AMFI- Association of Mutual Funds in India
BUDGET
PROPOSALS FOR FY 2018-19
Safe Harbour for investment
management activities of Offshore funds in India
Section 9A of the Income-tax
Act, 1961 prescribes 13 conditions that need to be fulfilled by the offshore
fund, and 4 conditions that need to be fulfilled by the India-based Fund
Manager, for the offshore fund to qualify for exemption from a business
connection risk and the risk of having a Permanent Establishment (PE) under the
Act. The conditions are rather stringent and difficult to fulfil or open to
interpretation. Mentioned below are some of the clauses that need to be
reviewed and relaxed
Background
i
One of the
conditions stipulated in clause 4b of Sec.9A is that the Indian AMC should be
registered as a fund manager or an investment advisor in accordance with the
specified regulations. "Specified Regulations" has been defined to
include SEBI (Portfolio Managers) Regulations, 1993 or the SEBI (Investment
Advisers) Regulations, 2013, or such other regulations made under the SEBI Act,
1992 which may be notified by the Central Government under this clause.
However, the above definition does not include SEBI (Mutual Funds) Regulations,
1996. Consequently, Indian AMCs who are only managing SEBI registered Mutual
Funds under the SEBI (Mutual Funds) Regulations, 1996 will face challenges
while seeking approval from the Central Board of Direct Taxes (CBDT) regarding
its eligibility for the purposes of Section 9A.
i
ii. “Corpus” is
defined as the total amount raised for the purpose of investment by the
eligible investment fund as on a particular date
i
iii. The
aggregate participation or investment in the fund, directly or indirectly, by
persons resident in India does not exceed 5% of the corpus of the fund {9A(3)(c
)}
i
iv. The fund
shall not invest more than 20% of its corpus in any entity {9A(3)(h)}
i
v. The monthly
average of the corpus of the fund shall not be less than Rs 100 crores
{9A(3)(j)}
i
vi. No business
connection of the offshore fund in India and no person acting on its’ behalf
{9A(3)(l)}
i
Remuneration paid to fund manager is
ii
a) not less than
the arm’s length price {9A(3)(m)}; and
iii
b) restricted to
maximum of 20% of profits of the fund {9A(4)(d)}
Proposal
It is recommended that the
definition of "Specified Regulations" should be revised to include
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
Till the time the above amendment is effected in
Section 9A, the CBDT may issue a notification to include SEBI (Mutual Funds)
Regulations, 1992 under “Specified Regulations”.
“Corpus” may be defined as the
Net Asset Value of the eligible investment fund as on a particular date
Seed capital invested directly
or indirectly by the eligible Indian fund manager should be exempt from this
clause
Passive breaches should be
exempt and provided 90 days within which the same shall be rebalanced or
rectified, similar to relaxation offered under Rule 10V(3)(a)(i)
Passive breaches should be
exempt and provided 90 days within which the same shall be rebalanced or
rectified, similar to relaxation offered under Rule 10V(3)(a)(i)
Suitable clarification/
amendment may be issued that:
- outsourcing
a part of the back office / support functions of the fund manager (such as fund
administration, fund accounting etc.), to an outsourcing entity in India (which
is a group entity of the fund manager), or
- appointment
of banker, custodian or broker in India by the fund or fund manager would not
result in non-fulfilment of this condition.
The condition of maximum 20% of
profits should be restricted to performance based fees or profit sharing
arrangements and not to fixed management fees. This may be clarified in clause
12 of Rule 10V.
Justification
Specified Regulations" has
been defined to include SEBI (Portfolio Managers) Regulations, 1993 or the SEBI
(Investment Advisers) Regulations, 2013, or such other regulations made under
the SEBI Act, 1992. As SEBI (Mutual Funds) Regulations, 1996 were framed under
the SEBI Act, 1992, the same meets the criteria “such other regulations made
under the SEBI Act, 1992.”
All Indian AMCs managing mutual
funds registered with SEBI are permitted to manage offshore funds under
Regulation 24B of SEBI (Mutual Funds) Regulations, 1996.
Since SEBI (Mutual Funds) Regulations, 1996 has not
been specifically included in the list of "Specified Regulations",
Indian AMCs which are only managing Mutual Funds under the SEBI (Mutual Funds)
Regulations, 1996, and have not registered under SEBI (Portfolio Managers)
Regulations, 1993 etc. could face unintended challenges / avoidable delay in
obtaining approval from the CBDT regarding its eligibility for the purposes of
Section 9A.
The current definition will not
take into account the mark-to-market gains or losses of the eligible investment
fund.. Investment restrictions as per 9A(3)(h) and restrictions placed under
9A(3)(c ) and 9A(3)(j) should include the MTM gains/losses and therefore cannot
be based on the original amount raised. It may also be noted that Open ended
funds will have ongoing subscriptions and redemption.
The eligible Indian fund
manager or the wholly owned offshore subsidiary of the eligible Indian fund
manager may be required to put seed capital while setting up the fund in order
to show “skin in the game” or create a performance track record.
The threshold of 20% could get
breached without any action by the fund manage, viz., redemptions or MTM
losses.
The threshold of 20% could get
breached without any action by the fund manager viz. redemptions or MTM losses
‘Business connection’ is a
broad term and its meaning has to be derived from various provisions of the Act
and judicial pronouncements. In the absence of clear guidelines as to when an
eligible fund would be considered as constituting a business connection in
India, any activity of an eligible fund may become subject matter of scrutiny
on whether it constitutes a business connection in India or not. Also, any
person having relation with an eligible fund such as sub-advisor, co-fund
managers may be deemed to be acting on behalf of the fund constituting business
connection in India, in the absence of clear guidelines. Therefore, it is important
to clarify situations with detailed examples on when an eligible fund or any
person acting on behalf of an eligible fund would be considered as constituting
a business connection in India.
This is already being tested in
Transfer Pricing assessments. In the event of a loss suffered by the fund, the
eligible fund manager will not be able to charge even the fixed management fee
which was determined before the investment management activity was commenced.
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