Mauritius' regulator red-flags removal of investment status by Sebi

Mauritius’ financial services regulator Financial Services Commission (FSC) has asked the Securities and Exchange Board of India (Sebi) to reconsider its stance of allowing only Financial Action Task Force (FATF) members to be eligible for category I status as foreign portfolio investors (FPIs).

In a meeting held a few days ago, FSC officials told Sebi to tweak its existing guidelines to allow funds from FATF-‘compliant’ regions to register as category I FPIs, sources in the know said.

According to norms notified last month, only those FPIs domiciled in regions that are FATF members can get a category I status and issue offshore derivative instruments. A category II status could also imply, in some ways, getting back the ‘high-risk jurisdiction’ tag.

FATF is an international body comprising 39 members that sets standards to combat money laundering and terror financing. 

Regions such as Mauritius, Cyprus and Cayman Islands are non-members. Mauritius is compliant with all major FATF guidelines even though it is not a member, the FSC officials have told Sebi. At present, the country is a member of The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which is committed to following standards to prevent money laundering and terror financing, including FATF recommendations.

“Mauritius is not deficient in AML (anti-money laundering) standards and it is not fair to exclude funds from the country from being classified as category I just because it is not an FATF member,” said a person who deals with Mauritius-based funds.

“Several Mauritius and Cayman Islands-based funds may come under category II, and not be able to issue offshore derivatives instruments,” added Richie Sancheti, head of the funds practice at Nishith Desai Associates.

Last month, Sebi merged three FPI categories into two. Category I includes central banks, sovereign wealth funds, pension funds, banks, asset managers, portfolio managers, and entities from FATF member countries. Category II comprises corporate bodies, charitable organisations, family offices, individuals and unregulated funds in the form of limited partnerships and trusts.

Mauritius mainly provides for two types of investments vehicles for offshore funds: Collective investment schemes which can invest across asset classes and closed-ended or private equity funds via an investment holding company.

Mauritius funds may now look to shift their fund management activities to FATF member countries if Sebi does not relax its existing norms, said experts. “The fund management responsibilities may be delegated to countries such as Singapore, which is an FATF member. The fund manager will have to take a local licence in Singapore and register as a category I FPI in India. The fund, however, can continue to operate from Mauritius,” said an expert on fund taxation.

Existing FPI norms allow unregulated funds to register as category I FPIs provided the investment manager is from an FATF appropriately regulated and registered as a category I FPI. This is subject to the manager taking responsibility of all acts of commission or omission of such unregulated funds.

“The current regulations are not targeted at any particular jurisdiction, and only meant to encourage investments from regions that meet certain compliance standards,” said a person who had given inputs to the regulator to form the current regulations.

Mauritius has been doing its bit to showcase its compliance with international tax norms and shed its image as a quasi-tax haven.

For instance, it has stepped up scrutiny of offshore fund structures in the past few months, putting several global and India-focussed funds wanting to set up structures in Mauritius under the country’s regulatory glare. 

FSC now combs through KYC information of new fund applications and does extensive background checks on fund sponsors and fund managers. 

FSC is also reaching out to regulators of countries in which these sponsors or managers are based to verify their antecedents.

Late last year, Mauritius had amended its Income Tax Act and inserted a clause for determining the place of effective management, making it difficult to establish residency in the country.

Companies operating in Mauritius are now subject to stringent substance requirements, including minimum number of resident directors and full-time employees.

These efforts have been recognised by the international community. Mauritius did not figure in the European Commission’s list of 23 countries deficient in anti-money laundering and terror financing frameworks announced in February this year. 

On October 10, the Council of the European Union has stated that Mauritius is compliant with all commitments on tax cooperation and has implemented the necessary reforms to comply with EU tax good governance principles.