QFI as a New Mode of Foreign Investments Vs FII route

Friday, August 17, 2012

Organized by Capital Market Committee Indian Merchants’ ChamberMumbai

I. Regulatory InterfacesII. EligibilityIII. KYCIV. Permitted Assets ClassesV. Operational ProceduresVI. TaxationVII. RepatriationVIII. Recommendations to make it a success

Key aspects under discussion

Regulatory Interfaces

SEBI RBI CBDTLead time to Commencement

FII Prior approvals

No prior approvals.Custodian to file returns.

Advance tax with annual returns

About 3 months

QFI No Approvals

No prior approvals.Custodian to file returns.

Withholding tax to be deducted by QDP.No obligation to file returns on QFI.

About 2 weeks

Eligibility

FII QFI

Eligible Investors

AMC’s / Pension Funds / Endowments / Banks / Trusts / Etc Broad Based Funds IndividualsForeign Corporates

Presently limited to any foreign entities from 45 countries.

Disclosure of ultimate beneficiaries.

Eligibility Criteria

Foreign Corporates–Listed, $ 2B asset base & avg. net profits of $ 50M.

Individuals must be foreign passport holders of 5 years with $ 50M net worth.

Funds need to be regulated in their home jurisdiction.

Declaration of being “Fit and Proper”!!!

No questions asked.

RBI Approvals FEMA Approval Not Required

List of 45 Eligible Countries

AustraliaAustriaBahrainBelgiumBrazilBulgariaCanada ChinaCyprusCzech RepublicDenmarkEstonia

FinlandFranceGermanyGreeceHong KongHungary IcelandItalyJapanKoreaLithuania

LuxembourgMaltaMexicoNetherlands New ZealandNorwayOmanPolandPortugalRomaniaRussia

Saudi ArabiaSingapore SlovakiaSloveniaSouth AfricaSpainSwedenSwitzerlandUAEUKUSA

Know your Client

KYC documentation – Identical for FII’s & QFI’sNo simpler than before, fortunately ONLY a ONE time nuisanceBlessing to both Investor & Intermediaries – KYC Regulatory Agency (KRA) KYC once uploaded by ONE Intermediary available to other Intermediaries Each Intermediary ONLY executes their Client AgreementBanking KYC remains an EXCEPTION due to RBI excluded from scope of KRA

Bottlenecks still to be addressed: RBI and SEBI need to jointly take ownership for KRA to make it more investor

friendly without impairing transparency Today, uplinking client data on KRA takes nearly a month – too long, should

not be more than 48 hours Overseas Attestation remains a nuisance – Notary attestation costly &

cumbersome, Indian Consulate very cumbersome too. Attestation by Banks limited ONLY to banks with presence in India! Since only FATF regime investors permitted, ought to allow regulated market

intermediaries to attest for their Clients atleast.

Permitted Asset Classes

Asset Class FII’s QFI’s

Equity 5% per Sub Account and 10% per FII in Investee Company

5% per QFI subject to a maximum of 10% in aggregate per Investee Company

Mutual Funds Permitted – both Debt & Growth

Permitted – both Debt & Growth

G Secs Permitted Not Permitted

Corporate Bonds Permitted Permitted

Derivatives Permitted No derivatives as yet.

Only forex hedging permitted.

Taxation

Taxation of QFI’s is an area where clarity is still lacking

Lack of clarity / uncertainties on following critical fronts: I. Is it obligatory on the part of QFI to file annual returns in

India?II. QDP is required to deduct Withholding Taxes when securities

are sold by QFI. What are those rates for withholding taxes?III. Treatment of losses incurred on some securities?IV. Is the QDP entitled to off set losses from profit trades?V. Are withholding taxes to be deducted on a daily basis from

each trade and paid in to the government?VI. Does the QDP administer tax rates as per country specific

DTAA agreement?VII. Does the CBDT issue a No Objection before funds may

repatriated back to QFI?

Repatriation

No prior permission from any Regulator – CBDT or SEBI or RBI

QDP to take responsibility by deducting Withholding taxes as per Statute

QDP carries responsibility for future tax demands post closure of account or due to inadequate funds available in India

QDP makes remittance after satisfying for tax payments of QFI

QDP may retain some balances in the QFI account to offset future tax demands for a couple of years

Fast Track Assessments needed to minimize future demand uncertainties

Operational Summary

Account Set – Up

QFI ONLY from FATF countries (presently 45)

Disclosure of Ultimate Beneficiaries

PAN CardQDP CustodianMultiple BrokersIndia Advisor (Optional)

Single Bank accountSingle Demat account

Limited POA with QDP

Operations

Pre-funding of trades

Clearing & Settlement by QDP Custodians directly with Exchanges

Permitted1. Equity2. Mutual Funds3. Corporate debt

Exclusions4. Derivatives5. G Secs

Tax administered by QDP

Grey Areas

Tax administration to be further clarified by CBDT

Obligation on QFI for filing of returns?

Computation of withholding taxes – per trade Vs periodic aggregation of profits / losses?

DTAA benefits?

Recommendations – Making a Success

KYC attestation should be permitted ALSO by Banks not present in India

KYC attestation should be permitted by Regulated Intermediaries from those FATF jurisdictions

CBDT notifications to bring clarity about: Obligation of QFI to file tax returns Rates of Withholding taxes Computation of profits – taxes per trade Vs periodic aggregation DTAA administration by QDP? Set – Off of losses by QDP?

FAST TRACK Assessment of QFI’s to minimize uncertainty due to future tax demands

Treatment & Eligibility of an entity registered in a FATF jurisdiction but more than 51% owned by Non – FATF residents?

Shifting of Sub Accounts and NRI accounts under the QFI regime?

Indian Merchants Chamber should make representations to Super Regulator to help expedite process