Sensex gains on reports that P-notes may not be taxed

Only participatory notes failing certain regulatory tests to be affected

The Bombay Stock Exchange benchmark index Sensex rose 1.2 per cent on Tuesday, led by short covering ahead of expiry of the March derivatives series, after the government said it would not target the so-called participatory notes in a blanket manner under its newly proposed rules targeting tax avoidance.

According to finance ministry officials only participatory notes, or P-notes, which fail certain regulatory tests may be subject to taxation. There are still worries, however, that foreign investors would refrain from issuing fresh P-notes on Indian stocks, pending further clarification from the government.

“Conditions put up means tax men can tax it, more clarification is still required to soothe FII nerves,” said Sandeep J Shah, CEO of Sampriti Capital.

P-notes are issued by foreign portfolio investors registered with the Indian market regulator, or by their sub-accounts, to investors abroad and they offer the buyer anonymity.

Finance Minister Pranab Mukherjee in his budget presented on March 16 for the financial year starting on April 1 proposed to introduce the General Anti-Avoidance Rule in order to “counter aggressive tax avoidance schemes”. He said it would be ensured it was used in appropriate cases.

The gains in the benchmark index were mainly supported by fast moving consumer goods and IT stocks on hopes of price rises and better pricing power in the January-March quarter, respectively.

Among the major gainers, Infosys ended 1.6 per cent higher, while ITC rose 1.5 per cent and Hindustan Unilever 3.2 per cent. While the Sensex climbed 1.2 per cent to 17,257.36 points, the 50-share National Stock Exchange index Nifty rose 1.14 per cent to 5,243.15 points.

“Tuesday's rally is more of a psychological one, based on TV reports,” said Jagannadham Thunuguntla, head of research, SMC Investments and Advisors Ltd.

Auto major Maruti Suzuki ended down 1.8 per cent and Mahindra and Mahindra closed flat on Maharashtra’s proposed two to four per cent increase in tax on petrol and diesel vehicles. Shares of sugar companies rose after news the government had allowed unrestricted export of an extra one million tonne of white sugar.

Shree Renuka Sugars ended 2.1 per cent up and Bajaj Hindusthan closed 1.8 per cent higher.