SEBI may ease norms for FPIs in line with HR Khan panel recommendations

The measures discussed include relaxed know your customer (KYC) norms, ease in broad-basing requirements (which presently stipulates at least 200 investors for a fund), and allowing FPIs from developed countries to obtain an India licence based on the registration certificate from their home countries, the paper stated.

"The tweaks would be initially aimed at the largest foreign investors in the Indian market – the US, the UK and Canada, which also have strong anti-money laundering laws and are a part of the Financial Action Task Force (FATF)," the article quotes sources as saying.

While the panel submitted its report to SEBI in June, the recommendations were under consideration as they required amendments to the Prevention of Money Laundering Act (PMLA) from which SEBI derives its own laws.

Since the Budget announcement, key representatives from FPIs have met with the Prime Minister’s Office (PMO) seeking exemption from tax surcharges on Category-I and Category-II funds.

While the government declined this, the measures are seen as an attempt to address foreign investor concerns.

Finance Minister Nirmala Sitharaman said, in a discussion on the Finance Bill in the Parliament on July 18, that FPIs should consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge announced in the Budget.

However, unlike the Budget speech, the proposal in the Finance Bill 2019 is wider and covers all taxpayers other than companies and partnership firms. Thus, once implemented, this move may adversely impact FPIs which are set up as non-corporate vehicles.

Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions. The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign or limited partnerships.

While the rationale behind such an increase in surcharge may have been to levy a higher surcharge only on HNIs, the sting of the unintended consequence has led to nervousness among FPIs, and may have partially triggered the subsequent correction in the stock market.

However, after the initial furore, the Central Board of Direct Taxes (CBDT) Chairman Pramod Chandra Mody offered a simple 'panacea' to such FPIs: restructure themselves as corporate entities.

FPIs registered as trusts will have to pay the new tax surcharge, Sitharaman said, dashing hopes the government may tweak relevant portions of the Finance Bill to ring-fence FPIs from the effects of the 'super-rich' tax.