FPI norms delay: Sebi's big reform runs into tax hurdle

One of the Sebi's biggest reforms, the creation of Foreign Portfolio Investors, a new category of investors created by merging FIIs and QFIs, has hit a tax hurdle. CNBC-TV18's Sajeet Manghat reports, certain complicated taxation issues concerning FPIs, have got the revenue department in a bind.

It's been more than two months since Sebi announced the creation of Foreign Portfolio Investors, a new category of investors aimed at encouraging dollar inflows. But the market regulator is yet to come out with the final circular implementing the FPI regime. So what's causing the delay? 

CNBC-TV18 learns, Sebi has sought clarity from the Finance Ministry on the issue of taxability of all category of investors, before issuing a final circular

The FPI regime had categorised foreign investors into three categories based on their risk assessment. While category I is primarily for government and government related institutions and require the least KYC, category II investors consists of FIIS & AMCs and pension funds who are regulated and registered with regulators in their jurisdiction.

And finally, category III investors who largely consist of qualified foreign investors and un-regulated entities looking to invest in India.

Now, reports suggest, the revenue department has raised issues over extending tax benefits to category 3 investors as it is concerned over tax leakages through the FPI regime. Not just that.

CNBC-TV18 also learns, concerns had been raised regarding whether the FPI regime required amendments to the I-T Act or not. But that issue seems to have been resolved with the decision that no amendment is required as the government has the powers to change the definition of FIIs and who classifies as FIIs.

So, for now investors will be watching how quickly Sebi and the Finance Ministry can resolve the issues raised. Do remember, the board of Sebi had approved the FPI regime in early October, so all eyes now on whether the final regulations are released before the onset of the new year or not.

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