Mauritius has been added to the Financial Action Task Force (FATF) greylist, a list for jurisdictions with deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.
FATF's decision is a heavy blow to the Indian Ocean island nation, which has been trying to shed its image as a tax haven, particularly after the Mauritius Leaks scandal. As the jurisdiction joins Pakistan on the greylist, investors in India are worried what the reputational damage could do to their portfolios.
Mauritius is the second-largest source of foreign portfolio investor (FPI) flows into India, after the US, and has remained so despite the amendment to the tax treaties between the two countries in 2017.
An FATF grey list is big red flag for sophisticated investors"
India's market regulator Securities and Exchange Board of India (Sebi) has said that investors from Mauritius will continue to be eligible for registration with it even as the island country has been placed on the greylist.
"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," Tejesh Chitlangi, senior partner, IC universal legal, told LiveMint.
About 80% of FPIs from Mauritius are already classified as Category-II by Sebi. The grey list tag dashes any hopes of these funds moving to Category-I. The remaining 20% of funds in Category-I may also have to be moved to Category-II as well considering the country's new status.
While these moves may not impact inflows into India - as FPIs may gradually relocate to jurisdictions like Singapore which (like Mauritius) shares a similar tax treaty with India - Mauritius could lose its significance as a financial centre in the medium term, experts told the Economic Times.
Mauritius' financial services regulator Financial Services Commission met Sebi officials last year, asking it to reconsider its stance of allowing only FATF members to be eligible for the Category-I status as foreign portfolio investors.