Retroactive merger tax bad news for Indian markets

India’s markets have not taken kindly to recent anti-business government initiatives. On Friday, India’s government announced that any merger dating back to 1962 which involved a foreign company could be retroactively taxed. Needless to say, the implications are significant as it will likely discourage future foreign investment.

If foreign investors in India have to worry about retroactive taxes, then there can be little comfort in any kind of long-term investment in the world’s most populous democracy.

If money flees India because of this legislation, then the rupee’s recent rebound likely comes to an end, and the stock market suffers as a result.

Take a look below at the price ratio of the iPath MSCI India ETN (INP, quote) relative to the Dow Jones Industrial Average (DIA, quote). As a reminder, a rising price ratio means the numerator/INP is outperforming (up more/down less) the denominator/DIA.

India, which staged a strong period of outperformance early this year following poor 2011 performance, is now showing signs of significant deterioration as U.S. stocks begin to outperform once again.

The weakness appears justified because it shakes foreign investor confidence in the rule of law in this historically corporation-unfriendly country. Furthermore, existing corporate investments may be divested purely because of fear over new taxes for past deals. 

Either way, it seems that the market may force policymakers to re-evaluate this decision, but further weakness likely lies ahead.

 

by Michael A. Gayed CFA for Emerging Money

 

 

 

 

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.


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