CA Aishwaryaa V
Foreign investment in India has been channelized through multiple routes, each subject to a separate set of regulations. Over the past few years, the Government has been working on ways to merge the various entry routes in order to simplify the investment route into India. The first step to this was the introduction of SEBI (Foreign Portfolio Investors) Regulations, 2014 which went on to replace the erstwhile SEBI (Foreign Institutional Investors) Regulation, 1995 and the Qualified Foreign Investors framework. Various categories of investors falling under these two regulations were merged into a single nomenclature – Foreign Portfolio Investor (‘FPI’).
Since introduction, the FPI regime has been constantly evolving in response to the industry activities and practical intricacies faced by those who venture into this route. To foster effective functioning of this regime, there have also been amendments to the tax laws, foreign exchange laws. In short, the FPI regime was launched by the following laws and regulations:
- SEBI (Foreign Portfolio Investors) Regulations, 2014
- SEBI – FAQs on SEBI (FPI) Regulations, 2014
- Notification No. FEMA. 297/2014-RBI dated 13 Mar 2014
- RBI Circular No. 112 dated 25 Mar 2014
A. Who can invest as a FPI?
In order to participate in the FPI investment route, the overseas investor is required to obtain registration as an FPI with the Indian designated custodians. The key eligibility criteria for registration are:
- Authorized by its constitutive document(s) to invest on its own behalf or on behalf of its clients
- Legally permitted to invest in securities outside the country of incorporation/ place of business
- It is not an opaque structure
- Not resident in India and not a non-resident Indian
- Track record, professional competence, financial soundness, experience, general reputation of fairness and integrity
- Is a fit and proper person as defined under SEBI (Intermediaries) Regulations, 2008
- Jurisdiction test: Investors must be resident in jurisdictions that are:
- Signatory to IOSCO MMOU / SEBI MOU or (in case of banks) central bank to be member of BIS
- Not listed in FATF public statements as
- having a strategic AML/ Combating the Financing of Terrorism deficiency to which counter measures apply; or
- insufficient progress in addressing deficiencies or not committed to action plan developed with FATF to address it
B. Are there different types of FPIs?
Yes, depending upon the constitution of the overseas investor, registration may be sought in one of the three categories:
| CATEGORY I: | Government and related entities such as foreign central banks, government agencies, sovereign wealth funds, multilateral organizations, etc. |
| CATEGORY II: | (a) Appropriately regulated entities such as banks, Asset management companies, investment managers/ advisors, portfolio managers(b) Reglated broad based funds such as mutual funds, investment trusts, insurance/ reinsurance companies. A broad based fund has been defined in the SEBI FPI Regulations, to be a fund incorporated outside India and has atleast 20 investors, with no investor holding more than 49%. If any investor holds more than 49%, such investor should be in satisfaction of the broad based condition.
(c) Unregulated broad based fund whose investment manager is appropriately regulated and registered as Category II FPI (d) University funds, pension funds (e) University related endowments already registered with SEBI
|
| CATEGORY III: | All others not eligible under Category I or II |
C. What are the permitted investments?
| Instrument | Limits |
| Equity shares | 10% of the total issued capital by a single FPI/ FPI group24% of the total issued capital by all FPIs |
| Non-convertible debentures/bonds | Instrument to be mandatorily listed within 15 days of issue expect for specified categories of companiesSubject to corporate debt limit of USD 51 billion for all FPIs |
| Government securities/ treasury bills | Overall debt limit of USD 30 billion for all FPIs |
| Other instruments | Units of schemes floated by domestic mutual funds, collective investment scheme, derivatives, security receipts of asset reconstruction companies, perpetual debt instruments and debt capital instruments as specified by the Reserve Bank of India, Indian depository receipts. |
D. Tax Treatment of FPIs
| Nature of Income | Taxation | Section |
| Dividend | Exempt, subject to dividend distribution tax by the payer company | 10(34) |
| Interest | Interest on specified rupee denominated bonds – 5% | 194LD |
| Interest on other securities – 20% | 115AD | |
| Capital Gains | Long term capital gains, subject to payment of Securities transaction tax (‘STT’)- NIL, else at 10% | 115AD r/w 10(38) |
| Short term capital gains, subject to payment of STT – 15%,else at 30% | 115AD r/w 111A |
The above rates are subject to the rates available as per the Tax Treaty based on the country of residence of the Investor.
The Finance Act (No 2) 2014 amended the definition of ‘Capital Asset’ under section 2(14) to include any securities held by a foreign institutional investor (i.e. foreign portfolio investor), thus putting rest to the controversies faced by the Foreign Institutional investors on classification of the gains arising on sale of securities as ‘capital gains’ or ‘business income’.
E. Budget, 2015 affecting FPIs
The Finance Minister has proposed several favorable measures to foster the growth of the FPI market. The amendments have put to rest some of the severe controversies surrounding the FPI regime.
- Minimum Alternate Tax (MAT) provisions would not apply to capital gains of FPIs except short-term capital gains which are not subject to securities transaction tax.
- Presence of fund manager in India would not result in creation of a Permanent Establishment (‘PE’) for the FPI provided the FPI as well as the fund manager Satisfy certain conditions concerning the shareholding pattern, place of control, Investments in an Indian entity, corpus of the fund, relationship between the FPI and the fund manager, etc.
As on Mar 2015, the total FPI investment in India is about USD 61 mn in equity and USD 227 million in debt. On an annual basis, the investment by FPIs have grown significantly from INR 51,649 Cr in Financial year 2014 to INR 275,325 Cr in Financial year 2015 (source: https://www.fpi.nsdl.co.in/web/Reports/ReportsListing.aspx).While the general economic scenario and industrial outlook may have contributed to this multifold increase, the simple regulatory environment coupled with a stable tax regime will definitely play a part to the increase of flow of funds into India.
