India: Investment Funds – 2016 In Perspective, Budget Expectations 2017

Last Updated: 10 January 2017
Article by Siddharth Shah, Bijal Ajinkya, Divaspati Singh and Abhilasha Mondal

Most Read Contributor in India, August 2019


In an audio-conference specially dedicated to funds and fund managers titled "Investment Funds: 2016 in Perspective, Budget Expectations 2017", we shall discuss several regulatory changes in 2016 and their impact on the business for the fund managers and the fund industry in general leading into what is on the industry wish list for the Budget 2017.

Join us for the audio-conference hosted by us to provide insight into these important developments and their impact on your business in an interactive session.


Siddharth Shah (Partner, Khaitan & Co)

Bijal Ajinkya (Partner, Khaitan & Co)

Local Time:*

Wednesday, 11 January 2017:
19:00 – 20:00 (IST) 08:30 – 09:30 (EST) 13:30  – 14:30 PM (GMT)


Thursday, 12 January 2017:
13:30 – 14:30
16:00 – 17:00
17:00 -18:00
19:00 – 20:00

* Please note that participants (regardless of their jurisdiction) are free to join the audio-conference at any of the above two timeslots, as per their convenience.

You may register for the audio-conference on:

  • Wednesday 11 January at this link; or
  • Thursday 12 January at this link.

Dial In:

USA 13233868721
UK 442034785524
Singapore 6531575746
Hong Kong 85230186877
Japan 81345899421
India (& Rest of World) +91 22 3960 0881

The foreign investment landscape in India has witnessed a bout of regulatory activity under the present administration. While the Indian Government has introduced relaxations in the foreign investment regulations and recognised the need to ensure a non-adversarial tax regime, it has also struggled to strike an appropriate balance between its resolve of popularising the "Make-in-India" campaign on one hand, and protecting its revenue base and preventing tax seepages on the other hand.

Some of the key changes relevant for the funds industry which were announced in 2016, and some of the budget expectations which will form part of the audio-conference are summarised below for ease of reference:

1. Liberalisation of Foreign Investment Regime for Funds and Fund Managers

In February 2016, the Reserve Bank of India (RBI) carried out necessary changes to the Foreign Exchange Management (Transfer and Issue of Securities to Persons Resident Outside India) Regulations 2000 (TISPRO) that in effect permitted foreign investments, under the automatic route, in investment vehicles such as alternative investments funds (AIFs), infrastructure investment trusts, real estate investment trusts and other such regulated entities. The notification also permitted non-resident Indians and registered foreign investors to invest in such investment vehicles under the automatic route.

For a more detailed analysis of the above notification and its impacts, kindly refer to our Ergo – "RBI Permits Foreign Investments in REITs, InvITs and Alternative Investment Funds".

Thereafter, in September 2016, the RBI released another notification (Notification) amending the TISPRO to relax the regime governing foreign investments in the 'non-banking financial services' sector. The Notification sought to: (i) open up the sub-sectors of 'non-banking financial services' for 100% foreign investment participation (under the automatic route provided they are regulated by a financial sector regulator or otherwise under the approval route); and (ii) align the capitalisation norms linked with foreign ownership with those prescribed by the relevant regulators by removing additional capitalisation requirements (if any) under the Foreign Direct Investment Policy (FDI Policy).

The extant framework of FDI Policy posed several challenges for fund managers, such as: (i) high capitalisation norms in case of foreign ownership in asset management company; (ii) regulatory ambiguity regarding approval requirements for asset managers investing their own capital, as a sponsor or otherwise; and (iii) additional capitalisation requirements in case foreign owned asset management entities created downstream joint ventures or subsidiaries. The Notification has eased the above issues faced by entities operating in the 'non-banking financial services' sector.

The Notification provides a much-needed boost to the financial services sector, particularly for domestic fund management and advisory activities which could now access foreign capital under a relaxed regulatory regime, and further the Government's intent to encourage global fund managers to operate out of India.

For a more detailed analysis of the Notification and its impacts, kindly refer to our Ergo – "FDI in Non-Banking Finance Companies: Relaxation and its Impact for Fund Managers".

2. Clarifications to Indirect Transfer Provisions

The indirect transfer provisions were introduced by the Finance Act 2012, with the intention to negate the effect of the judgment of the Hon'ble Supreme Court in the Vodafone case (Vodafone International Holdings BV v. Union of India ([2012] 341 ITR 1)). These provisions state that gains earned by a non-resident on the transfer of shares or interest in a foreign entity that derives substantial value from assets situated in India, will be liable to taxation in India. A share or interest is deemed to derive substantial value from assets situated in India, if on the specified date, the value of such assets:

  1. exceeds INR 100 million; and
  2. represents at least 50% of the value of all assets owned by the foreign entity.

These provisions are not attracted in case:

  1. the transferor is a person who does not have rights of managements or control in the foreign entity or the entity holding the Indian assets, and does not hold more than 5% of the voting power or share capital or interest in the entity holding Indian assets; and
  2. transfer of shares of a foreign company (that derives substantial value from assets situated in India) takes place as a result of amalgamation or demerger of the foreign company, subject to the fulfilment of certain conditions.

In December 2016, the Central Board of Direct Taxes released a circular (Circular) providing clarifications on the scope of applicability of the indirect transfer provisions, to address some of the queries raised by stakeholders. These clarifications primarily pertained to the tax treatment of fund structures such as: (i) funds with FPI registration undertaking investment in Indian securities; (ii) master funds and feeder funds; (iii) nominees or distributors; (iv) India focused sub-funds; (v) offshore listed FPIs, etc.

Khaitan Comment

The quintessential spirit of the Circular was that (except in the case of investments via India focused sub-funds where the indirect transfer provisions had blanket applicability) the indirect transfer provisions will be applicable in most of these scenarios unless the exceptions specified in (i) and (ii) above are met. Most large private equity and hedge fund structures will have a few large investors, and such investors may not qualify for the exemptions. The implications of the Circular gave rise to fears of double taxation; once at the level of the fund, and another at the level of the investor at the point of redemption of his units in the fund; heightening the already prevalent concerns of ambiguity surrounding the regulatory framework around investments in India. In fact, unless quickly rectified by the Government, this adversarial indirect transfer regime is likely to dampen investor appetite for long term capital commitment.

For a more detailed analysis of the Circular and its impacts, kindly refer to our Ergo – "Indirect Transfers in Fund Structures – Government Reiterates Law, does not Alleviate Concerns".

3. Treaty Renegotiations

In May 2016, a watershed moment in India's struggle with tax avoidance, the Government renegotiated the India – Mauritius Double Taxation Avoidance Agreement (Renegotiated India – Mauritius Treaty), and prospectively withdrew the beneficial capital gains tax exemption, in respect of acquisition of shares of an Indian company, that was provided under the extant treaty. The protocol released by the Government (Mauritius Protocol) provides a transition period to cushion the blow, whereby shares of an Indian company, acquired between 1 April 2017 and 31 March 2019 will be taxable in India at 50% of the actual taxable rate, provided the transferor satisfied certain conditions (also known as the 'Limitation of Benefits' clause or LOB). All such acquisitions arising after such transition period, i.e. on or after 1 April 2019, will be taxable in India at the rate provided under the Income Tax Act 1961. Secondly, the Mauritius Protocol also introduced withholding tax on interest income earned in India, whereby interest arising in India to Mauritian resident banks, in respect of debt or loans made after 31 March 2017, will now be subject to withholding tax at the rate of 7.5%. Thirdly, the Mauritius Protocol also provides for the updating of the provisions on information exchange as per international standards.

Subsequently, in November 2016, India and Cyprus signed a protocol (Cyprus Protocol) to amend their existing tax treaty. Unsurprisingly, the tax treatment under the treaty switched from residence based taxation to source base taxation, which in effect, results in the withdrawal of the beneficial capital gains exemptions clauses in respect of income earned in India. Gains from transfers of shares of Indian companies, where such investments are made on or after 1 April 2017 would become taxable in India. The Cyprus Protocol also provides a wider definition to the term 'permanent establishment' and has reduced the rate of tax on royalties from the existing 15% down to 10%. Further, it too provides for the updating of the provisions on information exchange as per international standards.

Interestingly, the Renegotiated India - Mauritius Treaty sealed the fate of the capital gains tax exemption provision under the India – Singapore Tax Treaty as well, as the latter specifically provided that the residence based taxation of capital gains thereunder would remain in force for only as long as the India – Mauritius Double Taxation Avoidance Agreement provided capital gains exemption in the source state. Accordingly, in December 2016, the Government issued a protocol (Singapore Protocol) amending the India – Singapore Tax Treaty, whereby capital gains derived in India from the sale of shares of an Indian company, by a Singapore resident, would become taxable in India. The Protocol provides that all investments made in India on or before 31 March 2017 will be subject to the LOB.  The Singapore Protocol also mirrors the two year transition period as provided under the Renegotiated India - Mauritius Treaty.  Further, the Singapore Protocol also provides for 'Mutual Agreement Procedure' mechanism to facilitate relief from double taxation in transfer pricing cases, and the application of domestic law provisions with respect to tax avoidance and tax evasion. No change is contemplated to the existing tax rates on interest incomes.

Khaitan Comment

With this move of tightening its tax treaties by withdrawing popular tax exemptions, the Indian Government aims to provide a level playing to all jurisdictions and cut down the possibilities of tax arbitrage by setting up investment vehicles in tax friendly jurisdictions for investments into India. Structuring of investments vehicles offshore will now wholly depend on the merits, substance and administrative convenience offered by the offshore regulatory framework of the relevant jurisdictions.

For a more detailed analysis of the treaty renegotiations and its impacts, kindly refer to our Ergos – "A New Year, A New Innings: After Mauritius & Cyprus, Singapore Lose Capital Gains Tax Exemption", "Mauritius No Longer a 'Sweet Spot'?", "India – Mauritius Tax Treaty 2.0 – Equity Investments Out, Debt Investments In", "Cyprus Loses the 'Non-Cooperative Jurisdiction' Tag", and "India makes Post-Facto Christmas Gift to Cyprus".

4. AIPAC Report and Budget Expectations

Wrapping up in December 2016, the Alternative Investment Policy Advisory Committee, set up by SEBI, released its reports listing out recommendations for the immediate improvement and long term development of the alternative investment funds sector in India. The report focused on the recommended regulatory reforms, and the crucial recommendations on the taxation front resonated closely with the stakeholder expectations and the upcoming budget projections, including: (i) removal of withholding tax on exempt incomes and exempt investors; (ii) relaxation of the safe harbour norms for onshore fund managers; (iii) clarification that indirect transfer provisions were not applicable to offshore investment vehicles; (iv) permitting set-off of losses in the hands of the investors; (v) allowing pass through status to Category III AIFs; (vi) exempting foreign investors from the requirements of obtaining PAN and income tax filings; (vii) introducing securities transaction tax to replace existing taxation model of AIFs, etc.

Khaitan Comment

The Government has generally been showing a very positive intent towards liberalisation and rationalisation of the regime for foreign investors. While it has clearly recognised alternative investment funds and investors as strategically important stakeholders for the country, and has introduced some path breaking changes during 2016, what remains to be seen is, having been armed with bolstered revenue courtesy the mainstreaming of the parallel cash economy thanks to the demonetisation drive combined with black money amnesty schemes, how prepared is the Government to be the 'Santa' for the fund industry fulfilling the wishes of the industry.

We intend to discuss in more detail some of the enlisted changes their impact on the fund industry as well as the rationale behind the budget expectations our audio-conference - "Investment Funds: 2016 in Perspective, Budget Expectations 2017", as mentioned above.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions