In order to instil confidence in the global investors and encourage them to retain their interest in the Indian stock market, the government should come out with a clarification that the General Anti-Avoidance Rules (GAAR) would not apply to a Foreign Portfolio Investor (FPI) on redemption and maturity of the Participatory Notes, the ASSOCHAM has submitted it to the Finance Ministry.
In a detailed Memorandum to the ministry, the chamber has said, it is common for investors to gain economic exposure in Indian securities through P-Notes. On redemption/maturity of P-notes, the underlying Indian security referencing the P-note may or may not be sold by the FPI. While the relevant rules governing application of GAAR offer protection to P-note investors. It remains unclear whether GAAR provisions could apply to an FPI on account of a P-note arrangement.
“We believe that the existence of a P-note arrangement or status of underlying Indian position referencing P-notes or passing of economic benefits to P-note holders should not be the criteria for evaluating commercial substance at the FPI level. It should be clarified that GAAR provisions will not apply to an FPI on redemption/ maturity of P-Notes,” the ASSOCHAM memorandum stated.
The chamber Secretary General Mr D S Rawat said at the present juncture, the global equity investors have been showing quite a bit of interest in the Indian market. “We would like this interest to stay and need to do all that is required to sustain their confidence”.
The memorandum said FPI is set-up in a jurisdiction based on different criteria which include ease of incorporation of a company, ease of operation and lower compliance costs. Other factors weighing in favour of setting up of FPI are stability of political and social system, availability of bilateral investment agreements, developed banking and financial infrastructure and strength of the regulator.
Further, the memorandum urged upon the government to clarify that the GAAR provisions would not be applicable to any securities issued by way of bonus or any subsequent bonus issuances so long as the original securities are acquired prior to April 1, 2017.
Bonus shares are received by virtue of original investments. No fresh investment is required for acquiring bonus shares. The total value of investments remains the same even after the issue of bonus shares. Only the number of shares held increases. Further, upon issue of bonus shares, there is a proportionate reduction in the value of original shares.
It should also be clarified that GAAR provisions will not apply to shares issued post 31 March, 2017 on conversion of CCPS, where the CCPS were acquired prior to 01 April, 2017. This is because no fresh investments are made on conversion of CCPS into equity shares. There is merely a change in the form of investments.