Indian high net worth families are becoming increasingly proactive in diversifying their investment portfolios and exploring global opportunities. The trend of setting up or expanding family offices in foreign jurisdictions like Singapore and Dubai aligns with their pursuit of favourable business environments, tax incentives, and access to international financial markets.
International Financial Services Centre (IFSC) at the Gujarat International Finance Tec-City (GIFT City) is catching the attention of such Indian families as a potential base for their global investment operations. GIFT IFSC aims to facilitate onshoring of offshore transactions and provide financial services that adhere to international standards, offering similar advantages to those of established financial centres like Singapore and Dubai.
Fund managers operating in IFSC will have to obtain one single umbrella registration with unified regulator (IFSCA) vis a vis the existing approach of multiple registrations wherein funds or various investment products offered by the asset manager were required to be registered with market regulator Sebi.
A Family Investment Fund (FIF) in Gift IFSC aims to provide a formal structure for family offices to manage their investment funds. This allows family offices to set up a dedicated entity to manage their investment activities. FIF is defined as a self-managed fund pooling money from a single family. The definition of ‘single family’ includes Indian entities in which the family exercises control and holds at least 90% economic interest. These entities can invest up to 50% of their net worth in FIFs, over and above the remittance limit for individuals under the liberalized remittance scheme.
A minimum corpus threshold of $10 million and a three-year period to arrange this corpus makes it at a par with the threshold for family office funds in Singapore. FIFs must establish and maintain a physical office within GIFT City, alongside designating at least one principal officer.
Most importantly, FIFs set up in GIFT IFSC are treated as Indian residents for tax purposes and foreign residents or offshore units from an exchange control perspective. Accordingly, several incentives have been extended to FIFs, including various concessions within the regulatory framework for overseas investments, tax benefits, and various logistical perks. Some of the key advantages of investing overseas through an FIF are:
Tax concessions: FIF would be entitled to 100% income tax exemption for a period of 10 consecutive years out of 15 years, coupled with GST exemption.
Overseas real estate: FIFs are permitted to invest in overseas real estate. This is a major advantage for families looking at investing in overseas real estate.
Borrowing and leverage: FIFs can borrow funds or engage in leveraging activities according to their risk management policy which can provide enhanced flexibility in their investment strategies.
Diversification across asset classes: FIFs are permitted to invest across various asset classes, including bullion, and art. This provides unparalleled flexibility to invest in diverse asset class options available overseas.
Overseas investment rules under the foreign exchange management Act has certain carve outs/ exemptions for FIFs. For instance, the restriction to invest only in regulated overseas funds does not apply for FIFs. The restrictions applicable to Indian entities on making overseas portfolio investments are relaxed in case of Indian entities investing in IFSC funds. This makes it easier for FIFs to make overseas investments.
FIFs set up in the format of trust structures can also be used as an effective succession planning tool. A visible shift is taking place as Indian families are increasingly gravitating towards more structured and advanced trust arrangements to effectively realize their succession objectives.
The versatility and customization of trust arrangements make them a valuable tool for families seeking to manage their wealth, protect their assets, and achieve their long-term objectives. Private trust structures can be applied to serve specific family goals and circumstances.
Overall, FIF is a great option as a family office for managing international investments and provides a competitive edge for Indian families looking to diversify their investment portfolios. While family trusts have proved to be a great tool for succession planning, FIFs add additional layers of benefits to present itself as a compelling new-age succession planning and international investment tool.
Rohit Jain is managing Partner and Roopal Bajaj is leader- funds, Singhania & Co.
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Updated: 11 Oct 2023, 09:47 PM IST