As per the Budget proposals, migration of a fund to a fund in IFSC will not be regarded as transfer if done on or before March 31, 2023. Transfer of units will be tax neutral. Grandfathered investments of the fund to continue to enjoy capital gains exemption on future sale by the IFSC fund. There is no impact on carry forward of losses for the investee company.
The Budget concessions may spur several Mauritius offshore funds to relocate to International Financial Services Centre (IFSC) at Gift City.
There are about 600-800 Mauritius funds investing into India. Experts reckon 5-10 per cent of such funds could mull making the shift to IFSC.
"If Indian investments are routed through an investment holding company in Mauritius, that can be replaced with an IFSC fund easily," said Sunil Gidwani, partner, Nangia Andersen.
He said that to begin with, global funds may want to consider shifting their India portfolio to IFSC but that would result in splitting the fund into two, may not be acceptable to investors.
As per the Budget proposals, migration of a fund to a fund in IFSC will not be regarded as transfer if done on or before March 31, 2023. Transfer of units will be tax neutral. Grandfathered investments of the fund to continue to enjoy capital gains exemption on future sale by the IFSC fund. There is no impact on carry forward of losses for the investee company.
According to Tushar Sachade, partner, PwC India, provisions in the Budget for considering holding period and cost of previous owner and non-lapsing of losses at the investee entity level, will enable a true replication of the offshore funds into the relocated AIFs in IFSC. This move can be a true game-changer for the Indian fund management industry and further boost the IFSC’s image and standing as an international financial centre, he said.
"The government’s unwavering quest for ‘AatmaNirbhar Bharat’ is markedly demonstrated by its firm push for re-location of offshore funds to IFSC AIF. The tax neutral transfer of investments from offshore funds to IFSC AIF will alleviate the tax-leakage concerns and the consequent hit to the investor returns," said Sachade.
Global investors, however, will have to keep tax implications of their home jurisdictions in mind before giving the nod for their units to be transferred to the IFSC fund, said experts.
For FPIs, Sebi would need to allow cashless off market transfer of units between the offshore fund and the IFSC fund. Sebi regulations at present do not allow foreign funds to shift base to India unless they sell their portfolios and buy them back through the Indian arms, which could result in tax implications.
FPIs that are willing to move to the GIFT City after the budget announcement are planning to reach out to the government in this regard, according to reports.
"For private equity funds ordinarily as an Indian fund acquiring any asset from offshore fund should comply with FEMA valuation norms. The same goes for issue of units to a non-resident. But if a fund in IFSC is regarded as non-resident for FEMA purposes such norms should not apply," said Gidwani.
"At the end of the day, global investors will have to be comfortable with India as a jurisdiction and its legal structure as the process will entail an entire fund documentation change," added another person.
FPI investments from Mauritius into India stood at Rs 4.59 trillion at the end of January, making the region the second highest source of FPI investment.
