Evaluating credit platforms February 2019
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
1
2
3
5
4
3
15
45
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
PwC / NDA
FPI Route
6
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
PwC / NDA
External Commercial Borrowings
10
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
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 !
February 2019Evaluating Credit Platforms
PwC / NDA
Key structures for Offshore Fund directly investing in debt in India
13
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
*Plus applicable surcharge (if any) and cess
PwC / NDA
Offshore credit funding - Alternative structures
Section 2
PwC / NDA
Indicative structure – standard debt
16
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
29
PwC / NDA
NBFC - Capitalisation
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
32
PwC / NDA
NBFCs - Key pros / cons
33
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
*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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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.
February 2019Evaluating Credit Platforms
43
Securiti-
sation Co. /
Investors
Securiti-
sation trust
Borrower
Security Receipts
Loan / receivables
PwC / NDA
Distressed Deals - Key Impact Areas
44
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
• 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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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
Brief comparison of alternative jurisdictions (2/4)
52
February 2019Evaluating Credit Platforms
Parameters Mauritius Hong Kong Singapore Cayman Netherlands Luxembourg
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
Brief comparison of alternative jurisdictions (3/4)
53
Parameters Mauritius Hong Kong Singapore Cayman Netherlands Luxembourg
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
February 2019Evaluating Credit Platforms
PwC / NDA
Brief comparison of alternative jurisdictions (4/4)
54
Parameters Mauritius Hong Kong Singapore Cayman Netherlands Luxembourg
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)
February 2019Evaluating Credit Platforms
*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)
February 2019Evaluating Credit Platforms
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
February 2019Evaluating Credit Platforms
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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