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Comment: Gateway for Cayman funds to India’s capital markets

The admission ofthe Cayman Islands Monetary Authority as a full member of theInternational Organization of Securities Commissions is set to simplif

The admission ofthe Cayman Islands Monetary Authority as a full member of theInternational Organization of Securities Commissions is set to simplify
access to India’s capital markets by Cayman-domiciled investment funds,
say Dennis S. Ryan and Sonia Xavier of law firm Conyers Dill &

Cayman Islands domiciled investment funds
historically have faced challenges when seeking to invest into Indian
capital markets. One of the major hurdles has been addressed by the
June 10 admission of the Cayman Islands Monetary Authority as a full
member of the International Organization of Securities Commissions.

way of background, the Iosco Objectives and Principles of Securities
Regulation were endorsed by its member regulators of various securities
and futures markets in 1998, and generally are viewed by securities
regulators as the key international benchmark on sound principles and
practices for securities regulation. Currently, Iosco members regulate
the vast majority of the world’s securities markets.

To access
the Indian markets, an investment fund must register as a foreign
institutional investor with the Securities and Exchange Board of India.
In the past, since Cima was not a member of Iosco, Sebi often engaged
in extensive due diligence and inquiries before allowing registration
of a Cayman fund as an FII. As a result, few Cayman Islands funds have
registered with Sebi. Cima’s admission to Iosco looks set to change
this trend.

The timing could not be better. With emerging
markets competing to attract liquidity, the Cayman Islands, with more
than 9,000 Cima-registered investment funds, a proven track record with
investors and an excellent and sophisticated service infrastructure,
has a great deal to offer India and investors that wish to access its

One remaining challenge is that the Cayman Islands do
not currently have a tax treaty with India. Mauritius, on the other
hand, has long been the preferred jurisdiction for investment into
India as a consequence of the favourable double taxation agreement
between those countries, contributing around 44 per cent of foreign
direct investment into India.

Investment funds from non-tax
treaty jurisdictions have developed a structure involving a
wholly-owned Mauritius subsidiary for purposes of Indian investment.
Typically, this structure requires a Cayman Islands (or other
non-treaty jurisdiction) investment fund to register with Sebi as an
FII. The Mauritius subsidiary fund will then be registered with Sebi as
a sub-account of the FII, permitting it to invest directly in Indian

The Mauritius fund will be set up as a Global
Business Company Category 1 that is resident in Mauritius for tax
purposes. As a Mauritius tax resident, this fund is subject to tax on
income at the flat rate of 15 per cent, but it is entitled to claim a
credit for foreign tax on income not derived from Mauritius against the
Mauritius tax payable, resulting in an effective tax rate generally
ranging between 3 per cent and nil. As a tax resident GBC1, the fund is
also entitled to take advantage of Mauritius’ network of tax treaties,
including the Mauritius-India double taxation agreement.

the agreement, capital gains realised from the sale of Indian
securities held by a Mauritius fund will be exempt from taxes in India
and taxable in Mauritius, provided the Mauritius fund does not have a
permanent establishment in India. Since Mauritius does not impose any
capital gains tax on its residents, such gains would ultimately not be
liable to any taxation. Additionally, there are no withholding taxes on
dividends and proceeds paid by the Mauritius fund to its shareholders.

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