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  • Aarthi Sivanandh, Hitoishi Sarkar and Naman Katyal

Debunking the Indian Central Bank’s Flip Flop on Mauritian Capital

Aarthi Sivanandh, Hitoishi Sarkar and Naman Katyal†

On 12 February 2021, the Reserve Bank of India (RBI) clarified its position on “investments in Non-Banking Financial Companies (NBFCs) from FATF non-compliant jurisdictions”. Vide the said clarification, new investors from FATF non-compliant jurisdictions are prohibited from acquiring ‘significant influence’ in NBFCs. The determining factor of indicating the investor’s significant influence is that the investor must possess more than or equal to 20 % of the voting power (including potential voting power) of the NBFC.

The RBI’s motivation for the aforementioned clarification is understandable as several Indian banks and NBFCs have collapsed due to regulatory oversight in the recent past. For instance, IL&FS one of the country’s largest NBFCs collapsed due to procedural lapses and audit oversights. Through this clarification, the RBI seems to have responded to the need for a more stringent monitoring of suspicious transactions. In 2018, India's Financial Intelligence Unit received more than 1.4 million suspicious transaction reports (STRs).

However, the authors are of the view that the measure is flawed and shall lead to a decrease in the overall foreign inflows in the country especially from Mauritius and have severe ramifications on the cash-crunched NBFC sector that is grappling with the pandemic and resultant economic pressures.

Over the years, Mauritius has emerged as a preferred jurisdiction for NBFC investors to route their funds as the revenue earned by Mauritius entities is exempt from taxes in India. This in turn has enabled Mauritius to acquire an eleven percent (11%) share of the total Foreign Portfolio Investment (FPI) that India received till the year 2021, second only to the United States.

This post seeks to highlight the inconsistency in the RBI’s treatment of Mauritian capital with those of other India regulators. The latter part of the post will outline the challenges posed by the RBI’s policy and offer viable policy alternatives.

Inconsistencies with the move

Despite its noble motivations, the RBI circular is faulty for the reasons enumerated in this post. It further fails to achieve its own objective of not treating investments in NBFCs from FATF non-compliant jurisdictions “at par with that from FATF compliant jurisdictions”. RBI circular’s restrictions do not apply to existing investments in NBFCs from FATF non-compliant jurisdictions and permits them to bring in additional investment to support their continuity of business in India, as long as they adhere to extant regulations. This essentially means that existing investors are permitted to freely make additional investments as per existing regulations and only new investors are subjected to a restriction of investment in NBFCs wherein they may gain significant control of 20% and will therefore need RBI Approval. This, further differentiation between investments from existing and new investors from the same jurisdiction is counterproductive and contrary to RBIs objectives in proposing this circular.

Equally concerning is the RBI’s own inconsistency while framing regulations dealing with treatment of the Mauritian capital. For instance, RBI through its Master Direction issued in 2019 had permitted the residents of IOSCO (International Organization of Securities Commissions) compliant countries such as Mauritius to become recognized lenders for ECB (External Commercial Borrowings) funding to Indian entities. The IOSCO member countries are not necessarily also approved FATF countries, and this has added to the uncertainty around India’s exact stance relating to Mauritian investments and loans. Thus, while the RBI seems comfortable allowing investors from Mauritius to fund Indian entities through the ECB route, an equity investment from the same set of investors is not permitted.

RBI’s recent clarification also falls foul of the spirit of Para 55 of the RBI Master Direction on Know Your Customer which does not preclude “regulated entities from having legitimate trade and business transactions with the countries and jurisdictions mentioned in the FATF statement.”

Opposing regulatory stands

Similarly, while the RBI continues to take ad hoc measures to deal only with FATF compliant countries, other Indian regulators such as the Securities and Exchange Board of India (SEBI) are framing policies contrary to the RBI’s circular. The SEBI (Foreign Portfolio Investors) Regulations, 2019 as amended in April 2020 permitted the Central Government of India to specify any country to be eligible to be accorded Category I FPI status. Shortly thereafter, the Central Government accorded Category I FPI status to Mauritius. This move is at odds with RBI’s stance citing Mauritius as a FATF non-compliant jurisdiction and adding additional levers of monitoring for fund flow into NBFCs. SEBI having accorded Mauritius a Category-I FPI status implied that it has a lower compliance burden, simplified know-your-customer norms and documentation requirements, and fewer investment restrictions for investors from Mauritius. Therefore, on one hand, the capital markets regulator of the country pursued a favorable policy decision regarding investments from a FATF non-compliant jurisdiction, whereas the central bank took a decision that negates the stance of SEBI.

Decoding the challenges

The RBI’s present ambiguous policies with regard to the treatment of capital from Mauritius presents key challenges for investors, companies that need urgent capital sources, and the entire ecosystem for companies to grow. This regulatory move would further lead to the NBFC sector heavily dependent on scarce domestic funds which instead of containing the liquidity crisis would only aggravate it. The RBI’s move also discourages the emergence of innovative NBFC models which rely on private equity/venture capital and to new companies emerging in the intersection of financial and technology services, all of which have their source of funds predominantly from the Mauritius. For instance, the applications for NBFC licenses of Bharat Pe, CarDekho, and Jupiter were not granted as of the date of this writing, due to their reliance on Mauritian capital.

It is our view that the treatment meted out to Mauritian capital in February 2020 by adding Mauritius to the FATF grey list due to its systemic deficiencies, such as, lack of strict regulatory framework to curb money laundering and its substandard conduct of financial investigation being some of the few cited factors, was premature and fails to account for its substantially improved compliance with the FATF requirements. For instance, Mauritius has already succeeded in implementing a series of measures, including risk-based supervision, providing access to accurate basic and beneficial ownership information by competent authorities, etc. to better its FATF compliance. Presently, Mauritius has declared that it is largely compliant to 35 out of 40 FATF Recommendations thus making the present RBI policy seem rather conservative.. The regulatory dissonance between SEBI, RBI its own circulars, and its master directions, obfuscates rather than clarifies the regulatory view of Mauritian investments.


The RBI’s stand on investment of Mauritian capital in the NBFC sector seems conservative and disproportionate given the current pandemic induced distress for capital. It maybe worthwhile for the RBI to carve out exemptions for recipients of Mauritian capital operating in non-sensitive sectors than a carte blanche approval requirement for all Mauritian capital investments into India. It may also do well do to see such measures are timebound and immediate corrective action be undertaken once the red flags relating to Mauritian capital are remedied. Lastly, coordinated regulatory approach is required among RBI and SEBI the dominant regulators of financial markets to facilitate than embargo development.

† Aarthi Sivanandh is a Partner, J. Sagar Associates, Hitoishi Sarkar is Member at GNLU Centre for Corporate and Insolvency Law and Naman Katyal is a student at Gujarat National Law University.

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