Spooked by Budget, foreign investors sell Rs 6000cr of equities

They have been on an unbroken selling streak since the Union Budget, spooked by increase in income-tax surcharge, taxes on buybacks, and lack of stimulus to prop up the economy.

Overseas investors have been on a selling spree this month.

Month-to-date they have pulled out Rs 5,673 crore from domestic equities, being net-sellers on 11 out of the 13 trading sessions.

They have been on an unbroken selling streak since the Union Budget, spooked by increase in income-tax surcharge, taxes on buybacks, and lack of stimulus to prop up the economy.

The government has proposed to levy a surcharge of 25 per cent on incomes between Rs 2 crore and Rs 5 crore and 37 per cent on income above Rs 5 crore.

While the higher surcharge has been originally aimed at the ultra-rich, foreign portfolio investors (FPIs), especially those with non-corporate structures, are caught in the crosshairs.

Market players said the tax proposal has impacted FPI participation, particularly those who actively trade in the futures and options segment.

“Quite a few FPIs are international mutual funds structured as trusts. The increased surcharge has affected them since funds are floated based on a stable and predictable tax regime,” said U R Bhat, director, Dalton Capital Advisors.

The slowdown in corporate earnings and India’s economic growth is also worrying foreign investors. According to analysts, index companies are expected to report a slip in earnings during the first quarter. Moreover, a lack of stimulus package in the Budget to revive growth has disappointed foreign investors.

“A fillip by way of a stimulus package expected in the Budget has not happened. Moreover, the valuations are stretched. Good companies are too expensive; others not doing well are hardly investment-worthy. Till a resolution is found for the various issues plaguing the economy, including the one related to FPI taxation, profit-booking could continue,” added Bhat.

The pull-out by FPIs comes amidst a decline in bond yields in India as well as across the developed world. Typically, a lower return on treasury yields lowers the attractiveness of the investment in risk-free assets, pushing investors to put their money in equities. 

This has been seen playing out in other emerging markets, which have reported positive foreign flows this month.

“Other emerging markets with falling interests are getting the same benefits, and there is more incentive to go there. If the pre-Budget tax budgets regime is restored, you could see better flows to India,” said Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies LLP.

FPIs had started to invest aggressively in India in 2019 after slamming the brakes a year ago. Influential foreign brokerages such as Goldman Sachs and BNP Paribas upgraded their stance on India in the hope of stability in corporate profit growth and resolution of the non-performing asset crisis.

“Globally, interest rates are falling and equity markets will get the benefit for those looking for better yields. If you did not have this prospect of tax, they will be more inclined to invest in India,” said Holland.