Tax and Regulatory update on Foreign Portfolio Investors (FPI) in India – January 2023 to March 2023

Taxation Updates

Central Board of Direct Taxes (CBDT) notifies ITRs for AY 2023-24

On 10 February 2023, CBDT notified¹ the Income Tax Return (ITR) Forms for AY 2023-24 to smoothen the compliance process. These ITR forms have been notified well in advance to enable the filing of returns from the beginning of the ensuing Assessment Year.

Partial relaxation concerning the electronic submission of Form 10F by select category of taxpayers following Director General of Income Tax (DGIT) (Systems) Notification No. 3 of 2022

CBDT had earlier provided partial relaxation that any non-resident not having PAN and not required to have PAN as per the provisions of the domestic law, may continue to furnish Form 10F in manual mode till 31 March 2023.

The recent CBDT Notification² dated 28 March 2023, has provided an extension in respect of manual filing of Form 10F till 30 September 2023.

The High Court upholds the claim concerning capital gains exemption under the tax treaty on basis of the Tax Residency Certificate (TRC)

The Delhi High Court recently in one of the cases³ quashed the reassessment proceedings initiated by the revenue and held that the TRC issued by the Singaporean authorities was sufficient evidence for claiming eligibility for the benefits under the India-Singapore Double Taxation Avoidance Agreement (DTAA).

The Court relied on past rulings and Indian government assurances, stating that the TRC was statutorily the only evidence required for DTAA benefits and disregarding it would be contrary to international law. The Revenue cannot go behind the TRC issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, and legal ownership and accordingly there is no capital gain liable to tax in India. The court also emphasised the binding nature of the Central Board of Direct Taxes (CBDT) circulars and relied on previous rulings to support the validity and efficacy of the TRC.

Regulatory Updates

Asset management companies to provide services to FPIs operating from IFSC

In consultation with the IFSC authorities, SEBI vide circular⁴ dated 6 January 2023, has permitted Asset Management Companies (AMCs) to provide management and advisory services to FPIs operating from IFSC and regulated by IFSCA subject to the following conditions:

Such FPI shall be allowed to invest in mutual fund schemes other than the schemes in the category of “thematic” as defined in the circular issued earlier by the SEBI in October 2017.

For investment in equity and equity derivative securities listed on recognised stock exchanges in India, such FPI shall not take contra-position for six months from the date of purchase or sale of such securities.

Allowing Stock Exchanges to launch multiple contracts on the same commodity in the commodity derivatives segment

To promote greater investor engagement in the market for commodity derivatives, SEBI vides its circular⁵ dated 11 January 2023, which has permitted stock exchanges to offer multiple contracts in the same commodity to serve all participants in the value chain.

The Circular shall come into force with immediate effect.

Participation of AIFs in Credit Default Swaps (CDS)

SEBI has issued a circular⁶ dated 12 January 2023, allowing AIFs to participate in credit default  swaps subject to certain conditions:

• Category  III  AIFs  may  sell  CDS,  subject  to  the  condition  that  effective leverage  undertaken  is  within  the  permissible  limits  as  specified  in  SEBI regulations;

• Total  exposure  to an investee  company,  including  exposure  through CDS, shall be within the limit of applicable concentration norm as specified in AIF Regulations;

• AIFs  shall  report  details  of  CDS  transaction  to  the  custodian,  by  the  next working day, in the manner as specified by the custodian;

• Category II AIFs and Category III AIFs may sell CDS, by earmarking unencumbered Government bonds/Treasury bills equal to the amount of the said CDS  exposure.

Fully Accessible Route for Investment by Non-residents in Government Securities – Inclusion of Sovereign Green Bonds

• Fully Accessible Route (FAR), was introduced by RBI to enable non-residents to invest in specified Government of India dated securities where the eligible investors can invest in such securities without being subject to any investment ceilings.

• RBI on 23 January 2023, through a circular,⁷ decided to include Sovereign Green Bonds as ‘specified securities’ under the FAR.

Changes in PMLA and Reporting of Beneficial Owner Timelines to 7 days

SEBI on 14 March 2023, has notified⁸ changes in SEBI (Foreign Portfolio Investors) Regulations, 2019. Under the new regulation which will be effective from 14 March 2023, FPIs will be required to inform SEBI and Designated Depository Participants (DDPs) about the following within 7 working days (As per erstwhile regulations, FPIs were required to inform “forthwith”):

• Any false or misleading information about a change in the material respect.

• Any change in their structure or ownership or control

In turn, DDPs are required to submit the above information to SEBI within two days.

A couple of days prior to this amendment, the provision of the Prevention of Money Laundering Act (PMLA) was amended wherein the threshold for identifying ultimate beneficial owners (UBOs) in FPIs was lowered to 10% for companies and trusts (earlier 25% and 15% for companies and trusts, respectively and only entities from high-risk jurisdictions were subject to a 10% threshold). SEBI has set a deadline for the FPIs to divulge the UBOs of their funds. Failure to comply with the deadline would result in the winding up of the position of FPIs and the cancellation of their licenses.

FPIs will have to inform in case of any penalty, pending proceedings, or findings of investigations for which action may have been taken or is in the process of being taken by an overseas regulator against them within seven days.

In case of any direct or indirect change in structure or common ownership or control of the FPI or investor group, it shall, as soon as possible but not later than seven working days, bring the same to the notice of its DDP. And in turn, DDPs will submit the information to the market regulator within two days.

Streamlining the onboarding process of FPIs

SEBI vide circular⁹ dated 27 March 2023 had simplified the procedural requirements for onboarding of FPI intending to facilitate ease of doing business and to reduce the time taken for their registration.

1) SEBI has now allowed designated depository participants (DDPs) to grant FPI registration based on scanned copies of application forms and supporting documents.

2) SEBI has also allowed DDPs to accept the use of digital signatures by FPIs for the execution of registration-related documents.

3) SEBI has also permitted verification of PAN by DDPs through the Common Application Form (CAF) module available on the websites of the depositories.

4) SEBI has allowed authorised bank officials to use the SWIFT mechanism for the certification of copies of original documents submitted by FPIs,

5) SEBI has allowed FPIs to submit its unique FPI investor group ID in the CAF, in lieu of providing complete details of all group constituents. In case the applicant wants to club additional FPIs (apart from itself) in such a unique investor group ID, the FPI may only provide details of such additional FPIs, along with the investor group ID.

International Financial Service Centre (IFSC)

Specification of Scheme Application Form for Registration of Scheme or Fund of Registered Fund Management Entities (FME)

International Financial Services Centres Authority (IFSCA) vide Circular¹⁰ dated 06 February 2023, has specified a scheme application Form wherein the registered FMEs seeking registration for their scheme or the funds in IFSC are required to submit the application in the format stated in Annexure I of the circular. This Form is being specified to streamline the process of registration of the scheme or the fund in IFSC.

Clarification concerning FME and Schemes set up in India by Sovereign Wealth Funds

IFSCA vide circular¹¹ dated 01 March 2023; has clarified the following with respect to Sovereign Wealth Funds desirous of setting up an FME and scheme(s) in IFSC:

• It has been clarified that the ceiling of 10% investment from FME or its associates in the case of Venture Capital Schemes and Restricted Schemes shall not apply to such funds.

• The restriction that certain schemes can only be close-ended in the case of Venture Capital Schemes, Category I and II Alternative Investment Funds shall not be applicable.

• A restricted scheme set up as an open-ended scheme by an FME of a sovereign wealth fund may comply with the provisions as applicable to close-ended schemes concerning investment in physical assets and computation and disclosure of NAV. Further Cap on investments in securities of unlisted companies shall not apply to such open-ended schemes.