Pursuant to insertion of Section 9A in the Income Tax Act, 1961 (IT Act), a safe harbor provision was provided to the non-resident investment funds from being regarded as tax residents in India even if their fund managers are located in India. It is available to “eligible investment funds” (EIFs) and “eligible fund manager” (EFMs) satisfaction of onerous eligibility conditions, including the compulsory registration requirement for EFMs with SEBI. SEBI had issued a consultation paper recently proposing an amendment to Portfolio Managers regulations in order to create an enabling provision. The proposed amendments have now been approved by SEBI in its board meeting held on September 23, 2016.

As of now SEBI has only issued a press release therefore, the particulars remain unclear. However, it is clear that the PMS regulations will contain a new chapter exclusively dealing with activities of portfolio managers as EFMs. The chapter is set to have procedures for existing SEBI registered portfolio managers as well as foreign based fund managers desirous of relocating to India to function as EFMs. Accordingly, such EFMs will be required to segregate funds and securities, make ‘material’ disclosures to the EIFs and make quarterly filings with SEBI. Further, minimum investment requirements, specific details of contents of disclosures being made to the EIFs, qualifications of principal officials of the fund manager, etc. are to be modified for these entities.

The provisions can be better gauged once the specifics are made clear. However, based on the information available, it seems that SEBI is only adding additional barriers to the existing ones under the IT Act. The PMS regulations are geared towards investor protection and making the provisions therein applicable to EFMs seems counter intuitive as their clients will be sophisticated non-resident investment funds which are required to have a minimum corpus of INR 1 billion. A less onerous regime similar to the provisions governing AIF fund managers would be better suited to achieve the desired objective.