Family offices are awaiting regulatory clarity before setting base in GIFT City as the Reserve Bank of India (RBI) may be mulling if such facilities at the International Financial Services Centre (IFSC) may lead to large sums of domestic money moving abroad, Moneycontrol learns from sources.
While current regulations permit family office operated funds – or Family Investment Funds (FIF) - to remit money overseas from GIFT City, the regulatory body for the finance centre is awaiting clarity from the central bank which worries movement of large funds could pose disrupt exchange rate management and forex reserves. “There are two kinds of FIFs, one which plans to move funds from India and invest overseas where the RBI and the government will have to take a call on what policies should be brought about,” IFSCA chairman K Rajaraman recent said at a BSE event.
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Currently only Azim Premji's family office has received an in-principle approval to set up a FIF in GIFT City, granted in January this year.
There are two routes through which a family office can remit money outside India via an FIF established in GIFT City. One is by way of Overseas Direct Investment (ODI) while the other is through Overseas Portfolio Investment (OPI), which experts believe would become the more popular route.
Through the ODI route, 400 percent net worth of the last audited balance sheet of the investing entity can be transferred to the FIF, Siddharth Mody, Partner JSA Advocates and Solicitors told Moneycontrol. FIFs need to maintain a minimum corpus of $10 million at GIFT City within three years of obtaining their registration certificate.
Arun Rajgopal, Partner at Saraf & Partners said that under the OPI route, up to 50 percent of the entity's net worth of the last audited balance sheet can be transferred to the FIF.
Incidentally, the OPI route is allowed only to FIFs in GIFT City and nowhere else in India, Mahesh Shekdar, co-founder at Dovetail Capital - an investment management company – told Moneycontrol.
The RBI is concerned with this Overseas Portfolio Investment (OPI) route available to FIFs at GIFT City.
A lawyer who specialises in GIFT City-based regulations said on the condition of anonymity the central bank would not be comfortable with family offices transferring significant sum out of India.“If family offices send 50 percent of their net worth overseas, it represents a substantial amount, and the RBI would be concerned about such a large outflow of funds from the country,” said the lawyer.
Shravan Shetty, Managing Director at consultancy firm Primus Partners said that while the government may be keen to pitch the OPI option to promote GIFT City, the central bank is cautious of significant outflows.
“If the RBI allows these channels to open and if there is a substantial exodus of funds from India, the central bank would face challenges in maintaining stable exchange rates and high reserves,” Shravan Shetty said.
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Primus Partners’ Shravan Shetty said the family office will have to first transfer in the FIF via a bank the corpus it wants to remit, which could be viewed as moving money outside of India and hence FEMA laws could apply. “Given the fact that there is an ambiguity on regulation, the RBI can come down hard on banks if they execute the transfer,” he added.
The central bank’s concern also stems from the fact that it will not have any control on the movement of funds once it reaches GIFT City and a substantial portion gets deployed to be moved overseas through the OPI channel.
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