FIIs - PUTTING INDIAN MARKETS ON THE MAT

By Ruma Dubey

There is no doubt that FIIs are calling the shots in our Indian markets. Stocks undulate to the tunes of the FIIs – they upgrade a stock, the price moves up sinuously and if they downgrade, the stock plummets down, as though in a tearing hurry to kiss gravity.

But allowing them to hold our markets and financial system to ransom? Behaving in what can be construed as nothing less than blackmailing, maybe it is time to let the FIIs know as to who the boss really is! Controlling the markets, FIIs are probably nurturing the misconception that they rule India and they can make the Govt bend backwards to accommodate them – or else we will go; that’s the message they have given time and again. And frankly, the Govt did pay heed to them, in fact only to them, which was very apparent in the Union Budget and also when it came to GAAR and Vodafone. The Govt also sent the message that, yes, we cannot do with you. Naturally having got used to having their way, the very same spoilt brats want more.

This fight over retrospective Minimum Alternative Tax (MAT) between the FIIs and the Govt has been really uncalled for. In many ways it shows how law and legal verdicts can be twisted as per convenience. Because they do not agree to this MAT, FIIs have been dumping our stocks and putting out bearish reports – on stocks and also Indian markets. That’s the only reason why our markets crashed – despite all factors playing in favor.

So what is this fight all about? At the center of all this is the Authority of Advance Rulings (AAR). There is a conflict of verdict given under AAR on MAT and that is the root cause.  The taxmen have levied the retrospective MAT using the 2012 AAR verdict – delivered to Castleton Investment, it said that MAT is applicable on foreign companies even if they do not have permanent establishment in India. Most FIIs and majority of the foreign companies work out of Mauritius, Singapore and countries with whom India has tax treaties.

On the other hand, FIIs are counter arguing using the 2010 AAR ruling – in the Bank of Tokyo-Mitsubishi case, the verdict was given that MAT can be levied only on domestic companies and not on foreign companies which do not have a balance sheet in India. So the tax authorities are using the AAR 2012 ruling to levy MAT and the FIIs are not ready to accept, saying that 2010 AAR ruling is relevant. Thus the market is caught in this crossfire between two AAR rulings.

To break this bone, we now await the Supreme Court (SC) verdict. Currently an appeal against how MAT can be levied on FIIs is pending with the SC though one does not yet know the date when this case is scheduled for a hearing. The Govt is trying to currently placate the FIIs by telling them they are not operating in any uncertain tax environment and soothing these sulking investors, the Govt has already made it clear to them that they will not be charged MAT from current fiscal. But sadly, like a helpless parent, it is telling the FIIs that this fight is not in their hands to settle but depends on a SC verdict.

Let’s see how this goes. The FM says that this MAT tax on FIIs will bring in around Rs.40,000 crore. One does not know how the Govt got this figure….

Somehow for us mere mortals, it seems really unfair that FIIs threaten and hold the markets to ransom every time any tax is demanded. Does the Govt ever use the same yardstick that it uses for FIIs on us?  And how can we forget one important point – just as much as India requires FIIs, the FIIs also need India. They are making money which is why they are here.

The argument is not about the imposition of this retrospective MAT on the FIIs, it is more about the pressure tactics which FIIs use every time things don’t go the way they want it to.