The document provides suggestions for structuring an optimal offshore fund to invest in Indian equities. It analyzes the FDI, FVCI, and FPI routes for foreign investment in India and compares jurisdictions like Mauritius and Singapore. Singapore is recommended as it provides greater protection from GAAR due to its LOB clause and availability of investment professionals. While Mauritius has tax treaty benefits, Singapore has lower overall costs for larger funds and those able to relocate personnel due to its established financial infrastructure. The key is balancing regulatory requirements, tax implications, and operating expenses for each fund.

1. SUGGESTIONS FOR AN OPTIMAL
STRUCTURE FOR OFFSHORE FUND
TO INVEST IN INDIAN EQUITIES
PRESENTATION FOR BCP ADVISORS PVT LTD
BY: VIKRAMVEER THAKORE
24 JULY 2014
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2. Table of Contents
CONTENT PAGE
Foreign Investments in Indian Equities 3
FDI Route 4
FVCI Route 5
FPI Route 6
Comparative analysis of the three routes 8
Key considerations for structuring an offshore fund 9
Fund Structure and functions of its key entities 10
Analysis of GAAR and PE 12
Tax overview of relevant jurisdictions 14
Comparative analysis of jurisdictions. Mauritius vs. Singapore 15
Process of setting up an offshore equity fund 24
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3. FOREIGN INVESTMENTS IN INDIAN EQUITIES
 All foreign investments in Indian securities
are regulated by the Foreign Exchange
Management Act 1999 (FEMA).
 Three principle routes of foreign equity
investments in India are:
1. Foreign Direct Investments (FDI) route
2. Foreign Venture Capital Investments (FVCI) route
3. Foreign Portfolio Investments (FPI) route
3

4. FOREIGN INVESTMENTS IN INDIAN EQUITIES
FDI Route
 FDI can be routed essentially using equity or
instruments convertible into equity shares:
1. Equity shares
2. Compulsorily Convertible Debentures (CCD)
3. Compulsorily Convertible Preference Shares (CCPS)
 FDI need to comply with pricing guidelines of the RBI
1. For purchases by the foreign investor the price should not
be lower than the fair market value computed on the basis
of DCF.
4

5. FOREIGN INVESTMENTS IN INDIAN EQUITIES
FVCI Route
 FVCI investments are governed by SEBI (Foreign Venture
Capital Investor Regulations), 2000.
 FVCI are limited to “Venture Capital Undertakings (VCU)”
in select sectors, i.e. Infrastructure, Bio-technology, IT,
R&D in certain sectors, Hotel cum Convention centers.
 FVCI investor is required to invest 66.67% of its investable
funds in unlisted equity of VCU.
 VCU investor is permitted to invest the remaining 33.33%
in IPO, Debt instruments where already holding equity,
PIPE subject to a one year lock in period.
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6. FOREIGN INVESTMENTS IN INDIAN EQUITIES
FPI Route
 FPI investments are governed by SEBI (Foreign Portfolio Investor
Regulations), 2014
 FPI Regulations combine and replace erstwhile regulations regarding
FII and QFI.
 Existing FIIs and QFIs deemed to be FPIs during the validity of their
existing registration.
 FPI registration is granted by Designated Depository Participant (DDP)
 FPI investments are governed by restrictions and conditions broadly
similar to FII.
 FPI Limits:
• Each FPI can invest up to 10% of any companies equity.
• Aggregate FPI/FII/QFI can ordinarily invest up to 24% in any company.
• With board and shareholders’ special resolution up to sectoral cap.
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7. FOREIGN INVESTMENTS IN INDIAN EQUITIES
Three Categories of FPIs
7
Category Eligible Investors
Category I Sovereign Investors, Central Banks,
Government Agencies, Multilateral Agencies,
etc.
Category II Regulated Mutual Funds, Investment Trusts,
Banks, AMCs, Insurance Companies, Pension
Funds, etc.
Category III All eligible investors not covered above. These
include Corporate Bodies, Individuals, Family
Offices, Trusts, etc.

8. FOREIGN INVESTMENTS IN INDIAN EQUITIES
8
FPI FVCI FDI
Nature of investor
Eligible foreign investors with
track record, and regulated
Institutional foreign
investors with track record,
and regulated
Institutional / Strategic
Governed by SEBI FPI Regulations SEBI FVCI Regulation
FIPB approval / automatic
approval
Can invest in
Primary and secondary shares
and debentures of listed
companies, domestic mutual
funds, derivatives on stock
exchanges, T bills, G-Secs, CP,
NCD of infrastructure cos.
Primary issue of shares in
VCUs, and secondary
purchase of listed securities
of VCUs up to a cap
Primary issue of shares, and
secondary purchase of
unlisted securities.
Limits for investment Within permitted limits for FPIs
Without need for FIPB
approval if within sectoral
caps, or FIPB approval
required if sectoral caps do
not permit
Without need for FIPB
approval if within sectoral
caps, or FIPB approval
required if sectoral caps do
not permit
Pricing restrictions
If purchased / sold through stock
exchanges or IPO, none
Bilateral, not through stock
exchanges. No pricing
restrictions
Bilateral, not through stock
exchanges. Pricing restricted
by RBI formula
Lock-in post IPO One Year No lock-in One year
Comparative analysis of the three routes:

9. 9
KEY CONSIDERATIONS FOR
STRUCTURING AN OFFSHORE FUND
Compliance with
regulations and
treaty terms.
Optimize Taxation.
Availability of skilled
and knowledgeable
manpower.
Ease of
Operations.
Permanent
Establishment
(PE). *
GAAR. *
Limit liability/ risk
of investors.
Ability to raise capital
commitments and
distribute sales
proceeds.
KEY CONSIDERATIONS FOR STRUCTURING AN OFFSHORE FUND
* Discussed in subsequent slides

10. STRUCTURE OF AN OFFSHORE FUND FOR EQUITY INVESTMENTS
10
Investor 1 Investor 2 Investor 3
Asset Management
Company
Advisory
Committee
BCP India Fund
(FDI + FPI)
Investment 1 Investment 3Investment 2Advisory Company
IndiaRestofWorldMauritius/Singapore
BCP India Fund Sub
(FVCI)
100% Sub
AdvisoryServices
Management Services

11. FUNCTION OF KEY ENTITIES IN THE STRUCTURE
11
Entity Function
1. Fund a. Register with DDP as FPI.
b. Route all FDI and FPI investments.
2. Subsidiary a. Register with SEBI as FVCI.
b. Route all FVCI investments in VCUs.
3. AMC a. Make all investment decisions in accordance
with Private Placement Memorandum
(PPM)/mandate.
4. Advisory
Company
a. Recommend investment opportunities to AMC.
b. No authority to make any investment decisions.
5. Advisory
Committee
a. Resolve conflicts of interest.
b. Approve investments beyond threshold levels.
c. Corporate governance and compliance.

12. GENERAL ANTI-AVOIDANCE RULES (GAAR)
 GAAR has been introduced in the Finance Act, 2012 but cannot be
applied before April 1, 2015.
 GAAR can be applied retrospectively for any part of transaction
affected post August 30, 2010.
 GAAR provisions override international treaties.
 GAAR empowers tax authorities to disregard transactions if they
believe “Impermissible Avoidance Arrangements” are used to obtain
tax benefits.
 Impermissible Avoidance Arrangements are:
a. Transactions not at arms-length.
b. Abuse of provisions of Income Tax Act.
c. Lack of commercial substance.
d. Non bona fide purpose.
e. Existence of Permanent Establishment.
 GAAR subject to threshold of INR 30 million.
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13. PERMANENT ESTABLISHMENT
 If Indian tax authorities establish that an offshore fund has a “Permanent
Establishment (PE)” or “Business Connections” in India, then its profits
are liable to be taxed in India irrespective of treaty benefits.
 PE maybe established in the following cases (non exhaustive):
a. If Fund’s investment decisions are routinely managed by a team in India.
b. If a fixed base (office) is available in India to an offshore fund on a regular
basis to manage the fund.
c. If employees of an offshore fund routinely provide service to it from India.
d. If an independent agents activities are mostly conducted on behalf of an
offshore fund.
e. If transactions between an offshore fund and its Indian agent are not
conducted on an arms-length basis.
Therefore, it is important to establish that the Advisory Company in the
proposed structure provides only recommendatory services, on a non-
exclusive basis, and on arms-length terms.
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14. TAX OVERVIEW OF RELEVANT JURISDICTIONS
14
NATURE OF TAX
BASIC TAX RATE
INDIA MAURITIUS SINGAPORE
1. Short Term Capital Gain (STCG):
< 12 months for STT transactions
< 36 months for non STT transactions
15%
30%
NIL NIL
2. Long Term Capital Gain (LTCG):
> 12 months for STT transactions
> 36 months for non STT transactions:
Without indexation
With indexation
NIL
10%
20%
NIL NIL
3. Securities Transactions Tax for equity
(STT)
0.01% for sell side 0.01% for sell side 0.01% for sell side
4. Dividend Income (DDT of 15%) NIL NIL NIL
5. Interest Income FPI/FII 30% 21-43% 15%
6. Withholding tax on interest 5% No relief 10%
7. Local Corporate Tax 30% Effective 3% 17%

15. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
15
Advantages of Mauritius Domiciled Funds (1/2):
1. India-Mauritius Tax Treaty backed by CBDT Circular and upheld by
Supreme Court of India.
2. Hitherto tried and tested jurisdiction for making investments into
India.
3. Exemption of tax on capital gains.
4. Relatively simpler regulatory processes and low set-up / operating
cost with easier time lines for set-up.
5. Flexible Company Law and other Regulatory framework in
Mauritius for efficient repatriation.
6. Flexibility to have multi layer structure in Mauritius.

16. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
16
Advantages of Mauritius Domiciled Funds (2/2):
7. Other Income taxable only in Mauritius as per India-Mauritius Tax Treaty.
8. Circular 789 on India-Mauritius Tax Treaty recommended to be respected
by Expert Committee on GAAR.
9. No thin capitalization rules.
10. Lower taxation rate in Mauritius:
a. Local tax rate of 15% in Mauritius can be effectively reduced to 3% on account of
deemed tax credit of 80% on foreign sourced income.
b. Dividend income from India not taxable, after claiming credit.
c. No tax on Capital Gains in Mauritius.
11. Protection for investors under Bilateral Investment Promotion and
Protection Agreement (BIPA).
a. Mauritius BIPA effective from June 2000.

17. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
17
Disadvantages of Mauritius:
1. Interest income taxable at 21.63% / 43.26% (as per domestic
tax laws).
2. Not a very popular jurisdiction for relocating investment
professionals on account of lack of activity in that jurisdiction.
3. India-Mauritius Tax Treaty under scanner of the Tax
Authorities – number of attempts made to deny Treaty
benefits alleging lack of substance and misuse.
4. Practical challenges in case of secondary sale where buyer
could insist for tax withholding where a Mauritius entity is a
seller.

18. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
18
Advantages of Singapore Domiciled Fund (1/2):
1. Established financial center and may be looked at as an attractive
jurisdiction by the Investors.
2. Flexibility for relocating investment professionals to Singapore.
3. India-Singapore Tax Treaty not yet under the scanner of Indian Tax
Authorities.
4. Highly regulated jurisdiction, optically could provide comfort to
India Tax Authorities for substance in that jurisdiction.
5. Complete exemption from tax on capital gains, subject to LOB
clause.
6. Lower tax withholding of 15% for interest paid by Indian Company
under India-Singapore Tax Treaty; lower tax rate available subject to
interest being actually remitted to Singapore and recipient being
the beneficial owner of such interest income.

19. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
19
Advantages of Singapore Domiciled Fund (2/2):
7. India-Singapore Tax Treaty has Limitation of Benefit (LoB) Clause for
Capital Gains exemption:
a. Singapore entity not set up for availing treaty benefits and undertakes
bona fide business activities.
b. Singapore entity is not treated as shell / conduit company (i.e. total annual
expenditure on operations is >S$ 200,000 during preceding 24 months
from date of gains OR is a legal entity listed on recognized stock exchange
in Singapore).
8. Local tax exemption in Singapore:
a. No tax on capital gains in Singapore.
b. Dividend income from India not taxable, subject to fulfillment of certain
conditions.
9. No thin capitalization rules in Singapore.
10. Tax efficient for making both convertible debt and equity
investments.

20. COMPARITIVE ANALYSIS OF JURISDICTIONS:
MAURITIUS vs. SINGAPORE
20
Disadvantages of Singapore:
1. Stringent approval processes and relatively stricter Regulatory regime.
2. Capital gains exemption under India-Singapore tax treaty (subject to
LOB clause).
3. Extended time line for obtaining licenses and setting up Fund entities
in Singapore.
4. Management fees to be paid at Singapore level - taxable at 10% in
Singapore subject to Manager qualifying for FSI-FM Award scheme, or
else taxable at 17%.
6. High setup and operating cost.
7. Applicability of GST on management fees in Singapore.
8. More difficult to create multi layer structure in Singapore.
9. No Bilateral Investor Protection and Promotion Agreement (BIPA).

21. IMPACT OF GAAR:
MAURITIUS vs. SINGAPORE
21
MAURITIUS SINGAPORE
1. Lack on investment
professionals in Mauritius
Presence of investment
professionals in Singapore.
2. No full fledged set up in
Mauritius
Full fledged robust operating set
up in Singapore.
3. Difficult to substantiate non-
tax / commercial reasons for
Mauritius structure
Substance can be defended on the
basis of a more robust local
investment team. MAS is a more
reputed regulator.
4. No Limitation of Benefit (LOB)
clause yet, therefore higher
threat.
Stringent LOB clause therefore
lesser threat.

22. COST BENEFIT ANALYSIS OF MAURITIUS AND SINGAPORE
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Assumptions:
Fund Size: USD 100 Mn Team Size:
Management Fees: 2% Partner: 1 No's
Carried Interest: 20% Principal: 1 No's
Analysts / associates: 3 No's
Support Staff: 2 No's
Annual Revenue: USD 2,000,000 USD 2,000,000
One Time Expenses: Mauritius Singapore
Fund Raising: USD 300,000
Legal: USD 200,000
Admin / Travel: USD 100,000
USD 600,000
Annual Expenses:
Sponsor Remuneration: USD 500,000
Manpower: USD 600,000
Office Overheads: USD 200,000
General, Travel etc.: USD 200,000 USD 1,500,000 USD 1,700,000

23. RECOMMEND SINGAPORE AS THE PREFERRED
JURISDICTION FOR THE FUND
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 In general, it appears that Singapore is a more advantageous
jurisdiction for setting up an Offshore Fund for routing equity
investments into India due to:
1. LoB Clause provides greater substance, and therefore higher protection from
GAAR.
2. Greater availability of investment professionals.
3. Proximity to India facilitates ease of travel.
 From a Cost-Benefit perspective, the final determination of the
jurisdiction will probably depend on the following factors
specific to each Fund:
1. Availability of existing manpower in Singapore or India.
2. Ability to relocate existing Indian manpower to Singapore.
3. Cost and availability of recruiting additional manpower in Singapore.
4. Expected interest earnings of the Fund. Higher the interest earnings of the Fund,
Singapore becomes more attractive.
5. Size of the Fund. Singapore’s attractiveness is directly proportional to the Fund
size. The larger the Fund corpus, the easier it is to absorb the minimum fixed
costs stipulated in the LoB clause.

24. PROCESS OF SETTING UP OFFSHORE EQUITY FUND
24
ACTIVITY NATURE OF ACTIVITY RESPONSIBILITY
1. Conceptualization of fund based on key strength
of management team.
AMC.
2. Preliminary discussion & feedback from key
investor relationships.
AMC.
3. Preparation of fund structure.
a. Select appropriate jurisdiction.
b. Incorporate fund company and AMC.
AMC, Legal Advisor, Tax
Advisor.
4. Preparation of legal and constitutional documents.
a. Constitution of fund, FVCI subsidiary, AMC, Advisor
b. Investment Management Agreement.
c. Investment Advisory Agreement.
d. Administration Agreement.
e. Private Placement Memorandum (PPM).
f. Subscription Agreement.
g. Other legal documents.
AMC, Legal Advisor, Tax
Advisor.
5. Marketing for commitments / Fundraising AMC, Marketing
Advisor, Legal Advisor.
6. Fund Closing and its documentation. AMC, Legal Advisor.

25. IMPORTANT DISCLOSURE
This presentation is an outcome of research done by
Vikramveer Thakore under the supervision of BCP
Advisors Private Limited as part of his summer project.
Contents of this presentation have been substantially
obtained from publicly available information and informal
discussions with various investment professionals.
However the contents of this presentation have not been
verified by any legal or tax professional. It is strongly
recommended that BCP Advisors Private Limited seeks
opinion of respective legal and tax experts before
implementing any part of this presentation.
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26. THANK YOU
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