Stringent know-your-customer (KYC) norms and lack of clarity in taxation are keeping away qualified foreign investors (QFI) from putting money in India, according to market men.
“It is extremely difficult for an Indian entity to do an in-person verification of a qualified foreign investor,” says Mr Atul Gupta, Managing Director, Orbis Financials, a custodial services provider.
need to simplify
Experts suggest that the KYC process can be simplified.
“SEBI has already provided for sharing of KYC with overseas regulators when a QFI wants to invest in Indian mutual funds through the indirect route using unit confirmation receipts (UCR),” says a CEO of a mutual fund.
“This could be extended to direct investment in equity as well.”
Under this route, a fund house appoints one or more UCR issuers in various countries and one SEBI-registered custodian in India.
The UCR issuer acts as the agent of the fund house overseas and is a regulated entity.
QFIs can buy and sell mutual-fund units in the form of UCRs, where one UCR represents one unit of the mutual fund.
QFIs are not allowed to switch, transfer, trade, withdraw or do systematic investments in UCRs.
They can only subscribe to or redeem them.
QFI participation has also been lacklustre due to lack of clarity in taxation-related issues.
The Union Government through The Central Board of Direct Taxes (CBDT) is expected to issue a clarification soon, said analysts.
Orbis' Mr Gupta says: “If QFIs are asked to file tax returns in India they would not come.”
Experts say that the CBDT has to address the issue and see what relief can be provided to QFIs to obviate payment of withholding tax and filing of returns.
This is because a QFI also has the option of coming into India through the foreign-institutional-investor (FII) or FII sub-account route.
FIIs usually come into India through beneficial treaty jurisdictions and their incomes are not taxed.
Moreover, they operate through custodians in India who only maintain their books of accounts and are not their agents.
With no permanent establishment in India, their income cannot be taxed as business income.
But QFIs will not get that benefit as a qualified depository participant virtually acts as their agent receiving money, buying and selling equity on their behalf, and repatriating the proceeds. This is likely to create an agent-dependent permanent establishment liable for taxation.
sebi note
The Securities and Exchange Board of India is seriously looking into this issue, said market men. The regulator is expected to come out with a detailed note on QFI investments in Indian equities soon.
Experts say that the SEBI also needs to recognise overseas financial advisors as they are the ones who advise QFIs.
These include private bankers, clearing brokers, financial advisors and global custodians who are regulated in their countries.
wait longer
Analysts say that it would take at least two to three years for QFI investments to come and that it remains to be seen whether the huge expectation of inflows from QFIs becomes a reality.