Evaluating credit platforms - Nishith Desai · Setting-up NBFC 26 Indian investee companies India...

Evaluating credit platforms

February 2019

PwC / NDA

Agenda

February 2019Evaluating Credit Platforms

2

Investment routes in India

Offshore credit funding –

Alternative structures

Offshore credit funds

Jurisdictional Analysis and

grappling with GAAR

Thank you

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2

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5

4

3

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49

57

PwC / NDA

Investment routes in India

Section 1

PwC / NDA

Key investment routes in India

4

Overview of foreign investment routes in India

FDI

Operating

entities

Investment

vehicle

• Company –

Equity

shares/

CCPS /

CCDs /

Warrants

• LLPs

FPI

• SRs

• Listed &

unlisted

NCDs/

bonds

Indian

CompanyP-Notes

FVCI

Indian

Company

• Equity

shares/

CCPS/

OCRPS/

NCPS/

CCDs/ OCDs/

NCDs/

Warrants

ECB

Foreign

Currency

Indian

Rupee

Denominate

d

• LIBOR +

450 bps

• Track I

and II

• Gsec + 450

(approx.

12%)

• Track III &

masala

bonds

• AIFs

• HFC /

NBFC / IDF

• ARCs

• REITs

• InvITs


PwC / NDA

FDI Route

5

FDI Co.

Company LLPNBFC /

HFC / IDF ARCs

• Permitted instruments: Equity shares /

CCPS / CCDs / Warrants

• Pricing guidelines & sectoral

restriction(s) applicable

• Options with assured IRR –

not permitted

• LLP to be engaged

in 100% automatic

route sector

• No FDI linked

performance

conditions

• Units of AIF / REIT / InvIT - permitted

under automatic route

• No pricing guidelines

AIFs REITs /

InviTs

India

Overseas

No separate registration under FDI route


PwC / NDA

FPI Route

6


Investee Company

FPI Co.

Investment

Investors

Capital

India

Instruments – SRs, SDIs; NCDs

(listed & unlisted)

Separate registration required with

SEBI – 8 to 10 weeks (approx.)

Non applicability of pricing guidelines /

coupon / sectoral restriction(s)

Debt limits – Headroom ?

End use restrictions for unlisted NCDs -

real estate business, land, capital markets

1

2

3

5

4

PwC / NDA

FPI NCDs

7

FPI NCD - Concentration norms

Minimum residual maturity:

reduced to 1 year

Single issue concentration

Single group concentrationConcentration norms –

SR investments exempt


Investee Company

FPI Co.

NCDs

Investors

Capital

India

*

*

*

01

50%

20%

20% group concentration limit – relaxation proposed by mid Feb‘19

PwC / NDA

FVCI route

8


Investee Company

(Infra)

FVCI

33.33% debt

Investors

Capital

India 66.67% Equity

Permitted sectors - 10 notified sectors -

Infra sector covered

Instruments Flexibility - Possible to invest

in OCDs / NCDs

PUT options permitted ?

66.67% equity linked instruments

No pricing guidelines applicable

1

2

3

5

4

PwC / NDA

Definition of Infrastructure

9

Category Sub-sectors

Transport and

Logistics

• Roads, bridges; Ports; Shipyards; Inland Waterways; Airport; Railway Track, tunnels, viaducts,

bridges, terminal infrastructure including stations and adjoining commercial infrastructure; Urban

Public Transport (except rolling stock in case of urban road transport); Logistics Infrastructure

Energy • Electricity Generation/Transmission/Distribution; Oil pipelines; Oil/Gas/Liquefied Natural Gas (LNG)

storage facility; Gas pipelines

Water and

Sanitation

• Solid Waste Management; Water supply pipelines; Water treatment plants; Sewage collection,

treatment and disposal system; Irrigation; Storm Water Drainage System; Slurry Pipelines

Communication • Telecom (fixed network); Telecom towers; Telecom & Telecom Services

Social and

Commercial

Infrastructure

• Education Institutions; Sports Infrastructure; Hospitals; Tourism infrastructure; Common

infrastructure for Industrial / other Parks with industrial activity, SEZs, tourism facilities and

agriculture markets; Post-harvest storage infrastructure for agriculture and horticultural produce;

Terminal markets; Soil-testing laboratories; Cold Chain; Affordable Housing


PwC / NDA

External Commercial Borrowings

10


• All FDI eligible

entities

• Port Trusts;

SEZ Units;

SIDBI; EXIM

Bank;

Registered

micro-finance

entities

Eligible

borrowers

• Resident

of FATF

or IOSCO

compliant

country (no

shareholding

requirements)

• Related parties

not restricted

for masala

bonds

Recognised

Lenders

• 1 year for Mfg.

companies (up

to USD 50 mn

per FY);

• 5 years for

ECB from

foreign equity

holder (for

specified

purposes)

• 3 years in all

other cases

Minimum

average maturiy

• Benchmark

rate + 450 bps

• Benchmark

rate:

• 6m LIBOR

for FC ECB

• Prevailing

yield of GoI

securities for

INR ECB

All-in-cost

ceiling

• USD 750

mn per financial

year - automatic

route

• Max ECB

Liability-Equity

Ratio 7:1

(foreign

equity holder).

for ECBs

>USD 5 mn)

Limits

PwC / NDA

End use of ECBs - Negative list

11


Impact on instruments viz. OCDs, NCDs, OCRPS, RPS under ECB route ??

• Investment in capital market02

• Equity Investment03

• Working capital purposes, general corporate purposes and repayment

of rupee loans; permitted from foreign equity holder

04

• On-lending to entities for the above activities05

• Real estate activities (as defined under the guidelines)01

PwC / NDA

Shortcomings of traditional investment routes

12

• Regulatory bottlenecks –

pricing, sectoral conditions;

• Tax leakage on repatriation

• Structuring inflexibilities

• Limited sectors

• Atleast 66.67% investment

in equity linked instruments

• All-in cost ceiling

• Lock-in period

• Thin cap restrictions

• Concentration norms;

• Unlisted investments;

• Investment cap and ceiling

on overall quantum

Alternative structures – To meet desired tax, regulatory & commercials !


PwC / NDA

Key structures for Offshore Fund directly investing in debt in India

13


• Security

• Repayment flexibility

• Downside protection with unlimited upside

• Fixed IRR

• Debt vs. Equity from Accounting /

consolidation stand point

• Regulatory constraints

Governing Factors

FVCI – OCDs for infrastructure sector 1

FDI – CCDs3

FPI – NCDs2

ECB – OCDs, OCRPS, loans, etc.4

PwC / NDA

FDI vs. FPI

14

Particulars FDI – CCDs FPI – NCDs

Equity Ownership • Initially debt, but equity on conversion • Lending rights; veto rights can ensure certain control.

Coupon • Repatriable without restrictions (net of tax) - subject to

TP benchmarking

• Parties may agree that interest can accrue and be

paid only out of free cash flows

• Same as CCDs

• Redemption premium taxability – may be deductible

as business expense; interest income in hands of

investor

WHT on interest • 40%* subject to Tax Treaty • 5%* (Base rate + 500 BPS approx.) / 20%*

Gains on sale • LTCG @ 10%; STCG 40%; Treaty exemption possible • LTCG 10%; STCG 30%; Treaty exemption possible

Pricing guidelines • Applicable • Not applicable

Security Creation • Not permissible • Permissible in favor of the debenture trustee

Sector-based

conditionality

• Only permissible for FDI compliant activities • Sector restrictions not applicable; end-use restrictions

for unlisted NCDs

Equity Upside • Investor entitled to equity upside upon conversion • Cannot be converted into equity, instrument to be

ultimately retired through repayment

• Equity linked returns possible


*Plus applicable surcharge (if any) and cess

PwC / NDA

Offshore credit funding - Alternative structures

Section 2

PwC / NDA

Indicative structure – standard debt

16


O/s India

India

Offshore Fund

SPV (FDI +

FPI + FVCI)

NBFCAIF

PORTFOLIO COMPANIES

1. Equity/CCDs

2. NCDs/OCDs

Equity/CCDs/PDI

Investment

Manager

Investment

Manager

Investment

Management

Services

Management

Services

Potential Sponsor

PwC / NDA

FPI - P Notes

17


P-notes

Investment

proceeds

FPI NCD FPI P-Notes

• Single group concentration

norms (20%); relaxation proposed

P-notes: Key aspects

• Tax implications – beneficial

ownership under Tax Treaty ?

• Issuance of ODIs with derivatives

as underlying prohibited

– Investment by FPIs in

equity linked notes ??

• Identification of beneficial owners

of FPIs - 50% single FPI limit -

Regulatory intent ?

Investee

Company

FPI Co.

NCDs

Investors

Capital

India

Investee

Company

Offshore

Fund

50%

NCDs

Investors

Capital

India

FPI-A FPI-B

50%

NCDs

Investors

PwC / NDA

Alternative Investment Fund (‘AIF’)

18


AIF to be registered with SEBI –

12 to 14 weeks

AIF to invest in debt / equity instruments

of Indian portfolio companies

AIF not permitted to grant loans – NCD /

OCD investment permitted

Manager & Sponsor if foreign owned

and controlled (‘FOCC’) – FDI

conditionality / sector to be complied,

investment instrument ?;

• IOCC no FDI restrictions applicable

1

2

3

4Indian investee

companies

Sponsor and

Manager

Management

services

Offshore jurisdiction

India

AIF

FDI route

Investors

NCDs /

RPS

OCDs /

OCRPS

Equity /

CCPS, CCDs/

Warrants

Trustees

PwC / NDA

Key requirements for AIF

19


Mandatory to appoint sponsor + investment manager for the AIF - ownership and control of AIF?

• AIF cannot invest more than 25% of corpus in a single investee entity01

• Minimum sponsor/ investment manager contribution required - Lower of, 2.5% of corpus or INR 50 million02

• Minimum tenure of AIF - 3 years03

• Minimum corpus - INR 20 crores; Minimum investment per investor - INR 1 crore04

• Borrowing / leverage - permitted only for meeting temporary funding requirements (subject to conditions) –

Feasibility for CAT III AIF ?

05

• Key investment team to have at least 1 key personnel with 5 years or more relevant experience06

• Double hatting – IM to AIF and IA to Offshore Manager – implications ? 07

PwC / NDA

Ownership and control of AIF

20

AIF (IOCC) AIF (FOCC)

• No sector restrictions / pricing guidelines • Sector restrictions / pricing guidelines applicable;

not applicable to debt

• All instruments should be possible viz. equity shares,

CCPS, CCDs, warrants, OCDs, OCRPS, NCDs, etc.

• Permitted instruments - Equity shares, CCPS,

CCDs, warrants and NCDs; OCDS ?

Downstream investments by

AIF not reckoned as foreign

investments

Sponsor is Indian owned and controlled

Investment Manager is Indian owned and

controlled

AND


PwC / NDA

AIF as a ‘side car’ of Offshore Fund

21

Investors

Offshore Fund

AIF

Indian investee

companies

Offshore

Manager

Indian Advisor

Equity

NCDs

India

Overseas


• Management fees split – Transfer Pricing

• GST on management fees

• Corpus at AIF level for 25% concentration limit?

• Characterisation of income at AIF level –

business income vs. other income?

• Thin cap implications – 94B

o Whether loan from non-resident AEs?

o Implicit or explicit guarantee is provided by

AE

• Computation of carried interest

PwC / NDA

Returns on Debt Investment in Category II AIF

22GAAR implications ?? February 2019Evaluating Credit Platforms

Right to receive and “Paid” (under Treaties)

Date of interest accrual ??

TDS on provision of interest

ICDS

Pay when able structures

Key Tax issues

1

2

3

4

5

Typical

returns

on debt

Discount on

issuance

Fixed

Redemption

premium

Variable

Redemption

premium

Ongoing

Coupon

PwC / NDA

Alternative Structures – AIF

23


• Tax pass through (other than business

income) - No tax leakage

• Instrument flexibility – to invest in NCDs

• Exchange Control restrictions not

applicable (IOCC AIF)

• Treaty exemption for AIF unit holders

• Prudential norms not applicable

• GST and income-tax on management fees

• Deemed distribution of income

accrued to AIF

• AIF concentration limits - max 25%

investment in a single investee

• No leverage to AIF

• Fixed tenure vehicle ; Not possible to list

PwC / NDA

AIF’s in IFSC

24

Management

Services

Management

FeesInvestments into

Investee Companies

Permissible investments

Foreign

Investors

Invest in

foreign currency Indian

Investors

IFSC AIF

ManagerIFSC

AIF

Cos.

incorporated

in IFSC

Cos.

incorporated

in India

Foreign

incorporate

Cos.

Cos. listed in

IFSC

Key takeaways

• GST & Income-tax holiday for Manager

• No limit on overseas investments by AIF

• Tax pass-through (other than business

income) for AIF continues

• FVCI route for select sectors

Points to consider

• Participation by domestic investors/

employees of manager/domestic sponsor?

• Applicability of FOCC regulations

• Outbound regulations

• India tax compliances for overseas investors


PwC / NDA

NBFCs

PwC / NDA

Setting-up NBFC

26

Indian investee

companies

India

Equity / CCPS / CCDs

F Co

NBFC

ECB

Indian Co

51%

49%

NCDs /

RPS

OCDs /

OCRPS

Equity /

CCPS, CCDs/

Warrants


NBFC to be set up as Company – 6 months

approx.; Acquisition of NBFC triggering

change of control approx. 3 months

100% FDI permitted under automatic route

>50% control and ownership with

resident Indians - No downstream

investment conditions

Minimum NOF of INR 2 crs (USD 0.3 mn)

Compliance with prudential norms &

capital adequacy norms

1

2

3

5

4

PwC / NDA

NBFCs - Classification

27


Non-Deposit taking

Non

Systemically

Important

Systemically

ImportantDeposit taking

Asset size <

INR 500 cr

Key aspects (NBFC-D & NBFC-ND-SI):

• Compliance with prudential norms

• Credit concentration norms

• No leverage ratio

Asset size >

INR 500 cr

Key aspects (NBFC-ND):

• Limited prudential

norms

• Exemption –

CRAR, Credit

concentration norms

• Max leverage ratio 7:1NBFC

PwC / NDA

NBFC - Key terms

Step 1 Paid-up equity capital and Free reserves (A) XX

Step 2 Add Accumulated balance of loss, Deferred revenue

expenditure and book value of other intangible assets (B)

X

Step 3 (C) = (A) minus (B) XX

Step 4 Add figures, if any, under the following items:

a) Investments in shares of Subsidiaries, companies in the same group, other NBFCs

b) Book value of debentures, bonds, outstanding loans and advances (including hire-

purchase and lease finance) made to Subsidiaries, companies in the same group

c) Deposits with Subsidiaries, companies in the same group

If the resultant figure exceeds 10% of (C), find out the excess = (D)

X

Step 5 NOF of = (C) minus (D) XX


28

Net Owned Funds

• NOF criteria of INR 2 crore to be fulfilled before approaching RBI for seeking registration

• NOF can be computed by the following step by step process (illustrative):

PwC / NDA

NBFC - Key terms

• Owned Funds - NBFC investments - Investment in shares, debentures, bonds, outstanding loans, advances including

hire purchase and lease finance made to and deposits with subsidiaries and group companies exceeding in aggregate

10% of Owned Fund + Perpetual debt instruments issued by NBFC-ND with assets between INR 100 crore and

INR 500 crore (up to 15% of Tier I of previous accounting year)

Tier I Capital

• OCPS + Revaluation reserves (discounted rate of 55%) + Hybrid debt + Subordinated debt + General provision

and loss reserves (subject to conditions) + Perpetual debt instruments (which is in excess of what qualifies for

Tier I above)

• To the extent the aggregate does not exceed Tier I Capital

Tier II Capital

• Paid up equity capital, compulsorily convertible preference shares, free reserves, balance in share premium

account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves

created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and

deferred revenue expenditure

Owned Funds


29

PwC / NDA

NBFC - Capitalisation


30

Instruments Permissibility under

FDI Regulations

Definitions under RBI, NBFC Regulations

Net Owned Fund

Credit Concentratio n Limit1

CRAR (NBFC-ND-SI)

Leverage Ratio (NBFC-ND)

Equity Shares

CCPS

CCDs 2 5

NCDs 3

Securities Premium 4

1. Credit concentration limits are based on percentage of ‘”Owned Funds’” 2. CCDs / NCDs would form part of Tier II capital (Tier II capital should not exceed Tier I capital). Secured NCDs shall not form part of Tier II

Capital. Only unsecured NCDs which are subordinated, shall form part of Tier II Capital. 3. NCDs investment through FPI route is permissible under exchange control regulations. 4. Securities Premium would be counted towards minimum capitalization only when received by the company on issue of shares to non-

resident and will not be counted in case of secondary transfer where it is received by the transferor5. For the purpose of calculation of leverage ratio, equity, CCPS, securities premium would be considered as part of owned fund and NCDs

would be considered as debt. CCDs and CCPs convertible within 5 years is not treated as debt

PwC / NDA

NBFC - Key regulatory conditions

Single / group* Exposure Limits Lending Investment Both

Single Borrower 15% 15% 25%

Single group of Borrowers 25% 25% 40%

Infrastructure Loan / Investment

Single borrower 20% 20% 30%

Single group of borrowers 35% 35% 50%

Credit concentration norms - % of Owned Funds


31

• Concentration Norms not applicable to NBFC not accessing public funds** (directly / indirectly) and not issuing guarantees

• Provisions not applicable in case of investment / loan to group / subsidiary company to the extent reduced from owned funds for

calculation of NOF

**Public funds include funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and

bank finance, but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5

years from the date of issue

PwC / NDA

NBFC - Key regulatory conditions

CRAR (15%)

• CRAR =

• Total Capital Funds = Tier I Capital + Tier II Capital

• Risk-weighted assets = Aggregate of risk weighted assets on balance sheet and

risk adjusted value of off-balance sheet items (Assets and investments of the

NBFC are given risk weights)

• Total of Tier I capital shall not be less than 10%

Total Capital Funds

Risk-weighted Assets


32

PwC / NDA

NBFCs - Key pros / cons

33


• Management fees could be structured -

GST savings vis-à-vis AIF structure

• Instrument Flexibility

• Distribution as per discretion of NBFC

• Access to domestic leverage

• Perpetual tenure; Ability to list

• SARFAESI

• Pure loans

• Distribution tax leakage / cash-trap;

• Set-up as Company only - compliance

requirements

• Prudential norms – Provisioning,

capital adequacy norms

• Concentration limits on Investment /

lending

• Stringent regulatory norms

• Thin capitalization

PwC / NDA

AIF vs. NBFC (1/2)

34

*Category II

**Lend to and invest in single borrower / investee exceeding 25% or 45% of owned funds in entity or single group of companies respectively. Also, Margin of 5% and

10% respectively would be provided if additional exposure is on account of infrastructure loan and / or investment

#Tier I and Tier II capital which shall not be less than 15% of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items


• AIF – Not permitted, except for meeting temporary funding requirements

• NBFC – Permitted for secured lending

Leverage on domestic

debt / borrowing

• AIF – 25% of its investible funds in one investee entity

• NBFC – Lend / invest 15%** / 25%** of owned funds to single entityConcentration norms

• AIF – Tax pass through; Investors liable to tax

• NBFC – No tax pass trough; Cash-trap & Tax leakageTax pass through

• AIF – GST and TP benchmarking applicable;

• NBFC – No management fees (may be structured)Management fees

• AIF – No requirement;

• NBFC – Minimum capital ratio requirement applicable#Capital adequacy

PwC / NDA

AIF vs. NBFC (2/2)

35


*Category II

• AIF – No such requirement;

• NBFC - NPA classification – 180 days. Uniform provisioning applicable across

asset types. Standard asset provisioning @0.40%

Asset classification &

provisioning norms

• AIF – Mandatory to distribute or deemed to be distribute

• NBFC – Distribution of amount at discretion of NBFCYear end distribution

• AIF – Listing not possible

• NBFC – IPO / listing possibleExit

• AIF – Close ended Fund to have a fixed tenure – extended upto 2 years with

investor approval

• NBFC – Not Applicable - Can have a perpetual life

Tenure of vehicle

• AIF – Company, LLP, Trust; Preferable to have a Trust

• NBFC – Mandatory to be a company; Onerous compliance under Cos Act

including Ind-AS, ICDS, etc.

Vehicle – entity set-up

PwC / NDA

Securitisation

PwC / NDA

Good Loans Securitisation / Direct Assignment

37

Outside India

India

BankSecuritisation

Trust

FPI

Good loan

Sale of

Good loans

Inflow of

funds

Issue of

SDIs

Inflow of

funds

Indian

borrower


Originator (Bank / NBFC) to set up

Securitisation Trust (‘Trust’) - transfer of pool

of homogeneous good loan assets

Securitised Debt Instruments (‘SDIs’) issued

to investors - FPI investment permitted

Trust to recover loan amount - distribute

recovery amongst SDI holders

Originator to have continuing stake in

performance of securitised assets

(Minimum retention requirement)

Compliance with RBI securitisation guidelines

- Conditions for “True sale criteria”

to be satisfied

1

2

3

5

4

PwC / NDA

Distressed assets - ARC structure

38

Investee Companies

India

Outside India

ARC

Offshore Fund

(FDI/FPI/FVCI)

AIFARC

Trust

Foreign Investors

SRs

(up to 85%)Units

Equity /

Debt

Loans

(Stressed

assets)

SRs

(min. 15%)

Equity /

Debt

• Registration with RBI – 8 to 10 months

approx.; NOF - INR 100 cr.

• ARC to acquire NPAs through ARC trust

• ARC acts as trustee/resolution agency

• ARC trust issues Security Receipts

(‘SR’) to banks / investors

• 15% SRs to be held by ARC - possible

to raise debt to acquire SRs

• FPIs permitted to invest in SRs - exempt

from FPI concentration limits


PwC / NDA

Category II AIFs notified as Qualified Buyers for SRs issued by ARCs Trusts

AIF’s with investment in ARC cannot invest in the SRs issued by that ARC1

No investment in SRs issued on the underlying loans of any associate or group company of AIF2

No investment in SRs backed by NPAs of banks holding > 10% equity in that AIF3


39

Investments by Cat II AIFs in SRs subject to following conditions:

Characterization of income from SRs in hands of AIF ?

PwC / NDA

Alternative Structures – ARC

40


• 85% SRs - FPI investment permitted

• Tax treatment on SRs - treaty benefits

available

• ARC trust - no concentration limits

• Tax pass through status to ARC trust

• Fee and other income of ARC - income

tax and distribution tax

• Deemed distribution on income accrued

to ARC Trust

• ARC - investment only in distressed

assets space

• ARC Co NOF - Ind-AS dynamics

• No loan origination. Only loan acquisition

PwC / NDA

Good Loans Securitisation

41


Key Impact Areas

s. 115TCA

of IT Act -

applicability to

NBFC & HFC ?

Applicability of

FPI investment

restrictions to

investments by

FPIs in SDIs ?

FPI P-Notes

on SDIs ?

Investments by

AIFs in SDIs ?

PwC / NDA

Taxability of Securitisation / ARC Trusts

No TDS on payments to Securitisation trust

Income from securitisation trust - taxable at applicable rates

All income from securitisation activities - exempt

Tax deducted at source on payments to Investors

• 25% (for Individuals, HUF);

• 30% (for others).

• Rates in force for non-resident investors

Securiti-

sation Co. /

Investors

Securiti-

sation trust

Borrower

Security Receipts

Loan / receivables

Tax pass through accorded to Securitisation Trusts


42

PwC / NDA

Taxability of Securitisation / ARC Trusts

Securitization Trust (defined under

section 115TCA)

• Special Purpose Distinct Entity - as per SEBI

(Public Offer and Listing of Securitised Debt

Instruments) Regulations, 2008

• Special Purpose Vehicle" as per the guidelines on

securitisation of standard assets issued by RBI

• Trust set-up by a securitisation company or a

reconstruction company formed, for the purposes

SARFAESI, or in pursuance of any guidelines or

directions issued by RBI, which fulfils such

conditions, as may be prescribed.


43

Securiti-

sation Co. /

Investors

Securiti-

sation trust

Borrower

Security Receipts

Loan / receivables

PwC / NDA

Distressed Deals - Key Impact Areas

44


Some relief for carry forward of tax losses and MAT on write-back of debt for cases under IBC

Basis/timing of

recognition of

income from SRs

Preferred return SRs for

non-ARC investors

in ARC trust

Applicability of

thin capitalisation

provisions (s.94B)

Pricing for acquisition of

NPA debt / securities of

distressed borrower

companies (s. 56 / 50CA)

Various SEBI norms

exempt for ARCs

MAT on waiver of loan granted to distressed borrower companies

(s. 115JB)

1 2 3

4 5 6

PwC / NDA

Offshore credit funds

Section 3

PwC / NDA

Offshore funds - Practical considerations

46


• Management fees & Carried interest

structure

• Foreign GP vs. Indian GP

• Need for offshore pooling vehicle

• Unified vs. co-investment structure

1

2

3

4

PwC / NDA

Unified vs. Co-investment structure (1/2)

47


1

4

Investee entity

Investment

manager

Offshore Fund

IndiaInvestment

management

agreement

AIFDomestic

investors

Offshore

investors

Investee entity

Investment

manager

Offshore Fund

India

Investment

advisor /

manager

Investment

management

agreement

Investment

management

agreement

Investment

advisory

agreement

AIF

`

Domestic

investors

Offshore

investors

UnifiedCo-investment

OffshoreOffshore

PwC / NDA

Unified vs. Co-investment structure (2/2)

48


1

4

Regulatory Aspects

• FDI Sector restrictions,

conditions and caps

• Choice of instruments

• Pricing guidelines

• Debt funding (flexibility vis-a vis

instruments and conditionalites)

• Migration to InvIT/REIT

• Key conditions in AIF/

InvIT/REIT regulations

Commercial Aspects

• Offshore leverage

• Tax indemnity from withholding perspective.

• % of corpus relevant for commitment size

• Security for debt investments

• Flexibility in operations for India team

• GP commitments

Tax Aspects

• Business Income characterization risk

• POEM / PE / substance related risk

• AOP risk

• Income tax on management fees and carried interest

• GST on onshore management fee and carried interest

• Section 56(2)(viib) application

• Transfer pricing aspects

PwC / NDA

Jurisdictional Analysis and grappling with GAAR

Section 4

PwC / NDA

Key considerations for having Holding SPV

50


Delinking risk at

overseas SPV level

Access to funds at

better terms & cost

Tax compliances + Tax

credits

Treaty networkRegulatory

ease / flexibility

1 2 3

4 5

PwC / NDA

Brief comparison of alternative jurisdictions (1/4)

51


Parameters Mauritius Hong Kong Singapore Cayman Netherlands Luxembourg

Tax Treaty

with India

Available Available Available No tax treaty Available Available

TRC Mandatory

for claiming

treaty benefit

Mandatory

for claiming

treaty benefit

Mandatory for

claiming treaty

benefit

Not relevant Mandatory for

claiming treaty

benefit

Mandatory

for claiming

treaty benefit

Limitation

of benefits

LOB for

reduced

capital gain

tax on shares

acquired after

01 April 2017

and sold on

or before 31

March 2019

Primary

purpose test

LOB for

reduced capital

gain tax on

shares

acquired after

01 April 2017

and sold on or

before 31

March 2019

Not applicable Nil Primary

purpose test

PwC / NDA


52



Ability to

pool funds

Tried and

tested

jurisdiction for

pooling

Evolving as a

jurisdiction for

pooling

Tried and

tested

jurisdiction for

pooling

Low tax

jurisdiction +

ease of doing

business

Not fully tested Possible,

subject to

certain

structuring

GAAR Relevant if

availing tax

treaty benefits

Relevant if

availing tax

treaty benefits

Relevant if

availing tax

treaty benefits

Not relevant Relevant if

availing tax

treaty benefits

Relevant if

availing tax

treaty benefits

PwC / NDA


53


Taxability in India

Interest Income 7.5% -

beneficial

ownership test

10% -

beneficial

ownership test

15% -

beneficial

ownership test

43.68% /

21.63% for FPI

10% -

beneficial

ownership test

10% -

beneficial

ownership test

Dividends Exempt -

Domestic law

Exempt -

Domestic law

Exempt -

Domestic law

Exempt -

Domestic law

Exempt -

Domestic law

Exempt -

Domestic law

Capital gains

on shares

Taxable under

domestic law

Taxable under

domestic law

Taxable under

domestic law

Taxable under

domestic law

Taxable under

domestic law,

subject to

conditions

Taxable under

domestic law

Capital gains on

other securities

(i.e. CCDs, etc.)

Not subject to

tax in India

Taxable under

domestic law

Not subject to

tax in India

Taxable under

domestic law

Not subject to

tax in India

Not subject to

tax in India


PwC / NDA


54


Taxability in home country*

Interest Income

from India

3% on net

income basis

Not subject to

tax

17% on net

basis. FTC

available

Not subject

to tax

Not subject

to tax

Not subject

to tax

Dividends

from India

May not be

subject to

tax due to

credit of taxes

paid in India

Not subject to

tax

Exempt subject

to conditions

Not subject

to tax

Not subject

to tax

Not subject

to tax

Tax withholding

on upstreaming

of profits

No WHT on

Dividends

No WHT on

Dividends

Not subject

to tax in

Singapore

No WHT on

Dividends

15% (subject

to conditions)

15% (subject

to conditions)


*Based on preliminary desktop research

PwC / NDA

GAAR trigger points

55

Allows tax officer to invoke GAAR and declare transaction

as Impermissible Avoidance Arrangement (IAA)


First

Condition There is an ‘Arrangement’

Second

Condition Main purpose is ‘Tax Benefit’

Third

Condition

Impermissible Avoidance

Arrangement based on

prescribed parameters

PwC / NDA

GAAR – Tax consequences

56


Such manner of determination may include – (a) Re-characterisation of expenditure, deduction or relief (b) Treating

debt as Equity and vice-versa (c) Treating accrual or receipt of capital as revenue and vice-versa

1

2

3

4

5

6

Disregard/ combine any steps or parts

Treat as if Impermissible avoidance arrangement not entered into

Disregard / treat any parties as same person

Reallocate income / expense / relief

Treat place of residence, situs of asset/ transactions at different place

Disregard/ look through any corporate structures

GAAR

Impact

pwc.in

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