Regulatory Updates – FPI
Indian Resident Fund Managers eligible to be constituents of FPI
SEBI vide its notification1 dated 3 August 2021 has amended the SEBI (FPI) Regulations, 2019 with respect to the eligibility criteria for granting FPI registration by permitting Indian residents other than individuals to be constituents of FPI fulfilling the following conditions:
- The Indian resident should be an eligible fund manager as per the provisions of Section 9A of the Income-tax Act, 1961 (‘Act’); and
- The applicant is an eligible investment fund as per the provisions of Section 9A of the Act.
Settlement Cycle shortened to T+1 days on optional basis
SEBI vide its circular2 dated 7 September 2021 has provided flexibility to the stock exchanges to either adopt T+1 or T+2 settlement cycle from its existing T+2 days settlement cycle. The stock exchange may opt for T+1 cycle for any particular scrip by giving advance notice of 1 month to all the stakeholders involved. The stock exchanges opting for T+1 cycle will have to mandatorily continue the same for a minimum period of 6 months before switching back to the T+2 settlement cycle. The stock exchange can switch back to the T+2 settlement cycle by giving 1-month advance notice. No netting off is possible between T+1 or T+2 settlement. The said mechanic would have substantial impact on the foreign funds/ entities considering the time zone difference and the settlement process.
The above-mentioned circular is effective from 1 January 2022.
Extension of timelines for annual audit and compliances to be carried out by Investment Advisers
SEBI vide its circular3 dated 30 September 2021 has extended the timeline for conducting annual audit compliance and obtaining a certificate from the auditor for financial year ending on 31 March 2021. The revised timelines have been tabulated below:
Conducting annual compliance audit
6 months from the end of financial year, i.e., 30 September 2021
31 December 2021
Submitting adverse findings during such audit, if any
31 October 2021
31 January 2022
Obtaining a certificate from auditor confirming compliance with client level segregation as per the prescribed Regulations
6 months from the end of financial year, i.e., 30 September 2021
31 December 2021
Relaxation in timelines for compliance with regulatory requirements
Due to COVID-19 pandemic, SEBI through its various circulars had relaxed timelines for compliance with various regulatory requirements like operating the trading terminals from designated alternate locations, KYC form and support documents uploading on the KRA system. SEBI vide its circular dated 30 July 20214 have given a further extension in timeline for operating the trading terminals from designated alternate locations to 31 December 2021 due to the prevailing situation of the COVID-19 pandemic.
National Securities Depository Limited (‘NSDL’) in consultation with SEBI vide its circular5 dated 28 September 2021 has extended the due date of providing KYC attributes such as Name, PAN, Address, Income range etc. to 31 December 2021. These KYC attributes need to be mandatorily provided for new accounts from 1 August 2021. Further, providing information regarding income range has been made optional for Institutional Investors6.
Regulatory Updates –IFSC
Framework for setting up International Trade Financing Services Platform (‘ITFS’) at IFSC
The International Financial Services Centres Authority (IFSCA) has announced framework7 for establishing ITFS in IFSC to enable exporters and importers to avail finance facilities at competitive terms. The aforesaid framework covers mainly:
- Key Definitions:
- Trade Financing Unit (‘TFU’) refers to an invoice or bill or any trade document on the ITFS which may be created by either exporter or importer.
- Financiers shall mean a Banking Unit or a Finance Company / Unit which is licensed/regulated/registered by IFSCA or with any financial regulator in India or abroad and is permitted to conduct Trade Finance Services.
- ITFS refers to an electronic platform for facilitating trade finance requirements of Exporters and Importers through multiple Financiers.
- Reverse Trade Financing refers to the process of initiating the creation of TFU by the Importer on ITFS.
- Standard Trade Documents refers to any document as agreed by the parties to the ITFS and includes any or all of these documents namely air waybill, bill of lading, certificate of origin, combined transport document, bill of exchange, insurance policy, packing list, inspection certificate and invoice.
The parties to the ITFS shall be permitted to undertake international trade finance activities which includes Export invoice trade financing, Reverse Trade Financing, Bill discounting under Letter of Credit, Supply Chain Finance for Exporters, Export Credit (Packing Credit), Insurance / Credit Guarantee, Factoring system and any other trade product.
- Eligibility criteria: Certain criteria have been prescribed for setting up a TFU. An entity (if entity is a bank or a finance company then it shall incorporate a new entity in IFSC) shall fulfil the following criteria:
- Financial Criteria: The entity should fulfil various financial criteria such as the parent entity or the promoter group should have a minimum net worth of USD 1 million, the TFU should have a minimum paid up equity capital of USD 0.2 million or equivalent in any other freely convertible currency.
- Due diligence of Promoters: The parent entity or the promoter group should be domiciled and regulated in a Financial Action Task Force (‘FATF’) compliant jurisdiction; or from any jurisdiction/country specified by the Government of India by an order, or by way of agreement or treaty with other sovereign governments.
- Technological Criteria: The entity should have the required technological backup and resources to smoothly conduct its operations.
- Participants and Eligibility Criteria of the Participants in the ITFS:
- Exporters, Importers, Financiers and Insurance/Credit Guarantee Institutions and other eligible entities will be the direct participants in the ITFS;
- The entities or the promoter group should be domiciled and regulated in a FATF compliant jurisdictions; or from any jurisdiction/country specified by the Government of India by an order, or by way of agreement or treaty with other sovereign governments;
- Separate Master Agreements shall be executed amongst the participants on or before entering into any transaction on ITFS.
- Currency for Conduct of Business:
The operations on ITFS shall be conducted only in a freely convertible foreign currency.
Accounting Standards to be followed by IFSC Banking Units (‘IBUs’) for regulatory reporting and compliance purposes
The IFSCA vide circular8 dated 30 July 2021 has issued directions to the IBUs to follow International Financial Reporting Standards (‘IFRS’) issued by the International Accounting Standards Board (‘IASB’) for preparation, maintenance and reporting of its financial statements. The financial year for the IBUs for reporting purposes shall be 1 April to 31 March and any deviation from the mentioned period will need prior approval by the IBUs. The IBUs where the parent entity is following IFRS already may prepare the financial statements from the beginning of quarter / half-year starting from October 1. The IBUs where the parent entity is following different accounting standards may adopt IFRS from period beginning 1 April 2022. The IFSCA may allow IBUs to adopt a different accounting standard based on merit of each case, which is applicable to the parent entity.
Clarifications for Finance Companies operating in IFSC
In order to enable provision of financial services under International Financial Services Centres Authority (Finance Company) Regulations, 2021 (‘Finance Company Regulations’) the IFSCA vide its circular dated 9 August 2021 has clarified that an entity which has obtained a certificate of registration or authorized to carry out a specific activity shall not require a new registration under the Finance Company Regulations for carrying out the same activity. However, any permissible activities outside the purview for which the registration / authorization is granted would warrant a fresh registration.
Financial Institutions (‘FIs’) in IFSC can participate in financial products linked to Indian Rupee
The IFSCA vide its circular9 dated 25 August 2021 has referred to RBIs clarification that the definition of overseas entity in the Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad dated 1 January 2016 shall not include branches of Indian banks and branches of other Indian financial institutions operating in IFSC. Therefore, such entities can offer financial products linked to Indian Rupee subject to the directions issued in this regard.
Non-banking custodians recognized by IFSCA can operate as Clearing Member in IFSC
The IFSCA vide its circular10 dated 15 September 2021 has permitted non-banking entities recognized IFSCA to operate as a Clearing Member in the IFSC to provide level playing field with other jurisdictions. The non-banking custodian entity through a branch structure shall be permitted to be a Clearing Member in the IFSC on fulfillment of the following conditions:
- The entity shall clear and settle trades of only its custodial clients;
- The entity should be technologically, financially and operationally be backed by its parent company and as a clearing member its functions should be limited to providing clearing and settlement services to its custodial clients;
- The entity shall allocate USD 1.5 million for its clearing and settlement operations and provide a declaration for the same to the IFSCA;
- The entity shall contribute to the Settlement Guarantee Fund as decided by the clearing corporation;
- The total exposure of the entity that can be taken on behalf of its registered clients shall be determined by its Board.
Bullion Trading Member and Clearing Members In GIFT-IFSC
The IFSCA vide its circular11 dated 17 September 2021 has permitted all the existing members of the stock exchanges and clearing corporations in GIFT-IFSC to enact as Bullion Trading/Clearing Member subject to the fulfillment of the net worth and minimum base capital criteria as prescribed by the Bullion Exchange and Bullion Clearing Corporation. These criteria will be applicable to new entities and also to foreign companies subject to a minimum criterion. These requirements are for the initial 6 months from the date of operationalization
Income attribution mechanism for beneficial tax treatment to specified funds in IFSC
Income-tax Act, 1961 (‘Act’) provides exemption to income earned by Specified Funds established or incorporated in India. The exemption is available to the following incomes:
- Income from transfer of a capital asset such as bonds, gold depository receipt, rupee denominated bond of an Indian company, derivatives on a recognised stock exchange of an IFSC where consideration is paid/payable in convertible foreign exchange;
- Income from transfer of securities (other than shares in a company resident in India);
- Income from securities issued by a non-resident (not being a Permanent Establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India;
- Income from a securitisation trust which is chargeable under the head ‘Profits and gains from business or profession’.
Further, Section 115AD of the Act provides beneficial tax rates to income earned from securities by FPIs. The benefit of this provision had been further extended to income earned on units held by non-residents (not being a Permanent Establishment of a non-resident in India) in a Specified Fund.
However, the above provisions did not provide the computation mechanism of income attributable to the Specified Funds and units of a Specified Fund held by non-residents. The Central Board of Direct Taxes (‘CBDT’) vide its notification12 dated 9 August 2021 inserted following rules to Income-tax Rules, 1962 (‘Rules’) wherein the mechanism for computing the allowable exemption is prescribed:
- Rule 21AI of the Rules – Computation of exempt income of Specified Fund for the purposes of Section 10(4D) of the Act;
- Rule 21AJ of the Rules – Determination of income of a Specified Fund attributable to units held by non-residents under Section 115AD(1A) of the Act.
For detailed discussion on the computation mechanism and the compliances to be fulfilled, please refer to our alert on the same at:
Retrospective applicability of indirect transfer taxation nullified
The indirect transfer provisions in India are an outcome of the landmark Supreme Court (‘SC’) judgement13 in case of Vodafone, where the SC held that gains arising from indirect transfer of Indian assets were not taxable under the provisions of the Act. In order to overturn this decision of the SC, Finance Act, 2012 brought a retrospective amendment introducing the indirect transfer provisions under the Act. The indirect transfer provisions state that the shares of a foreign company or entity deriving substantial value directly or indirectly from assets located in India shall be deemed to have been situated in India and therefore, any capital gain arising from the transfer of such shares would be taxable in India. The above led to criticism for the retrospective amendment introduced among different stakeholders as this led to tax uncertainty for investors.
In view of the above, the Taxation Laws (Amendment) Bill, 2021 (‘Bill’) was notified on 13 August 2021 nullifying the retrospective impact of the amendment.
- The Bill seeks to amend Section 9(1)(i) of the Act to provide that tax will not be applicable on transactions undertaken prior to 28 May 2012 (the date on which the Finance Bill, 2012 received the assent of the President).
- The Bill also proposes to introduce 4th, 5th and 6th provisos in Explanation 5.
- The Bill states that for the applicability of the 5th and 6th proviso the assessee will have to withdraw any appeal pending before any appellate forum or Court of law, or any proceeding or arbitration initiated or furnishes an undertaking waiving his rights to seek any remedy or any claim against the said income or any other conditions as may be prescribed.
- The Bill states that any amount refundable under the Act with respect to the above will be paid to the assessee without payment of any interest under Section 244A of the Act.
- For detailed discussion on the above, please refer to our alert at: https://www.bdo.in/en-gb/insights/alerts-updates/direct-tax-alert-retrospective-applicability-of-indirect-transfer-taxation-nullified
Treaty benefits available on re-domiciliation of offshore entities
The Mumbai Income Tax Appellate Tribunal (‘ITAT’) in a recent judgement14 has rejected Revenue’s objection and ruled that treaty benefits are available to offshore entities re-domiciled in a different jurisdiction from where it was incorporated.
The assessee, now a tax resident of Mauritius, discontinued its operations in British Virgin Islands (‘BVI’) and obtained a certificate to this effect. On re-domicile in Mauritius, the Registrar of Companies issued a ‘certificate of incorporation by continuation’ to the entity which stated that the certificate will come into effect on the date of de-registration of the company in its place of incorporation. As a result of the above, the assessee originally incorporated in BVI was re-domiciled in Mauritius and held a valid Tax Residency Certificate issued by the tax authorities in Mauritius. The tax authorities objected that the assessee is not eligible to claim tax treaty benefits under the India-Mauritius DTAA since the assessee was originally incorporated in BVI.
The Mumbai ITAT heard the matter and ruled in favour of the assessee granting tax treaty benefits under the India-Mauritius DTAA. The Mumbai ITAT made the following observations in its judgement:
- Corporate re-domiciliation, also referred to as continuation is a process by which a company moves it ‘domicile’ from one jurisdiction to another, while maintaining the same legal identity.
- Re-domiciliation can be effected where both the existing and the target jurisdictions are on the list of countries where re-domiciliation is possible. Popular offshore jurisdictions permit the re-domiciliation and BVI and Mauritius are such jurisdictions. Therefore, this process is an accepted principle.
- The Mumbai ITAT takes into account the smoothness and ease with which the re-domicile process was completed. The availability of treaty benefits with the jurisdiction of incorporation in such cases is ephemeral and basis for treaty shopping, however, the same is purely academic for the years under consideration.
- The Assessing Officer has granted the treaty benefits to the assessee and it is not open for the Departmental Representative to revisit the position. Also, in the current business scenario re-naming, re-structuring and even re-domiciliation of offshore companies are facts of life.
- A re-domiciliation of the company by itself cannot lead to denial of treaty entitlements in the country in which the entity is re-domiciled. However, re-domiciliation of the entity could trigger detailed examination of the re-domiciled company being actually fiscally domiciled in that jurisdiction which in the current case was not questioned.
- A doubt in the mind of the Departmental Representative cannot be a good enough reason to reject the treaty entitlement in question.
1SEBI.LAD-NRO/GN/2021/32 dtd.: 3 August 2021
2SEBI/HO/MRD2/DCAP/P/CIR/2021/628 dtd.: 7 September 2021
3SEBI/HO/IMD/IMD-I/DOF1/P/CIR/2021/632 dtd.: 30 September 2021
4SEBI/HO/MIRSD/DOP/P/CIR/2021/607 dtd.: 30 July 2021
5NSDL/POLICY/2021/0100 dtd.: 28 September 2021
6Foreign Institutional Investors, Mutual Funds, Public Finance Companies, Banks, Insurance Companies and Pension Fund.
7F. No. 388/IFSCA/ ITFS Platform/2021-22 dtd.: 9 July 2021
8F.No.383/IFSCA/IFSC RULE BOOK/IFRS/ IRAC NORMS/1 dtd.: 30 July 2021
9F. No. 191/IFSCA/EC-NDF-INR/2020-21/1 dtd.: 25 August 2021
10F. No. 224/IFSCA/CMD-DMIIT/CUST/2021/2 dtd.: 15 September 2021
11F. No. 329/IFSCA/Bullion MIIs/2021 dtd.: 17 September 2021
12Notification no. 90/2021 dtd.: 9 August 2021
13Vodafone International Holdings B.V.  17 taxmann.com 202 (SC)
14Asia Today Limited [TS-620-ITAT-2021(Mum)]