Buyback Tax Impact: IT Sector Sees Highest Foreign Outflows So Far In July

Overseas investors net sold $698 million worth of stocks of IT companies between July 1 and July 15.

(Photographer: Simon Dawson/Bloomberg)
(Photographer: Simon Dawson/Bloomberg)

The Indian IT sector witnessed the highest foreign fund outflows in the equity markets so far this month, contributing to the selloff triggered by a buyback tax and higher levy on the super rich in Union Budget 2019-20.

Overseas investors net sold $698 million worth of stocks of IT companies between July 1 and July 15, according to the National Securities Depository Ltd. data. That’s the bulk of $828-million foreign outflows between July 1 and July 15.

The foreign investors are on track to turn net sellers after five months as Finance Minister Nirmala Sitharaman, in her maiden budget, increased the tax on super rich, including foreign portfolio investors and alternative investment funds that plough funds through non-corporate structure or trusts.

India also imposed a 20 percent share buyback tax for listed companies—one of the common ways for software services providers to reward shareholders—to bring it on a par with dividends. Another proposal that unnerved the market is the plan to increase the minimum public shareholding threshold in listed companies from the 25 percent to 35 percent.

Banner Year of Share Buybacks in India Runs Into Tax Roadblock

Jefferies in a post-budget note said the top IT companies will have to reconsider share buybacks given the limited tax advantages. Morgan Stanley, however, said that IT firms, particularly the ones with high promoter stakes, may still prefer them as these are taxed in the hands of company, unlike dividends where both the company and shareholders pay tax.

Jefferies also said Tata Consultancy Services Ltd. and Wipro Ltd. would be impacted if the public float is increased to 35 percent.

The software and services sector was followed by banks and food, beverages and tobacco sector in terms of foreign outflows.

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What FPIs Bought So Far This Month

Foreign portfolio investors pumped $150 million into ‘miscellaneous’ stocks that didn’t fall in any sector-wise category between July 1 and July 15. This was followed by $123 million and $24 million infusion in non-banking financial services and telecom services sectors, respectively.

Details of investments in individual stocks during the period were not available. However, bulk-deal data revealed what some of the overseas investors bought in the first fortnight of July.

July 3

Bharat Financial Inclusion

  • Goldman Sachs Singapore acquired 8.78 lakh shares, or 0.63 percent equity, at Rs 904.1 apiece.
  • Integrated Core Strategies (Asia) acquired 18.06 lakh shares, or 1.29 percent equity, at Rs 898.24 apiece.
  • Vanguard Fund sold 33.14 lakh shares, or 2.36 percent equity, at Rs 899.32 apiece.
  • Ishares Core Emerging Markets Mauritius sold 9.38 lakh shares, or 0.67 percent equity, at Rs 899 apiece.

July 4

Super Shakti Metaliks

  • Aviator Emerging Market Fund acquired 83,400 shares, or 1.45 percent equity, at Rs 407 apiece.
  • LTS Investment Fund sold 83,400 shares, or 1.45 percent equity, at Rs 407 apiece.

Allsec Technologies

  • SSD Securities acquired 6 lakh shares, or 3.94 percent equity, at Rs 286.17 apiece.
  • First Carlyle Ventures Mauritius sold 6.84 lakh shares, or 4.49 percent equity, at Rs 286.49 apiece.

On July 5

Natco Pharma

  • East Bridge Capital Master Fund acquired 15.77 lakh shares, or 0.86 percent equity, at Rs 528 apiece.

Westlife Development

  • Allard Growth Fund acquired 16.95 lakh shares, or 1.09 percent equity, at Rs 306 apiece.
  • Tree Line Advisors sold 31.3 lakh shares, or 2.01 percent equity, at Rs 305.7 apiece.

On July 10

Allsec Technologies

  • C Mackertich Pvt. Ltd. bought 5.38 lakh shares, or 3.5 percent equity, at Rs 303 apiece.
  • SSD Securities Pvt. Ltd sold 5.38 lakh shares, or 3.5 percent equity, at Rs 303 apiece.

On July 12

Rural Electrification Corporation

  • Integrated Core Strategies (Asia) PTE Ltd. bought 1.02 crore shares, or 0.5 percent equity, at Rs 148.16 apiece.

Power Finance Corporation

  • The Windacre Partnership Master Fund LP bought 6.35 crore shares, or 2.4 percent equity, at Rs 124.85 apiece.
  • UBS Principal Capital Asia Ltd. sold 6.35 crore shares, or 2.4 percent percent equity, at Rs 124.85 apiece.