MC EXCLUSIVE Family offices stitch together AIF structures in GIFT City to bypass overseas investment hurdles

Family offices have been permitted to be opened from IFSC, GIFT CITY.

India’s wealthy are adopting creative workarounds for regulatory bottlenecks that have stymied direct overseas investments by single-family offices (SFOs) at GIFT City.

At least half a dozen prominent family offices, including those backed by an automaker, an auto component manufacturer and an IT sector promoter, are exploring pooled structures that resemble Alternative Investment Funds (AIFs), source told Moneycontrol.

SFOs based in the International Financial Services Centre (IFSC) at GIFT City have not been able to send funds abroad due to a lack of regulatory clarity on whether such transactions fall under the Overseas Portfolio Investment (OPI) route or the Overseas Direct Investment (ODI) route. The confusion stems from the fact that money remitted from India to GIFT City is considered an ODI transaction, whereas family office investments in global assets are typically treated as OPI.

Since an entity is not permitted to undertake both OPI and ODI transactions simultaneously, a regulatory deadlock has emerged. Though over a dozen SFOs have received licences from the GIFT City regulator, none of them has been able to operationalise foreign investments yet, the sources said.

To navigate the stalemate, multiple family offices are coming together to form entities  informally structured as an independent fund — essentially replicating the characteristics of an AIF, sources said.

While the fund appears unified on paper, internal arrangements unofficially allocate investment portfolios and returns to individual families.

“These arrangements work on informal agreements. For instance, the investments made by such funds are unofficially segregated between the various family offices,” said one of the sources cited above. “Some investments are made on behalf of one family within the fund while others are made by another. These structures are evolving due to the lack of clarity regarding single-family offices.”

The use of AIF-like structures gives such funds the freedom to make outbound investments, a privilege denied to traditional single-family offices in the GIFT City.

The Reserve Bank of India (RBI) has previously flagged concerns about the family office model being used as a backdoor for large-scale overseas remittances.

Under the Liberalised Remittance Scheme (LRS), individual residents can remit up to $250,000 a year for permissible transactions. The banking regulator has taken a view that family offices could sidestep the cap on LRS through family-office structures.

Despite multiple talks between the International Financial Services Centres Authority (IFSCA) and the RBI, there has been no formal resolution of the regulatory roadblock, which has necessitated the formation of the AIF-like structures.

“The lack of response from regulators has forced families to look for compliant alternatives, even if those structures are less than ideal,” a second person familiar with the matter said.

So far, only one family office based in GIFT City is known to have received permission to deploy capital internationally. The office belongs to a leading Indian industrialist and is reportedly being treated as a regulatory pilot.

“Their case is unique because they had existing licences for outbound investments and have made a written commitment to regulators that any foreign investments will be repatriated to India and used for philanthropic purposes,” the second source said.

The multi-family office-style AIFs is a stopgap arrangement, one that buys time for family offices until a regulatory solution emerges, the sources said.