1. Relaxation in Voluntary Retention Route (VRR) framework1
The Reserve Bank of India (RBI) vide its circular dated 22 May 20202 has announced that due to disruptions on account of COVID-19, an additional period of 3 months will be allowed to FPIs to invest at least 75% of their Common Portfolio Size (CPS). This is applicable to FPIs that have been allotted investment limits between 24 January 2020 and 30 April 2020. For FPIs availing the additional time period, the retention period for the investments would begin from the date they invest 75% of CPS.
2. Extension of timelines for KYC compliances for FPIs
- As per the Operational guidelines for FPI and Designated Depository Participants (DDP), FPI applicants while submitting the KYC forms also had to submit the originals of the supporting documents for verification. In case, the original document cannot be produced the applicant can produce an attested copy of the same.
- Due to COVID-19, Securities and Exchange Board of India (SEBI) vide its circular issued on 30 March 20203 had relaxed the above and allowed verification of the documents basis the scanned versions instead of the originals. The extension in the norms was provided till 30 June 2020. This relaxation has been further extended till 31 August 20204.
3. Extension of applicability of circular issued for Portfolio Manager
The circular issued by SEBI in February 20205 on 'Guidelines for Portfolio Managers', covering aspects like non-chargeability of upfront fees, restriction on fees charged for portfolio management service, direct on-boarding of clients by Portfolio Managers etc. The applicability of this circular was already extended to 1 July 2020 in March 2020. This has now been further extended to 1 October 2020 vide circular dated 29 June 20206.
4. Eligibility conditions under Section 9A of the Income-tax Act, 1961 (Act) relaxed
Vide notification dated 30 June 20207 the Central Board of Direct Taxes ('CBDT') has relaxed the following eligibility criteria w.e.f. 23 September 2019 for global funds registered with SEBI as Category-I FPIs, and desirous of moving fund management activities to India:
- The fund shall have a minimum of 25 members who, directly or indirectly, are not connected persons;
- Any member of the fund along with connected persons shall not have any participation interest, directly or indirectly, in the fund exceeding 10%;
- The aggregate participation interest, directly or indirectly, of 10 or less members along with their connected persons in the fund, shall be less than 25%.
Accordingly, funds registered as Category – I FPIs are NOT required to satisfy the above criteria, in case they have / wish to set-up a fund manager in India.
The above relaxations were earlier available to funds registered as Category – I and Category – II FPIs under the erstwhile SEBI (FPI) Regulations, 2014. However, with the re-categorisation of FPI categories under SEBI (FPI) Regulations, 2019, these relaxations are now available only to Category – I FPIs.
Section 9A in the Act provides a safe harbour to offshore funds with Indian fund managers. It provided that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager located in India shall not constitute 'business connection' in India of the said fund. Further, such an eligible investment fund shall not be classified to be a resident in India merely because the eligible fund manager in India undertakes fund management activities on its behalf, subject to satisfaction of certain conditions.
1. Bombay High Court holds that change of legal status would not per se affect eligibility of loss carry forward
Bombay High Court (Court) in a recent judgement8 has allowed the carry forward of losses of sub-trust of a Trust on conversion of its legal status to series LLC, as per the country of its incorporation.
The petitioners were earlier a "sub-trusts" of a Business Trust, which had been as an LLC as per the local laws of its country of incorporation (USA), pursuant to which the sub-trusts became "series" or sub-funds in the LLC. The tax authorities were of the view that the series in the LLC were not eligible to carry forward the losses, due to their conversion from sub-trusts to series.
The Court took cognizance of the fact that the sub-trusts or series have been individually assigned Permanent Account Numbers (PAN) in India and are recognised as separate taxpayers. The Court also observed that post conversion, the series in the LLC continue to be the same person as pre-conversion, as per the local laws in USA. Accordingly, the Court held that where an entity post conversion from one form to another continues to be the same person under the local laws in its country of incorporation, gains / losses earned by it in its earlier form would not be denied only because of change in status.
1. Under the VRR, FPIs need to invest at least 75% of their CPS within 3 months from the date of allotment.
2. RBI/2019-20/239 A.P. (DIR Series) Circular No.32
3. SEBI/HO/FPI&C/CIR/P/2020/056 dated.: 30 March 2020
4. SEBI/HO/FPI&C/CIR/P/2020/104 dated.: 23 June 2020
5. SEBI/HO/IMD/DF1/CIR/P/2020/26 dated.: 13 February 2020
6. SEBI/HO/IMD/DF1/CIR/P/2020/111 dated.: 29 June 2020
7. Notification No. 41/2020/F. No. 142/15/2015-TPL- Part (1)
8. Writ Petition No.2796 of 2019, 2803 of 2019 and 3525 of 2019
Originally published 10 July 2020
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