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Why Special Tax Exemption Given to Abu Dhabi Investment Authority-a Sovereign Wealth Fund

why-special-tax-exemption-given-to-abu-dhabi-investment-authority-a-sovereign-wealth-fund

During the Budget 2020 speech, the Finance Minister without naming the Abu Dhabi Investment Authority announced that in order to incentivize the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, it is proposed to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before 31st March 2024 and with a minimum lock-in period of 3 years.

However, clause 7 of the Finance Bill, 2020 mentions the Abu Dhabi Investment Authority. Clause 7 proposed to insert a new clause 23FE to section 10 of the Income Tax Act, 1961 to exempt certain income of a specified person. The specified person is defined in the clause itself to mean a wholly-owned subsidiary of the Abu Dhabi Investment Authority which–

(i) is a resident of the United Arab Emirates; and

(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;

and also includes a sovereign wealth fund that satisfies certain conditions.

The explanatory memorandum to Finance Bill, 2020 explains the rationale behind the insertion of the clause in page 10 of the memo file under 'Part-B Tax Incentives'. 

Exemption in respect of certain income of wholly owned subsidiary of Abu Dhabi Investment Authority and Sovereign Wealth Fund.

Section 10 of the Act provides for exemption in respect of certain incomes and activities under specific circumstances.

In order to promote investment of sovereign wealth fund, including the wholly-owned subsidiary of Abu Dhabi Investment Authority (ADIA), it is proposed to insert a new clause in the said section so as to provide exemption to any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating or maintaining any infrastructure facility as defined in Explanation to clause (i) of sub-section (4) of section 80-IA of the Act or such other business as may be notified by the Central Government in this behalf. In order to be eligible for the exemption, the investment is required to be made on or before 31st March, 2024 and is required to be held for at least three years.

For the purpose of this exemption, “specified person” is proposed to be defined to mean,-

(a) a wholly owned subsidiary of the ADIA, which is a resident of the United Arab Emirates (UAE) and which makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates; and

(b) a sovereign wealth fund which satisfies the following conditions:
A. It is wholly owned and controlled, directly or indirectly, by Government of a foreign country;
B. It is set up and regulated under the law of the foreign country;
C. Its earnings are credited either to the account of the Government of the foreign country or to any other account designated by that Government such that no portion of the earnings inures any benefit to any private person;
D. Its asset vest in the Government of the foreign country upon dissolution;
E. It does not undertake any commercial activity whether within or outside India; and
F. It is notified by the Central Government in the Official Gazette for this purpose.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.

ADIA, which is a sovereign wealth fund, is expressly covered in the Act itself within the meaning of specified person whereas in case of other sovereign wealth funds, the same needs to be notified by the Government of India in its official gazette for claiming the tax concessions.

About Abu Dhabi Investment Authority

The Abu Dhabi Investment Authority is a government-owned investment organization that manages the sovereign wealth fund for Abu Dhabi, United Arab Emirates. According to the Sovereign Wealth Fund Institute's rankings, the ADIA sovereign wealth fund ranked as the third-largest in the world in 2018 with $828 billion in assets. It is one of the world's largest institutional investors.

The huge amount of wealth managed by the ADIA is sourced primarily from Abu Dhabi's large oil reserves. The ADIA prefers to remain secretive, so not a great deal is known about its investment methodology or portfolio of holdings. In U.S. dollars, the 20-year and 30-year annualized rates of return for the ADIA portfolio were 6.5% and 7.0% respectively, as of December 31, 2017.

ADIA is a member of the International Forum of Sovereign Wealth Funds (IFSWF).

The International Forum of Sovereign Wealth Funds (IFSWF) is a non-profit international group of sovereign wealth fund managers which was established in 2009. It is based in London, England. As of February 2018, IFSWF had 32 members, including some of the world's largest sovereign wealth funds, like the China Investment Corporation, Kuwait Investment Authority, and the Abu Dhabi Investment Authority.
[Source: Wikipedia]

To know more about ADIA, refer to the ADIA website.

What is a Sovereign Wealth Fund

A sovereign wealth fund (SWF) is a state-owned pool of money that is invested in various financial assets. The money typically comes from a nation's budgetary surplus. When a nation has excess money, it uses a sovereign wealth fund as a way to funnel it into investments rather than simply keeping it in the central bank or channeling it back into the economy.

The motives for establishing a sovereign wealth fund vary by country. For example, the United Arab Emirates generates a large portion of its revenue from exporting oil and needs a way to protect the surplus reserves from oil-based risk; thus, it places a portion of that money in a sovereign wealth fund. Many nations use sovereign wealth funds as a way to accrue profit for the benefit of the nation's economy and its citizens.

The primary functions of a sovereign wealth fund are to stabilize the country's economy through diversification and to generate wealth for future generations.

The first funds originated in the 1950s. Sovereign wealth funds came about as a solution for a country with a budgetary surplus. The first sovereign wealth fund was the Kuwait Investment Authority, established in 1953 to invest excess oil revenues. Only two years later, Kiribati created a fund to hold its revenue reserves. Little new activity occurred until three major funds were created:
Abu Dhabi's Investment Authority (1976)
Singapore's Government Investment Corporation (1981)
Norway's Government Pension Fund (1990)
[Source: Investopedia]

According to the Sovereign Wealth Fund Institute (SWFI) 
A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established from:
Balance of payments surpluses
Official foreign currency operations
The proceeds of privatizations
Governmental transfer payments
Fiscal surpluses
And/or receipts resulting from resource exports

The definition of sovereign wealth fund excludes, among other things:
Foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes

State-owned enterprises (SOEs) in the traditional sense
Government-employee pension funds (funded by employee/employer contributions)

Or assets managed for the benefit of individuals

An SWF tends to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves.

Each sovereign fund has its own unique reason for its creation; furthermore, all funds have their own objectives.

Types of Sovereign Investment Vehicles:
Sovereign Wealth Funds (SWFs)–example Qatar Investment Authority
Public Pension Funds–example California Public Employees Retirement System (CalPERS)
State-Owned Enterprises – example Chinalco
Sovereign Wealth Enterprises (SWEs)–example St Martins Property

The legal basis in which sovereign wealth funds are created varies from governmental authority and fund.
Constitutive Law
Fiscal Law
Constitution
Company Law
Other Laws and Regulations

Some sovereign wealth funds are not as transparent as others. For example, one sovereign wealth fund may disclose their investment holdings on a periodic basis, while another fund keeps them private.

Sovereign Wealth Enterprise (SWE)

Sovereign wealth enterprises (SWE) are investment vehicles that are owned and controlled by sovereign wealth funds. These subsidiaries or vehicles allow greater flexibility for sovereign funds.

Top 10 sovereign wealth funds worldwide as of December 2019, by assets under management.
(in billion U.S. dollars)

Sl. No.
Sovereign Wealth Fund
Total Assets
1
Norway Government Pension Fund Global (Norway)
1,098.82
2
China Investment Corporation (China)
940.6
3
Abu Dhabi Investment Authority (UAE)
696.66
4
Kuwait Investment Authority (Kuwait)
592
5
Hong Kong Monetary Authority Investment Portfolio (China - Hong Kong)
509.35
6
GIC Private Limited (Singapore)
440
7
SAFE Investment Company (China)
417.84
8
Temasek Holdings (Singapore)
375.38
9
Qatar Investment Authority (Qatar)
328
10
National Council for Social Security Fund (China)
325
[Source: SWFI]

To know more about SWFI, refer to the SWFI website.

National Investment and Infrastructure Fund (NIIF)

National Investment and Infrastructure Fund (NIIF) is India’s first sovereign wealth fund that was set up by the Government of India in February 2015. Its creation was announced in the Union Budget 2015-16. The NIIF was allocated Rs 20,000 crore from the government.

National Investment and Infrastructure Fund (NIIF) is a fund created by the Government of India for enhancing infrastructure financing in the country.

National Infrastructure and Investment Fund Limited (NIIFL) is an investor-owned fund manager with the objective of creating long term value for its investors through investments in Indian Infrastructure. 

NIIFL currently manages three funds with distinctive investment and mandates. Government of India is an anchor investor in each of the funds. The funds are registered as Alternative Investment Fund (AIF) with the Securities Exchange Board of India (SEBI) and are currently raising capital from domestic and international institutional investors. 

NIIF through its Funds will invest in operating assets, greenfield projects and anchor third-party managed funds in core infrastructure and related segments.

Types of NIIF Funds

NIIF manages three funds - Master Fund, Fund of Funds and Strategic Fund. The funds were set up to make infrastructure investments in India by raising capital from domestic and international institutional investors.

Master Fund: The Master Fund is an infrastructure fund with the objective of primarily investing in operating assets in the core infrastructure sectors such as roads, ports, airports, power, etc.

Fund of Funds: A fund focused on anchoring and investing in credible and reputed third-party managers with a strong track record across diversified sectors within infrastructure services and allied sectors. Some of the sectors of focus include Green Infrastructure, Mid-Income & Affordable Housing, Infrastructure Services, and allied sectors.

Strategic Investment Fund: Strategic Investment Fund is registered as an Alternative Investment Fund II under SEBI. The objective of the National Investment and Infrastructure Fund II (“Strategic Fund”) is to invest largely in equity and equity-linked instruments. The Strategic Fund will focus on greenfield and brownfield investments in the core infrastructure sectors. A fund focused on investing in strategic assets and projects with longer term horizon across various stages of development.

Investments by NIIF

In January 2018, NIIF has made its first investment with DP World of Dubai, United Arab Emirates to create an investment platform for ports, terminals, transportation and logistics businesses in India. Hindustan Infralog, the joint venture platform between DP World and the NIIF announced that it bought 90% stake in the logistics firm Continental Warehousing.

It has also invested in the affordable housing fund of HDFC Capital Advisors Ltd.

Since then the NIIF has partnered with many overseas investors and the Government to invest in various infrastructure projects. One may refer to the NNIF website for more news.

Investors of NIIF

Government of India is the anchor investor in the NIIF, accounting for a 49 percent stake. Domestic Institutional Investors (DIIs) such as HDFC group, ICICI Bank, Kotak Mahindra Life and Axis bank are also contributors in NIIF’s Master Fund.

In October 2017, NIIF has signed an investment agreement worth US$1 billion with a wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA). As part of the comprehensive partnership agreement, ADIA will become the first institutional investor in NIIF’s Master Fund and a shareholder in National Investment and Infrastructure Limited, the NIIF’s investment management company.

Given the state of the Indian economy, India is in dire need of foreign investment. The infrastructure sector is considered to be the backbone of growth of any economy. This calls for more and more investment in this sector.

The investment by ADIA in India is definitely a welcome move. ADIA has invested or agreed to invest in India earlier also. It has around 12.56 % stake in the failed Infrastructure Leasing & Financial Services Limited (IL&FS) as on 30-03-2019.

In October 2019, Canada's PSP Investments, the Abu Dhabi Investment Authority and National Investment and Infrastructure Fund (NIIF) have acquired 26.3 percent stake for Rs. 7,614 crore in Mumbai's international airport through a joint investment in GVK Airport Holdings, a subsidiary of Indian industrial conglomerate GVK Power & Infrastructure and the holding company of the airport.

Singapore's sovereign wealth fund GIC Private Limited and the Abu Dhabi Investment Authority (ADIA) agreed to invest $495 million in renewable energy firm Greenko Energy Holdings, which has wind, solar and hydro projects.

ADIA is partnering Kotak Investment Advisors for Kotak Special Situations Fund, which will target NPA opportunities in India and committed to invest $500 million.

ADIA has an investment in the affordable housing fund of HDFC Capital Advisors Ltd to the tune of $ 500 million.

It is reported in media that ADIA, the world's third-biggest sovereign wealth fund, which has been investing in Indian equities and fixed income for years, has broadened its focus to include asset classes such as infrastructure, real estate and private equities. A further report is that Bankruptcy resolution rules introduced in 2016 helped pave the way for ADIA's $500 million investment earlier this year in a distressed debt fund.

According to media reports, many wealth and pension funds would like to see the government to further overhaul tax rules.

In this backdrop, ADIA is in the upper hand to negotiate for special tax concessions before continuing with significant investment in India. It is not unusual to have such favor by a giant investor for its significant investment. Such a concession also beneficial to the nation getting the mammoth investment.

The Finance Bill, 2020 exempts certain income of ADIA under section 10 in respect of its investment in India. However, to avail of the exemptions, ADIA has to invest money in India by 31st March 2024. ADIA must hold the investments for at least three years.

Reference:

Extract of Clause 7 of the Finance Bill, 2020 related to section 10(23FE)-

(d) after clause (23FD), the following clause shall be inserted, namely:–

(23FE) any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or equity, if the investment–

(i) is made on or before the 31st day of March, 2024;

(ii) is held for at least three years; and

(iii) is in a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Explanation.—For the purposes of this clause, “specified person” means–

(a) a wholly owned subsidiary of the Abu Dhabi Investment Authority which–

(i) is a resident of the United Arab Emirates; and

(ii) makes investment, directly or indirectly, out of the fund owned by the Government of the United Arab Emirates;

(b) a sovereign wealth fund which satisfies the following conditions, namely:–

(i) it is wholly owned and controlled, directly or indirectly, by the Government of a foreign country;

(ii) it is set up and regulated under the law of such foreign country;

(iii) the earnings of the said fund are credited either to the account of the Government of that foreign country or to any other account designated by that Government so that no portion of the earnings inures any benefit to any private person;

(iv) the asset of the said fund vests in the Government of such foreign country upon dissolution;

(v) it does not undertake any commercial activity whether within or outside India; and

(vi) it is specified by the Central Government, by notification in the Official Gazette, for this purpose;’;

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1 Comments

  1. That is good both for India and the UAE. What about the other Sovereign Wealth Funds; will they get the same treatment?

    ReplyDelete