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    Why the India-centric overseas funds aren’t based out of India?

    Synopsis

    A deep investment market with global participation significantly enhances the value creation propensity of an economy.

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    Most of the India-centric/invested funds are based offshore, which merely act as intermediate vehicles.
    By Divakar Vijayasarathy

    A market is a place for buyers and sellers to engage and trade. Higher the number of participants, higher the demand and higher is the value creation for all stakeholders. For a global investor, India is just another market, offering its stocks for investment. Just as more customers improve the vibrancy of the High Street, more investors, especially global one, improve the depth and liquidity on Indian bourses.

    From a landscape perspective, India has over 1,600 listed companies on NSE, while NYSE has around 2,600, which is not too bad. But if we were to compare the size, the difference is stark: the average market-cap of a US-listed company is $7.7 billion, which is 10-fold the size of its Indian counterpart at $0.7 billion. The consolidated value creation of listed companies to India’s GDP in 2019 was just 75 per cent, nearly 2.5 times in that of at 180 per cent.

    Offshore investors
    A deep investment market with global participation significantly enhances the value creation propensity of an economy. Global investors enter markets through funds or pools of money domiciled in conducive jurisdictions.

    Most of the India-centric/invested funds are based offshore, which merely act as intermediate vehicles. FDI from Singapore and Mauritius account for nearly 55 per cent of total flows (2019). At present, over 950 FPIs registered out of Mauritius and Singapore manage more than $100 billion of assets under custody in India as per Sebi.

    Apart from the free float of capital, these jurisdictions also have sizeable highly-skilled work force needed to support the fund management eco-system, comprising finance professionals, bankers, accountants, lawyers, etc. Singapore has over 1,60,000 employees in the financial sector, while Mauritius has over 4,600 only in company/fund management practice.

    Attracting global funds, at least those with an Indian mandate, has significant economic and social benefits. In 2019, the Surjit Bhalla Committee said the potential AUM even if one-fourth of FPIs are managed from India would be $248 billion. This can added over 7,500 highly skilled jobs with an income potential in excess $1.4 billion by 2025.

    Indian policy makers are aware of both this problem and its panacea. In 2015, the GIFT city was opened in Gujarat as India’s onshore hub for foreign funds. In five years, we have not seen much progress on that front. One of the primary concerns, at least initially, was that India’s tax laws were not conducive for onshoring of foreign funds, since an India-domiciled fund manager would create a permanent establishment (PE), thereby exposing the fund’s global income to taxation in India. Hence, a new Section 9A was introduced in 2015 with a clear mandate to facilitate location of fund managers of off-shore funds in India – provide that income of the fund from investments made outside India would not be taxable in India based on the domicile of the fund manager.

    The rationale was well placed. However, the fact that the regulations stipulated 20-plus ambiguous conditions and caveats (including remuneration), exposed the fund structure to the possibility of litigation. Further, the tax regulations overlapped with the Sebi norms on investment thresholds and related party holdings, which made the entire scheme cumbersome.

    SM Sundaram, former CFO of Barings Private Equity and a veteran fund expert based out of San Francisco, says: “Why would I put my entire structure to such high litigation risk when I have simpler options in Singapore or Mauritius. In India, tax regulators have added onerous conditions, which adds an additional layer of avoidable compliance oversight. Even though my new venture is an India-centric fund, we would
    be setting it off-shore.”

    A leading corporate lawyer, advising foreign funds, says “the inherent mistrust between the department and investors, and the fact that India is notorious for high-pitched assessments has made many investors stay away from even considering the Indian-domiciled fund manager option.”

    Another instance of policy and regulatory disconnect is the launch of Indian depository receipts (IDR). IDRs were touted as Indian gateway to overseas stocks, but didn’t take off for lack of regulatory coherence. IDRs traded on Indian exchanges were subject to Indian taxes, unlike GDRs/ADRs, and hence failed to impress investors. Standard Chartered IDR, the first and the only one to be listed in India in 2010, got delisted last month.

    As of today, the GIFT City has only one multinational fund registered so far, which has also retaliated while another global fund house is in the application stage. Despite several representations, AIFs in GIFT city are required to obtain PAN for their investors, which is not the case with foreign-domiciled funds. Only one foreign bank has got the approval to operate nearly two years after its application.

    Indian market and talent have, for long, being enriched by global offshores, at the cost of domestic contribution, thanks to a fractured regulatory landscape. While the intent of the policy makers is laudable and is in the right direction, lack of coherence between the regulators is a cause for concern. If India has to become a domicile for global fund managers, we need to simplify exemptions and ensure unity of purpose among the regulators. An unconditional assurance on ringfencing a fund would go a long way in gaining trust.

    Unlike our GDP numbers, we are not competing or comparing with our past, but with a host of global jurisdictions which thrive on simplicity and ease of doing business. Further, as much as we all agree (global funds included) India is a huge opportunity, perception alone cannot be a reason for tolerating consistent regulatory shortcomings.

    As the saying goes: Amazing things happen when we listen to our customers. However if we are not taking care of our customer someone else will.

    (Divakar Vijayasarathy is the Founder and Managing Partner of the Chennai-based DVS Advisors LLP. Views are his own)

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    2 Comments on this Story

    Amit Oza64 days ago
    Doubtful if any of overseas managed funds will move easily to GIFT unless it has reached a particular level - local funds need to scale up to tap international funds and indian managed funds need to make inroads into international investors. Also unified GIFT authority will help speed up approvals. I don't think India has high litigation - almost all countries have some issues with overseas funds / MNC. If a fund has nothing to hide, a simple PAN Card should not be any problem..
    Jeevan Chaukar65 days ago
    This is actually an important article and government should be positively working to address this seriously!
    But I really doubt anybody is doing something about this...
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