FATF puts Mauritius on grey list: Tejas Desai of EY explains the impact of this on FPI inflows

Mauritius was never a part of Financial Action Task Force (FATF) member country but they are on a grey list. FATF is an inter-governmental body which sets anti-money laundering standards.

SEBI says that if a foreign portfolio investor (FPI) is coming from a high risk jurisdiction or a non-cooperative jurisdiction then - a) that FPI will not be allowed to make any fresh purchases in the Indian market and b) there will be no fresh registrations given to those FPIs. Some of the big questions that arise now are - Is the FATF’s grey list equal to a high risk jurisdiction and if that is the case, then what happens? Will there be a ban on any immediate investments that are coming in from Mauritius? What will happen on registrations?

CNBC-TV18 tried reaching out to the market regulator and they have clarified on one aspect. They exclusively told the channel that FPIs from Mauritius will continue to be eligible for FPI registration with increased monitoring as part of the FATF norms. So, new guys can come in and register. However, what happens to the existing people and that is the question that still remains unanswered.

Out of the total FPIs coming into India, 15-20 percent still comes from Mauritius, though the significance of Mauritius has been coming down over the years as regulations have tightened. A lot of the FPIs coming from Mauritius are Category-2, which is a higher risk category, there are higher compliances. They are not Category-1, which means they cannot issue P-Notes or Offshore Derivative Instruments (ODIs).

So, if the market regulator is going to maintain status quo -- if those coming from Mauritius will still be allowed to invest in trade into India but we need some more clarity.

Throwing further light on this whole issue and its impact, Tejas Desai, senior partner at EY said, “From whatever I have been hearing, the custodian community has been in dialogue with SEBI and it does appear that SEBI is likely to issue a clarification, which will say that status quo be maintained, that Mauritius entities be allowed to invest into Indian securities, fresh applications for FPIs from Mauritius will also be allowed. There may be some enhanced KYC and documentation requirements which SEBI may impose but the view that seems to be emerging is that by placing Mauritius on the grey list, it does not tantamount to any form of a ban under the SEBI regulation."

According to him, what works in Mauritius' favour is the very good tax treaty. "Mauritius-India treaty despite the withdrawal of capital gain exemption on sale of shares, there continues to be an exemption for any other form of securities. Those benefits continue."

"The treaty still retains some of its charm and investors may want to use it for certain structures. I think the development yesterday about Mauritius being on a grey list is a bit of a dampener but if Mauritius works through this and in the next 6 months if it manages to move out of that list, then it will be back in the reckoning again.”