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    European funds look for new gateways into India post Chinese FDI curbs

    Synopsis

    Both the countries enjoy a favourable tax treaty with India and are also perceived positively by the tax authorities. Moreover, there is no need for them to take a pre-approval for the investment. In April, the government had made pre-approval mandatory for all the investments coming from neighbouring countries including China and Hong Kong.

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    MUMBAI: India's clampdown on foreign direct investment (FDI) from China has prompted several European funds to abandon their Hong Kong-based investment vehicles created for this purpose, said two people with the direct knowledge of the matter.

    Currently there are more than 100 FDI applications pending for approval with the government. Of these, around 15-17 are learnt to be from European funds which intended to use Hong Kong as a gateway into India. With these applications yet to get the government's approval, these investors are looking for friendlier alternatives such as the Netherlands and Ireland to route their money into the country, said advisors to these funds without identifying them.

    Both the countries enjoy a favourable tax treaty with India and are also perceived positively by the tax authorities. Moreover, there is no need for them to take a pre-approval for the investment. In April, the government had made pre-approval mandatory for all the investments coming from neighbouring countries including China and Hong Kong.

    “Many of the overseas investors are re-routing their funds through non contentious tax friendly jurisdictions because of the prevailing uncertainty on approval timelines and regulatory grey areas concerning fund flow from neighbouring countries ,” said Tejesh Chitlangi, partner, IC Universal Legal.

    In addition to the new investments, the existing ones too are suffering, say experts. The pre-approval of the government will be necessary even if the fund is an existing investor of a company and wants to buy additional shares or get bonus shares issued.

    For example, say a Hong Kong based fund has a 20% stake in a start-up. Now if the start-up goes for additional funding rounds from say existing investors and the fund is interested in participating, the allotment of shares cannot be done unless approved by the central government. Instead, the non-Chinese funds using the Hong Kong route would prefer to route their fresh investments into India from a different destination.

    “The FDI restrictions on bordering nations has impacted the position of Hongkong as a preferred jurisdiction,” said Moin Ladha, partner, Khaitan & Co. “With the continuing uncertainty around the approval process and threshold for determining beneficial ownership, investors would certainly consider alternate jurisdictions,”

    There are other countries like Singapore, Mauritius and Cayman Islands that offer a gateway into India. “Singapore is too expensive from a fund formation point of view while investments coming from Mauritius have been facing increased regulatory scrutiny in India,” said a tax consultant who works for the big four. “We have hence advised our clients to prefer a European jurisdiction instead,”

    Another person cited above said there are a handful of European funds who have set up both FDI and foreign portfolio investor(FPI) vehicles in Hong Kong and for such funds FPI part of the investments will continue to be based out of the Chinese territory owing to possible complications on the tax avoidance front. While FDI route is buy foreigners looking to buy over 10% stake in listed or unlisted company, FPI route is used by the funds in cases where they want to invest only in listed securities and that too stakes which are less than 10% of a company’s equity. Currently, there are no restrictions on FPI investment coming from China or Hong Kong.

    Hong Kong is amongst the leading source of FDI inflows into India. In the last five years, investment to a tune of $.25 billion has flowed into India from Hong Kong, the Reserve Bank of India(RBI) data showed.
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    2 Comments on this Story

    John 3 days ago
    Nice Article
    Vedantham Sheshashar4 days ago
    "State of Tax Justice report" - how did they arrive at this figure?? Government wants to shift from "Vivad" to "Vishwas" as tax officials are not capable of eradicating tax evasion. System also is complicated with the philosophy that - 'it's okay even if 99 criminals escape punishment, not a single innocent/non-criminal should be punished'.
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