HedgeCo.net (West Palm Beach) – A study by Dennis S. Ryan and Sonia Xavier of offshore law specialist, Conyers Dill & Pearman has come out ‘Cayman Islands Funds – Entering the Gateway to Capital Markets in India.’ The team describes the history and challenges of what Cayman Islands domiciled investment funds have faced when seeking to invest into Indian capital markets.

One of the major hurdles in this regard has been addressed by the 10 June 2009 admission of the Cayman Islands Monetary Authority (CIMA) as an ordinary (i.e., full) member of the International Organization of Securities Commissions (IOSCO), according to the report.

By way of background, the IOSCO Objectives and Principles of Securities Regulation were endorsed by its member regulators of various securities and futures markets in 1998, and generally are viewed by securities regulators as the key international benchmark on sound principles and practices for securities regulation. Currently, IOSCO members regulate the vast majority of the world’s securities markets.

To access the Indian markets, an investment fund must register as a Foreign Institutional Investor (FII) with The Securities and Exchange Board of India (SEBI). In the past, since CIMA was not a member of IOSCO, SEBI often engaged in extensive due diligence and inquiries before allowing registration of a Cayman fund as a FII. As a result, few Cayman Islands funds have registered with SEBI. CIMA’s admission to IOSCO looks set to change this trend in favour of Cayman Islands funds.

The timing could not be better, the report says, with emerging markets competing to attract liquidity, the Cayman Islands, with over 9,000 CIMA registered investment funds, a proven track record with investors and an excellent and sophisticated service infrastructure, has a great deal to offer India and investors that wish to access its markets.

One remaining challenge is that the Cayman Islands do not currently have a tax treaty with India, the law fim asid. Mauritius, on the other hand, has long been the preferred jurisdiction for investment into India as a consequence of the favourable double taxation agreement between those countries (the Mauritius-India DTAA), contributing to around 44% of foreign direct investment (FDI) into India.

Investment funds from non-tax treaty jurisdictions have developed a structure involving a wholly owned Mauritius subsidiary for purposes of Indian investment. Typically, this structure requires a Cayman Islands (or other non-treaty jurisdiction) investment fund to register with SEBI as a FII. The Mauritius subsidiary fund will then be registered with SEBI as a sub-account of the FII, permitting it to invest directly in Indian securities via SEBI.

The Mauritius fund will be set up as a Global Business Company Category 1 (GBC1) that is resident in Mauritius for tax purposes. As a Mauritius tax resident, this fund is subject to tax on income at the flat rate of 15%. However it is entitled to claim a credit for foreign tax on income not derived from Mauritius against the Mauritius tax payable, resulting in an effective tax rate generally ranging between 3% and nil. As a tax resident GBC1, the fund is also entitled to take advantage of Mauritius’ network of tax treaties, including the Mauritius-India DTAA, the report concluded.

Editing by Alex Akesson
alex@hedgeco.net

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The DIFC has clarified its position on news reports that have recently appeared regarding ‘Rashed Investment Bank’ an Islamic investment bank which has been proposed to be set up in Dubai. The DIFC said that while it welcomes initiatives within the Islamic finance industry, the “DIFC clarifies that it is not a member of the founding consortium of ‘Rashed Investment Bank’ and does not have a financial stake in the venture.”

Word had appeared in some media outlets that a new Islamic investment bank was going to be set up in Dubai, would have authorised capital of around $1 billion. The report which initially broke in the UAE’s Al Bayan newspaper claimed that the new bank would deal in hedge funds, structured products and equity capital markets.

It claimed that a number of investors from the UAE, Kuwait and Saudi Arabia were behind the new entity, although their identities were not made public, adding that it would be headquartered in the DIFC.

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CNNMoney.com – It’s time to say goodbye to Old Lane, the hedge fund management company bought by Citigroup last July.

Citi paid a very dear $800 million to snag the fund and its founder Vikram Pandit, who now runs the entire bank, but the fund’s investors got very little out of the deal. One wonders whether Old Lane was doomed from the moment it was bought, and whether death is the fate of funds that become part of Wall Street conglomerates like Citi (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and UBS (UBS) – the mega-banks that have rolled up merchant bankers, trading floors, and personal wealth management groups.

True, the hedge fund had problems independent of Citi, generating a modest 6.5% in its first year and falling about 6% amid last August’s credit turmoil. It continued to lag other multi-strategy funds thanks to bad credit bets. But problems at Old Lane are the latest in a string of blowups at banks that operate hedge funds. UBS shuttered its Dillon Read Capital Management last May due to big credit losses; and those problems gave markets a warning shot of the credit crisis to come.

The implosion of two highly leveraged credit hedge funds last June was the beginning of the end for Bear Stearns. And Goldman Sachs’ flagship Global Alpha fund began 2007 with $10 billion and ended the year with about $4 billion. Each of these debacles has had its own special flavor, but they all show how hedge funds can lose their mojo when they live within a big, bureaucratic institution.

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