Is the capital gains tax to blame for the foreign-investor exodus?

It's being offered as an explanation to justify past stories gone wrong but is weak as an argument

- VIVEK KAUL is the author of 'Bad Money'.

In the Hindi cinema of yore, villains were a very important part of the story. But they never had a backstory. No explanation was offered on why they became villains in the first place. If such an explanation had been offered, the movies of that era would have felt far more coherent and complete. While Hindi cinema got away with this lack of coherence, the stock market can't.

Villainy in today's stock market story has been ascribed to foreign institutional investors (FIIs) who have been selling Indian stocks lock, stock and barrel, having net sold shares worth ₹2.4 trillion from October to 13 March.

In fact, we are now being told by those in the business of managing other people's money (OPM)—individuals who thrive on selling different stock market stories at different points of time—that this selling is taking place primarily because of the long-term capital gains (LTCG) tax that FIIs need to pay. As far as backstories and explanations go, this is a clever one. But it's weak as an argument.

First, the tax came into effect from April 2018, with FIIs having to pay 10% on their LTCG. So, why come up with this story now when the tax has been around for nearly seven years?