Regulations enabling Foreign Investment in Investment Vehicles (including AIFs, REITs and InvITs) notified

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from India Tax & Regulatory Services Regulations enabling Foreign Investment in Investment Vehicles (including AIFs, REITs and InvITs) notified November 20, 2015 In brief The Reserve Bank of India ( RBI ) has notified the much-awaited regulations enabling foreign investments under the automatic route in Alternative Investment Funds ( AIF ), Real Estate Investment Trusts ( REIT ), Infrastructure Investment Trusts ( InvIT ) and other entities regulated by the Securities and Exchange Control Board of India ( SEBI ) or any other authority designated for such purpose (collectively referred to as Investment Vehicles ). Non-resident Indians ( NRIs ) and Registered Foreign Portfolio Investors ( RFPIs ) are also permitted to invest in units of Investment Vehicles under this route. Downstream investment by an Investment Vehicle are classified as foreign investment where neither the Sponsor nor Manager nor Investment Manager are Indian-owned and controlled. For this purpose, the extent of foreign investment in the corpus of the Investment Vehicle is irrelevant. Where the downstream investment is regarded as foreign investment, it will be subject to sectoral caps and conditions/ conditions for Foreign Direct Investment ( FDI ) in Limited Liability Partnerships ( LLP ). In detail Backdrop Attracting long-term foreign capital is believed to be one of the key drivers for India s economic growth. In this regard, the Government is introducing various policy reforms with respect to foreign investments in the Indian economy. AIFs, REITs and InvITs are expected to provide impetus to various crucial sectors of the Indian economy. Therefore, foreign investment in these Investment Vehicles has been on the radar of the Union Government in recent times. This is evident from the following: The Hon ble Finance Minister in his Budget speech in 2015 proposed foreign investments in AIFs. On 6 May 2015, the Union Cabinet approved inclusion of REITs as an eligible financial instrument under the exchange control regulations. In July 2015, the Union Cabinet cleared a proposal allowing foreign entities to invest in AIFs. With specific tax regimes being already introduced with respect to each of the above Investment Vehicles, an enabling regulatory framework is seen as the next step in the process for opening up these Investment Vehicles to foreign investors. The RBI has now notified the much awaited regulatory policy 1 in this regard, which is discussed in detail in the ensuing paragraphs. 1 By way of amendment to The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Eleventh Amendment) Regulations, 2015 and Foreign Exchange Management (Permissible Capital Account Transactions) (Fourth Amendment) Regulations, 2015 www.pwc.in

Regulatory framework Investment Vehicles 1. Foreign investment permitted in Investment Vehicles A person resident outside India [including an RFPI and an NRI] has now been permitted to invest in units of Investment Vehicles. For this purpose, Investment Vehicle means an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose, and shall include: (i) REITs governed by the SEBI (REITs) Regulations, 2014, (ii) InvITs governed by the SEBI (InvITs) Regulations, 2014, and (iii) AIFs governed by the SEBI (AIFs) Regulations, 2012. It is to be noted that no specific regulatory approval would be required for the purpose of such investments, subject to satisfaction of the other prescribed conditions. 2. Sale/ transfer/ pledge of units in Investment Vehicles Such investments can be transferred or sold in any manner or redeemed as per SEBI regulations/ RBI directions. However, the non-resident unitholder may not be able to exit investments in units of the Investment Vehicles by exercising an option/ right to exit. Further, these units could be pledged by the non-resident unitholder to secure credit facilities. 3. Downstream investments by Investment Vehicles When treated as foreign investment? Downstream investments by an Investment Vehicle shall be regarded as foreign investment if neither the Sponsor nor the Manager nor the Investment Manager is Indian- owned and controlled. For this purpose, ownership and control of companies is to be determined in accordance with the regulations 2 laid down in this regard. For entities other than companies, SEBI shall determine whether or not the entity is foreign owned and controlled. As ownership and control of an LLP cannot be determined under the extant FDI Policy, an LLP shall not act as sponsor or manager/ investment manager of an Investment Vehicle. Implications a) Downstream investments in companies Downstream investment to conform to sectoral caps and conditions/ restrictions, if any, as applicable to the company in which the downstream investment is made. b) Downstream investment in an LLP Downstream investment has to conform to the provisions of the scheme for Foreign Direct Investment in LLPs 3 as well as the extant FDI policy for foreign investment in LLPs. 4. Other restrictions/ conditions Specific to AIFs Control of the AIF should be in the hands of sponsors and managers/ investment managers, with the general exclusion of others. In case the sponsors and managers/investment managers of an AIF were individuals, for the treatment of downstream investment by such AIF as domestic, sponsors and managers/investment managers should be resident Indian citizens. An AIF - Category III with foreign investment shall make portfolio investment in only those securities or instruments in which an RFPI is allowed to invest. 5. Procedural conditions a) The payment for the units of an Investment Vehicle to be made by an inward remittance through normal banking channels, including by debit to an NRE or an FCNR account. b) Investment Vehicle to report to RBI or SEBI in the prescribed format. 2 Regulation 14 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. 3 Schedule 9 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 2 pwc

6. Definition of real estate business In the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, real estate business has been regarded as a prohibited sector for foreign investment. These regulations have now been amended to exclude REITs registered and regulated under the SEBI (REITs) Regulations 2014, from the ambit of real estate business. The takeaways The introduction of these regulations by the RBI was much awaited by various players across several industries. While it results in opening up a variety of investment opportunities to Foreign Investors, it also simultaneously provides domestic fund managers with an opportunity to manage these investments. More importantly, it could help in providing a much needed impetus to the Indian economy by providing an alternative source of finance to crucial sectors of the economy. Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax & Regulatory Services Regulatory Gautam Mehra, Mumbai +91-22 6689 1154 gautam.mehra@in.pwc.com Akash Gupt, Gurgaon +91-124 330 6509 akash.gupt@in.pwc.com PwC Page 3

Our Offices Ahmedabad Bangalore Chennai President Plaza 1st Floor Plot No 36 Opp Muktidham Derasar Thaltej Cross Road, SG Highway Ahmedabad, Gujarat 380054 +91-79 3091 7000 6th Floor Millenia Tower D 1 & 2, Murphy Road, Ulsoor, Bangalore 560 008 Phone +91-80 4079 7000 8th Floor Prestige Palladium Bayan 129-140 Greams Road Chennai 600 006 +91 44 4228 5000 Hyderabad Kolkata Mumbai Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hyderabad 500034, Andhra Pradesh Phone +91-40 44246000 56 & 57, Block DN. Ground Floor, A- Wing Sector - V, Salt Lake Kolkata - 700 091, West Bengal +91-033 2357 9101/ 4400 1111 PwC House Plot No. 18A, Guru Nanak Road(Station Road), Bandra (West), Mumbai - 400 050 +91-22 6689 1000 Gurgaon Pune For more information Building No. 10, Tower - C 17th & 18th Floor, DLF Cyber City, Gurgaon Haryana -122002 +91-124 330 6000 7th Floor, Tower A - Wing 1, Business Bay, Airport Road, Yerwada, Pune 411 006 +91-20 4100 4444 Contact us at pwctrs.knowledgemanagement@in.pwc.com About PwC At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. In India, PwC has offices in these cities: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity in separate lines of service. Please see www.pwc.com/structure for further details. 2015 PwC. All rights reserved For private circulation only This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents. 2015 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

from India Tax & Regulatory Services Government releases proposed roadmap to phase-out deductions under Income-tax Act November 21, 2015 In brief In his Budget Speech this year, the Finance Minister had indicated that the rate of corporate tax will be reduced from 30% to 25% over the next four years along with corresponding phase-out of exemptions and deductions. This was a step to simplify the tax laws, making them clearer and more transparent. In a move that exemplifies the Government s continued pragmatism and unrelenting focus on economic growth, it has recently issued a Press Release outlining how and when several deductions and exemptions in the tax law will be phased out. In detail The Government has now announced that it proposes to implement this decision in the following manner Profit-linked, investmentlinked and area-based deductions would be phased out for both, corporate and non-corporate taxpayers. Sl. No. Provisions having a sunset clause would not be further modified to advance/ extend the sunset date. For incentives that do not have a terminal date, a sunset date of 31 March 2017 would be provided, either for commencement of activity or for claim of benefit, depending on the structure of the provision in the Income-tax Act, 1961 (the Act). No weighted deductions will be available with effect from 1 April 2017. Based on the aforementioned principles the Government has planned the phase-out of the various deduction provisions under the Act in the manner laid out in the table below. Section of Proposed plan the Act 1 Section 32 The highest rate of depreciation is proposed to be reduced to 60% from 100% for certain blocks of assets from 1 April 2017. The rate would apply to all assets, whether old or new, covered under the relevant block of assets. 2 Section 35AD No weighted deduction would be allowed with effect from 1 April 2017 on any specified business which currently enjoys deduction of a. 100% on capital expenditure (other than expenditure on land, goodwill and financial asset) incurred while laying and operating a cross-country natural gas or crude or petroleum oil pipeline network, building hotel (two-star and above), warehousing facility for sugar, etc. b. 150% on capital expenditure in case of cold chain facility, warehousing facility for storage of agricultural produce, and affordable housing project, production of fertilizer, etc. www.pwc.in

Sl. No. Section of Proposed plan the Act 3 Section 35AC No deduction will be available from financial year (FY) 2017-18 (assessment year 2018-19) in respect of expenditure on eligible projects that promote social and economic welfare. 4 Section 35 The section provides for deduction for both, capital and revenue expenditure, and weighted deduction for donations made to certain institutions/ associations/ company incurred on scientific research. It is proposed that a. deduction under sections 35(1)(ii), (iia), (iii) and 35(2AA) be restricted to 100% from FY 2017-18, and b. deduction under section 35(2AB) be limited to 100% from FY 2017-18 as against 200% available upto 31 March 2017. 5 Incentives with no Sunset date of 31 March 2017 for commencement of activity is proposed for sunset clause for commencement of a. Development, operation and maintenance of infrastructure facility [Section 80-IA(4)(i)] activity b. Development of special economic zone (SEZ) [Section 80-IAB] c. Export of articles or things or services by a unit located in SEZ [Section 10AA] d. Commercial production of natural gas in blocks licensed under CBM-IV and NELP VIII [Section 80-IB(9)(iv) & (v)] e. Commercial production of mineral oil from block licensed under a contract 6 Sections 35CCC and 35CCD awarded up to 31 March 2011 [Section 80-IB(9)(ii)] No weighted deduction will be available from 1 April 2017, but deduction up to 100% of the expenditure on notified agricultural extension projects and skill development projects respectively, shall be available. The Government has invited comments on the above proposed phase-out plan, to be sent within 15 days to the Director (TPL III) of the Central Board of Direct Taxes. The takeaways It remains to be seen whether the promised tax rate reduction takes effect from FY 2017-18 itself, when most of the exemptions/ deductions will be phased out. With elimination in deductions and exemptions, the difference between taxable income and book profits is bound to reduce. Further, the difference in the tax rates and the effective rate at which Minimum Alternate Tax (MAT) is levied is set to shrink even further. It is therefore an appropriate moment at which to consider removal of MAT altogether, which can be a major simplification in the tax law that can have a positive impact on investor sentiment with minimal revenue sacrifice. It also remains to be seen what effect the elimination of incentives to high-priority sectors will have on the stated objective of attracting foreign capital to drive India s investment-led economic growth. Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax & Regulatory Services Direct Tax Gautam Mehra, Mumbai +91-22 6689 1154 gautam.mehra@in.pwc.com Rahul Garg, Gurgaon +91-124 330 6515 rahul.garg@in.pwc.com PwC Page 2

Our Offices Ahmedabad Bangalore Chennai President Plaza 1st Floor Plot No 36 Opp Muktidham Derasar Thaltej Cross Road, SG Highway Ahmedabad, Gujarat 380054 +91-79 3091 7000 6th Floor Millenia Tower D 1 & 2, Murphy Road, Ulsoor, Bangalore 560 008 Phone +91-80 4079 7000 Hyderabad Kolkata Mumbai Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hyderabad 500034, Andhra Pradesh Phone +91-40 44246000 56 & 57, Block DN. Ground Floor, A- Wing Sector - V, Salt Lake Kolkata - 700 091, West Bengal +91-033 2357 9101/ 4400 1111 8th Floor Prestige Palladium Bayan 129-140 Greams Road Chennai 600 006 +91 44 4228 5000 PwC House Plot No. 18A, Guru Nanak Road(Station Road), Bandra (West), Mumbai - 400 050 +91-22 6689 1000 Gurgaon Pune For more information Building No. 10, Tower - C 17th & 18th Floor, DLF Cyber City, Gurgaon Haryana -122002 +91-124 330 6000 7th Floor, Tower A - Wing 1, Business Bay, Airport Road, Yerwada, Pune 411 006+91-20 4100 4444 Contact us at pwctrs.knowledgemanagement@in.pwc.com About PwC PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in Assurance, Tax and Advisory services. PwC India refers to the network of PwC firms in India, having offices in: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India s service offerings, please visit www.pwc.in. *PwC refers to PwC India and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Tell us what matters to you and find out more by visiting us at www.pwc.in For private circulation only This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents. 2015 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

from India Tax & Regulatory Services Liberalisation of FDI Policy November 26, 2015 In brief The Department of Industrial Policy and Promotion (DIPP) has released Press Note No 12 dated 24 November 2015 liberalising the FDI Policy in 15 major sectors of the economy. Changes introduced in the policy include increase in sectoral caps, bringing activities under automatic route, and easing of conditions for foreign investment. In detail Key sectoral amendments Construction Development Sector Minimum area and capitalisation requirements have been removed. Each phase of the project would be considered as a separate project. Foreign investor is now permitted to exit and repatriate foreign investment on completion of project/ trunk infrastructure or completion of a lock-inperiod of three years, whichever is earlier. Lockin period shall be calculated with respect to each tranche of foreign investment. Transfer of stake from one non-resident to another non-resident can be undertaken without any lock in condition. Lock-in condition is not applicable to Hotels & Tourist Resorts, Hospitals, Special Economic Zones, Educational Institutions, Old Age Homes and investment by Non Resident Indians (NRIs). 100% FDI under automatic route allowed in completed projects for operation and management of townships, malls/ shopping complexes and business centres, subject to lock-in-period of three years. Real estate business is defined as dealing in land and immovable property with a view to earning profit. Earning of rent/ income on lease of the property not amounting to transfer will not amount to real estate business. The term, transfer has been defined. Among other things, it also includes any arrangement having the effect of transferring or enabling enjoyment of immovable property. Manufacturing and Trading Foreign investment is freely permitted in manufacturing 1 1 Manufacture, with its grammatical variations, means a change in a nonliving physical object or article or thing (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use, or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Manufacturers can freely sell their products, whether on wholesale or retail basis, including through e-commerce platform. One entity can now undertake both, wholesale trading and single brand retail trading business. Separate books of accounts and compliances will be needed for each business. In case of companies operating in high technology segments, having 'state-of-the-art' and 'cutting-edge technology, Government may relax 30% local sourcing norms. Companies operating brickand-mortar single brand stores permitted to retail through e-commerce. 30% local sourcing condition will be reckoned from the date of opening of the first store. Further, the sourcing commitment will apply annually. Indian brands can access FDI, and will be exempted from conditions, i.e. products should be sold under same brand internationally, and investment by non-resident www.pwc.in

brand owner, as set out in the FDI policy for single brand retail trading. An Indian manufacturer would be the company which is the owner of the Indian brand, and which manufactures in India in terms of value at least 70% of its products in-house and the balance 30% can be sourced from Indian manufacturers. Indian brands would need to be Indian owned and controlled. 100% FDI in duty-free shops located and operated in custom bonded areas has been brought under automatic route. Defence Up to 49% foreign investment, including portfolio investment, will be under automatic route. Foreign investment beyond 49% will require Government approval, and will need to demonstrate access to modern and state-of-the-art technology. In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern, or transfer of stake by existing investor to new foreign investor, Government approval will be required. Indian investee-company to be self-sufficient in product design and development. Furthermore, the company needs to have manufacturing facility and maintenance and life-cycle support facility for products manufactured in India. Civil Aviation 49% foreign investment under automatic route has been permitted in Regional Air Transport Service. FDI cap in non-scheduled air transport service and ground handling services has been increased from 74% to 100% under the automatic route. Broadcasting Foreign investment limit in the broadcasting carriage sector has been increased from 74% to 100% as set out below. Foreign investment beyond 49% will require Government approval. Setting up of up-linking hubs and teleports Direct-to-Home Cable networks both multi-system and local cable operators Mobile TV Head-end-in-the-Sky Broadcasting service Foreign investment limit in terrestrial Broadcasting FM Radio and up-linking of news and current affairs channels has been increased to 49% with prior Government approval. 100% foreign investment under automatic route has been permitted in up-linking of non-news and current affairs TV channels and downlinking of TV channels. Plantation Foreign investment in tea plantation has been brought under automatic route. Up to 100% FDI under automatic route has been permitted in coffee, rubber, cardamom, palm oil tree and olive oil tree plantations. Establishment and operation of satellite Foreign investment limit has been increased from 74% to 100% in establishment and operation of satellites. Government approval is required for foreign investment. Credit Information Companies Foreign investment limit in Credit Information Companies has been increased from 74% to 100% under automatic route. Private Banking FII/ FPI investment limit in private banking has been increased from 49% up to the sectoral cap of 74% Other amendments Non Resident Indians NRIs are now permitted to make investment through an overseas trust, company or partnership firms owned and controlled by the NRI, and can avail benefits that are available for NRIs making investment in their individual capacity, in sectors like construction development and civil aviation. NRI investments, both in individual capacity and through an overseas trust, company or partnership firms owned and controlled by NRIs, made under Schedule 4 of FEMA (Transfer or Issue of Security by Persons resident outside India) Regulations will be considered as domestic investment. Limited Liability Partnership 100% foreign investment has been allowed under automatic route in Limited Liability Partnership (LLP) operating in sectors under automatic route and without FDI-linked performance conditions. LLP are allowed to make downstream investment in an Indian company or LLP engaged in sectors under automatic route, and without FDI-linked performance conditions. PwC Page 2

Ownership 2 and control 3 in LLP have been defined. Downstream investment by LLPs would need to be reported to SIA/ DIPP. Companies neither having operations nor investment Foreign investment in an Indian company neither having operations, nor any downstream investments, has been brought under automatic route till the time the foreign investment is for undertaking an activity which otherwise does not require Government approval, or is not subject to caps and conditions. Swap of shares Foreign investment by way of swap of shares of an Indian company has been brought under automatic route for companies which are engaged in sectors covered under automatic route. Establishment of companies with foreign ownership and control, and Transfer of Indian ownership and control Establishment of companies with foreign ownership and control, and transfer of ownership and control from resident to non-resident in Indian companies, will require Government approval in sectors which are under Government approval route. Enhancement of limit of foreign investment under FIPB route The limit of foreign equity inflow has been increased to INR 50 billion for approval by FIPB. Beyond foreign equity inflow of INR 50 billion, approval of Cabinet Committee on Economic Affairs will be required. The takeaways These amendments will further ease, rationalise and simplify the process of foreign investments, thereby encouraging minimum government; maximum governance. With these amendments, the Government has attempted to accept some of the long standing demands of industry, and to make India a more attractive destination for foreign investors Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tax & Regulatory Services Regulatory Gautam Mehra, Mumbai +91-22 6689 1154 gautam.mehra@in.pwc.com Akash Gupt, Gurgaon +91-124 330 6509 akash.gupt@in.pwc.com 2 An LLP is considered as 'owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/ or entities that are ultimately owned and controlled by resident Indian citizens; and such resident Indian citizens and entities have majority of the profit share. 3 Right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP. PwC Page 3

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