FPI inflows hit 4-month low of Rs15K-cr in April

Investments by Foreign Portfolio Investors (FPIs) in the country’s capital markets hit a four-month low of just over Rs 15,000 crore in April amid taxation related concerns. FPIs have bought shares worth Rs 11,721 crore ($1.87 billion) in April, while they purchased debt securities to the tune of Rs 3,612 crore ($570 million), taking their net investment to Rs 15,333 crore ($2.44 billion), as per data compiled by Central Depository Services Ltd.

This was the lowest level of investment since December, when overseas investors had pumped in Rs 12,225 crore in the country’s capital markets (equity and debt). The pace of investment has slowed down in April on apprehensions that the government will impose a 20 per cent minimum alternate tax (MAT) on profits earned by overseas investors. Besides, the forecast of weak monsoon has lowered enthusiasm for Indian equities among foreign investors.

The Income Tax department has sent notices to 68 foreign investors for payment of dues totalling Rs 602.83 crore towards MAT. Finance Minister Arun Jaitley on Thursday offered tax relief to foreign investors, exempting income from securities transactions, royalties and technical service from MAT in a move to soothe frayed nerves. The government is likely to clarify on the MAT issue whether it will be applicable for investors coming from countries with which India has double tax avoidance pacts. Since January 2015, total net investment by overseas investors in the Indian capital markets stood at Rs 94,308 crore ($15.2 billion). 

Meanwhile, leading corporate houses are likely to issue rupee-denominated offshore bonds aka ‘Masala Bonds’ worth $6 billion this year and double it to $12 billion next fiscal, says a report. If raised, this will be one-fifth of the annual external commercial borrowings that domestic companies raise annually, which is hovering around $30-33 billion in the past three years, said an SBI Research report. According to the report, domestic corporates are likely to raise $30 billion in ECBs (external commercial borrowing) this fiscal, while their Masala Bond issuances are likely to be $6 billion. In the next fiscal the bond issuances are likely to be $12 billion, but the quantum of ECBs will remain stagnant at $30 billion, the report said.

Masala Bonds, christened by the World Bank, International Finance Corporation, since its first rupee bond issuance last November, are rupee-denominated debt instruments issued in offshore capital markets to overseas investors but settled in dollars and, therefore, the currency risk resides with investors. As per the report, Masala Bonds offer domestic corporates more options to blend their debt portfolio to optimise the liability and minimise the cost. Further, it can be a launch pad to sell the strength of rupee to the overseas investors. 

Among the first off the block to plan a Masala Bond issue is the Indian Railway Finance Corp which has a board approval to raise $1 billion through this route this fiscal. Earlier in 2014, IFC had issued a 10-year, Rs 1,000 crore rupee-bond to increase foreign investment by mobilising global capital markets to support infrastructure development. Following the success of the IFC issue, the Asian Development Bank also issued similar bonds. The IFC bonds are offering a yield of 6.3 per cent. Masala Bonds could also increase demand for similar products later as liquidity of these bonds goes up. This also shows the confidence of international investors in the country’s economy and the rupee. Another plus point is that while the cost of hedging the currency risk involved in forex borrowings takes away part of the advantage of lower borrowing costs, the Masala Bonds will transfer any currency risk to the investor from the issuer, thereby bringing down the cost of overseas borrowing considerably. 

The Reserve Bank in its monetary policy announcement on April 7 had said it would allow domestic corporates to issue offshore rupee bonds. But final guidelines are awaited.