After Mauritius muddle, Greek gridlock, eyes on QE3

A third round of quantitative easing, or QE3, is a long-shot positive trigger that the markets would watch for after they cracked on buzz that the government could look to introduce capital gains tax on Mauritius-based institutional investors and renewed fears of a European default surfaced after regional finance ministers postponed a decision over the weekend to extend further aid to Greece, according to experts.

“Capital will always chase higher returns and we could see a flow towards emerging market equities including India,” said J Venkatesan, vice-president equity at Sundaram Mutual Fund.

“QE3 would result in greater liquidity to emerging markets, which would be a short-term positive,” said Phani Sekhar, fund manager at Angel Broking.

This would come after the Sensex fell to its lowest close since February on Monday. The benchmark index for the Bombay Stock Exchange was down 610.79 points in early trade before closing at 17506.63 after a 363.90 point or 2.04% loss on Monday. The Nifty, its counterpart on the National Stock Exchange, closed at 5257.90.

Media reports said the government would seek to introduce capital gains tax on investments arising out of Mauritius during renegotiations on a bilateral treaty.

The country has a Double Taxation Avoidance Agreement with India, which allows foreign investors who route their capital through the country to avoid taxation.

Authorities later clarified that discussions with Mauritius over the treaty are yet to begin, suggesting the market reaction is premature.

Any modification of the treaty with Mauritius to extend capital gains only to companies who have some minimal level of business presence in Mauritius may affect short-term capital flows to Indian markets, said Sudhir Kapadia, tax markets leader, Ernst & Young.

“In case this happens, short-term investments into India will get impacted as we have relatively higher short-term tax. Foreign institutional investor (FII) money, predominantly short-term money, would find it tough to enter India as the hurdle rate of return goes up limiting the after-tax returns. However long-term flows would remain unaffected,” he said.

FIIs were net sellers by Rs512.57 crore according to provisional exchange figures on Monday. Domestic institutions were net buyers by Rs863.31 crore.

The market was also impacted negatively by news that Greece would have to adopt stricter austerity measures before getting further aid.   

“The G7 wants to impose stringent conditions on Greece which maybe difficult to push through as there are already riots taking place in the country. This has had a negative impact on all global markets including India,” said Naveen Fernandes, head of institutional broking at K RChoksey Shares & Securities Pvt Ltd.

European markets and key Asian indices were in the red on Monday.

In India, the real estate sector was the worst affected, dropping 4.16%. Oil & gas, and information technology lost 3.42% and 2.50%, respectively.

Reliance Communications was down 7.89% and Reliance Infrastructure 6.07%. Both companies are to be removed from the list of thirty stocks that constitute the Sensex, according to a release from the Bombay Stock Exchange issued on Friday.

Telecom infrastructure company GTL was down 62.40%, while group company GTL Infrastructure was down 43.27% after reports of a failed attempt at fund-raising and selling of shares by promoters.

The company suggested that it could be the victim of a bear hammering in a clarification to the Bombay Stock Exchange, denying that it had been on any road show to raise money.

“We have also observed increase in volumes and sharp fall in the share price of the company, and several rumours appearing in sections of electronic and print media about the company,” it said.

Another round of quantitative easing would be dependent on the central banker’s interpretation of recent weak US economic data after announcing the end of QE2 say experts.

Ben Bernanke the head of the US Federal Reserve, is set to decide on the end of the second round of economic stimulus called QE2 during the Federal Open Market Committee meeting set to begin on Tuesday.