Mauritius row hits FDI flow in '03

NEW DELHI: Blame it on Mauritius. The imbroglio over the beneficial ownership of outward investment from Mauritius resulted in a drop of around $1 billion FDI from the island nation in 2003. This perhaps accounts for almost the entire 30% drop in FDI in 2003.
While total FDI inflows declined $1.3 billion, FDI inflows from the island nation dropped $955.4 million, or nearly 72% of the total FDI decline during the year. FDI from Mauritius in 2003 at $562.2 million was 63% lower than $1,517.6 million that came in during 2002. The share of FDI from Mauritius to the total FDI inflows during the year also declined from 45.18% in 2002 to 27.04% in 2003.
Since the Mauritius route was under the scanner, major US investors routed their investments directly. As a result, US FDI inflows in 2003 grew to $413.9 million against $282.8 million in 2002.
FDI inflows from Mauritius has remained high ever since India opened its doors to foreign investors as the overseas firms prefer to set up ‘post box offices’ in the island nation to benefit from the capital gains tax exemptions granted under the Indo-Mauritius tax treaty.

However, during the recent stock market boom, investments from Mauritius came under government scrutiny to ascertain the beneficial owners of the investments. Even the market regulator, Sebi, expressed apprehension that some of the investment from Mauritius was being done through issue of participatory notes.
Government sources said they expected the trend from Mauritius to be reversed this year following the resolution of the ownership confusion late last year. But they were apprehensive that a larger growth in foreign institutional investments (FII) in a strong secondary market will continue to dent growth in FDI.
Another factor that affected FDI growth in a big way is the increasing trend among foreign investors to set up trading offices instead of going for full-fledged manufacturing operations.
Though exact data is not available as yet, sources said that there is hardly any proposal for greenfield facilities. Either foreign firms are buying out local companies from existing joint ventures, or they are setting up trading offices and resorting to trading through the wholesale trading route.
“There is a serious anomaly in the FDI norms. If you completely open the doors to imports and then permit FDI in wholesale trading, investors will resort to the latter. Most investors have large under-utilised capacities in neighbouring countries, from where products can be imported cheap. Trading activities do not call for significant direct investments,� sources explained.