Och-Ziff, the $30-billion New York-based hedge fund, has frozen secondary market stock investments in India due to soaring compliance costs and muddled tax policies, four people familiar with the development said.
Sumit Choudhary, the Hong Kong-based managing director of the firm who was overseeing India investments, recently left the company as it has ‘nearly shut its India desk’ said one of the persons familiar with the fund’s operations but who did not want to be identified.
The hedge fund founded by Daniel Och, a Goldman Sachs alumnus, has been cutting direct investments in India for some time. Instead, it was investing through participatory notes, a derivative instrument used by international investors to avoid local compliance issues.
Och-Ziff and Choudhury did not respond to emails and phone calls seeking comment on its India strategy. The long-short fund which has 11% of its investments in Asian region does not provide country wide exposure.
General Anti Avoidance Rules (GAAR) introduced in the last Union Budget has become a thorn in the side of global investors who benefited from tax treaties between India and countries such as Mauritius. These rules attempt to plug gaps in bilateral tax treaties that Indian tax authorities believe was exploited by international investors to avoid tax payments.
Although such rules are prevalent in many countries such as Canada and Australia, it has upset investors in the Indian capital markets because guidelines spelling out how the new regime will operate are not in place leaving investors at the mercy of taxmen who can potentially come up with tax claims at will. Further some investors are concerned that GAAR could operate with retrospective effect and the revenue authorities could seek to tax income from previous years.
Macquarie, the Australian investment bank shut short positions in one of its India funds recently citing lack of clarity in tax proposals, Reuters reported. Investors say many funds are on hold waiting for the final print on these rules. CLSA has also reportedly stopped issuing participatory notes pending clarification.
Och-Ziff, which was active in buying stakes in companies such as Nitesh Estates before the credit crisis, has still some investments left in the country, said another person. It has staff in its Mumbai and Bangalore offices.
The fund which has about 11% of its investments in Asia Pacific may be keeping its options open on resuming India investments if clarifications that the government has promised to come up with favourable investments are there, two of the people said.
“We have told them that their (foreign institutional investors) concerns would be taken care of,” finance secretary RS Gujral had said. “We will also clarify in the rules that the GAAR provisions will apply only from April 1, 2012 to allay apprehensions that past cases when they had impermissible arrangements will be reopened.”
But investors are still jittery and the overseas fund flows that touched a record for the first quarter anytime since portfolio flows began in 1992 have turned negative.
The net foreign funds purchase of equity at Rs. 43,950 crores as of first quarter ended March turned into net sales in April at Rs.771 crores, data from Securities & Exchange Board of India shows.
“I would prefer other markets than India if GAAR is implemented” Jim Rogers, chairman at Rogers’ Holdings and a former associate of George Soros had told ET Now in an interview.