India has seen its ultra-high-net-worth individuals (UHNIs) and high-net-worth individuals (HNIs) setting up their family offices overseas for quite sometime with Singapore and Dubai being the preferable hubs – these jurisdictions have been attractive due to their robust financial and regulatory framework and efficient tax regime. The family office acts as a pooling vehicle for making global investments which not only enables the family to generate forex hedged returns but also provides a secured financial platform in case the families decide to relocate base.
With a view to limit the above exodus and make India attractive for families, the government has permitted setting up of family office in the GIFT City. The concept is coined as ‘Family Investment Fund’ (FIF) which allows a single family or an entity in which members of the single-family exercise control and have substantial economic interest (at least 90%) to set up a self-managed fund which can pool money and invest in permissible securities and financial products. FIF can be set up as a company or LLP or a contributory trust and is regulated through IFSCA (Fund Management) Regulations, 2022 (‘FME Regulations’).
It is imperative to note that the FIF set up in IFSC will be considered as an Indian resident for tax purposes and an overseas resident/ offshore unit from an exchange control perspective. Conceptually, any investments flowing from India into the FIF will be regulated by the exchange control norms and any onward investments by FIF will be regulated by the FME Regulations – this also demonstrates the intention of the government to give control and authority to the IFSC Regulator in dealing with the entities operating through the GIFT City.
The standout feature of the FIF vis a vis other conventional routes (LRS/ ODI) is the ability to create a portfolio of various overseas products – FIF can invest in listed and unlisted securities, alternative investment funds, physical assets such as real estate, bullion, art etc. While these investment opportunities can be tapped both in India and overseas, the spirit and intent appears to have these investments outside India, specifically where investments are flowing into the FIF from resident Indian families.
Given that the FIF is an offshore unit, investments by resident individuals will be subject to the LRS limits i.e., up to USD 2,50,000 per financial year. As a welcome step, the Reserve Bank of India (RBI) has recently allowed a longer repatriation window of 180 days, instead of 15 days, for funds lying unutilised in foreign currency account in IFSC. Further, since contribution in the FIF will be considered as an OPI, any investment by an Indian entity (owned by a single family) will be subject to the restrictions provided under the Overseas Investment Rules.
Allowability of investments by family-owned entities in FIF by IFSC is an important consideration on couple of counts – one, it keeps the LRS limits of resident individuals free for other utilization; and two, since FME Regulations require the FIF to have a minimum corpus of USD 10 million in 3 years, it will be extremely difficult for Indian families to comply with this condition basis their individual or combined LRS limits, unless it being relaxed by the IFSC Authority. FIF has also been allowed to take leverage in foreign currency from banks located in GIFT City – given that such loans are expected to be available at affordable rates, it is a great alternate to sourcing high cost funds from India.
FIF would be entitled to 100% income tax exemption for a period of ten consecutive years out of fifteen years coupled with exemption from GST – however, FIF may be subject to MAT/ AMT as the case may be, and the same so paid should be available as credit in later years. Also, one should be mindful that using LRS for investing in FIF would attract TCS at 20% w.e.f. July 1, 2023 – while TCS is not an additional cost as it will be adjusted against the final taxes, the same is bound to impact the cash flows.
In terms of registration requirements for setting up of FIF in the GIFT City, one needs to apply to the IFSC Authority and Unit Approval Committee, post obtaining a provisional letter of allotment for office space from the developer. Further, from a substance perspective, FIF needs to have at least one principal officer in GIFT City who shall be responsible for overall activities of the FIF. One also needs to see how compliances and disclosure requirements evolve going forward.
Overall, the emergence of FME Regulations allowing formation of FIF in the GIFT City is forward looking and is bound to gain traction among the families looking for setting up of their family office. To add to it, the IFSC Authority is live and proactive to the needs and requirements to make the regime successful and is taking measures to enhance the robustness of the framework. Also, with the government expressing reservation on setting up family offices overseas, it should be an opportune moment for families to move towards GIFT City providing for an array of investment opportunities with the best-in-class infrastructure and favourable regulatory regime.
Samudra is an Associate Partner and Jagrit is a Senior Associate at Dhruva Advisors LLP. Views are personal.