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FIIs face challenges in shifting to new regime

Foreign investors are facing compliance difficulties in moving from the foreign institutional investor (FII) to foreign portfolio investor (FPI) regime. The deadline to obtain an FPI licence ends in March 2017.

Existing FIIs are required to submit documents and undertakings to obtain the licence. Also, there are issues regarding taxation under the new regime, say industry experts. These are forcing certain FPIs to rethink about remaining invested in India, experts add.

“There are many inconsistencies yet and they (government) haven’t clarified issues that need to be addressed,” said Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas.

Foreign investors are finding it difficult to complete the paperwork, which includes submitting constitutional documents, identity proofs, among others. The lengthy process of certification of original papers and the frequency of accepting documents by the Indian authorities is said to be asource of discomfort for foreign investors.

Legal experts feel regulators should liberalise some procedurals aspects to minimise hurdles.

“The migration process should not have any hurdles. The regulators should seek to appropriately liberalise some of the procedural aspects if they are creating some roadblocks in the migration process. However, transparency conditions, such as meeting KYC norms, should not be compromised,” Tejesh Chitlangi, partner, IC Legal.

On the taxation side, no corresponding amendment has yet been made under the Income Tax Act to extend FII benefits to FPIs. Expert feels the government should consider amending the IT Act to bring FPIs within the ambit of Section 115AD to get more clarity on existing rules.

Meanwhile, a working group of local custodians is believed to have made a presentation to the government and the Securities and Exchange Board of India (Sebi) seeking some relaxation in the registration process.

Under the new regulations, which came into effect in 2014, FIIs, their subaccounts and Qualified Foreign Investors (QFIs) will come under FPIs. Sebi rules have divided FPIs into three categories according to their risk profile and KYC (Know Your Client) requirements. FPIs would need to apply for registration through designated depository participants (DDPs), subject to compliance with KYC norms.

“The Centre and Sebi have been proactive, be it on tax recommendations and levies or smoothening the registration process. Though the SIT (Special Investigative Team on black money)’s recommendations on tightening KYC requirements have increased Sebi’s challenges to balance risk containment measures and ease of doing business,” said Sumit Agrawal, ex-Sebi official and founder, Suvan Law Advisors, a law firm specialising in regulatory matters.
Business Standard New Delhi,07th October 2016

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