The Reserve Bank of India (RBI) has declared that finance companies cannot be set up with foreign direct investments (FDI) from Mauritius, reported Economic Times. The decision is in line with the central bank’s recent reluctance to approve applications of non-banking finance companies (NBFC) with funding from the African nation, both due to concerns about round-tripping and to avoid Chinese investments in India.
RBI has reportedly told venture capital and private equity funds that NFCs cannot be set up with FDI from Mauritius or any other jurisdiction that doesn’t meet the benchmarks laid down by the Financial Action Task Force (FATF), an international body tasked with preventing money laundering and terror financing.
It should be noted that there are no restrictions on FDI in manufacturing or any other non-financial entities from Mauritius. The country was the second biggest source of FDI inflows into India in 2019-20. However, RBI is asserting that since NBFCs are more sensitive in nature, and it is necessary for it to satisfy itself about the “bonafides” of the ultimate beneficial owners of the applicants.
What is this really about?
The RBI’s decisions seem to be driven by two main concerns about FDI inflows, especially from tax havens like Mauritius.
- Prevent round-tripping: Round-tripping of funds — money that leaves India but is later routed back in the form of foreign investments, often from tax havens — has been a concern for the Indian government for several years. It has long been assumed that this is the only reason the small African nation of Mauritius has been such a major source of FDI for India. In fact, earlier this year, the country was put on FATF’s “grey list”, signalling greater scrutiny and monitoring by the international body.
Of late, RBI has been rejecting applications for NFBCs from Indian startups, many of which are funded by venture capital (VC) and private equity (PV) funds that are registered in Mauritius (SEBI’s website lists at least 42 registered foreign venture capital investors from the country).
Earlier in May, RBI had reportedly returned NBFC applications with funding from Mauritius. PE and VC funds wrote to RBI seeking clarity on its policy, and reminded it that Mauritius was only on the “grey list”, and didn’t necessarily need to be prohibited.
In August, the Indian Private Equity and Venture Capital Association (IVCA) wrote to RBI, arguing that the central bank’s moves would have a cascading effect on a “cash-strapped NBFC sector”. “The position taken by RBI is expected to deprive NBFCs of offshore capital as well as leave them dependent on funds from the domestic market,” the IVCA had said.
- Wary of Chinese investments: The increased scrutiny may also be linked to both the government’s and RBI’s attempts to address a growing Chinese influence in India’s financial markets. Earlier in August, unnamed sources told the Times of India that several of the rejected applications had the involvement of VC funds with origins in China. Many Chinese VC and PE funds are reportedly also registered in Mauritius.
India has been wary of Chinese dominance in matters of tech and finance for several years. Earlier this year, the government amended its FDI policies, seemingly for the sole reason of introducing bureaucratic hurdles for Chinese companies looking to invest or buy strategic interests in India. The fear, it seemed, was that the Chinese state-owned companies would try advantage of the global economic meltdown to buy strategic interests in India.
The government has trained its sights on fintech companies with links to China. It is reportedly concerned that many such companies operating in India have links to Chinese companies, and there was a chance of compromising sensitive details of Indian citizens such as Aadhaar, income tax details, bank accounts and more.
The Indian government has reportedly also set up a screening panel that will vet FDI proposals from China. The committee will be headed by the home secretary, with the DPIIT secretary as a member. More than 100 Chinese investment proposals are said to be pending.
That India and China were also involved in a stand off at the Line of Actual Control (LAC) in Ladhakh has only intensified the government’s suspicions. It has banned as many as 224 Chinese-owned apps so far citing “national security reasons”, including extremely popular TikTok, PUBG and WeChat.
The RBI’s prohibition on FDI from Mauritius will likely affect startup-funding in the country. We reached out to Sequoia Capital India, which is registered in Mauritius and is one of the largest VC funds in the country, asking for comment on how this decision will affect its business. The firm refused to comment, and added it would reach out to us when they are ready to engage on the subject. We have also reached out to the IVCA. The post will be updated if we receive a reply.