Global portfolio diversification has always been ignored by most High-Net-Worth Individuals (HNWI) and Family Offices because it was riddled with discouraging factors such as remittance limitation, opaque regulation, high transaction and set-up costs, and complex taxation. Finding the right investment opportunity was just half the battle. Friction in investing always over-powered the intent of global diversification for these investors.
Popular global booking centers such as Singapore, Dubai and Hong Kong enjoyed majority of interest from family offices because, unlike India, where LRS and ODI rules are difficult to navigate, these geographies offered business-friendly incentives, lower tax regimes, progressive regulation, and unrestricted access to global markets. However, that is set to change as India emboldens its stride to become a global financial hub.
The Indian government now allows the setting up of family offices in GIFT City, India's first International Financial Services Center (IFSC). GIFT City’s regulatory body, the IFSCA, permits family offices to set up a Family Investment Fund (FIF), which can then invest globally. The 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.
This new regulation is a game-changer as it directly addresses some of the major challenges affecting the global plans of family offices. Here are some key highlights that make GIFT City a lucrative choice for family offices over offshore destinations:
Unrestricted Global Diversification
The Family Investment Fund (FIF) is a powerful tool for building a diversified portfolio, reaching beyond domestic assets to include a variety of international options, such as listed and unlisted securities, and even tangible assets like real estate, bullion, and art. Individual investors are permitted to contribute up to $250K to FIFs. Meanwhile, a qualifying Indian entity, which must be 90% family-owned, can contribute up to 50% of its net worth.
The fund has to amass a minimum corpus of USD 10 million within three years of its establishment. Additionally, FIFs have the unique advantage of access to banks situated in GIFT City, where they can potentially take on leverage in the form of loans.
One of the significant benefits of establishing an FIF is the potential it offers to maximize the LRS limit for family members. By using the entity to achieve the required corpus of $10 million, individual family members can save their personal $250K global remittance limit for other international ventures.
Progressive Regulation
Investors have often voiced concerns over India's stringent rules on international investments. Nevertheless, the IFSCA, which oversees the regulation of GIFT City, operates based on a modern and transparent regulatory structure that ensures ease of business operations and protection for investors. For instance, only entities with a profitable track record of three years can make Overseas Direct Investments (ODIs), unless they are family offices in the IFSC, where this rule is not applicable.
The recently introduced Fund Management regulations by IFSCA aim to regulate the Fund Management Entity (FME), a shift from the traditional method of regulating the funds themselves. The FIF (Foreign Investment Fund) will be treated as an Indian resident for taxation, while considered a foreign resident for exchange control. All investments made by the FIF will be subject to FME regulations.
Regarding substantial requirements, the FIF, unlike entities in some island jurisdictions, is required to maintain a physical office in GIFT City, with at least one principal officer in charge of investment decisions. This level of regulatory stability and pro-investor approach aims to inspire confidence in high-net-worth individuals in India, prompting them to consider GIFT City as an attractive investment option.
The GIFT City Advantage
For Indian High Net Worth Individuals (HNIs), GIFT City offers unparalleled opportunities to access diverse financial services domestically, eliminating the need for overseas transactions. This leads to enhanced convenience, streamlined paperwork, and heightened efficiency for managing international investments. Besides its impressive financial infrastructure, the strategic location of GIFT City ensures seamless connectivity to worldwide markets. Its proximity to major Indian cities, such as Ahmedabad and Mumbai, further bolsters this connectivity. Additionally, the costs associated with administration, setting up, and ongoing operations are significantly lower compared to similar foreign jurisdictions, providing an additional advantage of GIFT City.
Tax Concessions
Operating within the parameters of a Special Economic Zone (SEZ), GIFT City provides several tax benefits and exemptions. An enticing prospect is the potential for a Family Investment Fund (FIF) to receive a 100% income tax exemption for ten consecutive years within a fifteen-year period, (subject to the nature of investments qualifying as requisite ‘business’) coupled with exemptions on Goods and Services Tax (GST). These fiscal incentives create an environment that allows High Net Worth Individuals (HNIs) to significantly boost their investment returns and strategically manage their tax responsibilities. Thus, investors have the flexibility to utilize these exemptions during the years when their returns peak, helping to minimize their tax liabilities. Asset classes with long exit horizons such as global PE/VC funds seem super attractive when viewed through this lens.
In addition to these factors, GIFT City boasts a wide range of wealth management firms, asset managers, and advisory services providers, making it the cherry on top. Family offices that establish a Family Investment Firm (FIF) in GIFT City can leverage the expertise of these professionals to enhance their investment strategies. The global financial hub status of India relies on IFSCA maintaining its relatively open regulatory approach. Strategically situated, GIFT City is an ideal destination for family offices looking to expand their investment horizons. If the regulatory body continues to embrace progressiveness and competitiveness, GIFT City has the potential to evolve into a formidable global financial hub in due course.
