Finance Minister P Chidambaram poured cold water on expectations of stock investors, who were hoping the Union Budget would provide a fillip to the next round of upsides on Dalal Street. Foreign institutional investors (FIIs) dumped stocks on Thursday, triggering a crash in the broader market, as a Budget proposal is being seen as a move to give more power to the taxman to scrutinise inflows routed through countries like Mauritius that have tax treaties with India.
Benchmark indices, which were trading marginally higher before the Budget, shuttled between gains and losses for some time after the Budget announcements. But, uncertainty gave way to a sharp decline as soon as investors discovered the potential impact of the FII tax proposal in the fine-print. The unwinding of bullish bets on the expiry day of the February series futures and options accentuated the slide.
"The Budget came as a disappointment for many investors who expected a lot from the event. The February derivatives series expiry also contributed to the fall with traders unwinding their long positions," said U R Bhat, managing director, Dalton Capital India. (SENSEX ON A CRASH COURSE)
BSE's 30-share Sensex fell 290.87 points or 1.52 per cent to close at 18,861. NSE's 50-share Nifty declined 103.85 points or 1.79 per cent to close at 5,693.
"The Budget has no surprises resulting in investors and traders selling on news," said Vikas Khemani, president , Edelweiss Securities
Another cause of disappointment for investors and brokers was that the Budget kept the securities transaction tax (STT) on cash transactions on the bourses unchanged. Instead, the finance minister cut STT on equity futures from 0.017 per cent to 0.01 per cent. This will result in STT getting lowered to Rs 10 per lakh from Rs 17 per lakh earlier.
"Reduction of STT on derivative trading is a wrong move and would not encourage retail participation. In fact, it is a major boost for high frequency trading, which may even encourage derivative bets," said Deven Choksey, managing director of K R Choksey Shares and Securities. "This is contrary to what the FM had said prior to the Budget and promised that he would look to encourage delivery-based trading," he said.
FIIs net sold shares worth Rs 1,317.79 crore on Thursday"the highest on a single day so far in 2013. Consultants said these investors are now concerned after the Budget proposal said the possession of a tax residency certificate (TRC) from the treaty partner is not sufficient anymore for a foreign investor or a non-resident wishing to avail of tax treaty benefits.
"The proposed change would not entitle a foreign investor to claim credit under the India Mauritius tax treaty on production of the TRC alone. This may result in more questions being raised by tax authorities to entities claiming treaty protection," said Gautam Mehra , executive director, PricewaterhouseCoopers
The Shome Committee report had recommended a continuation of the earlier tax circular which stated that the TRC was sufficient to claim treaty protection.
Brokers said though the lower fiscal deficit target was more or less in line with market expectations, the market is awaiting details
"Even though the fiscal deficit number is as per expectations, the quality of the deficit - represented not by investments leading to efficiency gains but by revenue expenditure largely in the form of doles - is poor and would need improvement in the future," said Dalton'
BSE's mid-cap index dropped 2.5 per cent, while the small-cap index declined almost two per cent, extending recent losses in these segments.
Brokers said now investors will focus on international markets and events for cues on the market as domestic triggers lack the strength to drive stocks.