Customer Care No.

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SEBI to enable Portfolio

Managers to act as Eligible
Fund Managers
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Introduction
1.0Following the insertion of Section 9A in the
Income-tax Act, 1961 ('Act, 1961') (popularly
known as "Safe Harbour Norms"), SEBI has
hailed to foreign fund management activity in
the country and has come up with a
consultation paper seeking comments from
public for the amendments to the SEBI (Portfolio
Managers) Regulations, 1993 wherein it is
proposed that an existing or new SEBI
registered Portfolio Manager maybe permitted
to act as Eligible Fund Manager ("EFM") to
manage Eligible Investment Funds ("EIFs").

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Amendment to clause (b) of section 9A
2.0The said amendment came in the backdrop of the amendment to clause (b) of Section 9A of
the Finance Act, 2016 where the scope of the tax relief of funds is widened by including the
words"is established or incorporated or registered in a country or a specified territory
notified by Central Government in this behalf"which until now was limited to the
countries with which India had entered into Double Tax Avoidance Agreement (DTAA) under
Section 90 or the agreement between specified associations for double taxation relief under
Section 90A (1). After the amendment, the funds established or incorporated or registered in a
country or a specified territory notified by the Central Government shall also be treated as EIFs.
Status of offshore funds before amendment
3.0Before the amendment, in the case of offshore funds, under the existing provisions, the
presence of a fund manager in India may create sufficient nexus of the offshore fund with India
and may constitute a business connection in India, even though the fund manager may be an
independent person. Similarly, if the fund manager located in India undertakes fund
management activity in respect of investments outside India for an offshore fund, the profits
made by the fund from such investments may be liable to tax in India due to the location of
fund manager in India and attribution of such profits to the activity of the fund manager
undertaken on behalf of the offshore fund.
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Therefore, apart from taxation of income received by the fund manager as fees for fund management
activity, income of offshore fund from investments made in countries outside India may also get taxed in
India due to such fund management activity undertaken in, and from, India constituting a business
connection. Further, presence of the fund manager under certain circumstances may lead to the offshore
fund being held to be resident in India on the basis of itscontrol and managementbeing in India. As
there are a large number of fund managers who are of Indian origin and managing the investment of
offshore funds in various countries, are not locating in India due to the above tax consequence in respect
of income from the investments of offshore funds made in other jurisdictions.
Luring of fund managers to relocate to India
4.0Therefore, to lure offshore fund managers to relocate to India, the permanent establishment norms
have been modified to the effect thatmere presence of a fund manager in India would not
constitute Permanent Establishment (PE)of the offshore funds resulting in adverse tax
consequences. Clause (k) of sub-section (3) of section 9A has also been modified to exclude that the
eligible investment fund shall not carry on or control and manage, directly or indirectly, any business from
India. Sub-section 6 provides that any income deemed to accrue or arise in India out of total income of
EIFs shall be liable to tax, irrespective of whether the activity of the eligible fund manager constituted the
business connection in India or not. TDS provisions u/s 195 & taxation of dividend, capital gains, interest
u/s 115A & 115AB of the Act shall continue to apply. However, the requirement to furnish PAN by the EIFs
u/s 206AA of the Act is not applicable. Further, sub-section 7 of section 9A states that total income of the
eligible fund manager shall continue to be taxable as per the normal provisions of the Act.

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Further, section 9A of the Act, 1961,inter alia, provides that fund management activity carried
out through an EFM located in India acting on behalf of an EIF, established or incorporated or
registered outside India, which collects funds from its members for investing it for their
benefitsshall not constitute business connection in India,subject to the fund and the fund
manager meeting certain specified conditions mentioned under the section.
The Income-tax (5th Amendement) Rule, 2016
5.0The Income-tax (5th Amendment) Rule, 2016 was issued on March 15, 2016 providing
guidelines for the application of Section 9A.
Proposed Aendment to SEBI (Portfolio Managers), Regulations, 1993
6.0In the backdrop of the notification on Safe Harbour norms, SEBI has had a series of
interactions with various stakeholders. During such meetings to discuss the enabling framework
for registration of EFMs, it was observed that advisory activity being permitted under PMS
Regulations; stakeholders mostly expressed interest to be registered only under PMS
Regulations. The participants also observed that certain provisions mentioned in PMS
Regulations may not be feasible for portfolio managers pertaining to their fund management
activities for EIFs.
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