In the last 25 years, Indian government has conferred diversified incentives on Foreign Portfolio Investors (FPI) with the objective to generate flow of funds into capital markets via foreign investments.

Unfortunately, certain businessmen of Indian origin are taking advantage of FPI policies to evade taxes which is detected by the Securities Exchange Board of India (SEBI).

Taking note, SEBI has issued norms barring the Persons of Indian Origin (PIO) from deriving benefits via foreign funds and mandated PIO are ineligible to be end beneficiaries of the foreign funds.

‘Foreign Funds’ means a mutual fund, closed-end fund or exchange-traded fund that invests in companies located outside of the investor’s country of residence.

The underlying intent behind issuance of these norms is to curb the practices of PIOs to use channel of foreign funds to evade tax payments.

However, the norms are adversely affecting the foreign funds associated with PIO. As per the official records, the future of 150 foreign funds (funded by PIO) registered with SEBI is in jeopardy and facing the prospect of license revocation.

No Indian or Non-Resident Indian (NRI) can be a beneficial owner of a foreign fund as per the new FPI norms. Following the expiry of the ongoing contracts, no fresh derivative positions will be taken by foreign funds until they satisfy the new FPI norms.

Foreign funds are facing the threat of exit from the Indian markets if they fail to fulfill the revised eligibility parameters within six months from the enforcement of new FPI norms.

As per new norms, foreign funds (51% owned by PIO) cannot be registered as an FPI and PIO cannot own more than 15% in any foreign fund (partnership) and 25% in any foreign fund (company). 

The new series of norms will cause difficulties to the foreign funds owned by PIOs as most foreign funds are initially funded by PIO prior to pooling money from the other investors.

FPIs are mandated by SEBI to reveal the end-beneficiary of participatory note (p-note) subscribers with the intent to nullify the incentive conferred on investors to use indirect participation routes such as p-notes to invest in Indian markets.

Despite of the divergent opinions, the norms disqualifying the PIO (excluding genuine instances, if any) to be end beneficiary of the foreign funds is the need of the hour to curtail misuse of FPI route to evade tax payments or else more businessmen of Indian origin will use FPI route to evade tax payments daunting the development of the nation economy.

Research inputs by Paruchuri Baswanth Mohan