With the current account deficit at a record low, the FM has rightly concentrated on sustaining the portfolio inflows from overseas. But maintaining the stance that the last budget adopted on Tax Residency Certificate issued by Mauritian government has cast a cloud on the sustainability of Foreign Institutional Investment flows in to the country.
Single-window for registering FIIs
There are currently three categories that foreign institutional investors can register under - as FIIs, sub-accounts and qualified foreign investors. The procedures for registering these various categories are different.
There is a need to simplify the process of FII registration in to India. Despite Indian stock market receiving net inflows of around $24 billion in 2012, number of FIIs registered declined from 1767 to 1759 last year. FII sub-accounts registered a small increase from 6278 to 6359. Hardly any QFIs have expressed interest in Indian equities.
The budget now proposes that designated depository participants can register the different classes of investors after applying uniform know-your-client procedures. A risk-weighted approach to registering FIIs is suggested that will mean that investors such as mutual funds, sovereign wealth funds or foreign banks will have lower risk weights and can register with greater ease.
The FM has now made it easier to differentiate foreign direct investment from foreign institutional investment. It is now proposed that if an investor has a stake of over 10 per cent in any company, it will be classified as FDI. Further details are awaited on this to understand the implication of this proposal.
Allowing foreign investors to play in exchange traded foreign currency derivatives will help these investors hedge their currency risk. It will also impart liquidity in the segment. This will in turn help small importers and exporters who hedge their international exposure with these instruments. This has become more significant against the backdrop of increased volatility in the rupee.
The General Anti Avoidance Rules, GAAR, introduced in the last Budget has now been made binding in Union Budget of 2013. These amendments will take effect from April 2016. Stock market participants are, however, worried about the implications of these measures on entities investing in to Indian market through Mauritius.
In the Union Budget of 2012, it was laid down that the tax-residency certificate (TRC) issued by the Mauritian government was necessary but not sufficient for claiming exemption under the double tax avoidance agreement (DTAA) signed between India and Mauritius. This Union Budget appears to uphold this view.
This implies that tax authorities can now question companies based in Mauritius even if they possess TRC. While this is a good move for curbing round-tripping, market participants will worry about inflow of FII money in to India.
It may be recalled that there was sharp decline in stock prices post Union Budget 2012 due to the inclusion of GAAR. Stock prices revived in 2012 only after the imposition of GAAR was postponed by two years.