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FM defers GAAR markets sigh in relief

Sensex gains nearly 400 points from intra-day low to close at 16,912.71, as traders cut bearish bets

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Indian shares staged a smart recovery on Monday, amid a sea of red in the global markets, after the government deferred by a year implementation of a controversial tax rule that would have hit foreign investors.

Finance Minister told the General Anti-Avoidance Rule (GAAR) would be delayed to financial year 2013-14, adding the burden of proving tax evasion would lie with the authorities rather than with foreign investors.

The Bombay Stock Exchange benchmark the opened about 210 points lower in the morning, following weak Asian markets, as election outcome in Greece and France threatened to derail the euro zone’s plan to tackle its debt crisis and weak US jobs data on Friday undermined hopes for global economic growth. The 30-stock index fell to a low of 16,513.77 in afternoon trade, but started recouping its losses after Mukherjee's statement on GAAR, allaying tax-related concerns among foreign institutional investors (FIIs). The rebound forced traders to cut their bearish bets, boosting the market recovery.

Major world indices
Asia/Pacific 7-May %chg*
Nifty 5,114.15 0.54
Sensex 16,912.71 0.48
Nikkei 225 9,119.14 -2.78
Hang Seng  20,536.65 -2.61
Taiwan Taiex  7,538.08 -2.11
Kospi  1,956.44 -1.64
Dow Jones  12,905.00 -0.40
Europe/Africa/Middle East#
DAX  6,526.56 -0.53
CAC 40  3,167.29 0.17
Sectoral Indices
  7-May % chg*
Cap Goods 9,253.31 3.87
Power 1,946.86 1.82
Metal 10,728.27 1.57
Cons Durable 6,706.26 1.45
Auto 10,147.43 1.23
Bankex 11,374.31 0.80
Realty 1,639.02 0.68
PSU 6,959.23 0.46
*Change over previous close; ** June Future; #till 5:30 IST
Data compiled by BS Research Bureau

The Sensex finally closed up 81.63 points, or 0.48 per cent, at 16,912.71, gaining nearly 400 points from its intra-day low. At the National Stock Exchange, the 50-stock Nifty index gained 0.54 per cent, or 27.3 points, to close at 5,114.15, after falling to as low as 4,988.

“The immediate reaction to the deferment of is one of relief,” said Girish Nadkarni, executive director and head of equity capital markets, Avendus Capital. “However, since its applicability is deferred and not cancelled, the relief will be short-lived. One could perhaps hope by next year the provisions would be substantially diluted or dropped altogether.” 

Inflows from foreign investors in Indian shares have dried up since Mukherjee announced GAAR in the the Budget on March 16. The rule aims to crack down on foreign  investors routing their flows through tax havens like Mauritius to evade tax. Following this, invested just about Rs 576.9 crore in Indian shares between March 16 and May 4, Securities and Exchange Board of India data compiled by the BS Research Bureau showed. Prior to that, they had net bought shares worth Rs 42,822 crore between January 1 and March 15.

“If the government committee on GAAR comes out with clear guidelines on provisions and implementation of the tax law, it would make the deferment meaningful for FIIs. The time gap between implementation of GAAR will help FIIs take a proper investment decision.” said Sameer Gupta, partner (tax and regulatory services), Ernst & Young.

Among the major gainers in the Sensex, BHEL surged 6.12 per cent to Rs 227.2, L&T rose 4.79 per cent to Rs 1,202.9 and DLF added 4.34 per cent at Rs 189.75.

On the BSE, the Capital goods index rose 3.87 per cent, while the power index advanced 1.82 per cent.

Market breadth was slightly in favour of gainers with 1,440 stocks advancing from their previous close on the BSE compared with 1,270 stocks that declined.

India was the best performing market in Asia today. Japan’s Nikkei 225 fell 2.78 per cent, Singapore’s Straits Times declined 2.2 per cent, Taiwan’s Taiex gave up 2.1 per cent and China’s Shanghai Composite ended flat.

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