Singapore pips Mauritius to emerge number two in FPI race

A string of regulatory setbacks have hurt Mauritius in the past two years

Singapore has pipped Mauritius to become the number two jurisdiction, only behind the US, for foreign portfolio investments (FPI) into India, aided by steady growth in equity assets, as well as a string of regulatory setbacks to Mauritius over the past two years.

Total assets under custody (AUC) routed via Singapore to India at the end of August stood at ~3.46 trillion — a 13.7 per cent rise over the previous year. About a third of these were debt assets, including investments through the voluntary retention route (VRR), which comes with a three-year lock-in. Total assets from Mauritius dipped 15.8 per cent to ~3.41 trillion over the same period.

Singapore, which adopted a new fund framework earlier this year, traditionally had a stable fund management regime. The nation’s Variable Capital Companies Act (VCC) is aimed at providing fund managers with greater operational flexibility and cost savings.

Mauritius has been hobbled by a string of regulatory reversals. It was included in the grey and blacklists put out by the Financial Action Task Force (FATF) and the EU, respectively, this year. This, market players say, has created a negative perception among large institutional investors, such as pension and endowment funds.

“That Mauritius is yet to become Fatf-compliant may have influenced fund managers’ decision to prefer Singapore over the island nation.

Although its VCC model is yet to gain traction, South Korean and Japanese funds managers increasingly prefer Singapore to Hong Kong for routing their investments to Asian countries. The growing economic substance of Singapore has also added to the confidence of FPIS, although the cost of set-up and management are still higher than Mauritius,” said Viraj Kulkarni, founder, Pivot Management Consulting.

The renegotiation of India’s tax treaties with Mauritius and Singapore in 2016 and the introduction of General Anti-avoidance Rule (GAAR) in 2017 have also benefited Singapore indirectly.

Equity investments made on or after April 1, 2019, are taxed at 10 per cent for investments for more a year, and at 15 per cent for those of shorter periods. So, a sizeable chunk of equity investments, once routed through Mauritius solely to avail of treaty benefits, now prefers to come via home jurisdiction. GAAR requires entities seeking treaty benefits to show sufficient commercial substance, which is easier to establish in Singapore than in Mauritius because of the availability of a large workforce there.

Mauritius has faced other setbacks, too. Back in 2018, it was included in the list of 25 high-risk jurisdictions by global banks acting as custodians for offshore funds. In 2019, about 80 per cent of the FPIS from Mauritius was pushed into category II after the re-categorisation of FPIS. These issues dragged on for a while before being resolved.

Notably, Singapore surpassed Mauritius in foreign direct investment (FDI) in 2018-19, with an aggregate investment of $16.22 billion versus $8.08 billion from Mauritius. In 201920, India attracted $14.67 billion in FDI from Singapore against $8.24 billion from Mauritius.