Sebi not to bar, but keep tab on Mauritius funds after FATF grey listing

While Sebi’s clarification is a positive for investors, foreign funds based in Mauritius will be subject to higher know your client (KYC), compliance and regulatory scrutiny, Sebi said.

Mauritius funds that account for the bulk of foreign fund flows into India’s capital market, were skeptical whether Sebi will allow them to register under foreign portfolio investor (FPI) regulations after the FATF, at its latest review of the status of member countries put Mauritius along with Pakistan, Cayman Island and some other countries, on the “grey” list.

FATF is an intergovernmental body that monitors and forms policies around anti-money laundering and prevention of terror funding.

A grey list indicates weak rules to prevent money laundering or terror financing in that jurisdiction. The list also lists out such jurisdiction that has committed to resolve identified strategic deficiencies within agreed time frames and is subject to increased monitoring.

“An FATF grey list is big red flag for sophisticated investors. They typically want to route their structures out of jurisdictions that do not attract high strictures from FATF. So even if Sebi will continue to grant registration we may see migration of funds away from Mauritius to other jurisdictions," said Tejesh Chitlangi, senior partner, IC universal legal.

This is the second blow for Mauritius as the funds coming from the country also attract additional tax due to indirect transfer provisions.

In 2019, funds and investors based in Mauritius made portfolio investments of Rs4,30,000 crore in India, becoming the second-largest source of foreign investors in India’s secondary markets, after the US.

While a majority of foreign funds were exempted from indirect transfer provisions in 2017, the Finance Bill of 2020 has removed exemptions for category II FPIs, which include hedge funds, and funds that are set up in countries not compliant with the FATF.

“It is noted from FATF website that when a jurisdiction is placed under increased monitoring, it construes that the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. The FATF does not call for the application of enhanced due diligence to be applied to these jurisdictions, but encourages its members to take into account this information in their risk analysis, Sebi noted.

“The intermediaries should take note of the same. Additionally, FATF identifies jurisdictions that have significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation. For all such countries, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system.  This list is often referred to as the “black list”. 

“It is mentioned in FATF website that this was previously called "Public Statement". Therefore, FPIs from Mauritius continue to be eligible for FPI Registration with increased monitoring as per FATF norms,” Sbi stated.