Indian regulators are in a Catch-22 situation over allowing the rich to float family offices in the country’s International Financial Services Centre (IFSC) in Gujarat for holding a part of their wealth in different foreign assets and currencies.
Differences have cropped up over the very nature of a transaction when a family moves money to a self-managed family investment fund (FIF) it sets up in the financial centre in Gandhinagar: Is it ‘overseas direct investment’ (ODI)? Or, should it be categorised as ‘overseas portfolio investment’ (OPI)?
While this may come across as splitting hairs about some financial markregulation, it is turning out to be more than that. Indeed, how regulators and banks finally interpret this transaction would decide whether India’s business families can spread their billions across financial assets in different markets.
With more than half a dozen applications, some from celebrities of India Inc, lying with the IFSC authorities, chances are the rule makers may have to soon think of ways to sort out the regulatory tangle.
THE DILEMMA
But there may be a related dilemma in spelling it all out. Whether it is ODI or OPI, the underlying regulatory principle for forming an offshore family office in Singapore (or, Dubai) is the same as incorporating it in ISFC GIFT City which is equivalent to an overseas territory when it comes to foreign exchange laws. Banks are largely refraining from remitting money to family offices in Singapore and Dubai, after a conference call with a senior RBI official last year to discuss the implications of the new Overseas Investment Regulations announced in August 2022.
The officer concerned was against such fund transfers for offshore family offices.
Now, no one quite knows whether it was the stance of the regulator or the personal views of the officer in question. RBI has neither clarified nor come out with an FAQ (as was expected) to clear the air. Interestingly, well before the chat with the RBI officer – and the debate over ODI versus OPI gathered steam – at least one large Indian business family was smart enough to move fast in establishing its family offices in Singapore and Dubai.
“So, RBI may be in a dilemma over whether to come out with an FAQ. On one hand, if it clamps down on such remittances now, how does it handle the cases where a few families have already set up family offices abroad? On the other hand, if it gives a green signal, then it could open a floodgate… Many Indian families would invest overseas. There could be a rush to take money out,” a person aware of the subject told ET.
THE REGULATORY KNOT
What is the confusion all about? While RBI has not issued any statement on the subject, the central bank’s view, as transpired in some of the meetings, is that the transfer of funds to a FIF in GIFT City is an ODI transaction as the fund is in control of the family whose money it holds. “ODI is meant for setting up subsidiaries or JVs to carry out business or for making strategic investments. But a FIF is not doing any bonafide financial services business, but simply holding investments on behalf of one family. So, how can such a vehicle created through ODI be used for portfolio investments?” said another person.
However, the rules of the IFSC Authority allow the formation of FIF. An Indian entity can remit 50% of its net worth to set up a FIF but must invest $10 million in three years – a condition that makes the rule suitable only for ultra-rich families. While IFSC insists that FIFs must have a diversified portfolio and should not be used to buy properties – an activity for which the liberalised remittance scheme (LRS) should be used by respective family members – there is nothing in the IFSC regulations that prevents the setting up of FIF. Nonetheless, IFSC has yet to give the final go-ahead to any FIF proposal. Industry circles believe that is probably because RBI has in some form put across its views to the IFSC Authority.
“One of the key reasons family offices are considering outbound investment through a GIFT City structure is the perceived higher limit of 50% of net worth under the OPI route as compared to the LRS route. A specific clarification on whether such investments would be classified as OPI or ODI would be useful. This is important because conditions for investment under the ODI route are different and can be restrictive in some ways,” said Rajesh Gandhi, partner at Deloitte India. The LRS window permits a resident individual to invest up to $250,000 a year in overseas securities and properties, subject to certain dos and don’ts introduced with the August 2022 regulations.
NEW DELHI TO HAVE THE LAST WORD
The RBI spokesperson and IFSCA officials did not respond to queries from ET. Since the regulations and procedures for setting up a FIF in IFSC are a little easier than forming a family office in a foreign jurisdiction, some of the well-known business families are seriously considering the FIF route – particularly, those who do not fear raids by officials of the tax department or enforcement directorate and are keen to park wealth away from the prying eyes of these agencies. So, with reputed groups exploring FIF, RBI and IFSC Authority may try to find a meeting point in the ODI versus OPI question.
“However, if what’s holding back the clarification or FAQ is the fear of a possible flight of capital and consequent pressure on the rupee – with finance and non-finance unlisted companies allowed to remit as much as 50% of their net worth – then neither RBI not IFSCA can take a final decision. Also, even if the rules allow such remittances, no bank will clear fund transfers if RBI is against it. So, New Delhi may have the last word on the matter,” said a senior banker.
IFSC was set up primarily to encourage the inflow of foreign capital, replacing Mauritius. What probably caught regulators unaware was the plan to use it for outflows.
