{"id":7995,"date":"2023-09-20T12:00:00","date_gmt":"2023-09-20T06:30:00","guid":{"rendered":"https:\/\/ijpiel.com\/?p=7995"},"modified":"2023-10-10T11:25:03","modified_gmt":"2023-10-10T05:55:03","slug":"boosting-infrastructure-development-through-family-offices-the-role-of-fifs-in-gift-city","status":"publish","type":"post","link":"https:\/\/ijpiel.com\/index.php\/2023\/09\/20\/boosting-infrastructure-development-through-family-offices-the-role-of-fifs-in-gift-city\/","title":{"rendered":"Boosting Infrastructure Development through Family Offices: The Role of FIFs in GIFT City"},"content":{"rendered":"\n

Abstract<\/span><\/strong><\/p>\n\n\n\n

\nThe growth of family offices in India presents a unique opportunity for wealthy families to\ncontribute to the country's infrastructure development. Family businesses, comprising a significant\nportion of India's GDP, offer a long-term investment perspective that aligns with the gestation\nperiod of infrastructure projects. Leveraging their expertise and networks can lead to well-informed\ndecisions and efficient execution. While there has been a trend of establishing overseas family\noffices, recent regulatory advisories discourage such structures, leading families to explore alternative\noptions like Family Investment Funds (\u201cFIFs\u201d<\/strong>) in GIFT City. GIFT City's development as an\nInternational Financial Services Center offers a streamlined process for FIF setup, providing a\npowerful tool for diversified global investments. This article explores the role of family offices in\ndevelopment of Indian Infrastructure and highlights the aspect of setting up of FIFs in GIFT City\nalong with the tax benefits, regulatory stability, governance that are the key factors in determining\nthe success of this growing financial hub.\n<\/span><\/p>\n\n\n\n

Growth of Family Offices<\/span><\/strong><\/p>\n\n\n\n

\nFamilies with significant wealth can contribute to India\u2019s infrastructural growth in several ways. In\nIndia, family businesses account for 79% of its GDP<\/a>. Such businesses often have a long-term\nperspective on their investments, which aligns with the nature of infrastructure projects which have a\nhigh gestation period. Many business families have access to expertise in various sectors. Their\nknowledge and networks can be leveraged to ensure well-informed decisions and efficient execution\nof infrastructure projects. Moreover, the 10 th Global Family Business Survey by PwC shows that\n71% of Indian family businesses<\/a> show a strong desire to adapt to new-age methods such as digital\ntransformation and data analytics, though this is more likely to come from outside than within the\nfamily.\n<\/span><\/p>\n\n\n\n

\nIndia has witnessed a trend of setting up of overseas family offices due to the benefits available in\nthose jurisdictions. Ultra-high net worth individuals are proactively exploring the family office route\nto manage their wealth and make investments globally. However, the Reserve Bank of India has\nrecently in a call with authorised dealer (\u201cAD\u201d<\/strong>) banks said the intent behind the relaxation in laws\nwas not to have wealthy individuals set up overseas family offices. It has instructed banks<\/a> to not\nfacilitate such structures as it is not permitted under current regulations. AD banks are treating this\nas an informal advisory while further clarification from RBI is awaited.\n<\/span><\/p>\n\n\n\n

\nIn the light of such advisory, it stands to reason that families are looking for alternative structures\nand FIFs in the GIFT City can provide such an opportunity.\n<\/span><\/p>\n\n\n\n

GIFT City: The gift that keeps on giving!<\/span><\/strong><\/p>\n\n\n\n

\nIn an attempt to "onshore the offshore\u201d, the IFSC (\u201cInternational Financial Services Center\u201d<\/strong>)\nregime is establishing itself as a one-stop shop for both domestic and offshore financial services\nbusinesses. With numerous pro-IFSC initiatives implemented by regulators and the government, the\nlong-awaited development of the Gujarat International Finance Tec-City (\u201cGIFT City\u201d<\/strong>) as a robust\nIFSC on par with international financial centres around the world is becoming a reality.\n<\/span><\/p>\n\n\n\n

\nThe GIFT City is situated in\u00a0the Gandhinagar district\u00a0in\u00a0Gujarat, India.\u00a0As of June 2023, it is home\nto several multi-national banks including\u00a0HSBC,\u00a0JP Morgan,\u00a0and\u00a0Barclays; various fintech entities,\ntwo international stock exchanges as well as India\u2019s first\u00a0international bullion exchange. The\ngoverning authority is the IFSC Authority (\u201cIFSCA\u201d<\/strong>). Perhaps no initiative has been as significant\nas the recent introduction of the IFSCA (Fund Management) Regulations, 2022 (\u201cFME\nRegulations\u201d<\/strong>).\n<\/span><\/p>\n\n\n\n

FIFs in GIFT City: A Parallel to Family Offices<\/span><\/strong><\/p>\n\n\n\n

\nThe FME Regulations define a FIF as a self-managed fund-pooling capital only from a single family.\nIn a departure from the previous fund regime in IFSC, which was based on the SEBI (Alternative\nInvestment Funds) Regulations, 2012, the FME Regulations regulates the fund managers i.e., fund\nmanagement entity (\u201cFME\u201d<\/strong>) while prescribing operating guidelines for the funds.\n<\/span><\/p>\n\n\n\n

\nA FIF must seek registration as an authorised FME. A FIF can invest in securities, financial products\nand other permitted asset classes. Some salient details are summarised below:\n<\/span><\/p>\n\n\n\n


Particulars<\/strong><\/span><\/td>Details<\/strong><\/span><\/td><\/tr>
Structure<\/strong><\/span><\/td>LLP (most preferable), private company or trust<\/span><\/td><\/tr>
Investment\nRestrictions<\/strong><\/span><\/td>Indian securities (due to roundtripping concerns)<\/span><\/td><\/tr>
Minimum Corpus<\/strong><\/span><\/td>Required to maintain a minimum corpus of $10 Mn in three years from date of registration<\/span><\/td><\/tr>
Human Resource Requirement<\/strong><\/span><\/td>Can be open ended (having no fixed maturity period) or close ended\n(having a fixed maturity period), depending upon the requirements of the\nfamily.<\/span><\/td><\/tr>
Investors<\/strong><\/span><\/td>Should be members of single family, i.e., lineal descendants of common\nancestors (including spouse).
Can also include non-individuals where the \u2018single family\u2019 exercises control\nand hold a minimum of 90% of economic interest<\/a>, such as sole\nproprietorship firms, partnership firms, LLPs, trusts, companies or\ncorporate bodies.<\/span><\/td><\/tr>
Types of Schemes<\/strong><\/span><\/td>Can be open ended (having no fixed maturity period) or close ended\n(having a fixed maturity period), depending upon the requirements of the\nfamily.<\/span><\/td><\/tr>
Borrowing<\/strong><\/span><\/td>An FIF may borrow or engage in leveraging activities as per its defined\nrisk management policy; they have full access to banks in GIFT City for\nthis<\/span><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

\n
A FIF can set-up any other investment vehicles in the form of companies, LLPs, trusts or any other\nform as may be specified by the IFSCA, subject to IFSCA\u2019s approval and payment of applicable fees.\nSuch additional vehicles shall be considered as part of the FIF when considering whether regulatory\nunder the FME Regulations are being met.\n<\/span><\/p>\n\n\n\n

Procedure for setting up a FIF<\/span><\/strong><\/p>\n\n\n\n

\nThe entity must first register as a unit in the GIFT City. While the entity can be a private limited\ncompany, LLP or trust, the easiest and most advisable is setting up a LLP. Whichever entity is\nselected, it must be incorporated in GIFT City. Other incorporation formalities would be creating a\nbank account (overseas bank account). The entity must procure Special Economic Zone (SEZ)\napproval. It can then apply for registration as an authorized FME.\n<\/span><\/p>\n\n\n\n

\nAmongst infrastructure requirements, it is important that the entity has adequate office space which\nis dedicated, secure and accessible only by authorised persons of the FME. Generally, infrastructure\nrequirements are commensurate to the size of the FME\u2019s operations in the IFSC. With a single window clearance for these steps, the process is quite streamlined and will take almost\n3 to 4 months in total. Fees payable includes application fees ($2500), registration fees ($5000) and\nannual fees ($2000).\n<\/span><\/p>\n\n\n\n

Investment opportunities<\/span><\/strong><\/p>\n\n\n\n

\nThe FIF is a powerful tool for developing a diversified portfolio and availing of global opportunities.\nPermissible investments through FIFs include listed \/ unlisted securities, including those listed on\nany stock exchange in India or offshore; money market instruments; debt instruments, which are\neither asset-backed or mortgage-backed securities; other investment schemes set up in India and\noffshore; derivatives including commodity derivatives; units of mutual funds and AIFs in India and\nforeign jurisdiction as well as investment in LLPs, and physical assets such as real estate, bullion, art,\netc. Further, there are no net worth requirements.\n<\/span><\/p>\n\n\n\n

\nAnother important flexibility in respect of FIFs it that although they are not permitted to seek\ninvestment from individuals or entities other than the members of a \u2018single family\u2019, they can share\neconomic interest with their employees and directors, as per their internal policy, in order to reward\nsuch individuals and to closely align their interests with those of the FIFs. There is a permissible\nlimit of 20% of a FIF\u2019s profits that can be distributed to such persons.\n<\/span><\/p>\n\n\n\n

Exchange Control Considerations<\/span><\/strong><\/p>\n\n\n\n

\nAny financial institution or any branch of such institution operating from the GIFT City will be\ntreated as a person resident outside India. Thus, it is an offshore financial center from an exchange\ncontrol perspective.\n<\/span><\/p>\n\n\n\n

\nUnder the overseas investment (\u201cOI\u201d<\/strong>) regime, Indian entities such as companies, LLPs, partnership\nfirms, as well as individuals can invest in foreign listed and unlisted entities, are subject to applicable\nrestrictions. These will govern investment in the GIFT City too. There are two routes: Overseas\nDirect Investment (\u201cODI\u201d<\/strong>) and Overseas Portfolio Investment (\u201cOPI\u201d <\/strong>).\n<\/span><\/p>\n\n\n\n

\nUnder the ODI route, investment can be by way of acquisition of unlisted shares in a foreign entity,\nor through subscription in a foreign entity or investment in 10% or more of the equity capital of a\nlisted foreign entity or investment with control where investment is less than 10%. On the other\nhand, the OPI route allows for investment in foreign securities other than those through the ODI\nRoute, with an exclusion of unlisted debt instruments or any security issued by a person resident in India who is not in an IFSC.\n<\/span><\/p>\n\n\n\n

\nIn case of a listed company, the investment should not exceed 50% of net worth on the date of last\naudited balance sheet. The perceived higher limit of 50% of net worth under the OPI route as\ncompared to the Liberalised Remittance Scheme (\u201cLRS\u201d<\/strong>) route is one of the key reasons<\/a> family\noffices are considering outbound investment through a GIFT City as opposed to offshore family\noffices.\n<\/span><\/p>\n\n\n\n

\nHowever, there is still some ambiguity<\/a> if transferring funds to a Family Investment Fund (FIF) in\nGIFT City qualifies as an Overseas Direct Investment (ODI) transaction because the family that\nowns the money has control over the fund. However, ODI is intended for establishing subsidiaries,\njoint ventures for business operations, or strategic investments. In contrast, a FIF doesn't engage in\ngenuine financial services business; it merely holds investments on behalf of a single family.\n<\/span><\/p>\n\n\n\n

\nResident Indians can invest up to USD 250,000 through the LRS route the IFSC. Residents can\nopen a foreign currency account in IFSC. A recent relaxation<\/a> permits remittances under LRS to be\nretained beyond a 15-day window although there are still some end-use restrictions.\n<\/span><\/p>\n\n\n\n

Tax Considerations<\/span><\/strong><\/p>\n\n\n\n

\nEntities operating within IFSC are bound by the same GST laws as applicable to the domestic\nentities, except for specific exemptions which provides a \u2018nil\u2019 rate<\/a> of tax on services by an\nintermediary of financial services located in IFSC to a customer located outside India.\n<\/span><\/p>\n\n\n\n

\nAs a SEZ, the GIFT City provides several tax benefits and exemptions. A FIF may enjoy a complete\nexemption from income tax for ten consecutive years within a fifteen-year period, provided that its\ninvestments qualify as a requisite 'business'. This will depend on a number of factors, key among\nwhich are frequency of trading and how the FIF has been accounting the income in their books. If\nsuch investments are shown as \u2018stock-in-trade\u2019 it becomes easier to show gains as business income\nwhile if they are shown as assets or investments, the gains made would generally be classified as\ncapital gains. However, this is subject to a deeper tax analysis and specialized tax advice should be\nsought.\n<\/span><\/p>\n\n\n\n

Conclusion<\/span><\/strong><\/p>\n\n\n\n

\nThrough the FIF regime, the GIFT City providing Indian families a streamlined and competitive\nenvironment for fund management in a dynamically growing global financial hub. It is certainly\nmore cost-efficient to set up a family office by way of FIF in GIFT City as compared to Singapore\nor Mauritius as it entails a lower cost of administration, set up and daily operations. Moreover, the\ngeographical advantage is unmatched. Investors will also welcome any further tax breaks or tax\nincentives that the government can provide along the lines that Singapore did to woo family offices.\n<\/span><\/p>\n\n\n\n

\nRegulatory certainty and predictability of governance will play big roles in the growth of GIFT City.\nWealthy investors and families of the calibre that the GIFT City seeks to attract will certainly be wary\nof deploying substantial capital where the legal, regulatory or administrative set-up may be saddled\nby unexpected surprises. However, if the regulatory body continues to embrace progressiveness and\ncompetitiveness, the GIFT City has the potential to grow into a powerful global financial hub in the\nfuture.\n<\/span><\/p>\n\n\n\n

\nWith FIF proposals pending with IFSCA, it remains to be seen if the fear of a possible flight of\ncapital from India (and consequent pressure on the rupee) will prevent both RBI and IFSCA from\ntaking a final decision. A clear go-ahead from the executive will give much-needed confidence to\nboth the industry and regulators.\n<\/span><\/p>\n\n\n\n

Disclaimer<\/span><\/strong><\/p>\n\n\n\n

The views of the authors in this article are personal and do not constitute legal \/ professional advice\nof any firm or organisation.<\/em><\/strong><\/span><\/p>\n\n\n\n

About the Authors<\/span><\/strong><\/p>\n\n\n\n

\nIpshita Bhuwania, Senior Associate at Tier-1 Law firm.\n
\nSunidhi Singh, Final Year Law Student at Symbiosis Law School, Noida.\n<\/span><\/p>\n\n\n\n

Editorial Team<\/span><\/strong><\/p>\n\n\n\n

Managing Editor: Naman Anand<\/em>
Editors-in-Chief: Abeer Tiwari & Muskaan Singh<\/em>
Senior Editor: Harshita Tyagi<\/em>
Associate Editor: Sunidhi Singh<\/em>
Junior Editor: Ishaan Sharma<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Abstract The growth of family offices in India presents a unique opportunity for wealthy families to contribute to the country's infrastructure development. Family businesses, comprising a significant portion of India's GDP, offer a long-term investment perspective that aligns with the gestation period of infrastructure projects. Leveraging their expertise and networks can lead to well-informed decisions […]<\/p>\n","protected":false},"author":265,"featured_media":8071,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":"","wp_social_preview_title":"","wp_social_preview_description":"","wp_social_preview_image":0},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/posts\/7995"}],"collection":[{"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/users\/265"}],"replies":[{"embeddable":true,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/comments?post=7995"}],"version-history":[{"count":73,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/posts\/7995\/revisions"}],"predecessor-version":[{"id":8069,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/posts\/7995\/revisions\/8069"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/media\/8071"}],"wp:attachment":[{"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/media?parent=7995"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/categories?post=7995"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ijpiel.com\/index.php\/wp-json\/wp\/v2\/tags?post=7995"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}