Tax and Regulatory update on Foreign Portfolio Investors (FPI) in India –October 2022 to December 2022

Regulatory Updates – FPI

Reduction  in  denomination  for  debt  securities  and  non-convertible  redeemable preference shares

SEBI on October 28, 2022, issued a circular¹ to reduce the denomination of debt securities and non- convertible preference shares. Various Market players had made a representation to SEBI regarding the  issuance of high face value which restricts the access to non- institutional investors impacting  liquidity in the corporate bond market.

Considering the aforesaid representation, SEBI has decided to reduce the denomination to INR 0.1 million which was INR 1 million earlier. This move will act as enabler to encourage investors to participate in debt securities.

Foreign Investment in Alternative Investment Funds

An Alternative Investment Fund (‘AIF’) can raise funds from a non -resident. In this regard, SEBI  vide circular² dated 9 December, 2022 has advised the funds to ensure  following criteria before acceptance of such investments:

a. Foreign  investor  should be a resident of the  country  whose  securities market  regulator  is  a  signatory  to  the  International  Organization  of Securities  Commission’s  Multilateral   Memorandum   of   Understanding  or  a  signatory  to  the bilateral Memorandum  of Understanding with SEBI.

b. AIFs  may  accept commitment  from  an  investor  being  Government  or Government related investor, who does not meet the aforesaid condition, if  the  investor  is  a  resident  in  the  country  as  may  be  approved  by  the Government of India.

c. The investor contributing twenty five percent or more shall not be the person mentioned in sanctions list notified by UN security council or is not a resident in the country identified in public statement of financial action task force.

In case, an investor does not meet the above specified criteria, it shall not drawdown any further capital contribution unless the conditions are satisfied.

Performance Benchmarking by Portfolio Managers

To help the investors in evaluating the performance of portfolio, SEBI, vide its circular dated 16 December 2022³ has recommended portfolio managers to adopt investment themes called “Strategies”. These broad Strategies shall be

• Equity
• Debt
• Hybrid and Multi Asset  

Generally, an investment approach (IA) is adopted by the portfolio manager to ensure that investment objectives of the client are met. In addition to IA, managers shall now comply with investment strategies and each IA shall be tagged to a single strategy.

Additionally, portfolio managers shall ensure compliance with timely valuation of their portfolio with the help of valuation agencies. The valuation must be carried out in accordance with the standardized valuation norms prescribed by Association of portfolio Managers in India.

Time Limit for declaration of first close of schemes, calculation of tenure and change of Sponsor/manager of Alternative investment funds

SEBI in its circular dated November 17 2022⁴, has prescribed general guidelines pertaining to first close of schemes of AIF. They are as follows:

• The First close  of  a  scheme  shall  be  declared  not  later  than  12  months from the date of SEBI communication for taking the PPM of the scheme on record
• In case of open-ended schemes of Category III AIFs, the First Close shall refer to the close of their Initial Offer Period.
• Existing  schemes  of  AIFs,  who  have  not  declared  their  First  Close,  shall declare their First Close not later than 12 months from the date of this circular
• The First Close of Large Value Fund for Accredited Investors (“LVF”) scheme shall be declared not later than 12 months from the date of grant of registration of the AIF or date of filing of PPM of scheme with SEBI, whichever is later
• In  case  the  First  Close  of  a  scheme  is  not  declared  within  the  timeline prescribed  above,  the  AIF  shall  file  a  fresh  application  for  launch  of  the said scheme
• The tenure of close ended schemes of AIFs shall be calculated from the date of declaration of the First Close.
• AIF  may  modify  the tenure of  a  scheme  at  any  time  before  declaration  of  its First Close.

Further, in case of change in sponsor/manager of AIF, prior approval shall be taken from board by AIF subject to the applicability of fees as prescribed.

No fresh commitments /investments by AIF adopting priority distribution model and incurring losses

While it has not been explicitly restricted in AIF Regulations that the sharing of loss by a class of investors shall not be less than pro rata to their holding in the AIF, it has been noticed by SEBI that certain  schemes  of  AIFs  have  adopted a distribution  waterfall in  such  a  way  that  one class of investors share loss more than pro rata to their holding  in  the  AIF than other  classes  of  since  the  later  has priority in distribution over the former.

The matter is under scrutiny and in a recent circular⁵, SEBI has been decided that schemes of  AIFs which  have adopted aforesaid priority distribution model, shall not accept any fresh commitment or make investment in a new investee company, till a view is taken by SEBI in this regard.

SEBI issues revised Master Circular for Foreign Portfolio Investors, Designated Depository (‘DDPs’) and Eligible Foreign Investors (‘EFIs’)

SEBI, vide circular number IMD/FPI&C/CIR/P/2019/124 dtd dated November 05, 2019, had issued the Operational Guidelines (hereinafter referred to as OG) for FPIs, DDPs and EFIs under the Securities and Exchange Board of India (Foreign Portfolio Investors), Regulations 2019. Subsequently, further guidelines pertaining to FPIs, DDPs and EFIs have been issued by SEBI through various circulars.

The provisions of the aforesaid circulars are incorporated in the Master Circular⁶ dated 19 December 2022  which supersedes the earlier OG issued vide circular dated November 05, 2019. The circulars mentioned in Annexure A of the Master Circular shall stand rescinded with the issuance of this Master Circular. With respect to the directions or other guidance issued by SEBI, as specifically applicable to FPIs, shall continue to remain in force in addition to the provisions of any other law for the time being in force. Terms not defined in this Master Circular shall have the same meaning as provided under the Regulations.

SEBI’s has been constantly  ensuring to roll out guidelines or amend the regulations on real time basis to ease the registration process, eliminate redundant regulatory conditions and lessen the compliance requirements for FPIs.

RBI to introduce Central Bank Digital Currency (‘CBDC’)

RBI has announced on October 7 2022, regarding commencement of its pilot project of introducing its very own digital currency for the first time in India. The main aim of government is to encourage a cashless economy and increase smoother and faster flow of transactions. The RBI has identified nine banks including State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank and HSBC to participate in the pilot project. Further, RBI intends to bifurcate the currency into two types namely general purpose or retail (CBDC-R) and wholesale (CBDC-W). Retail CBDC can be used by all including the private sector, non-financial consumers, and businesses. Wholesale CBDC is designed for restricted access to select financial institutions.

Tax updates

Draft Common Income Tax Return (‘ITR’) Form

CBDT through its notification⁷ dated November 1 2022, has proposed a Draft Common ITR which suggests merging all the existing return of income except ITR 7. However, there will be an option to either opt for current ITR-1/ ITR-4 or the proposed common ITR.

The proposed common ITR aims to facilitate ease of filing returns and reduce delays in filing the ITRs. It will consist of a questionnaire and based on the taxpayer’s answers, the appropriate ITR form will get selected and only the applicable schedules will be reflected. It is expected that this step by Income Tax Department will lead to reduction in compliance burden for taxpayers.

Relaxation in e-submission for Form 10F for selected taxpayers till 31st March 2023

The recent CBDT notification⁸ dated 12th December 2022 has provided partial relaxation with respect to e-submission of Form 10F till March 31, 2023, by non-residents not having PAN and not required to have PAN as per the provisions of the Income-tax Act, 1961. It has also been clarified that till March 31, 2023, such taxpayers may continue to furnish Form 10F in manual mode.

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