1. Mauritius now notified as a Category I jurisdiction

Vide its order dated 13 April 20201 Ministry of Finance has notified Mauritius as an eligible country for the purpose of granting Category I license.

The Securities and Exchange Board of India (SEBI) earlier, vide its notification dated 7 April 2020 had made amendments to the FPI regulations to include any country specified by Central Government by an order or by way of an agreement or treaty with other sovereign governments for entities investing from Financial Action Task Force member countries. Thus, with the recent order dated 13 April 2020, the funds set up in Mauritius will be eligible to opt for category I registration and consequently, under the Indian tax laws such funds will be outside the net of Indirect transfer provisions.

2. Increase in default FPI limit from 24% (of share capital of Indian companies) to sectoral cap

In 2019, Government of India had announced that the aggregate default FPI limit (i.e. limits on investments by all FPIs taken together) in the share capital of a listed Indian company will be increased from 24% to the applicable sectoral cap for that sector. Further, if any Indian company prefers to lower the limit for FPI investments, it can decrease the limit to either 24%, 49% or 74% with the approval of its Board of Directors and General Body. Subsequently Foreign Exchange Management (Non-debt) Instruments Rules, 2019 were notified by the Government on 17 October 2019 stating therein that the increase in FPI limit will be effective from 1 April 2020.

In accordance with the above, the Indian depositories (National Securities and Depository Limited – NSDL and Central Securities Depository Limited – CDSL) have updated the FPI limits for all companies in their database2.

3. Common Application Form (CAF) for FPI

Vide notification dated 27 January 20203, the regulators simplified the registration process for the FPIs and notified the CAF to ensure quick and smooth onboarding for foreign investors

SEBI vide its circular dated 4 February 20204 clarified the following:

  • Applicants seeking FPI registration shall be required to duly fill CAF and annexure to CAF and provide supporting documents and applicable fees for SEBI registration and issuance of PAN5
  • Other intermediaries dealing with FPIs may rely on the information in CAF for the purpose of KYC
  • Designated Depository Participants (DDP) may continue to accept in-transit FPI registration applications for a period of 60 days from date of issuance of this circular by SEBI i.e. 60 days from 4 February 2020.

The above circular is a step closer towards ensuring ease of doing business in India and will assist the FPIs on: Registration with SEBI; Allotment of Permanent Account Number (PAN) and carrying out of Know Your Customer (KYC) for opening bank and demat account all under one umbrella.

4. Investment by FPI in debt

The Reserve Bank of India (RBI) vide its circular dated 23 January 20206 made certain amendments in relation to the debt investment of FPIs investing in India. The details of the same are tabulated below.

Particulars Available limits
Short term investment in Central Government Securities (incl. Treasury Bills) or State Development Loans (SDL) 30% (of the total investment)
[earlier was 20%]
Short term investment in corporate bonds 30% (of the total investment)
[earlier was 20%]
Debt instruments issued by Asset Reconstruction Companies and by entity under Corporate Insolvency Resolution Process7 Exempted from short term investment limit

5. Relaxation/ Amendments in Voluntary Retention Route (VRR) framework8

RBI vide its circular dated 23 January 20209 had made the following changes for FPI investment through VRR.

  • The overall limits have been increased to INR 1.5 trillion (earlier INR 750 billion).
  • FPIs can transfer their investments made under the general investment limits to VRR.
  • Though mutual fund investments are not permitted under VRR, investments in exchange traded funds have been specifically allowed provided the exchange traded fund invests only in debt securities.

6. Investment in specified Central Government Securities without any restrictions

The Indian Finance Minister in 2020 Budget speech had announced that certain specified categories of central government securities would be opened fully for non-resident investors without any restrictions. In line with this announcement, the RBI on 30 March 202010 introduced a new route viz. 'Fully Accessible Route' (FAR) for non-residents to invest in certain specific securities starting from 1 April 2020.

Presently, five11 government securities have been notified for investment under FAR. In addition to the above, all new issuance of Government securities of 5-years, 10-years and 30-years tenor from the financial year 2020-21, will be eligible for investment under FAR as 'specified securities'. Also, RBI may add new tenors or change tenors of new securities to be designated as specified securities.

7. Budget 2020 updates in brief

Amendment Old provisions New provisions in Finance Act, 2020
Extension of concessional tax rate of 5% on interest income arising to FPI on government securities and qualifying corporate bonds Available only up to 30 June 2020 Date extended to 30 June 2023
No exemption for new Category II FPIs from Indirect share transfer provisions12 Finance Act 2017 had exempted assets held by investors in erstwhile Category I and II from indirect share transfer provisions and hence Category III was exposed to the indirect share transfer provisions With the abolition of category III FPIs from the statute under SEBI (FPI) Regulations, 2019 there was need for corresponding amendment in tax laws. Consequently, Category II FPIs have been granted exemption only for its investment prior to 23 September 2019. For investments post 23 September 2019 and newly set-up FPIs no exemption from indirect transfer provisions will be available.
Abolition of Dividend Distribution Tax (DDT) Indian companies were required to pay DDT upon distribution of dividend to shareholders/ unit holders.

Such dividends were exempt from tax in the hands of shareholders/ unit holders		 With the abolition of DDT, dividends will now be taxable in the hands of shareholders/ unit holders and will be subject to tax deduction at source13. FPIs will now be able to claim to claim the credit for such tax deducted as source subject to applicate treaty provisions and domestic laws of the foreign jurisdiction.
Widening of safe harbour rules for an offshore fund located onshore The Indian tax laws provides for safe harbour rules for an offshore fund subject to fulfilment of prescribed conditions Following conditions have been relaxed;
  • Restriction on participation by Indian residents
  • Minimum corpus requirement
Tax exemption for infrastructure investment by, subsidiary of ADIA; Sovereign Wealth Funds (SWF) and Specified pension fund No exemptions SWF and foreign pension funds will be exempt from Indian income-tax from 1 April 2020 on its Indian sourced dividends, interest, and/ or long-term capital gains arising from an investment (share capital, debt or unit) made in India, subject to the conditions prescribed.

Footnotes

1. F. No. 10/6/2019-EM dated 13 April 2020

2. https://www.fpi.nsdl.co.in/web/Reports/ForeignInvestmentLimitMonitoringListing.aspx https://www.cdslindia.com/publications/FIMonitoring.aspx

3. Notification No. F No. 4/15/2016-ECB

4. IMD/FPI&C/CIR/P/2020/022

5. PAN is issued by income tax authorities in India and accordingly separate fees are charged for PAN application.

6. RBI/2019-20/150 A.P. (DIR Series) Circular No. 18

7. Issued as per the resolution plan approved by National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016

8. Under the VRR, FPIs need to commit a minimum amount of investments for a specified period in India (at least 3 years) and the primary condition under the route is that 75% of the committed amount has to remain in India for the entire committed period.

9. RBI/2019-20/151 A.P. (DIR Series) Circular No. 19

10. RBI/2019-20/201 FMRD.FMSD.No.25/14.01.006/2019-20

11.

Sr. No. ISIN Security
1 IN0020190396 6.18% GS 2024
2 IN0020180488 7.32% GS 2024
3 IN0020190362 6.45% GS 2029
4 IN0020180454 7.26% GS 2029
5 IN0020190032 7.72% GS 2049

12. Indirect transfer as defined under section 9 of the Income-tax Act, 1961

13. In case of FPI's the tax will be deducted at source @ 20% (plus surcharge and cess)

Originally published 29 April 2020

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