New Delhi, July 2 -- Alternative investment funds and other entities operating out of GIFT City in Gujarat will no longer have to report their foreign asset holdings or foreign investments received to the Reserve Bank of India.
Instead, the GIFT City funds will have to submit their foreign liabilities and assets (FLA) returns with the International Financial Services Centre Authority (IFSCA), which oversees the financial hub.
The IFSCA said in a press release that the central bank has updated its frequently asked questions (FAQs) on filing FLA returns and revised the answers to some of the questions related to the matter.
This comes as a relief to the fund industry that had raised concerns a few months ago when the central bank had asked all entities, including funds, registered with the IFSCA to file its FLA returns with the RBI.
The funds had approached the finance ministry asking for regulatory clarity. Meanwhile, these funds were being approached by other international financial centres offering better terms. In May, the IFSCA issued a circular pausing this instruction from the RBI.
In the latest directive, the funds have been asked to file the FLA returns but based on the instructions given by the IFSCA, the authority said in the press release.
According to regulatory officials VCCircle spoke with, this means that the funds will still have to file the returns but the format and details to be filed will be determined by the IFSCA after discussions with the RBI.
In answer to Question 43, on whether an entity regulated by the IFSCA has to file the FLA returns for the financial year, the FAQ said: "Yes. Such entities are advised to follow the relevant instructions issued by IFSCA for submission of FLA return. These entities are not required to file the FLA return with RBI."
In answer to Question 44, on whether foreign entities' subsidiaries that are established in the IFSC will need to file an FLA return, the FAQ answers in the affirmative but adds that this filing does not have to be done with the RBI.
"Submission of FLA return by such subsidiary will be required and such entities are advised to follow the relevant instructions issued by IFSCA for submission of FLA return. These entities are not required to file the FLA return with RBI," it said.
Domestic or foreign?
Separately, there is an interesting divergence in the way investment in GIFT city entities will be treated, depending on whether the investment was done by a foreign entity or an Indian entity.
While the first will be treated as foreign direct investment (FDI) in an Indian entity, the second will be treated as a foreign investment by an Indian entity. That is, GIFT City may be treated as a domestic jurisdiction or a foreign jurisdiction when recording these investments.
A regulatory official, who didn't wish to be named, said that this was being done to ensure that the same investment is not being counted twice.
Under Question 44, on whether a foreign entity's subsidiary in GIFT City will be treated as a foreign direct investment, the circular says, "Yes, investment in [a] subsidiary in IFSC will be classified as inward foreign direct investment for the compilation of balance of payment and other external sector statistics."
Under Question 45, on whether investment by an Indian entity in a GIFT City entity or any other IFSC-based entity will be treated as foreign investment by the Indian entity, it illustrates with an example of an Indian entity (Entity A) investing in a GIFT City entity (Entity B).
It says: "Since Entity B is located in the IFSC, the investment by Entity A (Indian entity) is an investment in a person resident outside India (for the limited purpose of FEMA, 1999)."
"Entity A, itself being a person resident in India under FEMA, shall continue to comply with applicable FEMA reporting obligations, including FLA reporting in respect of its outbound investment in Entity B," it added.
FEMA is short for India's Foreign Exchange Management Act.
Published by HT Digital Content Services with permission from VC Circle.