The General Anti-Avoidance Rule (GAAR) may have been deferred for a year but many foreign institutional investors (FIIs) do not want to take chances. They are shifting their trading positions to Singapore, where derivatives of India's key equity index, the Nifty, are listed.
As on date, the SGX Nifty OI is 27 per cent higher than that for Nifty futures on the National Stock Exchange (NSE). The figures are more alarming if one considers the OI in a single month in May as the built-up positions on the SGX are 70 per cent higher than on the NSE.
In May, the SGX Nifty OI was worth over Rs 16,200 crore (Rs 162 billion) while that on the NSE stood at over Rs 9,250 crore (Rs 92.5 billion). As far as three-month contracts go, the Nifty futures OI on the NSE is over Rs 12,750 crore (Rs 127.5 billion).
"The trend of FIIs trading the Indian market in Singapore will continue till there is clarity on GAAR. The government is yet to clarify on the issue involving tax on FIIs under GAAR," said Dharmesh Mehta, managing director of institutional equities at Mumbai-based Enam Securities, taken over by Axis Bank recently.
Market experts say exchange-traded funds and hedge funds are avoiding taking positions in India, as they would be the most impacted by the implementation of GAAR. The most glaring example of this has been the shutting down of its hedge fund and ETF by Australian institutional investor Macquarie in April.
In an email to clients, Macquarie had said instead of trading in the Indian market, they would be trading the same Indian instrument at another exchange located in a foreign land.
"These entities will pay tax to the Singapore government now, which under the 'permanent set-up' provisions will be lower than in India. In addition, there is substantial clarity and confidence in continuity of the taxation rules in that country," Macquarie was quoted as saying.
Earlier, such a shift of trading from India to Singapore was seen in 2008, when the Securities and Exchange Board of India (Sebi) had banned the use of participatory notes (P-notes)
Markets end higher led by SBI
Markets end flat amid range bound trade
New Sebi norms to hit real estate funds
Panel moots Sebi-RBI mechanism to track foreign fund flows
Sensex dip below 16k level again on foreign funds selling