Sebi fears round-tripping via overseas Protected Cell Cos

In 2010, Sebi had barred PCCs to invest in Indian markets through FII (Foreign Institutional Investor) route after it came across instances where certain Indians had used these entities to route their money back into markets as FII funds.

However, the market regulator now fears that funds structured as PCCs, which are legal entities in places like Mauritius, might be looking at a re-entry into Indian markets through routes like Foreign Venture Capital Funds and other avenues for the purpose of round-tripping of funds, a senior official said.

PCCs are specially designed entities that might comprise of various cells, having funds of various investors, in such a manner that there is legal segregation and protection of assets and liabilities for each cell.

Also, the insolvency of one cell does not affect the business of the entire PCC or that of the other cells. Besides getting tax-related benefits for being considered as a single entity despite having various cells, foreign banks in the past have been found to be hard-selling these schemes to their wealthy clients for the protection of identity as well, the official said.

With an aim to safeguard the markets from any attempts of round-tripping of funds in contravention to the regulatory framework, Sebi is keeping a close eye on the foreign funds seeking to invest in the country, the official said.

The market regulator is also consulting the Reserve Bank, as well as other regulatory and administrative authorities, whenever it has a suspicion about some PCC disguising as FII, or a PCC seeking entry through routes like foreign venture capital funds for round tripping of funds, sources said.

A PCC-structure entity having collected funds from a large number of investors from abroad for investment purpose does not pose any risk to the Indian markets, but there has been instances wherein the funds have actually come from Indian investors, the official said.

Mauritius has been often alleged to be a key place used for round-tripping of funds back into India through overseas investment routes. However, a few other places like Cayman Islands and Seychelles have also been blamed for similar practices, largely on account of these being investor and tax-friendly jurisdictions.

In Mauritius, PCC structure has been in place since the year 2000. There, PCCs are granted license to operate as a category of Global Business Company (GBC), which can be in form of a trust, society, partnership or any body of persons, and are allowed to invest in overseas markets.

Funds coming through Mauritius have already been under scanner of Indian authorities for routing of black money in form of the FII and FDI inflows.