FPIs pulled out over Rs 1000 crore from equities post-budget. Here's why

FPIs started selling in both debt and equities since the beginning of July, however, post-budget the selling continued only in equities. FPIs invested Rs 7,904 crore in the debt segment in July and Rs 4,669 post-budget, while withdrawing a net amount of Rs 4,777 crore from equities in July and Rs 1,067 post-budget.

FPIs invested a net Rs 2,596 crore in June, Rs 7,920 crore in May, Rs 21,193 crore in April, Rs 33,981 crore in March and Rs 17,220 crore in February in the equity markets.

Though the higher surcharge is applicable to individuals, some 40 percent of the FPIs automatically come under the higher tax rate as they have been investing as a non-corporate entity such as trust or association of persons (AOPs), which under the income tax law are classified as individuals for the purpose of taxation.

Amid a backlash from FPIs over the new tax, the government said it is not targeting them by raising tax on super-rich individuals, and that they have an option to convert into a corporate entity to avail of lower rates available to such category.

Sitharaman in the budget proposed to increase the surcharge charged on top of the applicable income tax rate, from 15 percent to 25 percent for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37 percent for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39 percent and 42.74 percent, respectively.

Hike in surcharge in the budget will have an adverse impact on high-end consumption, as well as reduce the investible surplus of high-income individuals, whose money was the mainstay of mutual funds, portfolio management services and the midcap segment, said Yes Securities in a report.

“The increased surcharge also has a bearing on FPIs coming in through the Trust route and Cat-3 AIFs. This potentially reduces the post-tax attractiveness of India, vis-à-vis other markets, where such a high rate doesn’t exist,” it added.

In the budget, Sitharaman also said that investments by FPIs in debt securities would be allowed to be transferred and sold to domestic investors in a timely manner and also proposed FPI investment in debt securities issued by Non-Banking Financial Companies (NBFCs).

Other proposals included the merging of NRI portfolio route with the FPI route for seamless investment in stock markets and giving relief in levy of Securities Transaction Tax (STT) by restricting it only to the difference between settlement and strike price in case of exercise of options.