Foreign portfolio investors get Xmas gift from Sebi

To get same tax treatment as FIIs; rules on search & seizure and consent settlement cleared

Clearing the decks for a shift to a new and simpler regime for foreign portfolio investments into India, the Securities and Exchange Board of India (Sebi) on Tuesday said the government had agreed to a similar tax treatment for all categories of foreign investors. The board of the capital markets regulator also cleared regulations on consent mechanism and procedure for search & seizure operations, but deferred a final decision on rules for real estate investment trusts (REITs) and a new corporate governance code.

Differences over tax treatment between Sebi and the income-tax department had delayed the implementation of the Foreign Portfolio Investors (FPI) Regulations, 2013, which the Sebi board had cleared in October.

SEBI PLAYS SANTA

Key takeaways

• All types of foreign portfolio investors to get uniform tax treatment
• IPO grading made optional for companies
• The list of companies eligible for shelf prospectus expanded
• Regulations on consent settlement and procedure for search & seizure cleared
• Regulations for collective investment schemes realigned with the Sebi ordinance
• Investor Protection and Education Fund regulations tweaked to repay investors out of disgorgement amount

Under the earlier system, tax treatment for foreign institutional investors (FIIs) was different from that for sub-accounts and qualified foreign investors (QFIs). Under the FPI norms, Sebi had recommended a uniform tax treatment for all categories of foreign investors. The tax department, on the other hand, was apprehensive that a similar tax treatment would carry a high risk of defaults and the recovery process would be difficult.

“As regards FPI regulations, a communication from the Department of Economic Affairs to the Central Board of Direct Taxes and to Sebi has conveyed the decision that all categories of FPIs would be given similar tax treatment as currently available to FIIs,” Sebi said in a press release.

Market experts said, with all government departments finally coming on the same page on the issue, Sebi could now move to the new FPI regime.

“This is a very good decision. I presume a similar tax treatment would mean the FII manner of taxation — that is, a time-tested and stable method — will apply on all the three categories of FPIs,” said Gautam Mehra, executive director, PwC.

The FPI regulations club the two existing investor classes — FIIs and QFIs — into a single class and also do way with the need for direct registration with the market regulator. These also introduce the concept of risk-based know-your-client, where an FPI, depending on its nature of business, falls under one of the three categories and has a different documentation level.

“Clarity on tax treatment will boost foreign investments into the country. There used to be a lot of confusion over difference in taxation methods. The new FPI regime might end the confusion and make it a lot simpler for overseas investors,” said Pavan Kumar Vijay, MD & founder, Corporate Professionals.

On Tuesday, the Sebi board also approved the draft Sebi (Settlement of Administrative and Civil Proceedings) regulations, 2013, issued in October, and included the guidelines for determining settlement terms in the regulations.

Under the consent mechanism, Sebi settles charges against violators without admission or denial of guilt, for a penalty or market ban or both.

The Settlement of Administrative and Civil Proceedings Regulations formalise the existing consent-settlement process, conducted under Sebi’s May 2012 circular. The consent process had attained legal sanctity when an ordinance was promulgated by the President of India in October to give Sebi more powers.

The board also cleared the Procedure for Search & Seizure Regulations, 2013, which gives Sebi the powers to search premises for the purpose of investigation, much like the income-tax department.

The Securities Laws (Amendment) Second Ordinance, 2013, had conferred direct powers on the Sebi chairman to authorise an investigating authority or any other officer to conduct search & seizure operations.

Among other things, the Sebi board decided to amend the Issue of Capital and Disclosure Regulations (ICDR) to make the initial public offering (IPO) grading process voluntary and expanded the list of companies that can use shelf prospectus while raising capital through non-convertible debentures (NCDs).

A company filing a shelf prospectus with the Registrar of Companies is not required to file prospectus afresh while raising capital for a period of one year.