Safe Harbour for investment management activities of Offshore funds in India AMFI BUDGET PROPOSALS 2018-19 - MYREALITY.In, Real Estate, Share Market, Mutual Fund, Insurance
Trending
Powered by Blogger.
Friday, January 26, 2018

Safe Harbour for investment management activities of Offshore funds in India AMFI BUDGET PROPOSALS 2018-19


AMFI-  Association of Mutual Funds in India
BUDGET PROPOSALS FOR FY 2018-19

Safe Harbour for investment management activities of Offshore funds in India

Section 9A of the Income-tax Act, 1961 prescribes 13 conditions that need to be fulfilled by the offshore fund, and 4 conditions that need to be fulfilled by the India-based Fund Manager, for the offshore fund to qualify for exemption from a business connection risk and the risk of having a Permanent Establishment (PE) under the Act. The conditions are rather stringent and difficult to fulfil or open to interpretation. Mentioned below are some of the clauses that need to be reviewed and relaxed



Background

i                       One of the conditions stipulated in clause 4b of Sec.9A is that the Indian AMC should be registered as a fund manager or an investment advisor in accordance with the specified regulations. "Specified Regulations" has been defined to include SEBI (Portfolio Managers) Regulations, 1993 or the SEBI (Investment Advisers) Regulations, 2013, or such other regulations made under the SEBI Act, 1992 which may be notified by the Central Government under this clause. However, the above definition does not include SEBI (Mutual Funds) Regulations, 1996. Consequently, Indian AMCs who are only managing SEBI registered Mutual Funds under the SEBI (Mutual Funds) Regulations, 1996 will face challenges while seeking approval from the Central Board of Direct Taxes (CBDT) regarding its eligibility for the purposes of Section 9A.


i                       ii. “Corpus” is defined as the total amount raised for the purpose of investment by the eligible investment fund as on a particular date


i                       iii. The aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed 5% of the corpus of the fund {9A(3)(c )}


i                       iv. The fund shall not invest more than 20% of its corpus in any entity {9A(3)(h)}


i                       v. The monthly average of the corpus of the fund shall not be less than Rs 100 crores {9A(3)(j)}

i                       vi. No business connection of the offshore fund in India and no person acting on its’ behalf {9A(3)(l)}


i                      Remuneration paid to fund manager is
ii                     a) not less than the arm’s length price {9A(3)(m)}; and
iii                    b) restricted to maximum of 20% of profits of the fund {9A(4)(d)}


Proposal

It is recommended that the definition of "Specified Regulations" should be revised to include Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
Till the time the above amendment is effected in Section 9A, the CBDT may issue a notification to include SEBI (Mutual Funds) Regulations, 1992 under “Specified Regulations”.

“Corpus” may be defined as the Net Asset Value of the eligible investment fund as on a particular date

Seed capital invested directly or indirectly by the eligible Indian fund manager should be exempt from this clause

Passive breaches should be exempt and provided 90 days within which the same shall be rebalanced or rectified, similar to relaxation offered under Rule 10V(3)(a)(i)

Passive breaches should be exempt and provided 90 days within which the same shall be rebalanced or rectified, similar to relaxation offered under Rule 10V(3)(a)(i)

Suitable clarification/ amendment may be issued that:
- outsourcing a part of the back office / support functions of the fund manager (such as fund administration, fund accounting etc.), to an outsourcing entity in India (which is a group entity of the fund manager), or
- appointment of banker, custodian or broker in India by the fund or fund manager would not result in non-fulfilment of this condition.

The condition of maximum 20% of profits should be restricted to performance based fees or profit sharing arrangements and not to fixed management fees. This may be clarified in clause 12 of Rule 10V.

Justification

Specified Regulations" has been defined to include SEBI (Portfolio Managers) Regulations, 1993 or the SEBI (Investment Advisers) Regulations, 2013, or such other regulations made under the SEBI Act, 1992. As SEBI (Mutual Funds) Regulations, 1996 were framed under the SEBI Act, 1992, the same meets the criteria “such other regulations made under the SEBI Act, 1992.”

All Indian AMCs managing mutual funds registered with SEBI are permitted to manage offshore funds under Regulation 24B of SEBI (Mutual Funds) Regulations, 1996.

Since SEBI (Mutual Funds) Regulations, 1996 has not been specifically included in the list of "Specified Regulations", Indian AMCs which are only managing Mutual Funds under the SEBI (Mutual Funds) Regulations, 1996, and have not registered under SEBI (Portfolio Managers) Regulations, 1993 etc. could face unintended challenges / avoidable delay in obtaining approval from the CBDT regarding its eligibility for the purposes of Section 9A.

The current definition will not take into account the mark-to-market gains or losses of the eligible investment fund.. Investment restrictions as per 9A(3)(h) and restrictions placed under 9A(3)(c ) and 9A(3)(j) should include the MTM gains/losses and therefore cannot be based on the original amount raised. It may also be noted that Open ended funds will have ongoing subscriptions and redemption.

The eligible Indian fund manager or the wholly owned offshore subsidiary of the eligible Indian fund manager may be required to put seed capital while setting up the fund in order to show “skin in the game” or create a performance track record.


The threshold of 20% could get breached without any action by the fund manage, viz., redemptions or MTM losses.

The threshold of 20% could get breached without any action by the fund manager viz. redemptions or MTM losses
‘Business connection’ is a broad term and its meaning has to be derived from various provisions of the Act and judicial pronouncements. In the absence of clear guidelines as to when an eligible fund would be considered as constituting a business connection in India, any activity of an eligible fund may become subject matter of scrutiny on whether it constitutes a business connection in India or not. Also, any person having relation with an eligible fund such as sub-advisor, co-fund managers may be deemed to be acting on behalf of the fund constituting business connection in India, in the absence of clear guidelines. Therefore, it is important to clarify situations with detailed examples on when an eligible fund or any person acting on behalf of an eligible fund would be considered as constituting a business connection in India.
This is already being tested in Transfer Pricing assessments. In the event of a loss suffered by the fund, the eligible fund manager will not be able to charge even the fixed management fee which was determined before the investment management activity was commenced.


Safe Harbour for investment management activities of Offshore funds in India AMFI BUDGET PROPOSALS 2018-19 Reviewed by S. Chitra on January 26, 2018 Rating: 5 AMFI-   Association of Mutual Funds in India BUDGET PROPOSALS FOR FY 2018-19 Safe Harbour for investment management activities of O...

No comments:

Google+ Followers