The carnage at the indices began since July 5, when the Budget proposed a levy of an additional surcharge on individuals and trusts earning more than Rs 2 crore and Rs 5 crore, respectively.
However, Finance Minister Nirmala Sitharaman in Parliament made it clear that the super-rich tax was here to stay. She also gave a solution to the FPIs by advising them to register as companies to be out of the ambit of the surcharge.
In a recent panel discussion which was organised by ET, the then Finance Secretary Subhash Chandra Garg, who is now the Power Secretary, was quoted as saying: "So FPI, I'd also mentioned it, was not in the frame in the surcharge that was raised. It's a little collateral kind of consequence.
"They are quite vocal. The FPIs basically make investments in the secondary market. They don't make it the primary market. If you were to look at the economic and financial consequences of what their behaviour might be with our share markets actually being in very high PE ratios, it's not in the economic disinterest of the country if slight exit takes place.
"It also doesn't affect the real investment in the economy. But still there was an attempt on how we can find a way out to sort of at least take out both FPIs, which represent smaller investors, don't represent the cash rich. It becomes very messy. It has not been possible to find a way out. Then the conclusion is, which I also read, and the Finance Minister also had very clearly spoken - I don't think anything is going to be done for them in this year."
Notwithstanding, the FPIs continue to be on a selling spree ever since the budget was announced.
Retail traders grouse that over Rs 12 lakh crore in market cap has been eroded and that FPIs have over 50 countries apart from India to put in their investments.
Nonetheless, stock markets participants fear that once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles. Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions.
The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.
While the rationale behind such an increase in surcharge is to levy a higher surcharge only on high net worth individuals (HNIs) to garner more revenues in tax falling scenario, it has sent jitters among FPIs, and partially triggered the subsequent crash in the stock market.
Taking this into account, recently, the Central Board of Direct Taxes (CBDT) Chairman P.K. Modi had offered a solution to such FPIs that restructure themselves as corporate entities.
Nonetheless, as of August 2, FPIs have been net seller of over Rs 20,500 crore worth of stocks on the BSE, NSE and MSEI in the capital market segment, since July 1.
Consequently, the S&P BSE Sensex has shed around 2,700 points since the announcement on July 5.
On July 18, while ruling out tweaking the FPI surcharge, Sitharaman said trusts should register as companies to be out of the ambit of the surcharge.
"Some FPIs are registered as trusts. Therefore as an individual entity he comes under the taxation. Such FPIs who have registered themselves as trusts may consider the option of wanting to move to register as company," she said in reply to the Finance Bill, 2019 in Parliament.
( With inputs from IANS )