FAQs (Frequently Asked Questions) on QFIs (Qualified Foreign Investors) Compiled by IL&FS Securities Services Limited Ver

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1 What are the differences as an investor under the QFI category in comparison to the NRI category? A few of the differences as an NRI vis-à-vis a QFI are listed below : NRI Process of RBI Permission / PIS Approval required to be completed Applicant has to be an Individual of Indian origin Idle funds in bank account earn interest as per RBI norms Can trade in Equity Derivatives through NRO (non repatriable) funds Cannot participate in Currency and Commodity Derivatives Segment Can invest in G-Secs, T-Bills & ETFs Can participate in Securities Lending and Borrowing Segment Repatriation permitted subject to certain conditions and applicable limits Taxed on every sale transaction Bank requires 15CB certificate for each sale transaction Taxation responsibility of Bank Can avail of clearing and settlement services from a Custodian QFI No such permission or approval required Applicant can be Foreign National or an Individual of Indian origin but should not be a Resident of India and should be a Resident in one of the eligible countries, provided he is not invested in India through any other route (incl PIS) Idle funds in bank account do not earn interest. These funds, however, can be invested in Liquid Schemes of Mutual Funds Cannot participate in Equity Derivatives Segment Cannot participate in Currency and Commodity Derivatives Segment Cannot invest in G-Secs, T-Bills & ETFs Cannot participate in Securities Lending and Borrowing Segment Funds freely repatriable subject to payment of applicable taxes Currently taxed on every sale transaction. Norms expected to be relaxed permitting set-off within Calendar Month and Financial Year Bank would require 15CB certificate only at time of repatriation of funds Taxation responsibility of QDP Can avail of clearing and settlement services from a Custodian 1 of 7

2 What is the process for shifting from NRI to QFI category? The NRI needs to liquidate / sell all his holdings under the PIS route. This has to be followed by the closure of the PIS Demat Account(s). Subsequent to the closure of the PIS Demat Account(s), a fresh Demat Account under the QFI category can be opened I am holding an Indian Passport and have settled down in Kuwait. Can I invest in India through the QFI route? The norms talk about residency status. Since Kuwait is not one of the eligible countries, you cannot qualify as a QFI Are residents of Kuwait and Qatar eligible through the QFI route? Both Kuwait and Qatar do not figure in the list of 45 eligible countries published by SEBI. Residents of these nations, hence, do not qualify as QFIs Who is an Ultimate Beneficial Owner? A natural person or persons who ultimately own, control or influence a client and / or persons on whose behalf a transaction is being conducted would be considered as an UBO. It also includes those persons who exercise ultimate effective control over a legal person or arrangement A Company incorporated in the United Arab Emirates has a Qatari national (not out of 45 countries) as one of its Promoters. Whether this Company can be empanelled as a QFI? If the Promoter comes under the purview of definition of ultimate / end beneficial owner, he should not be a resident in India. The circulars for QFI do not state that the end beneficial owner has to be resident of one of the 45 countries specified by SEBI. This company can be empanelled as a QFI 2 of 7

3 A Partnership Firm incorporated in the United Kingdom has a Pakistani national as one of its Partners. Whether this Partnership Firm can be empanelled as a QFI? The Demat Account will have to be opened in the name of the Partners in the case of a Partnership Firm. Pakistan is not one of the countries in the list of countries specified by SEBI. Hence, the QFI account cannot be opened with a Pakistani national as one of the holders A corporate entity registered in Bahrain has a Dubai based corporate as a shareholder holding 70% stake. Will due diligence of only the Bahrain corporate be adequate? Further, the Dubai based entity has an Omani national holding 25% stake in this company Details of all persons / entities with shareholding or beneficial ownership equal to or above 25% are required to be obtained. Hence, besides the Bahrain company, details of shareholders of the Dubai company too would be required. If the Dubai company further has a corporate entity having 25% or more stake, details of shareholders of this company too would need to be submitted AAA Limited, registered in Slavakia (one of the eligible countries), has a Resident Indian as one of its Whole Time Directors. Can this company invest in India under the QFI category? Though the company qualifies as a QFI on a standalone basis, the norms state that the end / beneficial owner (in this case the WTD) should not be a resident in India. This entity, hence, cannot be registered under the QFI category ABC Limited, a Japanese Company, is registered as a QFI in India. One of the Promoters of the Company, Ms DEF, a Japanese national residing in Japan, also wants to invest in India, in her individual capacity, through the QFI route. Can she? The QFI norms restrict the end / ultimate beneficial owners from investing in India through multiple channels. Since the Company, ABC Limited, is already registered as a QFI, Ms DEF would not be eligible to seek registration as a QFI, even in her individual capacity 3 of 7

4 Can two Trusts having a common Trustee seek empanelment as QFIs? No, only one of them can. Multiple entities with the same beneficial owner(s) cannot be registered as QFIs Can the QFI trade in Derivatives? QFIs are currently restricted from trading in Equity, Currency and Commodity Derivatives Can funds be held in the Indian Bank Account in a foreign currency? The funds have to be held in INR in the local bank account Would the funds lying idle in the local Bank Account earn any interest? As per RBI norms, Banks have to open Non Interest Bearing Rupee Accounts in the names of the QFIs. Idle funds in the Bank Account would, hence, not earn any interest for the QFI Can the idle funds in the Indian Bank Account be invested in Liquid Funds? Idle funds can be invested in Debt Schemes of Mutual Funds under the USD 1 Bn limit. These funds can, hence, be invested in Liquid Schemes too. The allotment of the units however needs to be in Demat form and the Scheme is required to be listed on the Stock Exchange(s) My holding in the ADRs of XYZ Limited was converted into demat shares held in a demat account in my name in India on the ADRs being delisted. Can I sell these shares through the QFI route? 4 of 7

5 A separate Demat Account is required under the QFI category for investments in India. Since you already hold a Demat Account in another capacity, you cannot open a Demat Account under the QFI category. The shares of XYZ Limited currently held by you cannot be sold under the QFI route. Further, the QFI norms have listed down certain types of transactions as permissible. The transaction towards the purchase / receipt of these shares donot form part of this list. Accordingly, these shares donot fall under the QFI category of holding. Accordingly, these shares cannot be transferred into a QFI Demat Account from the Demat Account where they currently lie Can a QFI invest in ETFs (incl Gold ETF)? The QFI norms list down the type of permissible transactions and the type of permitted assets. ETFs do not figure in this list. Hence, unless specifically clarified by SEBI, ETFs are outside the ambit of permissible investments Can a QFI invest in Government Securities and Treasury Bills? No. These securities are currently not covered under the permitted assets under the QFI norms Can the QFI buy and sell shares of a particular company on the same day? Yes, subject to the full quantity of shares being delivered against the sale trade and full funds pay-in being made to honour the purchase trade. Neither the deliveries nor the funds can be netted off Can a QFI hedge a long position in the shares of ZZZ by taking an offsetting position in ZZZ Futures? No. QFIs are not permitted to trade in Futures and Options 5 of 7

6 What is the flow of an order for purchase of any security? The QFI would place the purchase order with the QDP. The QDP would carry out a few validations. If these validations pass muster, the QDP would pass on the order to the QFI s Broker for execution What is the flow of an order for sale of any security? QFIs are not permitted to short sell. The QFI would need to place the sell order with the QDP. The QDP shall check for the availability of adequate quantity and pass on the order to the QFI s Broker for execution if adequate stocks are sighted in the QFI s Demat Account Order flow for application for allotment of units in a Mutual Fund Scheme? The QFI shall place the order with the QDP. The QDP shall carry out certain validations and if the validations are successful, submit the application form to the R&TA of the MF along with the payment drawn from the QFI s local bank account How can the currency risk be hedged? RBI has permitted hedging of currency risk upto the extent of the market value of the QFI s investment portfolio and the amount blocked towards IPO applications. The hedging has been permitted on an OTC basis, through the local bank of the QFI What is the process for repatriation of funds from the QFI s local bank account to his designated overseas bank account? The QFI shall submit a request with the QDP. The QDP shall arrange for a certificate of tax payment from the Chartered Accountant. This certificate shall be submitted to the Bank along with an Outward Remittance Request from the QFI s local Bank Account. The bank shall then initiate conversion of INR to the QFI s base currency and transfer the funds to the QFI s designated Overseas Bank Account. The process is expected to take 3 6 of 7

7 4 working days from the date of receipt of the withdrawal request for the funds to reflect in the QFI s Overseas Bank Account Is it mandatory to submit a Tax Residency Certificate at the time of empanelment as a QFI? The Income Tax Authorities, vide notification no. 39/2012 [F.No.142/13/2012- SO(TPL)]/SO 2188(E) dated 17 September 2012 have made it mandatory for all foreign investors to submit a Tax Residency Certificate for availing DTAA benefits. This requirement would be applicable from 01 Apr 2013 Shall the QFI be responsible for tax computation? The QDP is responsible for the tax computation and payment to the Government. The QDP shall avail the services of a professional person / entity, i.e. a Chartered Accountant, to compute / validate the computation and pay the tax to the Government on account of and on behalf of the QFI At what point of time is tax payable? Besides the Interest income, Tax is applicable on every sale transaction where a profit has been made. The tax amount so computed has to be paid to the Government by the 7th of the following Calendar Month Shall the QFI have to file Income Tax Return in India? The QFI would need to file Income Tax Return in order to avail of the benefit of lower tax under the DTAA and seek refund, if excess tax has been paid during the Financial Year. The QDP shall arrange for a Chartered Accountant to provide various tax related services to the QFI 7 of 7