India: SEBI proposes fund netting for FPIs | Mauritius: Tax Residency Certificate (TRC) and grandfathering provisions do not override the principle of substance over form

At a glance

India: A consultation paper proposes allowing fund netting for certain FPI cash-market trades to reduce short-term liquidity needs, foreign exchange lippage, and funding costs, while retaining maintaining retaining gross settlement for non-outright trades.

Mauritius: Tax Residency Certificate (TRC) and grandfathering provisions do not override the substance-over-form principle.

A closer look

India

Background – Current settlement practice

Under India’s current settlement framework, FPIs must fund purchase obligations on a gross basis, without offsetting same-day sales. Although custodians settle net positions with clearing corporations, FPIs themselves cannot offset purchases against sales. This results in temporary over-funding, particularly during periods of high portfolio turnover such as index rebalancing.

What is SEBI proposing?

SEBI proposes allowing fund netting for FPIs’ “outright” cash market transactions within the same settlement cycle. Under the proposal, netting would apply only where an FPI has either a buy or a sell in a security, but not both. Securities with both buy and sell trades in the same cycle would continue to settle on a gross basis. Sale proceeds from outright sales could be used to fund same-day outright purchases, but any excess proceeds could not be applied toward non-outright (gross-settled) buy obligations.

If implemented, the proposal could:

• Reduce short-term liquidity and funding requirements.
• Lower FX conversion and bridge financing costs.
• Improve operational efficiency during index rebalancing and high-volume trading days.
• Maintain market integrity by restricting netting to eligible transactions only.

Risks and operational considerations

SEBI has acknowledged potential operational and clearing risks, including trade rejections and settlement timing mismatches. These are proposed to be mitigated through:

• Existing default waterfall and Core Settlement Guarantee Fund mechanisms.
• Mandatory system enhancements by custodians.
• Continued application of clearing corporation winding-down and risk management frameworks.

Mauritius

India’s Supreme Court has denied Tiger Global benefits of the India–Mauritius Double Taxation Avoidance Agreement (DTAA) on capital gains from its 2018 exit of Flipkart Mauritius, overturning an earlier Delhi High Court ruling. The Court held that Tiger Global’s Mauritian entities were effectively controlled from the U.S. and constituted conduit arrangements and reaffirmed that TRCs and grandfathering provisions do not override the substance-over-form principle.

Background

Tiger Global invested in Flipkart India prior to 1 April 2017 through Mauritius-based entities that held shares in Flipkart Singapore. Following Walmart’s 2018 acquisition of a majority stake in Flipkart for approximately USD 1.6 billion, Tiger Global realized substantial capital gains and claimed DTAA exemption, arguing that the investments were grandfathered and outside the scope of GAAR. While the Delhi High Court initially accepted this position, the Supreme Court has reversed it, holding that treaty benefits cannot be claimed where effective control and management lie outside Mauritius. The ruling is expected to have significant implications for foreign investment structures and tax planning in India, and calls into question earlier judicial principles (including the Court’s own) that a valid TRC alone is sufficient to access DTAA benefits.

Key observations of the Court include:

• TRC not sufficient: A TRC is an eligibility requirement but does not, in itself, establish treaty entitlement following the introduction of General Anti-Avoidance Rules (GAAR).
• GAAR applicability: GAAR applies to tax benefits arising after 1 April 2017, even where investments were made earlier. Rule 10U(2) permits examination of any arrangement for impermissible avoidance.
• Substance over form: The Court found that effective control and management of the Mauritian entities resided in the U.S., rendering them conduit structures lacking commercial substance.
• Burden of proof on taxpayer: The onus lies on the taxpayer to rebut the presumption of tax avoidance, which Tiger Global failed to do by demonstrating a genuine commercial purpose beyond tax benefits.
• Policy Emphasis: The Court reaffirmed India’s sovereign right to tax income arising within its territory and underscored the need to curb treaty abuse, round-tripping, and conduit arrangements.