Mauritius, Cayman Islands funds under watch for ownership info gaps

The Securities and Exchange Board of India (Sebi) is keeping an eye on funds based in Mauritius and the Cayman Islands that may not have provided adequate information about their ultimate beneficial owners, said two people familiar with the matter.

There are concerns that a number of such funds could have a high non-resident Indian (NRI) holding and be used by Indian promoters for round-tripping and manipulating share prices. This could also give a false sense of confidence to investors by virtue of a higher foreign portfolio investor (FPI) holding.

According to the current norms, no single NRI can be the beneficial owner of more than 25 per cent of any foreign fund’s asset under management. Cumulatively, NRIs cannot hold more than 50 per cent of the assets managed.

"All small to mid-sized funds from Mauritius and the Cayman Islands which may be run by Indians sitting overseas will be under watch. Sebi has also been sending queries about FPIs with high holding in some Indian group companies," said a custodian.

There are 600 FPIs based in Mauritius investing into India, of which 408 are category I, according to the NSDL website. There 336 funds from Cayman, of which 277 belong to category II. As on May 31, 2021, the website showed at least 10 funds from Mauritius that had their accounts frozen.

"There is a possibility that a number of Indian promoters may have invested in their own stocks through such funds, constituting a proxy holding," said another person who deals with FPIs.

Investors who have put in more than 25 per cent in a fund are considered beneficial owners. The threshold is lower at 15 per cent when the investor is a trust, and 10 per cent when the fund is from a high-risk jurisdiction.

In the past, Sebi has expressed concerns to custodians about the misuse of the FPI investment route by NRIs. There were some grey areas in FPI regulations earlier, and some custodians had different interpretations of the rules. However, there has been greater clarity on the matter after Sebi aligned the beneficial ownership rules with PMLA regulations in 2019.

The operating guidelines for FPIs say beneficial owners are the natural persons who ultimately own or control an FPI and should be identified in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

In the past, both Sebi and the Enforcement Directorate have cracked down on the suspected misuse of global depository receipts for routing black money back to India.