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The recent amendments to the SEBI’s Listing Obligations and Disclosure Requirement Amendment Regulations, 2018, insider trading regulations and revisions in the Double-taxation avoidance agreements (DTAAs) with Mauritius and The Avoidance of Double Taxation Agreement (DTA) with Singapore, have ushered higher corporate governance standards for Indian Listed companies and higher taxes for foreign investors coming from Mauritius and Singapore effective from 1st April, 2019. These changes will give India the right to tax capital gains arising on Indian equity shares sold by a Singaporean or Mauritian resident.
Here in this update, we’ll discuss the recent amendment to the SEBI regulations of disclosure requirement and insider trading and its impact on the foreign investors.
Under the SEBI’s Prohibition of Insider Trading (Amendment) Regulations, 2018, there is a restriction put on communication and trading by insiders. The Board of directors, who are dealing with UPSI are required to formulate a code of conduct to regulate and report trading.
This provision is intended to mandate the persons other than listed companies and intermediaries that are required to handle UPSI to devise a code of conduct governing trading securities by their designated persons.
These entities include professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks, etc., assisting or advising listed companies. Even entities that usually run outside the capital market may handle UPSI. This provision would mandate all of them to formulate a set of code of conduct. Through this, they’ll now have to put internal controls so as to check the insider trading.
After prolonged negotiations, concessional tax regime which was earlier present for foreign investors came to an end as India amended its DTAAs with Mauritius and signed the Revised Double Taxation Avoidance Convention (DTAC) and it also amended the Avoidance of Double Taxation Agreement (DTA) with Singapore. Under the amended treaty, which began on 1st April 2017, the capital gains tax was imposed at 50% of the prevailing domestic rate and the full rate was to be applied from April 1st, 2019. It also gave India the right to collect tax on capital gains arising on Indian equity shares sold by foreign investors from Singapore or Mauritius.
|Shares Acquired||Capital Gains Tax on the Sale of Shares||Rate of Tax|
|Before April 1, 2017||Taxable at the country where investor resides||100% of the capital gains tax rate|
|Between April 1, 2017-March 31, 2019||Taxable where the company is tax resident||50% of the capital gains tax rate|
|After March 31, 2019||Taxable where the company is tax resident||100% of the capital gains tax rate|
The after effect of this is the tax cost for foreign investors has increased. The government claimed that it was done because it wants foreign investors to come to India on the basis of returns investment in the country and not on account of tax considerations. It wants to create a uniform playing field for these foreign investors who are investing capital in India.
So, it is safe to say that, the recent amendments have enhanced the corporate governance standards for Indian listed companies and it has also added flexibility by allowing block trade within a company between insiders and related parties. It has also tried to curtail insider trading by keeping the transaction undertaken under regulatory obligations and exercise of the stock option at an already agreed price. But only time will tell whether the changed DTAAs will reduce foreign investment because of increased tax or it will boost the inflow as a result of a strong and transparent tax regime in the long run. India’s pace of growth and development would definitely cate to the latter scenario.
To get an accurate understanding of how the DTAC and DTA will apply in your circumstances and to get more information on this, you can contact our team of experts at Enterslice.