SEOUL May 1 India is faltering as an investment
destination because of significant policy mistakes and stock
prices there will slide if the nation's credit rating is cut,
according to Mark Mobius, one of the world's best-known emerging
"The Indian government has been making many many big policy
mistakes. The most important of all is the idea of having
retroactive taxation," Mobius, executive chairman of Templeton
Emerging Markets Group, told Reuters in a phone interview from
Foreign investors have raised concerns on two Indian
provisions seeking to tax indirect investments and combat tax
The first gives India power to retroactively tax the
indirect transfer of assets. The second targets tax evaders via
the General Anti-Avoidance Rule (GAAR), putting the onus on
investors registered in countries with special tax exemptions
with India to prove they do not intend to explicitly avoid tax.
Macquarie's Asia hedge fund in March exited its
short positions in Indian single stock futures in response to
the controversial proposed tax rules, fearing they would lower
Mobius's team manages $50 billion worth of emerging markets
equities for Franklin Templeton Investments, an arm of U.S.
money manager Franklin Resources Inc.
India constituted 16.1 percent of Mobius's $17.7 billion
Templeton Asian Growth Fund as of end-March. The flagship fund
had Indian software exporter Tata Consultancy Services
among its top-10 holdings.
Standard & Poor's last week cut India's credit rating
outlook to negative from stable, reflecting the toll that hefty
fiscal and current account deficits and political paralysis are
exacting on Asia's third-largest economy.
The agency warned the country had a one-in-three chance of
losing investment-grade status.
"If it actually happens, it will be a big shock. The market
will be shocked and prices will sharply decline," Mobius said.
On China, the fund manager said the political scandal over
deposed provincial political leader Bo Xilai reflected
increasing pressure the country faces on political reforms but
added it was not a big problem for equity investors.
Bo, the ambitious former leader of China's biggest
municipality Chongqing, was sacked in March after police began
investigating his wife on suspicion of murdering a former family
friend, a British businessman, in a row over money.
"This is well isolated in one province and I don't think
this is a big problem," Mobius said. The Asian Growth Fund had
nearly 28 percent of its portfolio in China companies as at
end-March, with PetroChina as its No. 1 holding.
Regarding South Korea, which faces increasing calls for
faster reform in corporate management practices, Mobius said
concerns about the ownership and governance structure at big,
family-run conglomerates were dragging down share prices.
"They have to do much further than that to allow minority
investors to have a greater say," he said, while praising some
companies for handing some of the power that the founding
families held to newly created holding companies.
"Right now, the reason why Korean stocks tend to sell at a
discount is because of this problem. That's the single most
important factor," he said. The flagship fund had 7.2 percent of
its portfolio in South Korean companies, with SK Innovation Co
Ltd among its top-10 holdings.
On Europe, the fund manager was optimistic about efforts
that euro zone policymakers are making to avert a catastrophic
collapse of the single-currency area, saying media reports and
some harsh commentaries were overblown.