Luxembourg and France Take Center Stage in India’s Foreign Investment Landscape

A significant shift is stirring within the ranks of foreign portfolio investors (FPIs) channelling funds into India’s vibrant economy. Luxembourg has unseated Mauritius as the third-largest FPI region, while France has made a triumphant entry into the top 10, marking a reshuffling of the investment landscape. This article delves deeper into the driving forces behind this transformation, exploring the reasons for these changes and their potential implications for India’s financial future.

Shifting Sands: Mauritius Slips, Luxembourg Rises

For years, Mauritius held the coveted position as the primary gateway for foreign investments into India, a role fueled in part by its advantageous tax treaty. However, recent regulatory recalibrations have altered the equation. The renegotiated tax treaty in 2019 brought capital gains on sale of shares under full taxation as of April 1, 2019. This, coupled with increased regulatory scrutiny on Mauritius as a tax haven, led to a 9% dip in investments from the island nation, paving the way for Luxembourg’s ascension.

Luxembourg: A Beacon of Stability and Expertise

Several factors have propelled Luxembourg’s meteoric rise. Its well-established reputation as a well-regulated financial center stands in stark contrast to the uncertainty surrounding tax havens. This, coupled with the virtual meetings between European and Indian leaders since 2020, has fostered closer financial ties. These meetings resulted in three key agreements aimed at bolstering trade relations, further solidifying Luxembourg’s position as a preferred conduit for European investments.

Beyond its regulatory pedigree, Luxembourg boasts a robust infrastructure catering to the needs of sophisticated investors. It houses some of the world’s largest FPIs and is renowned for its expertise in creating market-centric structures and offering attractive tax incentives. The increased engagement with GIFT City, India’s international financial services hub, further underscores Luxembourg’s commitment to the Indian market.

France Joins the Top 10: A Geopolitical Boon

Another noteworthy development is the arrival of France on the scene. With its AUC surging over 74% to reach ₹1.88 lakh crore, France has claimed a coveted spot among the top 10 FPI regions. This rapid ascent can be attributed to a confluence of factors, including the evolving geopolitical landscape. Events like Brexit, along with beneficial tax treatment for FPI investments under the India-France Double Taxation Avoidance Agreement (DTAA), have created fertile ground for increased French investments.

The DTAA stipulates those gains from certain share transfers will be taxed in the respective country, offering French investors potential exemptions for holdings below 10%. Coupled with France’s established economic prowess and its growing interest in the Indian market, these factors seem likely to fuel further investments from this European powerhouse.

Beyond the Big Movers: Rising Stars and Persistent Puzzles

Ireland and Norway have also secured higher rankings, occupying the fifth and seventh positions respectively. Ireland’s popularity stems from its efficient tax structure and global reach, while Norway’s steady climb reflects its burgeoning economic ties with India. Canada, however, witnessed a minor dip despite a 19% increase in its AUC, leaving the potential impact of the recent diplomatic tussle between the two nations as a matter of speculation.

Looking Ahead: A Diversifying Landscape

With Luxembourg and France leading the charge, and continued interest from Ireland, Norway, and Cyprus, the future of India’s FPI landscape appears to be one of diversification. This shift represents a move towards jurisdictions offering greater regulatory clarity, robust financial infrastructure, and favorable tax environments. This trend has the potential to attract a wider range of investors, inject fresh capital into the Indian market, and further bolster its economic growth.

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The changing pecking order within the FPI landscape reflects a dynamic interplay of regulatory changes, geopolitical shifts, and economic opportunities. As India continues to attract foreign investments, Luxembourg and France are poised to play pivotal roles, while established players like Ireland and Norway retain their significance. This evolving scenario presents both challenges and opportunities, demanding an agile and adaptive approach to capitalize on the full potential of foreign investment in India’s journey towards continued economic prosperity.