Structuring debt investments in India’s booming market through Mauritius

In recent years, India’s private debt market has enjoyed a significant boom, emerging as one of the largest in Asia. As of December 2022, India-focused assets under management (AUM) in private debt almost doubled to US$15.5 billion from a year earlier, according to Preqin. Some estimates indicate this figure could double by the end of 2024, more so given the significant economic growth prospect of India – with GDP set to surge by 7%, it’s the fastest-growing economy worldwide.

Amidst this unprecedented growth of private debt in India, investors looking to gain a foothold in this emerging market face a crucial question: where best to structure their debt investments? Some of the most common jurisdictions considered by fund managers for setting up India-focused Funds pooling offshore investors include Mauritius, Singapore, Netherlands, UAE and GIFT City. While Singapore remained a top source of FDI into India with about 32% of FDI flows during April 2022 – December 2023, Netherlands is emerging as a prominent jurisdiction for fund formation accounting for around 6% of FDI inflows during same period. Both the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) in UAE represent interesting structuring options through a flexible and business-friendly ecosystem prone by the regulators. Finally, in GIFT City, India aimed at onshoring the “offshore” transactions having an Indian nexus, and is certainly one to follow, especially post the upcoming general elections in India.

In this article, we’ll deep dive on why Mauritius is an ideal jurisdiction for structuring debt investments in India.

The rise of India’s private debt market

In an atmosphere of economic uncertainty and market fluctuations, international investors are increasingly looking to alternative investments. Private debt has become an attractive alternative for both borrowers and lenders in India, as the traditional banking sector faces challenges such as regulatory constraints, asset quality issues and liquidity crunch. With the demand for capital from mid-market and growth-oriented companies remaining strong, and the supply of capital from traditional sources still constrained, the private debt market in India is expected to grow significantly. It is thus no surprise that, according to Preqin, India’s private debt markets are at the same stage today as equity markets were in the 1990s.

The Indian private debt market, constituting primarily of investment in direct lending, distressed debt and mezzanine financing, is now regarded as one of the largest in Asia and serves as a viable alternative to traditional banking channels for financing purposes. Globally, Preqin expects private debt AUM to increase at a compound annual growth rate of 10.8%, reaching an all-time high of $2.3 trillion in 2027.

Why Mauritius stands out as an investment route

Aside its historical ties with India which transcends political and economic considerations, Mauritius has long been a significant source of foreign direct investment (FDI) into India, accounting for a substantial portion of FDI inflows. A cumulative FDI worth US$170 billion from Mauritius to India over two decades (2000-2023), accounting for 26% of total FDI inflows into India, shows a long-standing and trusted investment relationship – a relationship which has been further consolidated with the coming into operation of the Comprehensive Economic Cooperation and Partnership Agreement (CECPA), the first trade agreement signed between India and an African country.

Mauritius has built a solid reputation of being a jurisdiction of substance internationally. The prominence of Mauritius as a favored gateway for structuring investments into India are driven essentially on the following tenets:

• Stable economy with conducive business environment
• Skilled and multilingual workforce
• Hybrid legal system, combining both common and civil law
• Highest court of appeal is the judicial committee of the privy council of England
• Global connectivity and business-friendly time zone
• No minimum capital requirement with 100% foreign ownership
• No foreign exchange controls, free repatriation of profits, dividends, and capital
• No capital gains tax, dividend and interest withholding tax, or share transfer tax
• No estate duty, inheritance or wealth tax

Against the backdrop of India’s booming private debt market, investors are looking again at the best way to structure their private debt vehicles, and Mauritius offers more advantages than ever before as an investment route into India.

In addition to above drivers, the renegotiation of the Mauritius-India double taxation treaty opened new opportunities for the Mauritius International Financial Centre (MIFC), most notably reducing the withholding tax rate on interest from India to just 7.5%. This reduced rate, the lowest India has signed with a treaty partner, coupled with the tax efficiency, regulatory compliance, investment flexibility and market access that the MIFC offers are contributing towards positioning Mauritius as the ideal gateway for structuring debt investments in India’s booming private debt market.

The Government of Mauritius has also come up with a host of regulatory and tax related incentives in the 2023-24 national budget aimed at enhancing the debt-structuring attractiveness of the MIFC. The key amendments brought include:

• The partial exemption regime for interest earned by a collective investment scheme (CIS) or closed-ended funds (CEF) has been increased from 80% to 95%, effective from
  1 July 2024.
• Under the Securities Act, CIS and CEF can now invest in debt instruments including loans, debt obligations or similar instruments.

By way of illustration, in the context of a debt fund established in Mauritius, the interest income derived from its Indian investments would qualify for up to 95% partial exemption, subject to meeting substance requirements. This represents an effective tax rate of 0.75% in Mauritius. With 7.5% withholding tax rate in India, the total tax suffered by the fund on the interest income from India would be around 8.25%. In contrast, the withholding tax rate under Indian domestic law for payment of interest to non-residents is 20%.

How IQ-EQ can help

The thriving private debt market in India presents significant opportunities for international investors, and Mauritius emerges as an ideal jurisdiction for structuring these investments.

As private debt becomes a larger part of investor portfolios and as structures continue to evolve across jurisdictions, selecting a knowledgeable partner is crucial. With over three decades of experience and a robust technology suite, IQ-EQ offers a wide range of services, including debt fund set-up and launch, fund administration, loan servicing, portfolio reporting, regulatory and tax compliance, and ESG services – ensuring comprehensive end-to-end support for your investment ventures.

Get in touch with our team today to explore how IQ-EQ Mauritius can enhance your debt investment strategies in India.