Mauritius, once among the most preferred destinations for foreign portfolio investors (FPIs) for routing funds into India, has slipped to fifth position in terms of assets under custody (AUC) of FPIs as on June 30.

Ireland now stands at fourth with an overall AUC of Rs 4.41 trillion, edging out Mauritius whose AUC was at Rs 4.39 trillion at the end of June 2024, as per data from the National Securities Depository (NSDL). The gap between the two jurisdictions is wider when it comes to pure equity holdings.

While AUC of FPIs based in Mauritius recorded 11 per cent growth in the first half of the calendar year, those in Ireland registered a 26 per cent surge in AUC.

Legal experts and custodians said that though Mauritius has been the preferred destination, the time taken for approvals for new funds has risen significantly, resulting in delays in new fund registrations.

“There has been heightened scrutiny of Mauritius-based funds investing in India, leading to delays in setting up new fund structures and delays in approvals from the Mauritius regulator. This is leading to a shift towards other countries,” said Anand Singh, founder, Elios Financial Services and a member of the Capital Market Task Force, FSC Mauritius.

“Availability of tax treaty benefits in other European jurisdictions like Luxembourg, Ireland and France has led to investors preferring these nations over others. For instance, a fund based in Ireland or Luxembourg still enjoys zero tax on cash equities,” added Singh.

There are over 780 FPIs registered in Ireland compared to 595 registered in Mauritius, as per NSDL data.

The Mauritius government and India in March signed an agreement to amend the Double Taxation Avoidance Agreement (DTAA). Mauritius amended the norms in order to go with the Organisation for Economic Co-operation and Development’s (OECD) proposal on Base Erosion and Profit Shifting (BEPS). BEPS is a term used to describe tax avoidance strategies used by entities to reduce their tax bases.

The island nation introduced a ‘Principal Purpose Test’ (PPT) to prevent treaty abuse by taxpayers wherein if one of the principal reasons for choosing Mauritius is tax benefit, then treaty benefit could be denied.

“There has been a pushback from the industry on the tax treaty amendment and thus it has not been notified till now. Final approvals are awaited in Mauritius too. We expect that clarity will only come at the end of this year after the general elections in the country scheduled in November,” said an asset-service provider servicing FPIs.

Though a notification on the same is awaited, custodians said that there has been confusion among private equity funds and public market funds on whether they will be eligible for grandfathering benefits after it is made effective.

“The grandfathering is only for old funds and does not have any impact on new set-ups. However, there surely has been increased scrutiny of new funds,” said another legal expert.

First Published: Jul 10 2024 | 7:28 PM IST

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