FPIs set to seek clarity from RBI, Sebi on debt default resolution

Foreign portfolio investors (FPIs) are likely to seek clarity from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) on the recourse available to them in case of defaults in their corporate debt portfolio.

This comes after the central bank hiked the short-term investment limit for FPIs in both corporate and government debt, last week, to 30 per cent from 20 per cent.

FPIs do not come under the RBI’s June 7 circular on stressed asset resolution, which covers banks, term-financial institutions, small finance banks, and non-banking financial companies (be they deposit taking entities or otherwise). Thus, FPIs can’t be a part of the inter-creditor agreement (ICA), which is the first step towards finding a resolution under the June 7 circular before a company is referred to the National Company Law Tribunal (NCLT).

“We may now have a situation where, in the case of a default, FPIs and other secured lenders pull in different directions. We saw this happening after the default on Dewan Housing Finance (DHFL) debentures with mutual funds (MFs) and banks taking opposing views,” said an investment banker.

“It is one thing to say that FPIs had never sought clarity on the resolution route available to them earlier, another that you are now not to have recourse under the June 7 circular, which was not part of the equation. And that leaves only the NCLT as an option,” said a top corporate lawyer.

ICA did not initially offer a seat to MFs, even as some indicated that they may back a resolution proposal put forward by banks for DHFL. Later, Sebi said MFs could be part of an ICA after they had carved out the stressed portion. This also takes care of Sebi’s stance that MFs are not to enter into “standstill” agreement with promoters of stressed groups, giving them extended timelines to repay their debt.

A way out for FPIs is to be part of the ICA through the debenture trustee. This was first seen in the DHFL case, where Catalyst Trusteeship – the debenture trustee – sought the nod of retail investors to take a stand on the ICA.

FPIs are set to follow in the footsteps of offshore lenders, who as a class are also not part of the ICA at present. “This can become an issue if a company wants to source external borrowings, and this risk will get priced into the loan,” said a banker, hinting, in effect, that FPIs may seek a higher coupon rate on debentures, or alternatively even see special covenants be written in to protect their interests.

The development comes even as regulatory circles are abuzz with speculation that RBI, Sebi, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority may work together to fine-tune ICA so that all financiers are on the same page.https://www.business-standard.com/article/companies/fpis-set-to-seek-clarity-from-rbi-sebi-on-debt-default-resolution-120012501251_1.html?utm_source=SEO&utm_medium=RON

FPI inflow in equity nears Rs 1 trillion in 2019, highest in six years

<Overseas investors have been pouring in money in quality large-cap stocks in calendar year 2019 (CY19), with their net investment in Indian equities nearing the Rs 1-trillion mark during this period – a six-year high. Thus far in CY19, foreign portfolio investors (FPIs) have pumped in a net Rs 99,966 crore ($14.2 billion) in equities. The inflow during the year is highest since CY13, when they made a net investment of Rs 1.1 trillion ($20.1 billion) in equities.

FPIs reposed faith in India in the fourth quarter of CY19, putting in Rs 43,781 crore during October – December CY19, after pulling out Rs 22,463 crore from Indian equities during the third quarter (July-September) of CY19 from the equity market, according to the latest available depository data.

A latest report by BNP Paribas pegs the total flows in six major Asian regions – India, Taiwan, Korea, Indonesia and Philippines at $24 billion at the end of November 2019, compared to an outflow of $16.7 billion in 2018.

“Starting from the third quarter of CY19, foreign flows into Asia were consistently positive. The biggest winners were India ($12.8 billion), Taiwan ($9.1 billion) and Indonesia ($2.9 billion). Flows into Asia should rebound in 2020. Continued rate cuts and a newly begun quantitative easing by the US Federal Reserve, and an ongoing liquidity expansion by other frontline central banks are key potential catalysts for a revival in FII flows,” says Manishi Raychaudhuri, head of equity research for Asia Pacific at BNP Paribas.

A strong FPIs inflow during the year saw the benchmark indices — the S&P BSE Sensex (up 15 per cent) and the Nifty 50 (up 12 per cent) — register double digit returns in CY19. The benchmark indices have recorded their second best performance in past five calendar years.

Earlier in CY17, the S&P BSE Sensex and Nifty had rallied 28 per cent and 29 per cent respectively, on healthy inflows by FPIs as well as domestic mutual funds.

FPIs had invested a net Rs 51,252 crore, while mutual funds had put in Rs 1.2 trillion in equities during CY17.

On the other hand, domestic mutual funds pumped in Rs 52,850 crore in equities during CY19. Their holdings in 13 stocks from the Nifty and Sensex stocks, such as ICICI Bank, Kotak Mahindra Bank, HDFC Bank and Bharti Airtel, was at an all-time high level at the end of September quarter. These stocks have seen their market price appreciate between 21 per cent and 56 per cent during the year.

Shankar Sharma, vice chairman & joint managing director at First Global, however, remains cautious on the road ahead for flows into India and says the foreign investors remain a worried lot amid slowing growth and the recent political developments.

“Foreign investors are already very worried about India and will soon start worrying more. The recent political developments will add to their list of worries. All these increase the political risk of doing business in India. Companies want stability and a conducive environment to do business. There is a feeling that not enough recognition is being done on the problem at hand. There has to be a bouquet of policies that are needed to revive growth, which have to be backed by logic and a vision,” Sharma says.

Calendar Net flow Rs (in crore)

Year FPIs MFs

2013 113,136 -21,082

2014 97,054 23,942

2015 17,808 72,199

2016 20,568 48,170

2017 51,252 118,778

2018 -33,014 120,674

2019* 99,966 52,850

*Till December 24, 2019

Source: NSDL, Sebi

FPIs remain net buyers for 2nd straight month; infuse Rs 16,464 cr in Oct

Continuing their buying streak for the second straight month, overseas investors pumped in a net Rs 16,464 crore into the Indian capital markets in October amid positive domestic and global cues.

As per latest depositories data, foreign portfolio investors (FPI) pumped in a net amount of Rs 12,475.7 crore into equities and Rs 3,988.9 crore into the debt segment during October 1-31. This translates into a total net investment of Rs 16,464.6 crore in the domestic capital markets.

Prior to this, FPIs had infused a net Rs 6,557.8 crore into the Indian capital markets (both equity and debt) in September.

According to Himanshu Srivastava, senior analyst and manager research at Morningstar Investment Adviser India, the measures taken by the government to boost the economy such as abolishing super-rich surcharge, cutting corporate tax and recapitalisation of banks have boosted sentiment.

There also reports of the government reviewing the current tax structure on equity investments, he added.

"While these measures may not have an immediate impact, the takeaway for foreign investors is the government's intent to bring reforms and changes which are necessary for the economy to grow. This has boosted market sentiments and attracted foreign investors," Srivastava said.

However, he cautioned that these are early days to celebrate the FPI inflows as "slowdown in the domestic economy is evident."

On the global front, a reprieve in the US-China trade war has helped increase risk-appetite among global investors which has led them to look at emerging markets such as India, market experts said.

On the future outlook of FPI flows, Harsh Jain, co-founder and COO at Groww, said, "October has seen net inflows in both equity and debt. After the past few months of ups and downs, the inflows are getting more consistent over the weeks... this upward movement is here to stay as long as no major negative economic event takes place

FPIs stay bullish on India, pour in Rs 5,072 cr in October so far

Foreign portfolio investors (FPIs) have infused a net sum of Rs 5,072 crore into the Indian capital markets in October so far amid the government's efforts to revive domestic demand.

In the preceding month, FPIs had invested a net Rs 6,557.8 crore in the domestic capital markets (both equity and debt). This came following net outflows in July and August.

As per the latest depositories data, foreign investors put in a net sum of Rs 4,970 crore in equities and a net Rs 102 crore in the debt market during October 1-18, taking the cumulative net investment to Rs 5,072 crore.

Reacting to the inflow of funds in October, head of research at Samco Securities, Umesh Mehta said, "The worst seems to be behind us and markets have started to discount the forward looking Budget and revival of consumption."

"The government's efforts to revamp domestic demand by increasing DA, cutting corporate taxes, recapitalisation of PSU banks, strategic disinvestments have all contributed in changing FPIs' stance," he added.

Arun Mantri, technical and derivative analyst at Karvy Stock Broking, said that on the international front, "expectations of a US and China partial trade deal and expectations of positive outcome from negotiations have triggered a risk-on period."

Regarding the future course of FPI flows, Harsh Jain, co-founder and COO, Groww, said, "The momentum is expected to continue in the long term as India is a very attractive investment destination with sound fundamentals. The markets are extending gains in the hopes of better quarterly results. Brexit deal, if successful, will bring more confidence to the global investors' sentiments and help boost investment into India.

Relief for FPIs: Capital gains on debt securities now exempt from surcharge

The government on Friday exempted foreign portfolio investors (FPIs) that make capital gains on debt securities from the higher surcharge that was introduced in the Budget. This will bring relief to scores of funds.

“The enhanced surcharge shall also not apply to capital gains arising from the sale of any security, including derivatives, in the hands of FPIs,” observed a note by the finance ministry.

The announcement comes a month after the surcharge on income earned from equities and derivatives was scrapped. Debt funds, which make capital gains from trading in government or corporate bonds, will be the beneficiaries.

“The government has made it clear that capital gains for FPIs from all securities, including debt, will not be subject to the increased surcharge. This is a big positive for debt FPIs,” said Tejas Desai, partner (financial services), EY India. As of August, the total assets under custody of FPIs investing in debt stood at Rs 4.34 trillion, or 13.5 per cent of the overall FPI assets. “Interest income on debt will continue to suffer a higher surcharge,” added Rajesh Gandhi, partner at Deloitte India.

The earlier note by the government, on August 24, had stated that the enhanced surcharge would be withdrawn for capital assets mentioned in sections 111A and 112A of the Income Tax Act.

ChartThis included equity shares, units of equity-oriented mutual funds, and units of a business trust. For FPIs, gains arising from the transfer of derivatives were exempted too. Non-corporate FPIs, structured as trusts or association of persons, were hit by the higher surcharge.

Ordinance relief

Following the announcement on Friday, the government placed an amended Ordinance. The August 24 announcement was not accompanied by any Ordinance, and a number of chartered accountants (CAs) and tax consultants were undecided on levying a higher surcharge.

FPIs selling shares are issued tax certificates by their consultants and CAs, indicating the quantum of tax to be withheld. The same is withheld by banks and paid to the I-T department. “Legally, there was a dilemma. Most of the big accounting firms didn’t want clients to pay a higher surcharge as it had not materialised into law,” said a tax consultant who deals with FPIs. The top tax firms were also grappling with changing their systems to enable a different tax treatment for gains on equities and derivatives, and that for debt instruments.

Friday’s announcement will help do away with this differential tax treatment.

FPI surcharge removal, stimulus measures likely to boost markets: Experts

The stock markets may see a relief rally this week after the government removed enhanced surcharge on FPIs and also unveiled various measures to jumpstart growth, analysts said.

Giving in to the demands of overseas investors, Finance Minister Nirmala Sitharaman on Friday announced rollback of enhanced surcharge on foreign portfolio investors levied in the Budget.

The Budget proposal to hike surcharge on FPIs had spooked foreign investors, who withdrew more than USD 3.4 billion (Rs 24,500 crore) from domestic equities in July and August. The massive capital outflows also put pressure on the rupee, which slumped to 72-level against the US dollar last week.

"Withdrawal of enhanced surcharge on FPI is a big positive for Indian markets as it could reverse the outflows seen since post Budget. It should also help INR appreciation. Overall, a good sentiment booster for the Indian economy," said Rusmik Oza, Head of Fundamental Research, Kotak Securities.

The Centre also announced a raft of measures to revive growth momentum, including exempting startups from 'angel tax', a package to address distress in the auto sector and upfront infusion of Rs 70,000 crore into public sector banks.

"Withdrawal of the surcharge on FPIs is a shot in the arm for the sagging market. One can now expect reversal of the FPI selling. The market is likely to look up from now on," VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services said.

"However, sustained rally in the market will happen only when we have visibility on good earnings growth and reversal of the slowdown underway in the economy. This requires more reforms," Vijayakumar added.

In a bid to address slowdown in the auto sector, the government lifted ban on purchase of vehicles by government departments, and allowed additional 15 per cent depreciation on vehicles acquired from now till March 2020.

The revision of one-time registration fees has also been deferred till June 2020.

These steps are likely to prop up the automobile sector and revive demand, said Ashwin Patil, Senior Research Analyst (Auto Sector) at LKP Securities.

"These are just the kind of measures which were required to boost the economy. In the immediate term, we can expect the markets to bounce back on Monday with a gap up opening, and continue the rally for a few sessions to come," said Amit Gupta, Co-Founder and CEO of TradingBells.

Over the last week, the BSE Sensex lost 649.17 points, or 1.74 per cent. On Friday, the benchmark rebounded 228 points ahead of the finance minister's address.

Foreign investors pull out Rs 3,014 cr from capital markets in Aug so far

Overseas investors have pulled out a net amount of Rs 3,014 crore from the Indian capital markets this month so far, but the trend may reverse following the removal of enhanced surcharge on FPIs, experts said.

According to depositories data, foreign portfolio investors (FPI) withdrew a net amount of Rs 12,105.33 crore from equities, but pumped in Rs 9,090.61 crore into the debt segment during August 1-23.

This has translated into a total net outflow of Rs 3,014.72 crore from the capital markets (both equity and debt).

"Out of 15 trading sessions, foreign investors were net buyers in only two sessions. The sell off in equities continued due to a mix of factors including US Fed rate cut, US-China trade war and the post Budget tax hike on high income investors," said Harsh Jain, co-founder and COO of Groww.

The Centre on Friday announced a slew of measures to revive growth momentum, including rollback of enhanced super-rich tax on foreign and domestic equity investors imposed in the Budget.

Prior to the announcement of enhanced super-rich tax in the Union Budget for 2019-20 in July, FPIs were net buyers for five consecutive months.

FPIs had infused a net Rs 10,384.54 crore in June, Rs 9,031.15 crore in May, Rs 16,093 crore in April, Rs 45,981 crore in March and Rs 11,182 crore in February into the Indian capital markets.

However, the position reversed in July, when FPIs turned net sellers to the tune of Rs 2,985.88 crore.

Now, with the withdrawal of the enhanced surcharge on FPIs, confidence in the market is likely to be restored, analysts said.

"One can now expect reversal of the FPI selling. The market is likely to look up from now on. However, sustained rally in the market will happen only when we have visibility on good earnings growth and reversal of the slowdown underway in the economy which requires more reforms.

"The Finance Minister has announced that she will come back with more reforms soon. So, there is hope," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Govt's reform push: Business income may also see surcharge relief

Some investors on Friday said they feared taxation on business income will continue at 42.7 per cent, following the initial announcement.

Taxes had risen for foreign portfolio investors (FPIs) and others following surcharges introduced in the Budget.

The exemption from the surcharge, mentioned during the announcements on government measures to revive the economy on Friday, applied only to capital gains tax, experts had noted.

“FPIs having business income will still be affected. Also it has to be noted that this surcharge goes only for capital gains generated on listed shares and not on unlisted shares,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.

Govt's reform push: Business income may also see surcharge relief

Rajesh H Gandhi, partner, Deloitte India, said, “It remains to be seen whether the benefit will be extended to derivative income if that is treated as capital gains. Also it seems that the increased surcharge will continue to be applied to interest income.”

Finance Minister Nirmala Sitharaman on Friday announced a reversal of surcharges introduced in the Budget. This included removing surcharges imposed on domestic and foreign investors. The move applies to taxation under sections dealing with long-term capital gains and short-term capital gains, according to officials in response to a question during the press conference on its applicability.

This did not cover business income, though it will reduce taxes for the rest. A subsequent clarification mentioned “the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term and short-term capital gains... and also on tax payable at special rate under Section 115AD by the FPI on the capital gains arising from transfer of derivatives.”

Foreign investors pull out Rs 2,881 cr in just two trading sessions in Aug

Continuing their selling spree, foreign investors have withdrawn a net amount of Rs 2,881 crore from the Indian capital markets in the first two sessions of August on account of domestic as well as global headwinds.

According to latest depositories data, foreign portfolio investors (FPIs) pulled out a net sum of Rs 2,632.58 crore from equities and Rs 248.52 crore from the debt segment during August 1-2, taking the cumulative net outflow to Rs 2,881.10 crore.

Prior to this, FPIs withdrew a net Rs 2,985.88 crore from the Indian capital markets (both equity and debt) during July 1-31.

"FPIs withdrew more than they invested as the US-China trade war has started brewing again which is not helping investors' sentiments," said Harsh Jain, COO at Groww.

Further, "the announcement of rate cuts by Fed in the US has evoked confused reactions and added to the uncertainty," he added.

FPIs were net buyers in the Indian capital markets in the first half of 2019, barring January. They infused a net Rs 10,384.54 crore in June, Rs 9,031.15 crore in May, Rs 16,093 crore in April, Rs 45,981 crore in March and Rs 11,182 crore in February.

However, the trend reversed in July after the announcement of higher tax on FPIs registered as trusts and association of persons in the Union Budget for 2019-20, experts said.

The sentiments have also been impacted by slowdown in the economy, weak quarterly earnings and sub-par monsoon, among other factors, they added.

No clarification over FPI surcharge needed at present, says FM Sitharaman

Confusion continued on Monday over the government’s stand on the applicability of increased surcharge on foreign portfolio investors (FPIs), a move in the Budget that is likely to impact long-term money coming through mutual funds and pension funds.

While Finance Minister Nirmala Sitharaman said after the RBI board meeting in the capital that there was no need for any clarification on the additional tax burden, CBDT Chairman P C Mody said on the sidelines of an Assocham event in Delhi that the matter was being examined and a clarification could be issued soon. Several industry bodies, which represent portfolio investors such as Asset Managers Roundtable of India, are lobbying with the finance ministry and other sections of the government for an exemption on surcharge.

In case the government wants to exempt FPIs from the surcharge, it will have to insert a carve-out in the Finance Bill and make changes to Part-II of the First Schedule before it is passed into law, said legal experts. The tax on funds that earn an income of more than Rs 5 crore in a year and structured as association of persons (AOPs) or trusts will increase to 42.7 per cent, from the current 35.8 per cent. For funds earning an income between Rs 2 crore and Rs 5 crore, the tax rate will go up to 39 per cent, from 35.8 per cent.

The higher rates will apply to non-corporate FPIs and funds; about 50 per cent of FPIs are registered as non-corporates. A large number of FPIs are impacted by the increase in surcharge, as they are structured as trusts or AOPs. Such structures have been adopted to avoid minimum alternate tax. 

The Budget has proposed to raise the surcharge to 25 per cent, from 15 per cent, on taxable income between Rs 2 crore and Rs 5 crore, and to 37 per cent, from 15 per cent, for income above Rs 5 crore.

There will be an increase in tax to be paid by FPIs on long-term capital gains and short–term capital gains as well. For the former, effective rates will increase to 14.25 per cent, from 11.96 per cent, and for the latter, to 21.37 per cent, from 17.94 per cent.

“Admittedly, there is a difference in surcharge between corporate and non-corporate FPIs even today. However, because the percentages of surcharge were not too high, this was not a cause for concern. With surcharge rates as high as 25 per cent and 37 per cent, this is now beginning to hurt,” said Tejas Desai, partner, tax & regulatory services, EY.

According to Desai, there is no apparent basis to tax FPIs organised in different legal forms in their home country on a differential basis.

“In fact, a lot of the foreign MFs and pension funds, which ultimately represent the interests of small investors and invest long-term capital in the country, are organised as non-corporate vehicles and will be impacted by the higher surcharge. If that is not the intention, as it seems, the government should clarify this by proposing changes to Part-II of the First Schedule to the Finance Bill before it is passed into law,” added Desai.

Besides paying tax on capital gains, FPIs currently have to pay other taxes, including securities transaction tax and stamp duty.

Foreign investors pull out Rs 1,255 crore in just two sessions in May

Foreign investors pulled out a net Rs 1,255 crore from the domestic capital markets in just two trading sessions in May after remaining net buyers for the previous three months.

As per the latest depositories data, foreign portfolio investors (FPIs) pulled out a net sum of Rs 367.30 crore from equities and Rs 888.19 crore from the debt market during May 2-3, taking the total net outflow to Rs 1,255.49 crore.

Markets were closed on May 1 on account of Maharashtra Day.

Prior to this, FPIs infused a net amount of Rs 16,093 crore in April, Rs 45,981 crore in March and Rs 11,182 crore in February in the capital markets (both equity and debt).

"It is too early to take a call on the trend in May. It is possible that FPIs might pause a bit in view of the election outcome," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Indian capital markets have been receiving their share of the capital flows into the emerging markets after leading central banks of the world took a dovish monetary stance, experts said.

Vidya Bala, Head - Mutual Funds Research at FundsIndia, said, "In April FPI inflows into India were less robust than March, coming on the back of continuing rise in crude. FPIs continued buying selectively in banking and financial services and specifically in insurance sector besides oil and gas and utilities, according to data from NSDL."

However, the month of May could see some volatile movements as election results come out. The currently weak macro-economic numbers too will be further watched, she added.