Finance Bill amendment eases Mauritius funds' path for India shift

An amendment to the Finance Bill has allowed a wholly-owned special purpose vehicle (SPV) of an offshore fund to transfer securities to an International Financial Services Centre (IFSC) fund in Gujarat, while also enabling the IFSC fund to issue units either to investors in the offshore fund or to the offshore fund itself.  

This, said experts, will make it easier for Mauritius funds investing in India to shift to the IFSC. There are 600-800 Mauritius funds investing in India. Experts reckon up to 10 per cent of such funds could shift to the IFSC.

The earlier Budget provisions necessitated dismantling the Mauritius fund and issuing units of the new fund directly to investors. This could have potentially resulted in tax implications for investors in their home jurisdiction. Global investors had to be comfortable with India as a jurisdiction and its legal structure as the process would entail an entire fund documentation change.

According to the amendment, units of the resultant fund (IFSC fund) can now be issued to the original fund under the tax-neutral relocation. This means new units can be issued to the Mauritius fund to make it a feeder vehicle, thus doing away with the tax and legal ramifications for investors.

“The Bill now permits issuing units of the IFSC fund either to investors in the offshore fund or to the offshore fund itself. This will give much-needed flexibility to the fund manager to either shift the entire fund structure to the IFSC or to adopt a master-feeder structure,” said Tushar Sachade, partner, PwC India.

Further, the Bill permits transferring securities not only from the offshore fund but also from the wholly-owned SPVs of the funds. “Both these amendments would help meet the government’s objective to accelerate the process of relocation of the offshore fund structures to the GIFT City IFSC,” Sachade said.

Investors put capital in feeder funds, which invest their assets in a centralised vehicle known as the master fund. The master fund is responsible for making all portfolio investments and conducting trade.

“Many two-tier fund structures such as Luxembourg-Mauritius-India or Cayman-Mauritius-India are likely to be the first ones to consider relocation to the IFSC because it’s relatively easy to implement without affecting the ultimate investors in the global fund,” said Sunil Gidwani, partner, Nangia Andersen. The amendment to the Bill has also extended the grandfathering benefit on future sales of shares of Indian companies to category III AIFs. Earlier this benefit was provided to non-residents of Category I and II AIFs in the IFSC on capital gains arising on transferring shares of the Indian company by the AIF.

According to the Budget proposals, the migration of a fund to a fund in the IFSC will not be regarded as transfer if done on or before March 31, 2023. 

Transferring units will be tax-neutral. Grandfathered investments in the fund will continue to enjoy capital gains exemption on future sales by the IFSC fund. There is no impact on carry forward of losses for the investee company.

The Securities and Exchange Board of India (Sebi) is holding discussion to allow cashless off-market transfers of units between the offshore fund and the IFSC fund for foreign portfolio investors (FPIs), according to people in the know. Sebi regulations at present do not allow cashless transfers of securities between FPIs with different permanent account numbers. FPI investment from Mauritius in India stood at Rs 5.05 trillion at the end of February, making the region the second-highest source of such investment in India.