The BSE benchmark Sensex reversed the day’s steep losses to end higher by 82 points on brisk last hour buying after investors cheered Finance Minister Pranab Mukherjee deferring the controversial General Anti-Avoidance Rules (GAAR).
After GAAR and changes in the I-T Act that had spooked the investor community bringing down key indices to three-month low levels last week, the markets have now set all eyes on Parliament.
Moving the Finance Bill, 2012, which contains GAAR provisions, for consideration and passage in the Lok Sabha, Mukherjee deferred GAAR to 2013-14 and fixed the onus of proof from tax payer to the I-T Department that soothed the nerves of foreign investors.
Within minutes of government deferring GAAR, markets started recovering from the the steep losses it had suffered in the early trade in tune with global stocks. Global stocks took a severe knock after France and Greece poll results cast a shadow on eurozone's ability to overcome crisis.
The benchmark Sensex, which at one point of time during the day was down close to 320 points, dramatically reversed the fortunes to settle the day at 16,912.71, a rise of 81.63 points from its last close,
“Markets will now await initiation of the reforms process, which is necessary for the markets to sustain and move up from the current levels," said Kotak Securities Head (Fundamental Research) Dipen Shah.
The government’s other steps, which soothed the nerves of investors, included halving the capital gains tax for private equity investors to 10 per cent and relaxing the norms for arrest of persons involved in violation of Customs Act. Investors were frightened by the GAAR provision that put the onus on investors to prove that arrangements were not at aimed at tax avoidance. Also, foreign investors feared GAAR rule could apply to holders of Participatory Notes (P-Notes), the instrument through which foreign entities not registered in India could invest in the stock markets, issued by FIIs. The broad-based NSE Nifty also early logged a low of 5,017.80 before springing back to conclude at 5,114.15, a gain of 27.50 points.
“In the last hour of the trade markets recovered from the day’s low as the announcement brought cheer among the investors,” said Fairwealth Securities Head (Equity) Sharmila Joshi.
Rupee gains
Meanwhile the rupee, recouping from sharp early losses, gained an impressive 56 paise at 52.91/92 against dollar, to snap a four-day losing string as hopes of strong fund flows got a boost from the deferring the GAAR.
Treasury managers in banks said steps announced by RBI regarding FCNR and export credit also lifted the rupee sentiment. At the Interbank Foreign Exchange (Forex) market, the domestic unit opened weak at 53.63/64 and logged an intra-day low of 53.76 on early sharp fall in local equities due to negative global advices.
Moving in tandem with stocks, where late buying emerged after deferring of GAAR, the domestic unit started gaining, as exporters and some banks started selling dollars on hopes of more capital inflows in view of GAAR postponement. The local currency bounced back to a high of 52.85 before concluding at 52.91/92, a rise of 1.05 per cent. In the last four sessions, it had plunged by 0.93 paise, or 1.77 per cent.
Positive reaction
Reacting to the changes introduced in the Finance Bill, Ficci President R V Kanoria said that the industry body is happy its suggestions have been taken cognizance of and that there is a rethinking on GAAR. “I hope that they will also relook it and a more realistic GAAR will be introduced,” he said.
Similarly, PwC India Joint Tax Leader Ketan Dalal said, “GAAR has been deferred by one year. There also seems to be an intended to shift the onus of proof from the tax payer to the tax department, which again is welcome.”
“However, a fundamental issue that still needs to be addressed is the trigger of GAAR itself - the draft proposal contemplates the trigger ‘where one of the main purposes is to obtain a tax benefit’. Given that ‘tax benefit’ is worded unreasonably, one hopes this issue will be addressed,” he added.