Indian markets could have lost an estimated $10 billion worth investments from the overseas funds and ultra-rich foreign individuals over a period of little more than one month on taxation worries.

These investors, who mostly invest through P-Notes (participatory notes) in the Indian markets have either pared their exposure to the Indian securities or have deferred their investments since India proposed a new tax policy, the General Anti-Avoidance Rule (GAAR) late in March 2012, industry sources said.

While details about the new rule remain elusive, it is feared that it could lead to heavy tax burden for the foreign investors investing through tax-friendly places like Mauritius. Incidentally, most of the overseas entities route their investments into India through such places to take benefit of their tax-friendly regimes.

Many hedge funds and ultra-rich investors from abroad are said to prefer P-Notes, which are sold by India-registered FIIs (foreign institutional investors), as it helps them invest without directly going through the rigmarole of various regulatory processes.

The PNs account for more than 15 per cent of the total assets held by the FIIs in the Indian markets.

However, it is feared that the new rules could lead to a significantly high tax liabilities for FIIs, even if they route their funds through tax—friendly jurisdictions. Besides, the FIIs could be forced to pass on their tax liabilities to their P—note clients, thus adversely impacting their overall returns on investment.

Industry sources said that the fear, prevailing in the market since late March, could have led to at least $10 billion worth investments either having withdrawn or deferred by the P-note holders.

While there are no official figures for any such impact on the foreign investments, the latest data available with the market regulator SEBI show that the total value of PNs in the Indian markets stood at about Rs 1,65,832 crore (about $33 billion) at the end of March 2012.

This figure was on a sharp uptrend this year till middle of March, but started declining sharply after the GAAR proposals came to be known. The total value of PNs stood at about Rs 1,52,000 crore at the end of January and rose even further to Rs 1,83,151 crore by February.

While the mid—month figures are not disclosed by Sebi, the industry sources said that the total value of PNs are estimated to have reached near Rs 2 lakh crore (about $40 billion), before it started sliding in late March.

A further clarity is expected on the GAAR front this week after the Finance Minister, Mr Pranab Mukherjee, replies in Parliament to a debate on the Finance Bill.

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