UAE’s exit from FATF ‘grey list’ may boost FPI flows into India

Paris-based global financial watchdog Financial Action Task Force’s (FATF’s) move to remove the United Arab Emirates (UAE) from its ‘grey list’ is expected to bolster foreign investments into India, foreign trade analysts said.

The FATF screens cross-border transactions globally and sets guardrails to specifically halt money laundering and terror funding. It uses its ‘grey list’ to warn the global financial and banking system about countries posing increased risks.

The UAE’s removal last week after two years on the global watchlist of countries “vulnerable to money laundering and financing of terrorism,” is seen as a positive sign for more economic engagements with that country.

In 2021, the Reserve Bank of India had imposed curbs on funding in non-banking finance companies (NBFCs) by investors from Financial Action Task Force (FATF) non-compliant jurisdictions.

With the UAE exiting the ‘grey list’, analysts said that more foreign direct investment is likely to flow into the country as the cost of funding for UAE banks will also go down.

“Apart from witnessing investment inflow in NBFCs, the Indian infrastructure sector is also likely to see big-ticket investments from the UAE, of fund sizes above $100 million,” Viraj Kulkarni, founder of Pivot Management Consulting, said.

Kulkarni noted that following FATF’s decision, the number of UAE-based foreign portfolio investors (FPIs) in India may more than double to over 400 in the next two years from the current 198 on renewed push by brokerages, custodians, and tax firms, alongside efforts of UAE authorities.

India-based private equity and venture capital funds that want to invest in portfolio firms in the UAE can now do so with fewer obstacles, potentially leading to an increase in cross-border investments and collaborations between the two countries, analysts said.

Last Friday, the FATF announced that the UAE is no longer under intense scrutiny as the country has been actively investigating and prosecuting money laundering cases. It has also been seeking help from other countries to investigate money laundering and terrorist financing, while ensuring that its businesses adhere to international sanctions, FATF said in a statement.

While announcing the decision, FATF advised the UAE to continue its work with the Middle East and North Africa Financial Active Task Force to step up its efforts against money laundering and terrorist financing.

India-UAE bilateral trade relations have been soaring after both countries signed a Comprehensive Economic Partnership Agreement (CEPA). Both countries have set a target of $100 billion in non-oil trade by 2030.

Government data showed bilateral trade has increased by about 15% since CEPA came into force on 1 May 2022. In the first 12 months of the CEPA, bilateral non-oil trade hit $50.5 billion, or a 5.8% growth when compared with the corresponding period a year ago.