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In the last three years, the US has been the biggest contributor to the bulging assets under management of various global funds, owing to the easy monetary policy in that country. Soon, however, that will not be the case for Indian mutual funds, which are likely to stop accepting money from US investors with a new tax regime set to come into force in January.
The Foreign Account Tax Compliance Act (Fatca) guidelines will require foreign financial institutions receiving money from US investors to report the offshore holdings of those investors to American tax authorities. The new rules would increase compliance costs for mutual funds garnering assets in the US, making it unviable.
“The move will result in significant costs and compliance implications for fund houses accepting subscription from US investors, as the man power, paper work and ongoing reporting requirement will be massive. This is in addition to fears of any inadvertent non-compliance with the complex US regulatory regime. Hence, the worry for them now is whether accepting investments from US investors is worth these efforts,” said Tejesh Chitlangi, partner at IC Legal, Advocates & Solicitors.
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Currently, US tax authorities depend on entities in that country to self-report their offshore investments. Starting January 2014, foreign financial institutions receiving money from US investors will have to make various declarations, including the names and addresses of the investors and the details of their balances, receipts and withdrawals.
“The legal and cost implications will be such that fund houses may even consider not accepting funds from the US,” said the chief marketing officer of a bank-sponsored fund house.
Currently, fund houses receive money from both individual and institutional investors, as well from non-resident Indian investors domiciled in the US.
According to data on the Association of Mutual Funds in India website, foreign institutional investors (FIIs) account for about 0.5 per cent of the industry’s total assets under management. As of September 2013, FIIs had invested about Rs 4,467 crore in mutual fund schemes, down 13.7 per cent against March 2013. About half the amount invested was in equity mutual funds, while a fourth was in liquid and money-market funds.
At a recent event, Securities and Exchange Board of India (Sebi) Chairman U K Sinha had termed Fatca “a worrying development”. “There are certain developments having extra-territorial implications. Businesses should take note of it and figure how to do business,” he had said.
Though Fatca rules are likely to hit Sebi-regulated intermediaries the hardest, Sinha believes the answer may lie with the finance ministry, which is already in dialogues with US authorities.
“The finance ministry will have to play a big role in bringing about more clarity on the issue. One of the concerns raised by fund houses has been the issue of multiple KYC (know-your-customer) points,” said Ashvin Parekh, expert and advisor financial services, EY. “In the absence of clear guidelines, Sebi has asked fund houses to carry out the KYC compliance themselves, which is also why costs are moving up.”
Fatca, passed in 2010, aims to curtail offshore tax evasion by US entities. US investors putting in money in India could do so using an omnibus account, which acts like a pool of funds collected from investors. “Omnibus accounts will slowly be phased out, once Ultimate Beneficial Ownership regulations kick in. According to this regulation, each individual investor will have to declare the details of his/her investments, which will then have to be reported by the fund houses to US tax authorities,” said Anutosh Bose, chief operating officer, LIC Nomura Mutual Fund Asset Management.
