In September 2019, the Securities and Exchange Board of India (Sebi) notified the Foreign Portfolio Investors (FPI) Regulations, 2019 overhauling the erstwhile regulations of 2014. Under New FPI Regulations, Sebi recategorized FPIs in two categories (as against earlier three categories) based on status and jurisdiction of residence.
Under New FPI Regulations, Category I FPIs include sovereign wealth funds, pension funds, appropriately regulated entities, certain endowments and other entities from Financial Action Task Force (FATF) member countries which are appropriately regulated funds or unregulated funds with appropriately regulated and registered investment managers or are owned to the extent of at least 75% by certain Category I FPIs.
Category II FPIs include entities that do not qualify for Category I status under New FPI Regulations. Further, on account of the overhauling and recategorization under New FPI Regulations, those Category II FPIs under Erstwhile Regulations which did not qualify to be recategorized as Category I FPIs under New FPI Regulations got categorized as Category II FPIs under New FPI Regulations alongwith Category III FPIs under Erstwhile Regulations. Consequently, Mauritius based FPIs became disentitled for Category I status as Mauritius is not a FATF member.
The FATF is the global money laundering and terrorist financing watchdog and has 37 countries as its members. This inter-governmental body sets international standards that aim to prevent illegal activities and more than 200 jurisdictions have committed to implementing the FATF Recommendations through the strong global network of FATF-Style Regional Bodies (FSRBs) and FATF memberships.
There are multiple criteria that are applied for considering a country for FATF membership, including strategic importance test, quantitative indicators (e.g. size of GDP of the applicant country), qualitative indicators (e.g. impact on the global financial system, including the degree of openness of the financial sector and its interaction with international markets) and other considerations (e.g. participation in other relevant international organisations). Mauritius, as it is widely assumed, may not be able to meet GDP quantitative criteria for FATF membership.
With the introduction of New FPI Regulations, FPIs based in non-FATF member countries (such as Mauritius, Cayman Islands, Cyprus, Taiwan, United Arab Emirates and others) were put on a competitive disadvantage to their peers based in FATF member countries (such as Singapore, Luxembourg, USA etc). The former set of FPIs suddenly faced a retroactive change in regulatory regime whereby they could no longer enjoy the benefits that they enjoyed under the Erstwhile Regulations as these benefits would be available only to Category I FPIs under the New FPI Regulations.
Recent amendment that gives a new lease of life to Mauritius FPIs
Considering that Mauritius alone accounts for 13% of assets under management of all FPIs investing in India, industry representation and advocacy efforts were expected on account of the regulatory and tax fallout of the New FPI Regulations. Perhaps in continuation of the dialogue with the industry, co-regulators of other countries and commitment of the Government of India to make India an attractive investment destination, Sebi amended the New FPI Regulations on April 7, 2020 and introduced Central Government’s power to notify non-FATF member countries to be eligible for Category I FPI registration.
Soon thereafter, on April 13, 2020, the Government of India’s Department of Economic Affairs (“DEA") notified Mauritius as an eligible jurisdiction for seeking registration as Category I FPI, thereby removing the stigma and restoring the regulatory and tax benefits for Mauritius based FPIs.
To conclude: With Mauritius’ status getting restored, it is expected that eligible Mauritius based FPIs would be reclassified as Category I under the New FPI Regulations. However, neither the DEA order nor the April 7 amendment to New FPI Regulations confer the recategorization retroactively.
The DEA order stems from the long-standing socio-economic-political ties that India shares with Mauritius. It would be pertinent to note that Mauritius is one of the few countries with which India has had a tax treaty and trade relations since the pre-independence era.
Amidst the covid-19 lockdown and weak markets, Mauritius continues to cooperate with the EU, FATF and OECD and undertake the measures for implementation of the FATF Action Plan within the agreed timelines in order to maintain its position as a trusted and recognised jurisdiction for setting up investment funds and holding companies for investments in and trade with Asian and African countries.
Shagoofa Rashid Khan is Partner and Head - Funds, Investment & Advisory at Cyril Amarchand Mangaldas. Daksha Baxi is Head- International Taxation at Cyril Amarchand Mangaldas. Their views are purely personal and do not reflect those of Mint.