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Foreign Investors Turn Net Sellers After Five Months of Buying
Jul 23, 2019

There's been a heavy sell-off in the Indian stock markets following the Union Budget 2019. Since the Budget announcement, investor wealth worth Rs 8.8 lakh crore has been wiped out.

The biggest sellers in the ongoing correction are foreign investors.

Why are foreign investors dumping Indian stocks?

One of the main reasons is the higher tax burden on the super-rich in the form of additional surcharge.

All individuals and association of persons (AOPs) come under the purvey of this additional surcharge.

Why does this bother foreign investors?

Here's the thing - several foreign portfolio investors (FPIs) are structured as AOPs, limited liability partnerships and trusts.

As such, if they earn over Rs 2 crore a year, they will be subjected to the higher tax surcharge.

So, for a foreign investor earning between Rs 2 crore and Rs 5 crore, the effective tax rate goes up from 35.88% to 39%. And those earning more than Rs 5 crore income in India, the tax rate goes up from 35.88% to 42.74%.

FPI were hoping that the Finance Minister would relax the tax burden for them. But Nirmala Sitharaman stayed her ground and rejected the pleas. Here's what she suggested them to do instead: 'FPIs should consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge announced in Budget 2019.'

Nonetheless, FPIs have been on a selling spree in the latest month.

The chart of the day shows the net monthly flows of foreign investors in the Indian stock markets.

In the month of July, foreign investors have so far sold off equities worth Rs 7,143 crore.

It's certainly not a small amount. But one must also see the sell-off in the larger context - foreign investors have been net buyers of Indian equities in 2019.

Since the start of the year, their net investment in Indian equities is worth Rs 71,937 crore. They have been net buyers in five out of seven months.

So, the ongoing sell-off should not be seen as foreign investors exiting India for good. They will come back when the valuations get more attractive to compensate for the higher tax burden.

Data Source : CMIE

*Figures for the latest month as on 18 July 2019

This Chart Of The Day was published in The 5 Minute WrapUp - I Spoke to Tanushree About India's Demographic Dividend. This is What She Told Me...

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