Data Focus

Indian businesses prefer low-tax jurisdictions to route outward FDI

NARAYANAN V Chennai | Updated on April 19, 2021

Singapore was the most favoured with investment flow of $3.40 billion in FY21

A lot has been written about foreign direct investments being routed into India through low-tax offshore business centres such as Mauritius, Singapore and Luxembourg. But data from the RBI reveal that Indian businesses also prefer to use these jurisdictions to route their overseas direct investments (ODIs) into other countries.

ODIs are capital account transactions made by Indian companies, family offices or other entities outside India. The investment can be in the form of a joint venture or wholly-owned subsidiary set up overseas. The investment can be made as contribution to capital, acquisition of a foreign entity by market purchase of existing shares through a stock exchange or through private placement.

Preferred destinations

Singapore was the most favoured jurisdiction for Indian investors with a ODI flow of $3.40 billion in FY21 followed by the US($2.42 billion). Low-tax jurisdictions such as the Netherlands, Mauritius, Bermuda and British Virgin Islands are among the top 10 investment destinations for Indian investors.

According to RBI’s Census on Foreign Liabilities and Assets of Indian Direct Investment Entities, 2019-20, Singapore, the US and The Netherlands were top 3 ODI destinations in FY19 and FY20.

“Singapore, Mauritius, the Netherlands remain popular jurisdictions to route overseas investments from India owing to certain tax advantages coupled with the fact that several financial sponsors house their investment vehicles and funds here,” said Gaurav Singhi, Partner at Argus Partners.

“Jurisdictions like Singapore, Netherlands, Mauritius etc are chosen jurisdictions for setting up of overseas holding company structures or family offices due to the preferential provisions which come into play under the respective DTAAs and keeping in mind the focus jurisdictions for onward investments,” says Aparajit Bhattacharya, Partner at DSK Legal

He adds that investments into the US and UK are driven by inorganic growth opportunities for India Inc. in global markets.

ONGC Videsh, the overseas arm of state-run Oil and Natural Gas Corporation (ONGC), is the highest investor of ODI at $2.34 billion followed by Tata Steel ($1.20 billion), JSW Steel ($1.02 billion), Mahindra & Mahindra ($843 million) and Bharti Airtel ($750 million).

“As per publicly available data, and as a general trend, most ODI from India have been made in manufacturing/industrials, business services, investment/holding companies, in the hospitality industry, and in the IT and technology sectors,” said Bhattacharya.

Singhi of Argus Partners said mostly, pharma, tech and auto companies have attracted overseas opportunities.

Contraction in FY21

However, Indian investors have cut-back their overseas investments in a big way in FY21 to conserve cash and to focus on resurrecting their domestic operations, hit by Covid-19.

According to RBI’s provisional data, ODI of Indian investors fell 44 per cent to $18.62 billion in FY21 against $33.11 billion in the previous year. The ODI flows in FY19 stood at $31.76 billion.

“Since March 2020, cash flow of India Inc has been under pressure due to lockdowns/restricted level of operations, including a complete halt (barring a few essential sectors) in April-June, 2020,” says Bhattacharya. “However ODI in July 2020 jumped to $2.518 billion vs $893.18 million in June 2020 according to RBI published data.”

 

Published on April 19, 2021

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