P-notes taxation uncertainty seen hounding shares

Concerns about selling by foreign investors could keep shares under pressure this week if the government introduces short-term capital gains taxes on derivative products sold overseas.

Indian shares dropped to their lowest close in about two months on Monday on concerns the government could tax participatory notes, which are issued by foreign portfolio investors registered with Indian market regulators to overseas investors.

The move to tax would come though the introduction of the so-called General Anti-Avoidance Rule (GAAR) next month, some brokers warned on Monday.

That would mean foreign investors wanting to avoid the potential tax would have to sell holdings, or shift base to locations that could provide a way to avoid payments, before the end of the 2011/12 fiscal year at the end of the week.

Foreign investors sold Rs 135 crore rupees on Monday, their first net selling in 11 sessions, according to provisional National Stock Exchange data.

"Ambiguity pertaining to P-note taxation under GAAR is leading FIIs to wind up their positions," said Prakash Diwan, head of institutional clients at Asit C.Mehta Investment Intermediates.

"We expect more profits to be home by FIIs at least until 31st March," Diwan added.