Jittery foreign investors have pulled out a staggering Rs 12,256 crore from capital markets in the first week of May amid mounting worries over the 20-per cent minimum alternate tax (MAT) that they fear could be imposed on their profits.
Foreign portfolio investors (FPIs) have been reducing their investment in recent months. While in January, FPIs invested Rs 33,688 crore, they reduced it to Rs 24,564 crore in February, Rs 20,723 crore in March and down to Rs 15,266 crore in April.
Markets have tumbled ever since foreign funds started to publicly question the tax claims in April.
Consequently, shares and bonds have wiped out their entire gains in recent weeks. There has been a surge in FPI withdrawal in May with an estimated Rs 12,256.21 crore going out of the capital markets, according to the latest data compiled from depositories and stock exchanges.
According to official data, net sales of around $630 million on Wednesday is the biggest since foreign investors sold around $877 million on January 27 last year at a time when there was an exodus of foreign capital as investors turned jittery over higher US interest rates.
"FIIs (foreign institutional investors) continued to lighten their weight in Indian equities," Reliance Securities head of research Hitesh Agrawal said.
Last week, global rating agency Fitch had said that the issue of FPIs facing MAT demand may prompt them to think twice before investing in India.
The income tax (I-T) department has already issued notices to 68 FIIs totalling Rs 602 crore over non-payment of MAT.
Some foreign investors have gone to court while the government has decided to set up a high-level committee to resolve the issue. Foreign funds fear that authorities will target them more aggressively.
The anger over MAT is accompanied by some disappointment over what is being seen as the slow pace of reforms by Prime Minister Narendra Modi's government.
There has been a reversal for a market that has surged since 2014 on hopes that the Modi government would usher in a wave of economic reforms outperforming other emerging markets such as Brazil and South Africa.
Union finance minister Arun Jaitley has tried to allay fears of foreign investors saying he has referred the MAT dispute to a committee headed by Law Commission chairman AP Shah and sought an early recommendation.
Jaitley has said that the government would consider recommendations of the committee and take an appropriate decision as soon as possible.
The finance minister has also stated that the government is committed to certainty and providing an enabling environment to both domestic and foreign investors while avoiding any retrospective taxes.