What are hybrid instruments? An explainer on tax treatment
dividends. Foreign investors are also permitted to invest in CCDs issued by Indian companies under the foreign direct investment (FDI) route in any sector except those sectors that are prohibited. The guidelines on FDI treat CCDs as equity for the purposes of Indian exchange control laws.
CCD investments by foreign investors are subject to pricing guidelines. As per the FDI guidelines on pricing, the price/ conversion formula is to be determined upfront at the time of issuance of the CCDs, and the price at the time of conversion cannot be lower than the fair market value at the time of the issuance of the CCDs. In case of unlisted CCDs, any purchase or subscription of these instruments is subject to certain valuation norms prescribed under the tax laws.
Purchase or subscription of the CCDs at a value below the prescribed valuation norms are subject to tax as any other income in the hands of the investors. Taxability of interest income on CCDs is also a key consideration for the investors. As per tax laws, typically, interest income on CCDs is taxed as other income as per applicable slab rates/ maximum marginal rates (in case of resident investors) or as per relevant tax treaty rates (in case of non-resident investors).
In case of non-resident investors, an important aspect for availing beneficial tax rates under the tax treaties is whether the investor is a ‘beneficial owner’ of interest income. ‘Beneficial ownership’ is a test commonly applied in tax treaties to identify the economic beneficiary in a particular transaction, i.e., the party who has a right to use and enjoy the income. Tax courts have held beneficial ownership to mean exclusive possession and control over the interest income; and absolute freedom for the
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