Sebi's regulatory cap on NRI investments may affect AIFs GIFT move

Many draw their funds from overseas Indians looking to invest in their home country

Some alternative investment funds (AIFs) considering shifting to the international finance centre at Gujarat may find themselves in a fix over restrictions on non-resident Indian (NRI) capital.

Funds would be required to register as foreign portfolio investors if they operate out of the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC), which is being pushed as an alternative to offshore jurisdictions like Mauritius and Singapore. A regulatory cap which is required to be met by December 31, 2020 restricts the amount of NRI capital such funds can have.

The Securities and Exchange Board of India (Sebi) restricts total non-resident Indian investment to 50 per cent of all FPI assets. No single NRI can account for more than 25 per cent of the fund assets. This also applies to resident Indians and overseas citizen of India (OCI).

“Existing FPIs and new applicants shall be given a time period of two years from the date of coming into force of the amended regulations or from the date of registration, whichever is later in order to satisfy these eligibility conditions,” said the 2018 Sebi circular.

 

“A foreign portfolio investor who remains non-compliant even after the period specified above shall be prohibited from making any fresh purchase of securities and such foreign portfolio investor shall liquidate its existing position in the Indian securities market within a period of one hundred and eighty days,” according to Sebi’s operational guidelines for foreign portfolio investors.

Alternative investment funds are sophisticated investment vehicles for the wealthy. They have a minimum investment of Rs 1 crore. Many AIFs draw their investors from among NRIs who are both familiar with the market.

Tushar Sachade, Partner - Tax and Regulatory Services at tax consultancy firm PricewaterhouseCoopers, said alternative investment funds find the GIFT city an attractive option from a tax perspective. There is zero tax on bond trading and derivatives trading, dividend and interest income is taxed at only ten per cent for Category III AIFs (hedge funds) with non-resident investors. There are some regulatory constraints for those with a large proportion of non-resident Indians (NRIs).

 "A lot of debt and distressed asset AIFs are looking to set up in GIFT. The public equity AIFs with NRI money may need to take a more considered view. Operating as domestic AIFs frees them from NRI restrictions though taxation can be burdensome," he said.

Vivek Mimani, Partner at Khaitan and Co. said that Indian fund managers looking to raise NRI money may be affected even if they choose to come in through GIFT city.

 

"Restrictions on NRI investments, as applicable to FPIs, would apply to Category III AIFs in IFSC, since there isn't a specific relaxation accorded to IFSC AIFs, presently, and this may be an area of concern for fund managers who are looking to set up Category III AIFs in IFSC with an NRI investor base," he said.

“Given that NRIs / OCIs are the primary target investors for funds set up by Indian fund managers, the Government could consider relaxing the above conditions for set up in GIFT-IFSC,” said the December 2020 Deloitte Touche Tohmatsu India newsletter entitled ‘The Pulse’.

Alternative investment funds have made over Rs 1.6 trillion in investments as of September 2020, the latest data available. They have commitments worth over Rs 4 trillion.

GIFT, iCreate partner to support start-ups

GIFT City, the country’s only international financial services centre (IFSC), on Thursday said it has joined hands with iCreate to promote the start-up ecosystem, especially in the field of fintech.

In this regard, a memorandum of understanding (MoU) was signed between startup incubator International Centre for Technology and Entrepreneurship (iCreate) and GIFT SEZ. PTI