The Securities Exchange Board of India (SEBI) is permitting private equity funds investing in Indian public markets to go ‘off market’ for internal reorganization of their investments, if they move to their assets to the International Financial Services Centre (IFSC).
Foreign funds with an FPI license have often needed to do corporate re-organisation including shifting their assets from one account to another. But doing this during market hours impacts share price and also requires them to tap temporary credit lines.
The Indian Government in Finance Act 2021 provided a one-time opportunity for offshore funds to re-domicile to IFSC.
In a bid to sweeten the deal for such foreign funds, SEBI is allowing these select transactions to go 'off market' if they move to the GIFT city, according to a circular issued earlier this week
“This will reduce the cost of transferring the assets from overseas fund to IFSC. SEBI has been, in the past, reluctant to grant off-market transfers even in case of genuine corporate re-organisations. Funds had to sell and re-purchase the securities on the Indian securities market and incur transaction cost as well as market impact cost to do so,” Suresh Swamy, Partner, Pricewaterhouse and Co LLP said.
Further, offshore funds setting up as a category III AIF in the IFSC are entitled to a special tax regime, he said.
Under the AIF regime, equity gains are taxable at 10% and 15% for long-term and short-term gains respectively which is similar to FPIs. Income earned on sale of debt and derivatives is exempt from tax. Interest and dividend incomes are also subject to lower tax rate of 10%, Swamy said.
“The added benefit of redomiciling the offshore fund to IFSC as category III AIF is that such offshore funds shall no longer be required to rely on the tax treaties to claim exemption or lower rate of tax. Under the tax treaties, offshore funds had to satisfy GAAR/ MLI test as well as residency and beneficial ownership test which were onerous,” Swamy added.
GAAR stands for General Anti Avoidance Rule which came into effect in April 2017 to reduce tax leakages. Multilateral Instruments (MLI) are also tools used to avoid tax evasion.