Regulatory Updates

Amendment to Circular for mandating additional disclosures by FPIs that fulfil certain objective criteria:
SEBI vide circular dated 01 August 2024¹ declared exemption from the additional disclosure requirements from earlier circular dated  24 August 2023, which mandates additional disclosure requirements for FPIs meeting specific objective criteria outlined in the Circular. SEBI, notified that University Funds and University related Endowments will be exempted and shall not be required to make the additional disclosures, subject to them fulfilling all the following additional conditions:

1. Indian equity AUM being less than 25% of global AUM.

2. Global AUM being more than INR 10,000 crore equivalent.

3. Appropriate return/filing to the respective tax authorities in their home jurisdiction to evidence the nature of a non-profit organisation exempt from tax.

Reporting by Foreign Venture Capital Investors:
SEBI vide circular dated 13 September 2024² notified that FVCIs are required to submit quarterly reports to SEBI In accordance with SEBI (FVCI) Regulations, 2000 in the format specified with respect to their venture capital activity as Foreign Venture Capital Investor.
FVCIs shall submit the quarterly report irrespective of the fact that any investment is made or not during the quarter. The report for the quarter ending 30 September 2024 and 31 December 2024 shall be submitted in excel file in the revised format by 15 November 2024 and 15 January 2025 respectively through email. From quarter ending 31 March 2025 onwards, FVCIs shall submit quarterly report in the revised format on the SEBI intermediary portal (SI Portal). The report shall be submitted within 15 calendar days from the end of each quarter.

Enabling T+2 trading of Bonus shares where T is the record date:
SEBI vide circular dated 16 September2024³ decided to reduce the time taken for credit of bonus shares and trading of such shares, from the record date of the Bonus Issue under SEBI.

SEBI also demonstrated the procedure to implement the above:

1. The Issuer must apply for in-principal approval to the Stock Exchange within 5 working days of the board meeting approving the bonus issue. The deemed date of allotment will be the next working day after the record date (T+1 day).

2. Stock Exchanges will notify the acceptance of the record date and the number of shares in the bonus issue upon receiving the record date notice (T Day) and required documents from the Issuer.

3. After receiving SEBI's notification, Issuers must submit the necessary documents to Depositories for crediting bonus shares.

4.  Shares from the bonus issue will be available for trading on the next working day after allotment (T+2 day).

SEBI Establishes Foreign Portfolio Investor (FPI) Outreach Cell:
SEBI vide press release dated 25 September 2024⁴ has launched a dedicated Foreign Portfolio Investor Outreach Cell as part of the Alternative Investment Fund and Foreign Portfolio Investors Department (AFD).

This cell will focus on direct engagement with Foreign Portfolio Investors (FPIs), and
supporting them in accessing the Indian securities market seamlessly.

Key responsibilities of the FPI Outreach Cell will include following:

• Providing guidance to prospective FPIs during the pre-application stage, including assistance with documentation and compliance processes.

• Offering support during the onboarding phase and resolving any operational challenges that may arise during the registration process or thereafter.

SEBI Board approved proposal to ensure that Offshore Derivative Instruments (ODIs, or erstwhile P-Notes) and segregated portfolios of FPIs are subject to disclosure requirements on par with FPIs:
SEBI vide press release dated 30 September 2024⁵ in the board meeting approved a proposal to apply the additional disclosure framework specified vide SEBI circular dated 24 August 2023 directly to ODI subscribers, sub-fund structures, separate classes of shares, and other equivalent structures of FPIs with such segregated portfolios, to ensure that their disclosure requirements are on par with FPIs.
Non-compliance with the disclosure requirement shall lead to redemption of ODIs/ liquidation of segregated portfolio within 180 days.  Further, such defaulting ODI subscribers shall become ineligible to subscribe/ hold any positions through ODIs from any ODI issuing FPI

• Additionally, the Board also approved a proposal to prohibit ODI issuing FPIs from issuing ODIs with derivatives as reference/underlying and hedging their ODIs with derivative positions on stock exchanges.  Consequently, ODIs shall   only   have   cash   equity   /   debt   securities   /   other   non-derivative permissible investment by FPI as underlying and shall be fully hedged with the same securities on a one-to-one basis, throughout the life of the ODI.

• Approval was provided to mandate issuance of ODIs (other than those with government securities as underlying) by FPIs only through a separate dedicated FPI registration, with no proprietary investments under such registration.

Procedural Updates

SEBI Proposes New Asset Class to Bridge Gap Between Mutual Funds and Portfolio Management Services
SEBI has released a consultation paper dated  16 July 2024⁶ on New Asset Class which aims at bridging the gap between Mutual Funds and Portfolio Management Services/ AIF/ REITs/ InvITs. The New Asset Class is proposed to be introduced under the Mutual Fund structure, with relaxations in prudential norms for such New Asset Class to be adequately effective.

Eligibility to launch New Asset Class by Asset Management Companies (AMC):

1) Existing Mutual Fund shall be in operation for minimum of 3 years and has average Asset Under Management (‘AUM’) of not less than INR 10,000 crores, in immediately preceding 3 years; or
2) In case the above is not satisfied, then an AMC will be eligible if it appoints:

• A Chief Investment Officer with >10 years of fund management experience, managing AUM of >5,000 Cr; and

• An additional Fund Manager for the New Asset Class with > 7 years’ experience of managing AUM of >3,000 cr.

AMC can offer ‘Investment Strategies’ under pooled fund structure, akin to Mutual Funds schemes which are Long-short Equity Fund and Inverse ETF/Fund. The investment strategies under the New Asset Class may invest in derivatives or derivative strategies as a way of taking exposure in the Market. However, the total exposure through derivatives shall not exceed 50% of the net assets of an investment strategy. The minimum investment amount for investment under the New Asset Class shall be INR 10 lakh per investor at the level of the New Asset Class within the AMC/MF. The taxation of the New Asset Class is not provided. It needs to be seen whether the gains be eligible for 10/15% tax rates or will the 30% rate applicable to Specified Mutual Fund be applicable.

SEBI's, Consultation paper proposes applying granular disclosure criteria to ODI subscribers, limiting ODIs to cash equity, debt, or permissible FPI investments, and prohibiting FPIs from issuing ODIs based on derivatives
SEBI has released a consultation paper dated 06 August 06 2024⁷ applying the granular disclosure criteria directly to Offshore Derivative Instrument (ODI) subscribers which is currently limited to the FPIs. Additionally, SEBI is proposing that FPIs shall be prohibited from issue of ODIs with derivatives as reference/ underlying. Accordingly, ODIs shall only have cash equity/ debt securities/ any permissible investment by FPI (other than derivatives).

Key points of the Consultation Paper are summarised below:
1) Granular Disclosures
Since August 2023, granular disclosure upto ultimate natural person is required be made by a FPI where such FPI is having more than 50% exposure in single Indian corporate group or have a holding over INR 25,000 crore. Such disclosure requirements were not applicable at the ODI subscriber level. Going forward, the granular disclosure criteria shall be applicable directly to ODI subscribers, to be monitored by ODI issuers and their DDPs/ Depositories.
Also, the 50% Indian exposure test would have to be done at each ODI subscriber level by the ODI issuer. Additionally, the INR 25,000 cr test shall be done by ODI issuers, their DDPs and Depositories across ODI subscribers and group entities of ODI subscribers taking positions through one or more ODI issuers and group entities registered as FPIs.

2) Use of derivatives by ODI issuers
Since 2017, Category I FPIs have been allowed to issue ODIs against derivatives for speculative purpose or as a hedge against the cash equity/ debt.
It is proposed that ODI issuers shall be prohibited from issuing ODIs with derivatives as reference/ underlying. Accordingly, ODIs shall only have cash equity/ debt securities/ any permissible investment by FPI (other than derivatives). Further, ODIs should be issued through a separate FPI registration with no proprietary investments allowed. Existing ODIs with derivatives as underlying will be required to be redeemed within a period of one year from the date of issuance of the proposed framework.
ODIs allow foreign investors to take a leveraged position in securities market. Further, derivative positions in India allow investors to take a leveraged position in the Indian market. Thus, a leveraged position undertaken using an ODI, which is further hedged using derivative, may potentially lead to multiple levels of leverage.

IFSCA invites public comments on proposed amendments vide consultation paper
IFSCA issued a consultation paper dated 05 August 2024⁸ outlining proposed amendments and seeking public comments. This follows an earlier consultation on 10 October 2023, where IFSCA sought consultation from the public and regulated entities on the IFSCA (Fund Management) Regulations, 2022, which govern Fund Management Entities (FMEs) and Funds in GIFT-IFSC.
The consultation paper presents the following key proposed amendments:

1. Minimum investment criteria for Portfolio Management Services (PMS) scheme proposed to be reduced from USD 150k to USD 75k for non-accredited investors.

2. Concept of joint investors prevalent under SEBI AIF regulations proposed to be introduced wherein an investor is allowed to invest jointly with his/her spouse, his/her parent or his/her/daughter/son (number of investors cannot exceed 2) under Venture Capital Scheme and Restricted Schemes (CAT I/II/III AIFs). This will enable the investors to pool their funds and invest jointly to comply with the USD 250k and USD 150k minimum investment requirement under the respective schemes (minimum investment criteria not applicable to accredited investors).

3. The minimum scheme size for venture capital schemes, restricted schemes, retail schemes is proposed to be reduced from 5 million to USD 3 million.

4. Venture capital schemes and restricted schemes shall not buy or sell securities from associates, other schemes of the FME or its associates, or an investor who has committed to invest at least fifty percent (50%) of the corpus of the scheme, unless prior approval has been obtained from seventy-five percent (75%) investors in the scheme by value.

Provided that while obtaining approval of the investors, the investor who has committed to invest at least fifty percent of the corpus of the scheme and is buying or selling the investment, from or to, the scheme, shall be excluded from the voting process.

SEBI Proposes simplified registration for Foreign Portfolio Investors (FPIs)

To facilitate ease of onboarding for aforesaid FPI applicants and reduce duplication of available information SEBI issued consultation paper dated September 24,2024⁹.

1. In case of onboarding applicants belonging to the categories mentioned at Point 2 below, an abridged version of Common Application Form (CAF) having only those fields that are unique to such applicants shall be used. The remaining fields shall either be auto populated from the information available in the Depository system or shall be disabled, as applicable.

2. Multiple funds of investing/non-investing Investment Manager (IM) wherein IM or one its funds is already registered as FPI.

• sub-funds of a master fund wherein the master fund/one of the sub-fund is already registered as FPI.
• sub-funds of a fund with separate classes of shares or equivalent structure with segregated portfolio wherein such fund/one of its sub-fund is already registered as FPI and
• schemes of Insurance companies wherein the parent entity/one of the schemes of Insurance company is already registered as FPI.

3. While leveraging on the available information, an explicit consent to use the available information and confirmation that all the details other than those mentioned in the abridged version of CAF remain unchanged, shall be obtained from the applicant.

4. Custodians, upon receipt of information from the applicant, shall update the details in CAF against the registration number of the applicant. The comments/suggestions should be submitted latest by 15 October 2024.

International Financial Services Centres Authority (‘IFSCA’)

Listing of Debt Securities on the recognised stock exchanges in the IFSC

IFSCA vide circular dated 11 September 2024¹⁰ has notified for listing of debt securities on the recognised stock exchanges in the IFSC with effect from 01 October 2024. In accordance with regulatory framework provided by “The IFSCA (Listing) Regulations, 2024”.

In line with terms of regulation of the Listing Regulations, an issuer is required to obtain credit rating for its debt securities proposed to be listed on a recognised stock exchange from a credit rating agency registered either with IFSCA or with a regulator in a Foreign Jurisdiction.

The market participants have represented that there are some transactions wherein the issuers are already at an advanced stage of getting their debt securities listed on the recognised stock exchanges and it may be difficult for such issuers to obtain credit rating in a short time frame.

After careful consideration of the representations received, it has been decided that it shall be mandatory for issuers to obtain credit rating for the debt securities proposed to be listed on the recognised stock exchanges with effect from 01 October 2024.

Recent Jurisprudence

Delhi Tax Tribunal holds that Assessee is a genuine tax resident of Mauritius, eligible for the treaty benefits under Article 13 of DTAA; New Indo-Mauritius Protocol not yet notified.

• Delhi Tax Tribunal held¹¹ that the TRC certificate, Global Business License, and securities and exchange Borad of India (SEBI) registration clearly demonstrate that the Assessee is a genuine tax resident of Mauritius; Tribunal further notes that sample copies of Board Resolutions as furnished in the paper book demonstrate that Board meetings were conducted in Mauritius.

• Assessee is incorporated in Mauritius, holding a valid TRC issued by Mauritius Revenue Authority and carries on investment activities in India, registered as a Foreign Portfolio Investor (FPI) with SEBI.

• Assessee claimed exemptions on dividend and also paid taxes based at beneficial rates on capital gains as per Article 13(4) of tax treaty. The Assessing Officer “AO” on the basis of document received from SEBI held that the control and management of the assessee company lies in UAE, as the beneficial owner being resident of UAE (Assessee’s holding company who is resident in UAE) and denied the treaty benefits.

• ITAT explicitly notes the TRC certificate and copies of Board Resolutions and accepts Assessee's contention even after capital gains from sale of equity shares became taxable in India after 01 Apr 2017, under the Treaty provisions, the Assessee did not stop its investment activities and duly paid taxes in India on its investment activities.

• As far as applicability of protocol dated 07 Mar 07 2024 amending the Indo-Mauritius Treaty is concerned, ITAT observes that it will come into force only after each of the contracting States notify the same.

• Hence, ITAT dismissed Revenue's appeal and Grants treaty benefit basis TRC to Assessee.

Delhi Tax Tribunal holds that capital gains from transfer of rights and interests in Cumulative Convertible Preference Shares (CCPs) are not taxable in India as situs of capital asset in the nature of rights and interests was outside India.

• Delhi ITAT held¹² that the source of the taxpayer’s rights and interests, constituting a capital asset, was through an agreement executed in the USA, which were subsequently transferred and subjected to capital gain, was in USA and not located in India and therefore, income from its transfer is not taxable in India.

• The taxpayer, NRI, was employed with SIMI US, a group entity of Soft Bank Corp. He entered into employment agreement with Soft Bank Corp, whereby he was to receive CCPS of Indian companies.

• Various employment agreements were entered into over the period of time. SIMI US vide agreement, assigned rights and benefits in CCPS of in favour of Arora Trust, a pass-through entity whose sole beneficiary was the taxpayer.

• By virtue of Termination Agreement, the rights and interests in the CCPS that had accrued to the taxpayer, was transferred and extinguished and resultantly offered to tax in the tax return filed in the USA. The taxpayer offering the income to tax as LTCG is in compliance with the termination agreement.

• Since the capital asset was held for less than 36 months, it would be STCG. In the termination agreement, it has been clearly stipulated that the payments to be received by the taxpayer towards transfer of his right and interests will represent capital gain taxable under the domestic law of India and has to be offered to tax by the taxpayer by filing a tax return in India.

• Therefore, the tax return filed by the taxpayer offering to tax the LTCG is strictly in compliance with the terms of termination agreement and taxpayer is entitled for relief only to the extent of claims made in the tax return.

Mumbai Tax Tribunal holds that no levy of interest under section 234C for non-deduction of TDS by Payers where assessee had paid full tax on interest receipts as advance tax

• Mumbai ITAT held¹³ that since the payers faulted in deducting tax at source, the assessee discharged its liability by paying the full tax. Therefore, the assessee cannot be levied with interest under section 234C for the fault of the payers.

• The assessee was a company incorporated in Singapore and was registered as a Category I Foreign Portfolio Investor (FPI) with the Securities and Exchange Board of India (SEBI). The assessee had made investments in debt securities and equity shares in India. The assessee received interest on commercial papers, non-convertible debentures and government securities. The assessee filed its return of income and paid full tax on interest receipts as advance tax.

• However, on some part of said interest income received by the assessee, the payers did not deduct tax at source, though the payers were liable to deduct tax at source as per sections 196D and 194LD. In view of same, the Assessing Officer levied interest under section 234C upon the assessee.

• Mumbai ITAT held that for failure on part of the payer to deduct TDS under sections 196D and 194LD, the assessee cannot be penalized by levy of interest under section 234C. He has diligently discharged its full tax liability by paying the entire advance tax on the interest income.

• It can be seen that the advance tax is reduced by any tax deductible or collectible which means that even the legislators have taken care of liability of the payer to deduct tax at source on payments and to that extent, assessee is not required to pay any advance tax.

• It is not case of deferment in payment of advance tax on income as envisaged in section 234C. Since the assessee has discharged the tax liability, no interest is leviable under section 234C. Accordingly, the Assessing Officer is directed to delete the impugned addition.