Andrew Holland, CEO, Ambit Investment Advisors
We could see outflows unless there is clarity on P-Notes and NAVs. If you sell a part of the holding, does the whole P-Note become short-term or long-term? Moreover, if you are a fund and have daily or monthly NAVs, how is tax calculated in such cases? These are some points that need to be clarified. If these are not addressed by March 31, 2017, chances are FIIs will want to stay away from the Indian market. This will affect arbitrage opportunities. Everyone thinks FIIs are long-term investors but if the markets fall and they get redemptions, the funds will have to sell. So, it is not necessary they will hold on for a year until the new treaty comes into force. Moreover, now, if you hold assets for a month and then sell, short-term capital gains tax would be applicable. This can affect liquidity. Overall, this time next year, you could see lower volumes from FIIs if there is still confusion.
Tirthankar Patnaik, India Strategist, Mizuho Bank
The modification of the Mauritius treaty has been in the works for a long time. The idea in 1983 was to get more business through the Mauritius channel. But Indian tax authorities noted that there was significant round-tripping happening i.e. Indian capital was coming back to the country through the island nation. It is this pie that the tax authorities are targeting. Negotiations to address this issue have been on for a while so it hasn’t come as a surprise. Long-term investors, typically FPIs, should have no issues. A grandfather clause up to April 1, 2017 should also help matters. There is sufficient time for people to put in numbers, get out of numbers and re-valuate positions. Meanwhile, India has remained an attractive investment destination for investors, moving fairly in tandem with global risk assets since March. Hence, I don’t see a major fallout for Indian equities because of the amended treaty.