Regulatory uncertainty halts ultra-rich family offices' expansion in Gift City

Ambiguity in regulations

While rules initially indicated that outward remittances could be made through the Overseas Portfolio Investment (OPI) route, the people cited above said that RBI is viewing the Indian residents' control over IFSC FIFs as incompatible with the OPI route. Consequently, some authorized banks are halting FIF applications.

Moin Ladha, a partner at Khaitan & Co., highlighted the lack of clarity surrounding the treatment of initial remittances or fund infusions to set up entities in Gift City as FIFs.

"There is a lack of clarity on the treatment of initial amounts remitted to set up an entity in Gift City, which would be the Family Investment Fund. The issue is that investment in FIFs is permitted as a portfolio investment, and remittance for initial set up could be considered as an overseas direct investment." Ladha said.

Non-individual residents have two routes for remitting money outside India: OPI and overseas direct investment (ODI). However, RBI's interpretation that Gift city entities are 100% owned and controlled by individuals precludes the use of the OPI route, leaving the ODI route as an unsuitable alternative.

FIFs are a potentially important source of business for Gift City since financial hubs across the world, such as Singapore, the Netherlands and London, provide special frameworks for family investments. Experts said that there is growing interest in FIFs as more wealthy Indians are looking to invest overseas, and ironing out the regulatory issues would ensure these wealthy choose Gift City over Singapore or London.

"Under the Overseas Investment Rules, 2022, ambiguity remains regarding the classification of investments in a family office as an Overseas Portfolio Investment (OPI) or Overseas Direct Investment (ODI). RBI's stand traditionally has been to restrict an entity from making OPI through its ODI entities. However, the application of this rule within the context of IFSC remains unclear," said Suresh Swamy, a partner at Price Waterhouse & Co. LLP.

ODI Vs OPI

Family offices can also be set up via the ODI route. However, it can only be availed by entities structured as corporates. Further, there are higher compliance requirements for ODI investments. Experts said the ODI rules also come with a condition of bona fide purpose, which means that this route can be used to send money overseas only for certain defined purposes such as expansion, acquisition or setting up of businesses in a foreign country. Overseas portfolio investment refers to any investment other than ODI or other specified exceptions.

India has placed strict controls on moving capital overseas. Resident Indians are allowed to remit up to $250,000 annually, including for the purchase of property, investment in shares or securities, and setting up joint ventures or subsidiaries abroad. In contrast, FIF can not only pool money from individual members of a single family but also from the entities in which the family exercises control and holds at least 90% economic interest, such as sole proprietorship firms, partnership firms, LLPs, trusts, companies, or corporate bodies.