Mauritius is back in focus, though in a hush-hush way. Custodians of foreign funds are at a loss whether to classify Mauritius as a highrisk jurisdiction — a tricky call that has diplomatic and business repercussions.
After imposing new curbs on offshore funds where NRIs are either large investors or act as managers, stock market regulator Securities and Exchange Board of India (Sebi) has verbally asked custodians to draw a list of high-risk jurisdictions.
These are countries that could be used for money laundering or round-tripping of funds.
Sebi has communicated this verbally in two meetings with custodians. “But it (Sebi) is reluctant to either instruct custodians in writing or come out with a list of its own… probably because India does not want to sour diplomatic relations with Mauritius,” a person familiar with the subject told ET.
But a person who attended one of the meetings with Sebi officials said the regulator would prefer offshore financial centres like Mauritius to be included in such a list.
After the US, Mauritius accounts for the highest level (about 16%) of total foreign portfolio inflows. Its inexpensive and a favourite with many NRI/PIO (non-resident Indian/person of Indian origin) investment managers.
Senior bankers and brokers, preferring anonymity, said the curbs on NRI investments, though sold as anti-money laundering measures, have an uncanny resemblance to the demonetisation of November 2016: just as the ban on high-denomination currency notes was believed to have cut the cash flow to some of the political parties before the Uttar Pradesh polls of early 2017, the hurdles put up for NRI-linked foreign portfolio investors and categorising Mauritius as a highrisk jurisdiction could make round-tripping of money a lot more difficult in the run-up to the highstakes general elections of 2019.
“While no specific jurisdictions have been identified as high risk yet, the expansive definition under Sebis 2010 guidelines could potentially put all major investment jurisdictions used for structuring funds investing in India under the high risk category.
Also, even if the intention was different, the language of Sebis April 2018 circular ends up discriminating against NRI/resident fund managers,” said Divaspati Singh, associate partner at law firm Khaitan & Co.
According to the new Sebi rule, NRIs cannot be beneficial owners (BO) of foreign portfolio investors (FPIs). What is BO? First, BO would mean 25% ownership in a company or 15% in a trust or partnership — depending on how an FPI is structured abroad. Second, the BO rule would be triggered if the manager of such a fund is an NRI even though the person may not have any investment in the fund. Third, the threshold (for establishing NRI control or dominance in the fund pool) would be at a lower (and thus more stringent) level of 10% if the FPI is based in a high-risk jurisdiction.
Many of the top fund or asset managers managing FPI funds are NRIs and resident Indians who have set up offshore structures for raising funds from foreign residents and investing through the FPI regime. Of FPIs total (equity, bond and hybrid) assets under management of Rs 31.48 lakh crore, funds from US account for Rs 10.15 lakh crore, Mauritius Rs 4.98 lakh crore, Luxembourg Rs 3.23 lakh crore, Singapore Rs 2.94 lakh crore and the UK Rs 1.45 lakh crore, followed by Japan, Ireland, Canada, Norway and The Netherlands.
Last week, RBI imposed fresh restrictions on FPI investments in corporate bonds. The new concentration norms will result in some structural changes in the way FPIs invest and have been notified to address multiple concerns, of which round-tripping is one, said Tejesh Chitlangi, senior partner at IC Universal Legal.
Custodians, which are typically large banks and local financial services houses, will have to identify high-risk jurisdictions on the basis of the Sebi master circular of December 2010. “It is possible,” said Rajesh Gandhi, partner at Deloitte India, “that each custodian might be taking a different interpretation of the guidelines and might have its own list of high-risk jurisdictions, so countries such as Mauritius may not be considered high risk by some custodians.”
Gandhi felt Sebi could consider providing the list but if thats not feasible, then a detailed guidance should be given so that a uniform view can be taken.
According to Sameer Gupta, financial services tax leader at EY, “The requirement to now apply a lowered materiality threshold of 10% for identification of beneficial owner and higher KYC (know your customer) documentation in case of high-risk jurisdictions, will be an area of concern in the absence of clear guidance or written indication on which jurisdictions are high risk.” Sebi, he felt, should imminently clarify these aspects to ensure these requirements do not impede genuine investment activity.
Sebi did not respond to queries from ET. Mauritius is not included in the list of high-risk and monitored jurisdictions prepared by the Financial Action Task Force (FATF), an inter-government body. Under anti-money laundering criteria, such a list should consider countries that facilitate terror financing, funding of narco trade as well as offshore centres that encourage tax evasion.
While custodians are responsible for registration of FPIs, they are reluctant to publicly announce any list of risky jurisdictions for their clients.