Indian stocks gain on tax rule

Indian stocks gained the most in Asia after the government changed tax rules on overseas loans, extending policy reforms announced last week, and after the third-biggest party pledged support to the government.

The BSE India Sensitive Index, or Sensex, rose 2.1 per cent to 18,738.03 at 3.26pm in Mumbai, headed for the highest close since July 25, 2011. Bharat Heavy Electricals Ltd., the biggest power-equipment maker, surged the most since May 2009. ICICI Bank Ltd., Larsen & Toubro Ltd., the largest engineering company, and Tata Steel Ltd. soared more than 4 per cent each.

India cut the withholding tax on overseas borrowings by companies, stepping up a policy revamp to revive investments, and announced plans to add mutual funds to a scheme aimed at luring individual investors to stocks. The measures come a week after Prime Minister Manmohan Singh ended a 14-month freeze on diesel prices and opened retailing and aviation to foreigners.

“It’s good news that the government has survived but the more important thing is that there has been no rollback in the reforms announced,” Sam Mahtani, who oversees about $5 billion (Dh18.37 billion) as director of emerging markets at F&C Asset Management, said by phone from London. “The market can easily rise by more than 20 per cent if the government pushes forward with reforms.”

Samajwadi Party, which rules India’s biggest state, said on Friday it will support Singh’s alliance after the government fell short of a majority, Times Now channel reported, citing party chief Mulayam Singh Yadav. Trinamool Congress, the biggest ally in the coalition, withdrew support on Tuesday.Witholding tax.A tax on interest earned by foreigners in bonds issued abroad by local companies, and on interest payments for such debts, was lowered to 5 per cent from 20 per cent, the finance ministry said in a statement on Friday. The reduction is valid for three years, effective July 1, the ministry said.India’s rupee surged to 53.345 per dollar, the strongest level since May 10, after the announcement. The currency traded at 53.42 at 3.14pm. It has gained 1.7 per cent this week.

The Sensex climbed to a 14-month high on Monday after Singh unveiled the reforms last week, the biggest policy push of his previously gridlocked second term. The measures drove foreign funds to buy a net $951 million of local shares in the two trading days to Monday, the most in almost nine months, according to the regulator. Offshore funds have plowed a net $14 billion into Indian equities this year, the most among 10 Asian markets tracked by Bloomberg, which excludes China.

The Sensex, up 22 per cent this year, trades at 14.9 times estimated earnings, compared with the MSCI Emerging Markets Index’s 11.3 times. The Indian gauge’s valuation is still below its high for the year of 16.2 times reached in February, data compiled by Bloomberg show.“The valuation is not expensive,” F&C’s Mahtani said. “It’s about 12 forward-year PE, which is toward the lower end of the five-year band. It really depends on how much they can push reforms forward.”

The S&P CNX Nifty Index surged 1.6 per cent to 5,642.45. Its September futures traded at 5,657.40. The BSE-200 Index increased 1.5 per cent to 2,270.63. The National Stock Exchange of India Ltd. and the BSE Ltd. traded 980 million shares on Thursday, 11 per cent more than the 12-month daily average.

Bharat Heavy jumped 7.2 per cent to Rs231.6, the most since May 19, 2009. Mahindra & Mahindra Ltd. rose 3.3 per cent to Rs810.6.ICICI Bank soared 4.4 per cent to Rs1,067.85. Larsen & Toubro added 4.3 per cent to Rs1,586.5. Tata Steel rallied 5 per cent to Rs415.75.

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