Name: Gulabuddin Bawer

System ID:2018005220
Class: BBA , SECTION:A , IV SEMESTER
INTERNATIONAL BUSINESS
Why does a lot of FDI comes from Mauritius to
India?

Governments across the world are trying to attract Foreign Direct Investment (FDI) as a
policy tool to promote growth, employment, etc. India has also adopted policies for
promoting FDI and has seen significant increase in FDI in the decade of 2000 and
onwards. In this context, the paper looks at the FDI flows to India between 2004-14. It
analyses where the FDI is coming from, especially countries who are regarded as tax
havens such as Mauritius and Singapore, and tries to explain the reasons behind it.
The paper makes use of a unique dataset which identifies the ultimate
parent/controlling entity of the individual FDI inflows, and thus able to identify which FDI
inflow is coming directly from the home country of investor and which are routed
through the other country. To find the reasons behind the routing of FDI through a third
country, it analyses the secrecy aspect as well as the tax agreement of that country with
India to find the linkages between secrecy, tax agreements and routing of FDI to India.”
The above picture is a replica of a real multinational corporation and it explains a corporate
structure. The boxes represent a company/subsidiary, the country’s name alongside the box
represents where that particular entity is based, and the arrow represents the ownership and
investment direction. The green boxes are the ones who are undertaking actual
business/economic operations, while the grey ones are used only for the routing of investment
or other financial flows. In this particular example, a company based in the UK makes an
investment in three Indian firms, namely A, B and C, through a number of subsidiaries based in
Mauritius and Cyprus. For these investments, the country reported as the source of investment
will be Mauritius and Cyprus, while in actuality the investment is coming from the UK.
The Centre for Budget and Governance Accountability (CBGA), a think tank based in New Delhi
India, recently did a study focusing the FDI inflows to India during the period from 2004 to
2014. The study analyses each individual investment inflow to India during the period 2004-14.
The intention was to calculate out of all investments coming in to India, how much is being
routed through a third country, and the reason for choosing a specific country to route the
investment. The findings of the study reveal many interesting insights.

Table I above shows that of the top 10 countries reported as the largest source of FDI in India,
how much of these investments are actually from there and how much is actually investment
from some other country being routed through there.
Countries which are regarded as tax havens have a very high percentage of routed funds, with
Mauritius, Singapore and Cyprus having a share of over 90 percent. This means that more than
90 percent of investments from these countries are basically investments from some other
country, but are routed through there.
This begs the question – why do firms route their investment through a third country and how
do they choose which country to use for routing the funds? The answer to these questions lies
in the process known as “Treaty Shopping”. To understand what treaty shopping is, consider
the following example – let’s say there’s an investor based in Britain who wants to make an
investment in India. This investment and the gains made by it will be subject to taxation rules
which will be a combination of Indian law, British law and the Double Tax Avoidance Agreement
(DTAA) signed between India and Britain. Let’s consider another case where an investment is
made in India via Mauritius. In this case as well, the investment and the gains from it will be
subject to a combination of Indian law, Mauritian law and the DTAA between India and
Mauritius. If the investor finds that the investment made via Mauritius is subject to an overall
lower tax rate than an investment made from Britain, he/she will first move the money to
Mauritius, establish a shell company there and then invest in India. This way, the investor based
in Britain will take advantage of the benefits of the lower tax rate arising from the Indo-
Mauritian tax treaty; this process is known as treaty shopping.
The study finds that the tax treaties of India with all four of these countries, which host over 80
percent of routed investments, provide preferable tax benefits to investments made from those
countries, and that is a major reason for the re-routing of investments. Coming back to the
question this article started with – how is Mauritius the biggest foreign investor in India? The
answer is treaty shopping.
Further information:The author is with the Centre for Budget and Governance Accountability in
New Delhi, India and can be reached at suraj@cbgaindia.org. Views are personal. The full study
can be accessed here.
NB: In 2016, the Indian government amended its tax treaty with Mauritius, Singapore and
Cyprus. After these amendments, the preferential tax benefits were removed partially starting
in the fiscal year of 2017, and will be removed completely starting fiscal year 2019.
What is depositary receipt?
A depositary receipt (DR) is a negotiable certificate issued by a bank representing shares
in a foreign company traded on a local stock exchange. The depositary receipt gives
investors the opportunity to hold shares in the equity of foreign countries and gives
them an alternative to trading on an international market.
The DR, which was originally a physical certificate, allows investors to hold shares in the
equity of other countries. One of the most common types of DRs is the American
depositary receipt (ADR), which has been offering companies, investors, and traders
global investment opportunities since the 1920s.
Since that time, DRs have spread to other parts of the globe in the form of global
depositary receipts (GDRs) (the other most common type of DR), European DRs, and
international DRs. ADRs are typically traded on a U.S. national stock exchange, such as
the New York Stock Exchange (NYSE), while GDRs are commonly listed on European
stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually
denominated in U.S. dollars, but can also be denominated in euros.
Depositary receipts exist all over the world, but the most common is the American
depositary receipt, which first came about in the 1920s. In the U.S., American depositary
receipts typically trade on the AMEX, NYSE, or Nasdaq. For example, when an investor
purchases an American depositary receipt, the receipt is listed in U.S. dollars and a U.S.
financial institution overseas holds the actual underlying security.
ADR holders do not have to transact in foreign currencies because ADRs trade in U.S.
dollars and clear through U.S. settlement systems. The U.S. banks require that the
foreign companies provide them with detailed financial information, making it easier for
investors to assess the company's financial health compared to a foreign company that
only transacts on international exchanges.
Among other advantages, depositary receipts provide investors with the benefits and
rights of the underlying shares, which may include voting rights, and open up markets
that investors would not have access to otherwise. For example, ICICI Bank Ltd. is listed
in India and is typically unavailable to foreign investors.
However, the bank has an American depositary receipt issued by Deutsche Bank that
trades on the NYSE, which most U.S. investors can access, providing it much wider
availability among investors.
When a foreign-listed company wants to create a depositary receipt abroad, it typically
hires a financial advisor to help it navigate regulations. The company also typically uses
a domestic bank to act as custodian and a broker in the target country to list shares of
the firm on an exchange, such as the NYSE, in the country where the firm is located.