ICI Comments on Indian Regulations Governing Financial Institutional Investors

Washington, DC, February 10, 2003 - The Institute supports the regulatory changes initiated by the Securities Exchange Board of India (SEBI), noting that SEBI has implemented changes to the Indian market that have significantly improved India's clearance and settlement system and the environment for foreign investors in India. In a recent comment letter, the Institute urges SEBI to bring India more in line with international investing norms by abolishing the Financial Institutional Investor (FII) regime, thereby resulting in greater foreign investment in the Indian securities markets, increased depth and breadth of trading in those markets, and increased capital available to Indian issuers.

In addition, the Institute recommends the adoption of a rule that bars claims of prior ownership to dematerialized shares and an across-the-board 10 percent trading collar for all listed securities. The Institute also recommends ways to improve the process through which FIIs participate in initial public offerings. The Institute strongly recommends that SEBI adopt a single, uniform system for reporting significant portfolio holdings, or, at a minimum, exempt mutual funds, pension funds, and other institutional investors that are not investing for control from reporting under its takeover regulations. The Institute encourages SEBI to consider allowing securities lending under appropriate circumstances, and strongly urges SEBI to allow FIIs to participate in the newly-created futures market on equal terms with domestic institutional investors.

With regard to capital gains taxes, as a long-range goal, the Institute recommends that FIIs be exempt, whether though a statutory exemption, an administrative exemption or the modification of India's tax treaties (including most specifically the U.S.-India treaty).

The Institute also addresses specific capital gains issues relating to the netting of capital gains and losses and the rules for determining the cost basis of shares sold. With regard to withholding taxes on dividends, the Institute recommends that India adopt an at-source withholding regime. If such a regime cannot be implemented, the Institute recommends streamlining the current system so that reclaims are processed expeditiously and with minimal burden on FIIs.