Foreign investors are rejecting Indian stocks

Weekly Business Insights from Top Ten Business Magazines

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since 2017 | Week 351 | May 31-June 6, 2024 

Foreign investors are rejecting Indian stocks

The Economist | May 31, 2024

Extractive Summary of the Article | Read | Listen

How to explain the disparity? India’s economy is growing astonishingly fast, Bangalore and Mumbai have become destinations for bosses of global financial firms and Narendra Modi trumpets the country’s appeal in his electoral campaign. Given the enthusiasm, surely foreign money is flooding into the country.

Not quite. In April foreign investors dumped $1bn-worth of Indian shares. In May they dumped another $4.2bn. This is a sliver of the roughly $900bn of Indian shares in foreign hands, but it is a striking move given the mood music—and one that has pushed the share of the Indian stockmarket held by foreigners to just 18%, its lowest in a dozen years.

The usual explanations for the trend are unconvincing. India’s election has prompted jitters, yet locals remain happy to enter the market and Mr Modi, who looks certain to win, is a sure-footed custodian of the economy. Indian companies are expensive, trading at double the level of both their accounting (“book”) value and their Chinese competitors. Still, India’s economy is on a tear, its firms offer superior returns on equity and they are deleveraging, meaning that they are producing more profits while taking less risk.

An alternative—more convincing—explanation rests on how India treats foreign investment. The country has never been a straightforward destination for international capital, owing to disclosure rules and taxes on capital gains and dividends. Until recently, however, such taxes could be avoided or minimised if the investing firm was registered in a country with which India has a tax treaty. The most popular such countries were Mauritius, which since 1983 has offered an escape route from Indian levies, and Singapore, which has a treaty designed to mirror Mauritius’s.

The first sign of change came in 2017 when India imposed its own tax regime on new funds registered in these countries. Then, in March, officials confirmed reports that tweaks to its treaties might put older funds at risk. They asserted that a fund must be located alongside a large portion of its operations, which would exclude many in Mauritius. Although ministers declined to provide details, investors are confronting the possibility of vast tax claims and the need to move businesses.

These changes are not entirely without cause. Local investors were annoyed that their foreign peers received better tax treatment; some channelled domestic investments via foreign funds to minimise tax bills. That, in turn, irked officials, since local investors were then able to avoid India’s stringent disclosure requirements.

Moreover, the government planned to compensate for making investment tougher in this way by easing things in another. Nishith Desai, a lawyer, recalls a trip to Singapore in 2007 on behalf of the state of Gujarat, with its then chief minister, Mr Modi, who asked why India could not build its own Singapore-like financial hub. Today, that is his signature project: the Gujarat International Financial Tec-City (gift City).  But until things improve, foreign investors will see the messy situation and conclude that, for now, it is best to stay away.

2 key takeaways from the article

1. India’s economy is growing astonishingly fast, Bangalore and Mumbai have become destinations for bosses of global financial firms.  Given the enthusiasm, surely foreign money is flooding into the country.  Not quite. In April foreign investors dumped $1bn-worth of Indian shares. In May they dumped another $4.2bn. This is a sliver of the roughly $900bn of Indian shares in foreign hands, but it is a striking move given the mood music—and one that has pushed the share of the Indian stockmarket held by foreigners to just 18%, its lowest in a dozen years.
2. One of the more convincing—explanation rests on how India treats foreign investment. The country has never been a straightforward destination for international capital, owing to disclosure rules and taxes on capital gains and dividends. Until recently, however, such taxes could be avoided or minimized if the investing firm was registered in a country with which India has a tax treaty. Nevertheless, recent legislation for instance, in 2017 India imposed its own tax regime on new funds registered in these countries, and it is expected that the old funds will also be brought in this scope.

Full Article

(Copyright lies with the publisher)

Topics:  India, Capital Markets, Regulators