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 market investors.

"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 the Bahamas.

Foreign investors have raised concerns on two Indian provisions seeking to tax indirect investments and combat tax evasion.

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 investment returns.

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.

CHINA, KOREA
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 per cent 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 per cent 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.