Blackstone's India Fund benefits from tax haven

NEW YORK (Reuters) - Blackstone Group LP is taking advantage of a tax haven off the coast of Africa to boost investment in its fast-growing $2.2 billion India Fund as U.S. lawmakers weigh whether to curb the company's tax advantages.

A U.S. crackdown on tax loopholes for private equity giants such as Blackstone (BX.N) could spur investors to plow their money into offshore vehicles that get soft tax treatment. U.S. lawmakers have proposed legislation that could double the tax burden for Blackstone and others.

A symbol of U.S. superwealth, Blackstone made its debut on the New York Stock Exchange on Friday after raising $4.13 billion in an initial public offering.

But there's little U.S. lawmakers can do about Mauritius, a tiny island republic that also doubles as a tax haven and conduit for foreign investment in the hot India stock market.

In late 2005, Blackstone won the contract to run India Fund Inc., a closed-end mutual fund, after agreeing to cut investment management fees, according to U.S. regulatory filings. Blackstone beat out India Fund's long-time manager, Advantage Advisers, a unit of Oppenheimer Asset Management.

India Fund (IFN.N), set up as a Maryland corporation began operating through a branch in Mauritius in the early 1990s. The fund, which has a fixed number of shares and trades like a stock on the New York Stock Exchange, conducts its investment activities in India as a tax resident of Mauritius.

A tax treaty between Mauritius and India allows investors in the fund and other offshore investment vehicles to avoid paying taxes on dividends paid by Indian companies or on capital gains from the sale of Indian stocks.

For U.S. tax purposes, the fund qualifies as a regulated investment company. By distributing capital gains and dividends to investors, the mutual fund said it is relieved from all or substantially all federal income and excise taxes, according to regulation M of the U.S. tax code.

Since Blackstone took over management, the India Fund's assets have jumped 83 percent to $2.2 billion over a 16-month span ended March 31, the company has disclosed in U.S. Securities and Exchange Commission filings.

The increase is from investment gains and an offering last summer that raised more than $400 million from investors buying more shares.

Institutional investors, including Neuberger Berman LLC. Barclays Global Investors, Morgan Stanley and Citigroup, own about 11 percent of India Fund's shares, SEC filings showed.

As the mutual fund's assets have grown, so have Blackstone's management fees, calculated as a percentage of assets. Blackstone declined comment.

Blackstone has been keen to invest in India. Earlier this year, Blackstone entered into a venture to invest $5 billion in Indian infrastructure projects. The company has said in regulatory filings the mutual fund should benefit from having ties to Blackstone's corporate private equity operations.

In 2006, the India Fund paid nearly $14 million in management fees to Blackstone, the company said in filings.

The fund's net asset value surged 39.83 percent last year, including reinvestment of dividends. One of the fund's largest holdings is Reliance Industries Ltd. (RELI.BO), whose shares rose 86 percent in 2006. Reliance is India's biggest petrochemical company.

Most of the fund's investments are in the stocks of Indian companies, as diverse as cement and consulting to television and textiles.

Prakash Melwani, a Blackstone senior managing director is president of the fund. Punita Kumar-Sinha has been its portfolio manager since 1997.

Melwani has told investors the stellar returns of the last two years are unlikely to be repeated in 2007 as India's economy shows signs of overheating. Still, he said he sees good opportunities as Indian companies consolidate.

(Additional reporting by Michael Flaherty in New York)