Family Offices in GIFT City - The new innovative way for Indian HNIs to invest globally
Published: Oct 06, 2023
By Salil Arora, Advocate and Founding Partner (AviLeague Partners LLP)
WITH the recent announcement from the family offices of Narayana Murthy and Azim Premji that they are looking to establish a Family Investment Fund in the Gujarat International Financial Tec-City (GIFT City), a lot of high-networth individuals (HNIs) are exploring the option of setting up family offices in GIFT City.
As a background, family office is a privately held entity that manages investments and wealth for a family. The primary reason for establishing a family office is to establish a mechanism for succession planning and the equitable distribution of wealth among families, thereby minimising potential disputes .
Although the origin of family officecan be traced back to the maiordoms in ancient Rome (Latin for "principal of the house"), the highest-ranking servant entrusted with the household's most important affairs, the modern concept of a family office emerged in the 19th century with J.P. Morgan founding the House of Morgan in the mid-1800s to manage his family assets.
While the United States and Europe make up the majority of family offices today, there is a fast growing number of Asian family offices, and India is no exception. A number of Indians have been looking to set up their family office in popular global financial centres like Singapore, Dubai and Hong Kong due to their business incentives, lower taxes, progressive regulations, and easier access to global markets.
In order to provide similar incentives in India and to attract HNIs from India and abroad, the International Financial Services Centres Authority (IFSCA) has allowed setting up of self-managed funds pooling money from a single family known as Family Investment Funds (FIFs) in GIFT City, the sole operational International Financial Services Centre (IFSC) in India. The framework and requirements for establishing a FIF are contained in IFSCA (Fund Management) Regulations, 2022.
A FIFcan be set up asa company, contributory trust, limited liability partnership, or in any other form as permitted by IFSCA and must maintain a minimum corpus of USD 10 million within three years of its registration. It can invest in a wide range of assets, both in India and foreign jurisdictions, including unlisted securities, listed securities in IFSC, India, or abroad, debt securities, derivatives including commodity derivatives, mutual funds, Limited Liability Partnerships, physical assets such as real estate, bullion, art, etc. Each family member can contribute up to US$250,000, and qualifying Indian entities can contribute up to 50% of their net worth to FIFs. Further, a FIF may share economic interest with its employees, directors, FME or other persons providing services to the FIF, as per its internal policy to reward the persons providing services to the FIF or to align the interest of such persons with those of the FIF. In this regard, wherever required, the FIF may accept contributions from the aforementioned persons for the limited purpose of granting economic interest to them, which in no case shall exceed an aggregate of twenty percent (20%) of FIF's profits.
Some of the advantages of setting up FIFs in GIFT City are that foreign residents and their family-owned entities can establish family offices without needing to comply with India's FDI policy and foreign exchange rules. Further, repatriation of funds does not require regulatory approval.
As regards Indian residents, setting up FIF in GIFT City allows them to manage overseas investments subject to compliance with the liberalised remittance scheme (LRS) limit of USD 2,50,000 per financial year and restrictions provided under the Foreign Exchange Management (Overseas Investment) Rules, 2022 (OI Rules).
The OI Rules provide a more favourable regime for remittance into GIFT City. Specifically, the OI Rules provide that any investment in a fund or vehicle set up in GIFT City should be treated as Overseas Portfolio Investment (OPI). This makes it possible for families to either individually, or through their listed or unlisted group entities, remit funds to an FIF in GIFT by way of OPI.
In terms of tax benefits, GIFT City, operating offers 100% income tax exemption for FIFs for ten years within a fifteen-year period, along with GST exemptions. FIFs are treated as Indian residents for taxation and foreign residents for exchange control, subject to fund management entity regulations.
FIFs can further establish additional investment vehicles as companies, LLPs, trusts, or other forms.This allows different entity types for various investments, taxation treatments, and regulatory compliance levels.
It is pertinent to note that GIFT City offers convenience, efficiency, and lower costs for HNIs, eliminating the need for overseas transactions. Further, GIFT City's regulatory framework is considered progressive and investor-friendly, with the IFSCA overseeing operations.
With overall ranking of GIFT City improving continuously in global financial centres index and the Indian Prime Minister's vision of making GIFT City a premier global financial hub, the time is ripe for families to move towards GIFT City providing diversified investment opportunities with the best-in-class infrastructure and favourable regulatory regime.
(The views expressed are personal views of the author. No AI tool has been used for authorship)
