The National Security Council Secretariat has called for
measures to trace the origin of inflows through participatory notes (PNs) and
entities registered in tax havens like Mauritius, Cyprus and Cayman Islands, a
move that can impact both portfolio flows and foreign direct investment (FDI).
Unchecked flow of funds through these routes could result
in country-specific restrictions being rendered useless, the council has
informed top guns in the government. If the traceability condition does not
materialise, the government should make prior government approval mandatory
for investment from all known tax havens, the Council has suggested.
This means that investment in sectors where 100% FDI is
allowed through the automatic route would also need approval from the Foreign
Investment Promotion Board (FIPB) if the government accepts the Council’s
suggestion.
In the case of PNs, the Council has called for more
disclosures since actual source of funds remains unknown even after extensive
investigation. There is also a need to distinguish investment by private funds
as compared to sovereign funds, the Council has said in a note, recommending
measures to step in security screening of FDI in view of increase in
cross-border terror attacks and escalation in money laundering.
PNs are used by overseas investors, who are not registered
with SEBI, to invest in the Indian market through registered foreign
institutional investors (FIIs). Despite recent efforts to discourage
investments through PNs, flows through this route continue.
Almost 44% of the equity FDI inflows into the country
originate from Mauritius while Cyprus accounts for nearly 2.93% of the FDI
flowing into India. Cayman Islands is the 12th largest source of FDI flows
into India, accounting for nearly 0.71% of the foreign investment into India.
The revenue department has also been objecting to FDI from
tax havens on grounds of ‘treaty shopping’ or use of these destinations to
route funds flows with the objective of gaining a tax advantage.
(Source : The Economic Times, 23-10-2009)
