The benchmark indices on Friday dropped 1.5 per cent after the government refused to provide any relief to overseas investors on the higher tax surcharge announced in the Union Budget. Weak corporate earnings and a subdued outlook, particularly from private sector lenders, further dampened investor sentiment.
The Sensex closed at 38,337, down 561 points, or 1.44 per cent, while the Nifty ended at 11,419, down 178 points or 1.53 per cent. Both the indices posted their biggest single-day fall in two weeks, even as other global markets gained on hopes of an interest rate cut by the US Federal Reserve.
Finance Minister Nirmala Sitharaman in reply to the debate in Parliament on Thursday said foreign portfolio investors (FPIs) registered as trusts might consider the option of registering as companies to escape the higher tax surcharge.
The announcement dashed hopes of several FPIs which wanted a respite from the tax burden, originally aimed at the ultra-rich citizens.
According to estimates, the higher tax will impact over 2,000 FPIs and 40 per cent of overseas investor assets.
“Other EMs are getting the same benefits with falling interest rates. There is no incentive for FPIs to be in India with the higher tax burden. There was hope that there will be some carve-out for FPIs that has not happened,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
FPIs sold shares worth Rs 950 crore from the cash segment, extending their month-to-date selling tally to Rs 7,000 crore (over $1 billion). After the latest fall, the Sensex and the Nifty are back to levels seen on May 17.
“Markets are in a capitulation mode. There has been dearth of good news. The continuous corporate defaults, a high-tax regime, weak earnings season, and fragile economy are not helping sentiment. Markets are eagerly looking forward if policymakers can talk-up markets with a market-friendly tone,” said Jagannadham Thunuguntla, head (research), Centrum.