The clarifications on GAAR & P-Notes bring cheer for FPIs

Foreign investors have something to smile about…

In the last couple of weeks there were a couple of clarifications coming from the government which could bring cheer to FPIs. The clarifications on GAAR and P-Notes came in at a time when the global markets were roiled by the post BREXIT uncertainty. What are these FPI related clarifications all about?

Certainty over GAAR…

The General Anti Avoidance Rules (GAAR) was first pushed through by then finance minister, Pranab Mukherjee, in 2012. The idea was to measure transactions based on substance rather than on form. For example, FPIs will have to prove that there was a business case for them to have a trading office in Mauritius. Purely using the Mauritius route to avoid capital gains tax was not acceptable under the GAAR. While the GAAR was broadly in line with the global compliance best practices, there was a peculiar grey area in the GAAR announcements. Technically, GAAR was not prospective and therefore your previous year’s transactions would also be liable for higher taxation under GAAR. This created a unique problem for FPIs, who did not want any uncertainty over their past transactions. Now, the government has clarified that transactions prior to April 01, 2017 will not be subject to GAAR. This takes away a major area of uncertainty and also smoothens the way for implementation of GAAR next year.

4-year window on P-Notes…

The government has announced a window on holding of P-Notes which will be valid till December 2020. That means existing overseas derivative instruments (ODIs) that are currently open with P-Note holders can be held till December 2020 or the expiry of the existing contract, whichever is earlier. That does away with the uncertainty surrounding P-Notes that are currently open. The fear was that once GAAR is implemented, existing P-Notes that do not comply with the SEBI stipulations will have to be wound up. This would have created pressure on asset prices and returns on P-Notes. It has been clarified that such P-Notes can be held on till an outer date of December 2020, after which only P-Notes that adhere to new SEBI regulations will be permitted.

Issue of fresh P-Notes…

There was also concern that after the implementation of GAAR, fresh P-Notes may not be permitted. Now there is a clarification that P-Notes can be issued after the implementation of GAAR as long they abide by the new SEBI stipulations on P-Notes. This is good news for investors who prefer the simplicity of P-Notes to participate in Indian markets. In a way, the above 3 measures pave the way for smooth implementation of GAAR next year. It appears that putting off GAAR from here-on will not be necessary! ©

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