Mauritius: Fund Management Guide - Mauritius

Last Updated: 29 April 1998
With the globalisation of the world economy and the liberalisation of a number of emerging economies, investment patterns have considerably altered .The conservative notion of guaranteed returns has given way to bolder and more aggressive investment schemes. In view of the relative saturation of the developed economies where new and exciting investment opportunities are few and far between, a number of the larger corporates have been forced to divert their operating structures and have decided to relocate their businesses. Consequently, a number of those have established their operations in emerging markets.

Political uncertainty and the inevitable delays in the crystallisation of economic reform policies in emerging markets have traditionally caused considerable nervousness to the foreign investor. As a result, the tendency has been for foreign investors, especially those coming from high tax jurisdictions, to make use of offshore jurisdictions through which their investments could be channelled into the emerging markets. Although not an emerging capital market in itself, Mauritius has positioned itself as an active service provider for those investing in friendly emerging markets. Indeed, Mauritius is poised to be involved in this change process, not least of all because of its geographical and political proximity to a number of these emerging economies; namely South Africa , India, Pakistan and China.

The most immediate issue when talking about Mauritius in connection with offshore funds is that concerning the choice of Mauritius rather than any other jurisdiction. It is well known that sponsors of collective investment vehicles choose offshore domiciles to maximise their fund's appeal to the investors.The concept of an "offshore fund" is appealing because it is beyond the onshore regulatory net , offshore investment returns are tax favoured and because confidentiality is more easily guarded . Mauritius has an additional useful advantage to all the above considerations in that it is able to provide financial services of the highest possible professional level. Sponsors also value the fact that offshore investments are conducted most efficiently in Mauritius in view of the streamlined procedures which in turn imply lower costs and shortened time schedules. These offshore benefits together with the demonstrated acceptance of offshore domiciles by investors have created a competitive environment and Mauritius has been quick to modernise its statutory infrastructure to increase its attractiveness.

Indeed, the Mauritius offshore fund industry in its generic sense seems to be well entrenched in the new international economic order. The passing of the Mauritius Offshore Business Activities Authority (MOBAA) Act in 1992 was the harbinger of the launch of Mauritius as a financial services provider. This law provided for the creation of a regulatory authority for offshore matters - the Mauritius Offshore Business Activities Authority (MOBAA), which along with a number of disapplications of certain provisions of the local Companies Act, brought about a congenial atmosphere to the channelling of foreign investments into the emerging markets. Mauritius now offers a variety of fund structures which aim at the specific target requirements of fund promoters.

The Companies Act 1984 of Mauritius is largely based on the 1948 Companies Act of the United Kingdom and the procedure in the courts of law follow the British legal system although large portions of the substantive laws of Mauritius follow the French Civil Code. The final court of appeal with regards to matters brought before the Mauritian courts has remained the Judicial Committee of the Privy Council although Mauritius became independent in 1968 and a Republic in 1993.

A number of open-ended funds have been created in Mauritius The corporate structure most suitable to the collective investment scheme is that of the offshore investment company which was introduced by way of regulations pursuant to the MOBAA Act in 1994. The investment company allows the redemption of ordinary shares at the request of the shareholder. Moreover, redemptions can be made out of paid up capital, the share premium account or any other reserves whilst for the standard offshore companies, redemptions can only be made out of distributable profits or out of the proceeds of a fresh issue of shares.

Although it would appear that the increased liquidity generated by open ended funds has made them more attractive to investors, it is worth noting that a number of close ended funds have also been formed in Mauritius. It is thought that the reduced running costs of such funds tend to make them better performing than the open ended funds and as a result better adapted to medium and long term players. With regard to close ended funds, the limited life company (LLC) is most appropriate as it operates as a corporate entity but has all the transparency of a partnership for U.S. tax purposes .

With the increased demands of the investors for the servicing of funds, Mauritius has consistently perfected the quality of its professional services. Nowadays, investors do not hesitate to resort to Mauritian service providers for third party fund administration. In this respect, there are a number of specialised offshore management companies which act under the supervision of the MOBAA and provide registerial, secretarial and corporate management services to funds. The professionals servicing the industry are all Mauritians who graduated at the best European and American universities and institutions. It is largely because of this that Mauritius has emerged as a credible and "clean" jurisdiction. This would also explain why a number of the most reputable multinationals in the world keep using the Mauritian route for their fund structures.

Several banks operating Offshore Banking Units (OBU's) in Mauritius provide custodial services to fund operators. The calculation of the Net Asset Value (NAV) is also competently carried out by a number of the management companies which act as Administrators and Registrars of funds.

With regard to asset management services, the tendency so far has been for fund promoters to have their investment advisers and managers either in the jurisdiction in which the fund is listed or in the country in which the investment is carried out. For this reason, the demand for service providers in that particular field has been slower to materialise.

Traditionally, investment funds established through Mauritius have tended to be sub accounts of investment managers who operate in the country in which the investment is being made. However, it is being noted that offshore funds are becoming increasingly active in their country of incorporation. This change of attitude is no doubt associated with the keenness of the fund promoters to ensure the effective tax residence of the fund in Mauritius. As a result, the more recently incorporated funds have their asset management services provided from Mauritius . This has been achieved by foreign asset management firms incorporating an offshore entity in Mauritius through which the asset management services are being directly supplied to the fund. Effectively, the fund is then being managed and the investments are being effected directly from Mauritius. It is thought however, that the above measures will soon be replaced by a more permanent structure whereby the asset advisory and management services will actually be supplied locally.

The Stock Exchange of Mauritius (SEM) has been very active in the economic scene of Mauritius since its creation in 1988. Recently, the SEM has started to accept both primary and secondary listings of offshore and foreign companies. These changes have so far modestly increased the presence of foreign companies on our stock exchange, it is thought that in the medium term, foreign investors will opt more and more for this alternative. There are a number of reasons why the SEM is bound to evolve with the developments in the offshore fund industry. The first reason is that open ended funds tend to prefer to be listed on a stock exchange as a markeatability tool for the promoters of funds. Additionally, with the increased awareness of investor protection measures, a listing offers the possibility of maximum transparency.

Furthermore in view of recent trends according to which institutional investors are refraining from having multiple listings coupled with the increased sophistication of the Mauritian economic climate, it is thought that primary listings on the Mauritian stock exchange will become an interesting proposition. In that context ,it is worth noting that the SEM is closely involved with the developments being envisaged in the creation of a regional stock exchange for Africa.

Any offshore fund will have as one of its primary concerns, the need to ensure maximum returns whilst reducing exposure to undue risks. Mauritius has been usefully resorted to as a base from which all high risk activities of the fund are being conducted. The economic stability of the country coupled with the soundness of its legal system has inspired the confidence of foreign investors who are consequently able to ensure that their financial interests are being protected at all times.

TAXATION:

Offshore companies incorporated in Mauritius are taxed at the rate of between 0% and 35% at the option of the taxpayer. All offshore companies incorporated after July 1998 will be subject to the revised rate of tax of 15%. Regulations will be introduced to introduce a system for the operation of tax credits which will then operate .

The network of double taxation treaties which Mauritius has with a number of countries has been an instrumental factor in the choice of Mauritius as a base for investment funds aiming at emerging capital markets. Mauritius has about 12 treaties already in existence. There are a number of other treaties awaiting ratification whilst others are being negotiated.

Since the introduction of the legal framework to provide for offshore corporate structures, the treaty which Mauritius ratified with India has been the used. Ironically, when this treaty was signed in 1985, neither country expected its future use to be so successful in attracting foreign investments into India. Nowadays, Mauritius is considered a most tax efficient route for investing in India. The low rate of withholding tax with regard to dividend payments by Indian companies demarcates Mauritius from a number of other countries with which India has signed double taxation treaties in a more recent past.

Quite apart from the large number of foreign corporations which have invested into India through Mauritius, the fund industry itself has been particularly buoyant in India. Since November 1995, when it became possible for Indian mutual funds to accept subscriptions from domestic Indian investors and foreign investors into the same fund, the scope for the creation of offshore funds investing into the Indian equity market has become more attractive as the Securities and Exchange Board of India (SEBI) approval will no longer be required for those foreign investors.

In July of this year, Mauritius has also signed a double taxation treaty with the Republic of South Africa. It is expected that upon its forthcoming ratification, this treaty will constitute a turning point in the role of Mauritius as a financial services provider to Africa. Indeed the provisions of this treaty are the most favourable which South Africa has signed with any country . The membership of both Mauritius and South Africa to the SADC and the PTA will undoubtedly facilitate the movement of funds through Mauritius into the African region.

With the forthcoming cession of Hong Kong to China, the treaty between China and Mauritius also seems set to take a new dimension.

The content of this article is intended to provide general information on the subject matter .It is therefore not a substitute for specialist advice.

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