MAT effect: FIIs seen taking a step back from India

Foreign institutional investors are set to break an 11-month streak of net inflows into the Indian debt market. They have turned net sellers in April for the first time since April 2014, the last time they had been net sellers in debt.

According to depository data, net outflows till April 27 have been Rs 817 crore. FII outflows come in the wake of recent tax notices demanding tax at 20 per cent on interest income, as opposed to five per cent without minimum alternate tax (MAT).

A large-scale outflow is not a best-case scenario, according to Maneesh Dangi, co-chief investment officer at Birla Sun Life Asset Management Company. “Given the way currency has behaved, inflows have paused and there has been a small correction in yields... We are not envisaging any great outflow and a May 2013-like event remains a low-probability scenario.”

Foreign portfolio investors (FPIs) had emerged net sellers by Rs 80,185 crore in the six months after May 2013 on account of factors including a depreciating rupee. The rupee depreciated to 63.77 against the dollar on Monday.

“This is another bolt from the blue for us. The withholding tax reduction from 20 per cent to five per cent in May 2013 was meant to encourage investment in government securities at that time and that was why many of us came in. It looks like that five per cent might not apply and MAT might,” said one foreign investor in a concall with government officials last week.

“The Finance Bill will be passed in Parliament, which is when this prospective action on MAT will become law… This matter... is under consideration right now but will be resolved before it is passed… If we have a decision on that sooner, we will announce it,” said minister of state for finance Jayant Sinha in the same call.

The equity segment has a slightly different story. Foreign portfolio investors have been net buyers by Rs 15,594 crore so far in April.

However, a single day’s inflows accounted for the bulk of the total investment. Foreign investors were net buyers by Rs 16,357.75 crore on April 22, the day of a large bulk deal in Sun Pharma. Without this deal, FPIs would have been net sellers in equity, too.

“Even before this whole MAT issue started, India was looking overbought. The MAT issue and the way it has been handled… people are nervous and looking to take some money out,” said Andrew Holland, CEO, Ambit Investment Advisors.

According to him, India remains attractive to foreign investors. They would watch triggers including legislation over land acquisition, goods and services tax, and whether the government steps up spending to help a pick-up in growth.

Others, too, agree. Standard Chartered Securities in its Equity Strategy report issued at the beginning of the month said the market was finding it difficult to pinpoint when earnings and policy execution would meet expectations. Global factors too have been playing spoilsport.

“The pullback is also due to the apprehension that a likely pickup in execution could coincide with the US Fed raising its interest rates. These concerns are likely misplaced as the initial phase of the US Fed raising rates has historically been associated with high growth phase of the Indian economy. A pickup in capex is likely in the second half of 2015,” said the report authored by director and chief investment strategist Mitesh Dalal; investment strategist Ashish Mittal; senior investment strategist Siddhali Desai; and associate strategist Sachit Damani.

They recommended investors take advantage of the correction continue to invest in a phased manner.

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