Mauritius and the ‘color of money’

The largest bail amount in history is of the order of $1.5 billion for the release of Subrata Roy, “managing worker” at Sahara India, a financial organization which once claimed to be India’s second largest employer.

Unable to deposit the amount, Roy has been in Delhi’s Tihar jail since 2014. Among his company’s assets are iconic London and New York hotels, Grosvenor House, and The Plaza, which Sahara said it would sell to spring the boss. For several months, prison authorities gave him access to a conference room with video facilities to facilitate transactions that would enable him to raise the bail. Given the value of the properties on the block, it seems strange that no deals were forthcoming. The 67 year-old Roy no longer makes the headlines.

In 2012, an intriguing headline featured on the pages of Times of India, India’s largest English daily: “Mauritius offers India two islands in effort to preserve tax treaty.”

According to the paper, “Mauritius has offered a couple of sun-drenched islands to India as part of a trade and investment deal. While the offer has been talked about for a while, Mauritius has revived it – at a time when it’s very keen on persevering with the 1983 double-taxation avoidance treaty with India.” Those islands were never ceded to India, and the Times of India retracted the news, but the very fact that the item was published underlined the importance to Mauritius of its financial relationship with India.

The hotels that didn’t get sold and the islands that were never ceded are linked through the more shadowy realms of India’s financial flows.

Let’s look at the Sahara case first: Subrata Roy was the flamboyant head of a “residuary non-banking company” or RNBC, which accepts deposits of tiny amounts. Over time, Sahara came to build townships, and own cricket teams, a newspaper, even an airline. When Roy’s two sons were married in 2004, 10,500 guests attended the joint celebrations in his 170 acre-estate in the north Indian city of Lucknow. A Russian gymnast showered flower petals on guests from a hot-air balloon, flamenco dancers entertained them, and they were joined by the prime minister, political leaders from every major party, and the A-listers of Bollywood, India’s cinema fraternity.

Roy’s political connections were well known, and rumors of whose money he was managing changed with every major election. The facts that landed him jail were that he had failed to obtain requisite clearance for the issue of several bond schemes of two Sahara companies, with a total face value of Rs. 20,000 crore, roughly $3 billion. The Securities and Exchange Board of India (SEBI) ruled the issues to be illegal, and asked Sahara to refund the amounts to its 30 million depositors. This mammoth number allowed Sahara to claim that all individual deposits were of a cash value of below Rs. 10,000, the threshold above which transactions need to be made by check or other banking channels.

Confronted by the regulator and the courts, Sahara said the bulk of these deposits had been repaid; further, that no complaints of non-payment had been received. It was unable to satisfy the courts of the former claim, though the latter seemed to be true. When the courts asked for documents pertaining to the deposits, they arrived by the truckload. The courts sent officials out to track depositors selected at random: not one could be located. No depositors, ergo no complaints!

Fed up, the courts ruled that Sahara should deposit Rs. 20,000 crore with SEBI. Roy was thrown into jail, and the price of his “Get Out of Jail” card was set at half this sum, Rs. 10,000 crore. The fact that this sum is not forthcoming leads many to believe that the Sahara assets are not Roy’s to control, and that beneficiaries other than the company determine their disposal.

India’s intelligence agency, the Central Bureau of Investigation, or CBI, estimated in 2012 that US$500 billion of illegal money of Indian origin was stashed abroad. Against that number, the sums involved in the Sahara transaction barely cause the needle to budge.

But unlike in the Sahara case, much of that money does come back. Gains from unrecorded transactions, many related to real estate clearances and transactions, find their way to traditional bolt-holes overseas, and are held there until required in India.

When this money is ready to return to India, it seeks anonymity. This has been provided by the convenient device of participatory notes, or PNs, which allow Foreign Institutional Investors (FIIs) to buy Indian equities without revealing the ultimate beneficiary to our regulators. Since 2000, the largest point of origin of such investments has been Mauritius; in the first decade of this century, nine of the 10 largest investors in India were based in Mauritius.

Mauritius2Aside from its convenient location (and those lovely islands in the sun), Mauritius has become a financial gateway to India thanks to a double tax avoidance treaty (DTAC) with India. Capital gains in India get taxed at the Mauritius rate of 3 percent, and much of this, I am informed, can be eliminated by local tax avoidance measures. India has a similar treaty with Singapore, which has a much deeper and stronger financial market, but the Limitation of Benefits (LoB)1 provisions in Singapore make it less attractive to those in a hurry to move money into India.

What kind of investors would seek the cover of participatory notes? Some investors desire anonymity for strategic reasons, not wanting to reveal the extent or timing of their bets on specific assets; others, who are round-tripping illicit funds, get the benefit of the same cover. Some money, it is believed, has both colors at once – and belongs to Indian businessmen who control listed companies, and use the PN route to manipulate the prices of their own stock.

Concerns about the color of PN money have existed for almost two decades now, and were formally tabled in 2001 by a Joint Parliamentary Committee on securities scams. Since then, regulators have passed the buck to politicians, who have passed it to each other. In October 2007, in a bullish market flush with liquidity, the regulator banned PNs, and Indian equities crashed. Within the week, the matter was ‘clarified’ stating the stricture would only apply to fresh exposures. The markets duly recovered.

Since then, there has been much bureaucratic business with disclosure norms and quantitative ceilings on FIIs and the number of sub-accounts they run. But PNs still ply the Indian Ocean: try analyzing any form of foreign investment into India – portfolio or direct – and you end up concluding that Mauritius is the largest source of global finance.

Though there is periodic concern about how tax avoidance agreements will affect the Mauritius routing, there is also little incentive to rock this cozy arrangement. At the broader level, FIIs, and the PNs they hold, have become critical to the health of Indian equity markets. Over 20 percent of the floating stock in listed Indian companies is held by FIIs, and no government wants to rock the boat of our stock markets by triggering an exit, even a temporary one.

In his first year in office, Prime Minister Modi made a two-day visit to the tiny nation, signaling its place in the Indian world-view. Speaking to the Mauritius parliament in March 2015, Prime Minister Modi told its leaders that, while there were concerns about the treaty giving shelter to tax evaders, and it need to be reviewed in that light, “I also assure you that we will do nothing to harm this vibrant sector of one of our closest strategic partners.”

For the time being, at least, Mauritius seems to have been granted status quo – without ceding its islands. A pity about Mr. Roy, though.


  1. To qualify for the capital gains exemption, the Singapore entity must have incurred an annual expenditure of 200,000 Singapore dollars on operations in Singapore in the 24 months prior to the date the capital gains arise.