Greater Gateway Series 2019:

India

The document is not designed to be a substitute for professional advice for particular business concerns or issues. The content of this document is based on our understanding of the applicable laws and regulations, and our interpretation of the same. The reader of this document may not rely or use this document without taking any professional advice.

Frequently Asked Questions

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1. Who are the key players in the capital market?

1. Who are eligible to invest under Foreign Portfolio Investor (FPI) regime?

The FPI eligibility requirements set out by the SEBI are as follows: – A person who is neither a resident of India nor a non-resident Indian (NRI).

– Incorporated in a country whose securities market regulator is a signatory to International Organization ofSecurities Commission’s (IOSCOs) Multilateral Memorandum of Understanding or a signatory to bilateralMemorandum of Understanding with the SEBI.

– Incorporated in a country whose central bank is a member of Bank for International Settlements (BIS) (forbanks).

– Legally permitted to invest in securities outside the country of its incorporation or establishment or place ofbusiness.

– Authorized by its Memorandum of Association and Articles of Association or equivalent document(s) or theagreement to invest on its own behalf or on behalf of its clients.

– A fit and proper person based on the criteria specified in Schedule II of the SEBI(Intermediaries) Regulations,2008; and

– Competent and financially sound with sufficient experience, a good track record and a generally good reputationof fairness and integrity.

Eligible investors are required to submit their FPI application to SEBI for approval.

2. What type of investment instruments are available to FPIs?

– Equities listed or to be listed on the BSE and the NSE– Treasury Bills issued by the RBI– Government Bonds– Corporate Bonds– Derivatives traded on recognized stock exchange– Mutual funds units– Security receipts issued by Asset Reconstruction Companies– Treasury bills and dated government securities– Commercial papers issued by an Indian company– Rupee denominated credit enhanced bonds– Indian depository receipts– Perpetual debt instruments and Debt capital instruments as may be specified– Units floated by Collective Investment Scheme– Unlisted non-convertible debentures/bonds issued by an Indian company, etc.

Regulators Stock Exchanges

Central Securities Depositories

Central Counterparty

Government Securities Market

- Reserve Bank of India (RBI)

- Securities Exchange Board of India (SEBI)

- National Stock Exchange (NSE)

- Bombay Stock Exchange (BSE)

- National Securities Depository Limited (NSDL)

- Central Depository Services (India) Limited (CDSL) Reserve Bank of India

- National Securities Clearing Corporation Limited (NSCCL)

- Indian Clearing Corporation Limited (ICCL)

- Negotiated Dealing System

- Clearing Corporation of India Ltd (CCIL)

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3. Describe the entry process and post trade services supported by BNY Mellon.

4. Are there any fees associated with the registration as a FPI?

Registration fees are payable depending on the Categories of Investors. The registration fees are summarized

below.

Investor Types Registration/Renewal Fee Validity of Registration

Category I Exempt 3 years

Category II USD 3,000 3 years

Category III USD 300 3 years

5. How many FPIs and countries participating in India securities market in recent years?

As per records available in public domain, there are 9,400 FPIs registered in India as of January 16, 2019. Based on the Assets under Management (AUM) data published on the website of National Depository Services Limited, U.S., Mauritius, Luxembourg, Singapore and U.K. are the top five countries participating in India under the FPI regime (Figure 1).

Source: NSDL, https://www.fpi.nsdl.co.in/web/Reports/ReportDetail.aspx?RepID=81; INR/USD as of on December 31, 2018 is 0.01430.

Figure 1: Top countries which are participating in India under FPI regime, AUM by Country

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6. Illustrate the trends in foreign securities investment in India market.

Figure2: Trends of Securities Investment in FPI

*Net of sales and purchases Source: NSDL, https://www.fpi.nsdl.co.in/web/Reports/Yearwise.aspx?RptType=5; INR/USD as of December 31, 2018 is 0.01430.

Figure 3: Assets under Custody of Custodians

Source: NSDL, https://www.fpi.nsdl.co.in/web/Reports/ReportsListing.aspx; INR/USD as of December 31, 2018 is 0.01430.

Figure 4: Assets under Custody of Custodians by Segment

*Others: Portfolio Managers, Trust, Depositary Receipts, Brokers, etc. Source: NSDL, https://www.fpi.nsdl.co.in/web/Reports/ReportDetail.aspx?RepID=80x, data as of December 31, 2018

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1. What are the key features of the present trading ecosystem in India?

Below outlines the trading mechanism and restrictions on foreign investors.

Trading hours

Equities: 9:15 am to 3:30 pm (IST) and Pre-Open call session 9:00 am to 9:15 am (IST) Government securities market : 9:00 am to 5:00 pm

Settlement cycle

T (Trade Date) +2 for equities T+1 for government securities T to T+2 for corporate bonds

Settlement currency Indian Rupee (INR)

Trade pre-matching Yes

Short selling

Equities: Only allowed if against borrow positions derived from securities lending and borrowing scheme Government securities: Not allowed for foreign investors

Investment limit

Individual limit of 10% per FPI in a listed company Aggregate limit of 24% by all FPIs

Lock-in period

Equities: No (except for preferential allotment, pre-issued capital, etc.) Fixed Income Instruments: No

Fails Yes – refer to section 3 below

Buy-In Yes – refer to section 4 below

Account structure Segregated cash, securities and depository accounts

Appointment of local custodian

Each FPI can only appoint one local custodian

Free of payment transfers

It is only permitted if they are registered under the multi-investment manager structure and have the same Permanent Account Number (PAN)

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2. What is the settlement procedures for equities and debt in India?

Listed Equities:

Government Securities:

*CSGL – Constituent Subsidiary General Ledger Account

Corporate Bonds:

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3. Are failed trades permitted in the Indian securities market?

Yes, failed trade is possible, but is subject to penalties as outlined below.

The penalty charges are as follows:

i. Funds and securities shortages – Exchange members (generally stock brokers) failing to fulfill their fundingobligations (all markets including the valuation debit raised on account of securities shortages) and membersfailing to fulfill their securities deliverable obligations to Clearing Corporation would be subject to the followingpenalty structure:

S. No Type of Non-fulfillment Penalty Charge % per day

1. Funds shortages 0.07%1

2. Security shortages 0.05%

ii. Margin shortages – The following penalties shall be levied on a monthly basis in respect of margin violations:

Instances of Disablement Penalty to be levied

1st instance 0.07% per day

2nd to 5th instance of trading suspension

0.07%2 per day + Rs.5000/- per instance from 2nd to 5th instance

6th to 10th instance of disablement 0.07% per day + Rs.20000 ( for 2nd to 5th instance) + Rs.10000/- per instance from 6th to 10th instance

11th instance onwards 0.07% per day + Rs. 70,000/- (for 2nd to 10th instance) + Rs.10000/- per instance from 11th instance onwards. Additionally, the member will be referred to the Disciplinary Action Committee for suitable action

Instances as mentioned above shall refer to all disablements during market hours in a calendar month. The penalty charge of 0.07% per day shall be applicable on all disablements due to margin violation anytime during the day.

iii. Security deposit shortages – Members not fulfilling the security deposit requirement for continuedmembership would be subject to a penalty charge of 0.07% per day.

iv. Non-allocation / rejection of institutional trades – Trades marked as ‘INST’ and not allocated to valid CPcodes and institutional trades rejected / not-accepted by Custodians shall be subject to penalty at 0.10% of thetotal value or Rs.10,000 whichever is lower.

v. Invalid institutional trading (inter-institutional deals) – Penalties would be applicable as per the provisionsof the normal market. Additional penalties would be imposed if trades are executed by ineligible foreigninvestors3, who do not fall under the category below.

- Eligible foreign investors - For sell orders, only FPIs are permitted to place orders - For buy orders, FPI's, DFI's, Banks, Mutual Funds and Insurance Companies, Pension Funds registered

under PFRDA and such other institutions as may be approved from time to time, are permitted to place orders

- Where RBI has stipulated collective limits for FPIs, NRIs, PIOs, etc. in certain securities, these entities are permitted to place orders on both buy and sell sides.

- Penalties - If the selling client is ineligible - the trade would be compulsorily closed out and a penalty of Rs.25000

shall be imposed. - If the buying client is ineligible – a penalty at the rate of 1% of the value of the trade or Rs1 lakh whichever

is lower will be imposed.

1 Penalty charge will be levied on the amount in default as per laws in relation to failure in meeting the obligations by any Clearing Member 2 Penalty for margin shortfall 3 Refer to clients who are not eligible to trade in Exchange as per any regulations or laws.

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vi. Other penalties (including penalties on failed trade and other violations)

Type of Default Penalty Charges

Company Objections Bad & Fake and Company Objections Rectification/ Replication of Bad & Fake delivery in all markets

0.09% per day from the day of non-compliance

Wrong claims of dividend, bonus etc. Rs.100 per claim

Same set of shares reported twice under objection 10% of value with a minimum of Rs.5000/- per claim

Incorrect undertaking on Form 6-I 10% of value with a minimum of Rs.5000/- per claim

Late withdrawal of company objections Rs.2 per share with a minimum of Rs.200/-

Non settlement of trade under Trade-to-Trade (TT) segment

0.50% of trade value

Cancellation of trade under TT segment Rs.1000/- per trade per side Failure to settle within the stipulated time under TT segment

Maximum of Rs.10000/- or Rs.500/- per trade per day, subject to maximum of 2.50 times the value of trade for each side

Failure to report within the stipulated time under TT segment

Maximum of Rs.5000/- or Rs.500/- per trade per day, subject to maximum of 2.50 times the value of trade for each side

Source: www.nseindia.com

4. Is there a buy-in procedure?

Yes, the buy-in procedure is as follows: On the settlement day (T+1 or T+2), NSCCL or ICCL, the clearing corporation, accepts pay-in of securities made by delivering members through the central depositories and identifies the shortages. The amount payable by the delivering member is equivalent to the securities not delivered and valued at the market valuation price. This is known as valuation debit. For all such short deliveries, the clearing corporation conducts a buy-in auction on T+2 day, after completion of the pay-out, through the trading system.

If the buy-in auction price is more than the valuation price, the clearing member, such as stock brokers is required to make good the difference. All shortages not bought-in are deemed closed out.

5. Is securities lending available to FPI?

Yes, SEBI and RBI allow FPIs to lend and borrow securities through the Securities Lending and Borrowing (SLB) offered by the stock exchanges and to short sell securities against the borrowed positions. All SLB transactions must be routed to the clearing corporation of the stock exchanges with the NSCCL and the ICCL, who are the approved intermediaries.

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1. Is INR a restricted currency?

INR is a non-convertible currency and is allowed to fluctuate within a trading band managed by the RBI.

The foreign exchange market is tightly regulated by the RBI and all FX transactions can be booked through any authorized dealers of RBI. FPIs are permitted to convert foreign currency only for securities-related transactions.

2. What type of FX options are available to FPIs?

FX options available to FPIs are spot, next day, same day or forward basis.

3. Are currency hedging tools available for FPI? If yes, what are they?

Foreign investors are eligible to hedge their exposure in INR with authorized dealers in India through permitted derivative products. Foreign investors can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back-to-back basis for the principal investment amount.

FPIs are also permitted to hedge the coupon receipts arising out of their investments in debt securities in India that are due in the next 12 months.

The hedging products available in India are: - FX contracts with INR as one of the currencies - Foreign currency – INR options - Foreign currency – INR swaps for IPO related flows - Currency Derivatives traded on the stock exchange

1. What are the common corporate actions in India?

Most common corporate actions are as follows: - Dividend / interest - Buy-back of shares - Bonus-issue - Rights issue - De-merger - Stock split - Amalgamation / merger, etc.

The peak Corporate Action season is April to September.

2. What are the main sources of corporate action announcement?

Main sources of corporate action announcement are the websites of NSE and BSE:

- https://www.bseindia.com/corporates/corporate_act.aspx - https://www.nseindia.com/corporates/corporateHome.html?id=eqCorpActions

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1. What are the dividend and interest withholding tax rates applicable to income received by

FPIs?

Dividends distributed by Indian companies are exempt from withholding tax when paid to FPIs. This is on the

condition that the Indian company has paid a dividend distribution tax on the dividend declared, distributed or

paid.

The general interest income withholding tax rate applicable to non-residents is 20%. A concessional rate of 5%

withholding tax (subject to applicable cess and surcharge4) is applicable to interest payable on government bonds

and rupee denominated corporate bonds of an Indian company to FPIs between June 1, 2013 and June 30, 2020,

irrespective of the date of investment.

2. What other taxes may be applicable to FPIs?

- Capital Gains Tax (CGT)

Type of Investment

Capital Gains Listed equity shares / equity oriented mutual fund units (subject to STT**)

Listed equity shares (not subject to STT**)

Government bonds

Corporate bonds

Long Term* 10% 10% 10% 10%

Short Term* 15% 30% 30% 30%

Gains derived by FPIs at the time of the transfer/ sale of securities in India are liable to tax in India, but they are

not subject to withholding tax at the time of sale.

FPIs must discharge their tax liabilities prior to the repatriation of income. Tax must be paid prior to repatriation, or

it will be paid through quarterly advance tax instalments, whichever is earlier. Advance tax is payable where tax

liability is estimated to be INR 10,000 or more during a financial year. Four advance payments must be made on

the due dates prescribed:

Due date of tax payment Estimated advance tax payable

June 15 15%

September 15 45%

December 15 75%

March 15 100%

Income earned by an FPI must be reported through an annual income tax return, which must be filed by

September 30 of the assessment year (for corporate taxpayers) or July 31 of the assessment year (for non-

corporate taxpayers). Taxes paid in excess of the assessed liability can be reclaimed from the tax authorities via

the tax return.

- Securities Transaction Tax (STT)

STT is applicable to the sale and purchase of securities listed on a recognized stock exchange in India.

The STT rates are as follows;

− 0.1% on the sale of equity shares or the sale of an equity-oriented mutual fund on an Indian stock exchange.

This tax is to be collected in equal proportion by both the buyer and the seller.

− 0.01% on the sale of futures.

The rate of Capital Gains Tax (CGT) on equities may depend on whether STT has been paid or not.

* These rates do not include applicable surcharge. Rates are correct as of December 31, 2018. Long term refers to the listed shares or unit ofequity oriented mutual funds holding for more than 12 months.

**Securities Transaction Tax (STT)

4 A surcharge is applicable on the tax levied and is charged at a rate of 2% (where net income exceeds INR 10 million but less than INR 100 million) and 5% (where net income exceeds INR 100 million) for corporate taxpayer. For non-corporate taxpayer, the surcharge is charged at rate of 10% (where net income exceeds INR 5 million but less than INR 10 million) and 15% (where net income exceeds INR 10 million). Furthermore, a health and education cess applies at a rate of 4% and is calculated as a percentage of the sum of the withholding tax rate and surcharge on such withholding tax rate. Accordingly, the resulting TDS rate for corporate taxpayer would be 5.304% and 5.46% respectively and for non-corporate taxpayer 5.72% and 5.98% (correct as of December 31 2018).

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3. Are tax benefits available to FPIs under the current tax treaties in force with India?

According to domestic law, tax rates deducted at source on payments to non-residents should be at the rate

specified in an applicable double taxation treaty or the domestic rate, whichever is more favorable to the taxpayer.

India has concluded a number of income treaties for the avoidance of double taxation and benefits may be

granted upon provision of a tax residency certificate and other documentation/information.

4. Is a local tax consultant required in this market?

Income payments to FPIs are generally subject to withholding tax, either at the rate specified in domestic law or in

an applicable double taxation treaty. If an FPI is eligible to a lower withholding tax rate under the provisions of a

double taxation treaty, a local tax consultant must arrange for the necessary tax documentation and requirements

to be transmitted to the issuer or paying agent in order for tax relief to be applied at source.

FPIs must appoint their own local tax consultant to handle tax-related matters including obtaining a Permanent

Account Number (PAN), the computation of tax liabilities, facilitating the payment of taxes due, filing annual tax

returns and communicating with the tax authorities.

About BNY MellonBNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations orindividual investors, BNY Mellon delivers informed investment management and investment services in 35 countries. As of December 31, 2018, BNY Mellon had US$33.1 trillion in assets under custody and/oradministration, and US $1.7 trillion in assets under management. BNY Mellon can act as a single point ofcontact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.

About Grant ThorntonGrant Thornton in India is a member of Grant Thornton International Ltd. It has over 3,000 people across 15 locations around the country, including major metros. Grant Thornton in India is at the forefront of helping reshape the values in our profession and in the process help shape a more vibrant Indian economy. Grant Thornton in India aims to be the most promoted firm in providing robust compliance services to dynamic Indianglobal companies, and to help them navigate the challenges of growth as they globalise. Firm’s proactiveteams, led by accessible and approachable partners, use insights, experience and instinct to understandcomplex issues for privately owned, publicly listed and public sector clients, and help them find growth solutions.

An instinct for growthTM

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