India Killing Offshore Markets May Nudge FIIs To Look Elsewhere, Asia Traders’ Body Says
Investors look for tax certainty and not avoidance, says ASIFMA CEO Mark Austen.
India will continue to remain attractive for global investors but recent curbs by the country’s three main exchanges on data sharing may dent the market sentiment to some extent, according to an Asian federation of institutional investors.
The National Stock Exchange, BSE Ltd. and Metropolitan Stock Exchange said in a joint statement earlier this month that they will stop sharing data with foreign peers to prevent volumes from moving overseas. The decision will halt derivatives tied to Nifty 50 Index and S&P BSE Sensex and stocks on Singapore and Dubai stock exchanges.
While investor appetite for India is strong, a trend of some access channels becoming restrictive could have unintended consequences, Mark Austen, Asia Securities Industry & Financial Markets Association chief executive officer, Lyndon Chao, head of equities, and Eugenie Shen, head of its asset management group, told BloombergQuint in an interaction. The Association has recently released a white paper on the Indian capital market.
Indian markets will continue to be attractive, as according to International Monetary Fund projections, the country will be the fastest growing economy in the next two years, growing at a rate of 7.4 percent and 7.8 percent, respectively, Chao said.
The feedback from global asset managers is that clients are not ready to come to India and register as Foreign Portfolio Investors, said Shen.
Estimated offshore exchange-traded fund exposure to India is around $25 billion, and taking passive funds (not exchange-traded but tracking an index) benchmarked to India into consideration, the total exposure is nearly $75 billion, she added.
Not sharing market data will affect performance, Shen said. Hedging products sold to foreign institutional investors will be impacted, with six-month time horizon there could be a knee-jerk reaction to unwind, she added.
Suspension of providing data extends not only to exchanges but index providers like MSCI... If MSCI India loses market data, then the whole emerging market index will be impacted. This is making MSCI reassess the classification.Eugenie Shen, Head (Asset Management Group), ASIFMA
By killing the offshore market, foreign investors may look for other markets to trade in, where access is smoother, Mark Austen said. Indirect access to the markets is important, and sentiment can turn quickly with the offshore derivative instrument and participatory note routes shut, Austen warned.
FII Pullout
ASIFMA sees the recent trend of FIIs pulling money out of Indian markets as a function of volatility and not specific to India. On the tax framework for foreign investment in India, Austen said that taxation has been a long-standing concern for FIIs, due to the Minimum Alternate Tax , the General Anti-Avoidance Rule, and changes to the Double Taxation Avoidance Agreement with Mauritius. Investors look for tax certainty and not avoidance, Austen added.
The tax on long-term capital gains reintroduced in Budget 2018 amounts to double taxation according to Austen, as the Securities Transaction Tax remains.