The finance ministry on Tuesday constituted a working group to suggest ways of rationalising existing regulations relating to foreign portfolio investments, in order to encourage foreign investment into the country.

The group will review the legal and regulatory framework to simplify rules related to overseas investment coming in the form of?foreign institutional investment (FII), foreign venture capital investment (FVCI), private equity and NRI investment, according to notification issued by the finance ministry on Tuesday.

The 16-member working group, headed by UTI-AMC UK Sinha, will also re-examine the rationale of taxation of transactions through the securities transactions tax (STT) and stamp duty, it said. The Economic Survey 2008-09 has recommended phasing out of the STT, which is currently levied at 0.125% every transaction in cash for the delivery of shares. Transactions in ?derivatives? trading attract a lower STT of around 0.017%

The panel will further study arrangements relating to use of participatory notes and suggest any changes required to increase transparency. The review of the way PNs are being used is to ensure appropriate know-your-client (KYC) norms are in place. This, however, is unlikely to lead to any fresh restrictions on PNs, which are derivative instruments with the stocks or futures as underlying.

The Financial Express was the first to break the story in its Tuesday report?Govt to overhaul foreign investment regime. The committee ?terms of reference? has broadly defined foreign investment to encompass ?investment in listed and unlisted equity, derivatives and debt including the markets for government bonds, corporate bonds and external commercial borrowings.?

The committee, which will submit its report within four months, will identify challenges in meeting the financing needs of the lndian economy through the foreign investment. It will suggest specific short, medium and long term legal, regulatory and other policy changes.

The working group comprises KP Krishnan, Govid Mohan and Arvind Modi, all joint secretaries in the ministry, economists Ajay Shah and Ila Patnaik, National Stock Exchange managing director Ravi Narain and Sebi executive director KN Vaidyanathan, among others.

The group?s mandate, however, does not include foreign direct investment policy, which is handled by industry department of the commerce and industry ministry. Official sources told FE the finance ministry set up the committee after recommendations from the Prime Minister?s Office to iron out complexities in the foreign investment regime. On his visit to the US, Prime Minister Manmohan Singh exhorted foreign investors to invest in India and added that the country will continue to pursue economic reforms.

The working group will also study rules relating to FVCIs in comparison FIIs as the former are eligible for a more benevolent tax treatment. The group will further revisit the role of transaction taxes. Capital market transactions are subject to STT and also a 10% short-term capital gains tax. There is debate in the policy establishment as to whether the STT should be continued and whether ordinary income and capital gains need to be taxed at different rates. Also, conveyance of debt is subject to stamp duty, with state-level rate variations. The group will review levy stamp duty on such transactions.