Cayman Islands’ exit from the FATF grey list last week will bolster global private equity funds looking to invest into non-banking financial companies (NBFCs) based in India.

The region was put on the grey list for increased monitoring by the FATF, or the Financial Action Task Force, a global money laundering and terrorist financing watchdog, in February 2021.

Several US and European funds prefer setting up holding companies and funds in Cayman Islands for investments into India, according to experts.

“The RBI does not grant approval for shareholding in NBFCs from grey list jurisdictions. Hence, going forward, RBI should consider favourably and approve shareholders from Cayman Islands. This is a positive development for several global PE funds which are organised and based in Cayman,” said Punit Shah, Partner, Dhruva Advisors.

The RBI had issued a circular in February 2021 imposing restrictions on investments in NBFCs by investors from non-compliant FATF jurisdictions. New investors from non-compliant regions were prohibited from directly or indirectly acquiring ‘significant influence’ in the existing investee NBFCs as well as companies seeking Certification of Registration. The term ‘significant influence’ was defined as having more than 20 per cent of actual and potential voting power.

“The removal of Cayman Islands from the FATF grey list would bring relief to NBFCs, payment system operators and alternative investment funds that face restrictions in giving significant stakes to investors from FATF non-compliant jurisdictions,” said Yashesh Ashar, Partner, Illume Advisory.

Among top FPIs

Cayman is among the top 15 jurisdictions for foreign portfolio investments into India, with 385 FPIs and total assets under custody estimated at ₹75,000-100,000 crore. It was the fifth-largest contributor of foreign direct investment into India in FY22, amounting to ₹28,383 crore. This dipped 79 per cent to ₹6,069 crore in FY23. Cumulatively, it is the eight largest FDI contributor between April 2000 and June 2023.

FPIs investing from grey list jurisdictions are typically subject to additional know your customer requirements, increased monitoring and enhanced due diligence by fund custodians. These funds may also have to furnish updated ultimate beneficial ownership information for investors at a lower threshold than what is required from FPIs coming from FATF-compliant regions.

The grey list tag may have created a negative perception for Cayman among pension, endowment, and sovereign wealth funds, investment charters of which may prohibit investment through such jurisdictions. Some funds may have redirected investments into India from their home jurisdiction or FATF-compliant locations, said experts.

“Funds from FATF non-compliant countries were subject to not only additional documentation requirements by the custodians but also lowered limits for disclosure of beneficial ownership. Its removal from the grey list will reduce compliance burden for such funds and bring down overall costs,” said Manoj Purohit, Partner & Leader – Financial Services Tax, BDO India.

FATF said last week Cayman Islands had met the commitments in its action plan regarding the strategic deficiencies identified in 2021. This includes applying sanctions that are effective on those that do not file accurate beneficial ownership information and prosecuting all types of money laundering in line with the jurisdiction’s risk profile.

In 2018, Cayman was included among 25 jurisdictions that were classified as being high-risk by a group of foreign custodians in India, requiring greater scrutiny. This list was subsequently scrapped and each custodian was told to draw up its own list.

In 2020, the European Union had added Cayman to its black list of tax havens, citing lack of necessary tax reforms.

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