Mauritius, Singapore funds likely to shift to GIFT City after Sebi norms

Representative image | Illustration: Ajay Mohanty
About a fourth of India-focused funds based in Singapore and Mauritius could potentially migrate to the International Financial Services Centre (IFSC) at GIFT City, Gujarat, in the next few years, in the light of the new guidelines for alternative investment funds (AIFs) operating out of the region. 

On Monday, the Securities and Exchange Board of India (Sebi) issued these norms, combining the foreign direct investment (FDI), foreign portfolio investor (FPI) and foreign venture capital investor (FVCI) regimes for investors from abroad. This will Effectively ease the multi-licence framework that exists for foreign funds today. 

The new framework will allow Indian managers to directly sponsor and manage offshore AIFs set up at IFSC. These could potentially be an India managed-platform where a single pool of capital is raised from global investors, including Indian residents, and invested globally.
“This is a great step forward for attracting institutions to set up funds and attract millions of dollars,” said Andrew Holland, chief executive officer at Avendus Capital Alternate Strategies.

Several fund industry consultants, including top law and advisory firms, are gearing up for roadshows to showcase the benefits of setting up AIFs at GIFT to such investors. The cost for operating an India-focused fund out of IFSC could work out to $5,000-10,000 annually, compared with the $30,000-40,000 usually required for operating out of Singapore or Mauritius, estimates suggest. “The annual expenses for setting up and maintaining a fund globally is five to six times of what a fund would have to spend in India,” avers Richie Sancheti, head of investment funds at Nishith Desai Associates.

These funds will be exempt from paying Goods and Services Tax (GST) on the management fees earned, provided the manager has a physical presence at GIFT. Any entity set up at IFSC enjoys a tax holiday of 100 per cent of profits for the first five years and 50 per cent for the next five, subject to a Minimum Alternate Tax of nine per cent. With surcharge and cess, the total tax outgo for a fund could be about 10 per cent.

"Fund managers managing foreign investors' money will now benefit from incentives granted to units operating in GIFT in the form of no GST and reduced income tax on management fees earned by them. This is a significant encouragement to bring offshore funds managed by Indian fund managers onshore in GIFT City,” said Bhavin Shah, partner at consultants PwC India.

The Sebi guidelines say each scheme of an AIF should have a corpus of at least $3 million. The minimum investment value for an investor shall be $150,000 (for employees or directors of the AIF or manager, the minimum value shall be $40,000). New sponsors or managers will have to set up business only by way of a company or Limited Liability Partnership.

There are grey areas under the current circular. For instance, the regulator needs to clarify that the non-India portfolio for such funds would be exempt from tax for non-India investors and that investors from abroad would be exempt from filing tax returns in India once tax has been deducted at source.

“If a US investor invests into an AIF at GIFT, which in turn invests into Singapore, why should the US investor pay tax in India just because the manager is in India?” asks Sancheti.

Entities operating under the current FPI/FVCI regulations have to necessarily be non-residents. Experts believe the definition of ‘non-resident’ is different under the foreign exchange management and income tax laws. Under the latter, for instance, an entity incorporated in India which has control or management in India will always be a resident.

“Sebi needs to clarify that a GIFT entity is indeed eligible to be registered as a FPI/FVCI and satisfies the conditions in the relevant regulations,” said Anish Thacker, partner at EY India.

Another grey area is the rule surrounding the liberalised remittance scheme. At present, this is available only to resident individuals, not corporates, partnership firms or trusts. This could make it difficult for Indian general partners to sponsor offshore AIFs. 

“The concept needs to be marketed to a global audience and it might be difficult to recommend such structures till there is sufficient clarity on all these aspects,” said Sancheti.

Setting up base

  • One in four India-focussed funds from Mauritius, Singapore could set up shop in IFSC 
  • Sebi’s new framework will allow Indian managers to directly sponsor and manage offshore AIFs set up in IFSC
  • Industry players gearing up for roadshows to showcase benefits of setting up AIFs at IFSC
  • India-focussed funds operating out of IFSC may be 5-6 times cheaper than global funds
  • AIFs will be exempt from GST at IFSC GIFT City
  • Funds have to pay a MAT of 9 per cent, plus surcharge, cess
  • Regulator needs to clarify that overseas investors will not have to pay tax on non-India portfolio

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