We anticipate that the types of fund-level financing and the purposes for which financing is used will continue to diversify in 2022. Many Mauritius private equity funds currently use subscription-line facilities to bridge capital calls and reduce administration for their limited partners. Going forward, many funds will find it prudent to consider broadening their use of subscription lines for purposes such as foreign exchange (FX) hedging, letters of credit, evidencing certain funds for acquisitions, gaining a competitive advantage and realignment of investment strategies.
We also anticipate broader use of hybrid net asset value (NAV)/capital call facilities, particularly by credit funds implementing leveraged investment strategies. Private equity M&A activity continued at a robust pace in 2021, although deal volume dropped in 2020 due to the COVID-19 crisis. Even though many of the COVID-19 storm clouds remain, including a likely increase in interest rates, we believe the imperative to deploy fund capital will propel a very active deal market in the coming year. We have also seen that, positively for the sector, and despite some concern in the early days of the pandemic, credit and liquidity for the fund finance market has proven to be robust. The pool of lenders serving the subscription finance market in Mauritius has grown significantly. There has also been a corresponding ability to provide a greater degree of flexibility, with COVID-19 acting as the catalyst for this evolution.
Mauritius global funds (that is, investment funds and their intermediaries) 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, the Securities (Preferential Offer) Rules 2017 (as recently amended by the Securities (Preferential Offer) (Amendment
No. 2) Rules 2021, the Financial Services Act 2007 (FSA 2007), the Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008 (Securities Regulations 2008), the Financial Services (Peer to Peer Lending) Rules 2020, the Securities (Solicitation) Rules 2020, the Securities (Real Estate Investment Trusts) Rules 2021, and the Securities (Exemption) Rules 2021.
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 closed-end fund, commonly known as a private equity fund. Global funds can be structured as companies incorporated under the Companies Act 2001 or as limited partnerships (LPs), which came into force pursuant to the Limited Partnerships Act 2011 (Limited Partnerships Act), or licensed as companies or partnerships holding a Global Business Licence (GBL) under the FSA 2007.
Any CIS or closed-end fund (individually a Scheme or, collectively, Schemes) wishing to be approved, registered with, recognised and/or licensed by the Commission, under the Securities Act, must first apply to the Commission for authorisation as a CIS or closed-end fund in the manner set out in the Securities Regulations 2008, and obtain a GBL under the FSA 2007. Funds usually take the form of companies, LPs, protected cell companies (PCCs) or trusts. The typical vehicle used to structure a closed-end fund is a private company limited by shares or an LP, while a CIS is commonly structured as a public or private company, unit trust or PCC.
The Mauritian 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 (GP) is responsible for managing the business and affairs of the LP and is personally liable for the debts of the partnership. The GPs in an LP can elect for the LP to have a legal personality or not. If they elect so at the time of registration, they must file with the registrar of LPs a declaration signed by one or more of the GPs stating that the LP shall have legal personality. The register of LPs and certificate of registration shall state whether the LP has legal personality or not.
The Limited Liability Partnerships Act 2016 (LLP Act) was 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. The LLP Act applies to a person (a) offering professional or consultancy services, (b) holding a Global Legal Advisory Services licence, or (c) engaging in other prescribed activities. An LLP has a separate legal personality from its partners. 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.
On 1 January 2000, the Protected Cell Companies Act 1999 came into force, which created an incorporation and registration regime whereby a Mauritian company carrying out global business would be able to register as a PCC. A protected cell (known in some jurisdictions as a ‘segregated account’ or ‘segregated portfolio’) is an account containing assets and liabilities (known as ‘cellular assets’) that are legally separated from the assets of the company’s ordinary account, called its ‘non-cellular assets’, and also separate from assets and liabilities allocated to the company’s other protected cells (if any).
A trust, established under the Trusts Act 2001, is a legal relationship created by the beneficial owner creating the trust (the settlor) and the persons willing to undertake the office of trustee (the trustees). As part of this relationship, property (the trust fund) is declared held by the trustees for the benefit of certain parties (the beneficiaries) or for certain purposes, creating a binding obligation on the part of the trustees to act in accordance with the terms of the trust. Trusts are normally liable to income tax on its chargeable income. Chargeable income is calculated as the difference between the net income derived by the trust and the aggregate income distributed to the beneficiaries under the terms of the trust.
The regulatory and supervisory framework for global funds is in line with international principles and practices as laid down by the International Organization of Securities Commissions. 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. A fund is required to be managed by an investment manager licensed in Mauritius. A foreign regulated investment manager may alternatively be appointed, subject to the prior approval of the Commission.
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. In fact, we still have not been consulted on a single facility payment event of default in the first half of 2021. 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 leveraging 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).
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. In order to widen its array of financial products, Mauritius introduced its Limited Partnerships Act, 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. The obligation of shareholders 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 an LP, 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.
One would expect security to be taken over bank accounts of the fund and assignment of rights to make capital calls, accompanied by a power of attorney in favour of the lender to exercise such rights on behalf of the fund/GP and/or manager (as the case may be) in a typical fund financing security transaction. 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 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 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 the 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). 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 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 the Insolvency Act 2009. By statute, under the Insolvency Act 2009, while a receiver is in place, principles of contractual, legal and equitable set-off apply that 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 recommend 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 that cannot be set off against amounts owing to the shareholder.
Some of the salient amendments made to the present regulatory framework are as follows:
Amendments to the Securities Act through the Securities (Amendment) Act 2021 (Amendment Act)
Definition of ‘sophisticated investor’ widened
The definition of ‘sophisticated investor’ has been revised to include a CIS, a pension fund or its management company, a closed-end fund and an investor that warrants, at the time of entering into a securities transaction, that:
- its ordinary business or professional activity includes the entering into securities transactions, whether as principal or agent;
- in case he is a natural person, his individual net worth or joint net worth with his spouse exceeds 1 million USD, or its equivalent in another currency; or
- it is an institution with a minimum amount of assets under discretionary management of 5 million USD, or its equivalent in another currency.
Ability to self-certify (definition of ‘sophisticated investor’)
Further to the introduction of the investor’s warranties or to self-certify under the definition of ‘sophisticated investor’, the prior approval of the Commission is no longer required for an investor that did not satisfy the definition of being ‘sophisticated’. The ability to self-certify creates some flexibility in securities transactions and fundraisings. Nevertheless, the ability to rely on the investor’s warranties should not mean that there is no need for advisers to the fund or counterparties to the securities transactions to undertake reasonable due diligence to ensure the veracity of the representations. Indeed, the process requires subscription documents to incorporate the necessary representations and warranties as well as relevant evidence to enable the recipient of the investment to discharge its legal obligations properly.
The introduction of ‘retail investors’
The concept of ‘retail investors’ is new to the Securities Act and would mean such category of investors, other than sophisticated investors, as the Commission may determine. The Financial Services (Crowdfunding) Rules (discussed in more detail below) define a ‘retail investor’ as any person who is not an expert investor. The Amendment Act provides that no person, other than the holder (or his agent) of an investment dealer licence or investment adviser licence, shall solicit a retail investor in Mauritius to enter into a securities transaction, thus maintaining a rigid licensing and disclosure regime in marking activities relating to retail investors.
A foreign investment dealer and a foreign investment bank that is not soliciting a retail investor in Mauritius will not be required to be authorised by the Commission to provide underwriting services.
Retail investors can also only be offered participation in a foreign-domiciled CIS provided it has been recognised by the Commission.
Permitted CIS activities
The Amendment Act has facilitated the marketing of CISs established in a foreign jurisdiction to sophisticated investors in Mauritius by:
- introducing a definition of ‘Permitted CIS activities’, defined as ‘the marketing to a sophisticated investor in Mauritius of units or shares of an entity that carries out the activities of a foreign CIS where such marketing is undertaken: (a) by a CIS manager established in Mauritius; (b) by a person carrying out the activities of an investment dealer outside Mauritius; or (c) in accordance with such other provisions as the Commission may determine’; and
- dispensing Permitted CIS activities from complying with certain obligations under Part V of the Securities Act, such as the requirement to prepare and register a prospectus with the Commission and to carry out periodical disclosure of quarterly and final financial
Definition of ‘reporting issuer’
The definition of ‘reporting issuer’ has been revised to an issuer who: (a) by way of a prospectus, has made an offer of securities either before or after the commencement of the Securities Act; or (b) has made a takeover offer by way of an exchange of securities or similar procedure.
Thus, companies whose securities are simply listed on a securities exchange in Mauritius or have more than 100 shareholders no longer fall under the reporting issuers category and therefore are not:
- required to comply with the Securities (Takeover) Rules 2007;
- subject to the disclosure obligations under the Securities (Disclosure Obligations of Reporting Issuers) Rules 2007; and
- liable to the offences to insider dealing and other market abuses under the Securities Act.
Introduction of the Financial Services (Crowdfunding) Rules 2021 (Crowdfunding Rules)
The FSA 2007 was further to the National Budget Speech 2019–20, to include ‘crowd- funding’ as a financial business activity under Part I of its Second Schedule.
The Crowdfunding Rules apply to any person operating a crowdfunding platform in Mauritius and an application for such licence must be made in accordance with the FSA 2007. A crowdfunding operator is required to be a legal person incorporated in Mauritius and having its registered office and principal place of business in Mauritius. The crowdfunding operator shall also, at all times, have a minimum unimpaired stated capital of 2 million MUR or its equivalent in any other currency, or such higher amount as the Commission may determine.
The Commission considers that the introduction of the Crowdfunding Rules shall contribute to shape and improve access to finance for individuals, entrepreneurs, micro enterprises as
well as small and medium enterprises (SMEs) and that such regulated activity shall induce investors to contribute, through small investments, to the growth of SMEs, thus reinforcing the entrepreneurial spirit on the Island.
The year ahead
As 2021 is coming to a close, the generally steady growth in the global fund finance market continues notwithstanding the current effects of and challenges faced from COVID-19, 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 continues to prove itself to be a highly responsive jurisdiction to evolving market demands, and the results are a more efficient and user-friendly company product that offers flexibility in structuring, and certainty when engaging in transactions requiring securing company assets in the global funds market. The fund finance market was extremely resilient during and following the global financial crisis (outperforming many other forms of finance) and has benefitted from strong growth since.
There has been increased activity in the fund finance market over the last month as a result of COVID-19 recovery. Many deals already in the pipeline were put on accelerated timetables for closing. We remain cautiously optimistic for a robust fund finance market in 2022 – 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. Our Mauritius Fund Finance Team has worked with the vast majority of market participants over the last 18 months, and while COVID-19 presents a unique set of challenges, we are fortunate to have the benefit of this prior experience working with the vast majority of market participants in Mauritius.
For the original chapter in GLI – Fund Finance 2022 please visit: https://www.globallegalinsights.com/practice-areas/fund-finance-laws-and-regulations/mauritius
1 Page 43 of the Annual Report 2017/18 of the Commission:
2 FSC Newsletter – June to August 2020: https://eservices.rnu/t/ViewEmail/j/0F84B5B73DBE327C2540EF23f30FEDED/B66A08BE9AB52D9EFE6l94DE962A274B
and FSC Newsletter – March to May 2020: