Round Tripping: India is getting nervous

By R.V.

It was all over the newspapers in the UK. Two UBS bankers tried to create an offshore vehicle which one of India’s most powerful businessmen could have used, allegedly bypassing rules, to invest in securities at home. The businessman, who is said to be no other than Anil Ambani, was allegedly the ultimate owner of a Mauritius-based vehicle Pluri.

All this may not be true but the harm has been done by pushing Mauritius on the defensive. It has been splashed out as if Mauritius is to blame, not those who would have structured the vehicle in Europe, an activity which is the daily bread and butter of jurisdictions like Singapore, Caymans, Luxemburg, Jersey, Guernsey, Cyprus, etc.

Pluri was apparently established for the sole purpose of investing in Indian stocks, and it was presented in the media coverage as a colourable device crafted skillfully to enable Indian companies and nationals to carry out the prohibited activity of transferring funds out of and back into India for investing in Indian securities through foreign institutions — which is usually referred to as “Round Tripping”.

The Mauritius-India Double Taxation Avoidance Treaty (DTAT) was said to be on top of the agenda during the recent bilateral talks between the two countries. India is already showing signs of impatience and irritation. Certain groups in India, which unwittingly play into the hands of another offshore jurisdiction-in-waiting such as Singapore, are also showing signs of impatience and irritation against the ruling political establishment of India on the India-Mauritius DTAT. They obviously want to hit this establishment by using Mauritius as a proxy.

The fierce anti-corruption campaign led by Anna Hazare has strengthened such vociferous groups. For such groups, Mauritius is a favourite target when it comes to attacking Indian politicians for stashing bribe money paid out to them.

Assaults on the good standing of Mauritius’ financial sector of the sort would have called for convincing actions on the part of the authorities in Mauritius to clear the name of the country vehemently. The actions might have included some exemplary actions towards strict law enforcement along with lawful cooperation with the authorities in India to help them out publicly, if necessary, to the extent possible and within legal parameters to trace out the source of the incoming funds, which they suspect as being tainted.

This kind of action will not carry conviction enough however where the players and beneficiaries having demonstrable direct vested interests in the sector style themselves as self-proclaimed policemen and policy adviser to the sector. The best such a strategy can do is to put forward the now-stale argument that Mauritius is a jurisdiction of substance and has the entire legislative arsenal in place to fight money laundering. Will this kind of argument coming from those quarters carry conviction at the negotiating table, given the highly emotionally pitched one-sidedness of views held by those in India, who consider India as the victim of offshoring politicians the country had placed in power to serve its interests rather than their own? This is doubtful. 

The Indians have been carrying out a survey of substance, I dare say, to ascertain the directorships of Mauritians on the board of offshore companies. They have found out that in the case of a number of our local directors, some of them serve as directors on no less than 400 offshore companies individually. In one particular case a prominent figure of the sector allegedly sits on no less than 700 boards of directors of offshore companies. In another case, another Mauritian director apparently uses his spare time to act as director of a special fund offshore vehicle similar to the one having allegedly been mounted by the Swiss bankers for Ambani. If all this is true, our cause may be diluted even before we start doing the convincing.

As for money laundering, it is a fact that our legislation covers almost all the potential facets of this economic crime. Given this, it is a mystery how year in and year out we are being told that proceeds of crime are being deposited in our offshore funds without the enforcement agencies being able to take any significant measures to detect the crime.

To start with, such a situation would reflect failure on the part of the management companies and our bankers — whether it is a deliberate omission or not, that’s another story — to carry out a proper due diligence on the source of the money. There is avowedly an additional complication at the international level acting to restrain disclosure of information; the procedure remains throughout onerous and the walls of protection impenetrable right from origination of the transaction. Yet, the foreign counterparties involved in the transaction manage to make Mauritius pick up the bill ultimately and put us at cross-purposes with India’s suspicions of malfeasance, whether founded on facts or not.

It would be misplaced and the crux of irony if, during the negotiations with our Indian counterparts, the very persons who are said to be operating the sector with a direct private interest in it, are the ones who come forward with written representations to the Indian authorities. They ought not to have travelled to this point even if one can understand that they might have been nervous about the possibility that the money tap could dry up all of a sudden.

The Indian authorities in the meantime did not hesitate to take sanctions in the Ambani case. Mr Ambani entered into a settlement with the Securities and Exchange Board of India (SEBI) last January over allegations that his group would have misrepresented its end-of-year financial statements and violated overseas borrowing rules. As part of the settlement with SEBI, Reliance Infrastructure and Reliance Natural Resources companies cannot trade stocks on Indian Exchanges through December 2012.

As Mahatma Gandhi used to remind us, and the busy boys in the sector should always bear that in mind: “… there is enough in this world to cater for all our needs but not for our greed”. A bit of moderating the appetite and careful scrutiny of transactions by our financial service providers as well as an tough, independent and unsparing regulation of financial services should go a long way to protect our long-term interests.

* Published in print edition on 24 Feburary 2012