AIFs can now issue offshore derivative instruments from Gift IFSC 

The market for offshore derivative instruments (ODIs) at Gift IFSC may get a fillip with non-bank entities allowed to issue such instruments.

• Also read:RBI breather for lenders on AIF investments

Such entities have to be registered with the Securities and Exchange Board of India as foreign portfolio investors (FPIs) and can issue ODIs with Indian securities as underlying at Gift-IFSC, a circular on May 2 said. Until now, only foreign banks could issue such ODIs.

The relaxation will now allow alternative investment funds to issue ODIs. Over a 100 AIFs are registered at Gift IFSC.

Sunil Gidwani , Partner, Nangia Andersen, said: “In addition to offshore bank units investing in securities in Indian stock exchanges, other entities that invest in listed markets are mainly the funds in IFSC registered as FPIs. There was a spike in overall ODI issuance as a percentage of aggregate investments by FPIs after OBIs were allowed to issue such instruments last year. The new relaxation will further boost the ODI market.”

The Budget 2023 had amended Section 18A of Securities Contract Act, 1956, to provide that ODI contracts issued by FPIs in GIFT IFSC and regulated by the IFSCA will be valid and legal contracts.

At present, tax exemption is provided to non-residents for income earned from ODIs entered into with IFSC banks. On similar lines, exemption will need to be granted in the context of ODIs issued by IFSC AIFs.

“This will provide the much-needed certainty under domestic tax laws as against relying on treaty benefits (ODI structures done outside India) that are subject to onerous conditions,” said Jaiman Patel, Partner, EY India.

For instance, those writing an ODI from UK have to rely on the UK treaty to take the tax benefit on interest income and dividend. Tax authorities, at a later stage, can potentially deny the tax benefit on the pretext that the investor is not the beneficial owner. Coming through Gift IFSC, however, provides an added layer of certainty as treaty-abuse and indirect transfer provisions do not apply and there are no capital gains to he paid on the debt investment.

• Also read:Actual AIF investments just two-thirds of total commitment 

Standard Chartered Bank and HSBC have issued ODIs through the FPI route from Gift City.

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