consequence” of the new Finance Bill and solutions are straightforward.

The letter refers to the recommendations of the standing committee and says indirect transfers in case of a “small ownership” must not come under the new taxation rules. By “small” it refers to upto 10 percent investment in a listed company by a single FII. Accordingly small investment into derivative instruments must not be taxed as well.

The letter seeks greater clarity on GAAR and says investors must not get weary of investing in India.

For the time being, the government must make its stand clear on the various provisions of GAAR that has led to skepticism among international investors.