Rashesh Shah, Chairman and Managing Director of Edelweiss Financial Services, has called on the Indian government to eliminate capital gains tax for foreign investors. This proposed measure seeks to invigorate the stock market, attract overseas capital inflows, and bolster the Indian rupee, according to Shah's statements to Bloomberg Television.
India has experienced significant foreign portfolio investor (FPI) outflows, totaling more than $28 billion from its equity markets this year. Shah emphasized the need to signal to foreign investors that India is a desirable and permanent allocation for their capital. He believes that removing the capital gains tax could be a straightforward solution to encourage their return.
Addressing FPI Outflows and Market Health
Currently, long-term capital gains on listed equities held for over a year are taxed at 12.5%, while short-term gains face a 20% tax rate for foreign investors. Shah's proposal aligns with broader calls for tax changes to make Indian markets more attractive to global capital.
Finance Minister Nirmala Sitharaman recently indicated that tax revisions related to stocks would be considered, though specific changes to capital gains or transaction taxes were not confirmed. However, a recent global sell-off in artificial intelligence stocks and a decline in oil prices have already prompted some overseas funds to reinvest in India, with over $5 billion flowing into Indian equities in the past three weeks, contributing to a nearly 10% market rebound.
Domestic Inflows and IPO Opportunities
Despite the FPI challenges, Shah noted that robust domestic inflows continue to provide crucial support to Indian stocks, particularly during periods of global risk aversion. He estimates that Indian mutual funds could collectively invest $40 billion to $50 billion in equities annually, supplemented by another $20 billion to $25 billion from insurance companies and pension funds. This consistent domestic capital supply, totaling $60 billion to $80 billion annually, creates fertile ground for companies seeking to raise funds through initial public offerings (IPOs).
Edelweiss itself plans to list its asset management business within the next 18 to 24 months, underscoring the potential for the IPO market. The company's mutual fund arm, which manages assets worth approximately $19 billion, counts US private equity firm WestBridge Capital among its key investors. Another group entity, EAAA India Alternatives, recently debuted on the market after a successful IPO.
Shah's comments highlight a dual strategy for India's market growth: actively enticing foreign investors through tax relief while simultaneously leveraging strong domestic institutional inflows to support equities and foster a vibrant IPO ecosystem.