FATCA may adversely impact fund flows starting Jan 1

Foreign investors have invested over Rs 92,250 crore or USD 16.7 billion so far this year. This robust flow will be adversely impacted come January 1 when nearly 40% of the foreign flows will be governed by FATCA - Foreign Account Tax compliance Act, reports CNBC-TV18's Sajeet Manghat. To put it simply, FATCA was enacted by the US government to track down offshore investments and earnings of any US citizen.

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In other words, the proposed agreement is part of the US administration's efforts to combat possible tax evasion by its residents through foreign accounts in India and other countries.
Market regulator, SEBI sensing the impact that it may have on the fund flows is meeting the ANMI brokers, banks, custodian and other market participants on Wednesday to discuss the issues with respect to compliance and requirements.
Under FATCA, Foreign Financial Institution ie: entities non-US financial entities who are investing and earning income for US persons, are required to fulfill certain obligations.
As per the classification Indian intermediaries are classified as FFIs and hence they will be required to comply with FATCA registration if they want to continue handling of funds originating from an US person. From 2014, any US entity can invest only via FATCA registered entity. FATCA will require all intermediaries to report statement of account of the ultimate beneficial owner. Non-compliance will lead to punitive penalty and will attract 30 percent withholding of payments.
US will begin the process of registration on January 1. This process will end on April 25 and from July 1, transactions can be undertaken only if the Indian entity is FATCA compliant. But, the issue remains that India is yet to sign an Inter Government Agreement with the US on this issue. And unless this agreement has been signed, market participants will not be able to register under FATCA.
SEBI is meet on FATCA on Wednesday will discuss the issues with respect to compliance with FATCA. SEBI will also seek feedback from the market intermediaries on regulatory cost involved with respect to this compliance.
Market intermediaries are representing to SEBI that they should be exempted from compliance of FATCA since this increases their regulatory compliance cost.
SEBI will be submitted a detailed feedback along with its view to the Finance Ministry before the government negotiate and arrive at an Inter Government Agreement.