LTCG will hurt FII behaviour; will make India underperform other EMs, says Samir Arora

Rally in India is driven by strong US market, he further mentioned.

Speaking of money flow, he said that he sees money flow into balanced funds impacted with the imposition of new taxes.

He also expects some further negative reaction from the market on taxation development, Arora said.

On stocks, he mentioned that he has bought some growth-oriented stocks pre-Budget thinking that earnings growth in India is very strong and their revival seems to be happening.

Below is the verbatim transcript of the interview.

Latha: All the fine print and bold print is known, will people turn away from the market or will they take it in the stride after all with growth you don't mind giving away 10 percent?

A: Actually, people do mind. Before that let me give my background. I run an India only fund and it would serve me the best if I could convincingly tell the world that India is the best place to invest and that there you can't leave without India and that we make 15 to 20 percent return dollar terms and therefore if you pay 10 percent it will not matter therefore nothing suits me personally better. But the reality is that if I don't mind if people, in the end, say that LTCG tax should be paid. But at the same time guests on your channel and including your commentator should not say simultaneously that it does not matter.

I mean imagine, that on one end we say that on mobile phones if we increase duty by 5 percent suddenly the global manufacturing supply chain will change their strategy and start making those phones in India let us say and therefore it is a very important thing which all your guests will come and say. But if 15 percent tax is charged on a financial investor who can easily move from one market to the other nothing will matter to him. So, if 5 percent tax can change somebody's manufacturing plant of a multinational which normally takes much longer and these small things for him matters. But for a financial investor, it does not matter. So, I would say just one thing nobody minds long-term capital gains if that is what you want, but please also admit that it matters.

I just want to give this idea that India is growth and therefore nobody can leave without it. I am the number one beneficiary if that is what the world believes or it is one of the beneficiaries of this audience which knows effectively we are the marketers of India to the end investors and we would be most delighted if that is what the world felt. But please note - that just yesterday four results came out in the US. A company called Google which you may have heard of now called Alphabet has a USD 820 billion market cap and its earnings grew 28 percent and disappointed the market. Alibaba yesterday grew its earnings at 35 percent with a market cap of USD 500 billion. For Google type company the valuation is 20, so first let us agree two things that we don't care for the world and secondly, these things don't matter and both are wrong.

So, it matters and this growth of 15 percent, therefore, you can't leave without India I hope that was true because I would be the biggest beneficiary of that. It is a serious negative.

Sonia: Now, hereon where does India feature as far as the other emerging markets (EMs) are concerned? I ask you because so far India has underperformed EMs this year and yesterday we were speaking to a couple of global experts who indicated that other markets like Brazil, Mexico etc are looking far more attractive. Now with LTCG, do you get a sense that money could be moved out of India and perhaps into other markets?

A: I would be the biggest beneficiary and I will keep emphasizing because people think that we are acting like foreigners. The point is that, according to me, India should now unfortunately underperform global peers, emerging market peers by 5-10 percent whether that means a fall or an underperformance, I think more or less it is economics.

If you were expecting that 10 percent return from India and now you get 8.5 then it doesn’t mean that 8.5 is good, therefore I will still continue with that. That won’t normally change the relative ranking of people who have global choices.

Let us say there are fifteen countries that foreign investors can invest in. It cannot be the case that India – let us say they were projecting on whatever basis, 15 percent market growth and that the next country was only 10 percent and therefore this 15 became 13.5, it does not matter. It cannot be that the difference between us and the others is so much that we can absorb 1.5 percent less and it does not matter.

Yesterday on your channel, all these brokers, CEOs came and said, it does not matter if you have to pay 1.5 percent tax. These guys are lead managers for Indian initial public offerings (IPOs), which have market cap of Rs 500-1,000 crore and these issues get oversubscribed 100-200 times, that means the investor in these IPOs maybe getting 0.5-0.2 percent of his fund. So for 10 basis points (bps) of return, people are willing to put billions of dollars into IPO where they themselves will make not even 10 bps. I have never in an IPO, made more than 10 bps of my own NAV because if you have a billion dollar fund, you will get USD 5 million, on that USD 5 million, you will get 20 percent, so you will make USD 1 million so that is 0.1 percent. So for that how much effort we do, how much analysis we do, how many meetings we do, how many letters we write to the management so that our NAV can change by 5 bps and here they say 150 bps doesn’t matter. Absolutely wrong feedback to the government.

For full interview, watch accompanying video...