Non-resident investment funds usually have their fund managers located offshore, to not attract Indian tax liability. For encouraging offshore fund managers to relocate to India, Section 9A was inserted into the Income Tax Act, 1961, which provides a safe harbour to non-resident investment funds from being regarded as tax residents in India, merely by virtue of their fund managers being located in India. It is available to “eligible investment funds” and “eligible fund manager”, which satisfy the eligibility conditions specified in the section. An eligible fund manager needs to be registered with SEBI as a portfolio manager or investment adviser. Accordingly, SEBI recently issued a consultation paper proposing certain enabling provisions by amending the SEBI (Portfolio Manager) Regulations, 1993.

A separate chapter governing eligible fund managers in relation to their activities regarding eligible investment funds has been proposed. Apart from requiring foreign based fund managers to register if they seek to relocate to India, existing SEBI-registered fund managers may function as eligible fund managers. Eligible fund managers have to comply with the code of conduct and other norms, including segregation and reporting requirements. However, eligible fund managers are exempt from several provisions of the Portfolio Manager Regulations, such as, the obligation to act in a fiduciary capacity and the prohibition against speculative trading. These provisions primarily deal with relations between the fund and the manager, which may be governed by the laws of the applicable foreign jurisdiction or by business considerations under their mutual arrangements.

Section 9A is already making the funds jump through hoops merely to be eligible and the obligations on fund managers for registering with SEBI will only act as an additional barrier. The Portfolio Manager Regulations is geared towards investor protection and making its provisions applicable to eligible fund managers may be counter intuitive, as their clients would be sophisticated non-resident investment funds which need to have a minimum corpus of INR 1 billion. A regime similar to the less onerous provisions governing fund managers of Alternative Investment Funds would be better suited to achieving the desired objective.