Govt's push to attract offshore fund managers fails to take off

In a bid to simplify this structure, the government had amended Section 9 of the Income-Tax Act underlying 13 conditions

Overseas funds are not showing any enthusiasm in relocating their fund managers to India despite a relaxed regulatory regime and several incentives provided by the government.

According to experts, tough eligibility conditions and a high compliance burden were acting as impediments. Since the beginning, all major foreign portfolio investors (FPIs) were wary of having their fund managers located in India as they would then become a tax resident here and hence, the money being managed would be subjected to multiple taxes. Also, the fund cannot avail any treaty benefits based on the place of incorporation.

In a bid to simplify this structure, the government had amended Section 9 of the Income-Tax (IT) Act underlying 13 conditions, which if fulfilled would make a fund manager eligible for relaxations. The conditions include the requirement to have at least 25 members, with none of the investors owning more than 10 per cent. Further, the fund should not have any business connection with India and should have a minimum monthly corpus of Rs 100 crore.

The 25-member rule seems to be the biggest hurdle, as a majority of the funds that invest in India are fund-of-funds. Thus, although the number of end-investors is much higher, the number could be less than 25 at the fund level. Besides, many smaller FPIs who operate on a corpus of a few wealthy investors will not be able to meet these norms. 

 

On the other hand, broad-based funds, even though they can meet these criteria, would not be willing to shift as their fund managers handle investments in multiple countries and hence, it doesn’t have any business rationale. “The provisions of Section 9A of the I-T Act, 1961, provide immunity to investment funds from taxation in India by virtue of business connection on account of their relationship with fund managers in India. However, the conditions prescribed for availing such benefits are stringent, particularly the requirement that an investment fund should have a minimum of 25 members who are not connected persons. This leaves the benefit for only large and broad-based funds,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

All the major Indian FPIs either operate out of their place of incorporation or have created special investment vehicles in tax-friendly jurisdictions such as Mauritius, Singapore and Luxemburg. Even as India’s tax arrangements with these countries are changing, FPIs still prefer to operate from these locations due to reduced compliance burden and ease of doing business.