Foreign Investors Own Half Of HDFC Bank and ICICI Bank. An LTCG Cut Could Matter Most Here

Foreign portfolio investors (FPIs) hold about US$115 billion worth of HDFC Bank and ICICI Bank, roughly half of each lender's market value, according to a Jefferies report dated October 28. These are the two largest foreign holdings in Indian equities, so they stand to feel it most if foreign money responds to a cut in long-term capital gains (LTCG) tax on shares. The government has discussed such a cut but has not announced one.

FPIs sold a net US$59 billion of Indian equities between October 2024 and September 2026. Financials lost the most at US$16 billion, followed by IT and consumer staples at US$10 billion each. Outflows were US$21 billion in FY26 and US$16.5 billion so far in FY27, up to October 23. Add exits by foreign private equity funds and promoters, and equity-linked foreign outflows come to US$110 billion since April 2025.

Jefferies says foreign positioning in India is already light. Its analysis of 70 large emerging market funds, which together manage US$380 billion, puts India 0.3 percentage points underweight against the benchmark. The 10-year average is 2.2 points overweight. Underweight means a fund holds less than the benchmark index does. About 64% of the funds are underweight on India.

Jefferies points out the five companies that can gain most from an LTCG cut
Photo Credit: NDTV Profit

India taxes foreign investors at 12.5% on long-term gains, meaning shares held for a year or more, and 20% on short-term gains. The US, Taiwan, Hong Kong and Indonesia exempt them. The treaty routes that once let FPIs invest through low-tax countries have been largely shut since April 2019.

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Finance Minister Nirmala Sitharaman said on October 13 that the debate on LTCG, the securities transaction tax (STT) and treating all asset classes alike was a healthy one. The Economic Times reported, as cited by Jefferies, that the government on October 26 sought views from investors, market participants and tax experts as it reassesses capital market levies. Also on October 26, the Finance Ministry clarified that brokerage paid by overseas clients, including FPIs, non-resident Indians (NRIs) and overseas citizens of India (OCIs), from repatriable rupee accounts will count as exports and will not attract goods and services tax (GST).

There is a precedent. On June 6, the government cut to zero the tax on interest and capital gains from government bonds for eligible foreign investors. Debt FPIs then put in US$9 billion over June and July. Jefferies says an equity cut could similarly lift sentiment and support the rupee.

The report does not name HDFC Bank or ICICI Bank as the top beneficiaries. It says large-cap sectors such as financials, energy and consumer tech could gain most if FPI flows rise. Banks are its top preference, along with Reliance Industries, utilities and real estate, and it favours large caps over mid-caps. A cut that applies only to FPIs would help most directly where they hold the biggest stakes.

A cut would cost the exchequer. LTCG on equities brought in Rs 1.3 lakh crore in FY25, when markets peaked, and STT is running at about Rs 85,000 crore a year in FY27. Together they made up 8% of direct tax and 5% of gross tax revenue in FY25. Jefferies lists three options: an across-the-board cut, a cut for FPIs only, or computing FPIs' gains in dollar terms. A change can come through an ordinance, outside the Budget.

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