When it comes to risk capital, Helios Capital's Samir Arora believes that contrary to popular belief, there isn't enough capital to fuel India's growth and foreign capital flows should not be taken for granted. Capital gains tax on foreign investors makes India less lucrative than it seems and is one of the reasons why the market is where it is, Arora added.
Arora was speaking at a panel at the NSE to commemorate Moneycontrol Pro reaching a million subscribers.
"I think we are getting carried away that we have enough capital. Every company that has been created in private equity is nearly 100 percent foreign capital-funded," he noted. Arora said that it is not enough to say we are growing more than others. This is because despite the perception of growth, India is still underperforming compared to its potential. “We are growing much lower than what we should grow to really change (the return math for foreign investors)," he said.
Capital gains tax imposed on foreign investors, Arora noted, could be seen as a deterrent to investment. “Capital gains tax on foreign investors is one of the reasons why the market is like it is. Currently, if you look at 20, 25 years returns in dollars, the US market and Indian market have the same returns if you do post-tax. We keep talking about pre-tax because the index is pre-tax, but now everybody can see that it’s a big leakage.”
For example, Arora spoke about the performance of a prominent India-focused ETF: “If you look at the ETF of India, which is a foreign ETF called Indy ETF, it has underperformed this year by nearly 500 basis points, or 5 percent. The index is up 20 percent, but that ETF is only up 15 percent. How long can people be told our market is up 20% when that poor guy sees 15?,” he said.
Arora pointed out that India is one of the few countries imposing such a tax on foreign investors, which could harm long-term capital inflows. "No country in the world -- and there are maybe 200 (investable) countries in the world -- taxes to foreign investors. It’s not like we’re playing a special game,” he said.
In a July 25 interaction with Moneycontrol, Arora had pointed out that India may become less attractive to investors on a post-tax basis following the government's hike in long-term and short-term capital gains tax. He had also expressed disappointment over fund managers and analysts downplaying the impact of the tax change, which is likely to cause a permanent reduction in post-tax returns over the life of equities. “I am rather amused that analysts who agonize over tiny changes in corporate earnings and other short-term corporate events are blissfully missing the permanent hit to returns,” he had noted.
He also added that the ecosystem shouldn't get overconfident and should care about this. “I am in the mutual fund business...a beneficiary if taxes are high (this is because mutual funds do not pay taxes while buying and selling stocks, its is only taxed in the hands of the investor and therefore taxes are deferred). I have both businesses now, therefore, it is not me talking for myself, it is just wrong for India to get so overconfident that we have enough capital, we have these investors, and say we don’t care. We should care,” he said.
Foreign institutional inflows into India have slowed since early October 2024. High interest rates and good equity performance in the developed markets like the US have deterred investors from taking big bets into emerging markets.
Between October 23, 2023, and October 23, 2024, the BSE SENSEX Index increased by 22.60 percent. On the other hand, the S&P 500 rose by 37.48 percent. In terms of other Asian economies, The Shanghai Composite gained 15.32 percent, and the KOSPI Index grew by 7.36 percent. The FTSE 100 gained around 18.35 percent and the CCMP Index gained by 40.39 percent.
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