NRIs' India MF play to get thin as US Fatca kicks in

Heavy compliance cost may render equity purchases in mother country not worth their while

Indians residing in America might, from July, find it tough to invest in products offered by the Indian mutual fund (MF) sector.

The Foreign Account Tax Compliance Act (Fatca), that country’s new anti-tax evasion law, which takes effect in two months, is going to result in increased costs for fund houses here. So, some even contemplate not accepting any investments from non-resident Indians (NRIs) based in the US.

According to estimates, a total of $100,000-200,000 (Rs 60-120 crore) is invested by US NRIs every year in MFs. MF houses are concerned about the rise in compliance costs and regulatory oversight with Fatca implementation. “Most of the money coming from the US into the MF industry is NRI money. Servicing these clients, once the Fatca guidelines are in place, would lead to a manifold increase in compliance costs,” said Anutosh Bose, chief operating officer, LIC Nomura MF Asset Management.

UNCLE SAM ACTS TOUGH

• US anti-tax evasion law, Fatca, to be implemented by July 1
• Implementation to increase legal and compliance costs for mutual fund houses
• Inbound investments from NRIs may be stopped by fund houses, thus impacting the mutual fund business
• Compliance costs of existing accounts would continue to be high
• US-based feeder funds could also be hit

Other than MFs, the wealth management, broking and portfolio management services (PMS) sectors would also be impacted by the Fatca guidelines. Yet, market players said the lower investment sizes in MFs as compared to businesses such as broking or wealth management could impact asset management companies the most.

“For an investment of the size, it does not make sense to set up operations in the US. For the time being, we might not look at investments from US-based clients. While the amount is not that big, it would impact NRI investments,” said the marketing head of an MF house.

The operational costs at issue would include those for setting up of physical offices and strengthening personnel in the legal and audit departments. The Fatca guidelines aim at preventing tax abuse by US citizens through the use of offshore accounts. Once these are implemented, any income generated and distributed in the US is liable for tax treatment. Entities which do not both register and report face a 30 per cent withholding tax on their investments.

Fund houses’ decision to not do business with NRIs, however, puts a question mark on their existing customers, said sector officials. “Even if fund houses stop on-boarding fresh sets of US investors, the compliance costs/efforts with respect to pre-existing accounts would still be significant. Since such investors may not be forced to exit due to various factors, including taxation, losses on account of any reduced NAV (net asset value) would be a tricky issue to deal with,” said Tejesh Chitlangi, partner, IC Legal, Advocates & Solicitors.

Fund house officials said investments from US-based Indians who have an NRE account or are able to provide an Indian address would be the only ones to escape Fatca scrutiny.

Concerns are also being raised about the future of investments coming into offshore funds investing in the US, as these would qualify as income being generated in the US. An offshore fund, or a fund of fund investing abroad, is typically one which invests in international equities. For a US-based offshore fund, the dividend declared by it or by stocks in the fund would also come under the Fatca scanner. “The concern is that it might become very difficult to keep track of all the investments. There is a lot of confusion but we are still trying to figure out,” said the head of a domestic MF house.

As of last month, the total assets under management for the offshore fund category was Rs 3,191 crore, up 55 per cent since March 2013. Meanwhile, fund houses have been looking to expand their reach beyond the US to places such as Europe and Japan. Franklin Templeton, Religare Invesco and JPMorgan have already launched offshore funds focused on European equities. Reliance MF is looking at Japanese equities.