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Magazine Issues » November 2021

Cyprus roundtable: On the fast track to becoming a major cross-border hub

 

Attracting managers from the East
Cyprus has become a gateway for many non-European fund managers outside the bloc, such as the Middle East, India, Israel and China, which want to have access to the EU market.

As a member of the wider EU and Eurozone community, Cyprus provides investors with safety and stability as well as market access to more than 500 million EU citizens. The strategic location of Cyprus on the cross-border of three continents provides access to this area.

KPMG’s Vasiliou says the island is increasingly being seen as a gateway for Indian fund managers to raise capital in Europe, noting that there has been lot of interest since a major regulatory development in the summer.

On June 14 this year, the Indian Minister of Finance issued an order classifying Cyprus as an eligible country for category 1 FPI registration under the regulations of the Securities and Exchange Board of India (SEBI), making Cyprus only the third Financial Action Task Force (FATF) country to receive this classification, along with the UAE and Mauritius. It means that Cyprus funds may now benefit from several streamlined processes and incentives for investment into India.

“Those entities can now enjoy several advantages from this classification. Firstly, they can avail from a lighter KYC regime with several exceptions, for example there is no requirement to submit any financial statements or information of the senior management or trustees unless requested by the regulator,” explains Vasiliou. “This enables fast-track registration for category 1 entities, making it easier and more accessible for them to invest in India.”

The second significant advantage is that category 1 FPI entities enjoy an exemption from the indirect tax provision under the India Income Tax Act. Indirect taxes are applicable to an overseas investor upon the transfer of shares/interest in an entity that has investments in India.

Category 1 PFIs also benefit from enhanced trading limits and are eligible to invest in offshore derivative instruments such as participatory notes.

Vasiliou says this development gives a new opportunity for further growth of Cyprus’s fund industry by becoming an investment platform for attracting investors to India. “At the same time, being an EU member state that has transposed the AIFMD Directive, we have become more relevant to third-country managers looking to take advantage of the so-called passport regime and market their product across the EU with simple notification procedures. Cyprus can act as the gateway for Indian fund managers to raise capital in Europe.”

EY’s Koukounis agrees that there will be more demand from Asian asset managers to establish either their operations in Cyprus or establish their funds on the island and market them throughout Europe and across the world.

She says: “The overall system that we’ve been building over a decade now is definitely very strong and would encourage them to establish in Cyprus, starting from the fact that our legislations and the whole regulatory framework has been transposed from the European legislation. Our legal system is solid and robust, based on the common law foundations of the English legal system, and it’s very familiar to Indian asset managers.”

Cryptocurrency opportunities
There could be bright future for cryptocurrency investment in Cyprus, given that the domicile’s target investors – high-net-worth individuals and family offices – are increasingly interested in this asset class.

Globally, total assets under management in crypto hedge funds grew to a whopping US$3.8 billion in 2020, almost doubling in size from 2019, according to the third annual ‘Global Crypto Hedge Fund Report’ by PwC and the Alternative Investment Management Association (AIMA).

PwC’s Evagorou believes that all in all, the crypto industry is one to watch out for and that there is a positive trend towards investors opting for this asset class. “The PwC study showed the median crypto hedge funds returned +128% in 2020 (versus +30% in 2019), which is massive, so I absolutely would expect the trend towards crypto investments to continue to grow, and especially via fund vehicles.”

The PwC/AIMA report found that the average ticket per investor for such crypto funds is around half a million dollars, with the majority of investors being either high-net-worth individuals (54%) or family offices (30%). “This is exactly the type of investor that the Cypriot industry would typically cater towards, and obviously the ticket size is that sweet spot that Cyprus is aiming for,” says Evagorou.

Panayiotou adds that GMM has been receiving requests for crypto funds from family offices and individual investors, but the lack of regulation around the asset class in Cyprus has made it very challenging to introduce such funds.

This is set to change with the regulator, CySEC, recently issuing directives regarding crypto service providers and how they should be behaving in the industry, as well as a circular about the initiation of the registration process.

Evagorou explains that the introduction of a formal process is game-changing. Previously, there was no process or regulation around crypto, and the industry has been concerned about the reputational risk and general regulatory uncertainty.

“The more regulation that comes in and the more prepared that we are for it, I think the more lucrative this space is going to become, and for all the right reasons in my opinion. The Cyprus regulator and legislator are picking up on this space, which is testament to the fact that we want to be current, and we want to remain relevant in the current sphere in how the economies and businesses are evolving,” she says.

Borisov, whose firm Leon MFO Investments does not invest in crypto directly, but rather in third-party funds that are not domiciled in Cyprus, points out the challenges: “Recently one of those funds told me that they have to change their fund administrator, which is a large, well-known international group, because the fund’s technological requirements are even higher than the well-known group can provide at this stage. They have had to switch to a more specialised US provider. I would expect that crypto should be the next step after other issues around law and technology have been solved.”

CIFA is working closely with the regulator to see what the situation in other jurisdictions is and take action towards properly regulating cryptocurrencies in Cyprus.

“It’s something that I believe will be welcomed by the industry, because we don’t want to leave these kinds of services unregulated,” says Yiasemides, “so CIFA will prepare a report to help the regulator decide which direction the legislation should take.”