SEBI avoiding nod for Mauritian investments: report

Capital market regulator Securities & Exchange Board of India (SEBI) is going slow on giving licences to foreign funds' investment vehicles, better known as sub-accounts, based out of Mauritius.

According to a report in The Economic Times , SEBI has not spelt out the reason, but some think it may be part of a larger strategy to put subtle pressure on the tax haven to rework its 28-year-old tax treaty with India.

In its present form, the tax treaty allows investors from Mauritius to avoid tax on capital gains they make on investments in India. Local investors currently pay 15 per cent short-term capital gains tax if they sell a security in less than a year after buying it, but foreign investors coming from Mauritius pay no tax in India.

Local investors are taxed even on the long-term gains if a security is sold outside the stock exchange. But for investors from Mauritius, there is no tax on profits, either short term or long term, from such off-market deals.

Over the years, this tax advantage paved the way for rampant treaty-shopping by foreign funds, which emanated from various jurisdictions but set up paper companies in Mauritius to enter India. To bring down such tax avoidance, New Delhi wants to tweak the tax treaty to ensure investment vehicles in Mauritius are not merely shell companies, according to the report.

The report quoted an unidentified senior official involved with the FII registration process as saying the reason for SEBI going slow on sub-account applications from Mauritius could be the direct tax code being introduced and the Indian government's eagerness to amend the tax treaty.

Officials in intermediaries dealing with SEBI confirmed that the regulator is taking unusually long in processing applications from Mauritius. Significantly, some of the funds from non-treaty destinations have been able to renew their licences.