Sebi hit the brakes on 'free of cost' transfers for FPIs in past year

An FPI could earlier transfer assets between its arms, in the wake of a merger of schemes or similar reorganisation, through an application to the markets regulator

4 min read Last Updated : Jun 14 2019 | 12:29 PM IST

The Securities and Exchange Board of India has not been giving permission to foreign portfolio investors (FPIs) to transfer assets through a provision which was previously in common use.

An FPI could earlier transfer assets between its arms, in the wake of a merger of schemes or similar reorganisation, through an application to the markets regulator. This ‘free of cost’ transfer was allowed if end-beneficiaries were the same in both entities.

Such permissions have, however, been hard to come by in the past 12-18 months, say three people who are familiar with the matter. This has happened due to concerns that the step was being used to avoid taxes.

“They will not give it except in very limited cases. Avoiding treaty shopping could also be one of the objectives,” said one of the sources.

A source said this had affected the entities based out of Mauritius. A number of these have sought to relocate because of changes to a treaty with India which had earlier saved them from the capital gains tax. Investments from Mauritius are fully taxed with effect from April 1 this year.

“People have made representations,” said another person, who added that this did not result in the regulator changing its stance.

The halt in approvals also coincides with Sebi having announced changes to some rules on foreign investors. This included provisions around free-of-cost (FOC) transfers of assets. At the time of change, any such transfer required the intermediary, called the Designated Depository Participant (or DDP), to send the details to the regulator. The change sought to allow DDPs themselves to process such requests if the foreign investor had more than one investment manager, following a Multiple Investment Managers (MIM) structure. Others though required regulatory sanction, according to the December 2017 board meeting which discussed the issue.

“For non-MIM FPIs, the request for FOC may be forwarded to Sebi through the DDP concerned, for appropriate consideration,” it had said.

These have not been forthcoming, according to the people cited earlier.

This means foreign investors would now have to sell and repurchase their assets from the market if they want to effect such transfers.

Rajesh H Gandhi, partner at tax advisory firm Deloitte India, suggests while regulatory and tax concerns need to be kept in mind, portfolio switches have become more complicated since FOC transfers aren't allowed. "Foreign investors have to (then) sell in the market and repurchase the same securities. This would bring elements of market risk and transaction costs into such transactions. If such deals happen off-market, it would result in significant saving of STT (securities transaction tax), brokerage charges, stamp duty and forex conversion cost for the FPI," he said.

Riaz Thingna, Director, Grant Thornton Advisory said that such transfers may be very relevant in cases of global mergers of foreign portfolio investors. The absence of regulatory approval could impact the cost for such FPIs and also the ease with which such mergers can be executed, though in most other cases, transfers through the stock market would be more tax efficient.

"There is a likelihood of such transfers escaping the tax and regulatory net if not done in the open market, so one can understand why Sebi would encourage transactions through market sales and purchases.

On the other hand, funds would have to find a way to pass on the additional expenses incurred if it is the result of a global merger. It wouldn't be very easy to pass it on to investors by citing such a situation," he said.