India has never been one to make a comprehensive announcement and then sit back and watch. Back in 2013 it rolled out a mechanism to protect retail investors that had bought shares in companies that then underperform after their IPOs. Just a few months after putting this safety net in place, it did a complete U-turn and gave up on the idea.
Something similar happened in DCM last year. India first banned retail investors from buying Basel III bonds, only to back-track a few months later and eventually scrapping the restrictions.
Unsurprisingly, in the weeks before India announced its budget for fiscal year 2015/2016 on February 28, there was a lot of chatter among ECM bankers on how the government would handle the taxing of real estate investment trusts ( Reits ). The outlook then was largely positive, with the market believing that months of discussions with the government would have provided the ministers with enough feedback on what would work and what wouldn’t.
To some extent, India didn’t disappoint, scrapping long-term capital gains tax on the transfer of Reit units by sponsors and tackling head-on the problem of double taxation.
But at the same time it showed its absolute unwillingness to fix all the problems in one go. The budget ignored the dividend distribution tax (DDT), withholding tax and minimum alternate tax (MAT) — the existence of which pose big roadblocks to opening up the Reit market.
It’s time for India to put forward its plans on these concerns, or risk losing out.
For starters, the uncertainty about these taxes is simply not good for market sentiment. India has been trying to get a Reit framework together since 2008, so it has had plenty of time to work out a tax regime. By causing confusion and failing to put together an acceptable tax structure, it is sending out a very sorry signal to the investment community.
Seizing the moment
This is also at a time when all eyes are on India. Stock markets are on the rise and investors are bullish. Reits in particular appeal to international investors, who are yield hungry and eager to expand their India portfolios.
Issuers are also itching to get started. Many are already sitting on piles of assets that they want to structure as Reits . With India’s rental market having had a dull past, Reits will give sponsors the perfect avenue through which to net some hefty returns, either by getting foreign investment or by way of exits.
Macro factors have already given India the momentum it needs to go places. Now all it needs is to put together the best regs possible.
Getting rid of DDT entirely would do wonders for issuer sentiment. Dividends paid by a special purpose vehicle (SPV) to the Reit face a hefty 17.65% DDT — enough for sponsors to lose the incentive to invest more in their SPVs. By easing this, the government could entice more companies to establish Reits .
Reducing the minimum alternate tax (MAT) for Reits , or scrapping it, could also be a way forward. MAT is charged when there is an exchange of shares of the SPV for Reit units at market value. But as this typically happens when setting up the Reit, it penalises sponsors. The government could usefully fix this.
While it’s at it, India should also take another look at rules that make it mandatory for unitholders to stick with their investment for more than 36 months for it to be classified as a long-term asset. For conventional equity, the requirement is only one year.
What’s needed is not just clarity, but firm — and positive — measures. If India ponders the question of whether to tax or not to tax for too long, its ECM market might just end up meeting an end as tragic as Shakespeare’s Hamlet. It can be tempting to see endless internal debate as measured consideration. Often it signifies nothing more than weakness.