1. INTRODUCTION
In the recent past, an increased number of ultra-high net worth individuals and families started using jurisdictions outside India such as Singapore and Dubai to open 'family offices' to utilise and invest their personal income. 1 Targeting such individuals and families, the International Financial Services Centres Authority ("IFSCA") (which serves as the unified regulatory authority for International Financial Services Centres ("IFSCs")), gave due recognition to family investment funds ("FIF(s)") pursuant to the International Financial Services Centre Authority (Fund Management) Regulations, 2022 ("FM Regulations"). The only IFSC currently operational in India is the Gujarat International Finance Tec-City, in Gujarat ("GIFT City").2
In this article, we attempt to analyse the prominent features of FIFs under the FM Regulations and the benefits available to such FIFs being set up in IFSCs.
2. SALIENT FEATURES OF FIFs
Registration and form: The FM Regulations require registration of entities which will be managing the funds that are set up in IFSCs. A fund managing entity ("FME") can be registered either as an authorised FME, registered FME (retail) or a registered FME (non-retail). An FIF investing in securities, financial products and such other permitted asset classes can be registered as an FME under the FM Regulations.3 The FIF can be established as a company, limited liability partnership, contributory trust or any other form as permitted by IFSCA.4
Minimum Corpus: An FIF is required to maintain a minimum corpus, i.e. the total amount of funds committed by the investors by way of written contract or any other document, of at least US$ 10 million within a period of 3 years from the date of obtaining the certificate of registration from the IFSCA. 5
Single Family: An FIF is a self-managed fund, pooling money only from a 'single family'. A 'single family' means 'a group of individuals who are the lineal descendants of a common ancestor and includes their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, ex nuptial children)'. 6 Pursuant to a circular dated March 1, 2023 issued by the IFSCA ("Circular"), the definition of 'single family' was broadened to include sole proprietorship firm, partnership firm, company, limited liability partnership, trust or a body corporate, in which an individual or a group of individuals of a single family exercise control and directly or indirectly hold substantial economic interest.7 A substantial economic interest shall mean having at least 90% economic interest including through shareholding or controlling right in a company, share in profits of a partnership or a limited liability partnership, beneficial interest or share in trust property in case of an indeterminate trust or in any other manner to the satisfaction of the IFSCA.8
Contributions: An FIF was not permitted to seek money from individuals or entities outside a single family. However, pursuant to the Circular, an FIF has been allowed to accept aggregate contributions of upto 20% of its profits from its employees, directors or other persons providing services to the FIF, as per its internal policy, for the limited purpose of providing economic interest to such persons, provided that all risks associated with the investment are also disclosed to such persons. In the event that such persons who have invested in the FIF do not wish to continue with their investment in the FIF, an exit may be offered to them by the members of the 'single family' who already hold an interest in the FIF, at a price determined by a third party valuer. Further, an FIF can also set up additional vehicles in the GIFT City. Such additional investment vehicles will be treated as part of the main FIF for the purpose of meeting the requirements of the FM Regulations.9
Permissible Investments: The contributions received by an FIF can be invested in several types of instruments including securities issued by listed or unlisted entities, debt securities, money market instruments, derivatives, units of mutual funds or alternative investment funds, investment in limited liability partnership or physical assets such as real estate.10
3. KEY ADVANTAGES FOR SETTING UP FIFs IN IFSCs, INCLUDING GIFT CITY
The government of India has offered a number of benefits to encourage the setting up of FIFs in IFSCs. Some of these benefits include relaxations under the regulatory regime for investment outside India, tax benefits and other logistical benefits.
In India, overseas investments by persons resident in India are primarily governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022, and the Foreign Exchange Management (Overseas Investment) Directions, 2022 ("Overseas Investment Regime"). This regulatory regime controls and restricts certain investments made outside India by Indian individuals and body corporates, for instance restrictions regarding the end use of the investments and the permitted investment amounts. However, as per the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015, despite being incorporated within the Indian jurisdiction, an FIF is deemed to be a person resident outside India11 . Further, the definition of a 'foreign entity' under the Overseas Investment Regime includes an entity formed or registered in an IFSC12 .
Having said the above, it should be noted that a person resident in India making investments in such FIFs in IFSCs will continue to be governed by the Overseas Investment Regime.13 As an incentive for routing investments through IFSCs, the Overseas Investment Regime provides for certain relaxations such as permissibility of investment in an entity incorporated or setup in an IFSC and engaged in financial services and activity (except in banking and insurance)14 , no restrictions for investment in non-operating entities incorporated or setup in an IFSC15 , and exemption to an Indian entity from having three years profitability record prior to investing in an entity incorporated or setup in an IFSC16 . Further, while investment by a resident individual in an FIF would be restricted to the financial limit under the Liberalised Remittance Scheme ("LRS"), the LRS limit will not be applicable on routing the investment through a body corporate incorporated in India. However, in case of an overseas portfolio investment, the contribution by a body corporate in an FIF should not exceed 50% of its net worth as per its last audited balance sheet.17
Certain relaxations under the (Indian) Companies Act, 2013 have also been provided to an FIF incorporated as a company, for ensuring ease of doing business for companies incorporated in IFSCs, including an exemption from limiting investments through two layers of investment companies, relaxation in convening minimum number of board meetings and extended timelines for filing of various forms with the registrar of companies. 18 Further, the website of the GIFT City lists down certain tax benefits available to entities set up in the GIFT City.19
Lastly, setting up an FIF in an IFSC also reduces the costs of setting up and maintaining such offices in foreign jurisdictions like Singapore and Dubai.
4. CONCLUSION
The government of India has introduced the concept of FIFs to attract investments by high-net-worth individuals and families in India. The Circular issued by the IFSCA has further paved the way to attract such investments.
With the broadened definition of 'single family' under the Circular as well as permitting FIFs to establish additional vehicles (which can be structured differently from an FIF) for the purpose of meeting the requirement under the FM Regulations, it is easier for FIFs to comply with the requirement to maintain a minimum corpus.
Additionally, permission provided to FIFs for accepting contributions from its employees, directors, or other persons providing services to the FIF will help in incentivizing such persons associated with FIFs. Further, a mechanism for providing an exit to such persons has also been introduced and the intent of introduction of such an obligation seems to suggest that the obligation is mandatory on the part of the single family; however, the Circular uses the phrase 'an exit may be offered' and a clarification in this regard would be helpful.
Lastly, while to compete with jurisdictions like Dubai and Singapore, the government of India has undertaken various efforts to facilitate investments into an IFSC, the government of India is also conscious of preventing any misuse of these benefits. For instance, regulators are taking a stringent view with respect to acquiring real estate overseas through an FIF, where such real estate is for "personal use" or with an intention to utilize money outside of India. 20
Footnotes
1. Please refer to https://www.lifestyleasia.com/ind/culture/people/mukesh-ambani-family-office-insingapore/#:~:text=India's%20second%2Drichest%20man%20and,his%20new%20office%20in%20Singapore.
2. Please refer to
https://ifsca.gov.in/Pages/Contents/AboutIFSCA#:~:text=The%20main%20objective%20
of%20the,global%20economy%20as%20a%20whole
3. Regulation 3(4), FM Regulations.
4. Regulation 104(1), FM Regulations
5. Regulation 104(3), FM Regulations.
6. Regulation 2(1)(jj), FM Regulations.
8. Ibid.
10. Regulation 106, FM Regulations.
11. Regulation 3, Foreign Exchange Management (International Financial Services Centre) Regulations, 2015.
12. Rule 2(h), Foreign Exchange Management (Overseas Investment) Rules, 2022.
13. Rule 15, Foreign Exchange Management (Overseas Investment) Rules, 2022.
14. Schedule V, Foreign Exchange Management (Overseas Investment) Rules, 2022.
15. Direction 24(2), Foreign Exchange Management (Overseas Investment) Directions, 2022.
16. Direction 21(7), Foreign Exchange Management (Overseas Investment) Directions, 2022.
17. Schedule II, Foreign Exchange Management (Overseas Investment) Rules, 2022.
18. 8 Please refer to https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=NzY1MA==&docCategory=
Notifications&type=open;%20and%20https://w
ww.mca.gov.in/bin/ebook/dms/
getdocument?doc=NzY0OQ==&docCategory=Notifications&type=open.
19. Please refer to https://www.giftgujarat.in/business/ifsc?tab=Tax%20Incentives..
20. Please refer to https://economictimes.indiatimes.com/news/economy/policy/personal-use-of-family-office-
money-may-bediscouraged/articleshow/101351699.cms?from=mdr.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
