Sensex, Nifty jump on reports of rollback of tax surcharge on FPIs

Sensex gains 637 points, most in a day since January 31

The benchmark indices rallied on Thursday, with the Sensex posting its biggest single-day gain since January 31 and the Nifty zooming past the 11,000-mark on reports that the government was planning a rollback of the higher tax surcharge on foreign portfolio investors (FPIs). 

The Sensex rose 637 points, or 1.74 per cent, to end at 37,327, while the Nifty50 index gained 177 points, or 1.63 per cent, to settle at 11,032. 

Finance Minister Nirmala Sitharaman is facing pressure to roll back controversial tax measures introduced last month as foreign investors pull funds out of the Indian markets and automakers and other manufacturers report falling sales and job cuts. She has commenced a series of meetings with industry participants to address their concerns and decide on steps needed to bolster the economy.

Besides optimism over some positive announcement from the government, a sharp slide in the oil prices helped ease some concerns on the macroeconomic front. Brent crude prices have declined 12 per cent to $57 a barrel so far this month. Also, China’s move to fix the yuan rate at a stronger-than-expected level helped assuage fears of a currency war and further flare-up in trade tensions. Most global markets, too, rallied on Thursday.

Domestic stocks have seen a considerable correction since the Union Budget presentation on July 5. Budget proposals such as an increase in tax surcharge on FPIs, introduction of 20 per cent tax on share buybacks, and the move to increase the free float in all listed companies by 10 per cent to 35 per cent have disappointed investors. Also, lack of measures to shore up growth has sparked concerns of a prolonged downturn in the economy.

The benchmark indices have slid more than 6 per cent since the Budget, while the broader markets have come off even more. Some analysts say the latest correction is a buying opportunity.

“We are in buy territory. While a V-shaped recovery in share prices depends on policy action, our indicators suggest that investors with a bit of patience will likely be rewarded well in the next 12 months,” wrote Ridham Desai, managing director, Morgan Stanley India, in a note.

“Indian equities look attractive in a relative context amid subdued oil prices, global trade tensions and better relative valuations in what is a low-return world,” said Desai. “Policy action is still needed to protect India’s relative performance, which has sunk since the Union Budget.”

What has hit sentiment most is the higher tax surcharge on overseas investors, who have pulled out nearly Rs 22,000 crore from domestic equities since the Budget. Though the surcharge was aimed at the super-rich, FPIs with non-corporate structures or trusts have been caught in the crosshairs.

“Quite a few FPIs are international mutual funds structured as trusts. The increased surcharge has affected them since funds are floated based on a stable and predictable tax regime,” said U R Bhat, director, Dalton Capital Advisors.  “If you did not have the prospect of a higher tax, FPIs will be more inclined to invest in India,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.

Barring three, all Sensex stocks ended with gains, with HCL Technologies rallying the most at 6.4 per cent, followed by Tata Motors, which rose 5.6 per cent. Mahindra & Mahindra and Bajaj Auto rallied around 4 per cent each. Shares of Reliance Industries jumped nearly 4 per cent and made a 136-point contribution to Sensex gains.

With inputs from Reuters