REUTERS

MUMBAI

WHATEVER its intentions in cracking down on abuse of tax havens, India has alienated overseas investors with the timing and communication of its measures when it can ill afford to do so.

India’s move to target tax evaders through a general anti-avoidance rule (GAAR), along with a plan to retroactively tax the indirect transfer of assets, has spooked investors and added to an exodus of funds, battering the rupee.

Starting on Monday, India’s parliament will begin considering the finance bill that includes the tax proposals but final details may be a month or more away, government sources have said, which could prolong the uncertainty and aggravate a balance of payments shortfall.

“We are hoping that because of the currency and because of inflow problems, they might either delay it by a year or do something else,” said Samir Arora, an India-focused fund manager with Helios Capital Management in Singapore.

After days of what traders said was intervention to defend the rupee, the Reserve Bank of India late on Friday took steps to encourage dollar inflows, a move dealers said may do little to improve nearterm weakness in the currency, which is approaching an all-time low set in December.

Meanwhile, the gloomy mood derailed the year’s biggest initial public offering from India, with auto parts maker Samvardhana Motherson Finance Ltd on Friday scrapping its $311 million issue because of poor demand. Foreign funds are usually the biggest buyers of large Indian equity deals.

Adding to investor ire, India said on Friday it may review its tax break treaty with Mauritius, the East African island country that the majority of foreign portfolio inflows are believed to be routed through. Mauritius is the same source of fund flows India is targeting through its GAAR proposal.

“Govt going all out to make foreign investors flee India.

GAAR is not yet settled and they are making statements on Mauritius treaty review,” tweeted Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher Group. The GAAR proposal and a move that would tax already-completed mergers of foreign companies with Indian assets, potentially putting Britain’s Vodafone back on the hook for more than $2 billion in taxes even after India’s Supreme Court ruled in its favor, have slammed investor sentiment.

Already, investors had been put off by policy paralysis following a spate of corruption scandals as well as slowing growth, persistent inflation and a fiscal deficit that ballooned to 5.9 percent of gross domestic product in the last fiscal year as the government has been politically unable to cut fuel subsidies. Macquarie’s $1.5 billion Asian Alpha Fund exited its short positions in Indian single stock futures in response to the proposed tax rules, instead using a futures contract in Singapore to get its short exposure to India.