Sebi move on FPI regime grounded

The Securities and Exchange Board of India’s move to harmonise various modes of foreign investments into Indian markets has hit a finance ministry road block.

At its board meeting in October, Sebi had approved the foreign portfolio investors regime and announced the formulation of the Sebi (Foreign Portfolio Investors) Regulations, 2013.

Earlier, the regulator allowed foreign investments into stocks through its two-decade old foreign institutional investors framework and the qualified foreign investors mode.

The new route was intended at unifying these modes and doing away with stringent requirements such as prior registration.

However, the Department of Revenue, under the finance ministry, which has to make corresponding changes in the taxation framework to make the new regime operational, has put this on the back burner, saying the changes need amendments in the Income Tax Act.

“The changes require an amendment in the law and that cannot happen now, as the Budget in February will be an interim one. They (Sebi) will have to continue with the existing regime until a full Budget is presented in June-July,” a finance ministry official told Business Standard, on condition of anonymity.

He added DoR had already informed Sebi about the legal requirements and the fact that not much could be done in this regard before the new government was in place.

The amendments in tax laws are crucial, as foreign investors and intermediaries seek clarity in the taxation framework, as well as an assurance that none of the benefits available under the current framework will be taken away in the new regime.

Section 115AD, which deals with tax on income of foreign institutional investors, doesn’t recognise the term ‘foreign portfolio investor’.

Currently, FPIs cannot claim tax exemption, though Sebi has notified the new regime.

In the draft report of a Sebi-appointed

expert committee, an entire chapter was devoted to changes needed in tax laws.

However, this chapter was excluded in the committee’s final report, as tax matters were considered outside the purview of Sebi.

“Foreign investors invest in emerging markets such as India for a few extra percentage points of returns.

“For the sake of simplicity, they don’t want to risk losing the bulk of this to the tax guy,” said an official at an intermediary that dealt with foreign investors. Lack of clarity on tax issues had led to the failure of the QFI regime, championed by the finance ministry until last year.

The new norms, based on the recommendations of the K M Chandrasekhar committee, said though existing FIIs and sub-accounts would continue to operate under the FPI regime, QFIs would have to be registered as FPIs within a year.

To make entry norms easier, Sebi had also approved doing away with the current practice of FIIs and their sub-accounts requiring prior direct registration with the regulator to operate in Indian markets.

The FPI regime was expected to lead to more investments from foreign investors in India’s capital markets.

In his Budget 2013-14 speech, Finance Minister P Chidambaram had said Sebi would simplify procedures and prescribe uniform registration and other norms for the entry of FPIs.

He said the market regulator would converge different know-your-customer norms and make it easier for foreign investors such as central banks, sovereign wealth funds, university funds and pension funds to invest in India.

DEAD END?

• In October 2013, Sebi issued new norms for foreign investors
• The regulator brought FIIs & QFIs under a common framework foreign portfolio investors
• Investors not prepared to move to the new regime without tax clarity
• FinMin says change in law not possible before general polls
• Sebi, investors may have to continue with the existing regime till July