In fact, during the past few years, Mauritius has projected itself as an investment and trading bridge between Africa and Asia, particularly with the conclusion of the double taxation treaty between Mauritius and India (Treaty) and other African member states of the African Union, and the recent amendments made to the Treaty. The economy has since experienced a positive trend in its global business market.
Broadly, global funds (that is, investment funds and their intermediaries) (Global Funds) in Mauritius are regulated by the Financial Services Commission (Commission). The Commission has, since 2001, developed a very flexible set of guidelines as well as a consolidated regulatory and supervisory framework for the regulation of such global funds, namely the Securities Act 2005 (Securities Act), the Securities (Licensing) Rules 2007 (Securities Licensing Rules), Securities (Preferential Offer) Rules 2017, the Financial Services Act 2007 (FSA 2007) and the Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008 (Securities Regulations 2008). As a result, the number of funds being regulated by the Commission stood at 977 as at 31 December 2016, representing an increase of 1.88% compared to the number of funds authorised at 31 December 2015. The number of funds has increased by 0.72% over the period from January to June 2017, to reach 984.1
Further growth is expected to be seen following the recent amendments to the legislations in Mauritius, including the global business regime (discussed below) affecting the global funds market. These changes correspond with the approachability of the regulators in Mauritius, and their willingness to listen and accordingly respond to industry needs and demands in a commercial manner, while at the same time protecting the Mauritius ‘brand’. These changes also seek to address the uncertainties investors may be having, to realign the present regulatory framework with the Organisation for Economic Cooperation and Development (OECD) / Base Erosion and Profit Sharing (BEPS) requirements, and to see Mauritius as a one-stop shop for financial products and services.
Fund formation and finance
Global funds – Overview
The present regulatory framework contemplates two main categories of Global Funds, namely: an open-ended fund, also known as a collective investment scheme (CIS); and a close-ended fund, commonly known as a private equity fund (Private Equity Fund). Global funds can be structured as companies incorporated under the Companies Act, 2001 (Companies Act), as limited partnerships which came into force pursuant to the Limited Partnership Act 2011 or licensed as companies or partnerships holding category 1 Global Business Licences (GBL 1) under the FSA 2007.
The amendments brought to the present regulatory framework include amendments to the Companies Act and the FSA 2007 which have, among others, repealed the ‘category 2 global business licences’ (GBL 2) regime and ‘GBL 1’ regime. Effective from 1 January 2019, a single unified global business licence will be issued, termed a ‘Global Business Licence’ (GBL) (as more fully discussed below) which can therefore be used to structure Global Funds. It is anticipated that the harmonisation of the global business regime in Mauritius, which is in line with the Government’s avowed mission to combat money laundering, will foster investors’ confidence in the market.
The Mauritian Limited Partnership (LP) combines features of both a company and a partnership, and acts as another preferred vehicle for foreign investors that may provide flexibility in structuring a CIS. It can have separate legal personality just like a company, while at the same time enabling some partners, known as limited partners, to contribute and participate in the returns of the LP without being engaged in its day-to-day management. The general partner is responsible for managing the business and affairs of the limited partnership and is personally liable for the debts of the partnership.
The Limited Liability Partnership Act, 2017 was recently introduced to further equip the economy’s financial sector with innovative tools, as well as alternative and attractive vehicles to investors – the Limited Liability Partnership (LLP). Similar to the LP, the LLP combines features of both a company (holder of a GBL) and a partnership, where the LLP is incorporated as a body corporate having separate legal personality from its partners, thus providing the flexibility of a partnership. Under an LLP, the partner is accountable and liable to the LLP only to the extent of its contributions (except in the event of insolvency). The LLP is required to have at least two partners and one manager. The relationship between the partners and the LLP is governed under a partnership agreement.
The regulatory and supervisory framework for global funds is in line with international principles and practices as laid down by the International Organisation of Securities Commissions (IOSCO). Intermediaries ensure the proper functioning of investment funds and hence protect the best interests of investors. All global funds are therefore subject to ongoing reporting obligations, as imposed by the Commission under the Securities Act and the FSA 2007. Reporting obligations include submission of Audited Financial Statements and Quarterly Statutory Returns (Interim Financial Statements), in accordance with the FSA 2007.
As in recent years, despite numerous headwinds, fund finance markets have continued their outpaced growth in the first half of 2018, building upon and continuing a market trend in place since at least 2010. Similarly, fund finance performance remained pristine, and no loan losses or write-downs from last year have become public. Other than the infrequent dust-up that has occurred between an investor and a general partner/investment manager, we are still not aware of any substantial case law relevant to fund finance in 2018. Also, as indicated above, we expect further positive growth in 2019.
As the private funds sector grows and matures in Mauritius, financing solutions are increasingly required by funds and fund managers. The need for finance can vary, from equity bridge or capital call facilities used to assist liquidity and speed of execution for private equity funds, to more esoteric products used by hedge funds in addition to their prime brokerage agreements, such as NAV-based margin loans to provide liquidity or leverage, and equity or fund-linked derivative solutions. Consistent with prior quarters, capital call subscription credit facilities continued their positive momentum in 2018 and had an outstanding year as an asset class.
In fact, we still have not been consulted on a single facility payment event of default in the first half of 2018. Also, as more investors look to limit their investments to a smaller group of preferred sponsors, sponsors are also diversifying their product offerings. We have, for instance, noticed a trend involving a number of sponsors leveraginging their existing investor relationships by creating funds focused on sectors in which they have not traditionally participated (i.e., buyout shops creating direct-lending funds). In addition to the very positive credit performance, the asset class seemed to enjoy significant year-over-year growth in the Mauritius fund industry. Below we set forth our views on the state of the fund finance facility market and the current trends likely to be relevant in 2018. We remain confident based on our experiences, as well as anecdotal reports from multiple facility lenders, that the fund facility market expanded materially from 2010 to 2018. The positive growth for private funds was driven by a confluence of factors, the more so as investors have become increasingly comfortable with global funds structures.
We consider that the following four key trends continue to dominate the market, even in the first half of 2018: (i) the general maturation of the fund financing product and market; (ii) the continuing expansion of fund financing into various fund asset classes, and particularly, private equity; (iii) fund structural evolution, largely responsive to the challenging fundraising environment and investor demands; and (iv) an entrepreneurial approach among funds to identify new investor bases and new sources of capital commitments. In our view, these trends will continue to have a material impact on the fund financing market in 2018 and beyond.
General security structure for Mauritius transactions
Historically, funds have predominantly been incorporated as corporate structures. Some companies may have more than one class of shares, which denote various fee structures and/or limitations on the types of investments some shareholders can make. There may also exist multiple series within each class of shares. To widen its array of financial products, Mauritius introduced its Limited Partnership Act 2011, adding a new dimension to the international investment community. This investment vehicle enables Global Funds to be structured as partnerships in Mauritius, reducing the need for complex master-feeder structures and ensuring tax-efficient structures.
Mauritius has become a central hub for foreign direct investment into India and Africa due to its network of double taxation avoidance agreements and investment protection and promotion agreements with various African countries. However, while investors have been able to form global business companies for foreign direct investment, the more rigid structure of companies means they are not always perfectly suited for these investment projects. For example, for funds structured as a Mauritius corporation, a shareholders’ agreement governs the relationship with the shareholders rather than a partnership agreement. Shareholders’ obligation to pay in capital contributions is contingent upon the issuance of further shares, and a corporation’s ability to issue shares is generally not delegable under Mauritius Law, thus limiting the ability to make capital calls on investors in an event of default under the fund financing facility.
Security for the fund finance consists of: (a) a security assignment by the fund of the capital commitments, right to make capital calls, right to receive and enforce the foregoing and the account into which the capital commitments are to be funded; and (b) a charge on the bulk of its other assets including its accounts, investments compensation from various of its assets including bonds, guarantees, negotiable instruments and the like. The security package relating to the capital calls is tailored in order to account for specifics of Mauritius law and the structure of the fund as a corporation (rather than a limited partnership, as most funds in Mauritius are structured as corporations). In particular, various rights in respect of the fund are vested in the board of directors and cannot be easily delegated. Mauritius law requires that shares be issued in exchange for capital calls.
So while one would have a pledge over the security provided above, the ability for a lender to make a capital call on its own would be complicated by the foregoing. In a worst-case scenario, the preferred enforcement mechanism would have the lender appoint a receiver (and if necessary, a liquidator), as each have statutory authority to make capital calls and issue shares in order to satisfy creditors to whom such security is pledged. Indeed, after an event of default, a lender is entitled to appoint a receiver under the Insolvency Act of 2009. Security documents, such as fixed and floating charge documents, would need to provide that if a receiver were appointed, it would have full management powers to the exclusion of the board of directors. Under the Insolvency Act of 2009, the receiver would have the power to make calls of unfunded capital to the extent such assets are included in the charge granted to a lender and issue shares.
It is also recommended that a liquidator be appointed in order to avoid certain issues relating to set-off of claims by shareholders against the called capital (described further below). The liquidator would also be permitted to call capital. For example, various contract law defences may be waived in Mauritius by contract in the situation where the fund is not in insolvency (including non-performance by the fund). In the US, such language was cited in the Iridium line of cases. Generally, such language is sought for three reasons: (a) to waive contract law defences such as lack of consideration, mutual mistake, impracticability, etc.; (b) to prevent the LPs from claiming that they may set off amounts owed to them by the fund against what is due to the lender; and (c) claims that an issuance of shares or some other action by the fund is required as a condition for payment of capital contributions.
We recommend that such language be included in this transaction, since in the event of insolvency of the fund, the language may prove helpful and could avoid other defences raised by shareholders that their commitment to contribute capital is a “financial accommodation” or otherwise avoidable under insolvency laws. Such ability to waive in advance the right to raise the defence above and other defences by contract could be inserted in the contract (presumably by amendment to the shareholders’ agreement or by an investor letter); however, general waivers are not effective, so specific waivers would be required as to each of the possible defences.
Moreover, such contractual waivers would not be effective in a number of circumstances, including rights to set-off pursuant to Insolvency Act of 2009. By statute, under the Insolvency Act of 2009, while a receiver is in place, principles of contractual, legal and equitable set-off apply which would permit set-off by shareholders, and such set-off is available to the extent that claims have been incurred prior to the commencement of the liquidation (subject to other limitations). To avoid such risk, we normally recommended the initiation of winding-up by a lender by appointment of a liquidator, as such appointment would crystallise the liability of shareholders as a statutory liability which cannot be set-off against amounts owing to the shareholder.
Some of the key amendments made to the present regulatory framework are as follows:
Amendments to the Companies Act
As mentioned above, the definitions of ‘GBL 1’ and ‘GBL 2’ have been removed from the Companies Act and new definitions of ‘GBL’, and ‘Authorised Companies’ have been introduced.
Companies are also required to keep their share registers for a period of at least seven years as from the date of the completion of the transaction, act or operation to which it relates, failing which, the companies may be liable to a fine.
Amendments to the FSA 2007
As mentioned above, the FSA 2007 has been amended to introduce new definitions of ‘GBL’, ‘Global Business Corporations’ and ‘Authorised Companies’.
The GBL will be required: (a) where the majority of shares or voting rights or the legal or beneficial interest in a resident corporation, other than a bank licensed by the Bank of Mauritius and such other corporation as may be specified in the rules issued by the Commission, are held or controlled, as the case may be, by a person who is not a citizen of Mauritius; and (b) such corporation proposes to conduct or conducts business principally outside Mauritius or with such category of persons as may be specified in rules issued by the Commission. The holder of the GBL is subject to strict, enhanced, substance requirements which are as follows:
- has to be managed and controlled from Mauritius;
- has to be administered by a management company;
- has to at all times carry out its core income generating activities in, or from Mauritius by:
- employing, either directly or indirectly, a reasonable number of suitably qualified persons to carry out the core activities; and
- having a minimum level of expenditure, which is proportionate to its level of activities.
When assessing the core income-generating activities of its licensees, per type of license, the Commission will rely on indicative definitions2 some of which are listed below:
Collective investment scheme: Investment of funds in portfolios of securities, or other financial assets, real property or non-financial assets; diversification of risks; and/or redemption on the request of the holder.
Closed fund: Investment of funds collected from sophisticated investors, in portfolios of securities, or in other financial or non-financial assets, or real property.
In determining whether the holder of a GBL is managed and controlled from Mauritius, the Commission shall have regard to such matters as it deems necessary in the circumstances, in particular, that the company: (a) has at least two directors, resident in Mauritius, of sufficient calibre to exercise independence of mind and judgment; (b) maintains at all times, its principal bank account in Mauritius; (c) keeps and maintains, at all times, its accounting records at its registered office in Mauritius; (d) prepares its statutory financial statements and causes such financial statements to be audited in Mauritius; and (e) provides for meetings of directors to include at least two directors from Mauritius.
Another amendment brought to the FSA 2007 is that every licensee is required to keep and maintain, at all times, a register of beneficial owners of each of its clients and record such information as the Commission may determine. The Commission may now request for any information on the licensees relating to the due diligence procedures on the beneficial owners of any person acting on behalf of the clients of the licensees.
Also, in its quest to position Mauritius as a fintech hub for Africa, the Government has introduced two new licensable activities under the list of financial business activities under the FSA 2007, namely: the ‘Digital asset marketplace’; and ‘Custodian services (digital asset)’. These new licences aim to provide a regulated environment for the safe custody of digital assets by investors and further enable the exchange of digital assets.
Amendments to the Income Tax Act
The reform to the tax regime seeks to have a harmonised tax system between the holder of a GBL 1 (effective as from 1 January 2019, a GBL) and a domestic company. The Deemed Foreign Tax Credit regime available to a holder of a GBL 1 will therefore be abolished and a partial exemption regime will be introduced, applied subject to the companies satisfying predefined substantial activities requirement by the Commission. Under the partial exemption regime, 80% of specified income will be exempted from income tax, except for banks. The below provides for some of the circumstances where the exemption would apply:
- foreign source dividends derived by a company and profits attributable to a foreign permanent establishment;
- interest and royalties; and
- foreign source income derived by a CIS, closed end fund, CIS manager, CIS administrator licensed or approved by the Commission.
The existing credit system for relief of double taxation will continue to apply where partial exemption is not available. The GBL will be required to comply with pre-defined substantial activities so that its specified income is exempt from tax.
Amendments to the Limited Partnership Act
The amendments to the present regulatory framework seek to introduce new obligations to certain structuring vehicles. Thus, LPs are required to main a register of partners, disclosing the name of the beneficial owner or ultimate beneficial owners where the partner is a nominee. A beneficial owner or ultimate beneficial owner means a natural person who holds himself or by his nominee not less than 25% of the aggregate voting power exercisable at a meeting of the partners. Where an update or entry is made to the register of partners, the updated register of partners will need to be filed with the Registrar of Limited Partnership (Registrar) within 14 days of such change. The Registrar shall not disclose the details on the register of partners to any person unless it is required by the beneficial owner or ultimate beneficial owner, or ordered by the Court of a Judge in Chambers to do so, or unless it is required for the purpose of an investigation enquiry, to do so.
Amendments to the Limited Liability Partnership Act
All references to ‘GBL 1’ have been amended to references to ‘GBL’. LLPs are required to main a register of partners, disclosing the name of the beneficial owner or ultimate beneficial owners where the partner is a nominee. A beneficial owner or ultimate beneficial owner means a natural person who holds, himself or by his nominee, not less than 25% of the aggregate voting power exercisable at a meeting of the partners. Where an update or entry is made to the register of partners, the updated register of partners will need to be filed with the Registrar within 14 days of such change. The Registrar shall not disclose the details on the register of partners to any person unless it is required by the beneficial owner or ultimate beneficial owner, or ordered by the Court of a Judge in Chambers to do so, or unless it is required for the purpose of an investigation enquiry, to do so.
Other related developments
Anti-money laundering: The Financial Intelligence and Anti-Money Laundering (FIAMLA) Regulations 2003 have been replaced with the FIAMLA Regulations 2018 which came into force on 1 October 2018. The FIAMA Regulations 2018 have redefined or introduced certain key definitions which include that of a ‘customer’, ‘competent authorities’ and ‘reporting person’.
The existing provisions on the question of undertaking verifications on the identity of customers and beneficial owners have now been repealed. Accordingly, under the new regime, the relevant supervisory authority or regulatory body has discretion to allow a reporting person to complete the verification of the identity of a customer and beneficial owner once the business relationship has been established. However, this is subject to the following conditions:
- the verification of identity is essential not to interrupt the normal conduct of business;
- the verification of identity occurs as soon as reasonably practicable; and
- the money laundering and terrorism financing risks are effectively managed by the reporting person.
An important caveat to this new regime is that once a reporting person has been allowed to establish the business relationship before the completion of the verification exercise, s/he has an obligation to adopt and implement risk-management procedures concerning the conditions under which a customer may use the business relationship prior to verification.
FinTech: The surge of financial technology (FinTech) activities has already started to redefine the financial sector on a global scale, and this movement is also gaining ground in Mauritius. Two new licensable activities, ‘Custodian of Digital Assets’, and ‘Digital Asset Marketplace’, have been introduced (as mentioned above) to establish a regulated environment for the safe custody of digital assets by investors. Also, to keep abreast of latest technological advances, the Commission previously introduced the Online Data Capture System, as well as the Online Licensing Submissions Platform. The introduction of the abovementioned licensable activities is intended to reduce the uncertainty of investors, and will help reflect Mauritius as a robust jurisdiction from which the international blockchain companies may operate.
Establishment of sovereign fund: Mauritius plans to establish a sovereign fund to provide seed capital for the development of Fintech activities, and which is intended to be used as a means to attract companies to Mauritius and promote the economy as a robust and transparent regulatory regime for Fintech.
The year ahead
As 2018 is coming to a close, it continues the generally steady growth in the global funds finance market, with investors continuing to reap the benefit of hefty distributions at record rates, and Mauritius further enhancing itself as a fund domicile as well as a preferred jurisdiction for setting up global funds targeting investment opportunities in India and Africa. Mauritius has indeed proved itself to be a highly responsive jurisdiction to evolving market demands, and the results are a more efficient and user-friendly company product which offers flexibility in structuring, and certainty when engaging in transactions requiring securing company assets in the global funds market.
Its quick implementation of a series of innovative changes to the existing legislations has ensured that Mauritius will remain one of the premier locations in which to do business. The changes to the legislation encourage the highest standards of conduct without stifling the innovation of investors, and further enable them to compete on a global platform. We remain cautiously optimistic for a robust fund finance market in 2019 – and we further expect the number of facilities consummated to continue to grow at a solid clip as fundraising improves and the product further penetrates the private equity market, and a greater number of existing facilities get refinanced.
1. Page 47 of the Annual Report 2016/17 of the Commission: https://www.fsc mauritius.org/ media/4434/fsc-mauritius-annual-report-2016-17_final.pdf
2. Circular dated 15 October 2018 issued by the Commission: https://www.fsc mauritius. org/media/67462/cl-on-core-income-generating-activities-v5.pdf.