Originally published in Contact, January 2011

In our series of articles looking at Guernsey relationship with the emerging markets, Joe Truelove, reports on the opportunities for Guernsey in India. As Head of Channel Islands Business Development for Corporate Fiduciary at Kleinwort Benson, Joe joined Guernsey Finance on its first official trip to Mumbai in October. Accompanied by a group of investment fund industry specialists, Paul Christopher from Mourant Ozannes, Stuart Platt-Ransom of the Legis Group, State Street's Gerald Hough, and Robin Fuller from Dominion Fund Management, the Guernsey Finance delegation was led by Deputy Carla McNulty Bauer, Minister for Commerce and Employment.

There is no doubt that, as an emerging market, there is a buzz around India at the moment. The economy is thriving, huge construction projects are very much in evidence, and there is a confident air. This is an economy which has not been hit by the effects of the credit crunch and the banking crisis.

Indeed many economic commentators are flagging India as the BRIC (Brazil, Russia, India and China) nation with the most potential for growth and development. The demographics of India are remarkably diverse. It is the second most populous country in the world, with nearly 1.2 billion people. Already representing more than a sixth of the world's population, India most populous country by 2025.

Most believe that it is only a matter of time before India becomes an economic superpower. Goldman Sachs predicts that "from 2007 to 2020, India's GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the United States (in US$) by 2043. Certainly from a Guernsey funds perspective we are hearing a lot more about the business that can be potentially done with India, the value this business would bring to our finance industry in general and the need to promote and establish Guernsey as the jurisdiction of choice for the types of structures we can offer for investing in India.

So why is India so in vogue for Guernsey's fund industry? And why would India look to Guernsey to do business? From my experience in Mumbai, it was clear to see that there is business to be won in India, and not just within the funds arena.

Investment Funds

The key opportunity for new investment fund business in India is the provision of administration services to Guernsey domiciled investment funds, which are used to invest into India. To allow tax efficient investment into the country, Mauritius and Singapore both currently have a double taxation treatment with India. Guernsey does not, so a Guernsey domiciled vehicle would not be appropriate to invest direct into India. However it could serve a purpose as the domicile of a feeder fund, which invests into the Mauritius fund that in turn invests into India.

This would combine the tax efficiency of a double taxation treaty jurisdiction with the high standards of corporate governance of Guernsey. One challenge that Guernsey faces is the fact that currently US investors make up a significant proportion of the foreign investment in India, and the traditional jurisdiction of choice for US investors is Cayman. US investors are comfortable with a structure that uses a Cayman feeder fund investing into a Mauritius master fund.

However many investors prefer to invest into listed vehicles. Guernsey, with its strong reputation for high standards of corporate governance and proximity to the City of London, has long been the domicile of choice for closed ended London listed vehicles. Kleinwort Benson has a long track record of administering listed investment funds, whether they are listed on the full London exchange, AIM, the Irish stock exchange or the CI Stock Exchange. A listed fund will have broad appeal to many UK institutional and high net worth investors. Using a highly recognised stock exchange acts as a stamp of quality, which will really give an Indian fund manager a high profile flagship investment vehicle to tap into the European investor base.

Alternatively for those fund managers who would like to test the water with a closed ended vehicle listed on a recognised stock exchange they could use the Channel Islands Stock Exchange. This will make an investment fund more marketable to a wider audience of investors than an unlisted fund, and the CISX listing is very cost effective.

A number of funds investing into India in the past have listed on AIM, which is not itself a recognised exchange and was not designed specifically for investment funds. A trend we are seeing at the moment is that investment funds are migrating from AIM to the main market.

For instance, I met with one Indian fund manager who is in the process of launching a closed-ended, London-listed, Guernsey-domiciled £100 million fund to invest into Indian listed securities through Mauritius. It is my assessment that after they finalise this listing there will be a series of copycat style fund launches who will replicate the structure, generating further opportunities for new business for Guernsey from this region.

This opportunity would attract a high calibre of promoter requiring company secretarial services and financial reporting together with high standards of corporate governance. There will be a requirement for Guernsey lawyers, auditors and fund administrators. There may be some opportunities for banking deriving from this, for example lending, foreign exchange and forward foreign exchange. The chance to engage with so many of Mumbai's investment fund community, making them aware of Guernsey as a funds domicile and particularly the advantages of a Guernsey, closed ended London listed vehicle, was a huge advantage of the Guernsey Finance trip.

Private client trusts

India has an English style common law system and is familiar with the Anglo Saxon concept of trust. In addition, its company law is similar to that in Guernsey. As such, I believe that there are a number of opportunities for trustee services provided by Guernsey based trustees.

Scenario one: There is a large number of Non Resident Indians working overseas. Should they return to India they will be taxed if they bring assets or earnings they have generated into India. One potential solution is for them to settle these assets on a discretionary trust and return to India, leaving these assets offshore in trust.

Scenario two: Resident Indians are limited to the amount that they can invest outside India (maximum of $200,000 USD per annum.) Also Indian citizens cannot borrow money to buy property in the UK. By incorporating a company offshore they can actually pool their assets as a family group and then be in a position to buy a property in the UK, using a mortgage if necessary in addition to capital.

Scenario three: Individuals involved in private equity fund management who are not Indian resident, and who do not plan to be, could benefit from a carried interest trust. Each of these opportunities will generate trustee fees, potentially deposit services, maybe investment management and, in the respect of buying UK property, there may also be a demand for lending. All of which could be offered by service providers like Kleinwort Benson in Guernsey.

The strong historical and cultural links between the UK and India ensure that there will be a continued exchange of people and ideas between both countries. Globally mobile professionals moving between east and west will benefit from Guernsey's estate planning and wealth management services. On the recent trip I met a Mumbai based investment fund lawyer who had worked in London and Zurich and had visited Guernsey on business and launched a fund with Kleinwort Benson.

What did I learn from my trip to India?

On a logistical level I can tell you that the best months of year to travel there are December and January – October when I went was oppressively hot. The blue and white taxis have air conditioning, their drivers speak English and they are typically clean which is not universally the case. You need to be very careful what you eat, and be prepared to run the gauntlet of assorted beggars and street vendors wherever you venture. I can attest from personal experience that the Air India "Maharaja Lounge" at Mumbai airport is not the most comfortable place to sleep in the event of a delay on the return trip.

Going forward

The primary objective of the first official Guernsey Finance trip to India was to inform our hosts about

Guernsey, tell them about our finance industry and what we can offer. The trip was very well received, and I think we made significant headway in achieving our objective. However, as a jurisdiction we need to continue to build on this good work in raising awareness about Guernsey as a financial centre of excellence.

We have a good story to tell, and we are supported by a pragmatic and commercially minded regulator so we have just the right level of regulation to satisfy investors that their investments are properly managed, without so much regulation that it makes it very difficult for managers to get funds approved locally and launched.

Would I return to India?

There is certainly potential for business and I have already encouraged my colleagues in our private client team that there are opportunities for them in India.

From the funds side, I will be watching developments in the investment fund market for Indian promoters very carefully. To win business in a foreign jurisdiction you do have to keep returning there to show some commitment. It was great to visit as part of a team, pooling our contacts and sharing knowledge. So if the opportunity arose again to join a Guernsey Finance delegation, and maybe attend a conference where we could cost effectively meet a large number of potential business introducers, then I would be keen to join the team and support our jurisdiction.

You have to remember that it is a very long journey and quite expensive to get to India, and while there are opportunities for Guernsey, the streets of Mumbai aren't quite paved with gold...yet.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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