India Needs To Tax FPIs Differently Than The Super Rich, Says Samir Arora Of Helios Capital

“Forget about raising animal spirits, you have scared people into doing nothing,” says Samir Arora of Helios Capital.

Samir Arora of Helios Capital. (Photographer: Amit Bhargava/Bloomberg News)
Samir Arora of Helios Capital. (Photographer: Amit Bhargava/Bloomberg News)

India needs to tax overseas investors differently than the nation’s super rich, according to Singapore-based fund manager Samir Arora, as higher taxes in the budget have triggered the worst foreign fund outflows in nine months.

While the budget in itself would have been welcomed, the tax part was unnecessary and is leading to unintended consequences, Arora of Helios Capital Management Pte, told BloombergQuint in an interview. India’s wealthy and foreign investors are two different categories, he said. “The government could have easily reversed it [bringing FPIs within tax surcharge net] without being called a rollback. It could have been easily adjusted.”

Arora also rejected the argument that how can the government “tax India and not FPIs”. “The government should say it is taxing FPIs,” he said. But it’s saying that it’s taxing rich Indians, and the government can’t decide to tax rich Americans, according to Arora. The structure of the tax makes it clear that tax on foreign investors “is unintended”, he said, adding “different battles need to be fought differently”.

The budget proposed to increase the surcharge on individuals with a taxable income of Rs 2-5 crore to 25 percent and for those earning more than Rs 5 crore to 37 percent. This led to an effective tax rate of 39 percent and 42.7 percent—one of the highest in the world—respectively, for the two groups.

Global and non-resident investors participate in India via non-corporate trusts, leading to concerns that the tax also applies to FPIs, prompting them to pull out money from the nation’s equity market. Foreign institutional investors sold around Rs 3,446 crore from the day of the budget announcement till July 22, according to data available on the website of National Securities Depository Ltd.

The pain of the tax will not be fully visible, according to Arora. “When you get $5-billion inflows, remember you could have got $10 billion. When you get $10 billion one day, you could have got $15 billion,” he said. But the impact of this tax will be aggravated in a bull market when investors make money and pay a higher levy on it, he said.

This is the cost of investing in India, Samir Arora said. “Expense ratios going up 400 basis points in a bull year. How can anybody manage it?”

Having remained volatile till the elections, Indian stocks have fallen after the budget. The Nifty 50 index has tumbled 3.75 percent since the budget on July 5.

But the market has not bottomed out yet and that will happen sometime in October-December, Arora said. The liquidity crisis started in September last year which means the returns will be over a low base, he said, making them look much better.

And the government is upsetting foreign investors in an otherwise bad market, which is acting as a “double whammy”, he said. “Forget about raising animal spirits, you have scared people into doing nothing.”

That being said, investors still need to remember how markets turn, according to Arora. Broadly, equity does better than debt over the long term and it is a good time to buy when the times are bad, he said.

India Stocks Fall as Super-Rich Tax on Foreign Fund Trusts Stays

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Edited excerpts of the conversation with Helios Capital’s Samir Arora:

Was the budget last straw in camel’s back? The veneer of India being last bastion of growth in a world starved of growth also seems to be cooling off. India may be cooling well but nowhere at the rate that most managers would have anticipated at the start of the year.

That is true. But we should not say that the budget was last straw as the budget was okay. Tax part of it was the last straw. It was a perfectly fine budget and mostly it would have been neutrally welcomed. But the tax thing was unnecessary. Moreover, the tax and the way it was dealt with by trying to justify it while it was clear that unintended target. The government could have easily reversed it without being called a roll-back kind of government. It could have been easily adjusted.

If it doesn’t get rolled back then do you reckon that the kind of selling that we have seen — again it is debatable as it is because of lower growth or tax or combination of both — but the kind of selling we have seen in July, can it get exaggerated or be continuous?

It is unfair of the public which is saying that oh, how can you tax India and not the FPIs. Either the government should say it is taxing the FPIs. It is saying they are taxing rich Indians who can’t decide to tax rich Americans. So, the structure makes it that it is unintended. It is not to say that how can you tax Indians and not foreigners. You are not taxing Indians, but rich Indians which is not as same as taxing FPIs. Different battles have to be fought differently. So, it is wrong of the high net worth individuals to think that if you are going to let go of the FPIs, you should also let go of the Indians. It is a different debate.

I don’t think the selling is related to the tax, because the pain of tax will not be visible to you, which is the sad part. When you get $5 billion inflows, remember you could have got $10 billion. When you get $10 billion one day, remember you could have got $15 billion. But if anybody thinks that it will be forgotten in bull market, in actuality this tax could be exaggerated.

Right now, it doesn’t matter to an investor whether he is paying tax or not. He is not making money in the first place. But, if a 2017-like year comes up — which will come up one day — and the market goes up 30 percent, therefore the guy who pays taxes goes up 26 percent because he has paid an average of 15-22 percent tax; so he has gone up (return) 25 percent. At that time, he will think that he has done as well as the index, but he will be 5 percent lower than the index.

People will stop looking at Indian exchange traded funds because without analysing they will think that these ETFs have not been able to replicate the index that we have asked them to replicate. Generally, in a bull market if you lose 4-5 percent relative to the index  — and when bull market happens, it will be all market hopefully — you will on margin keep losing investors who will think the cost of investing here has gone up. Because this is a cost. 50-70 percent of these investors don’t pay taxes in their home countries too because there are either sovereign funds, pension funds or they are from Singapore, Hong Kong or somewhere else. Even in the U.S., it is not clear that how they will take tax credit for taxes paid in India. So, this is a cost of investing in India. Expense ratio going up 400 basis points in a bull year. How can anybody manage it? It is really difficult. Right now, nobody realises that the tax is lower but the pre-tax income is not high enough to make any difference to anybody.

Is this sentiment a bit worrying? The lack of interest even after the market having corrected about 600-700 basis points from its highs and the sitting-on-the-fence kind of attitude.

That is also correct in some sense. Because somebody can still ignore these things if the market independent of this is doing so well. That somebody may say it’s okay, I will make less money and let us see the expense. Even then some people will come in, which is the problem. We will never be able to know the cost of it. It is not that you will have massive outflows every year. If you think you got $10 billion then you should have got $20 billion, which is my theory. Right now, you need something else to go and that will happen in next six months.

I think this market will bottom out, not now, but may be in the October-December period for a few reasons. One is, slowdown in NBFC crises started in September last year. Therefore, you can say that numbers will be in base when we look at October-December quarter and moving forward.

Second, we had two bad years which are 2018 and 2019. Even though in 2018 the index seems to be up and even now seem to be up, but we know it is not really, at broader market level. Since, I have been a fund manger from 1993, 2001 and 2002 was the only instance we had consecutive bad years. If we say that markets discount at least six months ahead of time, then you are covering a fall in six months even if the slowdown is there. Right now, it doesn’t seem any motivation for anybody to start buying because you are upsetting them in a bad market. Its like double whammy.

Does that hold true for total ignore of broader market space? While they didn’t chip in when the markets moved up, but they are bigger contributing factor when markets start falling? So, they have got literally not support coming from anyway.

Market cannot get support because the broader market is being attacked regulatory side. In the sense, if you say that we will go after anybody who has ever been an independent director of any company which has done something wrong then half of the directors will resign on their own ahead of it, as they don’t want to go through their accounts being frozen which has happened in case of Nirav Modi’s companies, Wipro-CFO and all these guys, who are supposedly big guys who are getting their assets frozen.

These things will happen in smaller companies. If you say that the auditor will resign under pressure, then mostly it will happen in smaller company. Directors will resign, not necessarily because they have done something wrong, but being scared of not wanting to get into these things, saying what is the point if the company is small and I am big, and why should I associate with it. So, things like this will happen in smaller companies like mid-cap firms. When it happens in one mid-cap company, then 10 companies which look like it will be under pressure. Right now, you are trying to clean up everything so fast and that impact will be on mid-cap and small-cap companies rather than big companies.

Big companies, other than last few days, I still think they will do better than the average market for next five to six months till for whatever reason it broadens and the market rally happens. Even this tax thing reversing or anything which makes the market feel that the government is listening to the market.

Do you think that is a bigger factor? Or the other part wherein the commentary from most corporate seems to suggest that growth is a challenge. Forget the Nifty 50. The broader end of spectrum, almost any SME that you speak to is starving of liquidity which could help its stay afloat and run the business.

There are two things here. In an otherwise bad market, you are trying to get FPIs upset. You are trying to clean up the country in a bad market and in a slowing economy and putting so much pressure on participants that if you are a neutral fund and lend money to these guys then you are bad. If you are an auditor or a rating agency, you are bad. That can work in an otherwise strong economy where you could handle the pressure. Forget about raising animal spirits, you have scared people into doing nothing. In same way, customers are also not buying because they too are scared in some sense about taxes and whatever.

If you are always in the moment, you will be always very bullish or very bearish. At one level, it is true. Second, to remember how these markets turn, what is the history, that broadly anywhere equity does better than debt over long term, and it is good time to buy when the markets are low. Those things are also important to remember and need not to follow through from day one. But those things have long history. That buy when times are bad, buy when there is slowdown because it is unjustified, because there are some other broader trends which are there for 100 years and which may not change.

So many charts and so many permutations and combinations suggest that mid caps and small caps are in levels where they would bounce back. Then you have an HDFC Bank and some other large ones suggesting that next two to three quarters warrant caution in more ways than one, the growth will not come in smaller names. So, would you be comfortable buying in smaller names because as you said that history may repeat and at some point, value will be found?

We get some frustration out of our system by shorting. But in general, the market is bottoming. Forget about the one stock which I may buy or have bought it last week. In generally, you will have one name which you had, and you like and see how it is fallen. But in general, the market will not bottom right now. It will take till the October-December quarter. Everything is much lower a year ago and this world works on year-on-year growth rate. It makes it look better.

Look at the sectors and how they have been aggressively blown apart. There is disruption in auto industries. If you say that electric vehicles will come at least in two-wheelers in 2025, what do companies do? Do they immediately start discouraging more investment on current technology? Or do they immediately move? When disruptions happen, mostly it is done by new companies. Even for investors, should they buy companies where they think that the terminal value could be significantly hit and by 2022 you cannot do your current activities. Forget about individuals who are buying these scooters. Should they wait for policy changes, charging stations, tax benefit which have come through? It confuses everybody and markets don’t like confusions.

There are so many things happening simultaneously in the same environment to actively go against a group of investors which everybody knows has been unfair. We are not affected by that one bid as we are not structured as a trust. But it is sad that people who are affected are so big and compartmentalised that they don’t care about the operation guys or NAV tax and who is responsible. Their job is to buy HDFC Bank and that is end of their job. Ask big guys, do they even know how taxes are calculated? They won’t know.