Regulatory Updates – FPI
1. Extension of timelines for KYC compliances for FPIs
- As per the Operational guidelines issued by SEBI for FPIs and Designated Depository Participants (DDP), FPI applicants while submitting the KYC forms also had to submit the originals of the supporting documents for verification. In case, the original document cannot be produced the applicant can produce an attested copy of the same.
- Due to COVID-19, SEBI vide its circular issued on 30 March 2020 had relaxed the above and allowed verification of the documents basis the scanned versions, instead of the originals. The extension in the norms was first provided till 30 June 2020 and then extended till 31 August 2020. These relaxations have been further extended in jurisdictions that are still under lockdown till the time lockdown is lifted from such jurisdictions. Also, these relaxations shall be no longer applicable to entities from jurisdictions where lockdown has already been lifted.
2. Draft Rupee Interest Rate Derivatives Directions released
The Reserve Bank of India released Draft Directions for transactions in Rupee Interest Derivatives (‘IRD’) on September 15, 2020. These Directions, inter alia, permit FPIs to transact in permitted exchange-traded IRDs subject to the conditions that, at any point in time:
- The net long position of FPIs, collectively, and across all exchanges, in exchange traded IRDs shall not exceed INR 50 billion (approx. USD 0.7 billion);
- The net short position of an FPI on exchange- traded IRDs shall not exceed its long position in Government securities and other Rupee debt securities.
The Draft Directions are open for comments upto October 15, 2020.
3. Guidelines for Investment Advisers - Amended Regulations
The SEBI on July 03, 2020, notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020 effective from September 30, 2020. The Amended Regulations cover the following key aspects:
- Increase in minimum net worth for individual and non-individual investment advisers (‘IA’);
- Qualification and Experience Requirements to be fulfilled by individual IA, principal officer and ‘persons associated with investment advice’ in the non-individual IA;
- Segregation of advisory and distribution services;
- Restrictions on implementation of advice; and other aspects.
Subsequently, SEBI vide Circular dated September 23, 2020 has issued guidelines for IAs in respect of the following:
- Client Level Segregation of Advisory and Distribution Activities, whereby clients and client group can avail only either of these services from an IA;
- Terms and conditions to be covered in the agreement between IA and client;
- Charging of fees vide Assets under Advice mode or Fixed Fee mode;
- Exemption to certain individual IAs from qualification and experience requirements;
- Maintenance of records, audit, risk profiling and suitability analysis for non-individual clients;
- Display of details on website and in other communication channels.
4. Write-off of shares held by FPI
As per the Operational Guidelines under the SEBI (FPI) Regulations, 2019 write-off of securities held by FPIs who wish to surrender their registration was permitted only in respect of shares of companies which are unlisted/illiquid/suspended/delisted. However, the SEBI vide Circular dated September 21, 2020 has permitted FPIs to write-off shares of all companies which they are unable to sell. Accordingly, FPIs would now be allowed to also write-off listed securities.
5. Collection and Reporting of Margins by Trading Member (TM) / Clearing Member (CM) in Cash Segment
In respect of the guidelines issued by SEBI for collection of margins from clients and reporting of short-collection / non-collection of margins by TM / CM, SEBI has notified the following vide Circular dated July 31, 2020:
- No penalty for short-collection / non-collection of margin shall be levied if TM / CM collects minimum 20% upfront margin in lieu of VaR and ELM from the client
- The penalty provision for short-collection / non-collection of upfront margin in cash segment shall be implemented with effect from September 01, 2020.
6. Procedural Guidelines for Proxy Advisors
SEBI (Research Analyst) Regulations, 2014 mandates proxy advisors to abide by Code of Conduct specified therein. The SEBI vide Circular dated August 3, 2020, has laid down certain procedural guidelines for proxy advisors. These guidelines cover aspects like formulation of voting recommendation policies, disclosure of methodologies and processes followed in the development of their research, alerting clients of any errors, sharing of reports, disclosure of conflict of interest, etc. The said guidelines were to be applicable with effect from 1 September 2020. However, after taking into consideration requests received from registered proxy advisors, and the prevailing business and market conditions due to COVID-19 pandemic, the SEBI has postponed the applicability of this circular to 31 January 2021 vide circular dated 27 August 2020.
Regulatory Updates – International Financial Services Centre (IFSC)
1. Operating Guidelines for Portfolio Managers in IFSC
The SEBI, vide Circular dated September 9, 2020 has issued operating guidelines for Portfolio Managers in IFSC. Key provisions of the same are as under:
- All provisions of the PMS Regulations and IFSC Guidelines shall apply to Portfolio Managers setting up/ operating in IFSC, subject to these operating guidelines.
- An entity, being a company or a limited liability partnership (LLP), which has the minimum prescribed net worth can act as a PM in IFSC, in the following forms:
- Any SEBI-registered intermediary (except trading member or clearing member) or its international associates in collaboration with such SEBI-registered intermediary may provide portfolio management services in IFSC, by setting up a branch in IFSC, subject to the prior approval and satisfaction of certain conditions
- Other entities (company or LLP) based in India or in a foreign jurisdiction, desirous of operating in IFSC as a PM, may form a company or LLP to provide portfolio management services.
- Certification from organisations recognised by financial markets regulator is required.
- PM should have net worth of not less than USD 750,000.
- PM shall provide portfolio management services only to specified persons like non-residents, NRIs, Indian financial institutions eligible to invest offshore, etc.
- PM shall not accept from the client, funds or securities worth less than USD 70,000.
- PM shall keep the funds of all clients in a separate account to be maintained by them in the IFSC Banking Unit as permitted by RBI.
2. Amended Guidelines for Investment Advisers in IFSC
The SEBI vide Circular dated September 28, 2020 has amended the Operating Guidelines for Investment Advisers in IFSC, key aspects of which are as under:
- A company / LLP / similar structure recognised in foreign jurisdiction is required to form a separate company / LLP in IFSC to operate as an investment adviser;
- Services can be provided only to specified persons like non-residents, NRIs, Indian financial institutions eligible to invest offshore, etc.
- Compliance required with net worth as well as annual audit requirements for investment advisers.
3. Eligibility and shareholding limit for clearing corporations in IFSC
In order to streamline the operations at IFSC, SEBI has introduced the following eligibility criteria and shareholding limits for clearing corporations desirous of operating in IFSC, vide Circular dated August 7, 2020:
- Any Indian recognised stock exchange or clearing corporation or any clearing corporation of a foreign jurisdiction can form a subsidiary to provide services of a clearing corporation in IFSC
- Atleast 51% of equity paid up capital is to be held by such stock exchange or clearing corporation as mentioned above
- The remaining share capital may be held by any other person (Indian or of foreign jurisdiction) subject to a 5% cap
- Certain entities such as other stock exchanges, clearing corporations, depositories, banking or insurance companies and other specified financial institutions can hold upto 15% of the remaining share capital.
4. Listing and trading of units of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) in IFSC
The SEBI vide Circullar dated September 16, 2020 has included units of InvITs and REITs in the ‘Permissible Jurisdictions’ as permissible securities for dealing on units by stock exchanges operating in IFSC, subject to following conditions:
- Such InvITs and REITs shall be incorporated / settled in ‘Permissible Jurisdictions’ as notified by the Government of India;
- Such InvITs and REITs shall fall and be regulated by the securities market regulator(s) in the Permissible Jurisdictions;
- Such InvITs and REITs are listed on any of the specified International exchanges in the Permissible Jurisdictions.
Permissible Jurisdictions listed in the Circular include USA, Japan, South Korea, UK, France, Germany and Canada.
5. Preparation of Accounts for certain entities in IFSC
The SEBI vide Circular dated 21 August 2020 has amended Clause 19 of SEBI (IFSC) Guidelines, 2015. The amended clause 19 states that the entities issuing or listing their debt securities in IFSC shall prepare their statement of accounts in accordance with IFRS/ US GAAP/ IND AS or accounting standards as applicable to them in their place of incorporation. In case an entity does not prepare its statement of accounts in accordance with IFRS/ US GAAP/ IND AS, a quantitative summary of significant differences between national accounting standards and IFRS shall be prepared by such entity and incorporated in the relevant disclosure documents to be filed with the exchange.
The clause further states that a statement of differences between local accounting standards and IFRS/ US GAAP/ IND AS (along with a disclaimer that issuer has not quantified the effect of applying IFRS/ US GAAP / IND AS to its financial information) would suffice, if the issue is targeted to institutional investors.
1. Scrip wise reporting not required in income-tax return for day trading or short-term sale of listed shares
The CBDT, vide press release dated September 26, 2020, has clarified that stock traders / day traders earning short term capital gains or business income need not furnish scrip wise details in the return of income for AY 2020-21. The Press Release further clarifies that scrip wise details are required to be filled up only for the reporting of long-term capital gains on shares / units eligible for the benefit of grandfathering. This is to ensure that long term capital gains are correctly computed by taxpayers while taking the benefit of grandfathering provisions.
2. Procedure for Sovereign Wealth Funds to claim tax exemption from specified investments in India
In order to enable CBDT to notify Sovereign Wealth Funds (‘SWF’) for the exemption under section 10(23FE) of the Income-tax Act, 1961 (‘Act’), the CBDT vide its Circular dated July 22, 2020 has laid down the procedure for eligible SWF to make such investments. The procedure laid down has been summarized below:
- SWF to make an application in Form I with the specified authority stating that the SWF is interested in making investments as per Section 10(23FE) of the Act. The key requirements in Form I include a self-certification by the SWF that:
- it is wholly owned and controlled directly / indirectly by its government and is regulated under its law,
- its earnings are credited to the government and do not benefit any private person,
- upon dissolution its assets will vest with the government, and
- it does not undertake any commercial activity anywhere in the world including India.
The SWF also needs to submit prescribed documents that support the above claims.
- The SWF is required to file return of income along with the audit report within the prescribed due dates. Also, it has to electronically file Form II, being an intimation by the SWF of investments made as per Section 10(23FE) of the Act to the tax authorities, within one month from the end of each quarter. Form II contains details of investments made during the quarter by the SWF along with other details such as the date on which the investment was made, amount of investment, type of investment and details of the entity in which investment is made. The due dates to file the form are tabulated below:
Due date for filing Form II
3. Rules for Pension Funds to claim tax exemption from specified investments in India
In order to enable CBDT to notify Pension Funds for the exemption under section 10(23FE) of the Income-tax Act, 1961 (‘Act’), the CBDT vide its Notification dated August 17, 2020 has inserted Rule 2DB and Rule 2DC in the Income-tax Rules, 1962 (‘IT Rules’) which lays down the conditions and procedures required to be fulfilled by the Pension Fund to make such investments. The conditions and procedures laid down in these rules have been summarized below:
- The Pension Funds should satisfy the following conditions laid down in Rule 2DB of the IT Rules –:
- Regulated under the law of a foreign country including the laws made by any of its political constituents being a province, state or local body, by whatever name called, under which it is created or established;
- Responsible for administering or investing the assets to fulfil the statutory obligations and defined contributions of one or more funds for providing retirement, social security, employment, disability, death benefits or any similar compensation to the participants or beneficiaries of such funds or plans, as the case may be;
- Earnings and assets of the pension fund are used only for meeting statutory obligations and defined contributions for participants or beneficiaries of funds or plans referred above and no portion of the earnings or assets of the pension fund is used for benefit of any other private person;
- No commercial activity is undertaken anywhere in the world including India;
- Providing intimate details of investment made by it in India for each quarter within one month from the end of each quarter in Form No. 10BBB;
- File return of income within the prescribed due date. Also, furnish a certificate from an accountant in Form No. 10BBC along with the return of income certifying compliance with the provisions of Section 10(23FE).
- The Pension Funds need to make an application in Form No. 10BBA with the specified authority as mentioned in Rule 2DC of the IT Rules stating that the Pension Fund is interested in making investments as per Section 10(23FE) of the Act. The key requirements in Form 10BBA include a self-certification by the Pension Fund certifying its basic information and that it fulfils all the eligibility conditions stated above. The Pension Fund also needs to submit prescribed documents in support of the claims made in the application form.
- As mentioned above, the Pension Fund has to file Form 10BBB being an intimation made by the Pension Fund of investments made as per Section 10(23FE) of the Act to the tax authorities, within one month from the end of each quarter. Form 10BBB contains details of investments made during the quarter by the Pension Fund along with other details such as the date on which the investment was made, amount of investment, type of investment and details of the entity in which investment is made. The due dates to file the form are tabulated below:
||Due date for filing Form 10BBB
- The Pension Fund is required to file return of income along with Form 10BBC within the prescribed due date. The Pension Fund is required to obtain a certificate from an accountant in Form 10BBC certifying compliance with the provisions of Section 10(23FE) of the Act.
1. Brought forward Long-term capital loss (‘LTCL’) and Short-term capital loss (‘STCL’) can be carried forward without set-off against exempt capital gains
Mumbai ITAT in a recent judgement has allowed the carry forward of brought forward LTCL and STCL to the subsequent years. The ITAT also disregarded the Assessing Officer’s (‘AO’) action of setting off such STCL against the Capital Gains earned by the taxpayer (a tax resident of Mauritius) from the transfer of securities exempt under India-Mauritius DTAA.
The assessee was a tax resident of Mauritius and registered with SEBI as a Foreign Institutional Investor. The assessee had filed the return of income wherein no capital gains on sale of securities were chargeable to tax due to the applicability of Article 13 of the India-Mauritius tax treaty. The assessee had brought forward LTCL and STCL of the earlier years which were carried forward for set-off in subsequent years.
The AO rejected assessee’s claim of carry forward of capital losses, contending as under:
- Brought forward capital losses ought to have been set-off against the current year’s capital gain, which was not done by the assessee, violating the very purpose for which losses were brought forward;
- Capital gains derived by a resident of Mauritius was exempt from tax in India, therefore, carry forward of losses from such transactions will not be allowable either in India or Mauritius;
- Once taxability of capital gains was determined as per the India-Mauritius tax treaty, it is impermissible for the assessee to revert back to the provisions of the Income-tax Act to calculate capital losses.
Therefore, basis the above observations the AO in its draft order.
The Mumbai ITAT ruled in favour of the assess and stated the following:
- There is no dispute that the capital gains earned by the assessee are exempt from tax as per Article 13 of the India-Mauritius tax treaty. Therefore, the direction of tax authorities to set-off the STCL against capital gains is without any reason and merit.
- The STCL was brought forward from earlier years and had been allowed by the AO to be carried forward in earlier years’ assessment. Accordingly, carry forward cannot be rejected because they pertain to a source of income which is exempt in the current year.
- The tax treaty cannot be forced upon the assessee and if the assessee does not opt for the tax treaty in one year, then he cannot be precluded from availing the benefits in the subsequent years.
- Basis the above the assessee is eligible to carry forward the entire brought forward STCL without any adjustments for gains earned during the year.
- Similarly, brought forward LTCL of the earlier years were permitted to be carried forward by the AO in earlier years assessment.
2. AAR’s decision rejecting exemption to Mauritius based investor challenged before Delhi HC
- The Authority for Advance Rulings (‘AAR’) had vide order dated March 26, 2020 rejected the application for advance ruling filed by Tiger Global International Holding, Mauritius (‘applicants’). The AAR had concluded that the ‘head and brain’, and consequently the control and management, of the applicants was with their beneficial owner who was outside of Mauritius and hence, the applicants were not eligible for exemption under the India-Mauritius tax treaty.
- The AAR’s ruling has been challenged by the applicant before the Delhi HC. The Delhi HC has admitted the writ petition vide order dated September 22, 2020 and has scheduled the hearing in January 2021.
 SEBI/HO/FPI&C/CIR/P/2020/056 dated.: 30 March 2020
 SEBI/HO/FPI&C/CIR/P/2020/104 dated.: 23 June 2020
 SEBI/HO/FPI&C/CIR/P/2020/162 dated.: 31 August 2020
 SEBI/LADNRO/GN/2020/22 dated: July 03,2020
 SEBI/HO/IMD/DF1/CIR/P/2020/182: September 23, 2020
 SEBI/HO/IMD/FPI&C/CIR/P/2020/177: September 21, 2020
 SEBI/HO/IMD/DF1/CIR/P/2020/147 dated.: 03 August 2020
 SEBI/HO/IMD/DF1/CIR/P/2020/157 dated.: 27 August 2020
 SEBI (Portfolio Managers) Regulations, 2020
 SEBI (International Financial Services Centres) Guidelines, 2015
 SEBI/HO/IMD/DF1/CIR/P/2020/185: September 28, 2020
SEBI/HO/DDHS/DDHS/CIR/P/2020/174 dated: September 16,2020
 SEBI/HO/MRD1/DSAP/CIR/P/2020/154 dated.: 21 August 2020
 Circular no.15 of 2020/F. No. 370142/26/2020-TPL
 Specified Authority: Member (Legislation), CBDT for applications made during FY 2020-21 and Member (having control over Foreign Tax &Tax Research Division) for applications made subsequently
 Notification No. 67/2020/F. No. 370142/28/2020-TPL
 Specified Authority as per Rule 2DC of the IT Rules: Member (Legislation), CBDT for applications made during FY 2020-21 and Member (having control over Foreign Tax &Tax Research Division) for applications made subsequently
 Goldman Sachs Investments (Mauritius) Limited [ITA No.2201/Mum/2017]
 W.P.(C) 6764/2020, W.P.(C) 6765/2020, W.P.(C) 6766/2020.