Foreign investors are not the only ones worried over the proposed General Anti-Avoidance Rules (GAAR). A senior government official told FE that foreign institutional investors? (FIIs) concerns over the potential tax liability arising from GAAR could jeopardise the PSU disinvestment programme.
Disinvestment secretary Mohammad Haleem Khan told FE that if the confusion over GAAR is not clarified in the relevant rules, it could hurt investor sentiment and make it difficult for the government to carry out the disinvestment programme.
The government plans to garner R30,000 crore from sale of stakes in select public sector companies this fiscal and might use a combination of methods for this including auction (offer for sale), which allows the whole process to be completed in a day. FII interest in these stake sales will be crucial in achieving the target and also in making the whole process meaningful. The sale of a 5% stake in ONGC in March through the auction route, according to many analysts, was a travesty of the concept of divestment as LIC, another PSU, was roped in to salvage the offer. To iron out the technical problems that showed up, Khan said Sebi was looking into the procedure and would resolve all issues related to the auction process to make it lucrative for many PSUs.
Khan expressed hope that once the Finance Bill is passed by Parliament and the relevant rules are laid down, investors will have clarity over how GAAR will operate. Once cleared, GAAR, ? which is based on the ?substance over form? doctrine ? will take effect retrospectively from April 1. It will allow Indian tax authorities to go behind the legal structures created by foreign investors to invest in India despite protective tax treaties (like the India-Mauritius treaty) and check if these structures lacked ?commercial substance?.
If the arrangement is found to be merely to camouflage the real purpose and avoid tax on capital gains, the investor could practically be deprived of the treaty benefit.
Nine out of every 10 FIIs investing in India come in through one or the other tax haven and about half of the total FII investments is routed through Mauritius. FIIs have assets under ownership of more than Rs 10 lakh crore or 17% of the capitalisation of India?s equity markets.
But some analysts feel that while tax implications of GAAR are important from the FIIs? point of view, they would equally be concerned about the right pricing of the stakes on offer and quality of assets of the company concerned when it comes to participating in stake sale of Indian PSUs. Says Jagannathan Thunuguntla of brokerage firm SMC Global: ?The primary concern of any investor is how the reserve price is fixed for the auction.?
The disinvestment programme for this year is slated to begin in June, with steel major RINL?s initial public offer (for 10% stake) likely to be the first to hit the market, followed by the IPO of Hindustan Aeronautics.
The disinvestment department would try to push a clutch of other IPOs as well, if the market situation improves. It also plans to go for auction in Oil India, SAIL and Hindustan Copper.
In the Budget, Mukherjee proposed GAAR in order to ?counter aggressive tax avoidance schemes, while ensuring that it was used only in appropriate cases, by enabling a review by a GAAR panel. The market has, however, come to think that GAAR could lead to harassment of foreign investors in India, especially because of the likely subjective element in its implementation.
