India inflows may get boost with category-I FPI status for Cyprus funds

Cyprus is the third non-FATF country to be given status in a move that could prompt more and possibly larger funds from Europea to route their investments through the island nation

The Indian government has classified foreign portfolio investors (FPIs) from Cyprus as eligible for taking up Category-I licence — a move that could boost investment from the region into India.

Cyprus is the third non-FATF country, after Mauritius and UAE, to be given the exemption --- a move that could prompt more and/or larger funds from the European Union to route their investments through the island nation. Cyprus is a part of EU, which is a political and economic union comprising 27 member states.

Being part of Category-I implies lower compliance burden, simplified know-your-customer norms and documentation requirements, and fewer investment restrictions. Indirect transfer provisions do not apply to category I FPIs.

Cyprus is among the top 20 FPI jurisdictions investing into India, with four out of its 22 registered FPIs belonging to category I.

It ranks nine on the list of countries with the most foreign direct investment into India, with cumulative equity flows of Rs 60,833 crore between April 2000 and March 2021, data from DPIIT shows. A fifth of these investments has come in the last three financial years.

"Cyprus becomes more attractive for FPIs based in EU, especially vis a vis other jurisdictions like Cayman Islands, Malta and the more expensive locations of EU, without any compromise on the quality and substance," said Viraj Kulkarni, founder, Pivot Management Consulting.

According to him, the island nation is a member of Moneyval (an associate member of FATF) and provides increased attractiveness on account of low tax rates, robust banking, emphasis on substance besides a deep pool of experts engaged in developing solutions for international Investment managers.

Investor body Cyprus Investment Funds Association (CIFA) wrote to its members on Tuesday, welcoming the move, as the relaxation would lower KYC requirements, enhance trading limits and allow investment in offshore derivatives instruments.

Experts suggest that the relaxation by the Indian government is a culmination of the growing political closeness between the two countries, especially in the backdrop of Turkey's closer bilateral relations with Pakistan that include joint military exercises in the past few months.

India and Cyprus had signed a revised agreement for avoidance of double taxation in 2016, allowing the former the right to tax capital gains arising from the transfer of investments made by Cyprus-based companies on or after April 01, 2017.

Notably, India had blacklisted the island nation in 2013 and deemed it to be a non-cooperative jurisdiction for failure to provide information requested for under the exchange of information provisions under the India-Cyprus tax treaty.

In 2016, the Indian government rescinded the notification blacklisting Cyprus.

Last year, the Securities and Exchange Board of India had relaxed its guidelines for FPIs seeking a Category-I licence, allowing investors from countries, which are not members of Financial Action Task Force (FATF), to qualify for such registrations if the countries are specified by the Indian government.

At present, the FATF has 39 members that includes the likes of Australia, Singapore, Luxembourg and China.