The Securities and Exchange Board of India (SEBI) on Tuesday, February 25, has clarified that the Foreign Portfolio Investments (FPIs) from Mauritius will continue to be eligible for FPI registration but with increased monitoring. The clarification comes after the island nation was recently listed in the ‘grey list’ of Financial Action Task Force (FATF), an inter-governmental policy making body that sets anti-money laundering standards.
SEBI’s clarification is issued after some fund managers approached the market regulator raising concerns over validity of FPI registration done through the tax haven.
“There have been apprehensions among market participants that whether inclusion of Mauritius in the ‘grey list’ would have an effect on the registration of FPIs from Mauritius,” noted SEBI.
Mauritius is the second largest source after the United States from which foreign portfolio investments come into the country. According to National Securities Depository Limited (NSDL) data released in January 2020, assets under custody of US FPIs are worth Rs 11,62,579 crore and those from Mauritius stood at Rs 4,36,745 crore.
FATF listing Mauritius in grey list is significant as for several years, there have been apprehensions about the island nation being a “money laundering” route for FPIs due to its limited regulatory oversight.
Also read: US and UK are Among the Safest Tax Havens in the World
“In February 2020, Mauritius made a high-level political commitment to work with the FATF and Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) to strengthen the effectiveness of its anti money laundering and counter terrorist funding regime,” stated FATF on February 21. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed time frames and is subject to increased monitoring.
Alongside Mauritius, 17 other countries have been categorised in the “grey list” or ‘Jurisdictions under Increased Monitoring’ including Pakistan, Myanmar, the Bahamas, Panama and Syria.
In July last year, International Consortium of Investigative Journalists (ICIJ) had revealed that corporations in Africa, Asia and West Asia have been choosing Mauritius to avoid taxes for decades. According to the series of investigative reports termed as ‘Mauritius leaks’ , the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius (under which any entity could apply for tax residency and pay zero capital gains tax) signed in 1982, became “the principal reason why Mauritius emerged as a top channel for investments being routed into India.”
However, as allegations on the treaty abuse grew, Indian tax authorities amended the DTAA in May 2016, and imposed capital gains tax.
Also read: Mauritius Leaks: Reports say Double Taxation Avoidance Agreement With India Was Abused For Over 30 years
In October last year, SEBI has reduced the number of FPI categories from three to two. Category I FPIs will have a simpler set of compliance norms compared to those in category II. Reportedly, about 80% of FPIs from Mauritius are classified as Category II by the market regulator. With Mauritius getting place in FATF’s grey list, the remaining 20% FPI currently in Category I are likely to come under the scanner.
Furthermore, the FATF action on Mauritius might also impact India’s Foreign Direct Investment and Alternative Investment Funds as Mauritius has been a major source of foreign investments in India.