The foreign portfolio investor (FPI) regime is not a done deal. The Reserve Bank of India (RBI) is yet to amend the Foreign Exchange Management Act (Fema). Also, designated depository participants are awaiting clarity on their responsibilities with regard to taxation of FPIs.
"The exchange control regulations in the form of Fema do not recognise FPIs as a category of foreign investors," said Russell Gaitonde, partner at BMR Advisors.
Fema contains rules governing foreign investors and the maximum limit they can hold in a company. For example, Schedule 2 in the Act mentions that the holdings of a foreign institutional investor in an Indian company “shall not exceed 10 per cent of the total paid-up equity capital”.
A note from law firm Khaitan & Co, too, said a clarification would smoothen the road for designated depository participants (DDPs). It said the stock market regulator had said DDPs would be required to set up a mechanism for tax deduction and payment in line with directions issued by the tax authorities and the RBI.
“This had created some concern among DDPs, since they felt this could potentially impose fairly onerous compliance obligations on them. With the CBDT (Central Board of Direct Taxes) now equating FPIs with FIIs, the expectation is that the stance of the CBDT with respect to DDPs shall mirror their stance with respect to custodians in the context of FIIs, and no tax deduction and payment obligations shall be imposed on DDPs. Nonetheless, an express clarification from CBDT in this regard is needed to help settle the issue definitively,” it said.
Sudipto Bhattacharya, senior vice-president at SBI-SG Global Securities Services, which provides custodian services, said the ambiguity continued when it came to their obligations.
"It is unclear if the designated depository participants would be required to make sure that foreign investors are meeting their tax obligations. Hopefully, this will not be the case. The custodians are likely to continue making representations to the various regulatory authorities on the matter," he said.
