FPIs face scrutiny as custodians label Mauritius high risk

Mauritius’ importance as a jurisdiction for Indian investment is significant, with foreign funds from the nation holding Indian securities (including debt and equities) worth ₹3.4 trillion as of 30 April, data from depositories showed.

Following the release of the Hindenburg report on Adani Group, which named certain Mauritius-based foreign portfolio investors (FPIs), most custodian banks have raised the risk status of Mauritius.

The report has also sparked a broader discussion in India about the opaque structures employed by a few Mauritius-based entities. Indian regulators have also turned wary of some Mauritius-based investors. Most recently, the government published a list of 21 countries whose investors were exempt from paying angel tax. Mauritius was not part of the list, even though it is a major source of foreign investment in India.

An email sent to Mahen Kumar Seeruttun, minister of financial services and good governance of Mauritius, on Thursday, remained unanswered.

“The risk perception of Mauritius has gone up significantly in recent months. Custodian banks also want to ensure that the entities coming from Mauritius are proper investors and there is no potential round-tripping,” said a custodian on condition of anonymity.

“For investors coming from high-risk jurisdictions, the overall documentation requirement is higher. Custodian banks also perform their own internal checks while dealing with such investors.”

Every global bank categorizes various countries broadly under high-risk, medium-risk and low-risk jurisdictions. Investors coming from low-risk jurisdictions are subject to the least compliance requirements. This categorization is based on several factors, including the political climate, global data-sharing pacts and anti-money laundering laws.

Custodian banks are global banks which act as contacts between market regulators, the Securities and Exchange Board of India(Sebi), and foreign funds. Under the rules, an FPI licence is issued by these custodian banks, and they are also in-charge of handling compliance matters on behalf of the funds.

In 2018, Sebi wanted to propose a list of high-risk jurisdictions so that the capital flows from these countries could be monitored better. During that time, there was speculation that Mauritius may be put on the high-risk list. This led to a major uproar from Mauritius-based funds, prompting Sebi to withdraw that proposal. Instead, Sebi asked custodian banks to maintain their own individual lists of high-risk jurisdictions.

Then in 2020, the Financial Action Task Force (FATF) put Mauritius on the list of “jurisdictions under increased monitoring”. India’s anti-money laundering law prohibits any inflows from countries that feature in the negative list of the FATF. Again, investors panicked, prompting Sebi to clarify Mauritius funds would not be blacklisted due to the FATF action. Mauritius was removed from the grey list after the FATF conducted a comprehensive review.

“But during both the previous occasions, despite the noise, investors were continuing to opt for Mauritius. But now the flows coming from Mauritius are drying up month after month,” said the second person cited above. “Custodians and other stakeholders are generally advising the potential clients to choose Singapore or Gift City Ahmedabad instead of Mauritius to reduce regulatory risk.”

In June 2022, Mauritius was the second-largest source of FPI investment in India, with funds from the island nation holding securities worth nearly ₹5 trillion, which was 11% of the total FPI assets under management (AUM) in India.

But by April, Mauritius fell to fourth place, with assets worth ₹3.4 trillion, or less than 7% of the total FPI AUM, NSDL data showed.

Updated: 01 Jun 2023, 10:44 PM IST