The International Monetary Fund (IMF) has asked Mauritius to set up a 'macro-prudential authority' to monitor the offshore investments from the island. One of the largest destinations of such offshore investments is the Indian stock market. The proposed authority will have a central role for the banking regulator, the Bank of Mauritius, to improve the assessment and mitigate systemic risks, the IMF said in a March 17 release.
According to the Fund, the nation faces spill over risks from the inter-linkages between large offshore activities, the banking system, and the domestic economy. The Fund has also recommended cutting back the 'zero tax' treatment since it makes the island's banks take more risks than they can handle.
Mauritius has, for long, been one of the preferred destinations for international funds because of its zero tax. Since the nation also offers an address for these funds, thanks to the double-taxation avoidance agreement with India, the funds get a preferential tax treatment when they invest in India.
The IMF made the comments following Article IV consultation with Mauritius. The IMF holds bilateral discussions with members, usually every year. An IMF team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. Following this, a report is prepared and submitted to the IMF Executive Board for discussion. A summary of the discussion is then shared with the country concerned.
During the consultation with Mauritius, the Fund also noted the need for the country to have a strong forex reserve base. As of February, the nation's reserves stood at $4.3 billion.
The proposed authority, according to IMF, will force foreign companies to offer more information about the source of their funds. This will address "information gaps regarding offshore business companies and their role in conglomerate groups", the Fund said.An email questionnaire sent to the Mauritius High Commission in Delhi remained unanswered at the time of going to press. A regulatory authority set up under IMF oversight will be bound to share all such information garnered with member countries.
But, the IMF thinks this is not enough. The multilateral institution's comments are in the context of global concerns about funds from dubious sources using tax havens such as Mauritius to tap into large stock markets such as India.
An email questionnaire sent to the Mauritius High Commission in Delhi remained unanswered at the time of going to press.
According to Sanjay Sinha, founder of Citrus Advisors, a Mumbai-based investment management firm, such adverse comments from the IMF would not impact the flow of funds to India via Mauritius. "They would take notice if there is a push to change the tax treatment; short of that, the rest is kosher."
There could be some down swing, though. Securities and Exchange Board of India data show money coming into the markets through participatory notes - the preferred investment vehicle for foreign funds into India - declined to Rs 2,17,740 crore at the end of February 2016. It has dipped six per cent since January.