How a foreigner can invest in India
Now the foreign nationals and business entities, called Qualified Foreign Investors, can invest in India without any hassles. The Government of India last year opened a new window for a new class, QFIs, to invest directly into Indian mutual funds and stocks in the listed companies. In order to attract foreign funds, the Reserve Bank has further allowed QFIs to invest up to $ 1 billion in corporate bond market and debt schemes of mutual funds without any lock-in period. Earlier only FIIs, their sub-accounts and NRIs were allowed to directly invest in Indian markets. Thus now a large number diversified individual foreign nationals and corporate who are desirous of investing in Indian Equity market can invest on fully repatriable basis in:
Equity Secondary Market – Exchange Traded Securities
Equity Primary Market – IPO and FPO
QFIs can buy up to 5% of the paid-up capital of a company, with the overall limit capped at 10% in a company. And these investment limits are separate or over and above that for FIIs and NRIs.
Are QFIs a separate class of foreign investors compared to FIIs?
QFI will be distinct from FII and non-resident Indians (NRI). A QFI can, for instance, be a foreign individual investor in Japan or any other country, who can buy into stocks of any listed company in India. All a QFI needs is fulfill a few requirements like the Know Your Customer (KYC) norms. While an FII is required to go through some more complicated route of approvals and SEBI registration and has to pay the registration fee as well, for QFI the procedure is very simple and there are no extra registration charges, except for the QDP and broker charges.
A FII is generally a High net worth Individual, large corporate and institutional investor whereas a QFI can be a retail middle income group investor.
How QFI can invest in Indian Equity Market
SEBI has prescribed the requirements and procedure for account opening by QFI along with manner of operations thereof. QFIs shall transact only on delivery based transactions and each transaction shall be cleared & settled on gross basis and they are not allowed to issue any offshore derivatives instruments/ participatory Notes.
In case QFI wish to buy equity shares of the companies in the caution list without obtaining prior approval of depositories then, stock exchanges shall develop a separate segment for intra QFI transactions.
QFI shall mean a person who fulfils the following criteria:
(i) Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and
(ii) Resident in a country that is a signatory to IOSCO’s or a signatory of a bilateral MOU with SEBI, Provided that the person is not resident in a country listed in the public statements issued by FATF from time to time on-(i) jurisdictions having a strategic Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) deficiencies to which counter measures apply, (ii) jurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies and further provided that such person is not resident in India and that such person is not registered with SEBI as Foreign Institutional
Investor or Sub-account or Foreign Venture Capital Investor.
Some of the prominent countries whose citizens are allowed to invest are: Australia, USA, Canada, France, Germany, UK, Japan, Russia, Qatar, UAE, Kuwait and Saudi Arabia, besides many more.
Though NRIs can for all practical purposes can invest in India as QFI, but there are no advantages of coming through this route in India.
A QFI has to comply with KYC (Know your customer) norms and has apply for a Permanent Account Number. The document required are:
Copy of passport of the Individual.
Registration certificate for Non Individual
Copy of PAN Card (Permanent Account Number, which is essentially a tax registration number, shall be applied in India with the help of QDP)
Mode of payment / repatriation
A QFI shall open a single non-interest bearing Rupee Account with an AD Category- I bank in India, for routing the receipt and payment for transactions relating to purchase and sale of eligible securities subject to the conditions as may be prescribed by RBI from time to time. The QDP will purchase equity at the instruction of the respective QFIs within five working days.
The sale proceeds of the equity shares shall be repatriated to the designated bank account of the QFI within five working days. Within these five working days, the sale proceeds of the existing investment can be also utilized for fresh purchases of equity shares under this scheme, if so instructed by the QFI.
Dividend payments on equity shares held by QFIs can either be directly remitted to the designated overseas bank accounts of the QFIs or credited to the single rupee pool bank account. In case dividend payments are credited to the single rupee pool bank account they shall be remitted to the designated overseas bank accounts of the QFIs within five working days (including the day of credit of such funds to the single rupee pool bank account). Within these five working days, the dividend payments can be also utilized for fresh purchases of equity shares under this scheme, if so instructed by the QFI.
QFIs can remit foreign inward remittance through normal banking channel in any permitted currency (freely convertible).
QFIs would be allowed to open a dedicated demat account with only one QDP (Qualified Depository Participant) in India. The QFIs would however not be allowed to open any bank account in India, though they can open more than one trading accounts and trade with one or more SEBI registered stock brokers. QDPs play the major role. QDP obtain all necessary documents of QFI for obtaining the PAN as well as KYC, ensure compliance of provisions of Anti Money Laundering Act and also ensure necessary deduction of taxes. QFIs are required to inform any direct/ indirect change in structure or beneficial ownership to DP and to make reporting as may be required.
Further responsibilities are placed upon QDPs to maintain investor related records of QFI and is further required to ensure shares held by QFIs to be free from all encumbrances at all times and to notify any penalty, litigation or proceeding etc. by overseas regulator against DP or QFIs to SEBI, Depositories and Stock Exchanges. For any change in account from one DP to another, the QFI is required to close the earlier account and to furnish all necessary details to the new QDP.
Since this category has just been introduced in India, at present, unlike for FIIs, there are no specific provisions relating to QFI. Meanwhile one can apply the normal provisions. If the QFI is entitled for the benefit of Double Tax Avoidance Agreement (DTAA), then the QFI is entitled to take recourse to the provisions of DTAA or the domestic law, which ever is more beneficial. As per the domestic Indian tax law, the taxation of the income earned by a QFI would be as under:
1.. Income distributed by mutual funds or their units:
Income distributed by the mutual funds and received by the unit holders is exempt in the hand of latter (section 10(35) of Income tax act).
2.. Income from the dividend declared by the Indian companies:
Dividend distributed by the Indian companies and received by the shareholders is exempt in the latter’s hand (section 10(34) of the ITA).
3.. Income arising on redemption of units:
When the unit holder its units back to the mutual fund for redemption, a transfer takes place within the meaning contained in the income tax act. Consequently this transfer will result in some profit or loss. This profit or loss will be chargeable to tax either as capital gain/loss or as business profit/loss depending on case to case.
Currently there is no tax on the long term capital gains on the redemption of units of equity oriented funds (subject to STT is paid), ie, if the units are held for a period of more than one year. However for short term capital gains, where the units of equity oriented funds (subject to STT is paid), are held for a period of less than one year by an individual, the tax rate is 15.45%.
For long term capital gains tax on redemption of units of non equity oriented funds, where the units are held for a period of more than one year by an individual, the tax rate is 20.60% if the investor chooses to avail the benefit of indexation of cost of acquisition. If the investor chooses not to go for indexation benefit, the tax rate is 10.3%. For short term capital gains tax on redemption of units of non equity oriented funds, where the units are held for a period of less than one year by an individual, the tax rate is according to the applicable tax slab of the individual.
4.. Income from sale of shares of Indian companies:
When the shareholder sells his shares, a transfer takes place within the meaning contained in the income tax act. Consequently this transfer will result in some profit or loss. This profit or loss will be chargeable to tax either as capital gain/loss or as business profit/loss depending on case to case. Currently there is no tax on the long term capital gains, ie, if the shares are held for a period of more than one year. However for short term capital gains, where the shares are held for a period of less than one year by an individual, the tax rate is 15.45%.
In the event that the profit / loss is treated as business income/loss, the taxation would be 40% in the normal course for a foreign company. For individuals the tax rate will be according to the applicable tax slab.
For those cases where the benefit of DTAA can be availed of, the taxation would differ and depend on the merits of each case. One need to look closely on all such cases before arriving on any conclusion.
The QFI must keep a track of all such transaction, and file annual tax returns.
Investment opportunities for Qualified Foreign investors (QFIs)
1.. India is a prominent emerging market. A QFI can encash the opportunity of becoming the part of Indian economic growth.
2.. A QFI can directly invest in Indian market with ease.
3.. India GDP growth is higher than many other countries including USA, UK, Japan. Thus India and Indian stocks offer some very good high yielding stocks and provides an opportunity to invest in some of the finest global companies directly.
4.. India offer better returns on the debt products as compared to many other countries.
5.. If units in equity oriented mutual funds or shares in listed companies are held for more than a year, currently there is no tax on the income (subject to STT being paid).