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Trending: Call for Papers Volume 3 | Issue 2: International Journal of Advanced Legal Research [ISSN: 2582-7340]

Offshore PE Funds’ “Off Market” Internal Reorganization | SEBI’s Sweet Deal

Background

The dream built in 2009, and the foundation was laid in 2012, Gujarat International Finance Tec (GIFT) city, the country’s first business district housing an International Finance Service Centre (IFSC) and SEZ for the domestic and international financial services. India attempts to capture business from financial services hubs like Singapore and London with the way of offering incentives to the investors conducting foreign financial transactions in this hub with a single-window clearance by a unified regulator IFSCA for quick compliance regulation.

Measures and impact

In the Finance Act, 2021 and other regulations made by the SEBI, the tax treatment of AIFs, Aircraft leasing, encouraging foreign offshore funds to relocate to India, banking and broking services, the objective is to attract investors.[1][2][3]

In April 2021, a huge number of applications were received at GIFT city to set up international financial service operations. There were 25 companies with 12 new ones lined up for investment proposals at GIFT IFSC. These proposals include the ones from Singapore Stock Exchange, fund management companies like DSP Asset Managers, Kedaara Capital, and Rising Fintech, Vman Aero Services, and many more.

PE Offshore Funds’ Internal Reorganization

Corporate reorganization broadly includes arrangements and compromises entered by the companies with their creditors or members, mergers, demergers, and amalgamations between group entities. There is a reorganization of the capital structure to make it attractive to investors.

Foreign funds with an FPI license need corporate reorganization, which would also include shifting of the assets from an account to another. There are two ways in which the fund could transfer the assets which are market hours and off-market hours. Market hours transfer would be an impact on the share price of the company. Trading in dematerialized securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers. An AIF can invest in listed securities in India under the Foreign Portfolio Investor (FPI) route. The AIF should also obtain an FPI license from SEBI under the SEBI (FPI) regulations, – 2019.

Off-Market Transfer of Assets/Shares

There are various costs involved in the transfer of shares/assets through the Stock exchange in India:

1.       Brokerage

2.       Securities transaction tax – 0.1% of the transaction value for delivery-based equity share trades.

3.       Stamp duty and GST – 9% CGST and 9% SGST

4.       Transaction charges – 0.0002% of the transaction amount

5.       Depository participant

6.       Capital Gains

Income on the transfer of shares in an Indian company is taxable as follows to Category III AIF:

1.      Short-term Capital Gains – 15% if Securities Transaction Tax paid, else 30%

2.      Long-term Capital Gains – 10% which is similar to FPIs, which are exempted from tax.[4]

In April 2019, around six foreign funds seeking to complete mergers and buyout off-market applied to the Security Exchange Board of India, which was not approved and put on hold. Due to the charges levied on the transactions done through the stock exchange, the funds have requested the SEBI to allow them to transfer the shares/Assets as a part of an acquisition deal through the Off-market route. SEBI insisted to compete with the stated transactions through the recognized stock exchange to maintain transparency.

In August 2019, in a circular[5], SEBI relaxed the norms for FPI in regulatory compliance by:

1.      Simplification of KYC requirements

2.      Permission to carry out the off-market transfer of securities

3.      Broadening of the diversification of FPIs

4.      Easing the registration process

The classification was replaced by II-tier than the earlier III tier.

Since the years, there have been many incentives announced by the Ministry of Finance and regulatory bodies.[6] The boiled-down objective of all the incentives is to encourage the relocation of offshore funds to IFSC and building a global financial hub.

FPIs deal gets sweetened

On June 1, 2021, SEBI released a circular that addressed the objective of the ambition of GIFT city by paving the way to the relocation of the funds to IFSC, under the Finance Act 2021.[7]SEBI permitted a one-time ‘off market’ transfer of its securities to the “resultant fund”. It permitted the transfer of the securities of the offshore funds to the new accounts through off-market transactions.

A Foreign Portfolio Investor, with the base jurisdiction of the offshores, like Singapore, Dubai, has the ability to transfer the base from the offshore to IFSC to avail the tax incentives and benefits offered to the investors based in IFSC GIFT.

Steps to transfer offshore funds to IFSC

The first step for an offshore fund to relocate to IFSC is to get an FPI license. With this, their existing investments would be stored in the accounts that at linked to their overseas entity. These would be further transferred from the old Demat account to the new one attached to IFSC FPI on the exchange and buying the securities irrespective of the merger or relocation. This gave a lot of flexibility to the fund manager in terms of relocation and reorganization of the funds.

There was an amendment in the Finance Bill, which allowed the SPVs (Special Purpose Vehicles), as a subsidiary of the offshore funds to isolate or scrutinize corporate assets and financial risk, where the offshore fund sells assets off of its balance sheet to the SPV, to transfer securities to an IFSC fund (resultant fund) in the GIFT City with the enable to the IFSC fund to issue shares either to the investors or the offshore fund itself.

FPI or its wholly-owned special purpose vehicle could approach the Designated Depository Participants (DDP) to approve a one-time “off-market” transfer of its securities to the resultant fund after due diligence.[8]

Impact of permitting “off-market” transfer of assets

The impact of the circular would be much beyond the surface area of the impact. The flexibility provided in the few IFSCs across the globe imbibes them with the quality and value to attract global investors and fund managers. It would provide the much-needed flexibility to the fund managers to transfer their assets to the IFSC, to avail the incentives, with an added advantage to choose freely the course of transfer i.e., Off-market. Transferring the assets during the market hours would impact their share prices, would burden them with transaction costs.

When not permitted, the funds are used to transfer their assets by selling and repurchasing the assets on the Indian securities market. The cost of transferring the assets from overseas funds to IFSC will be reduced. The experience in the IFSC GIFT would be similar on this tangent as of other IFSCs that allow off-market transfers like Singapore, Netherlands, and Luxembourg.

Income earned on the sale of debt and derivatives is exempted from tax. Income and dividend income are under the lower tax rate bracket of 10%. Offshore funds setting up as a category III AIF in the IFSC are entitled to a special tax regime. The Finance Act, 2021 has amended various provisions of the ITA to facilitate tax neutrality concerning the relocation of offshore funds to the IFSC. The funds earlier used to take support of tax treaties to reduce/exempt from tax. Offshore funds had to comply with General Anti Avoidance Rule, an anti-tax avoidance law, to prevent tax evasion and Multilateral Instruments (MLI),[9] to prevent tax treaty abuse under the tax treaties to reduce or seek exemption.

Conclusion

India has been pushing out itself from the prejudices and boxes to become an area of value and quality of business and investment. Setting up the first IFSC in the country is a humongous project that has a lot of potentials, with a lot of time which would take to reach the potential of global IFSCs. With incentives in finance and taxation, a large number of companies have proposed to invest at GIFT. The flexibility of transferring assets from offshore to IFSC, off-market would attract fund managers to transfer their assets to GIFT. The combination of incentives liberalized taxation, and flexible compliance would get India to achieve its ambition to become a gateway for inbound and outbound requirements of the international financial services.

AUTHORED BY: SAPTAK PANDYA

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