India Stocks Fall as Super-Rich Tax on Foreign Fund Trusts Stays

(Bloomberg) -- India’s benchmark equity index slumped to a two-month low on disappointment that the government didn’t offer any respite to foreign investors registered as trusts from the proposed super-rich tax.

The S&P BSE Sensex dropped 1.4% to 38,337.01 to the lowest level since May 17, with 27 out of the 31 shares on the gauge slipping into the red. For the week, the index is down 1 percent. The NSE Nifty 50 Index declined 1.5%. The pain for smaller companies was much more. The S&P BSE Mid-cap index fell 2% while a gauge of small-cap stocks slipped 1.8%, both at a five-month low.

In reply to the debate over the finance bill in the Parliament late Thursday, Finance Minister Nirmala Sitharaman said that FPIs registered as trusts may consider the option of registering as companies.

A higher surcharge on wealthy Indians in the budget had spooked overseas investors as it also applied to trusts -- a structure of choice for several foreign funds that invest in India.

“If an existing FPI restructures itself from a trust to a corporate entity, then it may have to provide a non-tax commercial rationale for doing so,” said Punit Shah, a partner at Mumbai-based Dhruva Advisors LLP. “The migration to a corporate structure could also entail additional capital gains tax burden.”

Reliance Industries Ltd. is scheduled to announce results later in the day. Of the five Nifty companies that have announced earnings so far, four have either met or exceeded analyst estimates.

Strategist View

• “Political signalling and what the finance minister has said on foreign portfolio investors is going against the global trend which is pro-market,” said Ajay Srivastava, managing director at Dimensions Consulting Pvt Ltd. “The pain is likely to continue because we are not a cheap market and the tax rates are going up even though economic growth has slumped.”

The Numbers

• All but two of the 19 sector sub-indexes compiled by BSE Ltd. declined, led by a gauge of vehicle manufacturers
• HDFC Bank contributed the most to the index decline, decreasing 1.5%; Mahindra & Mahindra Ltd. had the largest drop, falling 4.3%
• Cyient Ltd. fell 11% after 1Q net income missed estimate and analysts cut their ratings on the stock

Analyst Notes/Equity-Related Stories

• Small-Cap Misery Seen Ending in India Thanks to Rate Cuts
• RBL Bank Falls Most on Record as Bad-Loan Ratio Seen Worsening

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