Global Business: Is consolidation the new way forward?

The local offshore sector is currently at a crossroads with the entry into force on April 1 of the revised tax treaty with India while two heavyweight players were recently bought over by global firms on the lookout to consolidate their offering.

Two major transactions completed in the financial services sector will impact positively on the Foreign Direct Investment figures for the financial year 2016-17. Cim Group announced earlier in March the sale of its global business arm – Cim Global Business – to Luxembourg-based SGG Group for $90.3 million. The sale is subject to shareholder and regulatory approval. A few months earlier, in November, Sanne Group, a provider of outsourced corporate and fund administration headquartered in Jersey, acquired International Financial Services and IFS Trustees for $127.3 million.

It is interesting to note that the two transactions took place after the changes brought to the Double Tax Avoidance Agreement (DTAA) between Mauritius and India, observes André Bonieux, Senior Partner PwC Mauritius, who acted as transaction advisor to Cim Group in the sale of its global business. To recall, the Indo-Mauritian DTAA was renegotiated on May 10, 2016. According to the new terms coming into play on April 1, 2017, capital gains arising during the transition period – from April 1, 2017 to March 31, 2019 – will benefit from a 50% reduction off the domestic tax rate of India. However, the latter reduction shall be subject to the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards, while investments made before April 1, 2017 have been grandfathered.

For André Bonieux, the Cim Global Business and IFS transactions clearly indicate that the changes made to the Indo-Mauritian treaty are not really impacting on how global players in the financial services sector view the situation. In his opinion, neither IFS nor Cim will lose any of their clients into India. “It is interesting to note that a lot of players see India actually opening up. This is the conclusion from a workshop PwC held recently,” he states.

Over the last fifteen years, more than $90 billion worth of investments into India have transited via the Mauritius route. André Bonieux anticipates that this is a small figure compared to what lies ahead. Investors are very optimistic about the opening up of India’s economy and how this will attract investments. He thus finds that Mauritius clearly fits into this particular value chain for foreign investors, be it with or without a tax treaty. “The Mauritius route into India has got great days ahead,” highlights André Bonieux.

To understand the rationale behind the heavyweights of the Mauritian financial services industry being on the radar of big international groups for a takeover, it is important to be aware of the global context. Steve Cater, Partner PwC UK, who was Cim’s lead transaction advisor and whose team has been part of many similar transactions in Jersey, Guernsey, Isle of Man, Luxembourg, Bermuda and even Singapore, explains that consolidation is the new driving trend and will continue to be so for some years to come. Clients, he says, want to have a multijurisdictional offering while technology is beginning to change the sector as well. “The bigger you are, the abler you are to invest in the technology needed to evolve to the next level,” Steve Cater points out.

What about the reasoning behind Cim Group’s decision to make a definite cross on its global business activities? Its Chief Executive Officer, Paul Leech, singles out strategy as main justification for this move. Cim Group has been taking stock of international developments and for Paul Leech, based on the amount of consolidation going on worldwide and the feedback from their institutional clients, it is fairly evident that global business companies need to offer more than just their reputation as important players. “You need to offer a global footprint,” he states.

Being a global business in the current worldwide situation calls for being consolidated or becoming a consolidator, Paul Leech observes. Keeping the long term interests of the group’s shareholders in mind and after assessment of the different options available, Cim Group thus opted for PwC UK as transaction advisor in the search for an international buyer for its global business.

Paul Leech further expounds that a conglomerate with various business lines such as Cim Group must imperatively have a certain edge on its competitors in order to generate shareholder value. He adds that consensus had been reached on the fact that Cim Global could not carry on as before because returns would have drifted away in the face of changing dynamics of international markets. He is certain though that Mauritius will remain an important country for India, while André Bonieux reaffirms his confidence in the future of the Mauritian financial services sector.

Do the local players share his optimism? Different people will have different opinions obviously, answers André Bonieux. The focus should be on the fact that our global business sector has got an intimate knowledge of Indian institutions, regulations and way of doing things, which is an incredible asset to facilitate investments into India. “That comes from 25 years of working with India. Few jurisdictions have this expertise. We are optimistic and we see growth. I am confident that investors are not just here for India since we are talking about Africa too,” states André Bonieux, adding that the mood is hugely positive.

What will be interesting to follow, according to him, is whether other local players hop on the consolidation bandwagon as well, since the industry is pretty much fragmented right now. A lot of the licenses in the industry serve as nameplates only and that, for André Bonieux, is symptomatic of a very young and fragmented industry. These operators, he believes, would actually gain from consolidation. Whether this takes place or not remains to be seen in the near future.

Questioned on the risk of employment dwindling in the global business sector as a result of the new tax treaty with India, he observes that talks of profits doubling in the next five years are synonymous of confidence in the future of the industry – a feat you cannot achieve without recruitment or stability of jobs; an outlook shared by Paul Leech as well. For him, the global business industry in Mauritius is set out to be a buoyant employment sector. The country can leverage on being an expertise-driven and affordable jurisdiction, which renders it more advantageous than more pricey international financial centres such as Bermuda or Jersey. It remains to be seen how long Mauritius can afford to stay the low-cost option. One thing is certain: evolution and adaptability are the words for the survival of the Global Business industry
in Mauritius.