Wealthy individuals in India are increasingly favouring fund structures, versus investing from the company's balance sheet, as effective tools for managing wealth, investments, and taxes. Family offices are considering GIFT City, India's first international financial services center ("IFSC"), as a means to facilitate organized global investments.
Within the IFSC funds framework, a "Family Investment Fund" ("FIF") is established as a self-managed fund within the IFSC, collecting funds from a single family. These FIFs can take the form of companies, contributory trusts, LLPs, or other permissible structures defined by the International Financial Services Centres Authority ("IFSCA"). They can operate as closed or open-ended schemes and invest in various assets such as securities, shares, bullions, etc. and others.
To encourage the establishment of family investment funds in the IFSC, the IFSCA, through a circular dated March 01, 2023, has introduced certain relaxations under the IFSCA (Fund Management) Regulations, 2022 ("FM Regulations").
- Expansion of the definition of 'single family' to include entities: An FIF is a self-managed fund that pools resources exclusively from a "single family" as defined by the FM Regulations. The previous definition of a "single family" was limited to a group of individuals with direct lineage from a common ancestor, including their spouses, children (including stepchildren and adopted children), and ex-nuptial children. The circular now broadens this definition to encompass entities such as sole proprietorships, partnership firms, companies, LLPs, trusts, or corporate bodies. These entities, under the control of an individual or group of individuals from the same family, are now allowed to have a "substantial economic interest."
By widening the scope of the "single family" definition, the IFSCA permits FIFs to receive funding from entities where individuals or groups from the same family hold a significant economic interest, directly or indirectly. However, the FIF is still restricted from sourcing funds from individuals or entities outside the single family.
- Protection of minority non-family members' economic interests: To safeguard the interests of non-family members holding up to 10% economic interest in the single family's entity, the IFSCA mandates FIFs to disclose investment risks to these individuals. An exit strategy must also be offered to such non-family members in case they do not desire to continue holding interest in the single family entity. The exit shall only be offered by a person or group of persons from the single family holding a minimum of 90% interest in the entity. Further, the minimum acquisition price shall be determined by an independent third-party service provider such as, a fund administrator or custodian registered with IFSCA or an IBBI registered valuer, and shall be supported by a valuation report to be furnished by said service provider.
- Inclusion of non-family members' contributions for economic interest allocation: To align the interests of non-family members with the FIF, the IFSCA has specified that these funds can now accept contributions from individuals outside the single family. This acceptance is solely for allocating economic interest to FIF employees, directors, the fund management entity (FME), and others providing services to the FIF. These contributions cannot exceed 20% of the FIF's profits and should be in line with the FIF's internal policies.
- Setting up additional investment vehicles: FIFs are now allowed to establish additional investment vehicles, including companies, LLPs, trusts, or other forms defined by the IFSCA. These vehicles are considered part of the FIF for regulatory compliance purposes, offering flexibility in structuring economic interest allocation. For instance, these additional vehicles can have distinct entity types, enabling varied investments based on taxation preferences, regulatory requirements, and documentation complexity.
- Procedural requirements: Prior to the commencement of investment activities, individuals from the single family contributing to the FIF need to provide an undertaking to the FME's Principal Officer. The said undertaking will acknowledge that they understand the risks, costs, and benefits associated with FIF investments. Additionally, it acknowledges that certain regulatory measures and disclosures available to other schemes within the IFSC might not apply to FIFs. This will enable the FIF to operate in a more effective manner as compared to other schemes, by cutting down on cost and time with respect to inspections and disclosures, while also simultaneously ensuring that the potential risks of FIF investments are well understood by individuals of the single family.
In conclusion, the IFSCA's initiatives have encouraged single families to establish FIFs in the IFSC, ensuring the protection of non-family members' economic interests in the family's entity. The eligibility criteria for single families have been expanded, encompassing various entities and establishing a minimum threshold to safeguard family interests. These changes foster a supportive regulatory environment, enabling family offices to flourish in the IFSC.
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.
