1. Structure of Offshore Funds
An offshore fund could be a corporation, a unit trust or a limited partnership with the authority abroad. Investments will usually be in the form of units, shares, interests, or partnerships.
- a custodian
- a fund manager
- an administrator
- a prime broker
All these functionaries must be licensed under relevant legislation or regulation.
2. Challenges of Offshore Funds in India
International investment influx to India is largely amassed and managed by offshore authorities. This is because RBI and SEBI guidelines do not encourage fund managers who are based in India to manage offshore mutual funds. Consequentially, many offshore funds that target Indian investors used to make do with asset managers who moved to these offshore sites. There is a strong case for shifting offshore fund activities to uplift our mutual fund sector at home.
3. Solutions recommended by Experts
- Permit fund houses to manage offshore funds from India without levying tax on them as an Indian entity
- Allow direct investment by overseas investors in offshore mutual funds established here
4. Recent remedies and results
The Section 9A of the Income Tax Act, amended in the 2015 Finance Bill, attempted to remedy the situation to some extent.
It clarified that the revenue from an ‘suitable’ offshore fund will be exempted from tax in India if being handled by a fund manager based in India. This alleviated qualms about possibilities of double taxation. However, this too was restrictive in other manners – like the 10% limit imposed on one investor’s share.
Generally SEBI-listed foreign portfolio investors (FPIs) already comply with broad-based requisites of being diversified when it comes to investor participation. So, it should pass the eligibility criteria by default.
With these roadblocks, one recommended solution was to get overseas investors to directly invest in offshore funds registered here. RBI approved this in November 2015. Now international investors can invest in AIFs and REITs. In the 2016 Finance Bill, the taxation rules were made simpler and transparent.
5. Advantages of Offshore Funds
- Offshore mutual funds can give India further sectoral diversification
- Investors enjoy direct access and exposure to the international brands and businesses
- The strengths of 2 countries can join forces in terms of industrial innovation and quality. If Japan is the leader in electrical goods, India has world class IT services to offer
- Since offshore funds are generally established in countries that offer tax-efficiency to investors abroad, they get some tax respite
- They are always started in offshore jurisdictions with less investment rules, the overall asset management costs would also be less
- For tax purposes, offshore funds come under debt. So, they will levy taxes on your fund just like a fixed income fund
6. Disadvantages of Offshore Funds
- Remember to choose a long-term investment horizon to earn inflation-beating returns
- The price, rates and market fluctuations, policies, tax laws and other developments in both the countries can impact your returns
- You need to be vigilant of risks in the home country and offshore location
- Negative movement of currency value can counter even high gains
7. Things to know before investing in Offshore Funds
- Research on the economic and political conditions of the country in which your chosen fund house is planning to invest your money
- Start small and allocate smaller portion in the beginning
- Choose those funds that give you high exposure to global opportunities than being country-specific
- You must only invest one fund from an emerging market in a developed market, and not another emerging one
- Select funds known for being financially strong and transparent in their transactions