The initial public offer (IPO) of the National Buildings Construction Company (NBCC) that recently closed for subscription saw around 10-15 foreign institutional investors (FIIs) going back on their commitment to invest in the offering.
According to persons familiar with the development, the continuing confusion related to the taxation of FIIs made some of the overseas investors jittery at the last minute.
Sources privy to the development say that during road shows, notable FIIs, including, Nomura, Goldman Sachs, Geosphere Capital, Invesco Funds, Tudor, Sansar Capital and Ochziff, had all given an assurance of putting in substantial bids in the offering, but later opted out, citing lack of clearance from their respective investment committees.
?We believe the subscription in the QIB (qualified institutional buyers) portion would have been 25-30% more if these GAAR-related issues would not have erupted,? said a person privy to the developments.
?Some of the funds told us that their investment committee has directed them to opt out and not make any fresh investments till the uncertainty is cleared,? he added.
According to another person involved in the marketing of the offer, some of the foreign investors also trimmed the quantum of investments after the new tax proposal was announced. ?The issue size was small and, so, some FIIs assured us that they will put in bids of at least $5 million. That was also cut down by the time the actual bids came in,? he said, wishing not to be named.
According to market sources, the buzz prior to the IPO was that the institutional portion would be subscribed 12-15 times, but the final numbers showed that it got subscribed a little over seven times. Incidentally, the overall issue was subscribed nearly five times. The shares are scheduled to be listed on the bourses on March 12.
The root of the matter is the General Anti-Avoidance Rules (GAAR) proposal put forth by finance minister Pranab Mukherjee in the Union budget 2012-13.
According to the proposal, Indian tax authorities would have the power to tax the income of FIIs that are registered in countries with which there exists a Double Tax Avoidance Agreement (DTAA).
Most FIIs operating in the Indian market are registered in Mauritius and, so, do not have to pay any tax here as India has signed a DTAA with the island nation.
Even though the government has clarified that all such FIIs will not be taxed, the proposal has led to a huge sell-off in the secondary market with FIIs selling shares of nearly $500 million ever since the proposal was announced on March 16. Meanwhile, Asia Securities Industry & Financial Markets Association (ASIFMA) has already written to the finance minister that if the tax uncertainties are not resolved quickly, FIIs will feel that the tax risks are unacceptable.
Thereafter, these investors may proceed to liquidate their India investments and such a disorderly dissolution of large positions held by these overseas investors could seriously disrupt the Indian capital markets, it said in its letter. FIIs fear that the new tax rules could subject the foreign investment to double or triple taxation.