Horizons An FII Bulletin March 2014

Transcription

1 Horizons An FII Bulletin March

2 Disclaimer The information and opinions contained in this document have been compiled or arrived at from published sources believed to be reliable, but no representation or warranty is made to their accuracy, completeness or correctness. This document is for information purposes only and is not an advisory for investment/ disinvestment. The information contained in this document is published for the assistance of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This information is not for soliciting any business or subscription or a recommendation for invest/ disinvest in any investment avenues. This document is not intended to be a substitute for professional, technical or legal advice. All opinions expressed in this document are subject to change without notice. SHCIL and Grant Thornton make no representation that the information and material contained in this bulletin is appropriate or permitted for use in jurisdictions outside India. The terms and conditions are governed by the laws of India and the courts of Mumbai, India shall have exclusive jurisdiction. Whilst due care has been taken in the preparation of this document and information contained herein, neither Grant Thornton nor Stock Holding Corporation of India Limited nor other legal entities in the group to which they belong, accept any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith. 1

3 Contents Page Relevant changes in the Regulatory Framework 3 Relevant jurisdiction 16 Glossary 17 Our comments 18 Contact us 19 2

4 Relevant changes in the Regulatory Framework SEBI and other regulations Reporting of over the counter (OTC) trades in corporate bonds on trade reporting platforms of stock exchanges (SEBI Circular No. CIR/MRD/DP/10/ 2014 dated 21/3/2014) Currently, OTC trades in corporate bonds and securitised debt instruments are reported on the trade reporting and confirmation platform of the Fixed Income Money Market and Derivatives Association (FIMMDA). SEBI, vide Circular No. CIR/MRD/DP/10/2014, has advised that all OTC trades in corporate bonds shall be reported only on any one of the reporting platforms provided in the debt segment of stock exchanges viz National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and MCX Stock Exchange Limited (MCX-SX). Further, the trade needs to be reported within 15 minutes of its occurrence. Reporting of over the counter (OTC) trades in corporate bonds on trade reporting platforms of stock exchanges (RBI Circular no. RBI/ /500/ IDMD.PCD/ / dated 24/02/2014) The Reserve Bank of India (RBI), vide Circular no. RBI/ /500/ IDMD.PCD/ / dated 24/02/2014, directed its regulated entities to report their OTC trades in corporate bonds and securitised debt instruments on any of the stock exchanges (NSE, BSE or MCX-SX). These trades may be cleared and settled through any one of the clearing corporations - The National Securities Clearing Corporation (NSCCL), Indian Clearing Corporation Limited (ICCL) and MCX-SX Clearing Corporation Limited (MCX-SX CCL). The changes proposed by the SEBI and RBI circulars will come into effect from 01 April Investments in Commercial papers by Foreign Institutional Investors (FIIs)/ Qualified Foreign Investors (QFIs) (SEBI Circular No. CIR/IMD/FIIC/4/2014 dated 14/02/2014) RBI has reduced the existing sub-limit for investment in Commercial papers by FIIs/QFIs from US$ 3.5 billion to US$ 2 billion. Accordingly, SEBI has changed the cap on Commercial papers to US$ 2 billion and on credit-enhanced Bonds within the limit of US$ 51 billion to US$5 billion. Change in Government debt investment limits (SEBI Circular No. CIR/IMD/FIIC/3/2014 dated 29/01/2014) SEBI has doubled the sub-limit for investment in government securities to US$ 10 billion from US$ 5 billion, within the overall Government debt limit of US$ 30 billion. This additional limit has been made available only to FIIs registered with SEBI under the categories of Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks. However, the total limit of US$ 30 billion available for foreign investments in the Government securities has been kept unchanged. 3

5 FII position limits in Exchange Traded Interest Rate Futures (IRFs) (SEBI Circular No. CIR/MRD/DRMNP/2/ 2014 dated 20/01/2014) SEBI has, vide Circular No. CIR/MRD/DRMNP/35/2013 dated 05/12/2013 (discussed below), decided to permit stock exchanges to introduce cashsettled Interest Rate Futures on 10-Year Government of India Security. Further, with effect from 20 January 2014, SEBI has specified FII position limits in IRFs. The position limits prescribed for FIIs are as below: the gross open positions of the FII across all contracts shall not exceed 10% of the total open interest or INR 600 crores, whichever is higher SEBI has imposed additional restrictions stating that at any point in time the total gross short (sold) position of each FII in the IRF shall not exceed its long position in the Government securities and the IRFs the total gross long (bought) position for all FIIs in cash and IRF markets, taken together, shall not exceed the aggregate permissible limit for investment in Government securities for the FIIs Further, SEBI has directed the depositories on dissemination of information regarding the total FII investment values in Government and Corporate Bonds. To ensure compliance with the directive and keep a tab on gross long position of FIIs in IRFs, SEBI decided, in consultation with the RBI, to put in place a monitoring mechanism.. The features of this mechanism are as below: stock exchanges shall provide information regarding aggregate gross long position in IRF of all optionsfiis to be taken to the depositories - National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), together at the end of the day. In addition, stock exchanges to also publish theese details on their websites NSDL and CDSL shall aggregate the gross long position of FIIs in IRFs in each exchange and add it to the investment of FIIs in Government debt in order to monitor their compliance with the regulatory limit as and when the total cash and IRF of all FIIs equal 85% of the permissible limit, NSDL and CDSL shall inform the RBI, SEBI and the stock exchanges NSDL and CDSL shall inform the RBI, SEBI and the stock exchanges once 90% limit is utilised. Besides, the stock exchanges shall notify the market and thereafter, the FIIs shall not increase their long position in IRF any further till the overall long position of FIIs in cash and IRF reach below 85% of the existing permissible limit Foreign Portfolio Investors (FPIs) In order to simplify the entry routes for the flow of funds from outside India, the Finance Ministry, in the Union Budget, 2013, indicated classification of the various classes of foreign investors into FPIs. Thus, the existing investors, comprising FIIs, subaccounts and QFIs, will all be categorised into a single and new investor class called the Foreign Portfolio Investor (FPIs). The provisions included in these Regulations have also eased and simplified the Know Your Customer (KYC) norms for FIIs. The KYC norms will now be categorised in four levels. The documentation requirement for each level is specified as under: at the Entity level: Proof of address, constitutive docs, Permanent Account Number (PAN) card, financials, SEBI registration certificate, Board resolution and KYC form senior management (Whole-time Directors/ Partners/ Trustees, etc): List of management personnel, proof of identity, proof of address and photographs 4

6 authorised signatories: List of authorised personnel and their attested specimen signatures, proof of identity, proof of address and photographs Ultimate Beneficial Owner ('UBO'): List of ultimate beneficial owners, proof of identity, proof of address and photographs All registrations of investors (currently categorised as FII/ sub-account/ QFI) will, henceforth, be merged to form FPIs. Thereupon, investors would be classified broadly under three categories based on their perceived risk profile Category Perceived risk categorisation Eligible Foreign Investors I Lowest risk Government and Government-related foreign investors such as Foreign Central Banks, Government Agencies, Sovereign Wealth Funds, International/ Multilateral Organisations/ Agencies II Medium risk Appropriately regulated broad-based funds such as mutual funds, investment trusts, insurance/ reinsurance companies, other such funds, etc. Regulated entities such as banks, Asset Management companies, investment managers/ advisors, portfolio managers, University Funds and Pension Funds III High risk All other eligible foreign investors investing in India under the Portfolio Investment Scheme (PIS) route. The categorisation also includes all those investors which are not eligible under categories I and II such as endowments, charitable societies/ trust, foundations, corporate bodies, individuals, family offices, etc Exemptions (from submission of the above specified documentation) at the Entity level, submission of documents like financials and board resolution papers is exempted at the senior management (Whole-time Directors/ Partners/ Trustees, etc) level, submission of proof of identity, proof of address and photographs is exempted at the authorised signatories level, submission of proof of identity, proof of address and photographs is exempted at the UBO level, submission of all documents mentioned above is exempted at the Entity level, submission of financials is exempted the senior management (Whole-time Directors/ Partners/ Trustees, etc) is exempted from submitting the proof of identity, proof of address and photographs at the authorised signatories level, submission of proof of identity, proof of address and photographs are exempted at the UBO level, all requirements are exempted upon submission of a declaration that no UBO has a holding above 25% at the Entity level, there are no exemptions at the senior management (Whole-time Directors/ Partners/ Trustees, etc) level, submission of photographs is exempted at the authorised signatories level, submission of proof of address is exempted at the UBO level, submission of proof of address and photographs are exempted 5

7 other features of the FPI Regulations are as under: Highlights New investor class Risk classification Salient features of the FPI Regulations Existing FIIs, sub-accounts and QFIs shall be merged to form a new investor class termed as FPIs. All foreign entities shall be classified in three broad segments depending upon the risk perception (as listed in the table above). no direct registration required for FIIs and sub-accounts with SEBI FPIs to submit their application for registration to the Designated Depository Participants (DDPs) Registration process New registration and renewals Investment avenues Custodian of Securities, which are registered with SEBI, shall be deemed as DDPs upon their compliance with the requirements the registration granted to FPIs by the DDPs on behalf of SEBI shall be permanent, unless suspended or cancelled by the market regulator all registration and renewal certificates will be issued by the DDP upon granting/ renewing the registration DDPs shall carry out necessary due diligence and obtain appropriate declaration and undertakings before registering the FPIs SEBI-approved DDPs shall register FPIs on behalf of the market regulator, subject to compliance with the KYC requirements FPIs shall be allowed to invest in securities in the Primary and Secondary markets, units of schemes floated by domestic mutual funds, dated Government securities, derivatives, Commercial paper, security receipts, Indian Depository Receipts or other such instruments, as specified by SEBI from time to time FPIs (except those categorised under Category III) can be issued, or otherwise dealt in Offshore Derivative Instruments (ODIs), directly or indirectly, subject to: issuance of such offshore derivative instruments only to persons who are regulated by an appropriate foreign regulatory authority issuance of such offshore derivative instruments after compliance with the KYC norms all existing FIIs/ sub-accounts/ QFIs to continue buying, selling or otherwise dealing in securities till their existing registration remains valid Recent regulations/ circulars relevant to the FPI regime are: FPI Investment under PIS, Government and corporate debt (RBI Circular No. RBI/ /533 A.P. (DIR Series) Circular No.112 dated 25/3/2014) (RBI Notification No. FEMA.297/ 2014 RB dated 13/03/2014) The RBI has reviewed the extant guidelines specific to PIS for FIIs and QFIs, It has decided to put in place a framework for investments under a new system called the Foreign Portfolio Investment Scheme. The salient features of the new scheme are: the Portfolio investor, registered in accordance with the SEBI guidelines, shall be called the RFPI. The existing class of Portfolio Investors, namely FIIs and QFIs registered with the SEBI, shall be subsumed under RFPI the RFPI may purchase and sell shares and convertible debentures of an Indian company on recognised stock exchanges in India through a registered broker. An RFPI can also purchase shares and convertible debentures, which are offered to the public, as per the relevant SEBI guidelines/ regulations RFPI may sell shares or convertible debentures so acquired: in an open offer, in accordance with the SEBI (Substantial 6

8 Acquisition of Shares and Takeovers) Regulation, 2011; or applicable taxes) from the SNRR account to the foreign currency account in an open offer, in accordance with the SEBI (Delisting of Equity Shares) Regulations, 2009; or through buyback of shares by a listed Indian company, in accordance with the SEBI (Buyback of Securities) Regulations, 1998 the RFPI may also acquire shares or convertible debentures: in case of a bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the Central Government or any State Government; or the RFPI shall be eligible to invest in Government securities and corporate debt, subject to limits specified by the RBI and SEBI from time to time the RFPI shall be permitted to trade in all exchange-traded derivative contracts across the stock exchanges in India, subject to the position limits as specified by the SEBI from time to time the RFPI may offer cash or foreign sovereign securities having the AAA rating, or corporate bonds or domestic Government securities, as collateral to the recognised stock exchanges for their transactions on the cash and derivative segment of the market in case of a transaction in any security pursuant to an agreement with a merchant banker for creating the relevant market or subscribing to unsubscribed portion of the issue, in accordance with Chapter XB of the SEBI (Issue of Capital and Disclosure Requirements ) Regulations, 2009 the individual and aggregate investment limits for the RFPIs shall either be below 10% or 24%, respectively of the total paid-up equity capital, or 10% or 24%,respectively of the paid-up value of each series of convertible debentures issued by an Indian company. The RFPI limits for investments in composite sectoral cap under the Foreign Direct Investment (FDI) policy shall be within the overall FDI sectoral caps RFPI shall be eligible to open a Special Non-Resident Rupee (SNRR) account and a foreign currency account with an Authorised Dealer Bank. Further, the RFPI can transfer sums from a foreign currency account to SNRR account at the prevailing market rate for making genuine investments in securities. The Authorised Dealer Bank may transfer the repatriable proceeds (after payment of the RFPI shall report the transaction to the RBI in the same format used for providing the report by FIIs in the LEC Form Any FII holding a valid certificate of registration from the SEBI shall be deemed to be an RFPI for three years, till the period of expiry of the block for which the fee has been paid as per the SEBI (FIIs) Regulations, Reporting of trades involving Securitised Debt Instruments on trade reporting platforms, and clearing and settlement of trades in Securitised Debt Instruments through clearing corporations (SEBI Circular No. CIR/IMD/DF/1/2014 dated 7/01/ 2014) SEBI, vide Circular dated 24 January 2013, specified the guidelines for providing dedicated debt segments on stock exchanges. As per this circular, the debt segment offers separate trading, clearing, settlement and reporting facilities for the Securitised Debt Instruments. For developing the Securitised Debt Instrument market and to improve transparency, it has now been decided that all trades in Securitised Debt Instruments (listed or unlisted), by mutual funds, FIIs/ sub- 7

9 accounts/qfis/ FPIs, Alternative Investment Funds, Foreign Venture Capital Investors and Portfolio Managers, shall be reported on the trade reporting platform of either the NSE, BSE or MCX-SX within 15 minutes of the occurrence of the trade. To ensure agreement of both the sides to the trade, the reporting for a trade must be done by the buyer and the seller on the same platform. The offer document/continuous disclosures, if any, relating to the traded Securitised Debt Instruments, along with other additional information pertaining to the trade/reporting, are available on the website of the stock exchanges. All trades in Securitised Debt Instruments (listed or unlisted), carried out between specified entities, namely, mutual funds, FIIs/ sub-accounts/ QFIs/ FPIs, Alternative Investment Funds, Foreign Venture Capital Investors, Portfolio Managers, and RBI-regulated entities, shall necessarily be cleared and settled either through the NSCCL, ICCL, or MCX-SX CCL. All transactions cleared and settled in terms of this circular will be subject to the norms specified by the NSCCL, ICCL and MCX-SX CCL. KYC requirement (SEBI Circular No. CIR/MIRSD/13/2013 dated 26/12/2013) In order to simplify the KYC requirements, SEBI has now prescribed a standard Account Opening Form (AOF), having two parts, which are as below: the first part, used by all SEBI-registered intermediaries, will contain the basic KYC details of the investor; the second part will capture additional information specific to the area in which the intermediary operates. With the centralised KYC Registration Agency Regulations (KRA) system in place, the client has to undertake the KYC process of the account opening procedure only once. This means that he/she need not undergo the KYC process again when he/she approaches different intermediaries in the securities market. The above provisions would help in avoiding repeated modifications in the KRA system. It is to be noted that intermediaries dealing with eligible foreign investors investing under PIS may be guided by the clarifications issued vide SEBI Circular CIR/MIRSD/07/2013 dated 12 September Declaration and undertaking regarding Protected Cell Companies (PCC), Multi- Class Share Vehicles (MCV) or an equivalent structure by FIIs (SEBI Circular CIR/IMD/FIIC/21/2013 dated 19/12/2013) SEBI, vide Circular No. CIR/IMD/FIIC/ 1/2010 dated 15 April 2010, mandated all FIIs/ sub-accounts to submit declaration and undertaking such as PCC/ MCV or an equivalent structure with regards their opaque structure. It is now clarified that if any applicant is required by its regulator or under any law to ring-fence his/ her assets and liabilities from other funds/ sub-funds, such applicant shall not be considered to possess an opaque structure, provided: the applicant is regulated in his/ her home jurisdiction; each fund/ sub-fund of the applicant satisfies broad-based criteria; and the applicant gives an undertaking to provide relevant information regarding his/ her beneficial owners as and when SEBI seeks these details. Exchange Traded Cash Settled IRFs on 10-year Government of India Security (SEBI circular No. CIR/MRD/ DRMNP/35/2013 dated 05/12/ 2013) SEBI, vide Circular no. SEBI/DNPD/Cir 46 /2009 dated 28 August 2009, permitted stock exchanges to launch physically settled futures on 10-year Government of India Security. However, SEBI has now decided to permit stock exchanges to introduce cash 8

10 settled IRFs on 10-year Government of India Security. The market regulator has permitted two different designs for cash-settled futures on 10-year Government bonds. The details of these bonds are as under: option A: Coupon-bearing Government of India Security as underlying option B: Coupon-bearing notional 10- year Government of India Security with settlement price based on a basket of securities as underlying The stock exchanges can allow trading of contracts on either one or both of these options. Details have been listed in the circular. Main features of the product are as below: Particulars Option A Option B Underlying Coupon Final contract settlement value Government of India Security having face value of INR 100 with semi-annual coupon and residual maturity between nine and 10 years on the day of expiry of the IRF contract. The value of the coupon will be the same as that of the underlying bond. The final contract settlement value shall be equal to 2000* Pf, where Pf is the final settlement price of the underlying/ notional bond). Pf will be deduced by calculating the weighted average price of the underlying bond based on the prices during the last two hours of trading on the Negotiated Dealing System-Order Matching (NDS OM). If less than five trades are executed in the underlying bond during the last two hours of trading, then its price at the FIMMDA shall be used for the final settlement. Notional coupon bearing 10-year Government of India Security having face value of INR 100 and requiring semi-annual payment. There shall be a basket of Government of India Securities with residual maturity between nine and 11 years on the day of expiry of the IRF contract, with appropriate weight assigned to each security in the basket. To be decided by the exchange. It reflects the interest rate environment during the launch of the contract. The final settlement price shall be based on the average settlement yield (Ys), weighted average of the yields of bonds in the underlying basket, where weights equivalent to the weight of the bonds will be the assigned in the underlying basket. Ys will be rounded off to four decimal places. If less than five trades are executed in the underlying bond during the last two hours of trading, then FIMMDA price shall be used for determining the yields of individual bonds in the basket. 9

11 Investments by FII/ QFIs in Credit Enhanced Bonds The Government of India permitted FIIs to invest in Credit Enhanced INR Bonds up to an equivalent of US$ 5 billion within the overall Corporate Bond limit of US$ 51 billion. The RBI, vide Circular - RBI/13-14/368 dated 11 November 2013, permitted FIIs and QFIs to invest in Credit Enhanced Bonds, as per paragraph 3 and 4 of the RBI A.P. (DIR Series) Circular No. 120 dated 26 June 2013, up to a limit of US$ 5 billion within the overall limit of US$ 51 billion earmarked for corporate debt. Once the aggregate investments of all the FIIs/ QFIs reach 90% of the investment limit, a notice shall be published by the depositories on their websites informing the investors of this development. Further, no fresh purchases shall be allowed without prior approval of the depositories. For fresh purchases by FIIs/ QFIs, after the investment limit reaches 90%, prior approval of the depositories shall be obtained. The FIIs/ QFIs shall make such request for prior approval to the concerned depository through the Custodians/ Qualified Depository Participant (QDPs), after providing requisite details. The concerned depository shall provide the details of the prior approval requests received by him/ her to the other depository. In case the aggregate holding of the FIIs/ QFIs exceeds the overall investment limit, irrespective of any reason, the FII/ QFI, who is responsible for the breach, shall mandatorily divest excess holdings to the Depository Participants (DP) within seven working days of the notification of the breach by the depositories. The Custodians/ QDPs shall obtain necessary authorisation from the FII/ QFI at the time of opening the account for this kind of divestment of excess holdings. ( common contract note across CM, F&O and CD segments for all the stock exchanges. The issue of a common contract note in the new format will be applicable from 01 April Centralised database for Corporate Bonds/ Debentures (CIR/IMD/DF/17/2013 dated 22/10/2013) a comprehensive database at a single place, containing particulars such as issuer details, type of issuer, instrument details, credit ratings, allotment details, etc depositories will jointly create and maintain a centralised database for corporate bonds and debentures the depositories shall collect the requisite information regarding bonds/ debentures from issuers, stock exchanges, debenture trustees, and credit rating agencies the database will be accessible to anyone without any fees stock exchanges, credit rating agencies and debenture trustees will be provided secure logins to update information in the database on a daily basis Amendments in investment limits in Government securities for FII/ QFI (CIR/IMD/FIIC/15/2013 dated 13/09/2013) FIIs/ QFIs have been permitted to invest in Government debt securities without using the auction mechanism FIIs can invest in Government debt without purchasing debt limits till the overall investment limit reaches 90% auction mechanism will be initiated for the allocation of remaining limits once the overall investment limit reaches 90% Common Contract Note (NSE Circular No. NSE/INSP/25030 dated 18/11/2013) As notified by its circular, NSE, in consultation with SEBI, other exchanges and member associations, decided to have a 10

12 Income tax updates Recent amendments: Cyprus designated as a Notified jurisdiction Recently, the Controlling Authority, Indian Revenue Service issued a press release indicating that Cyprus will be considered a notified jurisdictional area under section 94A of the Income-tax Act, 1961 ( Act ), vide Notification No. 86/2013 dated 1 November 2013, published in the Official Gazette through SO 4625 GI/13. The above notification would impact investments made in India from Cyprus, especially those involving prescribed lock-in conditions. Besides, transactions with entities based in Cyprus will necessitate maintaining a lot of information and documentation. Furthermore, the higher rate of Withholding Tax (WHT) may have an impact on the cash flows and the overall return on investment. Tax Residency Certificate (TRC) The Finance Act, 2013 has done away with the requirement of obtaining prescribed particulars in the TRC. In other words, a taxpayer can continue receiving the TRC as issued by the foreign authorities. The Central Board of Direct Taxes (CBDT) has now issued a notification amending Rule 21AB of the Income-tax Rules, 1962, prescribing nonresidents to furnish additional information, along with the TRC. The details, required to be furnished in Form 10F, are as follows: status (individual company, firm, etc) of the taxpayer; PAN details of the taxpayer, if available; nationality (in case of an individual), country, specified territory of incorporation, or registration (in case of others); taxpayer s Tax Identification Number (TIN) in the country or specified territory of residence. In case there is no such number, then a unique number that serves as his/ her identification by the government of the country or a specified territory of which the taxpayer claims to be resident, needs to be furnished; period for which the residential status, as mentioned in the TRC, is applicable; and address of the taxpayer during the period for which the TRC is applicable. The CBDT has clarified that it is not required to furnish the prescribed additional information if these details already form a part of the TRC. In addition, the Finance Bill, 2013 has clarified, with retrospective effect, that from financial year submission of the TRC shall be a necessary but not a sufficient condition for a non-resident in order to claim any tax treaty benefit. Limitation of Benefit (LOB) clause in India Mauritius Tax treaty: The Financial Services Commission (FSC) of Mauritius recently revised the Guide to Global Business ("Guide") to enhance the level of substance which Mauritius-based entities need to demonstrate for holding a Category 1 Global Business Licence ("GBL- 1"). This development is important since it is necessary for a company to obtain GBL-1 to become eligible for applying to a TRC. This, in itself, is a necessary pre-condition for a company to qualify for treaty benefits under the India-Mauritius Double Taxation Avoidance Agreement ("Treaty"). The FSC has revised the list of guidelines that it considers relevant to determining whether a company is being managed and controlled from Mauritius for the purpose of issuing/ renewing a GBL-1 through amendments to Section 3 of Chapter 4 of the Guide. These revisions are: 1) Resident director qualifications: Before the amendment, a company holding a GBL-1 was required to have at least two resident directors with sufficient calibre to exercise independence of mind and judgment. While these requirements have 11

13 been retained, there is now an additional requirement for the Mauritian resident directors to be "appropriately qualified". 2) Administration of closed-end funds and collective investment schemes: The FSC has introduced a fresh requirement stating that a company, either a collective investment scheme, a close-end fund, or an external pension scheme, which is seeking a GBL-1, must be administered from Mauritius. In addition to these, a company designated as a GBL-1 will have to fulfil other criteria as well, including: (i) maintaining its principal bank account in Mauritius at all times; (ii) keeping and retaining its accounting records at its registered office in Mauritius at all times; (iii) preparing its statutory financial statements and getting them audited in Mauritius; and (iv) having at least two Mauritian resident directors in its meetings' of directors. Further the new requirements are in addition to the existing regulatory obligations set by the FSC which a GBL1 must adhere to. Key Enhanced Substance Requirements While determining whether a corporation is managed and controlled from Mauritius, the FSC will consider whether a corporation meets at least one of the following criteria: office premises in Mauritius; or employment of or shall employ on a full time, basis at administrative/technical level, at least one person who shall be resident in Mauritius; or constitution contains a clause whereby all disputes arising out of the constitution shall be resolved by way of arbitration in Mauritius; or holds or is expected to hold within the next 12 months, assets (Excluding cash held in bank account or shares/interests in another corporation holding a Global Business License) which are worth at least USD 100,000 in Mauritius; or Listing of shares on a securities exchange licensed by the FSC; or Incurred or expected to have a yearly expenditure in Mauritius which can be reasonably expected from any similar corporation which is controlled and managed from Mauritius. Section 194LD Income by way of Interest on certain bonds and Government securities to FII and QFI The Finance Act, 2013 inserted a new section, titled Section 194 LD, wherein tax rate on interest income, which is receivable on or after 01 June 2013 but before 01 June 2015 by the FIIs/ QFIs from investment in rupee-denominated Corporate Bonds and Government securities, has been reduced from 20% to 5%. Further, the rate of interest with respect to rupee- denominated bonds shall not exceed the rate notified by the Central Government. The CBDT has now, vide Notification No. 56 /2013/F.No.149/81/2013- TPL, specified the rates of interest with respect to rupee-denominated bonds of an Indian company. We have summarised these details below.. Exercising the powers conferred by the provision to sub-section (2) of Section 194LD of the Income-tax Act, 1961, the Central Government has notified the following rates of interest with respect to rupee denominated bond of an Indian company: 12

14 Particulars In case of bonds issued before 01 July 2010 In case of bonds issued on or after 01 July 2010 Source: SBI website Rate of Interest as prescribed The rate of interest shall not exceed 500 basis points over the base rate of the State Bank of India (SBI) as on01 July 2010 The rate of interest shall not exceed 500 basis points over the base rate of the SBI as applicable on the date of issue of the said bonds Base rate of State Bank of India* (SBI) 7.50% as on 01 July 2010 Effective date Interest rate (%) General Anti-Avoidance Rules (GAAR) GAAR provisions were included in the Finance Act, However, the Finance Minister, in the Union Budget, 2013, in response to the recommendation of an expert committee, deferred the introduction of GAAR. Consequently, on enactment of the Finance Bill, 2013, Chapter XA relating to GAAR, was inserted in the Income-tax Act, The provision was to come into effect from FY The expert committee also recommended certain other points in this regard, which have been taken into account to modify the GAAR provisions in the Finance Bill, The key highlights of the modifications are: - an arrangement to be treated as an impermissible avoidance arrangement only if its main purpose is to obtain tax benefit as against the earlier provision where one of the main purposes of obtaining tax benefit resulted in the arrangement being conferred with this classification - factors like time period of the arrangement, payment of taxes (directly or indirectly) and exit route to be relevant but not sufficient from the commercial substance perspective - an arrangement is deemed to lack commercial substance if it has no significant effect on the business risks or net cash flows of any party involved in the arrangement, other than the attached tax benefit - the Approving Panel to now comprise a Chairperson who is a current or an ex-judge of a High Court, one member of the Indian Revenue Service not below the rank of Chief Commissioner of Incometax and an academic or scholar having knowledge of matters such as direct taxes, business accounts and international trade practices - the directions issued by the Approving Panel to be binding on the assesse as well as the tax authorities without any right to appeal. Appeal against assessment and reassessment orders passed on the directions of the Approving Panel to lie directly before the Tribunal - the two separate definitions of associated person and connected person have been combined into one inclusive definition 13

15 Form 15CA and Form 15CB Recently, vide Notification No. 58/2013 dated 5 August 2013; Rule 37BB of the Income-tax Rules, 1962 was amended. Accordingly, new Forms 15CA and 15CB have been prescribed by the CBDT, vide Notification No.67 of 2013 dated 02 September The above guidelines were to come into effect on or after 01 October Vide this amendment, new Forms 15CA and 15CB have been prescribed, making the earlier forms redundant. Features of the new forms are as below: - the new forms contain two categories (i.e. Part A and Part B of Form 15CA) on which remittances are required to be reported - only taxable remittances (including salary or interest) are required to be reported in Form 15CA - limit up to which remittances are required to be reported in part A of Form 15CA remains unchanged (the same limit was prescribed by the 12th Amendment Rules). On the other hand, other taxable remittances (not covered in part A) are required to be reported in Part B - specified list (provided under Rule 37BB) has been amended further. It is not a necessity now to report remittance covered by that list The below table summarises the manner of reporting remittances made to non-residents (NR) or a foreign company under different situations as per the old and new Forms 15CA and 15CB: S. No. Scenario Form 15CA (valid up to 30 September 2013) If remittance is not chargeable to tax Form 15CA (valid from or after 01 October 2013) I 1. Single remittance does not exceed INR 50,000; and 2. Aggregate payment during the year does not exceed INR 2,50,000. To be reported in Part A and Part B of Form 15CA Not to be reported at all II 1. Single remittance exceeds INR 50,000; and 2. Aggregate payment during the year does not exceed INR 2,50,000. To be reported in Part A and Part B of Form 15CA To be reported in Part A and Part B of Form 15CA III 1. Single remittance does not exceed INR 50,000;and 2. Aggregate payment during the year exceeds INR 2,50,000. To be reported in Part A and Part B of Form 15CA To be reported in Part A and Part B of Form 15CA If remittance is chargeable to tax (including salary or interest) I 1. Single remittance does not exceed INR 50,000;and 2. Aggregate payment during the year does not exceed INR 2,50,000. To be reported in Part A and Part B of Form 15CA To be reported in Part A of Form 15CA II 1. Single remittance exceeds INR 50,000; and 2. Aggregate payment during the year does not exceed INR 2,50,000. To be reported in Part A and Part B of Form 15CA To be reported in Part B of Form 15CA, as well as in Form 15CB and other prescribed documents, if any III 1. Single remittance does not exceed INR 50,000; and 2. Aggregate payment during the year exceeds INR 2,50,000. To be reported in Part A and Part B of Form 15CA To be reported in Part B of Form 15CA, as well as in Form 15CB and other prescribed documents, if any 14

16 FPI Taxation There is lot of confusion in the market with respect to tax regulations pertaining to the profile of the FPIs. However, recently, SEBI, in its Board Meeting held on 24 December 2013, cited to the CBDT its receipt of a communication from the Department of Economic Affairs. The communication stated that all the three categories of FPIs will be given the same tax treatment as the FIIs. Relevant extract from the press release is: As regards FPI regulations, the communication from the Department of Economic Affairs to the CBDT and to SEBI, conveying the decision that all three categories of FPIs would be given similar tax treatment as available to FIIs presently, was noted. 3

17 Relevant jurisdiction Recent rulings: STT paid Long Term Capital Loss not allowed to be set off against taxable Long Term Capital Gains. [Dy DIT (IT) vs Asia Pacific Performance SICAV ITAT Mumbai 27 December 2013] interest earned by a non-resident on Income-tax refund is not taxable in India at a concessional rate of 10% as per the India-France treaty, if such a nonresident has a permanent establishment in India. [Director of Income-tax vs Pride Foramer SAS High Court of Uttarakhand 04 December 2013] taxation of derivatives as speculative income/ loss is not applicable to FIIs. [Platinum Asset Management Ltd vs DDIT ITAT Mumbai 04 December 2013] a non-resident entitled to concessional rate of tax on gains arising on off-market sale of listed equity shares [Cairn UK Holding Ltd vs Director of Income-tax High Court of Delhi 07 October 2013] the amount received by the assesse for delay in buy back of shares under open offer, between the period from the announcement of its intention of acquiring shares and the acceptance of shares under open offer, to be considered as a part of sale consideration and accordingly to be exempted under India-Mauritius Double Taxation Avoidance Agreement (DTAA) [Genesis Indian Investment Co. Ltd vs Commissioner of Income-tax ITAT Mumbai 14 August 2013] the tax refund received by a Singaporean resident will not be taxed at a concessional rate of 15% under Article 11 of India-Singapore Double Taxation Avoidance Agreement, unless it is proved that the income is remitted to or received in Singapore. [Abacus International (P) Ltd vs Deputy Director of Income-tax (International Taxation) ITAT Mumbai 31 May 2013] income arising on account of entry by an FII into forward exchange contract to provide hedging mechanism against adverse foreign exchange movement has to be considered as Income from Capital Gain. However, the matter is escalated to an assessing officer for taking a fresh decision after duly examining the additional evidence filed by the assesse FII. [Merrill Lynch Capital Markets Espana SA vs DDIT ITAT Mumbai 12 December 2012] 16

18 Glossary SEBI FII QFI RFPI ITAT DDIT FPI CBDT LOB TRC FSC GBL KYC GAAR NSE RBI DTAA NSCCL ICCL MCX-SX CCL PCC MCV STT QDP AOF Securities and Exchange Board of India Foreign Institutional Investor Qualified Foreign Investor Registered Foreign Portfolio Investor Income Tax Appellate Tribunal Deputy Director of Income Tax Foreign Portfolio Investor Central Board of Direct Taxes Limitation of Benefit Tax Residency Certificate Financial Service Commission Global Business Licence Know Your Client General Anti-Avoidance Rules National Stock Exchange Reserve Bank of India Double Taxation Avoidance Agreement National Securities Clearing Corporation Limited Indian Clearing Corporation Limited MCX-SX Clearing Corporation Limited Protected Cell Companies Multi Class Share Vehicle Securities Transaction Tax Qualified Depository Participants Accounting Opening Form

19 Our comments It can be observed that SEBI, being the supreme capital market regulator in India, has been bestowed with more powers by the Finance Ministry in the Union Budget, SEBI will be following a riskbased approach, which is focused on KYC norms for the FPI regime.

20 Contact us About Stock Holding Corporation of India Limited Stock Holding Corporation of India Limited (SHCIL) was promoted by public financial institutions and incorporated as a limited company on 28 July SHCIL is the first and largest custodian in the country engaged in providing custodial services to various clients since over 25 years. SHCIL provides post trading and custodial services to, among others, institutional investors, foreign institutional investors, foreign portfolio investors, mutual funds, banks, insurance companies and pension funds. SHCIL also provides Professional Clearing Member services to institutional and retail trading members in the futures & options segment. In addition, SHCIL offers its clients Constituent Subsidiary Ledger Account (CSGL Account) services for their transactions/ holdings in Government of India securities and other securities issued by the various State Governments. SHCIL is the only non-banking custodian permitted by the RBI to offer this service. SHCIL has also been accorded membership of NDS-OM, a real time order matching system for trades in Government of India securities. SHCIL has received a No Action letter under Sec. 17 f(5) of US SEC Regulations, which permits it to offer custodial services to US-based funds. In terms of the SEBI (Foreign Portfolio Investors) Regulations, 2014 notified on 07 January 2014, SHCIL, being a custodian of securities registered with SEBI on the date of commencement of the regulations, is permitted to act as a Designated Depository Participant (DDP). Besides, SHCIL also has a pan India presence and caters to various investment needs of over a million retail clients through its 195 branches. SHCIL, through its two wholly-owned subsidiaries also offers broking services (SHCIL Services Ltd.) and end-to-end document management solutions and repository services to insurance sector (SHCIL Projects Ltd). Contact us To know more about Stock Holding Corporation of India Limited please visit or contact us at the below mentioned address: Address Stock Holding Corporation of India Limited 301, Centre Point, Dr Babashaeb Ambedkar Road, Parel Mumbai E: marketing.institutions@stockholding.com T: / M: /

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