Over the past few year, the objective of successive governments—rightly so—has been to strengthen and deepen the structures and policies of the Indian capital markets. One milestone initiative was to permit non-residents to invest in Indian capital market through the “Foreign Portfolio Investment” (FPI) route.
The significant increase in investments of foreign funds in the Indian capital market through the FPI route has helped in writing the success story of the Indian stock market. The government has also been very astute, at the same time, by taking measures to limit the flow of “hot” money into India and restricting round-tripping of Indian money. Measures around P-Notes, KYC, PMLA, FPI regime, etc, have been judiciously implemented in this regard.
In order to retain the best talent in India, the government has taken various initiatives to encourage and permit Indians to act as the fund managers of global funds which invest funds into India. Thus, the intention of the government has been to restrict Indians from investing in India through the FPI route but not to restrict them from managing the FPI investment. Such intention was reflected in the FAQ released by Sebi in 2014:
“Question 114: In case of a company/AMC registered and regulated in one of the eligible jurisdictions whose ultimate beneficial owner is/are Indian company/PIO/NRI/resident Indian, the following may be clarified:
(ii)Can an entity which is incorporated outside India register as FPI where the beneficial owner of that company is a resident Indian?
(ii)In the FII regime, such entities were granted registration with the condition that they would not be allowed to make investments on behalf of self. This position shall continue in the FPI regime.”
Through the above FAQ, Sebi permitted an asset management company to obtain FPI registration which is promoted by a resident Indian. Since Indians have a direct exposure and comprehensive knowledge of the Indian capital market, permitting Indians to manage the FPI investments in India provided comfort to the foreign investors by establishing a stable investment strategy with “sticky” long-term growth, even during times of market volatility.
In April 2018, Sebi issued a clarificatory circular with respect to the KYC norms for FPIs. This circular also laid down guidance on the manner in which a beneficial owner of an FPI has to be identified and reported. The authors believe that through this circular, SEBI was reiterating its intention to restrict “Indian” money being round-tripped. However, unwittingly, it resulted in ambiguity on the ability of Indian managers to manage foreign pools of money, a position which was clearly permitted earlier both under the FII and FPI regime and succinctly articulated in above mentioned Sebi’s FAQ 114.
Unless clarified, the effect of the Sebi circular would be to encourage people with hands-on experience to manage investments in the Indian markets from offshore locations. This is a great disadvantage to India since the country would stop retaining the best home-grown fund management talent, which would, in turn, stunt the development of a highly desirable segment of the asset management industry onshore and also result in the country losing the benefit of tax revenues on the revenues generated by onshore Indian taxpayers.
In light of the rationale provided above and the fact that the overall government objective of ensuring “Indian” money is not round-tripped to India, we believe Sebi should not have concerns in permitting resident Indians to be the beneficial owners of an offshore investment manager entity (i.e. a non-investing FPI) to manage the investment of funds into India, as long as such funds are not tainted.
Given the above, Sebi and the government should clarify and restate Sebi’s intention to permit Indian managers to manage foreign pools which is aligned to the governments objectives. This will obviate the need for the brightest Indian managers to move overseas which is anathema to the Government and what they have been working very assiduously to prevent.
By KT Chandy,Tax partner, EY India
With contributions from Padmini Pai, senior tax professional