FIIs worried despite Pranab Mukherjee clarification

Finance minister Pranab Mukherjee’s clarification on participatory notes (P-notes) came as a relief to the markets on Friday, but foreign investors are expecting more.

The last day of the financial year saw Sensex gaining 2.03% or 345.59 points following Mukherjee’s remarks that P-note holders would not be liable to be taxed and that a clarification would be issued in due course.

“The Indian tax authorities would examine the tax liability of the said financial institutional investors (FIIs). However, the tax authorities would not go beyond the FIIs to check any further detail about the participatory notes holders,” said Mukherjee.

FIIs seemed somewhat relieved by the statement as they net-bought equities worth `962.65 crore on Friday, after being on the sidelines for some sessions now.

However they are not happy with the way the matter has been decided and are looking for detailed clarifications.

Hong Kong-based Asia Securities Industry & Financial Markets Association (ASIFMA), which represents major financial institutional investors (FII) in the region, has expressed concerns on the FM’s remarks.

“It is helpful to know that the indirect transfer rules will not apply to participatory notes (P-notes) holders. However, the industry would have preferred to have been consulted in advance of such a major change, before the Indian government confirmed its plan to pursue taxation of FIIs themselves,” ASIFMA said in a release.

The industry body also said that the concerns regarding FIIs having to bear substantial levels of taxation once new rules come into force still remain.

“Threats of taxation directly on FIIs could seriously disrupt the Indian capital markets,” said Nicholas de Boursac, CEO of ASIFMA.

Experts believe the markets may remain under pressure till the clarity emerges on the whole issue.

“The markets shooting up on Friday was a knee-jerk reaction. Also, year-end window dressing may have led to buying. However, foreign investors are unlikely to take FM’s statement on face value. We may see some upside because shorts have been squeezed but we may not see any major upside,” said V K Sharma, head of private broking and wealth management at HDFC Securities.