Sebi might tweak IPO, tax norms

Amendments being considered to provide finishing touches to framework, as market awaits RBI circular

The Securities and Exchange Board of India (Sebi) might further tweak the rules governing the qualified foreign investor (QFI) regime.

Two of the main changes being discussed internally are how best to classify these investors in an initial public offering (IPO) and a provision governing taxation. “We have received suggestions regarding these provisions. We are considering an amendment to the (earlier) circular shortly,” said a senior Sebi official.

At present, Sebi guidelines say QFIs are eligible for allotments in the non-institutional category in an IPO. Up to 15 per cent of the total shares on offer in an IPO are reserved for this segment, also known as the HNI (high net worth individuals) category. Qualified institutional bidders (QIBs) get 50 per cent, while the remaining 35 per cent is reserved for individual (retail) investors.
 

FINAL FINE-TUNING?

• QFIs’classification with only non-institutional investors for IPOs might change 
• Onus of taxation on QDPs might be rephrased/removed, as CBDT’s call final on tax issues 
• RBI circular giving effect to QFI regime on non-interest rupee accounts awaited

“The QFI route was originally opened for individuals and non-institutions only. Over the past few months, the guidelines have evolved to include institutions. Now, if an institution which would be eligible to take the QIB route decides to take the QFI route, should it not be allowed the same benefit? That is the thinking within Sebi now,” the official added; work is on to decide what sort of dynamic classification would best fit the case. Sebi is also considering allowing investors to bid under different categories, depending on their individual characteristics.

Another important change on the anvil is the provision putting the onus of tax collection on Sebi-registered qualified depository participants (QDPs). According to clause 7.20 of the Sebi circular dated January 13, “The DP shall be responsible for the deduction of applicable tax at source on account of profits or gains or dividends or any other income accruing to or received by a QFI before making any reinvestment/repurchase or repatriation/remittance to a QFI, and remit and report the same to the relevant tax authorities.”

Sebi has received inputs saying it was beyond its ambit to direct anyone to follow a certain procedure with regard to taxes. “That is the prerogative of the CBDT (Central Board of Direct Taxes). Therefore, we might change these provisions,” the official added.

However, unless otherwise clarified, any person remitting money outside the country would be responsible for deducting the necessary taxes payable under law, say tax consultants.

With these amendments, the capital market side of the QFI framework would be almost complete. Inter-mediaries and investors are still awaiting the enabling circular from the Reserve Bank of India (RBI). “RBI is yet to come up with the circular to operationalise the recent government directive that allowed opening of non-interest bearing rupee accounts by QFIs. This is one last hurdle before we go full steam on QFIs,” said an official with a QDP.

The Sebi circular dated June 7 says a QFI can open a single non-interest bearing rupee account in India, for routing the receipt and payment for transactions relating to purchase and sale of eligible securities, “subject to the conditions as may be prescribed by RBI from time to time”.