FM becalms Dalal St for now, but GAAR angst stays

For the second straight day, equities were influenced by the buzz on the provisions of General Anti-Avoidance Rule (GAAR), which comes into effect on April 1.

Unlike Monday, though, things went the right way in the later half of Tuesday after finance minister Pranab Mukherjee said the GAAR measure was not about harassing honest tax-payers and investments through participatory notes, but about checking evasion.

That helped the Sensex rebound 204.58 points or 1.2% to 17257.36 points. The Nifty  rallied 58.90 points to 5243.15.

“The real issue is not participatory notes, but the tax residency and the intent of investors. Investors who don’t have a physical presence in countries such as Mauritius, but issue tax residency certificates to avoid double taxation while investing in India — they can’t avoid taxes from now. They will have to move base to Singapore, where the tax residency carries more weight as laws there are stricter,” said Ambareesh Baliga, COO, Way2Wealth Securities.

For invocation of GAAR, any transaction must satisfy 1 of 4 tests, said finance ministry sources. These include 1. Bonafide or main purpose test, 2. Abnormality test of a transaction; 3. Commercial substance, and 4. Misuse and abuse.

Meantime, officials of the finance ministry, along with Sebi chief U K Sinha will be meeting foreign investors on Wednesday to address their anxieties, sources said.

Earlier, Mukherjee said he is ready to examine and modify GAAR, if required. “GAAR is based on mandate given to me by this House to get black money stashed in foreign banks and also prevent generation of black money,” Mukherjee said.

Participatory notes are offshore derivative instruments (ODIs) used by foreign investors not registered with the Securities and Exchange Board of India to take an indirect exposure to Indian equities. These instruments are issued by registered FIIs or their sub accounts.

FIIs seem to be cautious though. Reports said CLSA Asia-Pacific Markets, Goldman Sachs and a couple of other foreign investment banks have stopped selling participatory notes citing recent uncertainty.

“CLSA has taken the position not to increase its current Indian P-Note book as a way of minimising the possible tax exposure,” said the brokerage in an e-mail to clients, seen by Reuters on Tuesday.   

“For CLSA or any other P-Note issuer, the tax liability must rest with the end ODI investor, the end beneficiary of the economic gain,” CLSA added, referring to offshore derivative instruments.
FIIs were marginal net buyers of equities worth Rs43 crore in the cash segment on Tuesday. They have been creating shorts in the futures segment over last few days and were net sellers of equities worth `94 crore on Monday.

“The FIIs have just been hedging their portfolio by creating shorts in index futures. Though there is no clarity as of now on clause 9 in the GAAR, but from markets perspective, levels of 5200 are likely to be held with upside capped at around 5400-5450 in near term”, said Monal Desai, vice-president and head of institutional equities (derivatives) at Prabhudas Lilladher.