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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.
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.
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.
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.