Last week, over a cup of coffee with the Equities head of one of the large international broker dealers, I got a fascinating insight into the reasons why Indian stocks are so attractive. He gave me five reasons (caveat - I have not verified accuracy myself), aside from valuations (fairly rich at about 22x or so and climbing, nowhere as expensive as China), emerging markets attractiveness, India growth story etc..
1. Investing through Mauritius in India is completely tax free (for PNotes only?)
2. India has the largest number of single stock derivatives - some 330 stocks can be traded in the Future & Options (F&O) segment of the market - many of these stocks have low market caps ($1 billion and less) and low floating stock.
3. An investor can take a long futures position for a month at no cost by buying the stock future (he said India is unique in this aspect), even the earlier 'badla' system meant you paid for the financing for the long position. Now, you pay only after the month is over, to rollover the position. The margin paid is a requirement everywhere, but in other markets you pay a financing charge on the position.
4. Steady rupee appreciation means that currency moves are usualy in favour of a foreign investor - and can be as much as 2% in some months
5. Total anonymity in PNotes
So only the 5th and last reason has been (or will be) taken away by the new SEBI rules. The games of taking large positions in illiqiud stocks at the beginning of the month, driving them up over the course of the month and more games on settlement day (last Thursday of the month) will continue for now. And these clever speculators will earn anything from 5-15% at a minimum per month, tax free!
I wonder why Indian citizens don't protest this favored treatment of foreigners?
The Indian speculator pays short term taxes at the maximum marginal rate, some 35%, which the foreign speculator does not.
The foreign speculator pushes up the Indian currency, making the best industries in India - IT, textiles, auto component exports etc. - less competitive. The large inflows will probably fuel inflation and push up domestic interest rates, almost ensuring that domestic demand will slow as will the economy. Then he will move out fast, leaving a sinking stock market and a slowing economy, having made a packet and paid not a cent in taxes. Wow! Talk about a government providing perverse incentives.....
Why does India have this sweetheart deal with Mauritius, where investors that come through that country do not pay taxes. Why Mauritius? Reminds me of the explanation I once got when I asked about these little pockets in India called Union Territory (UT). Must be some historic
anomaly, but they serve a very useful purpose - I was told they are ideal for evading excise on liquor when the state next to that UT either has a high excise duty on liqour or does not permit liqour......
Money, liquor,.....politicians favorite pastimes.
Here's a forecast - the Indian government will take away the 5 reasons given earlier, one by one or faster and the party will be over. Most domestic investors will not understand until its too late and the stock market has sunk by 50% or more; and it could be that it will be so fast that they will assume its yet another 'correction' on the path to a new high. Then with the tatters of stock prices and a slowing economy the blame game will start.
Usually they blame themselves and the foreigners in equal measure. So "Nuclear deal, no Sensex at 30,000, no 9% growth, elections again.....ahhh, we have shot ourselves in the foot yet again."
And like every other time it will not be true. Give it 4-5 years for some recovery, some infrastructure investment and capacity de-bottlenecking and the Indian bull will run again.
I'm really getting ahead of time. Here this bull run has not yet ended, and I am talking of the next one. Time to get back to my fully hedged positions in the Indian stock market.
1. Investing through Mauritius in India is completely tax free (for PNotes only?)
2. India has the largest number of single stock derivatives - some 330 stocks can be traded in the Future & Options (F&O) segment of the market - many of these stocks have low market caps ($1 billion and less) and low floating stock.
3. An investor can take a long futures position for a month at no cost by buying the stock future (he said India is unique in this aspect), even the earlier 'badla' system meant you paid for the financing for the long position. Now, you pay only after the month is over, to rollover the position. The margin paid is a requirement everywhere, but in other markets you pay a financing charge on the position.
4. Steady rupee appreciation means that currency moves are usualy in favour of a foreign investor - and can be as much as 2% in some months
5. Total anonymity in PNotes
So only the 5th and last reason has been (or will be) taken away by the new SEBI rules. The games of taking large positions in illiqiud stocks at the beginning of the month, driving them up over the course of the month and more games on settlement day (last Thursday of the month) will continue for now. And these clever speculators will earn anything from 5-15% at a minimum per month, tax free!
I wonder why Indian citizens don't protest this favored treatment of foreigners?
The Indian speculator pays short term taxes at the maximum marginal rate, some 35%, which the foreign speculator does not.
The foreign speculator pushes up the Indian currency, making the best industries in India - IT, textiles, auto component exports etc. - less competitive. The large inflows will probably fuel inflation and push up domestic interest rates, almost ensuring that domestic demand will slow as will the economy. Then he will move out fast, leaving a sinking stock market and a slowing economy, having made a packet and paid not a cent in taxes. Wow! Talk about a government providing perverse incentives.....
Why does India have this sweetheart deal with Mauritius, where investors that come through that country do not pay taxes. Why Mauritius? Reminds me of the explanation I once got when I asked about these little pockets in India called Union Territory (UT). Must be some historic
anomaly, but they serve a very useful purpose - I was told they are ideal for evading excise on liquor when the state next to that UT either has a high excise duty on liqour or does not permit liqour......
Money, liquor,.....politicians favorite pastimes.
Here's a forecast - the Indian government will take away the 5 reasons given earlier, one by one or faster and the party will be over. Most domestic investors will not understand until its too late and the stock market has sunk by 50% or more; and it could be that it will be so fast that they will assume its yet another 'correction' on the path to a new high. Then with the tatters of stock prices and a slowing economy the blame game will start.
Usually they blame themselves and the foreigners in equal measure. So "Nuclear deal, no Sensex at 30,000, no 9% growth, elections again.....ahhh, we have shot ourselves in the foot yet again."
And like every other time it will not be true. Give it 4-5 years for some recovery, some infrastructure investment and capacity de-bottlenecking and the Indian bull will run again.
I'm really getting ahead of time. Here this bull run has not yet ended, and I am talking of the next one. Time to get back to my fully hedged positions in the Indian stock market.
