Gartner Analyses Mauritius as a Top Offshore Services Location

NEWSLETTER January 2011 Dear Readers, The key findings from Gartner provide independent confirmation of the positioning that Mauritius has strived to achieve over the years as an International Financial Services Centre. There is no doubt that the factors mentioned by Gartner have played a determining role in convincing international investors to choose Mauritius as their jurisdiction of choice. This being said we have to continue to expand our product offerings and geographical reach and the number of bilateral agreements that Mauritius has signed recently and will continue to do in the future will contribute significantly to maintain on Mauritius as a leading international financial services centre. Jimmy Wong, Managing Director Inside this issue: Gartner Analysis Pg 1 Guest Column Pg 2-3 News At A Glance Pg 4 Microgen 4 Series at DTOS Pg 5 Gartner Analyses Mauritius as a Top Offshore Services Location For the first time, Gartner, an internationally recognized information technology research and advisory company, has included Mauritius among their analysis of the 30 leading offshore locations in the world. This study investigates the suitability of Mauritius for offshore services, according to 10 criteria: language, support from the government, labor pool, infrastructure, educational system, cost, political and economic environment, cultural compatibility, global and legal maturity and security and privacy of data and intellectual property (IP). Some of the key findings include the strong governmental support, high ease of doing business in Mauritius, reliable infrastructure and economic stability, as well as an educated work force and favorable tax incentives. Furthermore, Mauritius bilingual (French and English) workforce and advantageous time zone, attract European investors. Additionally, it is one of the least expensive locations, especially for French services. In regards to the IT/BPO sector s contribution to the Mauritian economy, a growth of 8% is anticipated by 2015, with direct employment in the sector amounting to 25,000. Over the last five years, Mauritius IT/BPO industry has been able to maintain annual growth rates of 40%. Mauritius aims to continue its growth in global shares of IT and BPO sourcing market by leveraging its competitive advantages and ongoing improvement. Tassarajen Pillay Chedumbrym, Minister of Information and Communication Technology ended by stating that Mauritius mentioning in the top locations for doing off-shore business brings great international exposure for the ICT sector. Page 1

GUEST Column Revised Pricing Norms: Implications on Investment in Indian Securities When the global financial markets are caught up in the overhauling process for mitigating risks post recession, the Indian Monetary Regulator, the RBI has issued a revised set of pricing norms for securities issued to person resident outside India. The revised policy raises various issues and concerns for the India focused investment through Mauritius as well as other countries. Therefore, in this Article we have attempted to capture the scenario of pricing post the revised policy. Background Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under Foreign Exchange Management (Transfer or Issue of Security to a Person Resident outside India) Regulations, 2000 ( FEMA Regulations ). Thus, one of the important factors with respect to any foreign direct investment in India is the pricing norm applicable to the instrument used whilst making the investment. Erstwhile Pricing Regime Historically until April 7, 2010, the exchange control regulations in India provided that the price of shares issued to a person resident outside India by an Indian company under the foreign direct investment scheme shall not be less than the price determined as per SEBI guidelines where the shares are issued by a listed entity and in other cases, not less than the fair valuation of shares done by a chartered accountant as per the guidelines issued by the erstwhile Controller of Capital Issues (CCI Guidelines). The CCI Guidelines in turn provided that the value of equity shares of a company can be determined as an average of the value arrived at using the Net Assets Value method and the Price Earning Capacity method. It is noteworthy that the CCI Guidelines did not provide for valuation of preference shares or debentures. Revised Pricing Guidelines Recently, RBI has on April 7, 2010 amended the FEMA Regulations (which was published in the Official Gazette on April 21, 2010) to provide for new pricing guidelines. The revised pricing guidelines inter alia provides that the price of shares issued to persons resident outside India under the FDI Scheme shall not be less than (i) the price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company are listed on any recognized stock exchange in India; (ii) the fair valuation of shares done by a SEBI registered, Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method ( DFCF method ), where the shares of the company are not listed on any recognized stock exchange in India; and (iii) the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment. Issues for consideration In view of the revised pricing norms issued by the RBI, the following issues are pertinent and many of them require more clarity from the RBI: Preferential Allotment: It is not clear whether the revised pricing guidelines for preferential allotment referred to above are applicable only in case of unlisted entities or it also applies to preferential allotment by listed entities as well. Discounted Free Cash Flow Method: Whilst the CCI Guidelines provided operating guidelines for determining the fair value, the RBI has not prescribed any specific parameters for carrying out valuation under the DFCF method. Ordinarily, the DFCF method of valuation is based on assumptions of future numbers and generally takes into account future revenues, expenses and cash flows which is difficult to ascertain in case of a start-up or growth company. Contrary to pricing under the CCI Guidelines, where the issues of equity shares were made based on the past performance reflected in the last audited financial statement, foreign investors may be averse to paying value based on futuristic assumptions of cash flows. Page 2

Convertible Instruments: The revised pricing guidelines do not clarify the position for convertible instruments in view of the recent Consolidated FDI Policy issued by the Department of Industrial Policy and Promotions vide Circular No. 1 of 2010 dated 31 March 2010 (as updated by Circular No. 2 of 2010 dated September 30, 2010). The Consolidated FDI Policy clarified that pricing of capital instruments should be decided / determined upfront at the time of issue of such instruments. Prior to April 1, 2010 issuance of convertible instruments such as compulsorily convertible preference shares or compulsorily convertible debentures were generally made at par/face value and the number of equity shares to be issued upon conversion were either decided upfront based on the value of equity shares on the date of issue of convertible instruments or were determined at the time of conversion. Parties were free to commercially agree upon the conversion ratio and the conversion price based on performance. However, in view of the revised pricing guidelines read with the Consolidated FDI Policy, now whilst issuing convertible instruments, the price per equity share needs to be determined as on the date of such issue using the DFCF Method of valuation and the conversion ratio needs to be crystallized on such date itself. GUEST Column This may have an adverse implication for private equity investors who generally used to invest in convertible instruments where conversions were determined based on certain formula or future performance and earnings of the investee companies. This is because the fair value of start up or growth company shares can only be determined on future performance or at a time when preference shares / debentures are converted into equity. It is difficult to fix an upfront value on a share's premium. No Grandfathering Provisions: Neither the revised pricing guidelines nor the Consolidated FDI Policy specify / clarify on whether the convertible instruments issued on or prior to March 31, 2010 can continue to be converted in the manner contractually agreed between the parties or if the parties would have to amend the terms of the convertible instrument to comply with the current regime of Consolidated FDI Policy. However, now the general belief is that even with respect to convertible instruments issued on or prior to March 31, 2010 the companies should have first determined the fair value of the equity shares as per the extant pricing guidelines under FEMA Regulations and thereafter, the price of the convertible instruments should have been worked out by determining the exact conversion ratio of the convertible instruments into shares. Having said that, even if companies decide to fix the conversion ratio and the conversion price as of today, the question would be whether such ratio and the price have to be determined based on DFCF Method of valuation or whether they have to be determined based on the valuation norms prescribed under CCI Guidelines. Such determination of conversion ratio and conversion price would entail parties to enter into amendment agreements for restructuring the deals or amending the terms of the convertible instruments to comply with the Consolidated FDI Policy and FEMA Regulations. The unresolved issue: Whether the company would need to seek RBI s consent prior to amending the terms of the convertible instruments? This is because such revised terms will not be in consonance with the terms reported along with the FC-GPR filings and FEMA Regulations do not specifically permit the companies to revise the terms of the convertible instrument subsequently. Conclusion Whilst certain aspects of the revised pricing norms are quite clear, the RBI needs to still expressly clarify quite a few things including but not limited to specific parameters for determining the price using DFCF method of valuation, applicability of revised norms to convertible instruments and grandfathering provisions for convertible instruments. Recently, there have been deliberations amongst the regulators for relaxing the upfront determination requirement under the pricing norms for convertible instruments. However, such relaxation has a long way to go since it would require consensus among the RBI, Department of Economic Affairs and the Department of Industrial Policy and Promotions. Probably, we may get to see some clarity in the forthcoming Circular 1 of 2011 to be issued by the DIPP on March 31, 2011. Rajesh Begur, Managing Partner, ARA LAW, Mumbai, India Page 3

News At A Glance Congo Republic Signs DTAA With Mauritius Vice-Prime Minister as well as Minister of Finance, Hon Pravind Jugnauth, and Basile Ikouébé, Minister of Foreign Affairs and La Francophonie of the Republic of Congo, signed both the Double Tax Avoidance Agreement (DTAA) and the Investment Promotion and Protection Agreement on 20th December 2010, making it the 37th country with which Mauritius has a DTAA with. Thereafter, Basile Ikouébé confirmed that Congo is looking to Mauritius for help concerning the setting up of an Export Processing Zone (EPZ). Hence the signing of these agreements helps to promote collaboration in important areas for both parties. Additionally, Pravind Jugnauth emphasized the significance of using FDI as a tool to integrate international economies. He elaborated on to say that the influx of foreign investment, a major promoter of growth, generates financial resources for business, allows for transfer of technology and enhances the development of capacity of managers and entrepreneurs as well as employment opportunities. With the double taxation agreement, things that hinder cross-border activities will be eliminated, he added. Participating in the Indian Ocean Rim- Association for Regional Cooperation (IOR-ARC) also helps to facilitate cross-border trade and investment. Furthermore, Pravind Jugnauth underscored Mauritius location advantage permits it a central role in facilitating trade and investment. It is important to note that the IPPA, on the other hand, allows both countries to benefit from favorable treatment, consoling investors of the increased likelihood of their investments not being confiscated. Mauritius and Turkey Negotiate FTA On Monday 17 th January 2010, Mauritius and Turkey had their fifth round of discussions regarding the Free Trade Agreement (FTA) between the two countries. Turkey, bound by the Customs Union Agreement with the EU, must succumb to its rules regarding the ACP countries, of which Mauritius is included. Alternatively, Mauritius has entered an Economic Partnership Agreement (EPA) with the EU. As a result, basic duties and structural adjustment regarding the matter were examined between the two parties. This was accompanied by discussions revolving around the rules of origin as well as market access offer and requests. The Secretary of Foreign Affairs and Head of the Mauritian delegation, Ambassador Anand, P. Neewoor, emphasised the bilateral framework s ability to increase synergy between the two nations, create new opportunities, and improve relations. Moreover, the Head of the Turkish delegation, Murat Yapici, Director General of EU affairs, Undersecretariat of the Prime Ministry for Foreign Trade of Turkey, was impressed by the efforts and commitment that Mauritius puts into its trade relations, especially under the WTO. Yapici concluded by saying that Mauritius can now benefit from greater opportunities to export to Turkey. BOI and SADC Countries Promote Foreign Direct Investment The BOI and the Southern African Development Community (SADC) held the first SADC Investment Promotion Agency (IPA) meeting on the 18 th January 2011, at Maritim Hotel. Twenty Chief Executive Officers representing the 12 SADC nations attended the meeting in order to exchange their views on investment promotion and suggest improvements. The goal was to endorse SADC as a promising investment location and to encourage more foreign direct investors. The BOI signed four Memoranda of Understanding (MoU) with agencies to encourage investment in Botswana, Congo, Mozambique and Seychelles. Pravind Jugnauth, Vice Prime Minister of Mauritius, thereafter stated that Africa should have productive FDI in order to diversify the economy so as to enhance technology transfer and improve poverty. This in turn helps to increase the standards of living and economic growth. Pravind Jugnauth believes that as BRIC economies (Brazil, Russia, India and China) lead the global economy to a new level of growth, SADC countries will be better positioned and more FDI opportunities China and Mauritius Sign Two Agreements China and Mauritius signed agreements on the promotion of technical and economic cooperation. The agreement regarding technical cooperation consists of a generous donation of RMB 4 million and the economic cooperation agreement offers Mauritius a RMB 2 million interest-free loan. Minister of Foreign Affairs, Regional Integration and Trade, Arvin Boolell, referred to the signing of the agreements as successful. He pointed out that the latter will create an opportunity for Asian investors to invest in Africa via Mauritius. Page 4

B O A R D OF D I R E C T O R S Nicolas Maigrot (Chairman) Jimmy Wong (Managing Director) Eric Venpin Gaetan Lan Simon Pierre Ray DTOS is a leading service provider in the Global Financial Services Centre of Mauritius. It is a Management company duly licensed by the Financial Services Commission (FSC) to provide inter alia, corporate, trustee and fund administration services. DTOS Trustees Ltd is a wholly owned subsidiary of DTOS Ltd and licensed by the FSC to act as qualified trustee and to provide trust-related services. Third Party Administration DTOS Ltd has extensive experience in the administration of different types of funds that covers the traditional one tiered structure funds, master feeder funds, private equity funds, hedge funds. It offers an array of services to funds located in other jurisdictions. The services encompass the following areas: Fund Accounting Financial Accounting Compliance Registrar & Transfer Agency Reporting and client services With the proven capability to deliver high quality services for any size of fund, we offer a truly integrated service that can vary from fund accounting and administration amongst others. Our team services a vast client base including large pension funds, mutual funds, reputable international banks, Fortune 500 companies, institutional investors and their investment managers throughout the world. DTOS Fund Services provides a complete and comprehensive range of services regarding set up and administration of funds. Accounting and fund valuation services are provided for funds located in Mauritius and other jurisdictions. You may have specific business requirements, in which case you should contact: Jimmy Wong DTOS Ltd 10th Floor, Raffles Tower 19 Cybercity, Ebene Mauritius Tel: +230 404 6000 Fax: +230 468 1600 Email: bd@dtos-mu.com info@dtos-mu.com Editorial Team Jimmy Wong Sarah Li Liong Disclaimer: The information in the newsletter was prepared by the professional staff of DTOS Ltd. The information given is not exhaustive and readers are advised to consult with professionals such as independent accountants, legal counsel and investment bankers before taking any formal action. DTOS Ltd will be pleased to discuss specific problems. Whilst all reasonable care has been taken in the preparation of this newsletter, DTOS Ltd accepts no responsibility for any errors it may contain, whether caused by negligence Page 5