 "Sebi board may ease QFI issues")
There might be some easing of procedures on taxation norms involving these entities, as Sebi considers recommendations of the Chandrasekhar committee on the matter, said sources familiar with the matter.
Sebi is also likely to announce major changes to buybacks done through the open market route, take a decision on whether to expand the list of nine sectors in which foreign venture capitalists can invest and also decide on defining foreign direct investment (FDI) as those in which the investment is greater than 10 per cent of the shares of the company.
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The QFI route is a way for foreign entities, including retail investors from abroad, to bring money into India. These are done through a QDP. The problem with the QFI regime, say experts, is that the QDP is supposed to act as a gatekeeper and is liable for taxes that the QFI has to pay. The committee recommends merging the QFI and the foreign institutional investor (FII) routes into the newly created Foreign Portfolio Investor (FPI) category. This new route will tend to follow the easier tax norms which apply to FIIs, rather than the ones used for QFIs, suggest those in the know.
A recent note from law firm Nishith Desai Associates, dated June 19, drew attention to the fact that no mention was made of withholding tax in the new recommendations. "The press release does not make a mention of the responsibilities of DDPs (Designated Depository Participants) to withhold tax under the FPI regime. This may be relevant for greater clarity in the roles of the DDPs. Under the QFI regime, QDPs were assigned the responsibility to act as a single point of contact for all purposes, including withholding tax. QDPs would be responsible for any withholding tax in India before remitting returns to QFIs. However, under the present FII regime, FIIs themselves were responsible for all tax obligations on all remittances made," said the report, authored by Nikhil Joseph, Akshay Bhargav, Ruchir Sinha and Pratibha Jain.
The relative difference in inflows between the routes also seems to suggest the government would go with the FII method of dealing with taxes, rather than risk rocking the boat by applying to FIIs what was seen by intermediaries to be an 'onerous' tax procedure for QFIs.
FIIs hold assets of nearly Rs 14 lakh crore in Indian debt and equities, according to Sebi data. The net holding of QFIs is less than Rs 1,000 crore, according to depository data.
The regulator is also likely to consider other recommendations of the committee, including the ones on Know Your Client (KYC) norms which would place foreign institutions in one of three baskets. The easiest norms would be for foreign institutions backed by governments such as sovereign funds, the next for regulated entities such as asset management companies and the remainder in the third category, with the strictest KYC. This final category would also not be allowed to issue Participatory Notes, is the recommendation.
EASIER FRAMEWORK FOR FIIS
- Easier tax norm for QFIs
- FIIs no longer need to register with Sebi
- FII, QFI routes to be merged
- Mandatory to buy back at least 50% of proposed offer size
- Failing which, 2.5% proposed offer size to be forfeited
- 25% of offer size to be kept in escrow account
- Opening up of more sectors for VC activity
- New sub-category of Angel funds to be created under VC
- Angel funds allowed to invest in unlisted funds