FIIs wary of India on lack of clarity on P-notes tax: F&C

In his analysis of the European and global markets on CNBC-TV18, Jeff Chowdhry, head-emerging equities, F&C Investments, warns that the rumble in the Spanish economy will not go away quickly. But says the ECB (European Central Bank) is prepared to do step in.

Chowdhry is optimistic about the growth in the US economy and adds that it would very modest. He explains that a definitive statement by the Indian government on the P-notes issue would go a long way in assuring FIIs of the potential in the India growth story. Chowdhry did not feel that the disappointing Infosys results were relevant to the whole IT sector as a whole. Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: Did the Spanish yields or banks give any new cause for concern? Are the European markets once again nervous?
A: During the last week or so, people are relooking at the whole European issue which hasn't disappeared, but has been sidelined and clearly there has been some risk aversion last week. Q: Do you think that it could be another wave of fear? Or will the ECB come in with timely help?
A: The European economies don't want to make mistakes they made last year when no decisions were made for several months and the market just went into a tailspin. This time the European central bank, in particular, is prepared and willing to lend whatever it takes to help the system.
But the fundamental problem in Spain is not going to go away in a hurry. Q: Do you think the deterioration in the US economic data has been neglected and could weigh in the later part of this quarter?
A: In the last three or four months people have been very nervous about any sort of economic recovery in the US. So, effectively that has a sort of dampened expectations.
I believe that the US economy is recovering, but a very modest manner that will continue for the next year or so. Q: What's the FII view on India? Would a rate-cut be good enough a reason to buy India afresh?

A: No, it's a very simple answer, The FII view is that the market has really done itself a disservice on the whole tax issue. The biggest issue that FIIs are looking at is: Do we pay tax on P-Notes? Do we have to pay tax on any Mauritius entity or not? Until that becomes clear, FIIs are going to just sit and not do anything.

 

Q: The Indian finance ministry has announced that entities which don’t prove that they have any commercial reason to be in Mauritius will be taxed, but there will be no retrospective taxes. Would this be a salve or a negative?

A: What is more relevant is clarity and that's the problem. A definitive statement on P-Notes and the tax treatment of companies Mauritius is the need of the hour. What is troubling is the lack of clarity and different people holding different interpretations.
 
The only people who are making huge amounts of money out of this situation are the accountants and lawyers trying to interpret the rules.
  Q: The Infosys results were fairly disappointing for the markets. The market has given them a huge thumbs down and the stock fell 11%. Are you now wary of the entire IT sector?

A: Infosys clearly disappointed at every single level. But I don't think it is relevant for the entire sector. There are some Infosys-specific issues and we are just trying to get to the bottom of them at the moment.