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Debt financing and cross border merger for investment in India

Debt financing and cross border merger for investment in India

30 January, 2025

Mauritius has firmly established itself as a premier international financial centre (IFC), renowned for its robust regulatory framework, political and economic stability, and extensive network of bilateral treaties. Keni Lufor, Associate Director – Mauritius, highlights that beyond its idyllic tourist appeal, the country boasts a transparent legal system, competitive operational costs, and a highly skilled multilingual workforce. These factors have consistently attracted global investors seeking a strategic and efficient base for their international operations.

Significantly, Mauritius has successfully addressed global concerns regarding financial transparency. Its removal from the FATF grey list in 2021 and the EU's high-risk country list in 2022 underscores its commitment to maintaining a robust and compliant financial environment. The country has consistently demonstrated a proactive approach to international standards, actively participating in automatic exchange of information conventions and collaborating effectively with the Organisation for Economic Co-operation and Development (OECD).

This strong foundation has positioned Mauritius as a crucial gateway for foreign direct investment (FDI) into India. Historically, Mauritius has been a major source of FDI for India, contributing approximately 25% of total inflows between 2000 and 2024, amounting to roughly USD171.84 billion. In the fiscal year 2023-2024, FDI inflows from Mauritius continued to be substantial, reaching approximately USD7.97 billion, solidifying its position as a key investor nation, second only to Singapore.

 

Debt financing: A booming market

India's burgeoning economy is fuelling a surge in demand for flexible financing solutions, across various sectors. This has propelled private debt to the forefront of the country's private capital market, solidifying its position as the fastest-growing asset class. By the end of 2023, assets under management (AUM) for India-focused private debt had skyrocketed to nearly $18 billion, a substantial 29% increase from the previous year's $14 billion. This robust growth has firmly established India as the leader in private debt within the Asia-Pacific (APAC) region, surpassing any other individual market in terms of AUM, according to Preqin data. Furthermore, the Indian government's implementation of crucial reforms such as the Insolvency and Bankruptcy Code has significantly bolstered investor confidence in the private debt sector.

 

Mauritius: An efficient hub for debt financing

Mauritius offers a highly attractive fiscal environment for debt financing into India. The withholding tax rate on interest income from India is 7.5%, making it one of the most competitive rates among treaty partners.

The Government of Mauritius has further enhanced the appeal of the jurisdiction by implementing a series of regulatory and tax incentives in the 2023-24 national budget. Key amendments include:

  • Increased partial exemption: The partial exemption regime for interest earned by Collective Investment Schemes (CIS) and Closed-Ended Funds (CEF) has been significantly increased from 80% to 95%, effective from July 1, 2024.
  • Expanded investment scope: Under the Securities Act, CIS and CEF are now authorised to invest in a broader range of debt instruments, including loans, debt obligations, and similar instruments.

These enhancements have significant implications for debt funds established in Mauritius. Interest income derived from investments can now qualify for up to 95% partial exemption, subject to meeting substance requirements and satisfying conditions related to core income-generating activities. This translates to an effective tax rate of 0.75%/0.85% (due to the CCR levy for companies having a turnover exceeding MUR 50 million) in Mauritius. When combined with the 7.5% withholding tax rate in India, the total tax burden on the fund's interest income from India amounts to a highly competitive rate of 8.25%/8.35%.

 

Inbound mergers: A growing trend

Cross-border mergers and acquisitions (M&A) activity is experiencing significant growth in the Indian market, driven by a confluence of factors. Companies are actively seeking to optimise their strategies through market expansion, acquisition of cutting-edge technologies, portfolio diversification, and global operational consolidation. Indian companies are also increasingly pursuing international growth through acquisitions. This dynamic landscape has witnessed a surge in cross-border M&A activity across key sectors, including IT, pharmaceuticals, automotive, healthcare, industrial and consumer goods.

An inbound merger involves a foreign company merging with an Indian company. This structure allows the Indian entity to survive the merger while issuing shares or securities to the non-resident shareholders of the foreign company. For instance, in a merger between a U.S. company and an Indian company, the U.S. shareholders would receive shares in the surviving Indian entity.

 

Streamlined regulatory framework

The Indian regulatory landscape has undergone recent amendments to simplify and expedite cross-border M&A transactions. Effective from 17 September 2024, these amendments require Reserve Bank of India (RBI) approval for mergers between foreign holding companies and their domestic subsidiaries in India, while eliminating the need for clearance from the National Company Law Tribunal (NCLT). This streamlined process is expected to significantly benefit start-ups and accelerate the overall merger timeline.

 

Mauritius: A beneficial jurisdiction for inbound mergers

Mauritius offers a highly favourable company law and regulatory framework that facilitates seamless execution of cross-border mergers. Unlike many other jurisdictions where such mergers necessitate complex court applications, Mauritius provides a more streamlined and flexible approach. Applications for cross-border mergers can be submitted directly to the Registrar of Companies and the Financial Services Commission. The process typically commences with the conversion of the company into an Authorized Company, followed by the implementation of the merger. This approach is tax-neutral and has been successfully employed in numerous instances.

 

How can Ocorian help?

At Ocorian, we have extensive expertise in managing inbound mergers with India, leveraging this proven and efficient model to deliver successful outcomes for our clients.

India is a key market for Ocorian. Our teams from various offices frequently travel to the major cities, and we'd be delighted to meet with you to discuss how we could collaborate.

Our team in Mauritius offers a wide range of services, including company/fund set-up, launch, administration & accounting, portfolio reporting, regulatory and tax compliance and ESG services. We remove the burden of regulatory, marketing and distribution rules to enable our clients to focus on managing their core business.

Contact our team today to find out more.