Offshore Funds : Structure, Challenges, Remedies, Advantages, Disadvantages, Things to know

Offshore funds invest in overseas and multinational companies. Mostly NRI investors invest in these funds. Like any other mutal funds, offshore funds are also under the purview of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Also, the fund houses must comply with guidelines of the home country where the company they have invested is registered.

Offshore mutual funds

A foreign 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. The force behind an offshore fund entails a custodian, a fund manager, an administrator and a prime broker. SEBI mandates all these functionaries to hold relevant licenses and qualifications.

Challenges of Offshore Funds in India

Overseas authorities mostly accumulate and manage international investment influx into the Indian markets. This is because RBI and SEBI guidelines do not encourage fund managers based in India to manage foreign mutual funds. Consequentially, many offshore funds that target Indian investors earlier employed asset managers, who moved to these offshore sites.

There is a strong case for shifting the activities of the offshore funds to uplift our mutual fund sector at home. Therefore, to counter the challenges mentioned above, experts have suggested two solutions. One, permit fund houses to manage offshore funds from India without levying tax on them as an Indian entity. Two, allow direct investment by overseas investors in foreign mutual funds established in India. RBI approved this in November 2015. Now, international investors can invest in the form of AIFs and Real Estate Investment Trusts (REITs). In the 2016 Finance Bill, the taxation rules were also made more straightforward and transparent.

Recent remedies and results

Section 9A of the Income Tax Act, 1961, which was amended in the 2015 Finance Bill, attempted to ease the situation to some extent. It clarified that revenue from some offshore funds could claim tax exemption if a fund manager is based out of India is handling them. This cleared doubts over the possibilities of double taxation. However, this too was restrictive in some ways. SEBI-listed foreign portfolio investors (FPIs) already comply with broad-based requisites of diversification when it comes to the investors’ participation. Therefore, it should pass the eligibility criteria by default.

Advantages of Offshore Funds

• Offshore mutual funds can give India further sectoral diversification
• Investors enjoy direct access and exposure to international brands and businesses
• The strengths of the two countries can join forces in terms of industrial innovation and quality. For instance, 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 provide tax-efficiency to investors abroad, they get some tax relief
• An AMC starts them in overseas jurisdictions with fewer investment rules, and the overall asset management costs would also be less
• As per mutual fund tax rules, foreign funds come under the debt category

Disadvantages of Offshore Fund

• Remember to have a long-term investment horizon to earn inflation-beating returns
• The rates, market fluctuations, policies, tax laws and other developments in both countries can impact your returns
• It would be best if you were vigilant of risks in the home country and offshore location
• Negative movement of currency value can affect the return on investment

Things to know before investing

• Analyse the economic and political conditions of the country in which your chosen fund house is planning to invest
• Start small and allocate a lower portion in the beginning
• Choose those funds that give you high exposure to global opportunities than being country-specific
• Select funds that are known for being financially stable and transparent in their transactions

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