SEBI to enable Portfolio Managers to act as Eligible Fund Managers

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Customer Care No. 91-11-45562222
SEBI to enable Portfolio Managers to act as
Eligible Fund Managers
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• Introduction
• 1.0 Following the insertion of Section 9A in the
  Income-tax Act, 1961 ('Act, 1961') (popularly
  known as "Safe Harbour Norms"), SEBI has hailed
  to foreign fund management activity in the
  country and has come up with a consultation paper
  seeking comments from public for the amendments
  to the SEBI (Portfolio Managers) Regulations,
  1993 wherein it is proposed that an existing or
  new SEBI registered Portfolio Manager maybe
  permitted to act as Eligible Fund Manager ("EFM")
  to manage Eligible Investment Funds ("EIFs").

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• Amendment to clause (b) of section 9A
• 2.0 The said amendment came in the backdrop of
  the amendment to clause (b) of Section 9A of the
  Finance Act, 2016 where the scope of the tax
  relief of funds is widened by including the
  words"is established or incorporated or
  registered in a country or a specified territory
  notified by Central Government in this
  behalf" which until now was limited to the
  countries with which India had entered into
  Double Tax Avoidance Agreement (DTAA) under
  Section 90 or the agreement between specified
  associations for double taxation relief under
  Section 90A (1). After the amendment, the funds
  established or incorporated or registered in a
  country or a specified territory notified by the
  Central Government shall also be treated as EIFs.
• Status of offshore funds before amendment
• 3.0 Before the amendment, in the case of offshore
  funds, under the existing provisions, the
  presence of a fund manager in India may create
  sufficient nexus of the offshore fund with India
  and may constitute a business connection in
  India, even though the fund manager may be an
  independent person. Similarly, if the fund
  manager located in India undertakes fund
  management activity in respect of investments
  outside India for an offshore fund, the profits
  made by the fund from such investments may be
  liable to tax in India due to the location of
  fund manager in India and attribution of such
  profits to the activity of the fund manager
  undertaken on behalf of the offshore fund.

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• Therefore, apart from taxation of income received
  by the fund manager as fees for fund management
  activity, income of offshore fund from
  investments made in countries outside India may
  also get taxed in India due to such fund
  management activity undertaken in, and from,
  India constituting a business connection.
  Further, presence of the fund manager under
  certain circumstances may lead to the offshore
  fund being held to be resident in India on the
  basis of itscontrol and management being in
  India. As there are a large number of fund
  managers who are of Indian origin and managing
  the investment of offshore funds in various
  countries, are not locating in India due to the
  above tax consequence in respect of income from
  the investments of offshore funds made in other
  jurisdictions.
• Luring of fund managers to relocate to India
• 4.0 Therefore, to lure offshore fund managers to
  relocate to India, the permanent establishment
  norms have been modified to the effect that mere
  presence of a fund manager in India would not
  constitute Permanent Establishment (PE) of the
  offshore funds resulting in adverse tax
  consequences. Clause (k) of sub-section (3) of
  section 9A has also been modified to exclude that
  the eligible investment fund shall not carry on
  or control and manage, directly or indirectly,
  any business from India. Sub-section 6 provides
  that any income deemed to accrue or arise in
  India out of total income of EIFs shall be liable
  to tax, irrespective of whether the activity of
  the eligible fund manager constituted the
  business connection in India or not. TDS
  provisions u/s 195 taxation of dividend,
  capital gains, interest u/s 115A 115AB of the
  Act shall continue to apply. However, the
  requirement to furnish PAN by the EIFs u/s 206AA
  of the Act is not applicable. Further,
  sub-section 7 of section 9A states that total
  income of the eligible fund manager shall
  continue to be taxable as per the normal
  provisions of the Act.

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• Further, section 9A of the Act, 1961, inter alia,
  provides that fund management activity carried
  out through an EFM located in India acting on
  behalf of an EIF, established or incorporated or
  registered outside India, which collects funds
  from its members for investing it for their
  benefitsshall not constitute business connection
  in India, subject to the fund and the fund
  manager meeting certain specified conditions
  mentioned under the section.
• The Income-tax (5th Amendement) Rule, 2016
• 5.0 The Income-tax (5th Amendment) Rule, 2016 was
  issued on March 15, 2016 providing guidelines for
  the application of Section 9A.
• Proposed Aendment to SEBI (Portfolio Managers),
  Regulations, 1993
• 6.0 In the backdrop of the notification on Safe
  Harbour norms, SEBI has had a series of
  interactions with various stakeholders. During
  such meetings to discuss the enabling framework
  for registration of EFMs, it was observed that
  advisory activity being permitted under PMS
  Regulations stakeholders mostly expressed
  interest to be registered only under PMS
  Regulations. The participants also observed that
  certain provisions mentioned in PMS Regulations
  may not be feasible for portfolio managers
  pertaining to their fund management activities
  for EIFs.

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