Money Laundering: Indian Stock Market Edition

Hello, I am back with the topic I promised last time. (If you haven’t read the first part, click here to read it).

I am going to explain how money launderers use the Indian stock market, but before that, I need to explain a few concepts first:

• FDI (Foreign Direct Investment): This occurs when an investor, company, or government from one country establishes a lasting interest in a business operating in another country. The primary goal is to gain active control or significant influence over the foreign enterprise. Generally, it applies when the acquired stake is more than 10%.
• FPI (Foreign Portfolio Investment): This involves the purchase of foreign financial assets (stocks, bonds, or mutual funds). FPI investors are passive; they are looking for financial returns rather than management control over the companies they invest in. Generally, it applies when the acquired stake is less than 10%. Also, they can invest in various financial instruments.
• Tax Haven: A tax haven is a country or territory that offers foreign individuals and businesses a way to minimize or completely escape the tax liabilities they would normally owe in the countries where they operate. While there is no single universally agreed-upon legal definition, the Organization for Economic Co-operation and Development (OECD) identify tax havens using four distinct characteristics:
  1. Nil or Nominal Taxes.
  2. Lack of Transparency (Hiding the true owner or beneficiary).
  3. Lack of Effective Information Exchange (With foreign regulators or tax authorities).
  4. No Substantial Activity Requirement (Entities can register and benefit from the tax regime without needing a physical office, staff, or actual commercial operations within the jurisdiction).
• DTAA (Double Taxation Avoidance Agreement): Just as its name suggests, this is a bilateral financial treaty signed between two countries to prevent the same income from being taxed twice. Countries sign them to attract investment, increase the ease of doing business, and resolve disputes.

The Anomalies

According to the Department for Promotion of Industry and Internal Trade (DPIIT), during the FY 2025-2026 (April 2025 to March 2026), an FDI inflow of ₹5,16,935.85 Crore ($58,846.27 million USD) was recorded in India. The top three countries from where it came are:

1. Singapore: (₹1,73,897.82 Crore or $19,802.26 million USD)
2. USA: (₹98,011.64 Crore or $11,170.64 million USD)
3. Mauritius: (₹57,945.64 Crore or $6,576.47 million USD)

Shocked? Mauritius? How? Wait, there is more. According to the DPIIT, from April 2000 to March 2026, the cumulative FDI inflow was ₹52,85,866 Crore ($787.728 Billion USD).

Out of this, 25% came from Singapore (₹13,92,006 Crore or $194.688 billion USD) and 24% came from Mauritius (₹11,50,846 Crore or $186.767 Billion USD).

Mauritius is pouring 2.5 times more money than the USA into the FDI Equity segment in India. The USA, in cumulative terms, stands in 3rd place with just 10% of the total FDI inflow.

Now let’s look at Assets Under Custody (AUC), which refers to the current market value of all the stocks, bonds, and securities currently held by investors. This is a good indicator of FPI data. According to the NSDL, Mauritius ranks in the 5th position with ₹3,57,777 Crore in assets (Equity, Debt, Hybrid, Mutual Funds). It used to hold a higher rank (generally 2nd position), but since around 2022, its FPI dominance has slowly been declining.

You must be thinking: what is the point of this data? And also, whenever the name Mauritius comes up, you think about tourism, not investments or FDIs. What is actually going on here?

You are right. Mauritius’s population is around 1.2 million with a projected nominal GDP of $17.12 billion for 2026 (IMF Projections). Yet, this tiny country poured $6.576 billion USD in FDI into India last financial year alone. This looks very suspicious. So, what is happening here? If you have read my last blog, you might already have an idea. If not, I am going to explain it anyway.

Reasons for the Anomalies

There are primarily two reasons for this:

1. The Tax Haven Advantage

Major international organizations like the Tax Justice Network (TJN), Oxfam International, and the International Consortium of Investigative Journalists (ICIJ) all consider Mauritius a tax haven. Historically, Mauritius was considered a full tax haven. Following international pressure, they introduced some reforms so that inter-governmental bodies would no longer classify them as such. However, they did just enough to satisfy the requirements without compromising their attractiveness as a shield from tax liabilities.

• Favorable Tax Rates & Exemptions: While Mauritius has a standard corporate tax rate of 15%, specialized offshore companies can utilize exemptions that drive their effective tax rate down to 3%. Furthermore, Mauritius levies no capital gains tax and no withholding tax on dividends paid to non-residents.
• Shell Companies with No Substance: The “Mauritius Leaks” revealed that many entities registered in the country exist purely on paper. Corporations exploit this by paying artificial royalties, interest, or service fees to their Mauritian subsidiaries, artificially lowering their taxable income in their home countries.
• Financial Privacy: The country offers strict financial privacy, such as Category 1 Foreign Portfolio Investor status, which allows the ultimate beneficial owners of investing entities to remain legally undisclosed to the public.

2. The Power of DTAAs

Mauritius currently has 45 active operational treaties in force. Seven are awaiting ratification, seven are awaiting signature, and 19 are under negotiation. DTAAs generally eliminate double taxation through three primary methods:

• Tax Exemption: One country completely gives up its right to tax a specific type of income, leaving it to be taxed solely by the other country.
• Tax Credit: The income is taxed in the source country first. Then, the resident country allows the taxpayer to deduct that paid amount from their domestic tax bill.
• Lowered Withholding Rates: The treaty sets capped, preferential tax rates for cross-border payments like dividends, interest, and royalties.

India also has a DTAA with Mauritius. That is how Mauritius became a launchpad for investment in India. Foreign investors started preferring Mauritius for the Indian financial market, and this flow of capital created an entire ecosystem for investment expertise. This is exactly where money launderers started taking advantage of the system.

Mauritius has historically been a focal point for global financial flows due to its low-tax regime and ease of doing business. However, these same features made it an attractive transit point for money laundering.

Old Methods

• Round-Tripping: This was the classic method, heavily used to launder black money back into developing economies.
  • Extraction: Illicit funds were smuggled out of the home country, often via illegal Hawala networks.
  • Placement: The funds were deposited into a Mauritian “letterbox” shell company—an entity with no employees or physical office. Because of historical financial privacy laws, the Ultimate Beneficial Owner (UBO) remained completely hidden.
  • Repatriation: The Mauritian shell company then “invested” the money back into the original country as Foreign Direct Investment (FDI). The dirty money was now clean, legitimate capital on the books.
• Participatory Notes (P-Notes): P-Notes are Offshore Derivative Instruments. Historically, foreign investors could buy P-Notes from a registered financial institution in Mauritius to invest directly in foreign stock markets without registering with market regulators. Launderers abused this total anonymity to pump black money into the stock market, generate legal trading profits, and integrate the funds into the legitimate economy.

The Regulatory Crackdown and New Tactics

In 2020, the FATF placed Mauritius on its “Grey List” due to strategic deficiencies in its Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) regime. Facing severe economic consequences, Mauritius aggressively updated its laws.

By 2021, the government mandated strict UBO reporting, required companies to prove “economic substance” (having real local offices and employees), and enhanced banking due diligence. These reforms successfully got Mauritius off the Grey List in 2021, effectively killing the “simple shell company” model.

• Trade-Based Money Laundering (TBML): Instead of moving naked cash, launderers now manipulate the invoices of real-world goods.
  • Over/Under-Invoicing: A criminal’s front company in their home country buys goods from their Mauritian entity at highly inflated prices. The excess payment legally transfers illicit wealth out of the country disguised as a standard commercial trade.
  • Phantom Shipments: Invoices and customs documents are forged for goods that do not actually exist. The Mauritian entity processes the payment, cleaning the money through standard trade finance banking channels.
• Multi-Jurisdictional Layering: A Mauritian company is no longer used in isolation. Today, launderers construct elaborates corporate chains to fragment the paper trail. For example, illicit funds might flow into a British Virgin Islands (BVI) trust, which owns a Cayman Islands holding company, which in turn directs a Mauritian operating company. This forces law enforcement to navigate multiple legal systems and time zones just to find the true owner.

The Crux: Why the Stock Market?

There are various reasons for using the stock market for money laundering.

For instance, according to SEBI rules, a company promoter cannot hold above a certain percentage of shares. If they want to maintain control without explicitly breaking the rules, they might route fake investments through offshore entities to indirectly increase their stake and ensure they still make the ultimate decisions in the company.

Alternatively, consider someone with ill-gotten gains that they cannot use freely. What they can do is hold a small, legitimate percentage (5-6%) in a specific company and slowly artificially inflate its stock price through FPI investments from abroad. Once the capital gains from holding their legitimate small stake match the amount of their black money, they sell the shares. This is essentially circular trading via a foreign route.

After the FATF crackdown, methods have evolved, and Mauritius is no longer the easy launchpad it once was—which is evident in its declining FPI investments. But it is still one of the biggest financial conduits in the world.

Maybe next time we will talk about how Bollywood helps in money laundering. Till then, bye!