New Indian route for Cyprus funds

Indian regulations currently allow global investors to invest in India via a number of different routes namely Foreign Direct Investment, Foreign Portfolio Investment (FPI), Foreign Venture Capital Investment, and Alternative Investment Fund, etc. Depending upon the modalities of investment and other factors, one of the most preferred routes is FPI route.

FPI is an investment route by non-residents in Indian securities including shares, government bonds, corporate bonds, non-convertible debentures, units of business trusts, etc. The class of investors who make an investment in these securities is known as Foreign Portfolio Investors.

Entities from Financial Action Task Force (‘FATF’) member countries or from any country specified by the Central Government by an order or by way of an agreement or treaty with other sovereign Governments which are:

• appropriately regulated funds
• unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI:
• University related endowments of such universities that have been in existence for more than five years:

Accordingly, funds coming from those nations which are non-FATF compliant can also obtain Category I FPI registration in case Central government approves.

Government of India vide Order dated 14 June 2021 has notified Republic of Cyprus as an eligible country for obtaining Category I FPI registration under the Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulation, 2019.

With this order from the Central Government of India, Cyprus based funds will now be able to register for a Category I FPI License and therefore benefit from the numerous advantages available to Category I FPIs, including:

1.      Exemption from Indirect transfer provisions

Investors in Category I FPIs are exempted from the applicability of “Indirect Transfer” provisions under the Indian Income-tax Act, which are otherwise applicable to an overseas investor upon transfer of shares / interest in an overseas entity with assets in India.

2.   Regulatory advantages

• Issue/ invest in Offshore Derivative Instruments (such as Participatory Notes), after compliance with the Know Your Client (KYC) norms as specified by SEBI;
• Lesser KYC documentation required by SEBI as compared to Category II FPI;
• Higher position limits for investing in derivatives.

• Assistance in advising and structuring under the FPI route.
• Assistance in Setting up the structure under the FPI route.
• Coordination with the custodian for obtaining information on periodic transactions and maintaining necessary records of the same.
• Computation of tax liability in respect of income earned on securities considering provisions of the Indian Income Tax Act and the Treaty (i.e. Double Taxation Avoidance Agreement) along with the applicability of Multi-Lateral Instrument.
• Issuance of certificate for repatriation of funds out of India as per the requirements of the Income-tax Act and RBI guidelines.
• Preparing and filing of Annual Income Tax Return.
• Replying and attending to notices/letters issued by the tax authorities and advising thereon.
• Appearing before the tax authorities in the course of any proceedings and reviewing assessment orders passed by them.
• General correspondence with the tax authorities

Michalis Vasiliou
Partner
KPMG Cyprus
Audit services & Head of Asset Management

Sunil Badala
Partner
Head BFSI Tax
KPMG India