The number of foreign portfolio investors investing in India through the UAE has seen a 20% rise in little over a year despite the middle-eastern country facing global scrutiny after it was added to the FATF grey list. The Financial Action Task Force (FATF),a global watchdog that combats money laundering and terrorist financing,had added the country to its grey list last year following the Russia-Ukraine war. The number of foreign portfolio investors investing into India from the UAE has risen to 173 from 143 in March last year.
Forty-four of them are Category 1 foreign portfolio investors while 129 belong to Category 2. In February 2021, the Indian Government notified the UAE as a Category 1 foreign portfolio investment (FPI) jurisdiction under the SEBI (FPI) Regulations, 2019 and brought it on par with Mauritius and other Financial Action Task Force (FATF) member countries. An FPI Category 1 licence denotes lower investment restrictions, ease of certain compliances (including lenient KYC requirements), relaxed overseas transfer and safe harbour provisions as compared to Category 2 FPIs.
“The government’s change in the status of the UAE, the rush from FPI investors and the time constraints imposed by the T+1 settlement cycle have prompted more funds to consider the UAE for setting up funds,” said Viraj Kulkarni, founder of Pivot Management Consulting.
However,the UAE is still not a popular jurisdiction for setting up India-dedicated funds and is not part of the top 10 FPI regions investing in India.
There were fears that the country’s inclusion in the FATF grey list may reduce its attractiveness as an investment hub for foreign inflows into India and raise the level of scrutiny by India’s financial regulators.
“The UAE’s inclusion into the grey list does not directly impact FPI registrations. A lot of family offices, for instance, are taking a category 2 FPI licence to invest into India. That said, the region may suffer a setback if custodians classify it as a high-risk jurisdiction,” said a senior lawyer.
While the UAE has become a popular destination for companies and wealthy individuals seeking tax avoidance, it is facing greater scrutiny amid global efforts to counter Russia’s invasion of Ukraine, according to reports.
India has seen a sharp increase in foreign direct investment (FDI) via the UAE in the past two years, especially from Emirates-based sovereign wealth funds. The FDI from the country stood at Rs 2,393 crore in 2019-20 and rose to Rs 31,242 crore in 2020-21.
The FDI from the region for 2022-23 stood at Rs 26,315 crore, the fourth largest among all geographies. India and the UAE have also more than doubled their non-petroleum trade target to $100 billion by 2030, according to reports.