June 20 (Bloomberg) -- India’s benchmark stock index sank to a four-month low after a report the government sought to tax gains on investments routed through Mauritius sparked a selloff.
Reliance Infrastructure Ltd. and Reliance Communications Ltd. plunged more than 6 percent each after they were removed from the benchmark index. Tata Consultancy Services Ltd. fell for a fourth day after the Financial Express said June 18 the nation’s largest software maker has been ordered to pay 6.56 billion rupees in back taxes after tax officials denied some of its claims. Reliance Industries Ltd., India’s most valuable company, tumbled to its lowest since April 2009.
The Bombay Stock Exchange Sensitive Index, or Sensex, lost 363.90 points, or 2 percent, to 17,506.63 at the 3:30 p.m. close in Mumbai. The index closed at its lowest level since Feb. 10. The gauge has dropped 11 percent from an April 4 high, exceeding the 10 percent-level regarded by some investors as a “correction.”
“The fear is that if the tax treaty is removed foreign investors will be subject to capital gains and the entire equation changes,” said Ravi Gopalakrishnan, chief investment officer for equities in Mumbai at Pramerica Asset Managers Pvt., a unit of Prudential Financial Inc., which manages $784 billion. “The street is pricing in the worst scenario.”
India will seek to tax capital gains on investments made through Mauritius as talks on its tax treaty with the island nation resume after three years, Business Standard reported yesterday. India wants to impose a tax because the gains are being made in India, the report cited Prakash Chandra, chairman of the tax board, as saying.
The country has yet to start negotiations with Mauritius after the latter expressed willingness to hold talks three months ago, said Shishir Jha, a spokesman for Central Board of Direct Taxes in New Delhi.
The S&P CNX Nifty Index on the National Stock Exchange lost 2 percent to 5,257.90 and its June futures settled at 5,265. The BSE 200 Index decreased 2.1 percent to 2,179.38.
“Most companies have been attracting money through the Mauritius route; if this case is reversed, it will be a double whammy,” said Deven Choksey, managing director at Mumbai-based K.R. Choksey Shares & Securities, which manages $125 million. “One is the tax aspect. Secondly, money will get pulled out.”
Reliance Infrastructure sank 6.2 percent to 544.95 rupees, is biggest since Feb. 9. Reliance Communications plunged 7.9 percent to 87.65 rupees, extending this year’s losses to 40 percent. Sun Pharmaceutical Industries Ltd. and Coal India Ltd. will replace the two Anil Ambani Group companies on the Sensex from Aug. 8, the Bombay exchange said June 17.
Tata Consultancy dropped 3.6 percent to 1,069.3 rupees and its June futures settled at 1,073.10 rupees. Reliance Industries, owner of the world’s largest oil-refining complex, lost 4.1 percent to 833.25 rupees, falling for seventh day.
Indian stocks will underperform in coming months amid uncertainties over the magnitude of policy tightening, the impact on demand, the direction of government policies and the outlook for global growth, BNP Paribas said.
“Indian equities could remain listless with a downward bias until the uncertainties dissipate,” analysts led by Manishi Raychaudhuri wrote in a report dated today. The analysts downgraded banks and auto shares to “neutral” and are “overweight” on technology, telephone and utility stocks.
The analysts reduced the end-2011 estimate for the Sensex to 20,500 from 23,600 to factor in lower earnings estimates and valuation multiples, according to the report.
The gauge has dropped 15 percent this year, the most among Asian benchmark indexes tracked by Bloomberg, on concern rising borrowing costs will hurt corporate profits. Sensex stocks are valued at 14.2 times estimated earnings, compared with 10.7 for the MSCI Emerging Markets Index.
The central bank raised the repurchase rate to 7.5 percent from 7.25 percent on June 16, extending the longest streak of tightening in a decade, joining its peers from China to South Korea in stepping up the fight against surging living costs.
Rising borrowing costs have begun to crimp demand. India’s $1.4 trillion economy expanded 7.8 percent in the three months through March 31, the slowest pace in five quarters, government data show.
Overseas investors sold a net 4.23 billion rupees ($94.3 million) of Indian stocks on June 16, taking total withdrawals from equities this year to 8.04 billion rupees, according to data from the Securities and Exchange Board of India.
--With assistance from Santanu Chakraborty and Ameya Karve in Mumbai. Editor: Ravil Shirodkar
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