Will Mauritius regain the tag of India’s top investor?

On April 13, the finance ministry notified Mauritius as an ‘eligible country’ for the purposes of Regulation 5 (a) (iv) of the SEBI (Foreign Portfolio Investors) Regulations, 2019. For starters, this particular regulation defines ‘Category 1 foreign investor’ (CAT1-FPI) which include entities from the Financial Action Task Force (FATF) member countries or from any country specified by the central government by way of an order or by way of an agreement or treaty with other sovereign governments.

By definition, CAT1-FPI could be appropriately regulated funds, or even unregulated funds whose investment manager is appropriately regulated and registered as CAT1-FPI, also subject to the investment manager undertaking the responsibility of all the acts of commission or omission of such unregulated funds.

Additionally, university-related endowments of universities that have been in existence for more than five years are also qualified to be registered as CAT1-FPI. It is noteworthy that Mauritius is not a member of FATF--the France-headquartered global money laundering and terrorist financing watchdog, which has 39 member nations.

According to the Economic Development Board (EDB), the island nation’s apex body for economic planning, investment, trade promotion, and facilitation, the ratification bears testimony to the strong relationship between India and Mauritius. “This recognition follows fruitful engagements at the highest level between Mauritius and India on further enhancing our trade and economic ties,” says EDB.

EDB, which operates under the aegis of the ministry of finance, economic planning, and development of Mauritius, also adds that the ratification follows interactions among the various authorities, including high-level discussions between the Financial Services Commission of Mauritius and the Securities and Exchange Board of India (SEBI) since October last year.

Finance minister Nirmala Sitharaman, in her Union Budget speech on February 1, had proposed to align exemption from the provision of indirect transfer to FPIs in line with new SEBI FPI regulations of 2019. The provisions around indirect transfer apply to FPIs that have deployed more than 50% of their portfolio investments in India.

According to these rules, transfer of shares or units of such funds even outside India attracts capital gains tax in India. For example, an investor in an offshore fund that is not CAT1-FPI, sells the units to some other investor, the transaction would attract 10% short-term capital gains tax if the shares or units were held for over 12 months. In the case of short-term capital gains tax applicability, which means the share or units are held for less than a year, the applicable tax rate would be in the range of 30% to 40% of the net capital gains.

Given that the net inflows from Mauritius account for over 11% of the total inflows (sum of equity-debt-hybrid investments) as of March 2020, the move is important. And, given the correction that the equity markets have witnessed in recent weeks, India’s valuations are relatively attractive for the foreign investing community.

Rightly, Mauritius has welcomed the Indian government’s move. “This is a major development for the Mauritius International Financial Centre (IFC). It brings the element of certainty back to Mauritius’ jurisdiction with respect to FPI investments,” Harvesh Kumar Seegolam, governor of the Bank of Mauritius, told The Economic Times.

Seegolam, who took charge of the Bank of Mauritius on March 1 this year, was the chief executive of Mauritius’ market regulator, the Financial Services Commission, since July 2017. “This development reaffirms both the position of Mauritius as a major IFC for foreign portfolio investments, as well as the confidence of investors in our jurisdiction," he said.

On its part, EDB further adds that the government of Mauritius has laid a strong emphasis on providing a conducive business environment to the investor community and this amendment unfolds a key development in reaffirming Mauritius as the hub of choice for international investments.

The key question now is whether Mauritius will get its mojo back.

In March 2012, Mauritius accounted for 27.49% of the total FPI flows into India in rupee terms. That has gradually dropped, and more than halved to 11.38% at the end of March this year.

According to half-yearly data from the Financial Services Commission (FSC), Mauritius, in June 2019, portfolio investments to India stood at $91.77 billion. This, compared to $76.33 billion in December 2012 is an absolute increase of $15 billion, or 20.2%. The highest FPI investment from Mauritius was recorded in December 2017 ($107.38 billion). The difference between the highest (December 20017) and June 2019 (latest data available) is $15.62 billion, or a reduction of 14.5%.

What is also important to note in the FSC data is the number of GBC1 (global business company–category 1) involved in the investments. From 1,357 in December 2012, the number was reduced by 390, or 28.7%, to 967 in June 2019. The highest number of GBC1s, at 1,450, was reported for June 2015. Compared to that, the number was reduced by 483, or 33.3%, in June last year.

However, as the investors from Mauritius now stand eligible to get classified as CAT1-FPI, with less stringent Know Your Customer (KYC) formalities, and reduced taxation adversaries, the island nation would hope to see its portfolio investment numbers in India growing. Just like foreign direct investment (FDI), where Mauritius has the highest share of 31%, owing to cumulative inflows of $141.93 billion from April 2000 to December 2019, the focus should be to get back the No. 1 country tag for portfolio investments too.