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INDIA: MAURITIUS-BASED FUNDS ELIGIBLE FOR THE PREFERENTIAL CATEGORY-I FOREIGN PORTFOLIO INVESTOR LICENCE

On 13 April 2020, further to an order issued by the Ministry of Finance of India, Mauritius was specifically declared by the Securities and Exchange Board of India (SEBI) to be an eligible country for its funds to be registered with SEBI as preferential Category-I foreign portfolio investor (FPI).

Amendments were brought to the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 on 7 April 2020, allowing investment entities from non-FATF (Financial Action Task Force) member countries the possibility to be registered as Category-I FPIs if the countries are specified by the Indian government.

Mauritius-based funds were previously not eligible to the category I licence given that it is a non-FATF country. Being part of Category-I implies lower compliance burden, simplified know-your-customer norms and documentation requirements, and fewer investment restrictions.

Furthermore, Indian authorities are entitled under their indirect transfer tax regime to levy taxes on investors for transactions that take place overseas if the underlying assets are located in India. The 2020-2021 Indian Budget had removed the indirect transfer tax exemption for Category-II FPIs. However, Category-I FPIs are exempted from the ambit of indirect transfer provisions under income tax law.

Mauritius is a major source of FPI funds into India. Through this order from the Ministry of Finance of India, Mauritius-based funds are now eligible to register as category-I FPIs and thus benefit from all the advantages available to Category-I FPIs including lower compliance burden, ability to issue and subscribe to Offshore Derivative Instruments backed by underlying Indian securities, higher derivative position limits, and exemption from indirect share transfer provisions. This development is a welcome move and will reinforce the advantages of Mauritius as a leading jurisdiction for the setting up and administration of funds.

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