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Capital gains: For FPIs, new SEBI norm is a tax-free ‘gift’

Post by Admin,Aug 21,2019.

Recently, the Securities and Exchange Board of India (SEBI) has released new norms that sought to simplify the compliance and operational requirements for Foreign Portfolio Investors (FPIs).

  • The norms are issued to check the outflows of FPIs as the shares worth over Rs 22,000 crore were sold in July and August 2019.
    • FPIs have been withdrawing from Indian equities after the government introduced higher tax surcharge on the super-rich in the Budget 2019.
    • FPI regulations have been redrafted based on the recommendation of H R Khan committee.
  • Revised regulations:
    • Removed broad-based criteria: SEBI decided to do away with the requirement that every FPI should have at least 20 investors.
    • Simplification of the KYC ( Know-Your-Customer) document requirement for overseas investors.
    • SEBI has also allowed central banks of countries that are not members of Bank for International Settlement (BIS) to register as FPIs in India.
      • According to SEBI, such entities are relatively long term, low-risk investors as they are directly/indirectly managed by the government.
  • FPIs shall be permitted for off-market transfer of securities which are unlisted, or illiquid, to a domestic or foreign investor.
  • Sebi has also permitted offshore funds floated by Indian asset management companies to register themselves as FPIsand invest in Indian markets.
  • Sebi has decided that FPIs may be re-categorized into two categories - Categories I and II - instead of the present requirement of three categories.
    • Sebi removed the concept of Category-III FPIs.

These changes will make the regulatory framework more investor-friendly

  • Apart from changes in FPIs regulations, SEBI has amended the Prohibition of Insider Trading regulations to include a clause to reward whistle-blowers.

What is Foreign Portfolio Investment?.

  • Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors.
    • It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
    • Foreign portfolio investment is part of a country’s capital account and is shown on its Balance of Payments (BOP).
    • The BOP measures the amount of money flowing from one country to other countries over one monetary year.
  • The investor does not actively manage the investments through FPIs, he does not have control over the securities or the business. However, since the investor’s goal is to create a quick return on his money, FPI is more liquid and less risky than Foreign Direct Investment (FDI).
  • In contrast, FDI lets an investor purchase a direct business interest in a foreign country. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
  • The investor controls his monetary investments and actively manages the company into which he puts money. However, because the investor’s money is tied up in a company, he faces less liquidity and more risk when trying to sell his interest.