AMITY SCHOOL OF BUSINESS

AMITY UNIVERISTY UTTAR PRADESH

DISSERTATION REPORT SUBMITTED TOWARDS THE

PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN
BUSINESS ADMINISTRATION

Optimal Structure for an Offshore fund to invest in

Indian Equity Market
SUBMITTED BY:

Abhijit Singh

BBA+MBA (2012-2016)

A3923012028

Roll No. : 14
 Certificate
This is to certify that Abhijit Singh student of Amity School of Business has completed the
Dissertation on the topic Optimal Structure for an Offshore fund to invest in Indian Equity
Market under the supervision and guidance of Mr.Harjit Singh member of Amity School Of
Business.
To best of our knowledge the report is original and has not been copied or submitted anywhere
else. It is an independent work of us.

Ms.Harjit Singh
 Acknowledgement

I express my sincere gratitude to my faculty guide Mr.Harjit Singh for her able guidance,
continuous support and cooperation throughout my project, without which the present work
would not have been possible.
 Table of Contents

Serial Number Subject Page Number

1. Objective 5
2. Chapter 1: Introduction 6-23
3. Chapter 2: Literature Review 24-28
4. Chapter 3: Research 29-30
Methodology
5. Chapter 4: Data Analysis & 31-34
Interpretation
6. Chapter 5: Conclusion 35-36
7. Bibliography 37
 Objective
The main objective of the study is to see how foreign investors be it the companies or FII’s/
FVCI’s invest in the Indian Equity Market ie: the stock market and what all guidelines plus
regulations they have to go about before investing.
The two countries from whose example is taken to explain the study are Mauritius and Singapore
in which companies reside in their respective countries but their area of operations are in India or
invest in the equity market.
Chapter 1-Introduction
Offshore Fund
An offshore fund is a fund which is located or based outside of one's national boundaries. The
term offshore is used to describe foreign banks, corporations, investments and deposits. A
company may legitimately move offshore for the purpose of tax avoidance or to enjoy relaxed
regulations. Offshore financial institutions can also be used for illicit purposes such as money
laundering and tax evasion.

Compliance with Availability of skilled and

regulations and treaty knowledgeable manpower.
terms.

GAAR

KEY CONSIDERATIONS FOR STRUCTURING AN OFFSHORE FUND

Ease of
Optimize Taxation.
Operations.

Ability to raise capital Limit liability/ risk of

commitments and distribute investors.
sales proceeds.

Why Offshore and not Onshore Financing?

India follows source based taxation on capital gains and taxes thereon may not be creditable in the
home jurisdiction of the offshore investors. Accordingly, offshore structures are used for offshore
investors to invest into India to avoid double taxation on the same income stream. Further, India
based structures with foreign participation may require regulatory approvals, compliance with
pricing norms and subject to performance conditions in certain sectors
Indian Equity Market

Indian Equity Market is the market in which shares are issued and traded, either through
exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital
areas of a market economy because it gives companies access to capital and investors a slice of
ownership in a company with the potential to realize gains based on its future performance.
In India there are total 23 registered exchanges out of which Bombay Stock Exchange and
National Stock Exchange have indices such as Sensex and Nifty50.

Bombay Stock Exchange

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first
Stock Exchange and one of India’s leading exchange groups. over the past 137 years, BSE has
facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising
platform. In 1875 was established as "The Native Share & Stock Brokers' Association". BSE is a
corporatized and demutualised entity, with a broad shareholder-base which includes two leading
global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides
an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual
funds. It also has a platform for trading in equities of small-and-medium enterprises (SME). 

More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed
members. The companies listed on BSE Ltd command a total market capitalization of USD 1.32
Trillion as of January 2013. It is also one of the world’s leading exchanges (3rd largest in
December 2012).

"The BSE entered the technology race in 1995 with the introduction of screen based trading. It
switched over from the open outcry system in just about 50 days. Considered a rare feet at that
time. Two years later it extended its presence nationwide through BSE on-line Trading (BoLT)
which now covers about 400 cities. The network now runs on a fault tolerant TANDEM, S74016
which is connected through LAN, WAN and VSAT and has capacity for 20 Lakh trades a day
with order execution time being less than a second”

S&P BSE SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-
Weighted" methodology of 30 component stocks representing large, well-established and
financially sound companies across key sectors. The base year of S&P BSE SENSEX was taken
as 1978-79. Though since September 1, 2003, S&P BSE SENSEX is being calculated on a free-
float market capitalization methodology. 

What is Free-Float Methodology?

Free-float Methodology refers to an index construction methodology that takes into consideration
only the free-float market capitalization of a company for the purpose of index calculation and
assigning weight to stocks in the Index.
Free-float market capitalization takes into consideration only those shares issued by the company
that are readily available for trading in the market. It generally excludes promoters' holding,
government holding that will not come to the market for trading in the normal course. In other
words, the market capitalization of each company in a Free-float index is reduced to the extent of
its readily available shares in the market. 
All the BSE indicies are calculated by:

Free-float market capitalization of index constituents

----------------------------------------------------------------- x Bas Index Value

Base Market capitalization

Whereaeas, the new base market capitalization is calculated:

New Market capitalization

New Base Market capitalization = old Base Market capitalization x ----------------------------
old Market capitalization

National Stock Exchange

NSE was started in November 1992 as a tax paying company. NSE is a nation-wide trading
system conforming to international standards. It was set up to provide, fair efficient and
transparent security trading system at all India level. It has its central office at Mumbai. Its
members all over India are linked via satellite and cables to the system. From 1996 NSC is linked
up with the Internet. It is the main Stock Exchange in the Country and averages Rs.10000 Crore
presently (in the equities segment alone) and bound to multiply further in the coming future.

The CNX Nifty is the flagship index on the National Stock Exchange of India Ltd. (NSE). The
Index tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian
securities. It includes 50 of the approximately 1600 companies listed on the NSE, captures
approximately 65% of its float-adjusted market capitalization. It covers 21 sectors of the Indian
Economy and has been trading since April 1996. It is owned and managed by India Index
Services and Products Ltd. (IISL). IISL is India’s first specialized company focused on an index
as a core product.

The CNX Nifty is computed using a float-adjusted, market capitalization weighted methodology
which was started on 26th June, 2009 wherein the level of the index reflects the total market value
of all the stocks in the index relative to a particular base period.
The base period for the CNX Nifty index is November 3, 1995, which marked the completion of
one year of operations of NSE's Capital Market Segment. The base value of the index has been set
at 1000, and a base capital of Rs 2.06 trillion.

The CNX Nifty is computed:

Market Capitalization = Equity Capital * Price

Free Float Market Capitalization = Equity Capital * Price * IWF

Where,
IWF(Invisible weight factors) : is a unit of floating stock expressed in terms of a number available
for trading, higher IWF suggest greater number of shares held by the investors. The IWFs for each
company in the index are determined based on the public shareholding of the companies as
disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis. The
IWF includes:
 Shareholding of promoter and promoter group
 Government holding in the capacity of strategic investor
 Shares held by promoters through ADR/GDRs.

Index Value = Current Market Value / Base Market Capital * Base Index Value (1ooo)

All the primary and secondary market also the offshore fund investors are regulated by SEBI.
Securities and Exchange Board of India

After various scams and loopholes being discovered in the stock market the government set up
SEBI to monitor the stock market. This was mainly done after the Harshad Mehta scam in 1991-
92.

The Securities and Exchange Board of India was enacted on April 12, 1992 in accordance with
the provisions of the Securities and Exchange Board of India Act, 1992.
It was officially established by The Government of India in the year 1988 and given statutory
powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament.

Initially SEBI was a non statutory body without any statutory power. However in the year of
1995, the SEBI was given additional statutory power by the Government of India through an
amendment to the Securities and Exchange Board of India Act, 1992 

Power and Functions

• Protection of investors interests in securities

• Promotion of the development of the securities market and,
• Regulation of the securities
• inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
• inspect the books of accounts of a financial intermediaries.
• compel certain companies to list their shares in one or more stock exchanges.
• registration brokers.

Foreign Investments in India

Foreign investment in Indian securities is regulated by the Foreign Exchange Management
Act 1999 (the “FEMA”), the policy of the Government of India announced from time to time
through its various ministries, regarding foreign investment in different industrial sectors in
India and the regulations issued by SEBI. Under the FEMA, the Reserve Bank of India (the
“RBI”) has been given the power to prohibit, restrict or regulate the transfer or issue of any
Indian security by a person outside India.
FEMA provides the statutory framework that governs India’s system of controls on foreign
exchange dealings. Without permission (general or special) from the RBI, residents of India
cannot undertake any transaction with persons outside India, sell, buy, lend or borrow foreign
currency, issue or transfer securities to non-residents or acquire or dispose of any foreign
security.
In exercise of its powers under the FEMA, the RBI issued regulations called the “Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside India)
Regulations (the “FEMA Regulations”) in 2000. Rules for investment by FIIs and FVCIs
have been prescribed under the FEMA Regulations and are described below.
Regulations for Foreign Institutional Investors and Foreign Venture Capital Investors
Investments in India will be made either directly by the Fund, which has been registered as a
sub-account under New York Life’s Foreign Institutional Investor (“FII”) registration with
SEBI, or through its wholly owned subsidiary, New York Life Investment Management India
Fund (FVCI) II, LLC (the “Subsidiary”), which has been registered as a FVCI with SEBI.
Investment by the Fund will be governed by the SEBI (Foreign Institutional Investors)
Regulations, 1997 (the “FII Regulations”), and investment by the Subsidiary will be governed
by the SEBI (Foreign Venture Capital Investors) Regulations, 2000 (the “FVCI
Regulations”). Investment by the Fund and the Subsidiary are also governed by the FEMA
Regulations.

Investment by the Fund and the Subsidiary in India is dependent on their continued
registration as an FII and FVCI, respectively, with SEBI. Investment by the Subsidiary is
further dependent on the grant of permission by the RBI to invest in an Indian Venture
Capital Undertaking, a Venture Capital Fund or a scheme floated by a Venture Capital Fund.
In the event the registration of either the Fund or the Subsidiary is terminated or is not
renewed or the RBI permission to the Subsidiary is terminated, they could potentially be
forced to redeem their shares, and such forced redemption could adversely affect the Fund’s
and the Subsidiary’s returns.

Under the FII Regulations, FIIs are permitted to invest only in the following:

(i) securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock exchange
in India;

(ii) units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed on a recognized stock exchange in India or not;

(iii) dated government securities;

(iv) derivatives traded on a recognized stock exchange in India; and

(v) commercial paper.

Further, FIIs are allowed to engage only in delivery-based trading and are not allowed to
engage in short selling, although they are permitted to use derivative instruments to take
positions that take advantage of decreases in market prices. FIIs are allowed to tender their
shares in case of an open offer following a takeover bid by an acquirer.
FIIs are also permitted to take forward cover on their equity and debt exposure to hedge against
currency fluctuations.
Further, FIIs who have issued derivative instruments based on underlying Indian securities
such as participatory notes and any other equivalent instrument are required to make a
monthly disclosure to SEBI as regards the details of the instrument as well as the ultimate
investor in such instruments.

The following restrictions apply to investment by an FII in India:

(i) An FII cannot invest in more than 10% of the equity shares or 10% of the paid up
value of each series of convertible debentures of any Indian company. Further, the
FII and FII sub-account shareholders of an Indian company cannot together hold more
than 24% of the paid-up equity capital or paid up value of each series of convertible
debentures of an Indian company, which limit can be extended to the foreign
investment limit for the sector in which the company operates if the board of directors
of such company passes a resolution to this effect followed by a special resolution of
the shareholders of the company. The limit of 24% may be lower where, under the
general foreign investment policy of the Government of India or some statutory
regulation, the foreign investment limit (whether in general or in relation to FIIs) is
lower than 24% or, where there is a ban on investment by FIIs. For instance, the
foreign investment limit in FM Radio Broadcasting and in public sector banks is 20%
and there is ban on investment by FIIs (or indeed any other type of foreign
investment) in lottery and gambling. Where the foreign investment policy or statutory
regulations specify a lower limit, the investment by FIIs cannot be increased beyond
this limit by resolutions of the investee-company’s board of directors and
shareholders. Subject to these limits, an FII can invest in any listed company on a
recognised stock exchange through a registered broker in India. An FII can also invest
(subject to the limits of 10% per FII and 24% (or less, as applicable) per investee
company) off the stock exchange in private placement transactions provided that the
investment is in a sector that is open to foreign investment

(ii) An FII is required to invest at least 70% of its aggregate investment in India in equity
and equity related instruments such as fully convertible debentures, the convertible
portion of partially converted debentures and tradable warrants.
Under the FVCI Regulations, the Subsidiary has to invest at least 66.7% of its investible
funds (“investible funds” are defined in the FVCI Regulations as funds committed for
investments in India net of expenditure for administration and management of the relevant
venture capital investor) in unlisted equity shares or equity linked instruments. The
remaining 33.3% of its investible funds can be invested only as follows:

(a) subscription to the initial public offer of a venture capital undertaking whose shares
are proposed to be listed;

(b) debt or debt instruments of a venture capital undertaking in which the FVCI has
already made an investment by way of equity;

(c) preferential allotment of equity shares of a listed company. Such investment shall be
subject to a lock-in period of one year;

(d) equity shares or equity linked instruments of a financially weak company or a sick
industrial company whose shares are listed. A “financially weak company” is defined
in the FVCI regulations as a company which has at the end of the previous financial
year accumulated losses resulting in the erosion of more than 50% but less than 100%
of its net worth as at the beginning of the previous financial year. A “sick industrial
company” is a company which has at the end of any financial year accumulated losses
equal to or exceeding its net worth; or

(e) special purpose vehicles which are created for the purpose of facilitating or promoting
investment.

A “venture capital undertaking” is defined in the FVCI Regulations as a domestic company

whose shares are not listed on a recognized stock exchange in India which is engaged in the
business of providing services, production or manufacture of articles or things excluding
activities or sectors that are specified in this behalf by the Central Government. The
sectors/activities that have been excluded to date by the Central Government are non-banking
financial services other than non-banking financial companies registered with the RBI and
categorized as equipment leasing or hire purchase companies, gold finance companies other
than companies engaged in gold financing for jewelry and activities not permitted under the
Industrial Policy of the Government of India (i.e., retail trading, atomic energy, lottery
business, gambling and betting, agriculture and plantation). The list of excluded
activities/sectors may be added to at any time, in which case the Subsidiary would have to
divest any investment in shares in companies operating in the excluded sectors which could
have a material adverse impact on the Subsidiary’s, and hence the Fund’s, returns.
The FVCI Regulations also require an FVCI to maintain books of accounts, records and
documents which shall give a true and fair picture of the state of affairs of the FVCI and to
make quarterly filings with SEBI in a prescribed format stating the nature of its activities in
the previous quarter.
FVCIs are required to enter into an agreement with an Indian custodian to act as custodian of
the FVCI’s securities.”
Three principle routes of foreign equity investments in India are:
Foreign Direct Investments (FDI) route

Foreign Venture Capital Investments (FVCI) route

Foreign Portfolio Investments (FPI) route

1. Foreign Direct Investments (FDI) route

As per the FDI Policy, FDI can be routed into Indian investee companies by using equity
shares, Compulsorily Convertible Debentures (“CCDs”) and fully Compulsorily
Convertible Preference Shares (“CCPS”).

Herein below is a table giving a brief comparative analysis for equity, CCPS and CCDs:

Particulars Equity CCPS CCD

a) Basic Character Participation in Assured Dividend – Assured Coupon –
governance and risk Convertible into Equity Convertible into Equity
based returns

b)Liability to Pay Dividend can be declared Fixed dividend if profits Fixed Interest payment -
only out of profits accrue not dependent on accrual
of profits
c)Tax Efficiency No tax deduction, dividend payable from post tax Interest expense
income - Dividend taxable @ 15%47 in the hands of deductible – Withholding
the company tax as high as 40% but it
can be reduced to 5% if
investment done from
favourable jurisdiction

d)Liquidation CCD ranks higher than CCPS in terms of liquidation preference. Equity gets the
Preference last preference.
How can an investment be recognized as an FDI?
Case 1: If the investing company which is owned and controlled by resident Indian citizens
and/or Indian Companies which are owned and controlled by resident Indian citizens makes any
investment, then the foreign investment is said to be Nil.

Case 2: If the investing company which is owned or controlled by “non-resident entities”, the
entire investment by the investing company into the subject Indian Company would be considered
as indirect foreign investment.

Case 3: If the investing company is an operating-cum-investing/investing company which makes

onward investment into its wholly owned subsidiary, then the indirect FDI in such wholly owned
subsidiary shall be the mirror image of the percentage of direct FDI in the operating-cum-
investing/investing company.

Pricing Requirements under FDI

FEMA also regulates the price at which a foreign direct investor invests into an Indian company.
Accordingly, shares in an unlisted Indian company may be freely issued or transferred to a foreign
direct investor, subject to the following conditions being satisfied:

• The price at which foreign direct investor subscribes / purchases the Indian company’s shares is
not lower than the floor price computed on the basis of the Discounted Cash Flows (“DCF”)
method. However, if the foreign investor is subscribing to the memorandum of the company, the
DCF floor price does not apply.

• The consideration for the subscription / purchase is brought into India prior to or at the time of
the allotment / purchase of shares to / by the foreign direct investor.
RBI has permitted that shares/debentures with
Foreign Venture Capital Investments (FVCI) route
FVCI investments are governed by SEBI (Foreign Venture Capital Investor Regulations),
2000.
FVCI are limited to “Venture Capital Undertakings (VCU)” in select sectors, i.e.
Infrastructure, Bio-technology, IT, R&D in certain sectors, Hotel cum Convention centers.
FVCI investor is required to invest 66.67% of its investable funds in unlisted equity of VCU.
VCU investor is permitted to invest the remaining 33.33% in IPO, Debt instruments where
already holding equity, Private Investment in Public Enterprises (PIPE) subject to a one year
lock in period.
FVCIs can invest directly into eligible Indian portfolio companies subject to compliance with
certain investment conditions and restrictions as stipulated under the FVCI Regulations and
the Indian exchange controls.

FVCIs can invest directly into eligible Indian portfolio companies subject to compliance with
certain investment conditions and restrictions as stipulated under the FVCI Regulations and the
Indian exchange controls.

FVCIs can invest directly into eligible Indian portfolio companies subject to compliance with
certain investment conditions and restrictions as stipulated under the FVCI Regulations and the
Indian exchange controls.

What is Venture Capital Undertaking?

The term “VCU” has been defined to mean a domestic company whose shares are not listed in
India and which is engaged in a business which does not fall within the negative list. The current
negative list includes sectors such as gold financing (excluding those companies which are
engaged in gold financing for jewellery), non-banking financial services (excluding those non-
banking financial companies which are registered with the Reserve Bank of India and have been
categorized as ‘equipment leasing’ or ‘hire purchase companies’), activities not permitted under
the Industrial Policy of the Government of India and such other activities that may be notified by
SEBI in consultation with the Indian government.
 Foreign Portfolio Investments (FPI) route
FPI investments are governed by SEBI (Foreign Portfolio Investor Regulations), 2014
FPI Regulations combine and replace erstwhile regulations regarding FII and QFI.
Existing FIIs and QFI(Qualified Foreign Investors) deemed to be FPIs during the validity of their
existing registration.
FPI registration is granted by Designated Depository Participant (DDP)
FPI investments are governed by restrictions and conditions broadly similar to FII.

FPI Limits:
 Each FPI can invest up to 10% of any companies equity.
 Aggregate FPI/FII/QFI can ordinarily invest up to 24% in any company.
 With board and shareholders’ special resolution up to sectoral cap.

In January 2014, the Securities and Exchange Board of India notified the SEBI (Foreign Portfolio
Investors) Regulations, 2014 (“FPI Regulations”), which repeals the SEBI (Foreign Institutional
Investors) Regulations, 1995 (“FII Regulations”). It significantly revises the regulation of
foreign portfolio investments into India.
FPI Regulations seek to introduce a risk-based approach towards investor Know Your Customer
(KYC) requirements, ease the entry process and reduce timelines for investor participants.
However, on the key issues which foreign investors currently deal with, viz. ambiguity on the
‘broad based’ criteria, eligibility to issue/subscribe to offshore derivative instruments and
clubbing of investment limit, SEBI seems to have revisited the current position which may impact
the industry. Interestingly, SEBI also seems to have changed the individual investment cap that an
FPI can hold in Indian companies under the FPI Regulations.
 GAAR (General Anti Avoidance Rules)

While a statutory GAAR has been introduced in the Tax Act, Indian tax authorities cannot apply
GAAR prior to the financial year beginning on April 1, 2015. Prior to such date, guidance needs
to be taken from judicially-evolved anti-avoidance principles..

 GAAR has been introduced in the Finance Act, 2012 but cannot be applied before April 1,
2015.
 GAAR can be applied retrospectively for any part of transaction affected post August 30,
2010.
 GAAR provisions override international treaties.
 GAAR empowers tax authorities to disregard transactions if they believe “Impermissible
Avoidance Arrangements” are used to obtain tax benefits.
 Impermissible Avoidance Arrangements are:

a. Transactions not at arms-length : It refers to arrangements that create rights or

obligations not normally created between independent parties transacting on an
arm’s length basis.

b. Abuse of provisions of Income Tax Act : It results directly or indirectly, in the

misuse or abuse of the Act.

c. Lack of commercial substance : This refers to the transfer of funds between parties
without any substantial commercial purpose, self-cancelling transactions the only
purpose of which is to obtain a tax benefit

d. Non bona fide purpose : the Indian tax authorities would have the power to
disregard entities in a structure, reallocate income and expenditure between parties
to the arrangement, alter the tax residence of such entities and the legal situs of
assets involved, treat debt as equity, vice versa
Which Jurisdictions are Typically Considered for Setting up India-
Focused Funds Pooling Offshore Investors?

Mauritius

Mauritius has emerged as a favorite destination for overseas investment into Indian corporates,
currently accounting for about 40 % of total foreign inflows into India.
Mauritius has special relevance because of the Bilateral Investment Protection Agreement
(“BIPA”) between India and Mauritius. Currently India does not have a BIPA with countries such
as the US or the Cayman Islands. The BIPA provides a number of benefits including fair and
equitable treatment, compensation for losses, protection against expropriation, ability to repatriate
capital and returns, efficient dispute resolution framework, etc.
The tax treaty between Indian and Mauritius includes a provision that exempts a resident of
Mauritius from Indian tax on gains derived from the sale of shares of an Indian company.
Presently, the capital gains tax relief under the India- Mauritius tax treaty continues to be
available. The Governments of India and Mauritius are, however, in the process of renegotiating
the treaty. Based on publicly accessible information, it appears that the two countries are
considering the inclusion of a ‘limitation of benefits’ (LOB) criteria within the treaty. The LoB
clause is likely to stipulate an expenditure threshold for claiming the capital gains tax relief.
A similar provision exists in the India-Singapore tax treaty, which provides that a Singapore
resident shall be deemed to have substance (and not be considered a conduit) if it incurs annual
operational expenditure of SGD 200,000 in Singapore for 2 years prior to the transaction.
It is expected that the new LOB clause in the Mauritius treaty may be drafted on similar lines as
the Singapore treaty. The expenditure threshold however is likely to vary.
On a separate note, the Mauritius FSC(Financial Services Commission) has also introduced
domestic substance rules to be satisfied by Mauritius based GBC1(Global Business Company,
category 1) entities before January 1, 2015. Based on the new rules, FSC may consider various
factors while determining whether a GBC1 entity is managed and controlled in Mauritius. These
include: (i) existence of at least 2 resident directors with relevant expertise, (ii) principal bank
account in Mauritius, (iii) accounting records maintained in Mauritius, and (iv) financial
statements audited by a local Mauritian auditor. In addition, the FSC may take into account any
one of the following criteria: (i) office premise in Mauritius, (ii) at least 1 full time employee in
Mauritius, (iii) dispute resolution through arbitration in Mauritius, (iv) assets (excluding cash and
shares of GBC1 company) of at least USD 100,000 in Mauritius, (v) listing on Mauritius stock
exchange, and (vi) annual expenditure that is reasonably expected from a similar entity managed
and controlled in Mauritius.
From our interactions with Mauritius officials, we understand that both sides are committed
towards arriving at an agreement that ensures maximum certainty for investors in Mauritius.
Singapore

Singapore is one of the more advanced holding company jurisdictions in the Asia-Pacific region.
Singapore possesses an established capital markets regime that is beneficial from the perspective
of listing a fund on the Singapore stock exchange. Further, the availability of talent pool of
investment professionals makes it easier to employ/ relocate productive personnel in Singapore.
The popularity of Singapore as a jurisdiction for making inbound investment into India is linked
to the India-Singapore tax treaty, which provides a similar capital gains tax exemption as
available under the India-Mauritius tax treaty.
The benefits of the India - Singapore tax treaty should be available to entities that are liable to
tax in Singapore based on their residence, domicile or any criterion of a similar nature. However,
unlike the India - Mauritius tax treaty, capital gains tax exemption under the India - Singapore
tax treaty would be available only on satisfaction of specific conditions referred to as the
limitation on treaty benefits (“LOB”).1
Singapore does not impose tax on capital gains. Gains from the disposal of investments may
however be construed to be of an income nature and subject to Singapore income tax. Generally,
gains on disposal of investments are considered income in nature and sourced in Singapore if
they arise from or are otherwise connected with the activities of a trade or business carried on in
Singapore. As the investment and divestment of assets by the Singapore based entity are
managed by a manager, the entity may be construed to be carrying on a trade or business in
Singapore. Accordingly, the income derived by the Singapore based entity may be considered
income accruing in or derived from Singapore and subject to Singapore income tax, unless the
Singapore-based fund is approved under section 13R and Section 13X respectively of the
Singapore Income Tax Act (Chapter 134) (SITA) and the Income Tax (Exemption of Income of
Approved Companies Arising from Funds Managed by Fund Manager in Singapore) Regulations
2010. Under these Tax Exemption Scheme, “specified income” derived by an “approved
company” from “designated investments” managed in Singapore by a fund manager are exempt
from Singapore income tax.
For fund managers considering Singapore resident structures, a combination of Singapore
resident investment funds and SPVs can be considered, given the tax exemption schemes and the
tax proposals for the companies under the domestic law. The move has merits for groups that
have ability to demonstrate substance (both in the entity and in Singapore as a jurisdiction).
However, the eligibility criteria for claiming capital gains tax exemption under the tax treaties
with India should also be carefully studied as the same may (as in case of Singapore) require
some substantive conditions to be established in the jurisdiction.
Particulars Mauritius Singapore

Taxability of various income streams in India after considering benefits under the DTAA
Interest Income 21.63% (for FIIs / FPIs) and 15% on gross basis; subject to
43.26% (for others) beneficial ownership
Capital Gains on transfer of shares Not Taxable Not taxable

Capital Gains on transfer of NCDs Not Taxable Not taxable

LOB clause in treaty Does not exist Exists

Availability of Tax Credit Available Available. In case TRC is not
obtained, the tax credit would no
be available and there would be
double taxation
Local Tax Laws
Local corporate tax Effective tax rate 3% on net basis 17% on net basis; which can be
reduced to NIL
Local capital gains tax Nil Nil
Withholding tax rate on Dividend NIL NIL

Cost of setting up Relatively less costly Comparatively more costly

Chapter 2: Literature Review
The Mint, 2013 (New Delhi) says Mauritius moved a step closer to plugging the loopholes in
the India-Mauritius double tax-avoidance agreement that allow companies to avoid paying taxes
on their investments in India.
It is doing so by laying down rules for companies which would require them, among other
things, to create a tangible business structure, and not just a company on paper.
The move comes at a time when the Indian government has expressed its reservations about
companies routing their investments through Mauritius to reduce the tax burden.
In an amendment in the Guide to Global Business, the Financial Services Commission (FSC),
which regulates financial services except banking and global business in the country, has
introduced stricter regulations, including guidelines that will determine if management and
control of a company is from the island nation. It has also listed minimum expenditure and asset
requirements for such companies.
The amendments suggest that listing on the local stock exchange could be one of the ways of
meeting so-called economic substance requirements.
According to Mukesh Butani, chairman of BMR Advisors, Mauritius is trying to address India’s
concerns and ensure that taxpayers benefiting from the treaty are not affected by the strict
provisions of Indian tax authorities.
“Investors are considering whether they should move to other jurisdictions,” he said. “Mauritius
is in a way preparing for GAAR (general anti-avoidance rules that will be implemented from
April 2015),” Butani said.
With the introduction of GAAR, foreign institutional investors availing the benefits under the
treaty will come under the Indian tax department’s scrutiny.
Mauritius said companies will have to comply with these so-called “economic substance” norms
to obtain a tax residency certificate (TRC),which is a precondition for availing the benefits under
the India-Mauritius pact. As per Circular 789 issued in 2000 by India’s Central Board of Direct
Taxes, the TRC issued by the Mauritius Revenue Authority is sufficient evidence for claiming
tax treaty benefits.
Under the bilateral agreement between the two countries, capital gains from sale of securities can
be taxed only in Mauritius. Capital gains tax is close to zero in Mauritius and consequently
almost 40% of investments into India come through that country.
India has been trying to renegotiate the tax pact with Mauritius for the past few years to check
so-called round tripping and other treaty abuses. Round tripping entails moving money out of
one country into another, and getting it back under the garb of foreign capital.
After prolonged negotiations, Mauritius has agreed to include a limitation of benefit clause,
similar to the one in the treaty between Singapore and India. The accord with Singapore
stipulates that only those companies that spend a minimum of $200,000in Singapore can avail of
the benefits of the treaty.
According to the norms, “global business” companies in Mauritius will have to satisfy at least
one of the following criteria: assets of at least $100,000 in Mauritius; shares listed in an
exchange licensed by the local regulator; and a yearly expenditure on the lines of a similar
company controlled and managed from Mauritius or having an office in Mauritius.
To establish whether a business is managed and controlled from Mauritius, the norms spell out
that at least two directors in the company should be resident in Mauritius with appropriate
qualifications and that the company should have a principal bank account in Mauritius.
The new rules also say that if a company is licensed as a collective investment scheme, closed
end fund or external pension scheme, it would have to be administered from Mauritius.
The commission also wants directors to provide sufficient time to the affairs of each board and
be actively involved in the control and management of a company.
The additional requirements have to be complied with by 1 January 2015 by companies that want
to seek renewal or a fresh TRC.
Sridhar Nagarajan, chief executive officer of Standard Chartered Bank (Mauritius) pointed out
that only 5% of Mauritius’s gross domestic product (GDP) comes from global business
transactions, much lower compared to some tax havens where such transactions account for more
than 50% of GDP.
“Global business flow related to India has shown significant reduction over the past year. It may
be going through other centres like Singapore. But the Indian government should realise that
Mauritius is a very transparent jurisdiction and shares information with India even without an
information sharing arrangement. That is not the case with other jurisdictions where-in
cumbersome legal procedures are to be followed to obtain the same information,” he said. “The
Financial Services Commission has also been proactive in trying to assuage the concerns of the
Indian government by initiating amendments to the global business guidelines with an aim to
significantly increasing the “substance” requirements. This will invariably impact smaller
international clients and medium-sized Mauritian management companies which service them in
terms of compliance costs. However, we hope it brings some certainty to investors and thus
reverse the investment trend” he added.
Press Trust of India ,2013 (Mumbai) says to further ring-fence its jurisdiction from any
attempts of round tripping and money laundering activities, Mauritius has agreed to include a
'limitation of benefits' (LOB) clause in its revised tax treaty with India.
While specific details of this clause in the India-Mauritius tax treaty are being ironed out, LOB
clauses are typically aimed at preventing 'treaty shopping' or inappropriate use of tax pacts by
third-country investors.
The LOB clause limits treaty benefits to those who meet certain conditions including those
related to business, residency and investment commitments of the entity seeking benefit of a
double taxation avoidance agreement (DTAA).
"Mauritius and India have agreed on the principle of including a limitation of benefits (L0B)
clause in the treaty," Marc Hein, chairman of the island nation's Financial Services Commission
(FSC), told PTI.
FSC is Mauritius' integrated regulator for global business companies and non-banking financial
services sector.
"This LOB clause will have the effect of bringing even more substance to companies which want
to be tax resident in Mauritius," said Mr Hein, who was here to participate in an international
taxation conference.
He added that "there is already a mechanism to prevent misuse and the further obligations should
alleviate the fears of the Indian Authorities".
While a DTAA is already in place between two countries, it is being revised amid concerns that
the Indian ocean nation was being used for round-tripping of funds to and from India, although
Mauritius has always maintained that there have been no concrete evidence of any such misuse.
The two countries had signed this DTAA in 1982 when late Indira Gandhi was India's Prime
Minister and was part of various steps initiated by the two countries at that time for strengthening
the flow of investments to and from Mauritius. While Mauritius has traditionally been one of the
biggest source of foreign direct investment (FDI) into India, the flow has slowed in recent years.
on the other hand, flow of global investments through Mauritius has shifted in favour of Africa.
Mauritius, which has a large population of Indian origin people, has also been projecting itself as
a 'gateway to Africa' for quite sometime now.
"It is a fact that more companies are now being registered targeting investments in Africa and
this shows that Mauritius has now truly become the investment platform for Africa," Mr Hein
said.
"After 2o years servicing international investors and institutional investors, it is proof that
Mauritius is today a mature International Financial Centre (IFC) and remains a preferred IFC
because of its high number of experienced professionals, low operational costs and solid legal
and regulatory frameworks," he added.
India's share in total number of investments made by global companies through Mauritius has
almost halved in the past two years to about 15 per cent, while Africa now accounts for over 5o
per cent.
CNBC, 2013, Aastha Maheshwari says More and more MNCs, with Indian subsidiaries, are
now shifting their base from Mauritius to another island nation- Singapore in order to save taxes.
So is Singapore now taking over as the new tax haven? CNBC-TV18’s Aastha Maheshwari finds
out.
This tiny island tucked in the Indian Ocean has so far been the corporate's favourite tax haven
Mauritius, is in fact one of the biggest sources of foreign direct investment (FDI) coming into
India. But all that's set to change. With the Indian government considering proposals to remove
tax benefits from Mauritius, global companies are now considering investing through Singapore
instead.
 
CNBC TV 18 learns that some of these companies are Standard Life, global partner for the
largest private life insurance company in India- HDFC ST Life. Smithkline and Castleton, part of
the global holding co of GSK Pharma and GSK Consumer Dow Agri Sciences, the holding
company of Dow Chemicals in India.
And even some private equity firms like 3i, which along with others such as CX Partners and
Edelweiss Capital had started this trend in 2012.

But what makes Singapore click?

Gautam Mehra, executive director, PwC says "The main reason for people to shift to Singapore
is the uncertainty over General Anti Avoidance Rule (GAAR). People are not about tax rates,
what will be taxed, how much investors want surety on parameters that are taxable, which due to
GAAR remains a question in Maritious. While in Singapore, the limitation of benefit treaty is a
positive. It allows companies who are two years in existence in Singapore and with expenditure
more than 200,000 Singapaore dollars every year to get capital gains exemption."
Mauritius, however, is not giving up yet.
The island nation is trying to make the investment process more transparent, under which
companies are asked to provide office and bank account details in order to prove the entity is for
real and not just a front to save taxes. And Mauritius is also in talks with the Indian government
to have a benefit treaty, inline with the Singapore treaty to escape the GAAR burden. But till
these uncertainties are sorted out..unless the issues are resolved it looks like taxing times for
mauritious will continue for some time.
Chapter 3- Research Methodology
a. Research Design
 The research design is Exploratory research (an unstructured research with no set of
formal questionnaire to gain background information) and the method used was:
Secondary Data Analysis
Case Analysis
In depth Interview: where I directly spoke with a financial consultant who gave me
relevant information about the various regulations and tax guidelines.

b. Data collection
 A secondary data source like catalogue of the companies, and various internet sites
has been used in this project also data shown by the consultant, a part of it is shown,
as have taken permission from the company
Chapter 4- Data Analysis & Interpretation
 COST BENEFIT ANALYSIS OF MAURITIUS AND
SINGAPORE

Assumptions:
Fund Size- USD 100 Mn Team Size:
Management Fees- 2% Partner: 1 No's
Carried Interest- 20% Principal: 1 No's
Analysts / associates: 3 No's
Support Staff: 2 No's

Annual Revenue: USD 2,000,000 USD 2,000,000

One Time Expenses:  Mauritius  Singapore

Fund Raising- USD 300,000
Legal- USD 200,000
Admin / Travel- USD 100,000
USD 600,000
Annual Expenses:
Sponsor Remuneration- USD 500,000
Manpower- USD 600,000
Office Overheads- USD 200,000
General, Travel etc- USD 200,000 USD 1,500,000 USD 1,700,000
 The above Cost benefit Analysis of Mauritius and Singapore have been based on assumptions
taken by me.
The fund size of both the jurisdictions are taken as USD100mn each, the annual revenue as USD
2,000,000 each and the one time and annual expenses are also taken to be the same.
The management fees and carried interest are taken to as 2% and 20% respectively and a brief
about the number of team members are also been given.
Now, after adding up the expenses Mauritius give a profit of USD500,000 whereas Singapore
gives USD300,000 sill Singapore is recommended as the preferred jurisdiction for the fund. This
is because of the LOB (Limitation of Benefit) clause that provides a greater substance and
protection from GAAR, easier to set up the business as has a more robust enviroment because of
the authority being more strict and recognized.The Lob clause states that any company carrying
out it’s operations in Singapore need to spend at least SGD200,000.

MAURITIUS SINGAPORE

1. Lack on investment professionals in Presence of investment professionals in Singapore.

Mauritius

2. No full fledged set up in Mauritius Full fledged robust operating set up in Singapore.

3. Difficult to substantiate non-tax / commercial Substance can be defended on the basis of a more robust local
reasons for Mauritius structure more reputed regulator.

4. No Limitation of Benefit (LOB) clause yet, Stringent LOB clause therefore lesser threat.
therefore higher threat.

TAX OVERVIEW OF RELEVANT JURISDICTIONS

NATURE OF TAX
BASIC TAX RATE
 INDIA MAURITIUS SINGA
1. Short Term Capital Gain (STCG):

< 12 months for STT transactions 15%

NIL NIL
< 36 months for non STT transactions 30%

2. Long Term Capital Gain (LTCG):

> 12 months for STT transactions NIL
> 36 months for non STT transactions: NIL NIL
Without indexation 10%
With indexation 20%
3. Securities Transactions Tax for equity (STT) 0.01% for sell side 0.01% for sell side 0.01%

4. Dividend Income (DDT of 15%) NIL NIL NIL

5. Interest Income FPI/FII 30% 21-43% 15%

6. Withholding tax on interest 5% 10% 10%

7. Local Corporate Tax 30% Effective 3% 17%

 Chapter 5- Conclusion

In general, it appears that Singapore is a more advantageous jurisdiction for setting up an

Offshore Fund for routing equity investments into India due to:
1. LOB Clause provides greater substance, and therefore higher protection from
GAAR.
 2. Greater availability of investment professionals.
3. Proximity to India facilitates ease of travel.

From a Cost-Benefit perspective, the final determination of the jurisdiction will probably depend
on the following factors specific to each Fund:

1) Availability of existing manpower in Singapore or India.

2) Ability to relocate existing Indian manpower to Singapore.
3) Cost and availability of recruiting additional manpower in Singapore
4) Expected interest earnings of the Fund. Higher the interest earnings of the Fund,
Singapore becomes more attractive
5) Size of the Fund. Singapore’s attractiveness is directly proportional to the Fund size. The
larger the Fund corpus, the easier it is to absorb the minimum fixed costs stipulated in
the LOB clause.

Bibliography
 Report on 'Fund Structuring and Operations' by Nishith Desai Associates.
 Research Document published by KPMG titled 'Jurisdictional Analysis'.
  Double Taxation Avoidance Agreement (DTAA) between India and Mauritius,
http://www.allindiantaxes.com/mauritius.php
 Double Taxation Avoidance Agreement (DTAA) between India and Singapore,
https://www.iras.gov.sg/irasHome/uploadedFiles/Quick_Links/Protocol%20amending
%20Singapore-India%20DTA%28Ratified%29%2812%20Aug%202011%29.pdf

Article 1:
http://www.livemint.com/Politics/JrezuTzTCswF2qCEEWO8qI/Mauritius-may-tighten-rules-
for-firms-seeking-tax-treaty-ben.html

Article 2:
http://articles.economictimes.indiatimes.com/2013-12-08/news/44942769_1_india-mauritius-
global-business-companies-mauritius-and-india

Article 3:
http://www.moneycontrol.com/news/cnbc-tv18-comments/mncs-change-route-flock-to-
singapore-to-save-taxes_1008160.html