OECD Blacklist: Closer tabs on FIIs likely

NEW DELHI: The government may restrict investments by foreign institutional investors (FIIs) from ‘weakly regulated tax havens’ to prevent fund inflows of questionable origin.

The finance ministry has asked the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) to prepare a list of weakly regulated tax havens, where entities are registered without enough due diligence.

The regulators are expected to draw upon Organisation for Economic Cooperation and Development’s (OECD) frequently-revised list of tax havens that are not committed to improving transparency in tax matters. OECD identifies these countries based on the level of transparency, willingness to share information and safeguards against money laundering.

Sources declined to indicate the possible countries that might be blacklisted. When OECD revises the list, it drops the countries that have committed themselves to remove harmful tax practices in a time-bound manner. Its 2004 blacklist included Marshall Islands, Andorra, Liberia, Liechtenstein and Monaco while the 2000 list included 35 countries, including British Virgin Islands, Marshall Islands, St Kitts and Nevis, Seychelles, Cook Islands, US Virgin Islands and Antigua.

“Earlier, the list had countries like Mauritius, Cayman Islands and Bermuda. They were dropped after they made commitments to reform,” said KPMG partner Sudhir Kapadia.

Many FIIs operate out of Mauritius, with which India has a double taxation avoidance agreement. Because Mauritius is a tax haven for FIIs operating in India, many believe the provisions of India-Mauritius treaty have been misused by unscrupulous operators to launder illegal funds and channel these into stock markets.

However, the government is understood to be of the view that the recent volatility in the stock market does not strengthen the case for tightening FII inflows.