FPI holdings from Singapore, Mauritius surge 25% before DTAA implementation

Grandfathering is term for alteration of rules that apply to a certain investment technique

Foreign portfolio investors (FPIs) based in Mauritius and Singapore had, it now appears, rushed to take advantage of the ‘grandfathering’ clause in the new Double Tax Avoidance Agreement signed between both the governments of the two countries and New Delhi.

The treaties took effect from April 1. According to the data from Prime Database, 22 of the top 50 funds which invested in India through these two routes increased their India exposure to Rs 1.25 lakh crore by end-March, from Rs 1.04 lakh crore at end-December 2016 — a rise of around 25 per cent.

The other 28 FPIs’ exposure to India saw a marginal decrease. The data cover FPI exposure to Indian companies in excess of one per cent.

 

Grandfathering is the term that allows investment actions taken before a certain date to be subject to old rules. In the new tax arrangement with Mauritius and Singapore, all investments from these places will be subject to a short-term capital gains tax (if booked before 12 months). However, all investments prior to March 31, 2017, would be exempt from paying such capital gains tax, under the grandfathering clause. 

In those three months, for instance, the market value of Morgan Stanley Mauritius jumped more than two-fold to Rs 6,719 crore in the three months. Similarly, the portfolio value of Government of Singapore funds, HSBC Mauritius, Ishares India and Cinnamon Capital saw their holdings’ value rise a little more than a fifth. FPIs pumped a little more than $6 billion (Rs 38,500 crore) into Indian equities during the three months. 

In contrast, the total value of investments of these top 50 FPIs remained the same at around Rs 3.65 lakh crore.

As on April, the Singapore and Mauritius-based entities owned nearly 30 per cent of all FPI assets, showed data from depository NSDL.

Said Pranav Sayta, senior tax partner at consultancy EY: “A number of other factors would have also contributed, including the outcome of the recent state elections and high potential growth for the Indian economy as a whole. Yet, the fact that investments made up to end-March are grandfathered under the tax treaties with both, and also under the newly-applicable General Anti-Avoidance Rule provisions (on taxes), encouraged investors to accelerate their investments, to be eligible for tax benefits upon a future exit.”

Investments between April 2017 and end-March 2019 would attract 7.5 per cent tax. From April 1, 2019, all investments through these countries would attract 15 per cent short-term capital gains. Long-term capital gains (on holdings of more than one year) will be exempt for both domestic and foreign investors.

Experts say all the major FPIs domiciled in Singapore and Mauritius are revaluating their strategies with the new tax regulations. While some of them are moving out of these jurisdictions to more tax-friendly countries like France and Netherlands, some others plan to reduce their short-term trades and concentrate on long positions.

“FPIs are coming to terms with the new reality, that there will be no tax havens. For a short span of time, they could think of shifting their base to other jurisdictions. But, from a long-term perspective, the government has already made its stance clear. If it is under the impression that any tax treaty is being misused, they would amend the treaty with that country,” said Tejesh Chitlangi, partner, IC Legal.