Sebi Plans to Allow FPIs Have Multiple Demat A|cs
India's capital market regulator is considering a proposal to allow foreign portfolio investors to hold multiple demat accounts in the wake of recent changes to tax treaties related to capital gains besides granting permanent registration to market intermediaries.
One FPI would represent the in terest of each offshore derivative instrument subscriber separately through multiple accounts.
Sebi is likely to discuss this at a meeting on September 23. “The board will discuss the feasibility of this proposal and Sebi will put out a con sultation paper se eki n g public co mments be fo r e taking any final decision,“ said a person aware of the matter.Sebi currently allows an FPI to have only one demat account. This hadn't mattered much since most issuers were protected from capital gains tax under treaties with Mauritius, Singapore or Cyprus.
Recent changes to the treaties have led to capital gains benefits being excluded. “The request is to address a complex problem wherein FPIs who are mandatorily required to deal only in demat shares face challenges allocating tax liabilities among ODI subscribers since each such subscriber could enter into a contract at different times and accordingly the issuer FPI will book trades in the underlying security at different times,“ said Siddharth Shah, corporate and fund partner, Khaitan & Co. “However, when an ODI subscriber redeems his interest, the tax provisions provide that since the demat shares have no distinct numbers the computation of tax liability will take place on a FIFO (first in first out) basis,“ he said. “This would potentially result in a tax liability mismatch amongst the ODI subscribers.“ Indian investors can open multiple demat accounts.
“Tax treaty change is likely to result in tax payment by FPIs on short-term capital gains on listed shares earned by them on shares acquired from April 1, 2017,“ said Gautam Mehra, partner, PwC. “However, for those FPIs who are issuers of ODIs, maintenance of a single demat account could result in some situations where it may get difficult to correlate tax paid by the FPI to individual ODI holders.“
Custodians are not in favour of the proposal as they feel it would be a challenge to administer and monitor such demat accounts. “Why take a convoluted approach and kill the industry when FPIs can do it by internal accounting?“ said an executive at a foreign custodian bank. Shah echoed this view. “While clearly there may not be one perfect so lution for a problem, a solution in itself should not create more problems and that's what the industry needs to bear in mind,“ he said. The regulator is planning to scrap the process of initial registration for market intermediaries and give them a permanent licence.
Only stock brokers and sub brokers are currently granted permanent registration, while other intermediaries such as merchant bankers, underwriters, credit rating agencies, debenture trustees and others are granted registration for five years and then have to seek renewal.
“There are enough checks and balances available to assess the performance of an intermediary such as fit and proper compliance, periodic inspections and audits,“ said Sumit Agrawal, partner, Suvan Law Advisors. “Granting permanent registrations until cancelled or suspended would be in line with global practices. In developed securities markets like US, Singapore and Australia, registration granted to the most intermediaries is perpetual in nature."
The Economic Times New Delhi,19th September 2016