The concept of family office has gained prominence in India over the past 8-10 years, especially due to an increase in the number of the high net worth individuals (HNIs) who have started exploring the family office as one of most efficient and effective means for investment, wealth management and succession planning.
In view of the growing interest of the HNIs and ultra HNIs in family offices in India as well as offshore countries, the expert committee constituted by the International Financial Services Centres Authority (IFSCA) recommended a separate regulatory regime and a favourable environment for Indian as well as foreign individuals so as to attract HNIs and ultra HNIs across the globe to set-up their family offices in International Financial Services Centres (IFSC). So far, Gujarat International Finance Tec-City (Gift City) has been recognised as the IFSC by the Indian government, and it is the sole operational IFSC in India.
The recommendations of the expert committee were considered by the IFSCA in IFSCA (Fund Management) Regulations, 2022 (Fund Regulations) which provide a separate framework for family offices in IFSC. The Fund Regulations allow setting up of family investment fund (FIF) in IFSC to act as self-managed fund for pooling money only from a single family.
This article discusses some of the key aspects of the Fund Regulations related to, inter alia, structure, eligibility and investments options of FIFs established to act as single-family office(s) in IFSC.
Structure of Family Office(s) in IFSC
The Fund Regulations provide adequate flexibility regarding the structure of a FIF. A FIF can be set up in the form of a company, contributory trust, limited liability partnership (LLP), or any other form as may be permitted by the IFSCA from time to time. A FIF needs to maintain a minimum corpus (i.e investments or assets under management) of USD 10 million within a period of 3 years from the date of obtaining a certificate of registration from the IFSCA. An investment professional would need to be appointed by every FIF to manage the investments.
A FIF cannot seek investments from individuals or entities outside of the single family, but it may share economic interest with its employees, directors, fund management entities or other persons providing services to the FIF. In this respect, the FIF may also accept contributions from such third parties for the limited purpose of granting economic interest to them, not exceeding twenty percent (20%) of the FIF’s profits.
Who can set up Family Office(s) in IFSC?
A FIF can be set in IFSC by a single family. The Fund Regulations initially restricted the scope of a single family to a group of individuals who are the lineal descendants of a common ancestor, including their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, and ex nuptial children). However, earlier this year in March 2023 , the IFSCA clarified that a single family will also include sole proprietorship firms, partnership firms, company, LLPs, trusts, or body corporate, in which an individual or a group of individuals of a single-family exercises control and directly or indirectly holds “substantial economic interest “.
This circular has expanded the ambit of the definition of ‘single family’ and would enable the family-owned entities to set up family office(s) in the IFSC provided that such entities meet the above-mentioned criteria of control and substantial economic interest.
Where can a family office invest?
The Fund Regulations provide various options for the family offices to invest the family funds and diversify the family investments. FIFs have a wide range of investment options available to them including unlisted securities, securities listed or to be listed in IFSC or India or foreign jurisdictions, debt securities, units of mutual funds or alternate investment funds in India or foreign jurisdictions, money market instruments, and by way of contribution in limited liability partnership.
FIFs set up in IFSC are allowed to invest in India as well as foreign jurisdictions. While any investment in Indian entities/assets by a FIF will have to comply with foreign exchange regulations (including sectoral cap, pricing guidelines and other provisions of the foreign direct investment (FDI) policy in case of equity or equity-linked investments), any investment outside India by a FIF will be outside the purview of [Indian] foreign exchange laws.
Family office(s) in IFSC by non-residents
The Fund Regulations have opened up a new avenue for the foreign residents (including non-resident Indians) and/or their family-owned entities to create and set up their investment entity in India without being required to comply with the FDI policy and the foreign exchange rules . Any repatriation of funds outside India from IFSC does not require any regulatory approval.
For instance, as per the extant FDI policy and the foreign exchange rules, prior government approval is required for any foreign investment in core investment company or an investing entity engaged in activity of investing in the capital of other Indian companies/LLPs (where such investing entity is not registered with the Reserve Bank of India (RBI) as a non-banking financial company). However, no such government approval will be required for foreign investment in an investment entity set up in IFSC.
Family Office(s) in IFSC by Indian residents
While the new overseas direct investment (ODI) framework notified in August 2022 allows the Indian entities to invest in financial service activities abroad subject to certain conditions, the ODI framework does not allow Indian residents to invest in a foreign entity engaged in financial service activities. It is learnt that the RBI has clarified to the bankers that the intent of the ODI framework is not to allow Indian residents to set up (directly or indirectly) family office(s) outside India.
The restriction of making ODI by the resident individuals only in an operating foreign entity not engaged in financial services activity does not apply to an investment made in IFSC. In view of this, the resident individuals and/or the family-owned entities of the resident individuals fulfilling the criteria of single-family office can set up FIFs in IFSC to manage their overseas investments.
Any direct investment in FIF by the Indian residents will have to comply with the liberalised remittance scheme (LRS) and the ODI framework. The permissible remittance limit under LRS is USD 250,000 per financial year. The investment in IFSC by the family-owned companies will need to be in compliance with the ODI framework, including the limits on financial commitment (which is. 400% of the net worth of the Indian investing entity).
Our thoughts
The start-up ecosystem in India offers a good investment opportunity for HNIs. In fact, as per the reports, various HNIs have invested/are looking to invest their funds in Indian start-ups either directly or through investment funds for wealth creation and accumulation.
There are various fiscal incentives (including tax exemption, tax holiday period, concessional rate of tax, stamp duty exemptions etc.) available to the entities set up in IFSC. The capital account restrictions set out in the foreign exchange regulations do not apply to non-residents investments in the FIFs established in IFSC. Further, since the family office is set up to invest and manage the money of a single-family and not the third parties, the IFSCA has prescribed a simpler compliance mechanism for the family office. With a diverse range of investment options and favourable regulations, Gift City is likely to attract domestic as well as foreign individuals (including non-resident Indians) who are looking to set up their family offices in India.
Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as a legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.
For further information on this topic please contact Mr. Dinesh Gupta, Associate Partner (dinesh.gupta@clasislaw.com) & Mr. Shubham Tandon, Associate (shubham.tandon@clasislaw.com) at Clasis Law.
Footnotes
1.”corpus” means the total amount of funds committed by investors to the fund management entity under a scheme by way of a written contract or any such document as on a particular date.
2.Circular no. F.No.333/IFSCA/FIF/2022-23 dated 1 March 2023 issued by the IFSCA.
3.The term ‘substantial economic interest’ means 90% economic interest which has to be in the nature of shareholding (in case of a company) or profit-sharing rights (in case of a partnership or LLP) or beneficial interest (in case of a trust)).
4.The Foreign Exchange Management (Non-debt Instruments) Rules, 2019
5.The Foreign Exchange Management (Overseas Investment) Rules, 2022, and the Foreign Exchange Management (Overseas Investment) Regulations, 2022