The deferral of General Anti Avoidance Rules (Gaar by the central government on Monday to April 2016 has laid most of the FII concerns to rest and is likely to support the flows in coming years, believe experts.
The central government’s approval of major recommendations proposed by Shome Committee include Gaar relief for non-resident investors in FIIs and to those FIIs that choose not to take any benefit under an agreement under section 90 or 90A of the Income tax act.
Gautam Trivedi, MD and head of equities-India at Religare Capital Markets, said the approvals are a very big positive.
“The finance minister has responded to concerns of the market participants. Also this provides enough time for investors to review their investment structures,” he said.
The approval comes as a relief for FII investments being routed through Mauritius.
“While there is no mention of Mauritius in the FM’s statement, the government has accepted that, if the treaty benefit is availed of, Gaar should not apply by implication. Meaning, so long as the Mauritius tax residency certificate is available, Gaar should not apply,” said Ketan Dalal, joint tax leader at PwC India.
All this is said to aid the flow of money through participatory notes (P-notes) an offshore derivative instrument. The total value of P-notes on equity and debt currently constitute 14% of the overall assets under the custody of FIIs.
P-notes allow foreign investors to invest in India without registering with the Securities and Exchange Board of India (Sebi) and hence are considered as a means of gaining quick exposure to Indian equity market.
Siddharth Shah, head-funds practice at Nishith Desai Associates said for FIIs, it’s clearly an immediate respite. “P-notes as an access route would continue to see flows till there’s no commercial disincentive or till the Securities and Exchange Board of India takes steps to discourage the same,” he said.