It's advantage Singapore over Cayman Islands as RBI eases investment rules for offshore funds

Singapore to emerge as key destination for OPI investments post tweak in rules

Singapore is set to emerge as the preferred jurisdiction over the current favourite Cayman Islands for outward remittances following the recent relaxation in rules by the Reserve Bank of India (RBI), legal experts said.

The central bank recently allowed listed Indian companies and individuals to invest in offshore funds regulated by  fund managers, bringing Singapore on a par with the rest.

“These relaxations will facilitate setting up efficient structures for carry/ co-investment vehicles even in jurisdictions like Singapore as opposed to the earlier regime, where Cayman Island had emerged as a more viable proposition given the fund regulation ecosystem in those countries,” consulting firm Deloitte said in a June 10 report.

Under the earlier rules, Indian residents could invest in offshore funds only if they were regulated by the local authorities. The provision ruled out Singapore-based fund pooling vehicles since the financial hub doesn’t regulate funds and, instead, their managers do so.

“This change will also allow Indian stakeholders to more effectively tap global investment opportunities directly,” the Deloitte report said.

The Caymans, where funds are regulated, are used by both wealthy investors and companies wanting to make international investments.

Wealthy individuals send money overseas through the Liberalised Remittance Scheme (LRS). The money is received by a pooling vehicle or feeder fund in the Cayman Islands, which route the investment to the destination jurisdiction.

Experts say using Singapore instead of the Caymans provides more tax certainty. India doesn’t have a double tax avoidance agreement (DTAA) with the Cayman Islands.

“The overseas investment in funds could also be driven by tax considerations. For instance, the Cayman Islands does not levy any local taxes but has no tax treaty with India, while Singapore levies local taxes but provides for some local tax exemptions to funds,” said Punit Shah, partner, Dhruva Advisors.

“The proposed clarification is a welcome measure. The current provision substantially restricted the ability of Indian individuals to invest in overseas funds.”

Tweaks open up portfolio investment route

In 2022, the Centre overhauled the foreign remittance rules for residents. Earlier, there were no restrictions on investment by Indians into offshore funds as long as they complied with the $250,000 limit under LRS. But there was one drawback. The compliance requirements were the same, whether the resident made a small investment or bought a controlling stake in an overseas entity.

Under the new rules, the government introduced an Overseas Portfolio Investment (OPI) route for residents to make smaller investments. It applies only if the resident buys less than a 10 percent stake in an overseas company. It also allows wealthy Indians to invest in foreign hedge funds and mutual funds that invest across a spectrum of companies. However, the OPI rules came with a caveat that the fund in which a resident is investing should be regulated in the local jurisdiction – a hurdle that has now been removed.