Domestic portfolio managers hail Jaitley call

Look to tap offshore business with onshore fund managers; waiting for some tax clarifications

Domestic portfolio management service (PMS) providers are in the process of setting up offshore funds to tap investors from financial centres like Singapore, Mauritius and Dubai. The move follows the Union Budget proposal to allow domestic fund managers to also manage offshore funds without adverse tax implications.

According to sources, brokerages Edelweiss, Karvy, Centrum and IndiaNivesh are looking to start offshore funds, domiciled abroad but managed by their PMS fund mangers. Some have already approached the market regulator, Securities and Exchange Board of India (Sebi), for a go-ahead.

Earlier, domestic fund managers managing offshore money were construed as "permanent establishment" and thereby exposed them to additional tax liability. As a result, many operated from abroad, though they managed India investments from there.

"We have filed with Sebi. We are confident that whatever the issues on the tax front will be resolved. The demand from foreign investors to invest into Indian equities is tremendous. We are getting queries from places as far as Europe at this point," said Sandeep Jain, director, IndiaNivesh.

Sector officials said there was a sharp increase in demand from investors in offshore jurisdictions, including Hong Kong and Singapore, to invest in Indian offerings. "At this point, very established players are looking to launch offshore funds," said Swapnil Pawar, chief investment officer, Karvy Capital.

Offshore funds and managers of these funds are required to fulfill certain requirements, specified in the current Finance Bill. These funds have to maintain a monthly average corpus of Rs 100 crore. The participation of Indians in such funds should not exceed five per cent of the corpus. There should be a minimum of 25 investors in each fund.

"The challenge for such funds would be the eligibility requirement, for funds and their managers. There is also some ambiguity on tax-related issues," said Pranay Bhatia, partner-direct tax, BDO India.

Domestically, PMS providers need to have a minimum net worth of Rs 2 crore. They mainly cater to wealthy clients and must have a minimum size of Rs 25 lakh.

Experts said starting of offshore funds would be an easy extension of the existing business for PMS providers. More entities are awaiting further clarity on the tax front before taking a decision. Clarifications from the Central Bureau of Direct Taxes are expected soon, they say.

The interest generated by the Indian market among investors abroad in the past year has created interest among PMS providers on tapping this relatively unexposed business opportunity.

"The present taxation structure has an inbuilt incentive for fund managers to operate from offshore locations. To encourage such offshore fund managers to relocate to India, I propose to modify the permanent establishment (PE) norms to the effect that mere presence of a fund manager in India would not constitute PE of the offshore funds, resulting in adverse tax consequences," Finance Minister Arun Jaitley had said in his Budget speech on February 28.

Sectoral officials also said in cases where PMS providers already have offshore funds, many fund managers have started returning to India. They named Motilal Oswal in this regard.
EXPANDING WINGS

• Four portfolio management service providers looking at launching offshore products
• Edelweiss, Centrum, Karvy, IndiaNivesh all said to be considering the launch of these products
• Officials said trigger is the Budget proposal to allow fund managers to locate back to India
• Earlier, fund managers were located in financial hubs like Singapore and Mauritius where these funds were launched
• Sectoral players said sharp increase in demand for these products from clients in Singapore, Hong Kong and Dubai