Govt paves way for IFSC units to issue P-notes to foreign investors

With an aim to boost business activities in the international financial hub GIFT IFSC, the government in the Budget paved the way for IFSC units to issue participatory notes or offshore derivative instruments to foreign investors.

Participatory notes (P-notes) are issued by registered foreign Portfolio Investors (FPIs) to overseas investors who wish to be part of the Indian stock market without registering themselves directly. They, however, need to go through a due diligence process.

Till December 2022, the value of P-note investments in Indian markets -- equity, debt, and hybrid securities -- was at Rs 96,292 crore, data with the Securities and Exchange Board of India (Sebi) showed.

Finance Minister Nirmala Sitharaman in her Budget speech on Wednesday recognised "offshore derivative instruments (ODIs) as valid contracts" in order to enhance business activities in the Gujarat International Finance Tec-City (GIFT City).

In line with the Budget's announcement, it is likely that necessary changes will be made to the IFSC regulations to allow Indian Financial Services Centre (IFSC) units to issue P-notes or ODIs to foreign investors, Rajesh Gandhi, Partner, Deloitte India, said.

There is already some interest in enabling IFSC funds to issue P-notes and it will be interesting to see whether the benefit will be restricted only to offshore banking units of foreign banks or extended to other entities like alternative investment funds (AIFs) set up in IFSC as well, he added.

Sunil Gidwani, Partner - Financial Services , Nangia Andersen LLP, said the regulatory changes in securities laws and guidelines on whether other funds in GIFT registered as FPIs can issue P-notes or not are yet to be issued by the IFSCA (International Financial Services Centres Authority).

According to him, the Budget proposal is confined only to taxation of P-note holders where the issuer is an offshore banking unit. While the FPI were taxed on the gains made from Indian stocks, offshore P-note holders were not taxed.

Earlier, P-notes were issued by FPIs from countries like Mauritius and Singapore.

The current tax law already provides for tax exemption for transfer of ODIs or P-notes issued by an IFSC issuer to a foreign investor.

The Budget proposal now extends the tax exemption to any distributions made by the IFSC P-note issuer -- offshore bank to the investor. This will ensure that there is no double taxation on the same income, Deloitte India's Gandhi said.