“For buying properties abroad, residents should use the Liberalised Remittance Scheme (of the Reserve bank of India), and not family offices,” a person aware of the view told ET.
Several business families are actively exploring setting up family offices in GIFT City which is closer to home and less expensive than destinations such as Singapore and Dubai.
Popular in western countries, the concept of ‘family office‘ – serving the wealth management needs of a family – was recognised a year ago by the GIFT City regulator International Financial Services Centres Authority (IFSCA) when it came out with the ‘family investment fund’ (FIF) regulations.
“However, the focus of FIFs should be on ‘investment’ and not on acquisition of properties abroad for personal use. Or, for using it as a vehicle to move funds that would never come back, or with the objective of transferring funds to family members who would subsequently become citizens of another country. That wasn’t the intention behind allowing FIFs,” said the person.
An FIF can be housed under entities like a trust and a limited liability partnership.
The option of GIFT City for incorporating family offices also stems from the regulatory hurdles in forming similar dedicated entities in other offshore centres (like Singapore). The family money pooled into an LLP in India and invested in a family office entity in Singapore would require the permission of RBI as it would be construed as ‘overseas direct investment’ (ODI) as against ‘overseas portfolio investment’ (OPI).
“Under the Overseas Investment Rule read along with the Master Directions, an Indian individual who is a resident in India as well as an unlisted Indian entity is permitted to invest in a fund set up in GIFT City. This creates opportunities for family offices to set up a self-managed FIF in the GIFT City. However, IFSCA has been uncomfortable allowing investment by residents in GIFT funds where the monies are getting invested back into India. Further, while investment into an FIF by unlisted entities is legally permissible, RBI may not be comfortable in allowing investment by such entities whose sole purpose may be to invest into such FIFs,” said Parul Jain, who heads the international tax practice at the law firm Nishith Desai Associates.
Under LRS, a resident individual is allowed to invest up to $250,000 a year overseas in securities and properties. Against this regulation, the question arises whether a large number of individuals can collectively pool in a huge amount and remit it abroad to hold the money under a family office.
The possibility to use GIFT FIF as OPI – which has easier compliance requirements compared to ODI – may also be driving many to examine GIFT as a location for their family offices. Currently, an FIF is allowed to invest in a variety of assets. Under the circumstances, this may require a clarification in the FIF rules if the investments have to match the regulatory thinking that deployment of any GIFT family office money should be purely for ‘investments’ and not ‘personal use’.
