Why Finance companies can not be set up with FDI from Mauritius now?

The Reserve Bank of India (RBI) has said to the industry body for venture capital and private equity funds that finance companies can not be set up with foreign direct investment (FDI) from Mauritius. It has also banned FDI from such similar jurisdictions that do not comply with the benchmarks of the Financial Action Task Force.

Key Facts

  • Such FDI restrictions are not meant for Indian manufacturing or any other non-financial services companies.
  • Further, the foreign portfolio investors (FPIs) from Mauritius and other jurisdictions can register with the Securities & Exchange Board of India (SEBI) in order to trade on Indian stock exchanges.
  • However, rules have been tighten for finance companies as they are permitted to leverage several times their equity with public funds.

Why this step has been taken?

The RBI has taken this decision because of two main reasons-

  1. To prevent round-tripping–  In the round-tripping the funds and money first leaves India but later it is invested and moved towards India in the form of foreign investments. This usually comes from the countries called as tax heavens including Mauritius. Mauritius is also the major source of FDI in India.
  2. To curb Chinese investments–  The tighter norms could also be an attempt by government as well as RBI to lessen the growing Chinese investment in India’s financial markets. Since, many of the Chinese Venture Capital funds are also registered in Mauritius. China could invest through Mauritius. This, tighter norms would now take care of it.

Other Steps taken by India

  1. Mauritius was listed  in FATF’s -grey list, for a greater scrutiny and monitoring by the international body.
  2. RBI has been rejecting applications for NFBCs from Indian startups which are funded by venture capital (VC) and private equity (PV) funds registered in Mauritius.
  3. Government of India also amended its FDI policies for creating bureaucratic hurdles for Chinese companies that seeks to invest or buy strategic interests in India.
  4.  Government has also set up a screening panel headed by the home secretary, with the DPIIT secretary as a member for the scrutiny of FDI proposals from China.