At least three of the biggest global banks have told their clients to stop buying Indian shares on worries over the land bill and tax claims by the government, sources at the banks said.

One of financial institutions, a UK bank that advises large pension funds and endowments on investment strategies in India, has taken this adverse stand in its annual advisory report, prepared after meetings with the government, Opposition, industrialists and economists. People familiar with the issue said this was the first time in three years that the bank has taken such a view.

According to two other banks that HT spoke with, similar advisories were sent by their foreign offices telling large institutional investors and high net worth individuals not to add to the existing India portfolio.

Banks such as Standard Chartered, Barclays, Citibank and Deutsche typically have dedicated research teams sitting in major cities that provide investment recommendations in various geographies to wellheeled clients.

“The tax issue has been very disappointing,” said one of the two persons, who was part of his bank’s team that participated in a fortnight-long interaction with policymakers and analysts in Delhi and Mumbai. “The sad part is that foreign institutions have not got any clarity yet,” he added.

At the root of the banks’ skittishness are tax notices of about ` 40,000 crore made on foreign institutional investors (FIIs), which have revived fears of an uncertain regulatory environment.

The finance minister in his budget had proposed exempting FIIs from paying the 20% minimum alternate tax (MAT) from April 1, 2015, sparking speculation that all previous years’ incomes would come under the scanner.

FIIs have never paid MAT, which is applicable to domestic companies or those that generate local business. This was then followed by notices from the income tax department to about 100 FIIs.

The other big factor are fears that the land bill, viewed as critical to hitting economic growth targets, will run aground on political opposition. The government’s task in getting the bill through has been further complicated by predictions of a failed monsoon and by suicides in indebted rural India.

FIIs have had a prolonged honeymoon with the Modi government, attracted by the PM’s credentials as a reformer and the huge majority he enjoys in the Lok Sabha.

They have poured billions into Indian equities and debt since May 2014: A chunky $6.34 billion has come in so far this year.

But since April 15, they have pulled out shares worth nearly Rs 3,350 crore, and have been net sellers on all but two trading sessions during this period.

Recently, a group of FIIs including UBS, Fidelity, JP Morgan, HSBC, Deutsche Bank and Goldman Sachs met finance minister Arun Jaitley.
On Thursday, finance ministry sources said FIIs belonging to nations with whom India has double tax avoidance agreements (DTAAs) are likely to be exempted from paying MAT.

“The government will have to take a view that this is a phase when we need foreign investors,” said IIFL chairman Nirmal Jain.

“Instead of an absolute black and white interpretation of what is fair and what is unfair, more pragmatic business-like view should be taken.”