Financial sector regulators Sebi and RBI have enhanced their vigil on funds coming from Mauritius, suspecting round-tripping or routing of Indians' illicit money back into the country through the island nation.
The oversight has been increased by the regulators after they noticed a significant surge in venture capital funds coming from Mauritius in sectors like telecom and real estate, which have been subject matter of close scrutiny for money laundering cases, sources said.
Adding to the regulators' concern, all but five foreign venture capital investors infusing money into India were based out of Mauritius and many of those entities even have common addresses, sources said.
A total of 154 foreign venture capital investors are registered with Sebi and are permitted to invest in Indian companies and as many as 149 of these entities are based out of Mauritius, an island nation in Indian Ocean. In remaining five, three are based out of Singapore and two in Cyprus.
The investments from these entities have more than doubled in Indian real estate companies to over Rs3,000 crore over the past year, while the inflow has grown nearly 2.5 times in telecom sector to over Rs7,500 crore during the same period.
A tax-friendly regime in Mauritius has always been a key factor in entities wishing to invest in India to set up shop in Mauritius.
However, this tax benefit has also come in handy for those wishing to indulge in round-tripping activities or routing of illicit funds back into India through Mauritius.
The fear of names being made public of those having money in bank accounts in locations like Switzerland has also led to a large number of entities shifting their illicit wealth to Mauritius with an aim to ultimately route the funds to India.
While there are agreements in place for exchange of information on entities indulging in tax evasion and tax frauds, the response has not been so encouraging from the authorities in Mauritius, sources said.
Indian government is also said to be keen on revising its tax treaty with Mauritius to make it easier for it to keep a tab on illicit wealth flow to and from the island nation.
As per the existing practice, a bank in Mauritius can inform its customer if a request has been made by India for information about that person on suspicion of wrongdoing and such disclosure to the concerned entity can hamper the probe.
The two countries have in place a pact that provides for automatic exchange of information on a routine basis, but this is not carried out in practice.
Mauritius has not exchanged information spontaneously eiher, over the last three years. During the same period, the maximum number of information exchange requests received by Mauritius has been from India.
However, Mauritius has denied being a route for Indian black money flow.
Last week, Mauritius' vice-prime minister and minister for finance and economic development Pravind Kumar Jugnauth said that the country has put in place all necessary checks against flow of black money and illicit funds were not being routed through it into India.
While Jugnauth claimed that the Double Taxation Avoidance Agreement (DTAA) with India was doing well, some lapses have been pointed out in the treaty by the Organization for Economic Cooperation and Development (OECD), the global agency working on implementation of international standards on taxation and other matters.
OECD has named Mauritius among countries where tax laws and international information exchange framework do not meet global standards.
As per OECD, "There are missing elements in the legal framework (of Mauritius) such as accounting information on some of the offshore companies. The assessment of the practice in Mauritius shows that there is room for improvement..."
OECD, in its review of Mauritius, also took note of reports expressing concern over Indian taxpayers using Mauritian business entities to round-trip profits.
